Faculty Scholarship Digest

February 2009

On a regular basis, Dean Michaels prepares a memorandum summarizing recent scholarship published by members of the Moritz faculty. The College boasts 50+ faculty members with national and international reputations. The range of influential and innovative legal scholarly works produced by our distinguished faculty reflects a variety of perspectives, interests, and areas of expertise.


Article

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Paul Rose, Sovereigns as Shareholders, 87 N. CAR. L. REV. 83 (2008).

In this article, Rose conducts a comprehensive examination of equity investments by foreign governments, including the risks such investments present, the landscape of their regulation, and the dangers of heightened regulation. It is a fascinating picture of considerable importance. Sovereign wealth funds (“SWFs”) are investment funds owned and controlled by governments. China and the United Arab Emirates, for example, both have SWFs created from the huge sums flowing into those countries from trade; they use SWFs to invest their money in entities located in other countries, such as the United States. Worldwide, SWFs have become very significant. At the end of 2007, SWFs had more assets than all private equity and hedge funds combined, even though there were only about forty active SWFs. SWFs have raised substantial fears in the United States – fears of political risk (e.g., a SWF investing in a company and then pressuring it to move its plants to an ally of the SWF country outside of the U.S.), fears of regulatory risk (e.g., how will the SEC get cooperation from a foreign government if it fears that a country’s SWF is engaging in insider trading or similar misconduct) and fears of economic risk (e.g., what if a foreign country has to suddenly liquidate all its SWFs assets because of a domestic issue). This is just a taste of the potential problems raised by SWFs that Rose canvasses.

Notwithstanding these fears, Rose counsels caution regarding further regulation. He notes a number of factors — such as the likelihood of political backlash — that make some of these fears unlikely to be realized and supports that view by reference to the current practices of SWFs. Rose also describes the existing web of state and federal regulation that keeps SWFs in check. Just as important, Rose argues, regulation poses a significant risk of discouraging investment of needed capital in the United States (SWFs provided $37 billion to U.S. financial firms during a recent eight-month period) and creates opportunities for “political mischief,” in which the ability to block SWFs is exploited for private gain. Indeed, what Rose sees as the greater risk is that SWFs may invest in less well-regulated markets outside the U.S. or purchase or control commodity producers and with this activity outside the U.S. “have the ability to affect U.S. security interests more drastically than SWF activity in the United States.” For this reason, the article also analyzes SWF regulation by other countries, and the scope and prospects for international accords, voluntary and otherwise.

Rose’s article provides a thorough and accessible tour through this complicated arena of great and growing importance.


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Paul Rose, Sovereign Wealth Funds: Active or Passive Investors?, 118 YALE L.J. POCKET PART 104 (2008).

In this short article Rose returns to the topic of Sovereign Wealth Funds (“SWFs”) that he covered comprehensively in his North Carolina Law Review article. In this piece, Rose pays special attention to the Treasury Department’s recently proposed regulations governing the process to be used by the Committee on Foreign Investment in the United States (“CFIUS”), a “multi-agency government committee that analyzes the national security implications of foreign acquisition of U.S. firms,” which was given a revamped role by a 2007 law. In Rose’s analysis, the new regulations will encourage great passivity in SWFs because the definition of “control” — which triggers CFIUS scrutiny — is both “slippery” and “cleverly structured,” so that scrutiny may come when an SWF “causes” such activities as hiring or firing of a senior manager, selling assets, issuing securities, or making a major investment. As a result, although Rose notes the scheme is limited by its reliance on CFIUS monitoring and self-reporting by SWFs, he concludes that they will effectively “diminish the threat of inappropriate SWF influence. Indeed . . . one may wonder what would constitute engagement between SWFs and [the companies they invest in]” that might not be construed as “control.”

Rose argues, however, that while this passivity may minimize political and security risks, it could also be a mixed blessing. New research indicates that SWF investment “might have a significant negative impact on returns.” One possible explanation that Rose offers is that other investors feel compelled to spend more resources monitoring the company in question out of fear that the SWF has a noneconomic interest, thereby lowering the share price as a result of the monitoring cost. If this is the explanation, the regulation-enforced passivity should help reassure other investors. A second explanation that Rose offers, however, is that SWF passivity decreases shareholder monitoring. In contrast to hedge funds or labor unions, for example, which often pursue governance influence, passive SWFs by definition may act like a large block of management votes, thereby increasing the likelihood that management will not maximize shareholder value. Moreover, as a separate matter, Rose notes that over time, SWFs may become dissatisfied with the passivity effectively demanded by the proposed regulations and “shift their investment capital to less restrictive markets.” For the time being, however, Rose concludes that the regulations are a “cautious, reasonable response by regulators to an overall lack of transparent and accountable fund governance by SWFs.”


Annecoos Wiersema, A Train Without Tracks: Rethinking the Place of Law and Goals in Environmental and Natural Resources Law, 38 ENVIRONMENTAL LAW 1239 (2008).

In this article, Wiersema argues that contemporary approaches to environmental regulation — ecosystem management under a “new governance” model — while admirable in their recognition of the short-comings of previous regulatory regimes, suffer from an absence of substantive goals established by law, and she proposes a framework for reintroducing this substantive component.

The article begins by surveying and explaining a very substantial literature that “advocates and describes shifts in regulatory patterns away from so-called command and control, centralized approaches to regulation, to more flexible, less hierarchical approaches, with a strong emphasis on collaboration and a mix of private and public actors.” Especially, though certainly not exclusively, in environmental law, the complexity and uncertainty in the subject of regulation require adaptive regulation methods that allow flexibility, experimentation, and constant input from many stakeholders.

The article then engages in close examination of two such “new” regulatory frameworks, the Chesapeake Bay Program and the Ramsar Convention on Wetlands. The article finds that a lack of substantive goals established by law has left outcomes in the former case unduly subject to the vicissitudes of short-term political circumstances and, in the latter case, to replacement of an original purpose of long-term environmental protection with other short-term priorities.

Rather than return to the approach of goal-setting at the highest level of legislation — which has tended to prove too broadly vague at best and irrelevant or wrong at worst — Wiersema proposes a “middle ground” that would involve a “process for generating specific goals that would include multiple stakeholders in a collaborative process, while requiring them to consider a specific value of long-term protection in their development of these goals.” She explains how this process might work in her specific case studies and explains that “where there are success stories, they may frequently be driven by a legal mandate that is specific enough to guide the flexible activity that is being advocated.”

Wiersema’s article proposes an important adjustment in the evolution of regulation in a field of great current interest.


Book Supplement

Larry T. Garvin

Larry T. Garvin, FARNSWORTH ON CONTRACTS (3RD ED.) (2009 UPDATE).

Garvin has been a co-author on this leading treatise for a number of years, with sole responsibility since Professor Farnsworth’s death in 2005. By now, the update has grown to include 385 pages of text and more than 1,000 case citations. The update includes expanded references to secondary sources, more coverage of drafting issues, and close attention to developments with the ALI. A

lthough a book like this is, of necessity, filled with see cites to be added to footnotes in the main text, Garvin’s style (and trademark thoroughness) still peek through. For example, the Update has contained a note that “Judge Easterbrook’s statement [referenced in the text] has been much criticized by commentators,” followed by a string cite with parentheticals. Now that passage has the additional comment, “Judge Easterbrook seems unrepentant, continuing to assert this even in cases governed by UCC Article 2A . . . [!]”