Cross-listings and the new world of international capital: another look at the efficiency and extraterritoriality of securities law.

Author:Guseva, Yuliya
Position:I. Introduction: International and Domestic Dimensions of Securities Law Debates through IV. Deregulation and Harmonization Reforms, p. 411-459
  1. INTRODUCTION: INTERNATIONAL AND DOMESTIC DIMENSIONS OF SECURITIES LAW DEBATES A. National Law Debates: Disclosure, Enforcement, and Private Actions B. Overview of the Article II. MECHANISMS AND ECONOMIC BENEFITS OF CROSS-LISTINGS A. An Overview of Cross-Listings B. The Costs and Benefits of Cross-Listings III. RISK OF PRIVATE LITIGATION AND CASE LAW ANALYSIS A. The Conduct and Effects Test 1. History, Fears, and Reforms 2. Review of Sample Cases: Reality Check on Legal Imperialism B. The Mighty Morrison IV. DEREGULATION AND HARMONIZATION REFORMS A. Foreign Private Issuers: Basic Regulatory Requirements B. New Deregistration Rule and Barriers to Exit C. A Global Market Watchdog or Secondary Regulator? V. QUINTESSENCE OF THE CURRENT POLICIES: JUSTIFICATION AND EVIDENCE A. Policy Justifications: Theory and Practice B. A Generalized Decision-Making Model C. Evidence: Regulations and Litigation 1. Statistics: Registration and Deregistration Trends 2. An Interplay between Litigation and Deregistration: A Jurisdictional Overview 3. Primary Policy Targets 4. The Foreign Law Factor VI. POLICY PROPOSALS A. International Cooperation B. Revisiting the Ex Post Factors: Litigation and Enforcement C. Improvisation with a Limited Issuer-Choice Option: An Opt-Out Procedure VII. CONCLUSION APPENDIX I APPENDIX II APPENDIX III APPENDIX IV APPENDIX V APPENDIX VI APPENDIX VII I. INTRODUCTION: INTERNATIONAL AND DOMESTIC DIMENSIONS OF SECURITIES LAW DEBATES

    Capital markets are not America-centric anymore. (1) Although the United States still has the largest securities exchanges, (2) many foreign jurisdictions, including developed and developing economies, are catching up with the leader in terms of their infrastructure and capital market institutions. (3) Despite the potentially greater susceptibility of emerging economies to the global recession, the trading volume, number of IPOs, and capitalization of their exchanges have been steadily increasing, often at the expense of U.S. exchanges. (4)

    This newly integrated and highly competitive market for capital forces sovereigns to vie for companies by improving the quality of all their domestic products, including law. (5) Striving to eradicate the inefficiencies and following the Weberian maxim that the "[r]ationality of the regulation of markets has been historically associated with the growth of formal market freedom and the extension of marketable goods ...," (6) scholars and practitioners are searching for the optimal level of national regulation within the internationalized market. This Article will continue this search exploring why and if the U.S. regulatory regime is possibly contributing to the outflow of issuers and what U.S. policymakers could do to improve the quality of their "goods" to bolster the competitiveness of U.S. securities markets.

    One of the typical pragmatic explanations of the outflow of capital and issuers from U.S. markets to alternative trading venues is the onerous barriers to entry and the costs associated with U.S. securities law. (7) The pertinent theoretical concern is whether and to what extent the U.S. legal structure, including the uniquely active plaintiffs' bar, the opt-out class actions regime, the strong SEC, and its extensive mandatory reporting requirements, imposes excessive costs not only on issuers as such, (8) but most importantly on the issuers whose economic center of gravity is located in a foreign jurisdiction. (9)

    Unfortunately, the results of the pertinent policy debates on disclosure, enforcement, and private litigation may seem both ambiguous and disconcerting to private and public observers alike, (10) while the debates themselves may appear somewhat dichotomous, split between two policy camps: pro-regulatory and pro-market. This Article rejects this putative dichotomy as an inefficient guide for policymakers, including courts and regulators. While acknowledging that the policy debate addressing the efficiency of disclosure, enforcement, and private litigation is crucial for improving domestic securities law, the Article suggests that when it comes to foreign issuers cross-listing their securities on U.S. markets, the focus of a regulatory and judicial inquiry should be firmly on the secondary nature of the U.S. regulatory structure, serving as an extra layer of law-related costs and risks. Based on this understanding of the U.S. regulatory regime, the Article will propose a different, more granulated approach to the analysis of the efficiency of the regulatory fabric: one that emphasizes the incentives of cross-listing issuers and takes into account the quality of securities law and enforcement in their countries of domicile.

    1. National Law Debates: Disclosure, Enforcement, and Private Actions

      Let us briefly summarize the central arguments featured in the current intra-U.S. policy discourse, starting with the critics of the current regulatory system and taking in turn the disclosure, enforcement, and private litigation debates. This short description will be later on supported by an analysis of the realpolitik of foreign issuer regulations and case law. First, a plethora of scholars view the U.S. disclosure (and accompanying antifraud provisions) as either suboptimal or unnecessary so long as (1) the markets are efficient; (11) (2) there is sufficient competition among regulators; (12) (3) private parties are competent to select and opt into a proper disclosure and liability regime; (13) (4) exchange-based arrangements are available; (14) (5) issuers are incentivized by a competitive market for capital and its infrastructural underpinnings to voluntarily disclose adequate and veritable information (15) in order to abate the fears of investors regarding the quality of a firm, (16) thereby improving its market valuation; (17) (6) reputational intermediaries like investment banks and the general institutional culture stand sentinel to protect market transparency; (18) and (7) exchanges themselves design proper mechanisms ensuring market fairness and maximizing the "surplus" for both investors and issuers. (19)

      The opponents of these more market-oriented and issuer-choice approaches abound, and the list is distinguished. Their arguments generally concern the suboptimal nature of voluntary disclosure, (20) variability of voluntary reporting, (21) non-regulatory issuer verification and signaling costs, (22) and the resulting underproduction of firm specific information. (23) These problems and a number of intrinsic flaws within the market infrastructure, such as underinvestment in market research (24) and the inability of exchanges to act as proper rule-setters and enforcers, (25) seem to necessitate the presence of extensive mandatory reporting requirements and a public enforcement system.

      Naturally, when it comes to SEC enforcement, i.e., the second paradigm within this debate, scholars are sharply divided again. The critics underscore the deep behavioral and political biases of the regulators (26) seeking to expand their monopolistic jurisdictional reach, (27) the inherent deficiencies of any regulatory monopoly, (28) and the duplicative and unnecessary "bureaucratic imperialism." (29) Moreover, it is argued that a number of serious prosecutorial flaws impair the scope, efficiency, and ultimate deterrence effect of enforcement, (30) while the SEC's tendency to ignore germane scholarly warnings of fraud hampers detection of cases deserving prosecution. (31)

      In the opposite camp, pro-regulatory sentiments are strong as ever. Scholars often emphasize the longevity of the SEC and the virtues of a federal regulatory system, (32) such as the functional benefits of enforcement centralization, a more efficient resolution of the collective action problem, and the alleviation of potential information losses bound to occur in a multi-regulator system. (33) An integrated approach to market manipulation detection, law enforcement, and remedial actions is hailed as a pillar of market efficiency and transparency. (34) Ultimately, some scholars view a separate enforcement system, supplementing private actions, as indispensable for the allocative efficiency of capital markets, forming a certain signaling equilibrium separating firms by their riskiness (35) and simultaneously mitigating the agency problem when managers' utility functions push them to misstate firm-specific information, thus distorting market pricing mechanisms. (36)

      The primary point of convergence within the securities law academia is the third aspect of this debate, to wit, private litigation. Most scholars are in accord that the system of private litigation is to some degree flawed. On the one hand, class actions are a positive invention "ameliorat[ing] the collective action problem confronting shareholders." (37) Yet on the other, overblown class actions, particularly "global" actions in the case of foreign issuers, (38) the proliferation of nonmeritorious suits (39) despite congressional attempts to curb frivolous claims, (40) an ostensibly enormous number of strike suits often filed by the "revenue-maximizing" plaintiffs' bar merely to extract a settlement from a defendant, (41) and the resultant incentives of the latter to promptly get rid of a nuisance suit by setting the claims (42) are all cited as the principal shortcomings of the current system. Ultimately, the existing litigation structure may entail social losses due to over-enforcement, (43) negatively affect disclosure by issuers under the Damocles, sword of extensive class actions, (44) and subvert the underlying deterrence objectives of securities litigation. (45)

      Moreover, the deeply non-compensatory nature of class actions produces mere "wealth transfers ... that neither compensate nor deter." (46) Without generating efficiency gains, a class action may result in a new allocation of gains and losses where non-litigating shareholders bear the brunt of an action. In this vein, particularly sharp...

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