Stock Transfer Restrictions and Issuer Choice in Trading Venues

Case Western Reserve Law Review Volume 55 | Issue 3 2005 Stock Transfer Restrictions and Issuer Choice in Trading Venues Jonathan Mary Maureen O'Hara Follow this and additional works at: https://scholarlycommons.law.case.edu/caselrev Part of the Law Commons Recommended Citation Jonathan Mary and Maureen O'Hara, Stock Transfer Restrictions and Issuer Choice in Trading Venues, 55 Case W. Res. L. Rev. 587 (2005) Available at: https://scholarlycommons.law.case.edu/caselrev/vol55/iss3/11 This Symposium is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. STOCK TRANSFER RESTRICTIONS AND ISSUER CHOICE IN TRADING VENUES JonathanMaceyt & Maureen O'Hara* INTRODUCTION The recent spate of corporate scandals (Enron, Tyco, etc.) opened a "policy window" through which Congress and the executive were able to overcome the strong interest group pressures resisting federal usurpation of the states' traditional autonomy over the regulation of the internal affairs of corporate firms. Congress's response to Enron and its successors was the Sarbanes-Oxley Act ("SOX"), which is designed to improve corporate accountability and to assert the Securities and Exchange Commission as a major force in competition with the states in the production of corporate law rules.' The Securities and Exchange Commission also responded to its new role by proposing rules to enhance the role of shareholders in electing directors. Much of corporate America observes, correctly, that SOX has increased costs with little or no benefit2 and that the SEC's proposals will diminish the effectiveness of corporate boards by provoking friction. t Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Regulation, Yale Law School. t Robert W. Purcell Professor of Finance, Johnson Graduate School of Management, Cornell University The authors are greatful to Stephanie Bredermann, Yale Law School class of 2007 for valuable research assistance. 1Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002). The SarbanesOxley Act, interalia, makes corporate officers responsible for earnings reports, forbids accounting firms from acting as consultants to accounting clients, and stiffens penalties for fraud. The Sarbanes-Oxley Act was signed into law in July, 2002. 2 Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. (forthcoming 2005). CASE WESTERN RESERVE LAW REVIEW [Vol. 55:3 This article starts with the premise that, while the proper role of corporate law is to reduce transaction costs by providing efficiently configured "off-the-rack" legal rules, the proper role of corporate governance is to promote transparency and to create an efficient contracting space in which investors can configure rules that reduce agency costs by aligning the interests of managers with their own interests. Much attention has been paid of late to the relative merits of the states versus the federal government as the optimal locus for generating laws related to corporate governance of U.S. corporations. Less attention has been paid to the continued relevance, if any, of the joint production of corporate governance rules by public companies and stock exchanges. This is odd because the stock exchanges, in rivalrous competition with other trading venues for listings and trading volume, long have taken the view that producing efficient, investorfriendly corporate law rules is an important component of the bundle of liquidity services they must offer. Thus, one must consider the relevance of the production of corporate law rules by stock exchanges to the perceived crisis in American corporate governance revealed in the Enron-era scandals and the passage of Sarbanes-Oxley in order to be able fully to evaluate the range of policy options available to confront the ostensible problem. Further, it seems clear that issuers have, or should have, an intense interest in the venue where their securities trade, if for no other reason than to ensure a robust, liquid, high-quality market for their firms' shares. Firms traditionally have considered trading venues important, and are concerned about the quality of the corporate governance rules on the exchanges on which they list. This article explains why this may no longer be the case, and what the implications are for corporate governance. This article continues our exploration of the law and economics of trading venues. Building on our organizing framework that describes 3 the economic development of stock exchanges the article then ana3 See Jonathan R. Macey & Maureen O'Hara, The Economics of Stock Exchange Listing Fees and Listing Requirements, 11 J. FIN. INTERMEDIATION 297, 298 (2002) [hereinafter Stock Exchange Listing Fees] (investigating "the once and future role of listing fees"); Jonathan R. Macey & Maureen O'Hara, Globalization, Exchange Governance, and the Future of Exchanges, in BROOKINGS-WHARTON PAPERS ON FINANCIAL SERVICES 1999 1, 1 (R. Litan and A. San- tomero eds., 1999) [hereinafter Future of Exchanges] (identifying "three ways in which the competitive environment has changed); Jonathan R. Macey & Maureen O'Hara, Regulating Exchanges and Alternative Trading Systems: A Law and Economics Perspective, 28 J. LEGAL STUD. 17, 19 (1999) [hereinafter Regulating Exchanges] (providing "a law and economic perspective on the regulation of [alternative trading systems]"); see also, Jonathan Macey & Hideki Kanda, The Stock Exchange as a Firm: The Emergence of Close Substitutes For the New York and Tokyo Stock Exchanges, 75 CORNELL L. REV. 1007, 1008 (1990) [hereinafter The Stock 2005] STOCK TRANS. RESTRICT. & ISSUER CHOICEIN TRADING VEN. 589 lyzes the three critical issues that relate to the production of corporate law by stock exchanges. These issues are the modem emergence of multi-market trading venues, the ability of exchanges to grant unlisted trading privileges to companies' stocks, and the renewed involvement of stock exchanges in corporate governance. The basic business of being a stock exchange has evolved over time as a result of competitive pressures. Like many other businesses, the business of being a stock exchange has become "commodified." The result of this commodification is that the business of being a stock exchange has transformed from its historical role as a quasigovernmental entity that had highly complex, multi-dimensional relationships with listed firms, into far more simple firms that focus on the marketing of a single service: the provision of liquidity to traders, investors, and, ultimately, to listed firms. Because different investors have radically different needs for and preferences about liquidity, a number of different trading venues have arisen to se (...truncated)