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Published online by Cambridge University Press: 17 February 2009
It is moving on towards half a century now since Mestmäcker's Verwaltung, Konzerngewalt und Rechte der Aktionäre appeared. It was among the first significant postwar studies of modern corporation law in a comparative context and one that productively used his comparative mastery of American law in ways that in turn were influential in shaping the terms of reference for the 1965 reform of the Aktiengesetz. Two topics dominated his study: the treatment of conflict-of-interests transactions by managers and controlling shareholders, and the application of appropriate principles of corporation law to the affiliatedenterprise system, the Konzern. On both counts the book repays reading today; at the same time, because of the clarity of its conception and organization, it encourages the reader to reflect on what a Habilitand of today might bring back from a similar intellectual voyage.
1 (Karlsruhe 1958).
2 I include Ballerstedt, , Kapital, Gewinn und Auschüttung bei Kapitalgesellschaften (Tübingen 1949)Google Scholar and Wiethölter, , Interessen und Organisation der Aktiengesellschaft im amerikanischen und deutschen Recht (Karlsruhe 1961)Google Scholar in this first cohort. A somewhat later but fully comparative work to add here is Großfeld, , Aktiengesellschaft, Unternehmenskonzentration und Kleinaktionär (Tübingen 1968).Google Scholar
3 There is no shortage of good studies of current vintage. Major explanatory texts such as Merkt, , US-amerikanisches Gesellschaftsrecht (Heidelberg 1991)Google Scholar and, despite its narrow title, Bungert, , Das Recht ausländischer Kapitalgesellschaften auf Gleichbehandlung im deutschen und US-Amerikanischen Recht (Munich 1994)Google Scholar have kept the German reader abreast of US corporation-law developments across the board. There also have been any number of sectoral studies of fields such as mergers and takeovers.
4 See, e.g., Ebke, , “Company Law and the European Union: Centralized Versus Decentralized Lawmaking”, 31 International Lawyer (1997) 961.Google Scholar
5 The single most significant study in this new era probably was Alexander, “Do the Merits Matter? A Study of Settlements in Securities Class Actions”, 43 Stanford L. Rev. (1991) 497Google Scholar; see also Romano, , “The Shareholder Suit: Litigation Without Foundation?”, 7 J. Law Econ. Org. (1991) 55.Google Scholar
6 Ernst & Ernst v. Hochfelder, 425 US 185 (1976) so held as to Rule 10b-5. That issue still is open as to proxy-fraud litigation under Section 14a and Rule 14a-9; see Virginia Bankshares, Inc. v. Sandberg, 501 US 1083, 1090, n. 5 (1991).
7 Blue Chip Stamps v. Manor Drug Stores, 421 US 723 (1975).
8 Santa Fe Industries v. Green, 430 US 462 (1977).
9 Virginia Bankshares, Inc. v. Sandberg, supra n. 6. While this decision so held as to proxy violations and the private Section 14a-9 action, it also may have implications for litigation under Rule 10b-5, which had allowed a more generous concept of transaction causation since the ruling in Affiliated Ute Citizens v. United States, 406 US 128 (1972).
10 Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 US 350 (1991), requiring private Rule 10b-5 actions to be brought within one year after discovery of the violation and in any event no more than three years after the event.
11 Central Bank of Denver v. First Interstate Bank of Denver, 511US 164 (1994). Only two major cases went against the grain: Herman & MacLean v. Huddleston, 459 US 375 (1983) authorized Rule 10b-5 private actions even if the transaction might have been challenged under an express private remedy of the 1933 Securities Act; and Basic, Inc. v. Levinson, 485 US 224 (1988) relaxed the requirement of plaintiffs reliance on the misstatement or omission by accepting a “fraud on the market” theory with its rebuttable presumption of reliance. The 1995 statute discussed below may, however, weaken this presumption.
While I do not discuss the problems concerning the definition of insiders herein, it is important also to mention the Supreme Court's struggle with the conceptual dilemma that the duty to speak requires a preexisting relationship with the issuing company. This still has not been unambiguously resolved; see United States v. O'Hagan, 521 US 642 (1997).
12 This has been the standard position of the SEC since its articulation in the original case finding an implied private right of action under the proxy regulations of Section 14a of the Securities Exchange Act, J. I. Case Co. v. Borak, 377 US 426 (1964). See the early study of Mestmäcker, , “Das Verhältnis des Rechts der Wettbewerbsbeschränkungen zum Privatrecht I”, DB [1968] 787Google Scholar; see also Buxbaum, , Die private Klage als Mittel zur Durchsetzung wirtschaftspolitischer Rechtsnormen (Karlsruhe 1972) 56 et seq.Google Scholar
13 Public Law 104-67, December 22,1995,109 Stat. 737, adding Section 27 to the Securities Act of 1933, and codified in 15 U.S.C. Section 77z-1, -2; and adding Section 21D to the Securities Exchange Act of 1934, and codified in 15 U.S.C. Section 78u-4. References hereafter are to the codified version.
The essentially political story of the Act's passage is told in Avery, , “Securities Litigation Reform: The Long and Winding Road to the Private Securities Litigation Reform Act of 1995”, 51 Business Lawyer (1996) 335.Google Scholar
14 See Weiss, , “The Impact of the Lead Plaintiff Provisions of the Private Securities Litigation Reform Act”, 39 Ariz. L. Rev. (1997) 561.Google Scholar
15 See Fisch, , “Class Action Reform: Lessons from Securities Litigation”, 39 Arizona L.Rev. (1997) 533, 542 et seq.Google Scholar; Levine, & Pritchard, , “The Securities Litigation Uniform Standards Act of 1998: The Sun Sets on California's Blue Sky Laws”, 54 Business Lawyer (1998) 1.Google Scholar
16 To these more general issues see especially Coffee, , “The Future of the Private Securities Litigation Reform Act: Or, Why the Fat Lady Has Not Yet Sung”, 51 Business Lawyer (1996) 975.Google Scholar
17 I leave aside one other reform; namely, the introduction of a new regime of proportionate joint and several liability, a matter of particular importance to peripheral participants in the alleged violations, especially professionals such as accountants. For a discussion, see Langevoort, , “The Reform of Joint and Several Liability Under the Private Securities Litigation Reform Act of 1995: Proportionate Liability, Contribution Rights, and Settlement Effects”, 51 Business Lawyer (1996) 1157.Google Scholar
18 Rule 9(b), Federal Rules of Civil Procedure.
19 U.S.C. Section 78u-4(b)(l)(B).
20 On the textual battle, see Olson, , Mahaffey, & Casey, , “Pleading Reform, Plaintiff Qualification and Discovery Stays Under the Reform Act”, 51 Business Lawyer (1996) 1101.Google Scholar
21 This is reflected in the major cases in conflict; they are, respectively, In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970 (9th Cir. 1999) and Press v. Chemical Investors Service Corp., 166 F.3d 529 (2d Cir. 1999).
22 U.S.C. Section 78u-4(b)(3)(B): “In any private action arising [hereunder], all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss … [except if needed to preserve evidence or prevent ‘undue prejudice’].” In addition, a little-noted and apparently unused subsection of this provision, Section (b)(3)(D), added by the 1998 Uniform Standards Act discussed below, permits the federal court to “stay discovery proceedings in a State court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments in an action subject to a stay of discovery [in the federal action].”
23 California Corporations Code Section 25104. For a still useful discussion of the role of state securities regulation within a federal regime – today rapidly fading in importance – see Jennings, , “The Role of the States in Corporate Regulation and Investor Protection”, 23 Law & Contemp. Problems (1958) 193CrossRefGoogle Scholar. To this day, at least, the Supreme Court has been careful not to find in the Securities Act of 1933 and Securities Exchange Act of 1934 any Congressional intention to preempt state regulation; see to this the otherwise divergent cases of Edgar v. MITE Corp., 457 US 624 (1982) and CTS Corp. v. Dynamics Corp. of America, 481 US 69 (1987). This is an issue under the Supremacy Clause. The indirect preemptive effect of the Commerce Clause is another matter, and one which caused Edgar and CTS to reach different conclusions.
24 See Levine & Pritchard, supra n. 15.
25 Gibson v. PS Group Holdings, Inc., 2000 U.S.Dist. LEXIS 3158 (S.D.Calif. 2000).
26 In factual terms it is a highly disputed matter. A recent important investigative article suggests that especially in the new information- and bio-technology sectors a substantial amount of actionable misinformation was occurring. Schoenberger, , “When the Numbers Just Don't Add Up”, New York Times, 19 August 2001Google Scholar, Section 3 page 1. This may be a factor in the “failure” of the 1995 Act to reduce the number of class actions. Thus, in 2001 alone, 270 cases had been filed through mid-August, as compared with 211 for all of 2000. Id., citing the Stanford Law School Securities Class Action Clearinghouse, available at <http://www.securities.stanford.edu/index.html>.
27 Public Law No. 105-353, November 3,1998, 112 Stat. 3227, codified in Section 28 of the Securities Act of 1933,15 U.S.C. Section 77p. The references to this Act below are to the codified version.
28 From the Congressional findings introducing Public Law 105-353, Section 2(5), 112 Stat. 3227(1998).
29 Section 27 of the 1934 Securities Exchange Act, 15 U.S.C. Section 78aa, has from its original enactment provided that the federal courts “shall have exclusive jurisdiction of violations of this chapter or the rules and regulations hereunder”. Paradoxically, the much more technical Securities Act of 1933, governing the initial issuance of securities, is open to the jurisdiction of the state courts.
30 U.S.C. Section 77p(f)(2)(B).
31 Of course, self-dealing or related transactions may be accompanied by deception, and if the deception is “in connection with the purchase or sale of a security” the entire transaction may be within the reach of the federal cause of action – but these are relatively rare cases, closer to the promoters'-fraud arena. See, e.g., Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960). The possible conflicts of interests arising in the context of takeover battles and the like are another matter, though as described below, the new statutory regime speaks to that matter as well.
32 This is the same distinction that provided the Supreme Court with the rationale to support state anti-takeover legislation against the argument that this legislation conflicted with the (dormant; i.e., unexercised) Commerce Clause of the US constitution. CTS, supra n. 23.
33 Removal is the procedural device that permits a defendant to transfer the case to the appropriate federal court. Under certain circumstances, including the present one, it is automatic when demanded. Remand is the return trip to state court; and as will be seen below, it is the remand context within which the two parties' conflict in fact plays out.
34 U.S.C. Section 77p(f)(2)(A).
35 Thus, Gibson, supra n. 25, rebuffed the defendant's removal effort because the complaint involved misstatements or omissions made in connection with a tender or exchange offer and the suit was brought in the state of incorporation. This so-called “Delaware carve-out” exception is discussed further below.
36 Two recent cases in the federal courts sitting in California illustrate differing judicial views of the new pleading strategy. Shaev v. Claflin (N.D. Calif. 2001), CCH FedSecLRep para. 91,452, granted the remand; Bertram v. Terayon Communications Systems, Inc. (C.D. Calif 2001), 2001 US Dist LEXIS 6215, denied it on the basis of pleadings that established the plaintiffs as purchasers. See also Lasley v. New England Variable Life Ins Co, 126 FSupp2 1236 (ND Cal 1999) and, elsewhere, Wald v. C M Life Insurance Company (ND Texas 2001), 2001 US Dist LEXIS 2593 and Gordon v. Buntrock (ND 111 2000), 2000 US Dist LEXIS 5977.
37 The Court's reasoning in Blue Chip is instructive in this regard:
“…[I]n the absence of the [transactional standing] rule,… [p]laintiff's entire testimony could be dependent upon uncorroborated oral evidence of many of the crucial elements of his claim, and still be sufficient to go to the jury… The very real risk in permitting those in [plaintiff's] position to sue under Rule 10b-5 is that door will be open to recovery of substantial damages on the part of one who offers only his own testimony to prove that he ever consulted a prospectus of the issuer, that he paid any attention to it, or that the representations contained in it damaged him.”
Blue Chip, supra n. 7, at. Of course, it should be noted that this was a case of non-purchasers, a “class” so protean as to mock all pretense that the implied civil remedy under Rule 10b-5 is based on a Schutznorm focused on an identifiable group of beneficiaries in the traditional doctrinal sense. The case of fraudulently induced non-sale or retention is more limited. This is a factor in the California litigation discussed further below.
38 See Morgensen, , “Why Investors May Find Arbitrators on Their Side”, New York Times, 19 August 2001, p. C1.Google Scholar
39 The Uniform Standards Act applies only when “one or more named parties seek to recover damages…” 15 USC §§ 77p(f)(2)(A)(I), (II).
40 Bertram, supra n. 36, brought under the protean Section 17200 of the California Business and Professions Code that addresses unfair business practices generally, is the more troubling case in this connection. It applied a “functional equivalence” standard to the pleadings, and on the pleaded facts recharacterized the action as one similar to a Rule 10b-5 action. The court refused to characterize the requested restitutionary relief as anything other than typical damages; it thus caused it to fail, under the federal proscription. In support of this approach, it cited the California Supreme Court's opinion in Rubin v. Green, 847 Pac.2d 1044, 17 Calif.Reptr.2d 828 (1993) as creating a strict rule against “manipulative” efforts to recharacterize pleadings in order to avoid a result that the more appropriate pleading would have produced. In other words, again from the di-vision-of-powers point of view, the court accepted the state-law characterization of the relief as determinative of the issue under the federal statute.
41 U.S.C. Section 77p(d)(1)(A), (B).
42 A typical example, in this case from the leading case of Paramount Communications, Inc. v. QVC Network, Inc., 637 Atl.2d 34 (Del. 1994), at n. 13: “We express no opinion on any scenario except the actual facts before the court, and our precise holding herein. Unsolicited tender offers in other contexts may be governed by a different precedent.” This approach has led to a minor academic debate over the motivation of the Delaware Supreme Court and the Delaware Court of Chancery to withhold appropriate guidance from its corporate and law-firm “clientele”. Compare Macey, & Miller, , “Towards an Interest-Group Theory of Delaware Corporate Law”, 65 Texas Law Rev. (1987) 469Google Scholar with Kamar, , “A Regulatory Competition Theory of Indeterminacy in Corporate Law”, 98 Colum. Law Rev. (1998) 1908.CrossRefGoogle Scholar
43 For an overview of both issues from that time, see Buxbaum, , “The Internal Division of Powers in Corporate Governance”, 73 Calif. Law Rev. (1985) 1671.CrossRefGoogle Scholar
44 To this structure of US law, see Buxbaum, , “Die feindliche Übernahme der anderen Art”, in: Festschrift Lutter (Uwe, Schneider et al. [eds.]) (Cologne 2000) 1295.Google Scholar
45 For a recent and well-named example, see Brazen v. Bell Atlantic Corporation, 695 Atl.2d 43 (Del. 1997). The subject is a large one, however, and not captured solely by focusing on penalty clauses, offers to sell “crown jewels”, etc. See generally Carney, , Mergers and Acquisitions – Cases and Materials (New York 2000) 588 et seq.Google Scholar
46 The evolution of this tendency is well-traced in Unocal Corp. v. Mesa Petroleum Co., 4493 Atl.2d 946 (Del. 1985), Paramount Communications, Inc. v. Time Incorporated, 571 Atl.2d 1140 (Del. 1990), and Unitrin, Inc. v. American General Corp., 651 Atl.2d 1361 (Del. 1995) on the one hand, and the slow descent into irrelevancy of the judicial oversight announced in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 Atl.2d 173 (Del. 1986) and reformulated in Mills Acquisition Co. v. Macmillan, Inc., 559 Atl.2d 1261 (Del. 1989), on the other. Some concern with the grant of inappropriate advantages to the favored bidder remains, once the target is “in play”, but it no longer has the strength it once did.
47 Only when the defense moves would even preclude a proxy battle for control does there still seem to be judicial control of some significance. Quickturn Design Systems, Inc. v. Mentor Graphics, 721 Atl.2d 1281 (Del. 1999), discussed in Buxbaum, supra n. 43.
48 Of course, if the substantive point involves the internal-affairs doctrine, these other courts typically would apply Delaware law to the matter (but as the derivative-suit field teaches, there is Delaware Delaware law and non-Delaware Delaware law).
49 On this point generally, see Buxbaum, , “Back to the Future? From ‘Centres’ to the ‘Uberlagerungstheorie’”, in: Festschrift Sandrock (Klaus Peter, Berger et al. [eds.]) (Heidelberg 2000) 149, 159ff.Google Scholar
50 While it is possible that a state-court characterization of its law might be challenged or disregarded by a federal court hearing a post-removal remand motion, this would have to be based on the notion that the difference found by the state court was not a difference relevant under the federal Uniform Standards Act, not on any lack of authority of the state court to find that difference.
51 Greenfield v. Fritz Companies, Inc., 98 Calif. Rptr.2d 530 (2000), (Supreme Court) review granted, November 21, 2000, 2000 Cal LEXIS 8710 (technically, the opinion now has been superseded by the grant of review; it would, e.g., not be citable at this time in other California court proceedings).
That the first State (re)actor would be California is not surprising, given its continuing unique role as a counterpart – if a steadily diminishing counterpart – to the leveling effect of Delaware and Model-Act norms in the field of corporation law.
52 Greenfield does not address that federal preemption issue directly. Instead, it cites the “1934 Security [sic] Exchange Act of 1934” as “disclaiming] preemption of state remedies and tolerat[ing] some overlap with state authority”, without mentioning either the 1995 or 1998 statutory changes. Ibid., at 541.
51 Ibid., at 539, citing Section 525 of the American Law Institute's Restatement 2nd of Torts.
54 Mirkin v. Wasserman, 23 Calif.Rptr.2d 101, 858 Pac.2d 568 (1992).
55 It did so on the ground that “judicial common law authority operates under no statutory inhibition; indeed, it enjoys positive legislative sanction”. Greenfield, supra n. 51, at 541. The principal basis for its conclusion is the provision in Section 25510 of California's Corporate Securities Law that the statutory provisions for civil liability shall not “limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect”. In this, Greenfield follows the early decision in Bowden v. Robinson, 136 Calif.Rptr. 871 (1977), which rejected the notion that the new statute had supplanted rather than supplemented common law actions and remedies.
56 Ibid., at 541.
57 Supra n. 11.
58 It should be noted that other courts have rejected the automatic reliance inherent in the fraud-on-the-market theory when interpreting state causes of action in the securities field. See in particular Malone v. Brincat, 722 Atl.2d 5 (Del. 1998).
59 Greenfield, supra n. 51, seems to consider that possibility as a given.
60 Ibid., at 537.