9 Hastings Business Law Journal, Issue 2

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INTRACORPORATE OPPORTUNISM: REDISTRIBUTIONAL COMPENSATION AND FIXING UNDEREXPOSED ABUSES OF CORPORATE WEALTH
Scott H. Mollett, 9 Hastings Bus. L.J. 2 (2013)

Changes in government policy occur frequently and can significantly affect the value of investments.  Depending on the type of action and design of the policy, the government may be obligated to provide compensation for losses in investment value.  As a normative matter, whether these losses should be compensated has inspired a long-running academic discussion, with arguments against government compensation currently holding the high ground.  But, this discussion has failed to investigate whether changes to corporate governance policy are similar to the standard model against compensation for policy change.  In particular, a corporation combines a variety of economic interests and decisionmakers that permits opportunistic behavior in ways not considered in the compensation debate.  The ongoing development of corporate governance in the United States and abroad raises concerns whether the presumption against compensation sufficiently addresses this risk of opportunism due to changes in corporate policy.  This article identifies the potential for opportunistic behavior within a corporation and proposes a scheme of redistributive compensation to mitigate such behavior.  Requiring an equitable distribution of gains created by policy change can reduce the potential for opportunism under a market approach and substantially improve the quality of corporate decisions.

 

DANCING WITH THE DERIVATIVES DEVIL: MUTUAL FUNDS' DANGEROUS LIAISON WITH COMPLEX INVESTMENT CONTRACTS AND THE FORGOTTEN LESSONS OF 1940
Kelly S. Kibbie, 9 Hastings Bus. L.J. 2 (2013)

This Article examines the implications of the drastic increase in the use of complex derivative instruments by mutual funds in recent years and the inadequacies of the current statutory and regulatory framework to effectively protect investors.  Astonishingly, there is no reliable information regarding the nature and extent of derivatives use by mutual funds.  A series of derivatives disasters demonstrating the catastrophic possibilities of these complex contracts, juxtaposed with the clearly annunciated purposes of the Investment Company Act of 1940 ("1940 Act") to protect investors from the dangers of leverage, emphasize the need for prompt reform.  With $11.6 trillion in the mutual fund purse, and with 94% of individual mutual fund investors saving for retirement, this situation is particularly timely.

The Article asserts that the doctrinal foundations of the 1940 Act are being undermined by mutual funds' pervasive use of derivatives.  Enacted to regulate investment companies following abuses during the Great Depression, the 1940 Act arguably prohibits many types of derivative transactions by mutual funds.  Further complicating matters, the SEC has not engaged in any rulemaking with respect to derivatives transactions by mutual funds and has not provided any formal guidance regarding the same since 1979, years before swaps were even invented.  Reforms should be enacted to prevent the types of harms to investors and the financial markets that the 1940 Act was designed to prevent, while preserving the unique benefits that derivatives trading can offer

 
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OCCUPY INFORMATION: THE CASE FOR FREEDOM OF CORPORATE INFORMATION
Roy Peled, 9 Hastings Bus. L.J. 2 (2013)

The global financial crisis illustrated that the enormous power amassed by large corporations can have devastating effect on almost every individual around the globe in case of a wave of massive corporate failures.  Forty-six years ago, demands for oversight over government operations and the desire for citizens to become more engaged in the democratic process had helped ushered in the Freedom of Information Act ("FOIA").  This article argues for extending a similar general duty of disclosure requirement to corporations because they hold pertinent information required for democratic participation.  This article examines the justifications for FOIA and their applicability to corporate information.  It reviews existing mechanisms in the U.S. and other countries, that allow for access to some corporate information, and discusses how they fall short of meeting the needs of an open and democratic society.  After considering possible arguments against the notion of freedom of corporate information, it reaches the conclusion that, subject to certain limitations, it is a much needed legal reform that can contribute significantly to a better functioning democratic society and a more responsible corporate world.

 
Robert W. McGee

Robert W. McGee

Thomas Tarangelo

Thomas Tarangelo

THE TIMELINESS OF FINANCIAL REPORTING: AN EMPIRICAL LEGAL STUDY OF RUSSIAN BANKS
Robert W. McGee, Yeomin Yoon & Thomas Tarangelo, 9 Hasting Bus. L.J. 2 (2013)

The timeliness of financial reporting has been an important topic in the accounting literature for decades.  There is a tradeoff between the timeliness of reporting and the value of the information being reported.  Prior to the advent of the internet, reporting had to be done using print media.  However, now that many companies post their annual and quarterly reports on the internet, it is

possible to report in a more timely fashion than has previously been possible.  The problem is that companies in some countries do not make full use of this disclosure tool.  They sometimes take many months to make the information available to the general public.  The present empirical legal study examines the timeliness of financial reporting in the Russian banking sector and compares it to the SEC benchmark.


Student Notes

CLOUD COMPUTING AND STATE SALES TAX
Tuan Q. Ngo, 9 Hastings Bus. L.J. 2 (2013)

Once a significant source of states' revenue and at times raising more revenue for states than any other single source, the state sales tax systems in state public finance now face formidable challenges.  The growth of cloud computing brings to light the inherent flaw in a tax system that hinges taxability on whether the transaction is a transfer of tangible property or a service.  While some states have extended their sales taxes to apply to cloud computing services, others have explicitly determined that such services are not taxable.  Drawing the distinction between tangible property versus service as the basis for imposing sales tax is no longer a workable framework for cloud computing services.  Addressing the systemic problem of the sales tax system requires shedding this outdated paradigm.  This Note examines the piecemeal efforts undertaken by states to tax remotely accessed software transactions and the underlying rationales that support these policy decisions.  The paper argues that the current framework is outdated for justifying the taxability of cloud computing services.  The Note will examine the evolving tax treatment of software transactions, which provides a logical starting point for anticipating how states may tax cloud computing services in the future.  The Note will also categorize the different models currently used by states to impose sales tax on access to hosted software and online databases.  Next, the Note will critique the theoretical foundations that underlie these different models before arriving at a theory that is more sound and satisfactory.  Finally, the Note recommends best practices for taxing software services by examining Washington's model.

 

TO TAX OR NOT TO TAX, THAT IS THE QUESTION: A CRITIQUE OF THE UNITED STATES' POLICY ON TAXATION OF SERVERS
Christopher Trester, 9 Hastings Bus. L.J. 2 (2013)

The international tax authorities are struggling to create an effective scheme to generate revenue from electronic commerce ("e-commerce").  Currently, the United States, a global leader in e-commerce, has no clear policy on the taxation of these transactions, which deters international companies from locating their servers within the United States based on the fear of high tax rates and uncertain results.  The United States should adopt a domestic and international policy that focuses on a consumption-based approach to taxing e-commerce.  However, the informal world tax organization, the Organization for Economic Co-operation and Development ("OECD") and several member countries recommend using source-based concept of permanent establishment to tax the transactions based on the location of the server.  By focusing on the location of the server, permanent establishment allows companies to manipulate the patchwork international tax scheme and locate servers in tax havens.  This paper proposes that the United States take the lead in shifting the international consensus towards a consumption-based approach of permanent establishment that sets a minimum floor of gross income and transactions within a jurisdiction.  This solution would not only eliminate the uncertainty of the United States' position on taxation of e-commerce, but also would generate increases in tax revenue and frustrate opportunities to manipulate the system.