Thematic articles

Here you will find our latest in-depth articles

Legal Personhood and Liability for Flawed Corporate Cultures

A number of recent corporate law scandals (including the Wells Fargo fraudulent accounts scandal, the Volkswagen emissions scandal, sexual harassment claims at Fox News and CBS, and various banking scandals currently under investigation in a high profile Australian Royal Commission) epitomize the danger posed by flawed corporate cultures. These scandals demonstrate that such organizational cultures can inflict damage on stakeholders, communities and society as a whole.

The aim of this study is to explore, from a theoretical and comparative perspective, the issue of accountability for misconduct arising from flawed corporate cultures.

This situation raises unique questions as to whom the law should target for misconduct in these circumstances. The research paper examines two specific types of liability which may be relevant in the context of misconduct arising from defective corporate cultures – (i) entity criminal liability and (ii) personal liability of directors and officers for breach of duty to their company. The study compares these forms of liability in the United States, the United Kingdom and Australia, to assess the extent to which they are well-suited to providing accountability for misconduct arising from flawed corporate cultures. As this comparative analysis shows, there are significant jurisdictional differences in these areas of law, which, in some cases, make such forms of liability ill-suited to achieve such accountability.

Bonded to the State : A Network Perspective on China’s Corporate Debt Market

A corporate bond market is thought to play an important role as a supplement to bankoriented financial systems in emerging markets – functioning in effect as a “spare tire.” Yet bond markets typically rely upon a formal institutional foundation that is often lacking in developing economies. China’s corporate bond market is huge, yet scholarly analysis of it is relatively scarce and some of its elements remain poorly understood. In this paper, we use a network perspective to explore the formation, operation and function of the Chinese corporate bond market. Our effort begins by unpacking the complexities of the market’s structure and formal regulation, which have been shaped by a surprising degree of regulatory competition among the three central government ministries overseeing the issuance and trading of corporate debt instruments. Next, we analyze China’s corporate bond market as a network of relationships – relationships that invariably lead back to the state – and explore the consequences of the state-centric network on the pricing, rating, and default of corporate bonds. The latter have been governed by informal norms protecting issuers from default, but these norms are under considerable stress. We label these norms TBTF (too big to fail); TCTF (too connected to fail), and TMTF (too many Chinese bondholders to fail) and illustrate their operation and limitations with recent examples. The paper concludes by highlighting some key policy issues raised by our analysis, including the consequences of regulatory competition, the potential role of the bankruptcy system in handling issuer financial distress, and the inter-linkages between the corporate bond market and China’s rapidly expanding shadow banking system.
State centricity has helped the Chinese corporate bond market grow exponentially, from virtually nonexistent fifteen years ago to the third largest in the world today. But state centricity has resulted in an institutionally fragile market. Several consequences of the market’s development along this path, such as concentration of risk in state-linked financial intermediaries, expansion of credit to local state-owned enterprises, growth in the shadow banking system, and the informal resolution of bond defaults, may undermine the spare tire function. The Chinese corporate bond market thus well illustrates both the accomplishments and the limitations of state capitalism.

Law and Finance

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle.

We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

European Company Law : The “Simpler Legislation for the Internal Market” (SLIM) Initiative of the EU Commission

Explanatory memorandum with regard to the recommendations by the company law slim working group on the simplification of the first and second company law directives

Corporate Governance – Current Trends And Likely Developments For The Twenty First Century

This article discusses current trends in corporate governance and theorizes on the likely impact of those trends for the twenty-first century. Part II focuses on an overview of four current trends in the areas of technology, globalization, shareholder activism, and private ordering. Part III assesses the likely impact of those trends on corporate governance in the twenty-first century. A successful corporation will need to seamlessly integrate technology to act effortlessly across international time zones, and it will need to raise capital quickly and efficiently in different global capital markets. The authors posit that these needs will lead to the emergence of a universal entity, affording its creators maximum flexibility.

Comparative Corporate Insolvency Law

This chapter deals with fundamental issues of corporate insolvency law. Particular attention is paid to the agency problems related to “bankruptcy governance” and how these are addressed in various jurisdictions. Methodologically, the chapter is based on a functional approach that compares different legal regimes against the yardstick of economic efficiency. The structure of the chapter follows the issues as they arise in time in a corporate insolvency proceeding: objectives of insolvency laws, opening and governance of proceedings, ranking of claims and the position of secured creditors and shareholders, and rescue proceedings. The chapter also covers the contractual resolution of financial distress. It concludes with thoughts on the reasons for the identified jurisdictional divergences and an outlook on the worldwide efforts towards harmonization of (corporate) insolvency laws. In terms of jurisdictions, the chapter mainly draws on the corporate insolvency laws in the US, England, France and Germany.

Designing Regulation for Mobile Financial Markets

Prior scholarship advocates for international harmonization of financial regulation as a solution to the problem of cross-border regulatory arbitrage. The scholarship is theoretical, and rests on the contention that financial institutions can simply depart from an unfavorable regulatory regime. This paper contributes an empirical foundation to the concern that financial institutions relocate following regulation, while also deeply qualifying claims that effective regulation requires international harmonization.

Using experience from swap markets following the Dodd-Frank Act, this paper provides the first empirical evidence that financial institutions migrate in response to derivatives regulation. This paper shows that U.S. banks substantially shifted inter-bank swap trading offshore while the delivery of swaps to U.S. customers did not decline.

Building on this case study, the article develops theory for what policy goals are more susceptible to subversion through migration. Policy goals concerned with regulating relationships between financial institutions and their customers (e.g., goals of customer protection) are less vulnerable to relocation than policy goals concerned with relationships between financial institutions (e.g., reduction of systemic risk). This distinction reflects pragmatic priors on the relative costs and benefits of cross-border arbitrage to providers of financial services and their customers.

In exploring how relocation skirted some regulations and alternative regulatory designs for achieving the same policy goals, the article solves a longstanding puzzle for international regulation. The claim that financial institutions can avoid territorially bounded regulation appears, on its face, suspect. If an institution truly removes its operations, what legitimate interest does a jurisdiction retain in regulating that institution? Through examining how operations may be restructured across borders, the article shows that a lack of harmonization: (a) does not affect whether a jurisdiction can in the abstract unilaterally implement its policy goals, but (b) does narrow the range of regulatory designs available to achieve policy goals. Absent harmonization, jurisdictions may be limited to regulatory designs that are more difficult to implement, for instance, due to political constraints or greater administrative burdens.

Regulation and Deregulation : The Baseline Challenge

A core challenge for financial regulation is how best to address the inherent dynamism of finance. The financial system is engineered to change. Periods of stability, evolving macroeconomic conditions, and regulation are among the forces driving the constant shape shifting of finance. As a result, rules established at Time A often have a different substantive effect at Time B. And because efforts to reduce the cost of complying with regulatory burdens, commonly known as regulatory arbitrage, are among the forces driving this change, a static regulatory regime will tend to be inherently deregulatory.

Currently, the processes through which the law is made are ill suited to accommodate this dynamism. Frictions built into legislative and regulatory processes make it difficult to update the law even when the substantive impact of a proposed change merely replicates the originally agreed upon balance. Complicating matters further, changing market structures may make it impossible to replicate the precise balance a law had been designed to achieve. Financial regulation often entails tradeoffs among competing values and new environments and innovations may enable but also necessitate different tradeoffs.

There is no easy way to reconcile the dynamism of finance with the lawmaking processes better suited for static environments. Proscribing innovation may be warranted in some domains, but has real costs and is unlikely to be feasible as applied to the system as a whole. Nonetheless, recognizing this tension is a critical to understand why regulation has failed to achieve desired aims and why it may well fail again. This tension also helps to explain the heated debate about the scope of deregulation prior to the 2007-2009 financial crisis and its role contributing to that crisis. Only by grappling with the myriad reasons for financial innovation and the mixed impact of that innovation can we develop the common ground needed to forge a better approach.

The New Mechanisms of Market Inefficiency

Mechanisms of market inefficiency are some of the most important and least understood institutions in financial markets today. A growing body of empirical work reveals a strong and persistent demand for “safe assets,” financial instruments that are sufficiently low risk and opaque that holders readily accept them at face value. The production of such assets, and the willingness of holders to treat them as information insensitive, depends on the existence of mechanisms that promote faith in the value of the underlying assets while simultaneously discouraging information production specific to the value of those assets. Such mechanisms include private arrangements, like securitization structures that repackage cash flows from debt instruments to produce new financial instruments that are less risky and more opaque than the underlying debt, and public ones, like the rules allowing many money market mutual funds to use a net asset value of $1.00. This essay argues that recognizing these mechanisms of market inefficiency as such is a critical first step in devising policy interventions that achieve desired aims. This runs counter to the instincts of many market regulators, like the Securities and Exchange Commission, and academics who have often assumed that markets should be structured to promote information generation and efficiency.

The essay further shows, however, that defenders of the informationinsensitive paradigm have failed to provide a robust institutional account of how those mechanisms can remain robust across different states of the world or the government support required if they cannot. When an adverse shock or other signal raises questions about the value of the assets underlying an information‐insensitive instrument, market participants can refuse, en masse, to treat those instruments as safe. Unless the government or some other actor can provide credible information about the value of the underlying assets or financial support that renders such information irrelevant, widespread market dysfunction can follow. When that happens, the very mechanisms of market inefficiency that had enabled a market to develop can exacerbate dysfunction. Following Ronald Gilson and Reineer Kraakman’s admonishment that institutions always matter, this essay calls for the development of rich institutional accounts of how the mechanisms of market inefficiency work, when and how they can fail, and what these dynamics reveal about the role regulators should play in these domains.

Regulatory and Market Challenges of Initial Coin Offerings

This article analyzes the main problems and the solutions adopted in the market for Initial Coin Offerings (ICO), an alternative financing solution that has experienced spectacular growth and notoriety in recent years. This market relies on the use of Blockchain protocols and is, therefore, characterized as disintermediated, decentralized and unregulated. The problems we identify in this article, their severity, and the solutions currently being adopted to address them, lead us to conclude that it is unlikely that either of these characteristics will survive in the near future. Our results also indicate that the concerns expressed by regulators and other market agents regarding ICO markets are well founded. We find it particularly disturbing that such a new, revolutionary market already displays many of the problems of traditional financial markets, and that these problems were exactly the ones that occurred at the genesis of the last financial crisis.

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