A prescription to retire the rhetoric of "principles-based systems" in corporate law, securities regulation, and accounting

Vanderbilt Law Review

Volumn 60, Issue 5, 2007, Pages 1411-1493

  Cunningham, Lawrence A ^a  

^a GEORGE WASHINGTON UNIVERSITY   (United States)

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EID: 38849108148     PISSN: 00422533     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (570)

1. The phrase "standards-based system" is also used. See infra text accompanying notes 10-18.
2. E.g., Written Testimony Concerning Accounting and Investor Protection Issues Raised by Enron and Other Public Companies: Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 107th Cong. (2002) (statement of Harvey L. Pitt, Chairman, SEC), available at http://www.sec.gov/news/ testimony/032102tshlp.htm (asserting that U.S. accounting is "based on rules, and not on broad principles");
3. S. REP. NO. 107-205, at 13 (2002) (stating the reasons why Congress chose to conduct a feasibility study regarding the use of a principles-based accounting system);
4. FIN. ACCOUNTING STANDARDS BD., PRINCIPLES-BASED APPROACH TO U.S. STANDARD SETTING, NO. 1125-001 (2002), available at http://72.3.243.42/proposals/principles-based_approach.pdf [hereinafter FASB, 2002 PROPOSAL] (proposing a principles-based approach to standard setting to improve the quality and transparency of financial accounting and reporting);
5. see also Stephen C. Gara & Craig J. Langstraat, The Sarbanes-Oxley Act of 2002: A New Ballgame for Accountants, 34 U. MEM. L. REV. 73, 93-94 (2003) (noting the possible downsides to the U.S. rules-based accounting system that were recognized by Congress when passing the Sarbanes-Oxley Act);
6. Anthony J. Luppino, Stopping the Enron End-Runs and Other Trick Plays: The Book-Tax Accounting Conformity Defense, 2003 COLUM. BUS. L. REV. 35, 161-62 (2003) (analyzing the desire of Congress to study the feasibility of a principles-based accounting system);
7. Jonathan R. Macey, Efficient Capital Markets, Corporate Disclosure, and Enron, 89 CORNELL L. REV. 394, 421 (2004) (stating that the plethora of "technical disclosure rules" makes financial fraud easier);
8. William H. Widen, Enron at the Margin, 58 BUS. LAW. 961, 965 (2003) (noting the financial world's "ethic of technical compliance").
9. Sarbanes-Oxley Act of 2002 § 108(d), 15 U.S.C. § 7218 (Supp. II 2002) ('The Commission shall conduct a study on the adoption by the United States financial reporting system of a principles-based accounting system.");
10. see id. § 7266 (requiring the SEC to review an issuer's filings at least once every three years);
11. see also infra text accompanying notes 199-201.
12. See, e.g., Nicholas Le Pan, Financial Regulatory Outlook, 23 NAT'L BANKING L. REV. 52, 53 (2004) (describing approach to corporate-governance regulation as addressing behaviors through "guidelines" that "are not rules," including "boards making sure they have the information they need in the form they need it"); Liam O'Reilly, Chief Executive, Irish Fin. Regulator (Rialtóir Airgeadais), Address at the Institute of European Affairs Seminar on Financial Services Regulation: Financial Services Regulation: Challenges and Burdens (June 21, 2005) (stating that the Irish Financial Regulator is "a principles-based regulator" and opposes "rules-based systems");
13. Cathy Quinn, Member, N.Z. Sec. Comm'n, Address at the Legal Teachers Forum: Corporate Governance Post-Enron (July 8, 2005) (advertising the country's "robust principles-based framework for good corporate governance" instead of a "more prescriptive rulesbased approach").
14. See, e.g., STOCK EXCH. OF THAIL., THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE FOR LISTED COMPANIES (2006), available at http://www.ecgi.org/codes/documents/cg_ principles_thailand_2006_en.pdf (setting forth non-binding principles and best practices);
15. William Baue & Graham Sinclair, Johannesburg Securities Exchange Requires Compliance with King II and Global Reporting Initiative, SOCIALFUNDS.COM NEWSROOM, July 16, 2003, http://www. socialfunds.com/news/article.cgi/article1174.html (describing the Johannesburg Securities Exchange as "principles-based," not rules-based, so as to "encourage[] directors to perform in the spirit of the code rather than simply apply[] the tick box approach"). The Task Force to Modernize Securities Legislation in Canada commissioned a study from me which initially asked which is superior, a rules-based or principles-based system of securities regulation, and ultimately involved elucidating some of the main characteristics of securities regulation in the United States and Canada.
16. Lawrence A. Cunningham, Principles and Rules in Public and Professional Securities Law Enforcement: A Comparative U.S.-Canada Inquiry, 6 CANADA STEPS UP 253 (2006), available at http://www.tfmsl.ca/docs/V6(5A)%20Cunningham.pdf.
17. E.g., Allison Dabbs Garrett, Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets, 32 DENV. J. INT'L L. & POL'Y 147, 161 (2004) (saying that many of Canada's provinces, such as British Columbia and Alberta, employ a principles-based system of regulation);
18. Ruth O. Kuras, Harmonization of Securities Regulation Standards between Canada and the United States, 81 U. DET. MERCY L. REV. 465, 472 (2004) (noting the differing factors between the United States's and Canada's economies that contribute to the selection of a rules-based or principles-based approach).
19. See Frederick Gill, Principles-Based Accounting Standards, 28 N.C. J. INT'L L. & COM. REG. 967, 973-80 (2003) (discussing the differences between rules-based systems and principlesbased systems as set forth by the FASB);
20. see also Matthew A. Melone, United States Accounting Standards: Rules or Principles? The Devil Is Not in the Details, 58 U. MIAMI L. REV. 1161, 116465 (2004) (describing the various bases for proposed accounting reform in the United States);
21. Hervé Stolowy, Nothing Like the Enron Affair Could Happen in France(!), 14 EUR. ACCT. REV. 405, 406-08 (2005) (reviewing responses to Enron Corp.'s fraud among French accounting scholars, practitioners, and policymakers);
22. Kenneth Yong, Exploring Rules-Based and PrinciplesBased Accounting Standards, ACCOUNTANTS TODAY, Nov. 2004, at 32 (international accounting is "popularly considered as being principles-based" while U.S. GAAP is "branded with a rulesbased reputation").
23. See, e.g., Executive Compensation and Related Person Disclosure, Exchange Act Release No. 8732A, Securities Act Release No. 54,302A, Investment Company Act Release No. 27,444A, 71 Fed. Reg. 53,158, 53,165 (Sept. 8, 2006) (adopting a less rules-based and more principles-based system of executive compensation disclosure, meaning disclosing all material items, whether or not they "fit squarely within a 'box' specified by the rules");
24. Cynthia A. Glassman, Comm'r, SEC, Remarks Before the Tenth Annual Corporate Counsel Institute: Priorities and Concerns at the SEC (Mar. 9, 2006) (reporting her effort in 2003 to make management's discussion and analysis disclosure less obscure by adopting an SEC "interpretive release that provided principles-based guidance").
25. See, e.g., Sean J. Griffith & Myron T. Steele, On Corporate Law Federalism: Threatening the Thaumatrope, 61 BUS. LAW. 1, 13-22 (2005) (arguing that the flexibility of state laws may prove preferable to the inflexible federal preemption of corporate law).
26. See, e.g., Louis Kaplow, Rules and Standards: An Economic Analysis, 42 DUKE L.J. 557, 559 n.2 (1992) (discussing the confusion in the use of the terms "rules," "principles," and "standards");
27. Pierre Schlag, Rules and Standards, 33 UCLAL. REV. 379, 382 n.16 (1985) (stating that "rules" and "standards" do not have "fixed meanings");
28. Kathleen M. Sullivan, The Supreme Court 1991 Term-Foreword: The Justices of Rules and Standards, 106 HARV. L. REV. 22, 57-59 & n.231 (1992) (describing the ambiguity among the terms "rules," "principles," and "standards").
29. See RONALD DWORKIN, TAKING RIGHTS SERIOUSLY 22-28, 71-80 (1977) (differentiating "principles, policies, and other sorts of standards" and asking whether rules really are different from principles);
30. John Braithwaite, Rules and Principles: A Theory of Legal Certainty, 27 AUSTL. J. LEGAL PHIL. 47, 47 n.1 (2002) ("[S]tandards are norms written in a way to measure performance.");
31. Ronald M. Dworkin, The Model of Rules, 35 U. CHI. L. REV. 14, 22-25 (1967) (expounding upon the use of "rules," "principles," and "standards").
32. See Sullivan, supra note 10, at 58 n.231 (describing the use of terminology among Professors Dworkin, Schauer, and Radin);
33. see also Kaplow, supra note 10 ("Outside the debate over formulation of the law, the terms ['rules' and 'standards'] are often used interchangeably.").
34. DWORKIN, supra note 11, at 22, 26 (defining a principle as a "requirement of justice or fairness or some other dimension of morality" and as a factor "that officials must take into account, if it is relevant, as a consideration inclining in one direction or another"). The concept of principles as performing an animating function derives from Dworkin's theory of 'law as integrity" that "instructs judges to identify legal rights and duties . . . expressing a coherent conception of justice and fairness."
35. RONALD DWORKIN, LAW'S EMPIRE 225 (1986). According to Dworkin, "[w]hen a judge declares that a particular principle is instinct in law, he reports . . . an interpretive proposal: that the principle both fits and justifies some complex part of legal practice, that it provides an attractive way to see, in the structure of that practice, the consistency of principle integrity requires."
36. Id. at 228. For a deeper discussion of the different roles of principles and rule in the "law as intergrity" theory,
37. see id. at 225-58.
38. This is the dominant approach in the accounting literature. See Mark W. Nelson, Behavioral Evidence on the Effects of Principles- and Rules-Based Standards, 17 ACCT. HORIZONS 91, 91 (2003) ("A 'standard' is the total body of principles and rules that apply to a given accounting issue.").
39. E.g., EVA H. HANKS ET AL., ELEMENTS OF LAW 44-45 (1994);
40. Sullivan, supra note 10, at 57-59.
41. See Symposium, Owning Standards, 48 B.C. L. REV. 1, 1-4 (2007) (presenting a discussion of "standards" in relation to intellectual property, antitrust, and corporate law).
42. See Braithwaite, supra note 11 ("[T]his distinction [in the definition of 'standards'] is not relevant to the analysis in this essay.").
43. See infra text accompanying notes 298-303 (discussing how rhetoric promoting principles-based legal and accounting systems may be related to promoting principles of business ethics).
44. See Kaplow, supra note 10, at 560 ("[T]he only distinction between rules and standards is the extent to which efforts to give content to the law are undertaken before or after individuals act.").
45. Cf. Arthur L. Corbin, The Parol Evidence Rule, 53 YALE L.J. 603, 630 (1944) (stating that no writing can prove its own completeness).
46. See NAT'L ASS'N OF SEC. DEALERS, NASD MANUAL R. 2110 (2007) ("A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.").
47. See Exchange Act Rule 15g-2, 17 C.F.R. § 240.15g-2 (2007) ("It shall be unlawful for a broker or dealer to effect a transaction in any penny stock for or with the account of a customer unless, prior to effecting such transaction, the broker or dealer has furnished to the customer a document containing the information set forth in Schedule 15G, Rule 15g-100, and has obtained from the customer a manually signed and dated written acknowledgement of receipt of the document.").
48. Sarbanes-Oxley Act of 2002 § 501, 15 U.S.C. § 78o-6 (Supp. II 2002).
49. See Messer v. E.F. Hutton & Co., 847 F.2d 673, 679 (11th Cir. 1987) (determining that an element of scienter was not necessary where advisors were prohibited from " 'engag[ing] in any transaction, practice, or course of business which operates as a fraud or deceit upon any client' "
50. (quoting 7 U.S.C. § 6o(1)(B) (2000)).
51. See, e.g., Margaret Jane Radin, Presumptive Positivism and Trivial Cases, 14 HARV. J.L. & PUB. POL'Y 823, 828-32 (1991) (using the continuum metaphor);
52. Carol M. Rose, Crystals and Mud in Property Law, 40 STAN. L. REV. 577, 604-10 (1988) (synthesizing the virtues of "crystalline" and "muddy" articulations of legal provisions);
53. Sullivan, supra note 10, at 57 (also utilizing the continuum metaphor).
54. See Scott Brewer, Exemplary Reasoning, Semantics, Pragmatics, and the Rational Force of Legal Argument by Analogy, 109 HARV. L. REV. 925, 972 (1996) (dismissing the notion of a continuum on grounds that it conflates distinct phenomena of logic and semantics that must be kept distinct);
55. James G. Wilson, Surveying the Forms of Doctrine on the Bright Line-Balancing Test Continuum, 27 ARIZ. ST. L.J. 773, 776-77 (1995) (arguing that the conception of a rulesprinciples continuum is an analytical dead-end bearing no normative significance).
56. See Nelson, supra note 14, at 96-100 (describing how precise and imprecise standards can constrain "aggressive," or biased, reporting).
57. See Cass R. Sunstein, Problems with Rules, 83 CAL. L. REV. 953, 963-64 (1995) (analyzing situations where "several factors are pertinent to the decision, but there is no rule").
58. See infra text accompanying notes 163-66.
59. See Ruth Gavison, Comment, Legal Theory and the Role of Rules, 14 HARV. J.L. & PUB. POL'Y 727, 750-52 (1991) (discussing the rule-like qualities of two different types of legal presumptions).
60. See infra text accompanying notes 74-76 (noting how the mandatory versus enabling question differs from the rules-principles question in context of canvassing content of prevailing systems of corporate law).
61. See Elaine A. Welle, Freedom of Contract and the Securities Laws: Opting Out of Securities Regulation by Private Agreement, 56 WASH. & LEE L. REV. 519, 562-63 (1999) (arguing that "seemingly neutral rules" may mask social biases).
62. See Frank Partnoy, A Revisionist View of Enron and the Sudden Death of "May," 48 VILL. L. REV. 1245, 1265 (2003) ("[R]ules-based tabular disclosure is quickly outdated.").
63. See Kaplow, supra note 10, at 563 (noting that the frequency of behavior and the rate of adjudication may make rules more costly than standards).
64. See id. at 564 (stating that rules produce more compliance as the cost of learning the law is reduced through their clarity).
65. See Nelson, supra note 14, at 93-94 (surveying how accountants interpret less precise expressions of qualitative thresholds).
66. See Stephen A. Saltzburg, The Fourth Amendment: Internal Revenue Code or Body of Principles?, 74 GEO. WASH. L. REV. 1702, 1703 (2006) (demonstrating, in the context of the Fourth Amendment, how "principled rules provide clearer guidance to law enforcement and citizens than arbitrary 'bright-line' rules").
67. 15 U.S.C. §§ 1, 3, 6 (2000 & Supp. IV 2004).
68. Schlag, supra note 10, at 411-14.
69. See id. at 405-07 (noting the importance of context in determining the certainty or openendedness of rules and principles).
70. See RICHARD A. POSNER, THE PROBLEMS OF JURISPRUDENCE 48 (1990) (citing "reduce[d] uncertainty about legal rights and duties" as an advantage of rules over standards);
71. Braithwaite, supra note 11, at 75-76 (concluding that the certainty of rules is dependent upon the type of activity to be regulated).
72. See Brett H. McDonnell, SOX Appeals, 2004 MICH. ST. L. REV. 505, 529 (2004) (making this point in the context of the rules-heavy Sarbanes-Oxley Act).
73. See Isaac Ehrlich & Richard A. Posner, An Economic Analysis of Legal Rulemaking, 3 J. LEGAL STUD. 257, 262 (1974) ("A perfectly detailed and comprehensive set of rules brings society nearer to its desired allocation of resources by discouraging socially undesirable activities and encouraging socially desirable ones.").
74. See, e.g., Colin S. Diver, The Optimal Precision of Administrative Rules, 93 YALE L.J. 65, 71-79 (1983) (setting forth criteria to determine the appropriate level of regulatory precision).
75. See, e.g., Kaplow, supra note 10, at 564 ("If the benefit of learning the law's content are substantial and the cost. . . is not too great, individuals' behavior under both rules and standards will tend to conform to the law's commands.");
76. see also Gavison, supra note 30, at 751-52 (proposing that a decision to follow a rule should necessarily constitute a statement that the decisionmaker thought the rule should be followed such that costs have been taken into account).
77. See, e.g., Clifford G. Holderness, A Legal Foundation for Exchange, 14 J. LEGAL STUD. 321, 322-26 (1985) (describing property law's preference for rules which create a closed class of assignees, allowing easier exchange than open, unidentifiable classes);
78. Rose, supra note 25, at 590-95 (elucidating this position, but coming short of endorsing it).
79. See Tom Baker, Alon Harel & Tamar Kugler, The Virtues of Uncertainty in Law: An Experimental Approach, 89 IOWA L. REV. 443, 486-87 (2004) (concluding that levels of uncertainty can be manipulated in order to increase deterrence);
80. Russell B. Korobkin, Behavioral Analysis and Legal Form: Rules vs. Standards Revisited, 79 OR. L. REV. 23, 30-43 (2000) (stating that an economic analysis leads to the identification of multiple factors that govern the selection of the appropriate legal form, although it can be concluded that standards are more appropriate than rules in this regard).
81. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027, 1098-1103 (1995) ("[A] host of Solomonic entitlement divisions-including liability rules and fractional property entitlements-can induce pre-taking negotiations superior to those of undivided property rules.");
82. Jason Scott Johnston, Bargaining Under Rules Versus Standards, 11 J.L. ECON. & ORG. 256, 272-73 (1995) ("Insofar as the law awards entitlements on the basis of an ex post determination of which party ought to have the entitlement, ex ante private bargaining may accomplish what the ex post legal standard desires.").
83. See Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 HARV. L. REV. 1685, 1685 (1976) (stating that individualism favors "clearly defined, highly administerable, general rules," while altruism supports the use of "equitable standards");
84. see also Duncan Kennedy, The Stages of Decline of the Public/Private Distinction, 130 U. PA. L. REV. 1349, 1350-57 (1982) (proposing a life cycle of legal distinctions).
85. See Meir Dan-Cohen, Decision Rules and Conduct Rules: On Acoustic Separation in Criminal Law, 97 HARV. L. REV. 625, 626-34 (1984) (proposing a separation between "conduct rules," which provide the general public with guidelines for conduct, and "decision rules," which seek to provide officials with guidelines for their decisions).
86. Frederick Schauer, The Convergence of Rules and Standards, 2003 N.Z. L. REV. 303, 319-20 (2003).
87. Id.
88. See supra notes 2, 7 and accompanying text.
89. Schauer, supra note 51, at 320.
90. 15 U.S.C. § 78p(b) (2000) (requiring designated insiders to disgorge profits from securities transactions occurring within a six-month window).
91. 15 U.S.C. § 78j (prohibiting the use of "manipulative or deceptive devices" in effecting fraud, manipulation, or insider trading); Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 (2007) (prohibiting any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security, including insider trading); see also United States v. O'Hagan, 521 U.S. 642, 649-65 (1997) (interpreting SEC Rule 10b-5);
92. infra text accompanying notes 63-65.
93. See Schauer, supra note 51, at 321-25 (treating these provisions as substitutes).
94. 15 U.S.C. § 78p(b).
95. Id. § 78j;
96. Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5.
97. See Merritt B. Fox, Insider Trading Deterrence Versus Managerial Incentives: A Unified Theory of Section 16(b), 92 MICH. L. REV. 2088, 2201-02 (1994) (reconciling the overall framework);
98. Steve Thel, The Genius of Section 16: Regulating the Management of Publicly Held Companies, 42 HASTINGS L.J. 391, 399 (1991) (making the case that the purpose of section 16(b) was to prevent insiders from manipulating corporate operations to induce favorable stock price fluctuations);
99. Roberta S. Karmel, The Relationship Between Mandatory Disclosure and Prohibitions Against Insider Trading: Why a Property Rights Theory of Inside Information is Untenable, 59 BROOK. L. REV. 149, 160 n.51 (1993) (book review) (arguing that section 16(b)'s benefits not achieved by section 10(b) are promoting long-term rather than short-term outlook among management and discouraging them from manipulating events over the short term).
100. But see Marleen A. O'Connor, Toward a More Efficient Deterrence of Insider Trading: The Repeal of Section 16(b), 58 FORDHAM L. REV. 309, 358-80 (1989) (arguing that section 16(b)'s system of deterrence is irrational and inefficient).
101. See Steven R. Salbu, Regulation of Insider Trading in a Global Marketplace: A Uniform Statutory Approach, 66 TUL. L. REV. 837, 861 (1992) ("Clear and precise regulation of insider trading would eliminate the need for section 16(b).").
102. See Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 255 (1976) (stating that while section 16(b)'s scope is unaffected by whether other sanctions might inhibit abuse of inside information, section 10(b) addresses problems left unaddressed by section 16(b)).
103. See TSC Indus., Inc. v. Northway, 426 U.S. 438, 449 (1976) ("An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.");
104. Joan MacLeod Heminway, Materiality Guidance in the Context of Insider Trading: A Call for Action, 52 AM. U. L. REV. 1131, 1137 (2003) (referring to materiality as "a broadly applicable judicial standard" that requires a court to assess "the likelihood that a reasonable investor (or stockholder) would consider a particular fact or particular information important in making an investment decision").
105. See Victor Brudney, A Note on Materiality and Soft Information Under the Federal Securities Laws, 75 VA. L. REV. 723, 727 (1989) ("The particular items of information mandated to be disclosed [under SEC rules] are presumably automatically deemed to be 'material.' "). Thousands of examples of prescribed items can be cited, including the specific requirements found in (a) Item 11 to Form S-1 concerning the required prospectus for offering securities, (b) Items 1-8 to Form 8-K stating events that require filing a current report, and (c) the content of both quarterly reports on Form 10-Q and annual reports on Form 10-K.
106. Securities Exchange Act of 1934 § 13(d), 15 U.S.C. § 78m(d) (2000);
107. see Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975) (emphasizing purposes of rule are to provide shareholders with information about the bidder and incumbent management and to provide additional information without any intention of aiding management in resisting a bid or tipping the balance of power between bidders and managers); Exchange Act Rule 13d-1, 17 C.F.R. § 240.13d-1 (2007) ("Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is specified in paragraph (i) of this section, is directly or indirectly the beneficial owner of more than five percent of the class shall, within 10 days after the acquisition, file with the Commission, a statement containing the information required by Schedule 13D.").
108. See TSC Indus., 426 U.S. at 448-49 (interpreting "materiality" in line with previous decisions in different contexts).
109. See Christopher W. Nobes, Rules-Based Standards and the Lack of Principles in Accounting, 19 ACCT. HORIZONS 25, 27-32 (2005) (identifying detailed, technical accounting rules that are required due to the absence of underlying standards or inappropriate underlying standards).
110. Brudney, supra note 64, at 734-35.
111. See infra text accompanying notes 123-24 (giving the example of statutory legal capital rules that are mediated by judicial invocation of reasonable accounting and valuation principles).
112. See Schauer, supra note 51, at 321-28 (citing SEC Rule 10b-5 as an example of a standard turned into a rule through judicial intervention);
113. infra text accompanying notes 108-15 (example of the relationship between section 102(b)(7) of the Delaware General Corporation Law authorizing director-liability exculpation and the judicial doctrine of good faith that amplifies an exception to that authorization).
114. Cf. Cristie L. Ford, New Governance, Compliance, and Principles-Based Securities Regulation, 44 AM. BUS. L.J. (forthcoming 2007) (recognizing the slipperiness of the two labels and navigating an analysis of comparative systems by developing a thick account going well beyond the form of provisions as rules versus principles to include such attributes as how law is promulgated, by whom, with what frequency, and with what level of enforcement).
115. E.g., Marcel Kahan & Ehud Kamar, Price Discrimination in the Market for Corporate Law, 86 CORNELL L. REV. 1205, 1236 (2001) ("Delaware's corporate law tends to rely on standard-based tests [meaning] that the relation between a certain set of facts and the outcome of a legal dispute is determined ex post rather than ex ante.");
116. Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUM. L. REV. 1908, 1914-15 (1998) ("Delaware [corporate] law is at one end of this continuum. It relies extensively on broad legal standards.");
117. Curtis J. Milhaupt, In the Shadow of Delaware? The Rise of Hostile Takeovers in Japan, 105 COLUM. L. REV. 2171, 2212 (2005) ("The major features of Delaware corporate law [include] the prevalence of broad standards over detailed rules.").
118. Compare Troy A. Paredes, A Systems Approach to Corporate Governance Reform: Why Importing U.S. Corporate Law Isn't the Answer, 45 WM. & MARY L. REV. 1055, 1133-34 (2004) ("Delaware law of fiduciary duties is itself more rule-like and predictable than many standards, having been fleshed out by an extensive body of case law precedent that reflects a consistent underlying norm of shareholder primacy."),
119. with Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters, 68 U. CIN. L. REV. 1061, 1071 (2000) ("Delaware's corporate law rules are standards based." (emphasis added)),
120. and Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. REV. 1009, 1014 (1997) (criticizing "a persistent tendency to acknowledge that Delaware corporate law largely involves standards, but then to try to reduce it to a set of rules").
121. See John C. Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 COLUM. L. REV. 1618, 1653-89 (1989) (distinguishing debate over contractual freedom from inquiry into how judges should approach gaps in corporate arrangements);
122. Larry E. Ribstein, The Mandatory Nature of the ALI Code, 61 GEO. WASH. L. REV. 984, 987-98 (1993) (surveying the arguments for and against mandatory rules for corporations).
123. DEL. CODE ANN. tit. 8, § 214 (2001) (stating that a certificate of incorporation may provide for cumulative voting);
124. MODEL BUS. CORP. ACT § 7.28 (2002) (providing that "[s]hareholders do not have a right to cumulate their votes for directors unless the articles of incorporation so provide"). In the minority of states that require cumulative voting, disputes concerning its use may be resolved by applying principle-like tools such as fiduciary duty.
125. See, e.g., Humphrys v. Winous Co., 133 N.E.2d 780, 782-89 (Ohio 1956) (reconciling the tension in a jurisdiction which requires cumulative voting but also permits the classification of directors).
126. See, e.g., HAL S. SCOTT & GEORGE S. DALLAS, MANDATING CORPORATE BEHAVIOR: CAN ONE SET OF RULES FIT ALL? 25-30 (2006), available at http://www.ahcgroup.com/pdfs/ S&P-Dallas&Scott-CorpBehavior.pdf (dwelling on the rhetoric of rules as "prescriptive and legalistic" while inadvertently showing that any preference for the approach of "comply or explain" has no bearing on the rules versus principles question).
127. E.g., MODEL BUS. CORP. ACT §§ 7.27, 7.28, 8.24 (covering action by shareholders, the election of directors, and action by directors respectively).
128. See Roach v. Bynum, 437 So. 2d 69, 70 (Ala. 1983) (deeming unenforceable supermajority shareholder quorum and voting provision required to appear in charter when they instead appeared in by-laws);
129. Datapoint Corp. v. Plaza Sec. Co., 496 A.2d 1031, 1034-36 (Del. 1985) (declaring unenforceable a director-approved by-law amendment limiting shareholder action because it conflicted with Delaware Code section 228(b), which requires any limitations on this grant of authority to appear in the charter).
130. E.g., Paulek v. Isgar, 551 P.2d 213, 215 (Colo. Ct. App. 1976) ("Where bylaws conflict with the articles of incorporation, the articles of incorporation control and the bylaws in conflict are void.");
131. Benintendi v. Kenton Hotel, Inc., 60 N.E.2d 829, 831 (N.Y. 1945) (striking down bylaws contrary to statutory requirements applicable to all corporations).
132. See tit. 8, § 141(a) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors."); Manson v. Curtis, 119 N.E. 559, 561 (N.Y. 1918) (stating that even in the presence of voting agreements, shareholders do not maintain proxy over corporate business and affairs);
133. MODEL BUS. CORP. ACT § 8.01 ("All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors.").
134. E.g., MODEL BUS. CORP. ACT §§ 8.03-.05, 10.03-.04, 11.03, 14.02-.03 (allocating power to shareholder in the election of directors, amendment of articles of incorporation, statutory mergers, and voluntary dissolution respectively).
135. See Lucian Arye Bebchuk, The Case for Shareholder Access to the Ballot, 59 BUS. LAW. 43, 43-46 (2003) (calling the supposed power of shareholders "largely a myth").
136. See tit. 8, § 211(b) ("An annual meeting of stockholders shall be held for the election of directors.").
137. E.g., Gashwiler v. Willis, 33 Cal. 11, 18-19 (1867) (stating that an action taken by a group of shareholder-directors in their individual capacities is not effective as a valid action of the board of directors).
138. E.g., tit. 8, § 141(b) (2001 & Supp. 2006) (requiring quorum);
139. MODEL BUS. CORP. ACT §§ 8.22, 8.24 (requiring notice and quorum respectively).
140. E.g., tit. 8, § 141(f), (i) (2001) (allowing action by unanimous written consent in lieu of a meeting and teleconferencing respectively);
141. MODEL BUS. CORP. ACT § 8.21 (allowing action by unanimous written consent in lieu of a meeting).
142. See Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 COLUM. L. REV. 1549, 1593 (1989) (noting power allocation function of such mandatory terms in corporate law).
143. See Jones v. Wallace, 628 P.2d 388, 391-93 (Or. 1981) (addressing the argument that otherwise invalid by-laws in effect upon the signing of a shareholder agreement can be enforced under a contract theory).
144. See, e.g., Zion v. Kurtz, 405 N.E.2d 681, 684-88 (N.Y. 1980)
145. see also Larry E. Ribstein & Burce H. Kobayashi, Choice of Form and Network Externalities, 43 WM. & MARY L. REV. 79, 85, 89 (2001) (describing the difficulties presented by corporate rules intended to affect closely-held corporations).
146. E.g., tit. 8, §§ 241, 251, 271 (2001 & Supp. 2006) (allowing for redemptions, mergers, and asset sales respectively);
147. see also MODEL BUS. CORP. ACT § 11.03 (governing share exchanges).
148. See Hariton v. Arco Electronics, Inc., 188 A.2d 123, 124-25 (Del. 1963) (rejecting shareholders' claim that a sale of assets transaction having the same functional effect as a merger required shareholder approval under statutory merger rules);
149. Heilbrunn v. Sun Chem. Corp., 150 A.2d 755, 757-59 (Del. 1959) (similarly rejecting the so-called de facto merger doctrine).
150. See D. Gordon Smith, Independent Legal Significance, Good Faith, and the Interpretation of Venture Capital Contracts, 40 WILLAMETTE L. REV. 825, 831-40 (2004) (tracing the origins and development of the doctrine of independent legal significance).
151. E.g., tit. 8, § 203 (providing specific rules which lay out ex ante instructions to avoid hostile takeovers including extensive definitions of terms such as interested stockholder, and bright-line thresholds, such as 90-day and 3-year periods, 66.66% voting approval requirements, and 85% ownership stipulations).
152. See, e.g., Equity Group Holdings v. DMG, Inc., 576 F. Supp. 1197, 1201-07 (S.D. FIa. 1983) (refusing to treat separate but related transactions having the functional effect of merger as a de facto merger under Florida law).
153. See, e.g., Rauch v. RCA Corp., 861 F.2d 29, 30-33 (2d Cir. 1988) (sharply distinguishing between merger and redemption transactions in accordance with technical details of separate statutory provisions despite substantively identical effects).
154. See PPG Indus., Inc. v. Guardian Indus. Corp., 597 F.2d 1090, 1095-96 (6th Cir. 1979) ("The merger was effected by the parties and the transfer was a result of their act of merging.").
155. See Branmar Theatre Co. v. Branmar, Inc., 264 A.2d 526, 529 (Del. Ch. 1970) (holding that a transfer of a lease agreement in connection with a sale of stock transaction was not an "assignment" under the terms of the lease).
156. See, e.g., Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 43-46 (1987) (determining, in the context of labor law, whether one company was the "successor" of another);
157. North Shore Gas Co. v. Salomon, Inc., 152 F.3d 642, 651-54 (7th Cir. 1998) (applying the de facto merger doctrine in the context of environmental law);
158. Ruiz v. Blentech Corp., 89 F.3d 320, 32425 (7th Cir. 1996) (applying the de facto merger doctrine in the context of personal injury liability).
159. See Louisiana Mun. Police Employees' Ret. Sys. v. Crawford, 918 A.2d 1172, 1191-92 (Del. Ch. 2007) (treating special dividend and stock-for-stock merger as integral components of single transaction rather than as separate transactions warranting independent legal treatment).
160. See, e.g., DEL. CODE ANN. tit. 8, § 262 (2001) (setting forth provisions governing appraisal rights in Delaware).
161. E.g., Glassman v. Unocal Exploration Corp., 777 A.2d 242 (Del. 2001) (stating that, absent allegations of fraud or illegality, appraisal is the exclusive remedy for a minority shareholder objecting to a short-form merger);
162. Rabkin v. Philip A. Hunt Chem. Corp., 498 A.2d 1099, 1104-05 (Del. 1985) (holding that an appraisal proceeding is not the exclusive remedy when minority shareholders allege nondisclosure or misrepresentation).
163. E.g., Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983) (overruling previous case law that limited monetary damages in a cash out merger to "a single remedial formula" and allowing plaintiffs to seek a fairness valuation by any method "in conformity with the principle applicable to an appraisal-that fair value be determined by taking 'into account all relevant factors' " (quoting tit. 8, § 262(h))).
164. E.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993) (addressing whether the business to be valued is solely the business as it existed absent the transaction or that business taking account of value that arises in the first stage of a two-step acquisition).
165. Rock, supra note 73, at 1016 (referring to the product of Delaware courts as "corporate law sermons").
166. See Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law Jurisprudence, 55 DUKE L.J. 1, 53 n.221 (2005) (citing and summarizing more than a dozen articles offering competing assessments of the virtues of such indeterminacy in Delaware corporate fiduciary duty law).
167. See Lawrence A. Cunningham & Charles M. Yablon, Delaware Fiduciary Duty Law after QVC and Technicolor: A Unified Standard (and the End of Revlon Duties?), 49 BUS. LAW. 1593, 1618 (1994) ("[A]s judges in equity, [judges in Delaware courts] must also be concerned that the rules they are applying lead to fair and consistent results.");
168. Lyman P.Q. Johnson & Mark A. Sides, The Sarbanes-Oxley Act and Fiduciary Duties, 30 WM. MITCHELL L. REV. 1149, 1193-94 (2004) ("Courts have long recognized that corporate officers and directors are fiduciaries and that equity, not law, is the source of their fiduciary obligations.").
169. See MODEL BUS. CORP. ACT § 8.30 (2002) ('The members of the board of directors . . . shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.");
170. D. Gordon Smith, A Proposal to Eliminate Director Standards from the Model Business Corporation Act, 67 U. CIN. L. REV. 1201, 1209-27 (1999) (arguing that the MBCA's statutory statement of the duty of care may alter the common law standards under which the standard has "thrived" to date).
171. See Paredes, supra note 73 (discussing how corporate law "should, to the extent possible, comprise bright-line rules, as opposed to more ambiguous open-ended standards");
172. see also Rock, supra note 73, at 1104 (noting and criticizing the tendency of scholars to pursue this route, as the more subtle approach of Delaware courts may prove preferable to bright-line rules in influencing the behavior of outside directors).
173. E.g., Miller v. AT&T, 507 F.2d 759, 762-63 (3d Cir. 1974) (illegal campaign contributions);
174. Smith v. Van Gorkum, 488 A.2d 858, 873-74 (Del. 1985) (ill-informed directors);
175. Francis v. United Jersey Bank, 432 A.2d 814, 825-26 (N.J. 1981) (director prone to inebriation and other ills failing to read financial statements);
176. see also In re Caremark Int'l Inc., 698 A.2d 959, 972 (Del. Ch. 1996) (approving settlement agreement and elaborating, in dicta, on the duty of care's bearing on maintaining a system of internal control).
177. DEL. CODE ANN. tit. 8, § 102(b)(7) (2001) (stating that a corporation's articles of incorporation may set forth a provision "eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director").
178. See Van Gorkum, 488 A.2d at 873-74 (holding directors liable for a breach of the duty of care when the court deemed their decision to accept a certain price per share in a merger transaction uninformed);
179. see also Bernard Black et al., Outside Director Liability, 58 STAN. L. REV. 1055, 1060 (2006) (noting that the Van Gorkum case represents the only instance where outside directors have made personal payments after a trial since 1980).
180. Tit. 8, § 102(b)(7). The limitation also excludes liability arising from breaches of the duty of loyalty, unlawful distributions, intentional misconduct, knowing violations of law, and deriving improper personal benefits.
181. Id.
182. See Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1, 4-6, 9-10 (2006) (describing the basis and history of the duty of good faith in light of attempts to insulate directors from liability for breaches of fiduciary duties);
183. Hillary Sale, Delaware's Good Faith, 89 CORNELL L. REV. 456, 466-82 (2004) (noting that director exculpation for due care breaches does not insulate directors from breaches of good faith and tracing the development of the duty of good faith through Delaware case law).
184. See Matthew R. Berry, Does Delaware's Section 102(b)(7) Protect Reckless Directors From Personal Liability? Only if Delaware Courts Act in Good Faith, 79 WASH. L. REV. 1125, 1127 (2004) ("[T]he courts have not provided clear guidance as to whether section 102(b)(7) protects directors from personal liability arising from their reckless conduct.");
185. John L. Reed & Matt Neiderman, "Good Faith" and the Ability of Directors to Assert § 102(b)(7) of the Delaware General Corporation Law as a Defense to Claims Alleging Abdication, Lack of Oversight, and Similar Breaches of Fiduciary Duty, 29 DEL. J. CORP. L. 111, 140 (2004) (concluding that the Delaware Supreme Court must "clarify the standard or threshold required for allegations of abdication or lack of oversight to . . . implicate the duty of good faith");
186. David Rosenberg, Making Sense of Good Faith in Delaware Corporate Fiduciary Law: A Contractarian Approach, 29 DEL. J. CORP. L. 491, 492 (2004) ("Delaware courts . . . currently offer no coherent framework for understanding the most fundamental duties imposed on corporate directors."). For the Delaware Supreme Court's attempt at clarification,
187. see Stone v. Ritter, 911 A.2d 362 (Del. 2006).
188. See supra text accompanying notes 66-71.
189. E.g., Schnell v. Christ-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971) ("[I]nequitable action does not become permissible simply because it is legally possible.").
190. E.g., tit. 8, § 144 (providing insulation from judicial review of self-interested transactions that are approved by a majority of disinterested directors or shareholders);
191. MODEL BUS. CORP. ACT §§ 8.60-.63 (similar provision).
192. See Marcel Kahan, Paramount or Paradox: The Delaware Supreme Court's Takeover Jurisprudence, 19 J. CORP. L. 583, 592-605 (1994) (offering coherent account of Delawaretakeover cases despite much criticism of them as incoherent);
193. Troy A. Paredes, The Firm and the Nature of Control: Toward a Theory of Takeover Law, 29 J. CORP. L. 103, 138-63 (2003) (offering coherent account of the cases using the theory of the firm).
194. E.g., Weinberger v. UOP, Inc., 457 A.2d 701, 709 n.7 (Del. 1983) (noting that among the strategies boards might use to approve a cash-out merger are independent negotiating committees);
195. see also Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 434-36 (1993) (discussing process-oriented concept of fairness in corporate law).
196. E.g., Paramount Commc'ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 46 (Del. 1994) (noting "directors' obligation to seek the best value reasonably available for the stockholders where there is a pending sale of control");
197. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989) ("[I]n the context of an auction for corporate control. . . directors commit themselves, inexorably, to obtaining the highest value reasonably available to the shareholders under all circumstances.");
198. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 184 (Del. 1986) (discussing directors' obligation, as part of their enhanced duties in a takeover situation, "to bring the target's shareholders the best price available for their equity").
199. E.g., Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1152-55 (Del. 1989) (noting that the burden rests on the target's board of directors to show any defensive measures were reasonable);
200. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955-57 (Del. 1985) (If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed.").
201. Emphasis on the process-oriented rules produces concern that directors and advisors use mindless checklists to meet the expected requirements.
202. See Stephen J. Lubben & Alana J. Darnell, Delaware's Duty of Care, 31 DEL. J. CORP. L. 589, 591 (2006) (noting "the waning of the duty of care [to] a rule that now requires little more of a director than a ritualistic consideration of relevant data");
203. infra Part III .A.
204. See, e.g., tit. 8, §§ 154, 160, 170, 171, 173, 244 (defining and using such technical and arcane terms as capital, surplus, and par value in elaborate detail to regulate a corporation's power to declare and pay dividends and make other distributions to its shareholders).
205. See, e.g., MODEL BUS. CORP. ACT §§ 6.21, 6.40 (2002) (using general tests of ability to pay debts when due and having assets exceed liabilities as limits on a corporation's power to declare and pay dividends and make other distributions to its shareholders).
206. See Klang v. Smith's Food & Drug Centers, Inc., 702 A.2d 150, 152-58 (Del. 1997) (allowing the use of other reasonable measures to determine legality of shareholder distribution despite technical terms in Delaware statute);
207. Randall v. Bailey, 23 N.Y.S.2d 173, 179-83 (N.Y. Sup. Ct. 1940) (construing traditional legal capital statute while recognizing potential departures from general accounting principles as reasonable).
208. See BAYLESS MANNING & JAMES J. HANKS, JR., LEGAL CAPITAL 194-97 (3d ed. 1990) (noting the evolution from old fashioned legal capital rules, which endure in Delaware statutory law, to a liberalized approach contained in modern statutes);
209. Craig A. Peterson & Norman W. Hawker, Does Corporate Law Matter? Legal Capital Restrictions on Stock Distributions, 31 AKRON L. REV. 175, 178 (1997) (concluding, after empirical study, that the forms may matter some for purposes of signaling information to shareholders in the market, even if they do not matter much in respect of creditor protection).
210. E.g., tit. 8, § 271(a).
211. E.g., MODEL BUS. CORP. ACT § 12.02(a).
212. See Hollinger Inc. v. Hollinger Int'l, Inc., 858 A.2d 342, 386 n.79 (Del. Ch. 2004) (emphasizing comparability of Delaware's section 271 with the Model Act's section 12.02(a) despite literal linguistic differences).
213. See Eric Talley, Turning Servile Opportunities to Gold: A Strategic Analysis of the Corporate Opportunities Doctrine, 108 YALE L.J. 279, 279 (1998) (succinctly stating the doctrine in a simple algorithm bearing a rule-like quality and expressing regret that "this doctrinal algorithm has proven unwieldy in application").
214. See generally Ne. Harbor Golf Club, Inc. v. Harris, 725 A.2d 1018, 1021-23 (Me. 1999) (drawing on synthesis of the corporate opportunity doctrine as codified by the American Law Institute as a way to provide clarity to this murky area);
215. Harvey Gelb, The Corporate Opportunity Doctrine: Recent Cases and the Elusive Goal of Clarity, 31 U. RICH. L. REV. 371 (surveying various state tests in corporate opportunity doctrine, including factors of corporate capacity and information disclosure, showing both broad principles and specific rules at work).
216. Matthew G. Dore, Statutes of Limitation and Corporate Fiduciary Claims: A Search for Middle Ground on the Rules I Standards Continuum, 63 BROOK. L. REV. 695, 720-36 (1997).
217. E.g., Griffith & Steele, supra note 9, at 20-23 (contrasting Delaware corporate law's "supple," "flexible," "subtle," and "responsive" corporate law to federal securities regulation, which involves issuing mandates, governance directives, and orders);
218. Faith Stevelman Kahn, Transparency and Accountability: Rethinking Corporate Fiduciary Law's Relevance to Corporate Disclosure, 34 GA. L. REV. 505, 512-13 (2000) (stating that flexible corporate law is more effective than "comparatively rigid, rules-based systems . . . such as the securities laws");
219. Kamar, supra note 72, at 1921 ("It is instructive . . . to compare Delaware law with federal securities law, which . . . [is] rule-based.").
220. E.g., Mark J. Roe, Institutional Foundations for Securities Markets in the West 1, 5-7 (Dec. 17, 2002) (unpublished manuscript, on file with author), available at http://www.econ.nyu.edu/user/frydmanr/Roe-AER2003. doc (explaining that deficiencies of the state corporate law system drove the creation of the federal securities regulatory system).
221. See, e.g., Kuras, supra note 6 (comparing Canadian securities regulation with U.S. securities regulation);
222. Robert Wright, Enron: The Ambitious and the Greedy, 16 WINDSOR REV. LEGAL & SOC. ISSUES 71, 73 (2003) (same).
223. E.g., Securities Act of 1933 § 5(a)(1), 15 U.S.C. § 77e(a)(1) (2000) (making it unlawful to use interstate commerce to sell a security unless a registration statement is effective);
224. id. § 77e(a)(2) (forbidding using interstate commerce to carry an unregistered security for purposes of selling or delivering it);
225. id. § 77e(c) (prohibiting offering to buy or sell a security before a registration statement has been filed for it). Similarly, the Securities Exchange Act exempts government and municipal securities and numerous others. Securities Exchange Act of 1934 § 3(a)(12), 15 U.S.C.A. § 78c(a)(12) (West 1997 & Supp. 2007) (defining "exempted security" for purposes of otherwise required registration under § 78l(b)).
226. Exempted classes of securities under the Securities Act include self-employed benefit plans, commercial paper, charitable and other nonprofit issuers, insurance, compensatory benefit plans, and small issues. Securities Act of 1933 § 3(a)(2)-(4), (8), 15 U.S.C. § 77c(a)(2)-(4), (8) (2000 & Supp. IV 2004);
227. Securities Act Reg. A, 17 C.F.R. § 230.251 (2007); Securities Act Reg. D, 17 C.F.R. § 230.501 (2007);
228. Securities Act Reg. E, 17 C.F.R. § 230.701 (2007). Exempted transactions include exchanges with existing shareholders, intrastate issues, private offerings and transactions by dealers, and brokers. 15 U.S.C. §§ 77c(a)(9), 77c(a)(11), 77d(1)-(4) (2000);
229. Securities Act Rule 144, 17 C.F.R. § 230.144 (2007);
230. Securities Act Rule 144A, 17 C.F.R. § 230.144A (2007). As to safe harbors, see, for example, Securities Act of 1933 §10, 15 U.S.C. § 77j, which allows tombstone advertisements; Chris-Craft Indus., Inc. v. Bangor Punta Corp., 426 F.2d 569, 574 (2d Cir. 1970) (en banc), which emphasizes the rule-like character of the safe harbor, referring to it as based on a "checklist" of features that provides guidance superior to any "judicially formulated 'rule of reason' ";
231. Securities Act Rule 135, 17 C.F.R. § 230.135 (2007), which addresses 15 U.S.C. § 77e(c) liability.
232. Application of Securities Act § 3(a)(9), Securities Act Release No. 646, 11 Fed. Reg. 10,956, 10,956 (Feb. 3, 1936) (limiting eligibility for § 77c(a)(9)'s exemption for exchanges with existing shareholders to an exchange made in good faith and not one intended simply to evade the statute's requirements).
233. See, e.g., Non-Public Offering Exemption, Securities Act Release No. 4552, 27 Fed. Reg. 11,316, 11,316 (Nov. 6, 1962) (explaining that the factors applied to determine whether the private offering exemption is available include the identity, number, and sophistication of the offerees, and size and manner of the offer);
234. Exemption from Securities Act § 4(1), Securities Act Release No. 285, 11 Fed. Reg. 10,952 (Jan. 24, 1935) (listing similar factors).
235. E.g., Exchange Act Rule 15c3-1, 17 C.F.R. § 240.15c3-1 (2007) (specifying methods of computing net capital).
236. E.g., Federal Reserve System Reg. T, 12 C.F.R. §§ 220.1-.132 (2007).
237. E.g., Exchange Act Rule 10a-1, 17 C.F.R. § 240.10a-1 (2007).
238. E.g., Exchange Act Reg. M, 17 C.F.R. §§ 242.100-.105 (2007).
239. E.g., Exchange Act Rule 10b-10, 17 C.F.R. § 240.10b-10 (2007).
240. E.g., 17 C.F.R. §§ 240.10b-9, 240.15c2-4 (2007) (regulating the transmission or maintenance of payments received in connection with underwritings).
241. See Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a) (2000) (prohibiting fraud in connection with the offer or sale of a security); Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b) (2000) (authorizing promulgation of anti-fraud regulations to prohibit use of manipulative or deceptive devices);
242. Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 (2007) (prohibiting the employment of manipulative or deceptive devices in connection with the purchase or sale of a security).
243. Exchange Act Rule 15c1-2, 17 C.F.R. § 240.15c1-2 (2007);
244. Exchange Act Rule 15c2-1, 17 C.F.R. § 240.15c2-1.
245. Kahn v. SEC, 297 F.2d 112, 115 (2d Cir. 1961) (Clark, J., concurring);
246. see also Roberta Karmel, Is the Shingle Theory Dead?, 52 WASH. & LEE L. REV. 1271, 1271 (1995) (explaining the concept as constituting an implied representation of fair dealing based upon holding oneself out to the public as a broker or dealer).
247. Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 173-74 (3d Cir. 2001) (en banc);
248. Order Execution Obligations, Exchange Act Release No. 37.619A, 61 Fed. Reg. 48,290, 48,322 (Aug. 29, 1996).
249. Securities Exchange Act of 1934 § 15(b)(4)(E), 15 U.S.C. § 78o(b)(4)(E);
250. see also Prudential Securities, Inc., Exchange Act Release No. 48,149, 80 SEC Docket 1785, 1785-87 (July 10, 2003) (finding, on the basis of Prudential Securities, Inc.'s settlement offer, that Prudential Securities, Inc. violated § 78o(b)(4)(E) by failing to supervise an employee who committed fraud in connection with the sale of securities); Prudential-Bache Securities, Inc., Exchange Act Release No. 22,755, [1985-1986 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 83,948, at 87,930, 87,945-48 (Jan. 2, 1986) (censuring Prudential-Bache Securities, Inc. for failure to supervise branch office managers).
251. See generally Lewis D. Lowenfels & Alan R. Bromberg, Broker-Dealer Supervision: A Troublesome Area, 25 SETON HALL L. REV. 527 (1994) (discussing the recent focus on supervision and the lack of clarity in the regulatory duties that complicate the issue);
252. John H. Walsh, Right the First Time: Regulation, Quality, and Preventive Compliance in the Securities Industry, 1997 COLUM. BUS. L. REV. 165, 169-206 (discussing the regulatory developments that encourage supervision).
253. See, e.g., Press Release, Sec. & Exch. Comm'n, SEC, NY Att'y Gen., NASD, NASAA, NYSE, and State Regulators Announce Historic Agreement to Reform Inv. Practices, (Dec. 20, 2002), http://www.sec.gov/news/press/2002-179. htm (announcing a "global settlement" among brokerage firms, state regulators, securities exchanges, and prosecutors in which brokerage firms now must "insulat[e] research analysts from investment banking pressure").
254. See Parnes, Litigation Release No. 16,877, 74 SEC Docket 708 (Jan. 31, 2001) (proceedings concerning Datek Securities).
255. E.g., SEC Reg. S-K, 17 C.F.R. pt. 229 (2007);
256. Securities Act Reg. C, 17 C.F.R. § 230.408 (2007);
257. Exchange Act Reg. 12B, 17 C.F.R. § 240-12b-20 (2007).
258. See supra text accompanying note 65 (discussing Section 13(d)'s requirements).
259. Congress, the SEC and courts have emphatically eschewed providing any bright-line content to the concept of materiality. See, e.g., Basic v. Levinson, 485 U.S. 224, 236 (1988) (rejecting agreement-in-principle test to trigger materiality of preliminary merger negotiations and stating that while "[a] bright-line rule indeed is easier to follow than a standard that requires the exercise of judgment in the light of all the circumstances . . . . ease of application alone is not an excuse for ignoring the purposes of the securities acts and Congress' policy decisions"); Selective Disclosure and Insider Trading, Securities Act Release No. 7881, Exchange Act Release No. 43,154, Investment Company Act Release No. 24,599, 73 SEC Docket 3, 10 (Aug. 15, 2000) ("[W]e do not believe an appropriate answer to [the difficulty of defining materiality] is to set forth a bright-line test, or an exclusive list of 'material' items.");
260. SEC Staff Accounting Bulletin No. 99, Release No. SAB 99, 64 Fed. Reg. 45,150, 45,151 (Aug. 12, 1999) (rejecting efforts to design rules of thumb for accounting, such as a threshold measure of 5% of earnings).
261. Securities Act Reg. C, 17 C.F.R. § 230.421(c), (d)(2) (requiring all prospectus information to be written in clearly understandable prose and prohibiting multiple negatives, respectively).
262. OFFICE OF THE CHIEF ACCOUNTANT, SEC. & EXCH. COMM'N, STUDY PURSUANT TO SECTION 108(D) OF THE SARBANES-OXLEY ACT OF 2002 ON THE ADOPTION BY THE UNITED STATES FINANCIAL REPORTING SYSTEM OF A PRINCIPLES-BASED ACCOUNTING SYSTEM (2003), available at http://www.sec.gov/news/studies/principlesbasedstand.htm [hereinafter SEC, SOX 108 STUDY]. The SEC's typology is discussed in detail in the next Section.
263. United States v. O'Hagan, 521 U.S. 642, 651-53 (1997).
264. Four classes of persons are exposed to insider trading restrictions and hence liability: classical insiders (based on corporate positions), temporary insiders (often professionals providing services to the corporation), tippers and tipees in the flow of information that includes such insiders, and misappropriators who essentially steal inside information. Ultimately, all these persons are restricted and liable based upon some ultimate connection to a breach of fiduciary duty.
265. See, e.g., id. (misappropriation);
266. Dirks v. SEC, 463 U.S. 646, 659-60 (1983) (tipping);
267. SEC v. Tome, 833 F.2d 1086, 1095 (2d Cir. 1987) (temporary insider);
268. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848-49 (2d Cir. 1968) (classical insider).
269. Harvey L. Pitt & Karen L. Shapiro, Securities Regulation by Enforcement: A Look Ahead At the Next Decade, 7 YALE J. REG. 149, 156-57 (1990). The foundations of this enforcement program were rooted in principles established two decades earlier.
270. See Cady, Roberts & Co., 40 S.E.C4. 907, 910-16 (1961) (describing anti-fraud rules-Securities Act section 17(a), Exchange Act section 10(b), and Exchange Act Rule 10b-5 - as "broad remedial provisions aimed at reaching misleading or deceptive activities").
271. See Douglas M. Branson, Choosing the Appropriate Default Rule: Insider Trading Under State Law, 45 ALA. L. REV. 753, 759-60 (1994) (dissecting the "complex" law of tippee liability stated in Dirks);
272. see also Lawrence E. Mitchell, The Jurisprudence of the Misappropriation Theory and the New Insider Trading Legislation: From Fairness to Efficiency and Back, 52 ALB. L. REV. 775, 778-81 (1988) (criticizing the misappropriation theory developed by common law as a problematic blending of a "conduct" approach with an "effect" approach).
273. Exchange Act Rule 10b5-2, 17 C.F.R. § 240.10b5-2 (2007) (stating three non-exclusive circumstances in which a person receiving confidential information owes a duty of trust or confidence that would trigger application of the misappropriation theory);
274. see also SEC v. Yun, 327 F.3d 1263, 1273 (11th Cir. 2003) (discussing background and scope of the SECs rule).
275. Exchange Act Rule 10b5-1(c), 17 C.F.R. § 240.10b5-1(c) (stating that insiders may trade on inside information when it is clear that the information is not a factor in their decision to trade, as under a pre-existing plan, contract, or good faith instruction).
276. See Alan D. Jagolinzer, Do Insiders Trade Strategically within the SEC Rule 10b5-1 Safe Harbor? (Aug. 29, 2005) (unpublished manuscript, on file with author), for a discussion that provides evidence suggesting that insiders exploit the rule-like characteristics of this provision.
277. Section 9 of the Exchange Act prohibits "manipulation of security prices." Securities Exchange Act of 1934 § 9(a)(2), 15 U.S.C. § 78i(a)(2) (2000) (making it unlawful for any person to effect transactions "creating actual or apparent trading activity . . . or raising or depressing [its] price . . . for the purpose of inducing the purchase or sale of such security by others"). For another example of a factor test,
278. see supra note 138 (distinguishing between public offerings and private placements of securities).
279. Section 10(b), 15 U.S.C. § 78j(b).
280. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977) ("[Manipulation] refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity.").166. Factors include activity-related features such as placing trades near the end of the day to exert price pressure and trading activity based on non-economic factors, and context-related features such as the trader's ownership concentration in the security and relative trading volume in it. Patten, Release No. ID-303, 86 SEC Docket 2336, 2339 (Dec. 12, 2005);
281. see also Finance Investments, Inc., Exchange Act Release No. 51,530, 85 SEC Docket 533, 534 (Apr. 12, 2005) (focusing on trading activity based on non-economic factors in finding market manipulation and also finding failure to supervise). Apparent motivations are relevant, like efforts that maintain a market price exceeding the minimum required for continued listing (such as $1.00 on the NASDAQ Stock Market). Patten, Release No. ID-303, 86 SEC Docket 2336, 2350 (Dec. 12, 2005). Evidence of market manipulation tends to be inferred from detailed facts, such as evidence of motive, placing orders for large numbers of shares and later canceling all or part of the order before it cleared, and matching of purchases by one participant in a scheme with sales by another.
282. The U.S. federal securities laws contain numerous anti-fraud provisions, including Exchange Act section 10(b), Securities Act section 17(a), Exchange Act Regulation 14A governing proxy solicitations, and Exchange Act section 14(e) and Regulation 14E governing tender offers. See 2005 SEC PERFORMANCE & ACCOUNTABILITY REP. 8 (explaining that the overall enforcement program must reach across all areas to achieve "[e]ffective deterrence of securities fraud' (emphasis added)).
283. E.g., Securities Act Rule 144A, 17 C.F.R. § 230.144A prelim. note 3 (2007) (qualifying the exemption for offers and sales to qualified institutional buyers);
284. Securities Act Rule 147, 17 C.F.R. § 230.147 prelim, note 3 (qualifying the exemption for single-state transactions);
285. Securities Act Reg. D, 17 C.F.R. § 230.501 prelim. note 6 (2007) (qualifying the exemption for offers and sales made under Regulation D);
286. Securities Act Reg. S, 17 C.F.R. § 230.901 prelim. note 2 (2007) (qualifying the exemption for off-shore transactions).
287. Exchange Act Rule 12g5-1(b)(3), 17 C.F.R. § 240.12g5-1(b)(3) (2007).
288. Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 835 F.2d 1031, 1036 (3d Cir. 1987).
289. Provisions concerning liability and defenses often hinge on principles too, such as scienter, knowledge, reasonable belief or investigation, privity, loss causation, and transaction causation.
290. This discussion has not mentioned the Trust Indenture Act, the Investment Company Act, the Investment Advisers Act, or the Gramm-Leach-Bliley Act. But a study of these laws and related regulations reveals a mixture of rules and principles that likewise defy tidy classification of the overall systems as rules-based or principles-based.
291. Proxy solicitation provisions, contained in Regulation 14A, involve (a) principles-like matters such as the definition of solicitation, exemptions, and safe harbors, (b) specific rule-like disclosure requirements for proxy statements, filing requirements, and forms of proxy, (c) shareholder proposal provisions and grounds for exclusion which blend a mixture of rules and principles, and (d) elaborate provisions encompassing the entire context in which proxy solicitations proceed, addressing the special roles of bankers, brokers, and dealers. Exchange Act Reg. 14A, 17 C.F.R. §§ 240.14a-1 to 14b-2 (2007).
292. See Wellman v. Dixon, 475 F. Supp. 783, 823-24 (S.D.N.Y. 1979) (stating the test). Compare Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 56-57 (2d Cir. 1985) (reciting but rejecting the test), with SEC v.
293. E.g., Lyman P.Q. Johnson & Mark A. Sides, Corporate Governance and the Sarbanes-Oxley Act: The Sarbanes-Oxley Act and Fiduciary Duties, 30 WM. MITCHELL L. REV. 1149, 1195 (2004) (characterizing the Sarbanes-Oxley Act as "adopt[ing] a wholly novel, rules-based approach to corporate governance");
294. Wright, supra note 134 (denigrating the "rules-based" approach of Sarbanes-Oxley).
295. See Jeffrey M. Lipshaw, Sarbanes-Oxley, Jurisprudence, Game Theory, Insurance and Kant: Toward a Moral Theory of Good Governance, 50 WAYNE L. REV. 1083, 1085, 1090-95 (2004) (explaining how common law at times provided an underlying basis in principles for Sarbanes-Oxley).
296. Katherine Schipper, Principles-Based Accounting Standards, 17 ACCT. HORIZONS 61, 71 (2003) (asserting that the Sarbanes-Oxley Act contains "detailed and prescriptive corporate governance, at the federal level," being "markedly different from the principles-based approach that has historically been taken at the state level" and warning that this atmosphere will, in turn, stoke demand for more rules in accounting).
297. See supra note 7 (citing sources).
298. Rebecca Toppe Shortridge & Mark Myring, Defining Principles-Based Accounting Standards, CPAJ., Aug. 2004, at 34.
299. Compare BARRY J. EPSTEIN & ABBAS ALI MIRZA, WILEY IAS 2004: INTERPRETATION AND APPLICATION OF INTERNATIONAL ACCOUNTING AND FINANCIAL REPORTING STANDARDS 559 (discussing classification under IAS No. 17) with ACCOUNTING FOR LEASES, Statement of Fin. Accounting Standards No. 13, ¶¶ 7(c)-(d) (Fin. Accounting Standards Bd. 1976).
300. CLASSIFICATION OF SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED, Statement of Fin. Accounting Standards No. 6, ¶ 11 (Fin. Accounting Standards Bd. 1975). The characteristics are essentially an expiration date beyond one year, limited lender cancellation rights, no covenants that are being breached, and the lender having capacity to consummate the financing.
301. Id.
302. Id. (dissenting opinion).
303. CLASSIFICATION OF OBLIGATIONS THAT ARE CALLABLE BY THE CREDITOR, Statement of Fin. Accounting Standards No. 78, ¶ 5 (Fin. Accounting Standards Bd. 1983).
304. Id. at ¶ 6 (dissenting opinion).
305. See ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, Statement of Fin. Accounting Standards No. 115 (Fin. Accounting Standards Bd. 1993).
306. Compare PATRICK R. DELANEY ET AL., WILEY GAAP 2004: INTERPRETATION AND APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 161-204 (2004) (explaining U.S. GAAP treatment of derivatives accounting),
307. with EPSTEIN & MIRZA, supra note 180, at 159-201 (explaining IAS treatment of derivatives accounting).
308. See also Nobes, supra note 67, at 13 ("The IAS No. 39 file at the IASB records that the project director . . . considered twelve FASB Statements, nine FASB Technical Bulletins, seven APB Opinions, nineteen AICPA Statements of Position, and 109 EITF consensuses.").
309. See FINANCIAL INSTRUMENTS: RECOGNITION AND DEVELOPMENT, Int'l Accounting Standard No. 39, ¶ 9 (Int'l Accounting Standards Bd. 2006);
310. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, Statement of Fin. Accounting Standards No. 115, ¶¶ 7, 12 (Fin. Accounting Standards Bd. 1993).
311. See Schipper, supra note 177, at 65-67, 71 (emphasizing that U.S. GAAP on derivatives ultimately is based on a fundamental principle of managerial intent).
312. A post-Enron revision expands the concept to require consolidation of so-called variable interest entities despite the basic rule. CONSOLIDATION OF VARIABLE INTEREST ENTITIES, FASB Interpretation No. 46 (Fin. Accounting Standards Bd. 2003).
313. See, e.g., Jonathan R. Macey, A Pox on Both Your Houses: Enron, Sarbanes-Oxley and the Debate Concerning the Relative Efficacy of Mandatory Versus Enabling Rules, 81 WASH. U. L.Q. 329, 337 (2003) ("Enron would create an SPE and 'buy' 97 percent of the equity in the entity in exchange for giving the entity some illiquid asset of highly uncertain value that Enron wanted to clear off its balance sheet. For SEC/GAAP purposes, this arrangement would permit Enron to move the asset off its balance sheet and even show a profit on its sale, so long as 3 percent of the equity in the SPE was owned by independent, outside investors.")
314. (citing Victor Fleischer, Enron's Dirty Tax Secret: Waiting for the Other Shoe to Drop, 94 TAX NOTES 1045 (2002)).
315. See Are Current Financial Accounting Standards Protecting Investors: Hearing Before the Subcomm. on Commerce, Trade and Consumer Protection of the H. Comm. on Energy and Commerce, 107th Cong. (2002) (statement of Edmund L. Jenkins, Chairman, Financial Accounting Standards Board) (explaining that when the equity level is that low, 100% of it must be held by third parties);
316. see also Gary J. Aguirre, The Enron Decision: Closing the Fraud-Free Zone on Errant Gatekeepers?, 28 DEL. J. CORP. L. 447, 454-55 (2003) ("First, it could not be controlled directly or indirectly by Enron. Second, an equity investor, also independent of Enron, must put at risk at least three percent of the SPE's capital.").
317. See generally THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK, Accounting Principles Bd. Opinion No. 18 (Accounting Principles Bd. 1971) (Messr. Broeker assenting with qualification),
318. reprinted in FIN. ACCOUNTING STANDARDS BD., ORIGINAL PRONOUNCEMENTS: AS AMENDED: VOLUME III APB18 (2005/2006 ed. 2005) (opining that investors in non-majority investments "should always be required to demonstrate an ability to exercise significant influence over the operating and financial policies of an investee and that at no level of voting control under 51% should such significant influence be presumed to exist"). Another disagreed "with the arbitrary criterion of 20% combined with a variable test of 'significant influence'. . . because such an approach is not convincing in concept and will be very difficult to apply in practice."
319. Id. (Messrs. Catlett & Horngren assenting with qualification). FASB Interpretation No. 35 clarifies: If there is an indication that an investor owning 20 percent or more of an investee's voting stock is unable to exercise significant influence over the investee's operating and financial policies, all the facts and circumstances related to the investment shall be evaluated to determine whether the presumption of ability to exercise significant influence over the investee is overcome.
320. CRITERIA FOR APPLYING THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK, FASB Interpretation No. 35 (Fin. Accounting Standards Bd. 1981).
321. E.g., C. W. Mulford & E. Comiskey, Investment Decisions and the Equity Accounting Standard, 61 ACCT. REV. 519 (1986) (performing empirical study and concluding that the 20% trigger influences investment decisions).
322. ACCOUNTING FOR CONTINGENCIES, Statement of Financial Accounting Standards No. 5 (Fin. Accounting Standards Bd. 1975).
323. See William W. Bratton, Private Standards, Public Governance: A New Look at the Financial Accounting Standards Board, 48 B.C. L. REV. 5, 26-37 (2007) (noting that the FASB chose decision usefulness - or "external transparency" - as the primary goal of accounting theory).
324. E.g., Schipper, supra note 177, at 61-63;
325. see also William W. Bratton, Jr., Enron, Sarbanes-Oxley, and Accounting: Rules Versus Principles Versus Rents, 48 VILL. L. REV. 1023, 1043-44 (2003) (explaining how Enron misunderstood a "three percent rule of thumb test" for third-party equity investment to be a rigid rule despite the SEC repeatedly insisting that the test was a principle and not "to be taken as a one-size-fits-all test").
326. Schipper, supra note 177, at 62.
327. Id. at 62-63, 66. Professor Bratton identifies at least seven other core principles in U.S. GAAP: (1) realization principle (revenue is recognized only when the earnings process is essentially complete); (2) matching principle (expenses are allocated to the period in which the related benefit contributes to generating revenue); (3) conservatism principle (prudent reaction to uncertainty as by using the least optimistic estimates); cost principle (assets are reported at historical cost, not at higher market prices; (4) consistency principle (using the same accounting methods over time); (5) materiality principle (information in financial statements should be meaningful to users and not trivial); (6) objectivity principle (information in financial statements should be verifiable); and (7) disclosure principle (full and fair disclosure should be made in financial statements).
328. Bratton, supra note 196, at 1048.
329. SEC, SOX 108 STUDY, supra note 156 (noting provisions addressing real estate sales, receivables transfers, investments, derivatives, leases, pensions, retiree benefits, stock options, and income taxes).
330. Id. (noting provisions addressing foreign currency translation, interest capitalization, intangible assets, asset retirement obligations, long-lived asset impairment, inventory, business combinations, and restructurings).
331. Id. (giving only one example of "principles-only" provisions, historical cost of depreciable assets).
332. See Nobes, supra note 67, at 29 (searching for an underlying principle in IAS No. 39).
333. Cf. GARY JOHN PREVTTS & BARBARA DUBIS MERINO, A HISTORY OF ACCOUNTANCY IN THE UNITED STATES: THE CULTURAL SIGNIFICANCE OF ACCOUNTING 361-62 (1998) (recognizing a need for harmonizing accounting standards among nations while noting the obstacles presented by cultural and political differences).
334. See Nelson, supra note 14, at 92 ("IAS appear more principle-based [than U.S. GAAP in part because] they have not had as much time to accrete rules.").
335. Schipper, supra note 177, at 67 ("The only way to provide for treatment and scope exceptions is by means of rules. . . . [S]ome of the detail and complexity in U.S. GAAP stems directly from requests for clarification or expansion of scope and treatment exceptions.").206.
336. See generally SEC. & EXCH. COMM'N, REPORT PURSUANT TO SECTION 704 OF THE SARBANES-OXLEY ACT OF 2002 (2003), available at http://www.sec.gov/news/studies/sox704report.pdf [hereinafter SEC, SOX 704 REPORT] (studying SEC enforcement actions from 1997 to 2002, as directed by section 704 of the Act, to prepare this study to identify areas of financial disclosure most susceptible to fraud and other improper conduct).
337. The requirement for revenue recognition is completion or substantial completion of the activity associated with the earnings process. See SEC Staff Accounting Bulletin No. 101, Release No. SAB 101, 64 Fed. Reg. 68,936, 68,936, 68,940 (Dec. 9, 1999) (explaining that "revenue should not be recognized until it is realized or realizable and earned," and discussing the further requirement that distinct earnings processes must be separated).
338. SEC, SOX 704 REPORT, supra note 206, at 5. U.S. GAAP's expense recognition principle is that expenses are to be recognized when incurred.
339. Id. at 14.
340. Id. at 14, 19. These accounting standards include SFAS 144 - Accounting for the Impairment or Disposal of Long Lived Assets, SFAS 141 - Business Combinations, and SFAS 146 - Accounting for Costs Associated with Exit or Disposal Activities.
341. See id. at 43 n.106.
342. Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911, 1916 (1996).
343. See Jeffrey Kahn, The Search for the Rule of Law in Russia, 37 GEO. J. INT'L L. 353, 380-87 (2006) (discussing the absence of the "rule of law" in Soviet Russia).
344. Black & Kraakman, supra note 210.
345. Id. at 1933, 1943.
346. Id. at 1955.
347. Id. at 1933.
348. Id. at 1967-68.
349. Id. at 1968-69.
350. See supra notes 123-25 and accompanying text.
351. Black & Kraakman, supra note 210, at 1969.
352. Id. ("[W]e can do no better than the vague standard, familiar from fraudulent conveyance law.").
353. Id. at 1934.
354. See supra notes 100-103 and accompanying text.
355. Black & Kraakman, supra note 210, at 1942-43.
356. Id. at 1935 (stating that independent directors shall approve an interested transaction "only if the company receives consideration, in exchange for property or services delivered by the company, that is worth no less than the market value of the property or services, and the company pays consideration, in exchange for property or services, that does not exceed the market value of the property or services").
357. Cf. Braithwaite, supra note 11, at 73
358. (citing Clifford D. Shearing & Richard V. Ericson, Towards a Figurative Conception of Action, 42 BRIT. J. SOC. 481 (1991)). Professors Black and Kraakman subsequently examined the forces contributing to the failure of the concurrent mass privatization program Russia undertook, attributing this largely to corruption enabled by insufficient protections against self-dealing by powerful corporate managers.
359. Bernard Black, Reinier Kraakman & Anna Tarassova, Russian Privatization and Corporate Governance: What Went Wrong?, 52 STAN. L. REV. 1731, 1731 (2000). This is a problem that legal rules are illequipped to handle in cultures lacking requisite norms that can be promoted by elaborating principles.
360. See generally Kevin E. Davis, Law-Making in Small Jurisdictions, 56 U. TORONTO L.J. 151, 152-53 (2006) (exploring the possibility that smaller or less developed countries could find it more appealing to adopt relatively vague standards rather than bright-line rules).
361. See Rado Bohinc & Stephen M. Bainbridge, Corporate Governance in Post-Privatized Slovenia, 49 AM. J. COMP. L. 49, 53 (2001) (providing an account of Slovenia's new corporate law, described as "property-rights based," and using the German co-determination model without using the terms "rules-based" or "principles- based");
362. Uriel Procaccia, Crafting a Corporate Code from Scratch, 17 CARDOZO L. REV. 629, 629 (1996) (providing an account of Israel's new market-based corporate code, also without using such other terms).
363. B.C. SECURITIES COMMISSION, QUESTIONS & ANSWERS: NEW BRITISH COLUMBIA SECURITIES ACT 1 (2004), available at http://www.bcsc.bc.ca/uploadedFiles/2004_ New_LegislationQ-A.pdf.
364. British Columbia Securities Act, Bill 38, 5th Session, 37th Parliament (2004) (not enacted as law) [hereinafter BC Securities Bill].
365. Id. pt. 5, §§ 27-28.
366. Id. pt. 6, § 29.
367. Id. pt. 1, § 1.
368. Id. pt. 4, § 20.
369. Id. pt. 1, § 1.
370. Id.
371. See SEC v. W.J. Howey Co., 328 U.S. 293, 298-301 (1946) (taking a broad, flexible approach to defining investment contracts, a subset of "securities");
372. see, e.g., Shanah D. Glick, Note, Are Viatical Settlements Securities Within the Regulatory Control of the Securities Act of 1933?, 60 U. CHI. L. REV. 957, 968-84 (1993) (arguing that viatical settlements are not "securities" as defined under the Securities Act of 1933).
373. Misrepresentation is defined as: (a) [I]n relation to an issuer (i) an untrue statement of material information or significant information, (ii) the failure to disclose material information or significant information that is required to be disclosed, or (iii) the omission of material information or significant information from a statement, if that information is necessary to prevent the statement from being false or misleading in the circumstances, or (b) in any other circumstance, a statement about something that a reasonable investor would consider important (i) in making a decision to trade a security, or (ii) in relation to a trading or advising relationship with a person, if the statement is untrue or omits information necessary to prevent the statement from being false or misleading in the circumstances. BC Securities Bill, supra note 228, pt. 1, § 1.
374. Id. pt. 3, § 14.
375. Id. pt. 4, § 18.
376. Id. pt. 4, § 25.
377. Id. pt. 4, § 26.
378. Id. pt. 4, § 30.
379. The B.C. Act's definition of "connected person" reads as follows: Connected person means, in relation to an issuer, (a) an insider, officer, employee, affiliate or associate of the issuer; (b) a person that is making or proposing to make a takeover bid for the securities of the issuer; (c) a person that is proposing to (i) become a party to a reorganization or business combination with the issuer, or (ii) acquire a substantial portion of the property of the issuer; (d) a person engaging in or proposing to engage in any business or professional activity with or on behalf of the issuer or with or on behalf of a person referred to in paragraph (b) or (c); (e) an insider, officer, employee, affiliate or associate of a person referred to in paragraph (b), (c) or (d); (f) a person with inside information, if the information was obtained at a time when the person was a connected person under paragraph (a), (b), (c), (d) or (e), or (g) a person that obtained inside information from another person (i) who, at the time, was a connected person under this definition, including this paragraph, and (ii) whom the person knew or reasonably should have known was a connected person.
380. Id. pt. 6, § 30.
381. Cf. HERMAN MELVILLE, MOBY-DICK, OR, THE WHALE 406 (positing a famous statement of two simple principles governing property rights when fishing - a "Fast-Fish belongs to the party fast to it" and a "Loose-Fish is fair game for anybody who can soonest catch it"-but lamenting that "what plays the mischief with this masterly code is the admirable brevity of it, which necessitates a vast volume of commentaries to expound it").
382. Sarbanes-Oxley Act § 108(d), 15 U.S.C. § 7266 (Supp. II 2002).
383. See supra note 2 (citing sources).
384. SEC, SOX 108 STUDY, supra note 156.
385. Id.
386. Id.
387. Id.
388. Id.
389. Id.
390. See United States v. Simon, 425 F.2d 796, 805-06 (2d Cir. 1969) (holding that an accountant is not insulated from liability solely on the basis of proving conformity to generally accepted accounting principles);
391. James D. Cox, Reforming the Culture of Financial Reporting: The PCAOB and the Metrics for Accounting Measurements, 81 WASH. U. L.Q. 301, 319-20 (2003) (discussing Simon in current context).
392. SEC, SOX 108 STUDY, supra note 156;
393. see also Certification of Disclosure in Companies' Quarterly and Annual Reports, Securities Act Release No. 8,124, Exchange Act Release No. 46,427, Investment Companies Act Release No. 25,722, 78 SEC Docket 875, 880 (Aug. 28, 2002) (stating that auditors' certification is not limited to whether financial statements conform to GAAP);
394. Floyd Norris, An Old Case Is Returning to Haunt Auditors, N.Y. TIMES, Mar. 1, 2002, at C1 (noting how the incumbent SEC Chairman had been touting Simon).254. Early in its history, the SEC took the position that compliance with GAAP is not a defense to allegations of inadequate disclosure.
395. In re Associated Gas & Elec. Co., 11 SEC 975, 1058-59 (1942). Some cases from the 1970s, in addition to United States v. Simon, did so, as well.
396. E.g., McLean v. Alexander, 420 F. Supp. 1057, 1085 (D. Del. 1976), rev'd on other grounds, 599 F.2d 1190 (3d Cir. 1979)
397. (citing In re Associated Gas & Electric Co. and Herzfeld v. Laventhol, Krekstein, Horwath & Horwath when holding that compliance with GAAP is "not a complete defense to charges of inadequate disclosure");
398. Herzfeld v. Laventhol, Krekstein, Horwath & Horwath, 378 F. Supp. 112, 122 (S.D.N.Y. 1974), aff'd in part, rev'd in part on other grounds, 540 F.2d 27 (2d Cir. 1976) ("The full disclosure by insiders, which is mandated by the securities laws, coincides with and reinforces the accountant's professional duty to investors who read his reports. This duty cannot be fulfilled merely by following generally accepted accounting principles."). These cases were cited with moderate frequency in the latter 1970s and early 1980s but then fell into desuetude. Case law thereafter suggested that compliance with GAAP discharged one's obligations in financial reporting.
399. E.g., SEC v. Price Waterhouse, 797 F. Supp. 1217, 1225 (S.D.N.Y. 1992) (finding that because Price Waterhouse's accounting procedures were in conformity with GAAP, they were not so defective as to support an inference of fraud). The old line of cases has been revived in the post-Enron era.
400. See In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 340 (S.D.N.Y. 2004) (holding that compliance with GAAP does not insulate accountants from liability under the securities laws). An alternative means of imposing liability despite compliance with GAAP invokes an SEC rule that requires financial statements to include, in addition to that expressly required, any information necessary to avoid misleading investors.
401. SEC v. Caserta, 75 F. Supp. 2d 79, 92 (S.D.N.Y. 1999); Exchange Act Rule 12b-20, 17 C.F.R. § 240.12b-20 (2007).
402. This belief is embedded in the standard form for an independent auditor's unqualified opinion, which reads as follows: "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of X Company as of (at) December 31, [20xx], and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles."
403. See, e.g., Coca-Cola Co., Annual Report (Form 10-K), at 126 (Feb. 20, 2007). AICPA explains how these concepts of "present fairly" and GAAP relate to each other: "The independent auditor's judgment concerning the 'fairness' of the overall presentation of financial statements should be applied within the framework of generally accepted accounting principles." THE MEANING OF "PRESENT FAIRLY IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES," Statement on Auditing Standards No. 69 ¶ .03 (Am. Inst, of Certified Pub. Accountants 1992),
404. reprinted in AM. INST. OF CERTIFIED PUB. ACCOUNTANTS, CODIFICATION OF STATEMENTS ON AUDITING STANDARDS AU § 411 (2007). This professional stance implies that there are not two separate requirements-of presenting fairly and in conformity with GAAP - but that the two are intertwined. On the other hand, professional standards authorized departures from GAAP when doing so was necessary to prevent financial statements from being "misleading." REPORTS ON AUDITED FINANCIAL STATEMENTS, Statement on Auditing Standards No. 58 ¶ .14 (Am. Inst, of Certified Pub. Accountants 1988),
405. reprinted in AM. INST. OF CERTIFIED PUB. ACCOUNTANTS, CODIFICATION OF STATEMENTS ON AUDITING STANDARDS AU § 508.14 (2007). Such opinions have been rare.
406. See DAN M. GUY ET AL., WILEY PRACTITIONER'S GUIDE TO GAAS 361 (2004) ("Only a handful of such reports have ever been issued."); see also id. at 365 (excerpting an example from 1976).
407. FASB's 2002 proposal of a principles approach to standard setting contemplated elevating the requirement of fair presentation to overarching importance so that accounting choices would reflect underlying economic reality.
408. FASB, 2002 PROPOSAL, supra note 2, at 1-2, 4, 7. The SEC's conclusion in its report may explain why this proposal did not appear to gain traction. British accounting experts describe such a stance as involving a "true and fair override," while that usage is not prevalent among U.S. accountants.
409. See, e.g., David Alexander & Simon Archer, On Economic Reality, Representational Faithfulness and the 'True and Fair Override,' 33 ACCT. & BUS. RES. 3, 3 (2003).
410. SEC, SOX 108 STUDY, supra note 156.
411. See, e.g., William W. Bratton, Venture Capital on the Downside: Preferred Stock and Corporate Control, 100 MICH. L. REV. 891, 933-34 (2002) (noting that while plaintiffs once had argued for a broad interpretation of the good faith standard in cases brought by bond holders and preferred stock holders, courts instead "invented a restrictive variant");
412. Joseph P. Liu, Regulatory Copyright, 83 N.C. L. REV. 87, 105-06 (2004) (stating that the 1976 revision of the Copyright Act "provides a highly detailed and specific set of rules," unlike previous acts, which had left the courts "to craft more via the fair use doctrine");
413. Gregory E. Maggs, Karl Llewellyn's Fading Imprint on the Jurisprudence of the Uniform Commercial Code, 71 U. COLO. L. REV. 541, 564-72 (2000) (noting that while the original intent of the drafters of the Uniform Commercial Code was to facilitate a "purposive interpretation" of the Code, the growing trend has been toward a "textualist approach").
414. See, e.g., JEAN TIROLE, THE THEORY OF CORPORATE FINANCE 199 (2006) (discussing different methods of risk management).
415. See, e.g., Jody Freeman, The Private Role in Public Governance, 75 N.Y.U. L. REV. 543, 545-49 (2000) (arguing that administrative law is "a set of negotiated relationships" between the public and the private sector);
416. Jody Freeman, Collaborative Governance in the Administrative State, 45 UCLA L. REV. 1, 3, 21-22 (1997) (advocating for a system of "collaborative governance" in the administrative process);
417. see also Paul R. Verkuil, Public Law Limitations on Privatization of Government Functions, 84 N.C. L. REV. 397, 466-69 (2006) (arguing that, despite the increase in privatization, the public sector must retain its influence in order to provide private sector guidance and oversight).
418. See IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION: TRANSCENDING THE DEREGULATION DEBATE 3 (1992) ("If we accept that sound policy analysis is about understanding private regulation . . . and how it is interdependent with state regulation, then interesting possibilities open up to steer the mix of private and public regulation.");
419. JAY A. SIGLER & JOSEPH E. MURPHY, INTERACTIVE CORPORATE COMPLIANCE 43-44 (1988) (arguing for a system of "interactive compliance" between government and business to avoid either rigid regulatory policy or excessive deregulation).
420. E.g., Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 77z-2, 78u-5(c) (2000) (section 27A of the 1933 Act and section 21E of the 1934 Act) (detailing when one is liable for making a forward-looking statement);
421. Securities Act Rule 175, 17 C.F.R. § 230.175 (2007) (detailing which statements made by an issuer or outside reviewer obtained by the issuer are deemed not to be fraudulent as long as they were made in good faith or with a reasonable basis);
422. Exchange Act Rule 3b-6, 17 C.F.R. § 240.3b-6 (2007) (same);
423. NAT'L ASS'N OF SEC. DEALERS, NASD MANUAL (2007) (specifying rules of broker conduct).
424. See, e.g., Saby Ghoshray, To Understand Foreign Court Citation: Dissecting Originalism, Dynamism, Romanticism, and Consequentialism, 69 ALB. L. REV. 709, 717 ("Anchored in the text, structure, and history of the [statute], textualism seeks the most literal meaning, free from the perceptive idealism of broader social purpose."). For a further inquiry into the nuances between textualism and intentionalism,
425. see Caleb Nelson, What is Textualism?, 91 VA. L. REV. 347, 376, which states: "[N]o mainstream judge is interested solely in the literal definitions of a statute's words, and textualists are willing to deviate in certain ways from the baseline that conventional meaning provides. Still, textualists prefer such deviations to be guided by relatively rule-like principles."
426. See Richard Lavoie, Subverting the Rule of Law: The Judiciary's Role in Fostering Unethical Behavior, 75 U. COLO. L. REV. 115, 195 (2004) ("To the extent a GAAR is successful in changing judicial approaches to statutory interpretation in tax shelter cases, practitioners' views will change to reflect the new legal landscape.").
427. Illustrative are debates concerning derivatives regulation among the SEC, the Commodities Futures Trading Commission (CFTC), and the International Swap Dealers Association (ISDA). See Frank Partnoy, The Shifting Contours of Global Derivatives Regulation, 22 U. PA. J. INT'L ECON. L. 421, 429-32 (2001) (noting that competition between the SEC and the CFTC has resulted in "a nasty and inefficient 'turf battle' " as opposed to increased efficiency).
428. See Bratton, supra note 196, at 1049 (arguing that rules "should with some frequency lead the auditor to say no to aggressive treatments chosen by clients, on grounds of full disclosure and conservatism");
429. Michael Gibbins, Steve Salterio & Alan Webb, Evidence About Auditor-Client Management Negotiation Concerning Client's Financial Reporting, 39 J. ACCT. RES. 534, 539 (2001) ("Unambiguous standards or clear statutory powers increase the general influence of the auditor.").
430. But see Donald C. Langevoort, Technological Evolution and the Devolution of Corporate Financial Reporting, 46 WM. & MARY L. REV. 1, 17 (2004) ("[A]s the accounting norms themselves became more complicated and subjective, the ability to confidently say 'no' to a client diminished.").
431. See, e.g., George J. Benston, Public (U.S.) Compared to Private (U.K.) Regulation of Corporate Financial Disclosure, 51 ACCT. REV. 483, 486-87 (1976) (explaining that the complex rules governing auditor activity are in part designed to avoid the significant cost of litigation);
432. Stephen A. Zeff, A Perspective on the U.S. Public/Private Sector Approach to the Regulation of Financial Reporting, 9 ACCT. HORIZONS 52, 65 (1995) (discussing how auditors want to back up their clients' financial reporting with explicit provisions of GAAP).
433. See Stewart E. Sterk, Information Production and Rent-Seeking in Law School Administration: Rules and Discretion, 83 B.U. L. REV. 1141, 1148-50 (2003).
434. See ROBERTA KARMEL, REGULATION BY PROSECUTION: THE SECURITIES AND EXCHANGE COMMISSION VS. CORPORATE AMERICA 301-02 (1982) (arguing that the SEC "can easily formulate new legal principles through ad hoc enforcement actions rather than through the rule-making process");
435. Lon L. Fuller, The Forms and Limits of Adjudication, 92 HARV. L. REV. 353, 355 (1978) (discussing the difficulties in assigning adjudicatory functions to administrative agencies);
436. David L. Shapiro, The Choice of Rulemaking or Adjudication in the Development of Agency Policy, 78 HARV. L. REV. 921, 940-41 (1965) (discussing the amorphous principles that may result when administrative decisions are made in an adjudicatory context).
437. See supra notes 227-57 and accompanying text.
438. See William R. McLucas, J. Lynn Taylor & Susan A. Mathews, A Practitioner's Guide to the SEC's Investigative and Enforcement Process, 70 TEMP. L. REV. 53, 67-68 (1997) (describing the SEC's enforcement procedures with respect to investment companies).
439. See supra notes 157-59 and accompanying text.
440. Renee M. Jones, Dynamic Federalism: Competition, Cooperation and Securities Enforcement, 11 CONN. INS. L.J. 107, 118-21 (2004) (describing the analyst and mutual funds conflicts).
441. E.g., Spencer, Litigation Release No. 14,856, 61 SEC Docket 1679 (Mar. 29, 1996) (relating to an Internet solicitation of investors promising 50% returns); Frye, Litigation Release No. 14,720, 60 SEC Docket 1787 (Nov. 15, 1995) (involving an Internet solicitation of investor promising risk-free profits);
442. Odulo, Litigation Release No. 14,616, 60 SEC Docket 120 (Aug. 24, 1995) (pertaining to an Internet solicitation promising 20% return);
443. Odulo, Litigation Release No. 14,591, 59 SEC Docket 2538-39 (Aug. 7, 1995) (announcing the filing of the complaint and consent to judgment in the same matter).
444. See Candies, Inc., Securities Act Release No. 7,263, Exchange Act Release No. 36,865, 61 SEC Docket 758, 760-62 (Feb. 21, 1996) (invoking a cease-and-desist order against a law firm assisting in a scheme to violate registration requirements by distributing abroad unregistered stock that was promptly resold into the United States);
445. Scorpion Techs., Inc., Litigation Release No. 14,814, 61 SEC Docket 749, 750 (Feb. 9, 1996) (involving an injunction to stop an illegal Regulation S offering of stock in 20 countries).
446. Whether it should be exercised and how the choice should be made are open questions. See James J. Park, The Competing Paradigms of Securities Regulation, 57 DUKE L.J. (forthcoming 2007).
447. See Doreen McBarnet & Christopher Whelan, The Elusive Spirit of the Law: Formalism and the Struggle for Legal Control, 54 MOD. L. REV. 848, 848 (1991) (exploring how "Creative compliance thrives on a narrow legalistic approach to rules and legal control").
448. Cf. Lincoln Sav. & Loan Ass'n v. Wall, 743 F. Supp. 901, 913, 920 (D.D.C 1990) ("[A]n accountant must not blindly apply accounting conventions without reviewing the transaction to determine whether it makes any economic sense and without first finding that the transaction is realistic and has economic substance that would justify the booking of the transaction that occurred. . . . It seems that the accounting firm was more concerned with attempts of conscientious regulators to deal with the savings and loans industry's severe crisis than the 'creative accounting' of its 'high flying' client."). My example is hypothetical, certainly not based on Enron, which flatly violated such rules.
449. Bratton, supra note 196, at 1041.
450. See Black et al., supra note 111.
451. Sarbanes-Oxley Act §§ 302(a), 906, 18 U.S.C. § 1350 (Supp. II 2002);
452. see SEC, CERTIFICATION OF DISCLOSURE IN COMPANIES' QUARTERLY AND ANNUAL REPORTS, RELEASE NO. 33-8124 (Aug. 28, 2002) (adopting rules as directed by section 302(a) of the Sarbanes-Oxley Act);
453. Michael Perino, Some Reflections on the Deterrence Aspects of the Sarbanes-Oxley Act, 76 ST. JOHN'S L. REV. 671, 681-85 (2002) (discussing the advantages and disadvantages of the new securities fraud crime).
454. SEC Reg. G, 17 C.F.R. § 244.101 (2007) (defining non-GAAP financial measures and those registrants subject to the regulation);
455. Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Securities Act Release No. 8182, Exchange Act Release No. 47,264, Financial Reporting Release No. 67, International Series Release No. 1266, 79 SEC Docket 1251, 1254-68 (Jan. 28, 2003) (requiring the disclosure of off-balance sheet arrangements);
456. Conditions for Use of Non-GAAP Financial Measures, Securities Act Release No. 8,176, Exchange Act Release No. 47,226, Financial Reporting Release No. 65, 79 SEC Docket 1057, 1058-62 (Jan. 22, 2003) (requiring the disclosure of non-GAAP financial measures);
457. Securities Act Release No. 8,039, Exchange Act Release No. 45,124, Financial Reporting Release No. 59, 76 SEC Docket 896, 896-97 (Dec. 4, 2001) (cautioning public companies using pro forma financial information and alerting investors to the dangers of it). These are interesting specimens because the SEC describes the documents as taking "principles-based" approaches despite showing rule-like qualities.
458. See Partnoy, supra note 33, at 1276 (discussing how the SEC "shifted the regulatory regime toward rule-based tabular disclosure").
459. See John E. Calfee & Richard Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 VA. L. REV. 965, 975-79 (1984) (analyzing uncertainty under a negligence standard to demonstrate how overcompliance with a certain standard may not optimize social costs).
460. See supra notes 252-55 and accompanying text.
461. See supra notes 66-69 and accompanying text.
462. See supra text accompanying notes 189-91.
463. See supra text accompanying notes 252-53.
464. JOHN C. COFFEE, JR., GATEKEEPERS: THE PROFESSIONS AND CORPORATE GOVERNANCE 371 (2006).
465. See Lawrence A. Cunningham, Beyond Liability: Rewarding Effective Gatekeepers, 92 MINN. L. REV. (forthcoming 2007) (exploring how to encourage auditor willingness to undertake duties that the current liability system discourages them from undertaking).
466. See supra text accompanying notes 11-14.
467. See supra note 17 and accompanying text (noting how some scholars dismiss the proliferation of labels to describe types of laws as nominalism with limited substantive import).
468. E.g., Bill Witherell, Corporate Governance: Stronger Principles for Better Market Integrity, OECD OBSERVER, May 2004, at 41 (announcing release of OECD, Revised Principles of Corporate Governance, retaining previous "principles-based" approach but emphasizing need to reexamine the previous guidelines in response to global corporate debacles).
469. See William W. Bratton, Jr., Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 1275, 1283 (2002) ("Enron in collapse was wrought into the fabric of our corporate governance system . . . .");
470. Peter C. Kostant, Sacred Cows or Cash Cows: The Abuse of Rhetoric in Justifying Some Current Norms of Transactional Lawyering, 36 WAKE FOREST L. REV. 49, 63-78 (2001) (illustrating the role transactional attorneys play in promoting profit-driven corporate wrongdoing);
471. Bevis Longstreth, Problems in the Corporate Bar as It Appears to a Retired Practitioner, 31 MONT. LAW. 22, 22, 32-33 (2006) (lamenting how the "gold standard of professional greats turned to dross" and suggesting several solutions to the problem);
472. W. Bradley Wendel, Professionalism as Interpretation, 99 NW. U. L. REV. 1167, 1170 (2005) ("Professionalism stands in opposition to the view of many lawyers that excellence in lawyering means engaging in 'creative and aggressive' structuring of transactions for the benefit of clients, even though the transactions are designed to evade regulatory requirements enacted to protect investors.").
473. To paraphrase T. S. Eliot, regulators cannot realistically expect to fashion a system so perfect that no one needs to be good.
474. See McBarnet & Whelan, supra note 277, at 849 ("Creative compliance uses formalism to avoid legal control. . . .").
475. See supra note 116 and accompanying text (noting the Schnell doctrine in Delaware judicial administration).
476. See supra text accompanying notes 167-70.
477. The limitations on general anti-abuse principles appear vividly in tax law, where the principles exist but rarely are enforced.
478. Sarbanes-Oxley Act § 406, 15 U.S.C. § 7264 (Supp. II 2002) ("[C]ode[s] of ethics" are "such standards as are reasonably necessary to promote (1) honest and ethical conduct ... (2) full, fair, accurate, timely, and understandable disclosure . . . and (3) compliance with applicable governmental rules and regulations.").
479. NYSE, INC., LISTED COMPANY MANUAL § 303A(10) (2003);
480. see also Order Approving NYSE and Nasdaq Proposed Rule Changes, Exchange Act Release No. 48,745, 68 Fed. Reg. 64, 154, 64, 180 (Nov. 4, 2003) (describing NASDAQ's changes to its Code of Conduct).
481. See David Hess, Robert S. McWhorter & Timothy L. Fort, The 2004 Amendments to the Federal Sentencing Guidelines and Their Implicit Call for a Symbiotic Integration of Business Ethics, 11 FORDHAM J. CORP. & FIN. L. 725, 726 (2006) ("[T]he Guidelines require that organizations establish an effective compliance and ethics program that promotes an organizational culture that encourages ethical conduct and a commitment to compliance with the law . . . ." (internal quotation marks omitted)).
482. Doreen McBarnet, After Enron: Will "Whiter than White Collar Crime" Still Wash?, 46 BRIT. J. CRIMINOLOGY 1091, 1105 (2006).
483. Why this is so requires speculation, and competing explanations seem plausible, as neither Sarbanes-Oxley nor related SEC regulations give specific guidance or requirements. On the one hand, the codes are textual embodiments of aspirational corporate culture and thus would not likely contain detailed rules; on the other, companies must promptly disclose waivers of ethics codes, some of which likely will be uncomfortable to explain, and broad general statements will minimize the frequency of waivers that must be disclosed.
484. See, e.g., Le Pan, supra note 4, at 52 (giving remarks of Canada's Superintendent of Financial Institutions, which note his office's regulatory effort to "resist the temptation to put in place detailed new rules" and express concern that such rules can be counter-productive in that they risk becoming a checklist ... [at which point] their benefit is, at best, greatly reduced");
485. Usha Rodrigues, Let the Money Do the Governing: The Case for Reuniting Ownership and Control, 9 STAN. J.L. BUS. & FIN. 254, 280 (2004) (quoting then-SEC Chairman William Donaldson as saying that a " 'check the box' approach to good corporate governance will not inspire a true sense of ethical obligation");
486. Harvey Pitt, Public Statement by SEC Chairman: Remarks at the Winter Bench and Bar Conference of the Federal Bar Council (Feb. 19, 2002) (stating that US GAAP is too "cumbersome and offer[s] far too detailed prescriptive requirements [which], by necessity, encourages accountants to 'check the boxes'-that is, to read accounting principles narrowly, to ascertain whether there is technical compliance with applicable accounting principles").
487. See ALASDAIR MACINTYRE, AFTER VIRTUE: A STUDY IN MORAL THEORY 259 (2d ed. 1984) ("[W]e still, in spite of the efforts of three centuries of moral philosophy and one of sociology, lack any coherent rationally defensible statement of a liberal individualist point of view.").
488. See TAMAR FRANKEL, TRUST AND HONESTY: AMERICA'S BUSINESS CULTURE AT A CROSSROAD 37-39 (2006) (describing how the culture of fraud and abuse of trust in the Enron era showed a society seeking to eliminate wrong by "redefining" and normalizing it).
489. See David Alexander & Eva Jermakowicz, A True and Fair View of the Principles/Rules Debate, 42 ABACUS 132, 161 (2006) ("[Concerning rules-principles debate in accounting,] much of the debate at the regulatory and policy level is at best vague and confused, more likely disingenuous, possibly intellectually dishonest.").
490. See, e.g., FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 212-18 (1991) (debating whether state corporation law is a "race for the bottom" and concluding that there may in fact be a "race for the top");
491. Lucian Arye Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1437, 1440 (1992) ("[S]tate charter competition produces a race for the top with respect to some corporate issues but a race for the bottom with respect to others.");
492. William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663, 663 (1974) ("Delaware is both the sponsor and the victim of a system contributing to the deterioration of corporation standards.");
493. Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469, 473-83 (1987) (summarizing and critiquing the prevalent theories of jurisdictional competition);
494. Roberta Romano, The State Competition Debate in Corporate Law, 8 CARDOZO L. REV. 709, 709 (1987) (same);
495. Joel Seligman, The Case for Federal Minimum Corporate Law Standards, 49 MD. L. REV. 947, 966 (1990) ("States will compete to design the most pro-incumbent management statutes as a device to attract or retain incorporations.");
496. Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 289 (1977) ("The almost universal belief that the competition between states for corporate charters works to the disadvantage of shareholders is on its face implausible.").
497. See, e.g., Lucian A. Bebchuk, Alma Cohen & Allen Ferrell, Does the Evidence Favor State Competition in Corporate Law?, 90 CAL. L. REV. 1775, 1778 (2002) (noting that the "dominant view among corporate scholars" is that Delaware "has 'won' the race for incorporations");
498. Lucian A. Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 YALE L.J. 553, 553 (2002) ("The dominant state in attracting the incorporations of publicly traded companies is, and for a long time has been, the small state of Delaware.");
499. William W. Bratton, Corporate Law's Race to Nowhere in Particular, 44 U. TORONTO L. REV. 401, 402-03 (1994) (citing "Delaware's position as the preferred state of incorporation of large American firms in terms of relational contracting");
500. Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 679 (2002) (challenging "the conventional wisdom that states compete for incorporations").
501. See Renee M. Jones, Rethinking Corporate Federalism in the Era of Reform, 29 J. CORP. L. 625, 625 (2004) ("The federal government, however, can serve as a credible rival to Delaware.").
502. See Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588, 605 (2003) (quoting a statement made in 1988 by the Chair of the Delaware Bar Association Corporate Law Council that Delaware had to modify its anti-takeover laws to avoid federal incursion into the state's corporate law).
503. For a rebuttal, see Roberta Romano, Is Regulatory Competition a Problem for Corporate Governance?, 21 OXFORD REV. ECON. POL'Y 212 at n.19 (2005).
504. See Melvin Aron Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1513 (1989) ("One result of Delaware's attainment of market share and market power through the past adoption of suboptimal managerial rules is that Delaware now has a special incentive not to lead in the adoption of such rules: the desirability of avoiding massive federal intervention in corporate law.").
505. Cf. Kamar, supra note 72, at 1911-14 (attributing Delaware's victory in the state-to-state competition, in part, to its use of principles injudicial decisions).
506. See Fisch, supra note 73, at 1072-82 (exploring how Delaware courts are unusual in other ways).
507. See Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 VAND. L. REV. 1573, 1603 (2005) ("[T]o a greater extent than is typical for members of the judiciary, Delaware judges propagate their vision outside the court room. Delaware judges publish an extraordinary amount of extra-judicial writing."). The authors cite an "incomplete" list of some two dozen recent pieces.
508. Id. at 1603 n.117.
509. See Griffith & Steele, supra note 9, at 11 (citing the "greatest difference between state corporate law courts and a regulatory agency" as "the ability of the judiciary, in Delaware especially, both to make and apply the law"). Mr. Steele wrote the cited article while serving as Chief Justice of the State of Delaware.
510. Id. at 1.
511. See William B. Chandler III & Leo E. Strine, Jr., The New Federalism in the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State, 152 U. PA. L. REV. 953, 979 (2003) (trumpeting Delaware corporate law as "principles- based" and denigrating federal securities regulation as "problematic" because it is "not part of any overall system of corporate governance"). The two authors wrote the cited article while serving as judges on the Delaware Court of Chancery.
512. Griffith & Steele, supra note 9, at 3.
513. Jones, supra note 309 ("Recent Delaware court decisions indicate that Delaware's judiciary has begun to respond to [preemptive threats] by adjusting its corporate law jurisprudence.").
514. Delaware Supreme Court opinions often have been characterized by language more common to sales literature than to legal analysis. E.g., Elf Atochem N. Am. Inc. v. Jaffari & Malek LLC, 727 A.2d 286, 290 (Del. 1999) ("Since 1983, the General Assembly has amended the LP Act eleven times, with a view to continuing Delaware's status as an innovative leader in the field of limited partnerships .... The Delaware Act has been modeled on the popular Delaware LP Act."). The Delaware Supreme Court rarely reverses its Chancery Court.
515. See Griffith & Steele, supra note 9, at 10 n.50
516. (acknowledging contrary evidence in the post-Enron years noted in Jones, supra note 309). It almost always produces unanimous opinions. This is surprising for law so often called indeterminate and thus suggestive of an unusual unity of outlook.
517. See Treasury and General Government Appropriations Act for Fiscal Year 2001, Pub. L. No. 106-554, § 515, 114 Stat. 2763, 2763A-72 (2000) (directing the OMB and federal agencies to implement procedural guidelines regarding information they disseminate to the public); OMB Guidelines for Information Disseminated by Federal Agencies; Notice; Republication, 67 Fed. Reg. 8452, 8453 (Feb. 22, 2002) (directing agencies "to develop information resources management procedures for reviewing and substantiating . . . the quality ... of information before it is disseminated");
518. SEC. & EXCH. COMM'N, FINAL DATA QUALITY ASSURANCE GUIDELINES (2005), available at http://www.sec.gov/about/dataqualityguide.htm (describing the SECs procedures for reviewing information to maximize its quality).
519. See DAVID JOHNSTON & KATHLEEN DOYLE ROCKWELL, CANADIAN SECURITIES REGULATION xxxvii ff (3d ed. 2003) ("Table of Concordance");
520. MARY G. CONDON ET AL., SECURITIES LAW IN CANADA: CASES AND COMMENTARY 265 (2005) (discussing variations in the laws and noting degrees of harmony).
521. CONDON ET AL., supra note 321, at 141-42.
522. See generally WPC - COMMITTEE TO REVIEW THE STRUCTURE OF SECURITIES REGULATION IN CANADA: RESEARCH STUDIES (Douglas Harris ed., Ottawa: Department of Finance 2003) (containing a collection of articles discussing the securities regulatory structure in Canada).
523. Letter from David Brown, Chair, Ont. Sec. Comm'n, to Doug Hyndman, Chair, B.C. Sec. Comm'n (June 27, 2003) (on file with author) (outlining objections to British Columbia's proposal, saying it "has gone too far," emphasizing the need for the securities commissions to work together and the importance of harmonization, but along different lines than those that British Columbia proposed).
524. See CONDON ET AL., supra note 321, at 352-53, 388;
525. Sukanya Pillay, Forcing Canada's Hand? The Effect of the Sarbanes-Oxley Act on Canadian Corporate Governance Reform, 30 MAN. L.J. 285, 305 (2004).
526. See Maureen Peyton King, Note, The SECs (Changing?) Stance on IAS, 27 BROOK. J. INT'L L. 315, 316 (2001) (noting that "[t]o date, the SEC has not accepted the IAS" promulgated by the IASC). The organization has changed its name several times: formerly the International Accounting Standards Commission ("IASC"), and currently the International Accounting Standards Board ("IASB"). This is, itself, a signal of the competition between IASB and FASB.
527. See ROBERT O. KEOHANE, AFTER HEGEMONY: COOPERATION AND DISCORD IN THE WORLD POLITICAL ECONOMY 237 (1984) ("In a post-hegemonic world, the rules of international regimes cannot be reliably enforced through centralized organizations.").
528. See James D. Cox, Regulatory Duopoly in U.S. Securities Markets, 99 COLUM. L. REV. 1200, 1237 (1999) (noting that "adherence to GAAP has been a bully pulpit for the SEC and other policy makers to champion improving regulatory developments in many foreign markets" and summarizing numerous unilateral and bilateral SEC efforts to influence securities regulation and accounting worldwide).
529. Id. at 1251.
530. Id. at 1208 (noting how rising stature of IASC during the mid-1990s presented the SEC with a difficult decision concerning whether to recognize its accounting standards for SEC filings and how the SEC therefore engaged with IASC, directly and through the International Organization of Securities Commissions (IOSCO), laying out basic criteria it would have to meet and providing a "stream of comment letters" on IASC proposals).
531. Cox, supra note 327, at 1202 (noting that "the SEC continues to promote convergence" between IFRS and U.S. GAAP, but faces "political considerations" in doing so).
532. Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP, Securities Act Release No. 8818, Exchange Act Release No. 55,998, International Series Release No. 1302, 72 Fed. Reg. 37,962 (proposed July 2, 2007) (introducing a rule that would allow non-U.S. SEC registrants to file financial statements using IFRS without reconciling to U.S. GAAP);
533. see also Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards, Securities Act Release No. 8831, Exchange Act Release No. 56,217, Investment Company Act Release No. 27,924, 72 Fed. Reg. 45,600 (Aug. 7, 2007) (soliciting public comment on allowing U.S. SEC registrants to report under either IFRS or U.S. GAAP). For some of the author's cautionary views on these proposals,
534. see Lawrence A. Cunningham, Beware the Temptation of Global Standards, FLN. TIMES (London), Sept. 11, 2007, at 11.
535. See Richard W. Painter, Convergence and Competition in Rules Governing Lawyers and Auditors, 29 J. CORP. L. 397, 399 n.6 (2004) ("European companies generally use International Accounting Standards (IAS), which supposedly promote 'standards based' instead of 'rule based' accounting, but there is considerable pressure from U.S. investors for European companies to conform to U.S. Generally Accepted Accounting Principles (GAAP).").
536. See supra note 177 (quoting FASB member Schipper to this effect). In the SECs case, constraints imposed by the Data Quality Act limit its rhetorical freedom to compete.
537. See supra note 320 and accompanying text.
538. See supra notes 212-25 and accompanying text.
539. See, e.g., Walter Lukken, CFTC Comm'r, Speech to China Financial Derivatives Forum (Sept. 26, 2006), in International Developments: CFTC's Lukken Tells China Enforcement, Flexibility Among Keys to Developing Market, SEC. L. DAILY, Sept. 29, 2005 (stating that advanced economies need principles as in recent CFTC codification (CFMA)-but for immature markets "a rules-based regulatory regime is essential").
540. See MIDDLE E. POLICY COUNCIL, JOINING THE GLOBAL RULES-BASED ECONOMY: CHALLENGES AND OPPORTUNITIES FOR THE GCC, available at http://www.mepc.org/ forums_chcs/20.asp (discussing whether the Gulf states are ready to adhere to the global rules-based economy);
541. Richard A. Posner, Creating a Legal Framework for Economic Development, 13 WORLD BANK RES. OBSERVER 1, 3-4 (1998) ("rules-first strategy" of law reform).
542. RULES-BASED FISCAL POLICY IN EMERGING MARKETS: BACKGROUND, ANALYSIS AND PROSPECTS (George Kopits ed., 2004);
543. TERESA DÁBAN ET AL., RULES- BASED FISCAL POLICY IN FRANCE, GERMANY, ITALY, AND SPAIN 13 (IMF 2003);
544. see also Pablo Zapatero, Searching for Coherence in Global Economic Policymaking, 24 PENN. ST. INT'L L. REV. 595, 595 ("[T]he International Monetary Fund, the World Bank, and the World Trade Organization have developed a coordination structure aimed at achieving coherence in global economic policymaking.").
545. The roots of the prevailing model of jurisdictional competition reside in one originally focused on the production of public goods. William W. Bratton & Joseph A. McCahery, The New Economics of Jurisdictional Competition: Devolutionary Federalism in a Second-Best World, 86 GEO. L.J. 201, 201 (1997)
546. (exploring and refining original contribution of Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. POL. ECON. 416 (1956)).
547. Bratton & McCahery, supra note 338, at 222-36 (discussing the consequences of relaxing the assumptions of the Tiebout model);
548. Cox, supra note 327, at 1231-32
549. (citing Tiebout, supra note 338, at 419).
550. In efficient capital markets, discounts are assigned to the securities of issuers in less-preferred regimes compared to prices of securities governed by more-preferred regimes. Issuers respond by relocating to regimes where no discounts are imposed. See Cox, supra note 327, at 1230-31 (summarizing but criticizing the argument).
551. Bratton & McCahery, supra note 338, at 275.
552. Professors Bratton and McCahery discuss this point in the context of competition for factors of production, id. at 268-76, but this provides a lesson concerning information.
553. See id. at 267 (observing that the literature on Tiebout's thesis notes that "[v]erifiability . . . may be delegated to the judgment of a legal professional").
554. See supra note 331 and accompanying text. Indeed, sovereign immunity likely would insulate states and state actors from exposure to liability for false advertising.
555. See Coll. Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 666-67 (1999) (holding that the state enjoys immunity despite making misstatements about a third-party's product).
556. See Cox, supra note 327, at 1231-32 (noting that arguments on behalf of jurisdictional competition's virtues made separately by Professors Romano and Mahoney all display mistrust of government such that the arguments are equally persuasive to support abolishing mandatory disclosure or privatization of regulatory functions);
557. Frederick Tung, From Monopolists to Markets?: A Political Economy of Issuer Choice in International Securities Regulation, 2002 WIS. L. REV. 1363, 1367-68 (noting the market-preferring orientation of devotees of jurisdictional competition).
558. See, e.g., COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT (2006) [hereinafter PAULSON REPORT], available at http://www.capmktsreg. org/pdfs/11.30Committee_Interim_ReportREV2.pdf (report commissioned by U.S. Treasury Secretary Henry M. Paulson, Jr.);
559. MCKLNSEY & CO., SUSTAINING NEW YORK'S AND THE US' GLOBAL FINANCIAL SERVICES LEADERSHIP (2007), available at http://www.schumer.senate.gov/SchumerWebsite/pressroom/special_reports/2007/ NY_REPORT%20_FINAL.pdf (study commissioned by New York City Mayor Michael Bloomberg and U.S. Senator Charles Schumer (NY)).
560. To illustrate, the PAULSON REPORT, supra note 345, strongly advocates "principles-based systems," and yet prescribes rules in contexts where rules are better for corporate managers than for investors or others.
561. Examples include recommendations: (a) to abandon the SECs recently-adopted principle that materiality is both a quantitative and qualitative concept, supra note 154, in favor of a rule that materiality means 5% of net income,
562. PAULSON REPORT, supra note 345, at 19;
563. (b) to reduce uncertainties associated with the principles underlying Rule 10b-5, supra note 164, by the SEC providing more detailed prescriptive rules,
564. PAULSON REPORT, supra note 345, at 12;
565. and (c) to stop using SEC enforcement actions to establish policy by principles, supra note 271, and instead adopt formal written rules, PAULSON REPORT, supra note 345, at 9.
566. For general criticism of the PAULSON REPORT along these lines, see Lawrence A. Cunningham, Report is Muddled, NAT'L L.J., May 14, 2007, at 23.
567. See supra notes 210-25 and accompanying text (discussing how Professors Black and Kraakman dubbed as "self-enforcing" the model of corporate law for emerging economies, which devotees of the binary labels would be tempted to call rules-based, and I referred to as rules-rich or rules-heavy);
568. supra notes 227-43 and accompanying text (discussing how the proposed British Columbia Securities Act advertised itself as principles-based, and I referred to it as principles-heavy or principles-rich);
569. see also supra notes 132-34 and accompanying text (referring to the "rules-density" of U.S. federal securities regulation);
570. supra notes 206-09 and accompanying text (referring to principles-rich contexts in which the SEC pursues accounting enforcement actions).