Information Issues on Wall Street 2.0
Billions of dollars have flooded new online marketplaces for trading private company stock. These marketplaces stand poised to become important, lasting features of the private company world as they provide a central meeting place for buyers and sellers and potentially increase the liquidity of private company stock. Increased liquidity is particularly important to investors in start-up companies, as these companies have faced longer periods of time before going public or being acquired. The new marketplaces also raise significant information issues, however, that threaten their legitimacy and efficiency. This Article is the first to examine these information issues — lack of information, asymmetric information, conflicts of interest, and insider trading — as well as possible solutions that would allow the markets to continue to evolve while promoting their integrity and investor protection goals. Specifically, the Article proposes establishing a minimum information requirement for secondary trading in private company stock and reexamining the thresholds for accredited investor status in order to ensure that market participants can fend for themselves without additional protections. The Article also examines potential responses to insider trading in these markets, arguing that a case exists for the SEC to take action in the private market context, since harm may be cognizable and the arguments for regulating insider trading are as strong in the private market arena as in the public.
Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark
This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the company, to themselves, or to investors. By analogy with the famous article by Friedrich Hayek, The Use of Knowledge in Society, this Essay considers the problem of obtaining necessary information for managers of large corporate enterprises. The suggested analytical framework views the share price, sensitively impacted by informed trading, as a mechanism for timely transmission of valuable information to top managers and large shareholders. Informed trading in the stock market is also compared to “prediction” or “virtual” markets currently used by corporations and policymakers.
Resolving the Subsidiary Director's Dilemma
Although subsidiaries play a significant role in our economy, surprisingly little has been written about the duties of their directors. Despite widespread acceptance of holding companies as commonplace business entities, several legal problems inherent in the holding company form of ownership remain unresolved. Holding companies raise legal dilemmas for subsidiary directors that are easier to ignore than to resolve. This Article examines the subsidiary director's dilemma and demonstrates that traditional models of corporate structure are not adequate for the subsidiary-parent situation. The Author argues that the law should recognize the special relationship between a parent and its subsidiary and adopt agency principles to address the question of subsidiary directors' duties within the larger corporate enterprise. Part I of this Article examines the current state of the law regarding the duties of directors of subsidiary corporations and finds that Delaware law seems to be pointing in the right direction by imposing a duty on subsidiary directors to act in the best interest of the parent. Part II of the Article focuses on a larger problem: If subsidiary directors owe a duty only to the parent corporation, what happens to the duties that corporate directors generally owe to non-shareholders, including to the subsidiary corporation itself? Part III examines four possible approaches to resolving the subsidiary director's dilemma. The Article concludes that subsidiary directors are in an untenable position and should not be expected to act independently of the holding company. Instead, agency principles should require that the subsidiary directors owe a duty only to the parent corporation and that any duties owed to non-shareholders be imposed directly on the holding company.