Stanford Journal of Law, Business & Finance

Stanford Journal of Law, Business & Finance is a trade journal focusing on Stanford Law, Business & Finance

Articles

Vol. 17, No. 1, Fall

The Double Liar Dilemma in Business Negotiations
"[T]he liar's punishment is, not in the least that he is not believed, but that he cannot believe anyone else." - George Bernard Shaw1The double liar dilemma is a perplexing issue that courts face when shaping the law that governs contract negotiation....
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The Adequate Procedures Defense under the UK Bribery Act: A British Idea for the Foreign Corrupt Practices Act
IntroductionOn July 1, 2011, the United Kingdom's new anti-bribery law, the UK Bribery Act ("Bribery Act"), came into force.1 The Bribery Act, one of the most comprehensive international laws governing both domestic and foreign bribery, has been viewed...
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Reducing Systemic Risk: The Role of Money Market Mutual Funds as Substitutes for Federally Insured Bank Deposits
AbstractIn the wake of the events of September 2008, money market mutual funds have made significant changes to the way they invest. Those changes have been driven by business and investment needs as well as by substantial revisions to the regulatory...
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Vol. 18, No. 1, Fall

Partnership Law and the Single Entity Defense
The Supreme Court has held that a single business entity cannot conspire with itself to restrain trade in violation of the antitrust laws. But this single entity defense raises two closely related questions. First, can conspirators escape liability by...
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What's in a Name: Mezzanine Debt versus Preferred Equity
Mezzanine loans and preferred equity interests are forms of investment in commercial properties; they are favored by investors, particularly institutional investors, who want a fixed, or at least floored, return and priority as to both their return on...
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It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery
Respected real estate analysts forecast that the U.S. is now poised to experience a renewed round of home mortgage foreclosures over the coming six years. Up to eleven million underwater mortgages will be affected. Neither our families, our neighborhoods,...
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"You Don't Miss Your Water 'Til Your River Runs Dry": Regulating Industrial Supply Shortages after "China Raw Materials"
Global industrial production depends on stable access to raw inputs. Food price volatility has emerged as a major concern for Group of Twenty Finance Ministers and Central Bank Governors (G20), while we are hearing new calls for bringing global disciplines...
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Vol. 17, No. 2, Spring

Federalizing Fiduciary Duty: The Altered Scope of Officer Fiduciary Duty Following Orderly Liquidation under Dodd-Frank
IntroductionThe financial crisis of 2008 ushered in a new era of regulatory reform in the United States. The failure of several large banks prompted Congressional scrutiny of the U.S. bank regulatory system. Many critics highlighted the government's...
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Is Imposing Liability on Credit Rating Agencies a Good Idea?: Credit Rating Agency Reform in the Aftermath of the Global Financial Crisis
IntroductionCredit Rating Agencies (CRAs) have an important function in the global economy. Ideally, they provide valuable information that enhances investors' ability to make investment decisions. As such, they have an obligation to ensure that the...
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Rethinking 363 Sales
Rather than go through the traditional Chapter 11 reorganization process, insolvent companies increasingly seek to sell all or substantially all of their assets under the authority of section 363 of the Bankruptcy Code. Such 363 sales offer certain advantages...
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Control Share Acts, Closed-End Funds, and the Battle for Corporate Control
This Article explores the economic and public policy harms that arise when closed-end funds assume antitakeover defenses, an issue at the heart of a recent no-action letter issued by the U.S. Securities and Exchange Commission. It argues that, in the...
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Vol. 17, No. 1, Fall

Gambling by Another Name; the Challenge of Purely Speculative Derivatives
Derivatives contracts can be used to hedge pre-existing risks, but they can also be used to speculate. This article focuses on derivatives contracts in which both counterparties are speculators. These "purely speculative derivatives (PSD) contracts"...
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Vol. 16, No. 2, Spring

Desiderata: The Single Member Limited Liability Company Olmstead Charging Order Statutory Lacuna
Every state permits a limited liability company to be formed and operated with one member (SMLLC) and every state permits a judgment creditor of that member to seek a court order charging the SMLLC ownership interest with a lien. A "charging order" requires...
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Vol. 16, No. 1, Fall

Shareholder Primacy and the Business Judgment Rule: Arguments for Expanded Corporate Democracy
AbstractThere is a fundamental flaw in the law's approach to corporate governance. While shareholder primacy is a well-established norm within United States corporate law, the business judgment rule essentially holds directors blameless when they fail...
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Insider Trading and Financial Economics: Where Do We Go from Here?
AbstractInsider trading is back in a big way. The current fallout from the "Great Recession" exposes the fragility of the financial system in the age of internationally integrated markets. There is widespread confusion about the causes of the current...
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Leveraging Litigation: How Shareholders Can Use Litigation Leverage to Double-Down on Their Investment in High-Stakes Securities Litigation
IntroductionYour client is an activist shareholder who wants to hold the board of directors accountable for actions that pose a likely breach of fiduciary duty. Faced with the prospect of months, if not years, of litigation, your client is hesitant to...
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Tax First, Ask Questions Later: Problems Predicting the Effect of President Obama's International Tax Reforms
AbstractThe Obama Administration has proposed a dramatic reworking of the way U.S. corporations are taxed on income they earn outside the United States. Although less prominent than other Washington policy debates, these changes are no less contentious....
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Vol. 15, No. 2, Spring

With or without You: Debt and Equity and Continuity of Interest
AbstractContinuity of interest is a judicially created doctrine designed to ensure that when holders of corporate interests in tax-free reorganizations exchange those interests merely on paper, the exchange is tax-free. The doctrine was intended to ensure...
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Looking for the Silver Lining: Regulatory Reform after the "Credit Crunch"
AbstractThis Article examines the prospect for regulatory reform in the wake of the current crisis in the financial markets. This Article analyzes the supervisory framework for regulating financial services in the United States and the United Kingdom...
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Note: An Alternative Approach to Vicarious Liability for International Accounting Firm Networks
IntroductionThe major accounting firm networks of the world are worried, and with good reason. In January of 2009, Judge Kaplan of the United States District Court for the Southern District of New York opened the door for international accounting firm...
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A New Framework for the Global Regulation of Short Sales: Why Prohibition Is Inefficient and Disclosure Insufficient
AbstractShort selling has long been regarded as aggressive speculation that destabilizes financial markets, raising concerns about their moral foundations. This view gathered unstoppable force in September 2008 when short sales were seen as the principal...
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Vol. 13, No. 2, Spring

Reformulating Antitrust Rules to Safeguard Societal Wealth *
Myopic application of the antitrust laws has produced two perverse effects: it has halted increases in aggregate social wealth and erroneously sanctioned business practices that cause significant societal welfare losses. Thus, current competition rules...
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Regulating Hedge Fund Managers: The Investment Company Act as a Regulatory Screen
The Blackstone IPO signaled a new strategy of exploiting all of the advantages of a public offering while avoiding critical regulatory constraints. Hedge fund managers such as Blackstone are the functional equivalent of private investment companies in...
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Employee Primacy, or Economics Meets Civic Republicanism at Work
This paper argues for employee primacy in corporate governance. "Employee primacy" has two elements: ultimate employee control over the corporation, and an objective of maximizing employee welfare. In methodology, the argument draws both upon economics,...
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Intermediated Securities, Legal Risk, and the International Harmonization of Commercial Law
Investors do not physically hold their investment securities any more. Securities are held and transferred through a complex, sophisticated, and international network of financial intermediaries, including central securities depositories, investment...
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Preventing the Inevitable: The Benefits of Contractual Risk Engineering in Light of Venezuela's Recent Oil Field Nationalization
"[T]He fact that we as a company still believe in the rule of law and the sanctity of contracts is not something that we will easily abandon."-Former Exxon Mobil CEO Lee Raymond1"It's naïve to expect stability in a developing country."-Anonymous Big...
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Vol. 13, No. 1, Fall

Bonding, Law Enforcement and Corporate Governance in China
Protection of minority shareholders is crucial to developing a strong capital market. Yet, formal legal enforcement is one, but not the only effective mechanism to offer this protection. When a country's formal legal enforcement is weak, to attract investment,...
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Contract-Centered Veil Piercing
The application of the doctrine of piercing the corporate veil to contract disputes has been attacked as undesirable. This article shows that applying piercing to contracts is desirable. Contract-centered veil-piercing functions akin to a penalty-default...
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A Revised Economic Theory of Disclosure Duties and Break-Up Fees in Contract Law
IntroductionNegotiating parties are usually incompletely informed about elements of the transaction, such as the value of the relevant asset or the costs of performance. A party can negotiate on the basis of what she already knows-e.g., the average value...
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Living on the Edge: Fiduciary Duties, Business Judgment and Expensive Uncertainty in the Zone of Insolvency
Although the extent of Delaware directors' fiduciary duties to creditors during financial distress remains unclear, consensus has begun to develop around the idea that concerns about expansive liability are misplaced because business judgment is typically...
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Corporate Cooperation during Investigations and Audits
I. IntroductionThe period 1999 to 2007 was characterized in the corporate setting by a major erosion of the attorney-client privilege and the attorney work product doctrine. To a lesser but still substantial degree there was a parallel erosion of the...
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Vol. 12, No. 2, Spring

The Expressive Function of Directors' Duties to Creditors
This Article offers an explanation of the "doctrine" of directors' duties to creditors. Courts frequently say - but rarely hold - that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These...
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Kickbacks or Compensation: The Case of Yield Spread Premiums
IntroductionThe compensation of mortgage brokers has been at the center of controversy over much of the past decade. In the federal courts, before Congress, and in variety of administrative settings, attention has focused on a particular form of mortgage...
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The Law, Marketing and Behavioral Economics of Consumer Rebates
IntroductionDuring the past two decades, consumer rebates have become a major marketing method. Although exact figures are difficult to ascertain, estimates of total rebate offer volume now range from $4 to $10 billion per year.1 According to one consulting...
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Payment Wars: The Merchant-Bank Struggle for Control of Payment Systems
In recent years, the cost to merchants of accepting credit cards has risen dramatically without a corresponding increase in the benefits. This trend has sparked a wide-ranging struggle between merchants and banks, as merchants have begun to seek methods...
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Explaining the Value of Transactional Lawyering
This article attempts to explain empirically the value that lawyers add when acting as counsel to parties in business transactions. Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value...
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A Critique of "Deepening Insolvency," a New Bankruptcy Tort Theory
IntroductionIn several recent decisions the theory of so-called "deepening insolvency" has been brought as an independent tort cause of action against directors, lenders, and outside advisors. The plaintiffs, generally bankruptcy trustees, allege that...
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Vol. 12, No. 1, Autumn

Antitrust Liability for Pharmaceutical Patent Settlements after Tamoxifen and Schering-Plough
IntroductionThe petition for a writ of certiorari in the case of FTC v. Schering-Plough Corp. produced a relatively bizarre situation. The petition was brought by the Federal Trade Commission (FTC), one of the two government agencies responsible for...
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A New Theoretically-Grounded Microstructure Trading Model* for Calculating Damages in Shareholder Class Action Litigation?
Current practice in class action litigation entails a series of arbitrary assumptions about fundamental parameters that may not meet Daubert standards of scientific evidence. This paper proposes a new model (denoted the Theoretically-grounded Microstructure...
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The Cost-Benefit Analysis of Financial Regulation: Lessons from the SEC's Stalled Mutual Fund Reform Effort
IntroductionOver the last twenty-five years, under both Republican and Democratic presidents, no analytical tool has become more fundamental to the modern administrative state than cost-benefit analysis (CBA).1 As commonly used, CBA helps regulators...
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Using Derivatives to Manipulate the Market for Corporate Control
IntroductionThe shareholder vote is a fundamental means by which corporate governance systems constrain managers' discretion over vast aggregations of property they do not own.1 The efficacy of that constraint, however, depends upon the existence of...
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Why (Only) ESOPs?
Introduction: ESOPs, Other SOPs & "Ownership Societies"Recent interest in the idea of an "ownership society" raises an intriguing prospect: since the mid-twentieth century, we have broadly spread ownership of two assets critical to maintaining a...
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Money in the Game: Executing a Governance-Based Hedge Fund Strategy
This paper discusses two topics that have been prominent in the corporate world in recent times: hedge funds and corporate governance. While these topics were rarely discussed in combination, as the attention on corporate governance has started to fade;...
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Vol. 11, No. 2, Spring

A Real Options Analysis of Pharmaceutical-Biotechnology Licensing
IntroductionIn today's drug development environment it is common for large pharmaceutical companies to turn to biotechnology companies to replenish their drying therapeutic pipelines. Biotechnology companies, in turn, rely on the greater resources of...
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Is the Dutch Auction IPO a Good Idea?
The Google IPO raised the question of whether Dutch auctions are preferable to the traditional bookbuilding method of financing. Some argue that Dutch auctions make public offerings more efficient in terms of price discovery by leaving less money on...
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Calculating Damages in Broker Raiding Cases
IntroductionWhen a securities broker or dealer "raids" another firm's branch office or trading desk, it improperly hires away a significant number of the raided firm's producers. This act deprives the raided firm of the producers' services and the profits...
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All's Fair in Love, War & Bankruptcy? Corporate Governance Implications of CEO Turnover in Financial Distress
Prior discussions of management turnover during financial distress have examined bankrupt and non-bankrupt firms as distinct groupings with little overlap. Separately investigating rates of turnover in-bankruptcy and out-of-bankruptcy, without a direct...
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Note: Corporate Governance: Economic Analysis of a "Comply or Explain" Approach
IntroductionThe recent wave of corporate governance scandals in the United States and Europe has caused a crisis of confidence in the corporate sector. As a result, corporate governance reform has been on the agenda of researchers, employees, executives,...
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Transparency in Global Merger Review: A Limited Role for the WTO?
This article addresses certain competition-related issues that parties to a transnational merger and acquisition (M&A) transaction must face, preferably during the strategic planning phase. The ultimate focus will be on the suitability vel non of...
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Vol. 11, No. 1, Autumn

The Application of U.S. Securities Laws to Overseas Business Transactions
Non-U.S. companies may consider privately placing securities in the United States in lieu of a registered public offering in order to avoid becoming subject to the Sarbanes-Oxley Act and other U.S. securities regulations. This strategy, however, can...
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Antitrust Class Actions: Chaos in the Courts
Antitrust suits are routinely brought as class actions. This should not be surprising: antitrust cases often involve a course of conduct that allegedly injured hundreds or even thousands of individuals. Many antitrust class actions involve an overreaching...
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The Future of I.R.C. § 482 as a Substance-over-Form Provision
IntroductionAs the current litigation in GlaxoSmithKline v. Commissioner illustrates,1 transfer pricing of intangible property is an indeterminate affair-open to multiple interpretations, wavering standards, and quarrels among trading partners. GlaxoSmithKline...
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"Once a Mortgage, Always a Mortgage"-The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments
Since the beginnings of English common law, property owners have used the mortgage as the principal instrument to finance real estate acquisitions, provide liquidity, and raise additional capital.1 And if a first mortgage proved insufficient, the owner...
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When Bankruptcy Meets Antitrust: The Case for Non-Cash Auctions in Concentrated Banking Markets
"The scarcity of money that dampened auction prices was, of course, the same scarcity of money that inhibited paying debts in the first place"**IntroductionJust about three years ago, in light of the financial collapse of Enron, Douglas Baird and Robert...
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Vol. 10, No. 2, Spring

Litigation between Competitors with Mirror Restrictive Covenants: A Formula for Prosecution
IntroductionLawsuits that concern the proverbial "cherry picking" of choice employees are commonplace in today's competitive business environment.1 The typical case concerns competitor suing competitor after one business hires the employees of the other...
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The Sale of the Washington Redskins: Discounted Cash Flow Valuation of S-Corporations, Treatment of Personal Taxes, and Implications for Litigation
This paper presents an economic argument for how a discounted cash flow (DCF) analysis should properly account for taxes when valuing an S corporation. Through a simple numerical example, we demonstrate that ignoring taxes in a DCF analysis when valuing...
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California Proposition 64 Requires That Pending Actions Based on the Unfair Competition or False Advertising Laws Be Dismissed
IntroductionOn November 2, 2004, by a vote of 59%, California voters passed Proposition 64, titled "Limits of Private Enforcement Of Unfair Competition Laws." This proposition curtails the expansive standing formerly allowed plaintiffs asserting unfair...
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Corporate Law, Profit Maximization, and the "Responsible" Shareholder
IntroductionThis Article explores the relationship between shareholder ethical responsibility and corporate law. Shareholder responsibility is a neglected aspect of the debate about corporate social responsibility. In that debate, conservatives defend...
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Marking the Software Patent Beast
The literature of software patents has thus far tried to directly address whether software patents increase innovation. The wholesale reform papers have persuaded neither the courts nor Congress, perhaps due to the unfortunate dearth of economic data.This...
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Vol. 10, No. 1, Autumn

Creditors' Committees as Estate Representatives in Bankruptcy Litigation
Bankruptcy courts, with some frequency and for a long time, and with the express approval of the lower federal courts, have determined that in particular Chapter 11 cases, a creditors' committee, rather than a trustee or debtor-inpossession, may prosecute...
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Creditor(s' Committee) Derivative Suits: A Reply to Professor Bussel
I am grateful to Professor Bussel for commenting on my article1 and to the editors for giving me a chance to respond to his critique.2Professor Bussel's defense of creditors' committee derivative standing3 rests on several propositions: (1) many courts...
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Upholding "Honest Services" While Abandoning Interpretive Principles: United States V. Rybicki
I. IntroductionUntil 1987, there was controversy about whether mail fraud included intangible rights. In United States v. McNally,1 the United States Supreme Court held that, although the mail fraud statute clearly protects property rights, it does not...
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The Diversity Paradox: Media Ownership Regulation and Program Variety
I. IntroductionThe Federal Communications Commission's decision to relax restrictions on media ownership didn't fuel a "Copernican revolution," as Commissioner Michael Powell once suggested, but the new rules certainly sent critics into orbit.1 Approved...
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A Review of the Economic Substance Doctrine
I. Introduction: Disallowance MethodsFor taxpayers to be able to plan their finances and be free from fear that the government will arbitrarily demand unexpected tax payments, taxpayers need to be able to rely on clear rules. They need to feel comfortable...
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Acorns and Oaks: Implied Rights of Action under the Securities Acts
It began, as they say, innocently enough. In 1946 a federal district court1 recognized an implied private right of action under section 10(b)3 of the securities Exchange Act of 1934 and Rule 10b-5.4 Since then, the federal courts have issued thousands...
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Trade Secrets, the First Amendment, and Patent Law: A Collision on the Information Superhighway
Trade secrets can be destroyed almost in the blink of an eye if published on the Internet. This Article examines recent case law that finds that even a misappropriated trade secret may be extinguished if it is published on the Internet. The Article concludes...
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Derivative Suits in Bankruptcy
IntroductionIt is a fundamental tenet of corporate law that creditors, unlike shareholders, may not bring derivative suits on a firm's behalf1-even if the firm is, or is nearly, insolvent.2 Corporate law affords creditors who are unhappy with a corporate...
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Corporate Transparency or Congressional Window-Dressing? the Case against Sarbanes-Oxley as a Means to Avoid Another Corporate Debacle: The Failed Attempt to Revive Meaningful Regulatory Oversight
The Sarbanes-Oxley Act of 2002 [the Act] is not designed to be self-executing. By congressional mandate, the Act's operative provisions depend upon the implementing regulations promulgated by the Securities and Exchange Commission [SEC]. This Article...
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