Reviving Reliance

57 Pages Posted: 29 Mar 2017 Last revised: 3 Oct 2017

See all articles by Ann Lipton

Ann Lipton

Tulane University - Law School; Tulane University - The Murphy Institute

Date Written: September 30, 2017

Abstract

This Article explores the misalignment between the disclosure requirements of the federal securities laws and the private causes of action available to investors to enforce those requirements.

Historically, federally mandated disclosures were designed to allow investors to set an appropriate price for publicly traded securities. Today’s disclosures, however, also enable stockholders to participate in corporate governance and act as a check on managerial misbehavior. To enforce these requirements, investors’ chief option is a claim under the general antifraud statute, section 10(b) of the Securities Exchange Act of 1934. But courts are deeply suspicious of investors’ attempts to use the Act to hold corporations liable for false statements related to governance.

As this Article demonstrates, judicial skepticism can be traced to the functional elimination of the element of reliance from private investors’ claims. Without the element of reliance, courts cannot discriminate between deception, which section 10(b) prohibits, and poor managerial decisionmaking, to which section 10(b) does not speak. Doctrines that courts developed to distinguish between the two now have the perverse effect of devaluing disclosures intended to facilitate shareholder participation in corporate governance. More troublingly, they enforce a normative viewpoint that shareholders do not, or should not, have interests beyond the short-term maximization of a firm’s stock price. This interpretation of shareholder preferences undermines modern regulatory initiatives that employ shareholders as a restraining force on antisocial corporate conduct.

This Article proposes that courts adopt new interpretations of section 10(b) that reestablish the centrality of reliance. By doing so, courts can facilitate shareholders’ participation in the corporate governance structure and reward investors who inhabit the role of corporate monitor.

Keywords: corporations, securities, corporate governance, litigation

JEL Classification: K22

Suggested Citation

Lipton, Ann, Reviving Reliance (September 30, 2017). 86 Fordham L. Rev. 91, Tulane Public Law Research Paper No. 17-3, Available at SSRN: https://ssrn.com/abstract=2941765

Ann Lipton (Contact Author)

Tulane University - Law School ( email )

6329 Freret Street
New Orleans, LA 70118
United States

Tulane University - The Murphy Institute ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

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