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March 17, 2011 By wpengine

Corporate Reorganization as Corporate Reinvention: Borders and Blockbuster in Chapter 11

Ruth Sarah Lee*

At its heart, Chapter 11 is supposed to be about giving struggling businesses a new beginning, predicated on the idea that “a failing business can be reshaped into a successful operation . . . a predictable creation from a people whose majority religion embraces the idea of life from death and whose central myth is the pioneer making a fresh start on the boundless prairie.”[1] However, major Chapter 11 cases filed in the past few months, and the subsequent discussions they provoked, raise a new question to peruse: how new should the new beginning be—how fresh the fresh start? When a corporation vows to change its business model in order to pay back its debts and become more successful, how much is it supposed to change? Can it morph into a completely different corporation after it emerges? Corporations like Borders Group, Inc. (“Borders”) or Blockbuster Inc. (“Blockbuster”) might be making Chapter 11 the fashionable, new way to metamorphose.

As far as large corporations are concerned, Chapter 11 should be about capturing, retaining, and protecting something that is of value. If a corporation has nothing of worth that can be preserved through reorganization, there are very few reasons why it should not be liquidated immediately, its parts dissembled and auctioned, whatever lifeblood leftover to be given to its creditors. All reorganization efforts “proceed in the shadow of the [liquidation] alternative…[r]eorganizations are designed and evaluated by comparison with the outcomes available” under liquidation.[2] What this means is that some corporations should file for Chapter 11 bankruptcy, while others should liquidate, depending on what they have to offer.

In practice, however, Congress created powerful incentives for all corporations to choose Chapter 11 in the past three decades.[3] Among these incentives are strong presumptions in favor of letting the debtor stay in control and the elimination of the insolvency requirement.[4] Related to this, legal academics have criticized reorganization procedures, regarding the system to be corrupt, due to forum-shopping, judicial irresponsibility, and competition.[5] But, these forces that guide corporations toward corruption are also steering companies into a new sort of reinvention bankruptcy—that is, a corporation that is popularly agreed to be not-viable nonetheless files for Chapter 11 with hopes of not only refinancing, re-designing, or changing its business model—by changing the entire business itself.

In reorganization, corporations need to have their reorganization plans confirmed by the bankruptcy judge, who, in turn needs to ascertain, inter alia, that confirmation “is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.”[6] As a result, at least theoretically, corporations should come up with plans that sound at least potentially successful. Blockbuster, which recently put itself up for sale when its reorganization plan collapsed,[7] can hardly be mentioned without an obligatory nod to Netflix and Redbox, both often credited with putting Blockbuster out of business, and both often cited as reasons why Blockbuster should have just liquidated instead of putting up a fight.[8] Netflix and Redbox are Blockbuster’s more digital age savvy competitors, famous for cheaper by-mail and vending-kiosk movie rentals, respectively. But now, Blockbuster is planning on “closing old-fashioned stores, installing new kiosks, and diving into digital delivery.”[9] In other words, Blockbuster is trying to turn into Netflix.

Observers have noted similarities between Blockbuster’s Chapter 11 and Borders’ Chapter 11.[10] Both are companies victimized by the digitalization of media and burdened with chains of large physical stores.[11] Borders’ bankruptcy has been attributed to “its failure to establish a strong online sales operation and a slow embrace of electronic books.”[12] Like Blockbuster, Borders is playing the chameleon by changing its identity: shifting “the focus away from its physical presence” and at the same time “overhaul[ing] its website and introduc[ing] a digital book store.”[13]

Borders and Blockbuster are merely two examples of companies that seem somewhat antiquated to the electronic generation. And as they flounder around in Chapter 11, they both have their eyes on becoming digitized, unrecognizable from their former selves. It is one thing to do a balance-sheet reorganization, refinance, close unprofitable chain stores, and rethink a business model, but it is another thing entirely to turn yourself from a video rental store into an online streaming service; or from a physical bookstore into Amazon.com. Yet this is what these corporations are considering.

In one sense, this is the same old story we have all heard before, that a bankrupt corporation must find new ways to make profits. However, practically speaking, this means that the 11 U.S.C. § 1129 hurdle should be relatively easy to clear as long as a corporation is flexible enough about its future. Any out-of-date corporation can turn around, point its finger at a more successful, technologically fashionable company and say, “I am going to be like that!” It is true that a judge might be skeptical about the ability of the corporation to change, especially in light of its debts, but Blockbuster is an example that is very established in its ways, with almost $1 billion in debt at the time of filing.[14]

Furthermore, this is actually a radical shift in the essence of reorganizational bankruptcy: We are no longer considering a corporation that has any worth to preserve at the beginning of the reorganization, we are considering a corporation that wants to create worth by reinventing itself.[15] We are no longer dealing with a viable business that has fallen on hard times and needs some tweaking; we are dealing with businesses that are so admittedly unviable that they need to transform into a completely different business in order to convince the bankruptcy judges that they have a fighting chance at life.

Borders is transforming into Amazon.com. Blockbusters is transforming into Netflix. What is Chapter 11 reorganization transforming into? Perhaps—rebirth.

* J.D. Candidate, 2012, Harvard Law School. The author would like to thank Kevin Cooper, Jason Iuliano, Mike Patrone, and especially Emily Zand for their help with this Commentary; also Professor Lynn LoPucki and Professor Katherine Porter for inspiring her foray into the world of Bankruptcy Law. All errors remain my own.

[1] Elizabeth Warren & Jay Lawrence Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 604 (2009).

[2] See Elizabeth Warren, Business Bankruptcy 28 (1993).

[3] Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 Yale L.J. 1043, 1045 (1992) (noting that the “presumption favoring management’s continued control, when combined with other provisions of Chapter 11 affording the corporate debtor considerable latitude regarding its treatment of creditors,effectively gave managers powerful incentives to pursue bankruptcy reorganization.”).

[4] See 11 U.S.C. § 1107 (2006).

[5] See, e.g., Bradley & Rosenzweig, supra note 3; see also Lynn M. LoPucki & Joseph W. Doherty, Delaware Bankruptcy: Failure in the Ascendancy, 73 U. Chi. L. Rev. 1387 (2006); Lynn M. LoPucki & Sara D. Kalin, The Failure of Public Company Bankruptcies in Delaware and New York: Empirical Evidence of a ‘Race to the Bottom’, 54 Vand. L. Rev. 231 (2001).

[6] 11 U.S.C. §1129(a)(11) (2006).

[7] See Ben Fritz, Blockbuster To Put Itself Up For Sale, L.A. Times, Feb. 21, 2011, http://articles.latimes.com/2011/feb/21/business/la-fi-ct-blockbuster-20110222.

[8] See, e.g., The Feldman File, http://feldmanfile.blogspot.com/ (Mar. 1, 2011, 13:32 CST); Mae Anderson, Blockbuster, Creditors Agree on Sale Plan, Bloomberg Businessweek, Mar. 10, 2011, http://www.businessweek.com/ap/financialnews/D9LSLSVO0.htm; Scott Gordon, What is the Future of Blockbuster?, NBC Bus. News, July 9, 2010, http://www.nbcdfw.com/news/business/What-Is-the-Future-of-Blockbuster-98149184.html; Blockbuster Files for Chapter 11 Business Reorganization, Business First, Sept. 23, 2010, http://www.bizjournals.com/louisville/stories/2010/09/20/daily39.html (noting that Blockbuster “lost out because Netflix and RedBox gained ground quickly with new platforms, and Blockbuster moved too late . . . like the Captain of the Titanic [Keyes, Blockbuster’s CEO] got on the ship after it hit the iceberg. He has been trying to bail it out with a bucket.”)

[9] Gordon, supra note 8.

[10] Nathan Borney, Blockbuster’s Proposed Bankruptcy Sale is Uncomfortable Reminder for Borders, Ann.Arbor.com Business News, Feb. 22, 2011, http://www.annarbor.com/business-review/blockbusters-proposed-bankruptcy-sale-is-uncomfortable-reminder-for-borders/.

[11] Id.

[12] Id.

[13] Joseph Checkler, Borders Files for Chapter 11 Bankruptcy Protection, Wall St. J. Online, Feb. 17, 2011, http://online.wsj.com/article/SB10001424052748703373404576147922340434998.html.

[14] See Checkler, supra note 13.

[15] An argument that could be made is that the brand name itself (Borders or Blockbuster) is value worth preserving through Chapter 11, even if the companies themselves completely change into unrecognizably new companies. However, this departs from most of the traditional Chapter 11 discussions (which are mainly about preserving assets and jobs).

Preferred citation: Ruth Sarah Lee, Corporate Reorganization as Corporate Reinvention: Borders and Blockbuster in Chapter 11, 1 Harv. Bus. L. Rev. Online 53 (2011), https://journals.law.harvard.edu/hblr//?p=1002.

March 18, 2011 By wpengine

Questioning the 500 Equity Holders Trigger

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William K. Sjostrom, Jr.

An obscure provision of the Securities Exchange Act of 1934 (Exchange Act)[1] has received unprecedented attention in recent months because of the prominent role it appears to be playing in Facebook’s decision on going public. Specifically, Exchange Act Section 12(g)(1) requires any company with “total assets exceeding [$10,000,000] and a class of equity security . . . held of record by five hundred or more . . . persons” to register such security under the Exchange Act.[2] The measurement date for these thresholds is the last day of a company’s fiscal year. It then has 120 days from that date to register. Today, the practical effect of this rule is to force certain types of firms into the public markets earlier than is desirable. A shift from a shareholder-based trigger to one based on trading volume would preserve the Rule’s underlying policy concerns while mitigating this unintended effect.

A company registers by filing a Form 10 with the Securities and Exchange Commission (SEC).[3] Form 10 requires the company to disclose, among other things, a detailed description of its business, properties, transactions with management, legal proceedings, and executive compensation as well as its audited financial statements.[4] Once a company has a security registered under the Exchange Act, it is required to file with the SEC annual, quarterly, and current reports and must comply with SEC proxy regulations.[5] Additionally, its directors, officers, and holders of ten percent or more of the total shares outstanding become subject to the short-swing profit rules under Exchange Act Section 16.[6] Basically, the company has the same SEC obligations as a public company but does not receive the benefits of going public, principally a large infusion of equity capital and liquidity for its stock.

Facebook has never been in a hurry to go public, especially because it has been able to privately raise plenty of capital. Widespread speculation, however, has the company filing to go public in April 2012. This is because Facebook has well over $10 million in total assets and recently disclosed that it plans to surpass 499 shareholders this year.[7] December 31 is the last day of Facebook’s fiscal year, so assuming it has 500 or more shareholders on that date, it will be required to file a Form 10 by April 29, 2012. People figure that Facebook will conclude that it might as well go public if it has to file public company reports regardless.

Google faced a similar situation in 2003. It had total assets of well over $10,000,000 and more than 500 shareholders on December 31, 2003, the close of its fiscal year.[8] Thus, it ended up filing a Form 10 on April 29, 2004, the same day it filed its IPO registration statement. As Google noted in its registration statement: “By law, certain private companies must report as if they were public companies. The deadline imposed by this requirement accelerated our decision [to go public].”[9]

Section 12(g)(1) is not actually designed to pressure private companies to go public sooner than they otherwise would, although it had that effect on Google and appears that it will have the same effect on Facebook. Congress added it to the Exchange Act in 1964 “[t]o extend to investors in certain over-the-counter securities the same protection now afforded to those in listed securities by providing that the issuers of certain securities now traded over the counter shall be subject to the same requirements that now apply to issuers of securities listed on an exchange.”[10] Up until that time, many public companies whose shares were actively traded, but not on an exchange, were not subject to Exchange Act reporting requirements, proxy regulations, or short-swing profit rules. As the SEC recently noted, “the registration requirement of Section 12(g) was aimed at issuers that had ‘sufficiently active trading markets and public interest and consequently were in need of mandatory disclosure to ensure the protection of investors.’”[11]

Number of record holders may have been a sensible proxy in 1964 for whether there was an active trading market in a company’s securities, but I do not think it is a sensible proxy today. There was no trading market in Google’s stock before it went public. One has developed recently for Facebook shares, but this has little to do with the number of Facebook shareholders. Rather, it is likely attributable to Facebook’s having over 500 million active users, making it perhaps the most well-known private company in the world.

More importantly, with the disappearance of the small IPO market over the last decade and a half, many companies are forced to remain private for much longer than similar companies had to in the past.[12] As a result, these companies have to do more rounds of private equity financing with each round adding more shareholders and getting the company closer to the 500-shareholder trigger. Unlike Google and Facebook, however, these companies do not have underwriters waiting in the wings to take them public when they do cross the 499 shareholder threshold. Thus, they may have to curtail their financing activities to ensure that they do not cross the threshold.

The bottom line is that Section 12(g) causes some companies to go public sooner than they otherwise would and constrains other companies’ ability to raise equity financing. Neither of these outcomes is desirable. Hence, the SEC should adopt a new rule exempting from Section 12(g) private companies with no active secondary trading in their securities.[13]

In that regard, the new rule could define “active secondary trading” as a volume greater than an average of ten trades per month during a company’s fiscal year.[14] A company could control the number of trades in its stock by imposing a restriction on its shares requiring company approval in advance of any transfer, with the restriction automatically expiring if and when the company goes public.[15]

The benefit of this approach is that Section 12(g) will then generally only capture companies with securities that are actively traded and will therefore much more closely align with the purpose behind its enactment. As a result, companies such as Google and Facebook will be able to control the timing of becoming subject to Exchange Act registration and therefore will not be forced to go public earlier than they want. Additionally, private companies with no active secondary trading in their securities will be able to seek private equity capital without concern for ending up with more than 499 shareholders.

[1] Securities Exchange Act of 1934, 15 U.S.C. § 78 (2006).

[2] 15 U.S.C. § 78(g)(1)(B). Note that Section 12(g)(1) actually specifies a “total assets” cutoff of $1 million, but Rule 12g-1 under the Exchange Act exempts issuers with $10 million or less in total assets from the application of Section 12(g)(1), essentially setting the cutoff at $10 million. See 17 C.F.R. § 240.12g-1.

[3] 15 U.S.C. § 78(12)(b).

[4] See U.S. Sec. & Exch. Comm’n, Form 10, pt. I, at 2–3, available at http://www.sec.gov/about/forms/form10.pdf.

[5] 15 U.S.C. § 78(13).

[6] 15 U.S.C. § 78(16).

[7] See Anupreeta Das et. al, Facebook Sets Stage for IPO Next Year, Wall St. J., Jan. 6, 2011, at A1.

[8] Google Inc., Registration Statement (Form S-1), at 36 (Apr. 29, 2004), available at http://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm.

[9] Google Inc., Registration Statement (Form S-1), at iv (Apr. 29, 2004), available at http://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm.

[10] H.R. Rep. No. 88-1418, at 1 (1964), reprinted in 1964 U.S.C.C.A.N. 3013, 3027.

[11] Exemption of Compensatory Employee Stock Options from Registration Under Section 12(g) of the Securities Exchange Act of 1934, Exchange Act Release No. 34-56010, 2007 WL 1953119 at *2 (July 5, 2007) (emphasis added) (quoting Reporting by Small Issuers, Exchange Act Release No. 23,407, 1986 WL 703825 at *2 (July 8, 1986)).

[12] See David Weild & Edward Kim, Grant Thornton LLP, Market Structure is Causing the IPO Crisis 7 (2009), available at http://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdf.

[13] Although I do not raise it here, elsewhere I have argued that the SEC should adopt a new rule exempting private companies with 100 or fewer non-accredited investors from Section 12(g). See William K. Sjostrom, Jr., Carving a New Path to Equity Capital and Share Liquidity, 50 BC L. Rev. 639, 665–68 (2009). As I explain in that article, the SEC has ample authority under the Exchange Act to adopt Section 12(g) exemptions. See id. at 670–72.

[14] The rule could exclude from the count transfers made by gift, to family members, to trusts for estate planning purposes, and the like.

[15] The company would likely need to put the restriction in place prior to selling its shares to investors.

Preferred citation: William K. Sjostrom, Jr., Questioning the 500 Equity Holders Trigger, 1 Harv. Bus. L. Rev. Online 43 (2011), https://journals.law.harvard.edu/hblr//?p=1028.

March 18, 2011 By wpengine

Consumer Casualties?

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Amy J. Schmitz*

On July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank),[1] which among other things calls for creation of the Consumer Financial Protection Bureau (CFPB) to serve as a centralized agency charged with protecting consumers from lending abuses and improper practices. The question is when and whether this agency will come to fruition—or suffer as a casualty of political warfare.

This CFPB has instigated a firestorm among liberals and conservatives. Liberals raise the CFPB as an engine for consumer protection from rampant lender abuses and “big bad banks.” Conservatives denounce the Bureau as expensive regulatory fluff in a “leftist” campaign to take over private business.

Both sides have overblown the rhetoric. They seem to forget that consumer rights were once about providing voice for consumers. Consumer activism first took root as a means for political protest, as abolitionists boycotted slave-made goods during the Civil War period and protestors acted collectively in refusing to purchase Japanese silk during World War II. Since that time, proposals for a consumer protection agency have drawn considerable support before falling prey to political gamesmanship. In the 1970s, President Jimmy Carter championed agency proposals that passed the House or Senate five times in seven years. Nonetheless, the agency died in politicians’ “us versus them” warfare.

The Dodd-Frank law now hopes to give the agency life. The problem is that the polemic threatens the key step in the CFPB’s development of naming a Director with the power to tackle the Bureau’s work. From the start, Harvard law professor Elizabeth Warren has been instrumental in conceptualizing the CFPB and most assumed that she would be named as the Director. It is difficult to deny her expertise as a long time bankruptcy professor and consumer advocate. Still, politicians began to bash her nomination, and an ugly confirmation battle promised to stymie CFPB progress. This led to the surprising announcement of Warren’s appointment as an “advisor” on the CFPB who has been the chief aid in setting up the Bureau while we continue to wait for the naming of a permanent Director with full authority.

The hope was that this “compromise” would placate politicians on both sides because it gives Warren a voice in the development of the CFPB but does not give her Director power such as rule-writing authority. Both sides are nonetheless unhappy. Some claim that this move underhandedly gives Warren unchecked power as a new “Consumer Czar.” Meanwhile, others are disappointed with this “watered-down” appointment and question President Obama’s commitment to protect consumers and fight lending abuses.

The reality is that we need to set politics aside, name a Director, and get the CFPB up and running with full authority to do its work. The CFPB should be cautious not to over-regulate. However, a properly equipped Bureau could help boost consumer confidence, which continues to be a major stumbling block in the economic recovery. Consumers need a voice in Washington to combat the formidable power of financial institutions. The CFPB will have the opportunity to provide that voice. The Bureau will have authority to write rules that address debt collections, loan modification, excessive bank fees, mandatory arbitration clauses, and risky forms of financial security in a focused manner. The Bureau also will centralize administration of the disjointed consumer protection laws we now have, and take over some enforcement duties from the over-burdened Federal Trade Commission.

For example, the CFPB should invigorate the 1977 Fair Debt Collection Practices Act.[2] Dodd-Frank transfers power to write guidelines for collections under the Act to the CFPB, and further equips the Bureau with new power to make rules regarding collections. This is supposed to happen by July 21 2011, but may be postponed until 2012 if politicians continue to wrangle over the initial step of naming a Director. Meanwhile, consumers are already lining up at the door of the illusory CFPB with complaints about collectors’ practices. Moreover, this line is expected to grow as the debt collection industry finds ways to skirt outdated collections rules by using robo-callers to land lines and cell phones to pester consumers in debt.

The CFPB is now little more than verbiage in Dodd-Frank. July 21 is the designated transfer date when the CFPB will take over consumer financial protection functions. However, many doubt we will have a Director in place by that time, especially since we are still waiting to learn of a nominee and then must face confirmation battles. At the same time, opponents of Dodd-Frank seek to repeal or severely curtail the Act, with some going so far as to claim the Act is an unconstitutional delegation of power. Furthermore, Senator Dodd retired in January after thirty-six years and there seem to be no congressional leaders championing the CFPB.

The CFPB may not be a perfect solution for curing consumer confidence, but it is at least worth a try. It is time for policymakers on all sides of the polemic to call a truce in order to quickly constitute the CFPB and equip it with the tools to tackle its work. The CFPB deserves a chance. Consumers should not be made to suffer as casualties of political warfare.

* Amy J. Schmitz, Associate Professor of Law, University of Colorado School of Law.

[1] Pub. L. No. 111-203, 124 Stat. 1376 (2010) (to be codified at 15 U.S.C. § 78o-7).

[2] 15 U.S.C. § 1692 (2006).

Preferred citation: Amy J. Schmitz, Consumer Casualties?, 1 Harv. Bus. L. Rev. Online 47 (2011), https://journals.law.harvard.edu/hblr//?p=1039.

March 28, 2011 By wpengine

In Dodd-Frank’s Shadow: The Declining Competitiveness of U.S. Public Equity Markets

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David Daniels*

As we enter into 2011, things are looking up. The Dow Jones has recently broken through 12,000 and is climbing to pre-recession heights. The economy has emerged from the greatest downturn since the Great Depression and continues to show modest growth.[1] Unemployment is slowly decreasing.[2] But all is not well. A potentially worrying trend that gained traction at the beginning of the millennia continues to unfold: the decline of the competitiveness of U.S. public equity markets.

For example, consider the U.S. primary equity markets. In 2000, these markets attracted 54% of all global initial public offerings (IPOs)—IPOs by foreign companies issued on at least one public exchange outside the company’s domestic market.[3] Similarly, foreign companies raised about 82% of the dollar value of all global IPOs on U.S. public exchanges.[4] The numbers were 26% and 10%, respectively, in 2010.[5] Foreign companies, it seems, have been increasingly likely to forego our public equity markets and list elsewhere. These figures, however, do not tell the whole story. So-called Rule 144A IPOs—issuances done on U.S. private equity markets—by foreign companies have risen markedly in proportion. Over the past ten years, the number of these issuances as a percentage of total global IPOs in the U.S. has increased from 62% to 81%.[6] The percentage value of these IPOs has grown even faster—from 60% to 95%.[7]

The proportionate rise in private equity issuances is especially important. Although technology has improved access to foreign markets for retail investors, the private equity market continues to be accessible only to institutional entities and the very wealthy.[8] More tellingly, foreign companies cross-listed on U.S. exchanges incur, on average, a 2.47% lower cost of capital than in Rule 144A markets (11.54% vs. 14.01%, respectively).[9] Since companies accessing these private equity markets are free from most U.S. securities regulation, including registration and liability under the Securities Act of 1933 and the Sarbanes-Oxley Act,[10] the rising regulatory and litigation burden imposed by such legislation may be an important factor in accounting for the proportionate increase in Rule 144A market issues and foreign companies’ shift to overseas exchanges.

Indeed, global financial services executives have confirmed that the litigious nature of U.S. capital markets is a central factor in undermining the competitiveness of those markets.[11] The perceived unfairness and unpredictability of the U.S. legal system have driven companies away from our public exchanges; 46% of executives surveyed believed the U.K. had more predictable legal outcomes compared with 16% for the U.S.[12] Likewise, 43% of executives thought the U.K. had a fairer legal process versus 14% for the U.S.[13] Furthermore, a majority of executives felt companies listed in the U.K. were less likely to be sued than those listed on our public exchanges.[14] However, while there are benefits of a stricter legal system, they may not outweigh the liability costs imposed on companies trading publicly in U.S. equity markets.

There is no doubt that tough enforcement mechanisms serve key deterrence and compensatory goals. Wronged shareholders should be compensated for their losses and corporate wrongdoers must be deterred from managerial shirking and self-dealing. Yet the U.S. legal system may not be accomplishing either of these goals in the securities litigation context. Deterrence of wrongdoing is undermined by corporations and their insurers typically bearing the full cost of any settlement against individual defendants.[15] Federal securities class actions, a feature unique to the American legal system,[16] fail to adequately compensate victims for their losses. Because the vast majority of federal security class actions are either settled or dismissed,[17] shareholder compensation often falls short. The median ratio of class action settlement to investor losses, which has steadily declined over the past fifteen years, is now at only 2.4%.[18] While average settlements, adjusting for outliers, are at an all-time high,[19] so are plaintiff’s attorney fees that further reduce the value of what injured shareholders ultimately receive.[20] Section 308 of the Sarbanes-Oxley Act was intended to streamline the regulatory process by adding civil penalties obtained from defendants to a fund used to compensate plaintiffs,[21] but the number of federal securities class action filings has not significantly declined over the last decade.[22]

Several other factors have led to the decline in the competitiveness of U.S. public equity markets. Increasing liquidity in foreign and private markets and better regulation of foreign public markets have each eroded the competitive advantage that our public exchanges once had.[23] Improvements in technology have made it easier for U.S. investors to invest in foreign markets.[24] Not only is there little that can be done to reverse the impact of these factors; such advancements are actually beneficial for us. U.S. companies can safely tap into a wider range of markets for funding, and U.S. investors can better diversify their holdings by investing overseas with a smaller increase in risk or inconvenience. Instead, policy makers should focus on a fourth factor: the regulatory costs imposed on companies choosing to list on our public equity markets versus the foreign and private alternatives. Such costs have been cited by financial services CEOs as the most important issue in determining the international competitiveness of our public equity markets.[25]

Policy makers should be mindful, however, of reducing regulatory costs too much. A “race to the bottom” would not improve our markets’ competitive position and would only harm their integrity. Instead, regulatory costs should be balanced against increasing transparency and accountability so that risk and agency costs are reduced. In turn, corporate borrowing costs would decrease and share prices should increase.

A commonly cited provision that goes too far in increasing costs without a commensurate increase in benefits is Section 404 of the Sarbanes-Oxley Act.[26] Envisioned as a way of bolstering the credibility of public companies’ internal control systems, Section 404’s costs of verification and disclosure have ended up being many times greater than expected.[27] First-year implementation costs of internal control systems for large companies were eighty times greater than originally planned and recurring costs vastly exceed initial estimates.[28] Worse yet, smaller companies were disproportionately burdened.[29] Although Section 404 addressed serious internal control issues that led to the corporate scandals of the dot-com era and likely increased intra-firm transparency, critics argue its benefits are difficult to measure, thus making its costs all the harder to justify. [30]

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was signed into law. One of the things it did was to ease the burden Section 404 had on small companies and introduce several corporate governance mandates that aim to increase transparency and accountability of companies listed on U.S. public equity markets.[31] Unfortunately, neither of these goals is likely to be met in the short term.

One of Dodd-Frank’s most ambitious corporate governance provisions, Section 971, aimed to open up the director nomination process to shareholders via proxy and instill more accountability upon corporate directors.[32] Critics, however, argue that improved shareholder proxy access would lead to harmful investor activism[33] and an unnecessary focus on political issues diverting attention away from creating shareholder wealth.[34] Due to a legal challenge by the U.S. Chamber of Commerce, the SEC has stayed implementation of the provision until the 2012 proxy season.[35]

Another promising provision, Section 951, was designed to give shareholders a non-binding advisory vote on executive and director compensation,[36] but its efficacy in improving managerial accountability has also been called into question. Specifically, opponents contend it will shift power to proxy advisory firms and not to individual shareholders who are seldom involved in the voting process.[37]

Ultimately, the Dodd-Frank Act does not go far enough toward improving the competitiveness of our public equity markets. Much more needs to be done. Securities litigation reform is one possibility, but such change is unlikely. Instead, policy makers should focus on better balancing the costs of regulation against increased corporate transparency and accountability. If nothing is done, our leadership in providing the best public equity markets will continue to erode.

* J.D. Candidate, 2013, Harvard Law School.

[1] National Income and Product Accounts Gross Domestic Product, 4th Quarter and Annual 2010 (Second Estimate), Bureau of Economic Analysis (March 21, 2011), http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.

[2] Unemployment Rate – Updated Monthly, http://employeeissues.com/blog/unemployment-rate/ (Mar. 21, 2011).

[3] Committee on Capital Markets Regulation, Share of Global IPOs (Narrowly Defined) Captured by U.S. Exchanges (December, 2010), http://www.capmktsreg.org/competitiveness/2010Q3update/(2A)Share_of_Global_IPOs_Captured_by_US_Exchanges(narrow).pdf .

[4] Id.

[5] Id.

[6] Committee on Capital Markets Regulation, Rule 144A IPOs by Foreign Companies as a Percentage of Total Global IPOs in the U.S. (December, 2010), http://www.capmktsreg.org/competitiveness/2010Q3update/(4)Rule_144A_IPOs_by_Foreign_Companies_as_a_Percentage_of_Total_Global_IPOs_in_the_US.pdf.

[7] Id.

[8] Committee on Capital Markets Regulation, Committee Interim Report, 34 (November 30, 2006), http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf.

[9] Luzi,Hail & Christian Leuz, Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings, 52 (European Corp. Goverance Inst., Paper No. 46, 2006), http://www.law.yale.edu/documents/pdf/cbl/HL_ECGI_Fin461.pdf .

[10] Committee on Capital Markets Regulation, supra note 6, at 45.

[11] See Michael R. Bloomberg & Charles E. Schumer, Sustaining New York’s and the U.S.’ Global Financial Services Leadership, 73 (2007).

[12] Id. at 76.

[13] Id. at 76.

[14] See id. at 76.

[15] Committee on Capital Markets Regulation, supra note 6, at 78.

[16] Id. at 71.

[17] National Economic Research Associates, Trends 2010 Year-End Update, 13 (December 2010).

[18] Id. at 25.

[19] Id. at 18.

[20] Id. at 23.

[21] Committee on Capital Markets Regulation, supra note 6, at 82.

[22] See National Economic Research Associates, supra note 14, at 2.

[23] Committee on Capital Markets Regulation, supra note 6, at 4.

[24] Id. at 4.

[25] Bloomberg, supra note 9, at 79.

[26] Stephen M. Bainbridge, Corporate Governance and U.S. Capital Market Competitiveness, 16 (UCLA School of Law, Paper No. 10-13, 2010), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1696303.

[27] Id. at 23.

[28] Id. at 23–24.

[29] Id. at 24.

[30] Id. at 29.

[31] Stephen M. Bainbridge, The Corporate Governance Provisions of Dodd-Frank, 2 (UCLA School of Law, Paper No. 10-14, 2010), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1698898##.

[32] Id. at 2.

[33] Id. at 11.

[34] Paul Atkins, The SEC’s Sop to Unions, Wall St. J., Aug. 27, 2010, at A15.

[35] Bainbridge, supra note 29, at 11.

[36] Id. at 2.

[37] See Stephen M. Bainbridge, Will the Unaccountable Power of RiskMetrics Put Teeth in the Dodd Bill’s Say on Pay Provision?, ProfessorBainbridge.com (Apr. 22, 2010), http://www.professorbainbridge.com/professorbainbridgecom/2010/04/will-the-unaccountable-power-of-risk-metrics-put-teeth-in-the-dodd-bills-say-on-pay-provision.html.

Preferred citation: David Daniels, In Dodd-Frank’s Shadow: The Declining Competitiveness of U.S. Public Equity Markets, 1 Harv. Bus. L. Rev. Online 56 (2011), https://journals.law.harvard.edu/hblr//?p=1072.

April 8, 2011 By wpengine

Harmony or Cacophony? A Preliminary Assessment of the Responses to the Financial Crisis at Home and in the EU

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J. Scott Colesanti*

To be sure, the recent reforms to the U.S. regulatory system are far from final. Even if House Republicans do not succeed in turning back the clock, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)^{^[1]} require so many studies, interpretations, and effectuating regulations that it will evade meaningful analysis for years. And while the nominally bipartisan Financial Crisis Inquiry Commission recently issued its report on causes for the financial crisis, that spirited document both spread the blame and disclosed infighting so as to cloud sufficiently any lasting impressions.

Separately, the European Union—tasked with confronting the same economic foes while facing its own legislative obstacle of supranationalism—has issued robust rounds of Directives, Regulations, and Recommendations.^{^[2]} Similar to efforts in the United States, the culmination of these reforms will trigger debate about business regulation on that continent for years to come.

So where do the two regulatory mosaics agree on primary culprits? And how strongly do they endorse targeted reform? An initial analysis might support the conclusion that the EU feels stronger about the culpability of certain practices and institutions than its American counterparts.

Take short selling, for example. While the SEC’s response in recent years has crystallized into gradually squeezing the most offensive forms of the questionable trading into a non-controversial category termed “abusive short selling,” this remedy has done little to quell the fires among aggrieved investors who feel that Dodd-Frank ultimately took aim at that pernicious practice only in the most oblique of fashions.^{^[3]} Meanwhile, the EU, although similarly concluding that “short selling is often not abusive,”^{^[4]} felt threatened enough by the practice to move to (i) enable the new EU regulatory body to suspend trading in a particular issue within a Member State for three months,^{^[5]} and (ii) require that, for certain issues, the seller evidence his borrowing of the subject shares or entering into an agreement for the same.^{^[6]} By contrast, requirements in the U.S. are less stringent, as the effectuating broker-dealer merely must possess “[r]easonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due” before accepting a short sale order in an equity security from another person.^{^[7]}

Separately, hedge funds, while coming involuntarily on the regulatory radar screen on both continents, in the EU are restricted from marketing to entities outside of the EU unless the counterparty is subject to an “equivalent [regulatory] regime.”^{^[8]}

Concerning the regulation of OTC derivatives, while both the U.S. and the EU have endorsed the notion of transparency, pan-European regulators shall have the authority to define subject derivatives within the Member State.^{^[9]} The U.S. remains dependent upon the efforts of the SEC and the CFTC to identify the potentially troublesome vehicles (and to play nice in coordinating information thereon).

Finally, the very notion of fraud prohibitions is under review across the pond. In June 2010, the EU commenced a consultation period on the 2004 Market Abuse Directive.^{^[10]} It is noteworthy that countries like Germany already outlaw even attempted insider trading. Conversely, Rule 10b-5,^{^[11]} America’s broad, catchall antifraud prohibition, has been left to its cursed fate of continued ad hoc interpretation by federal courts, which see attempted insider trading cases only on the rarest of occasions and often via consent agreements.^{^[12]}

Overall, the two systems share many common responses, with a modicum of differences. But the significance of these dissimilarities (as inchoate as they may be) is more than just academic. Somewhere in the SEC it has no doubt been noted that the Europeans—at least in name—scrapped their pan-European regulator in favor of the new European Securities and Markets Authority authorized to directly oversee credit rating agencies within EU Member States.^{^[13]} And the decades-old EU concept of “transfrontier insider dealing”^{^[14]} may be a concept worth importing as SEC enforcement efforts go global. Finally, Europe’s restrictions on hedge fund marketing outside the EU may inspire a wave of market protectionism viewed by some as pure jingoism.

One interesting side note concerns the role of the investor in this whole mess. While the SEC appears poised to remain true to its aged crusade to shield the sheep investor from slaughter, the EU perhaps invites more useful debate on the role of the purchaser in the ever-complicating bazaar. For example, Britain’s proposed Consumer Protection and Markets Authority^{^[15]} from last year was drawn to serve the twin goals of investor protection and market integrity while balancing such protections with “consumer responsibility.” As products grow more complicated and national interests in protecting home markets grow stronger, perhaps individual investor accountability will similarly grow from option to necessity.

* Associate Professor of Legal Writing, Hofstra Law School.

[1] Pub. L. No. 111-203, § 619, 124 Stat. 1376, (2010) (to be codified at 15 U.S.C. § 78o-7).

[2] Cf. New regulations for hedge funds, FT.com (Oct. 10, 2010, 7:25 PM), http://www.ft.com/cms/s/0/7da06198-d49b-11df-b230-00144feabdc0,dwp_uuid=79bea71c-a86b-11da-aeeb-0000779e2340.html#axzz1HvwZOhgO.

[3] See Letter to Senator Dodd and Representative Frank on Abusive Naked Short Selling, Inv. Vill., http://www.investorvillage.com/smbd.asp?mb=3532&mn=5603&pt=msg&mid=1683231 (last visited Mar. 27, 2011) (urging “hearings on abusive naked short selling and its effect on the market and public companies”).

[4] See Commission Proposal for a Regulation of the European Parliament of the Council on Short Selling and Certain Aspects of Credit Default Swaps, at 3, COM (2010) 483 final (Sept. 15, 2010), available at http://ec.europa.eu/internal_market/securities/docs/short_selling/20100915_proposal_en.pdf.

[5] Id. at 9.

[6] Id. at 7.

[7] 17 C.F.R. § 242.203(b) (2008).

[8] See Council Directive 2010/78, 2010 O.J. (L 331) 133 (EU), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:2010:331:0120:0161:EN:PDF; see also Parliament ushers in new EU rules for hedge funds and private equity, European Parliament Press Serv., http://www.europarl.europa.eu/en/pressroom/ content/20101110IPR93908/html/Parliament-ushers-in-new-EU-rules-for-hedge-funds-and-private-equity.

[9] See Commission Proposal for a Regulation on OTC Derivatives, Central Counterparties and Trade Repositories, COM (2010) 484/5, available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/20100915_ proposal_en.pdf.

[10] Public Consultation of the European Commission on a Revision of the Market Abuse Directive (MAD), SEC (June 25, 2010), available at http://ec.europa.eu/internal_market/consultations/docs/2010/mad/consultation_ paper.pdf.

[11] 17 C.F.R. § 240.10b-5 (2011).

[12] Ann Hadley Vom Eigen, Securities Fraud, 24 Am. Crim. L. Rev. 687, 688 (1987).

[13] Commission Regulation 1095/2010, of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory, 2010 O.J. (L 331) 84, available at http://www.esma.europa.eu/popup2.php?id =7331.

[14] Council Directive 89/592, of 13 November 1989 on Coordinating Regulations on Insider Dealing, 1989 O.J. (L 334) 30 (EC), available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31989L0592:EN: HTML.

[15] Matthew Vincent, Good Can Come of FSA’s Demise, FT.com (Jun. 18, 2010, 7:27 PM), http://www.ft.com/cms/s/2/54d4298c-7b06-11df-8935-00144feabdc0.html#axzz1Hoe9F2MD.

Preferred citation: J. Scott Colesanti, Harmony or Cacophony? A Preliminary Assessment of the Responses to the Financial Crisis at Home and in the EU, 1 Harv. Bus. L. Rev. Online 60 (2011), https://journals.law.harvard.edu/hblr//?p=1112.

April 9, 2011 By wpengine

Durbin Sticks to Guns, Chooses Slurpees Over Consumers: An Overview of the Durbin Amendment and Its Potential Adverse Impact on Consumers

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Brandon Gold*

When the chairmen of the Federal Reserve Board and Federal Deposit Insurance Corporation and the Acting Comptroller of the Currency express doubts about a regulation designed to eliminate seventy percent of a market, and when the queen and spokeswoman of consumer financial protection, Elizabeth Warren, refuses to comment on a financial rule supposedly enacted to protect consumers, one would expect a rational legislator to, at a minimum, delay such a measure until they could properly understand its ramifications.[1] Dick Durbin, the number two democrat in the Senate, refuses to fit that mold. Instead, Durbin, the author of the self-titled “Durbin Amendment” to the Dodd-Frank Act, refuses to reconsider the legislation directing the Federal Reserve to limit debit card interchange fees and threatens to filibuster any bill brought before the Senate that seeks to delay its implementation. Under the guidelines of the amendment, the Fed has proposed setting a maximum fee of twelve cents per transaction, a drastic reduction from the current average of forty-four cents.[2] Rather than heeding the advice of regulators and economists to delay the rule to allow time for a study of its adverse effects on consumers, Durbin has chosen to side with major retailers such as 7-Eleven who stand to reap and internalize the differential in fees.

The Durbin Amendment to the Dodd-Frank Act directs the Federal Reserve Board to issue a rule setting the maximum debit card interchange rates that banks can charge to an amount “reasonable and proportional to the cost incurred by the issuer with respect to the transaction” by April 21, 2011.[3] However, rather than letting the Fed determine what to include in the cost calculation, the amendment only allowed four cost categories (disallowing fraud costs, fixed costs, processing fees, set-up costs, etc.).[4] Citing this as one of the core deficiencies in the legislation, Acting Comptroller of the Currency John Walsh has acknowledged that the law’s narrow view of costs will harm the economy.[5] Additionally, four Federal Reserve economists have said that “calculation of that fee requires knowledge of social costs and benefits that are difficult, if not impossible, to measure accurately.”[6] They note that card use would likely decline,[7] presumably because banks will no longer be able to offer free services to their less-wealthy customers. While describing the fixing of interchange fees as “the most extreme form” of intervention, the Fed economists say that it is not clear that any intervention is necessary and imply that it may be better to do nothing than to fix fees based on a questionable definition of cost.[8] Using the costs enumerated by the Durbin Amendment, the Fed released its proposed rule in December 2010, which was to take effect July 21, 2011 as per the law.[9] The rule would set a maximum interchange fee of twelve cents per transaction, a seventy percent reduction from the average fee charged in 2009 average.[10]

After offering the amendment at the last minute, Durbin garnered support for its passage with promises that the cuts in interchange fees would not affect credit unions and community banks. However, both Fed Chairman Ben Bernanke and Acting Comptroller John Walsh have said that in reality, community banks and credit unions will still face the cuts in fees.[11] While the Durbin Amendment limits application of the fee regulation to firms with over ten billion dollars in assets, all institutions will end up with the same low price. This is because the exempt smaller institutions must compete with the larger non-exempt ones and will be forced to lower their own fees to compete “or lose more business to the banking giants.”[12]

Consumers are already feeling the costs of the proposed rule as banks have begun to increase fees and have ended customer-favorites such as free checking accounts and debit card rewards programs. Ninety-three percent of members of one community bank industry association said that they “would charge their customers for services that are currently offered free because of the . . . Fed rule.”[13] Chase banks in Illinois have already increased ATM fees in anticipation of the law, while other banks have stopped programs that reimburse customers for fees incurred at other banks’ ATMs.[14] Chase and Wells Fargo have terminated enrollment in their rewards programs because of the regulation[15] and other banks are mulling limiting debit-card transactions to small purchases.[16]

While Durbin proclaims that the legislation will benefit consumers by fixing a “broken” debit system,[17] the prospect of that happening seems unlikely. Sheila Bair, Chairman of the FDIC, doubts that merchants would pass on savings to consumers through lower prices.[18] Even some consumer advocacy groups have urged the Fed to withdraw its proposal.[19] The only apparent beneficiary of the rule seems to be the merchants who currently pay the fees, such as major retailers including Walgreens and 7-Eleven (who have spoken out in support of the amendment).[20] While companies have complained that the amount they pay in interchange fees has increased over the past decade, they neglect to consider that these costs result from consumers’ increased preference for debit cards due to their convenience and other benefits over forms of payment such as cash and checks.[21] Professor Kevin Murphy has dispelled the notion of the debit system being “broken,” noting that its displacement of checks and cash shows its success.[22] He also notes that debit networks had financed themselves through fees on retailers rather than consumers because it is more efficient that way. His economic analysis suggests that the Durbin Amendment does more harm than good to consumers and decreases efficiency.[23] If the costs of accepting debit cards exceeded the benefits, then retailers simply would not accept them.

The problems of fixing interchange fees becomes apparent when one analogizes the regulation to another industry. What if Congress decided that a Slurpee was too expensive? If a regulator was directed to set a maximum price for Slurpees but was forced by the law to set a price proportional to the cost of the ice involved in one Slurpee, it is hard to see how anyone would benefit. Such a price would clearly fail to take into account the fixed costs of owning and operating a store, the costs involved in employing clerks and keeping the store open, as well as the costs of buying and maintaining a Slurpee-making machine. 7-Eleven would clearly not sit idle and instead would be forced to resort to more opaque and less efficient measures of recuperating its costs. One could easily imagine that it would result to strategies such as charging fees for Slurpee cups and straws. It may decrease the number of stores and Slurpee machines. It might be forced to abandon its twenty-four-hour open-for-business policy. Given these likely adverse consequences, one would be hard-pressed to allow such a regulation to be enforced before taking the opportunity to study its effects.

As a result of the expected harm from and uncertainty regarding debit interchange regulation, Senator Jon Tester and a bipartisan group of congressmen in both houses have introduced bills that delay the implementation of the rule for one to two years to give regulators and professional organizations a chance to study its costs and benefits.[24] However, Senator Durbin has vowed to fight any attempt to delay enactment and has threatened to filibuster any such bill.[25] As of now, as many as ten more lawmakers are needed to get the sixty votes necessary to overcome the filibuster and pass the bill in the Senate.[26] While both the Senate and House bills have been referred to the appropriate committees, none have yet scheduled a hearing. As the April deadline approaches, it is critical that Congress acts now to delay or repeal the measure, and that Senator Durbin puts aside his ego for the sake of American consumers.

* J.D. Candidate, 2013, Harvard Law School.

[1]See Victoria McGrane and Robin Sidel, Banks Find Allies in Debit-Fee Fight, Wall St. J., Mar. 23, 2011, http://online.wsj.com/article/SB10001424052748703410604576216950643420330.html; Interview by Melissa Francis with Elizabeth Warren, Special Advisor to the President and the U.S. Treasury, CNBC (Mar. 22 2011).

[2] Debit Card Interchange Fees and Routing, 75 Fed. Reg. 81,725, 81,756 (Dec. 28, 2010) (to be codified at 12 C.F.R. pt. 235).

[3] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, sec. 1075, § 920(a), 124 Stat. 1376 (2010).

[4]Id.

[5] John Walsh, Acting Comptroller of the Currency, Remarks at the Annual Convention of the Independent Community Bankers of America (Mar. 23, 2011), available at http://www.occ.treas.gov/news-issuances/speeches/2011/pub-speech-2011-31.pdf.

[6] Robin A. Prager, Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues 47 (Fed. Res. Bd. Fin. & Econ. Discussion Series and Economics Discussion Series, Working Paper No. 23, 2009), available at http://www.federalreserve.gov/pubs/feds/2009/200923/200923pap.pdf.

[7]Id.

[8]See id. at 46–48, 52.

[9] Debit Card Interchange Fees and Routing, 75 Fed. Reg. 81,756 (Dec. 28, 2010) (to be codified at 12 C.F.R. pt. 235).

[10] Id.

[11] See Ed Roberts, Delay? Proceed? Congress Debates Interchange’s Fate, Credit J., Mar. 21, 2011, http://www.cujournal.com/issues/15_12/delay-proceed-congress-debates-interchanges-fate-1007753-1.html; Walsh, supra note 5, at 5.

[12] Roberts, supra note 11.

[13] Maya J. Randall, Banks, Retailers to Face Off Over Fed’s Debit-Card Rule, Wall St. J., Feb. 16, 2011, http://online.wsj.com/article/SB10001424052748704171004576148801652639530.html.

[14] Stephanie Shyu, Banks Increase ATM Fees to Offset Legislative Changes, SmarTrend, Mar. 17, 2011,http://www.mysmartrend.com/news-briefs/news-watch/banks-increase-atm-fees-offset-legislative-changes.

[15] Jenalia Moreno, Debit cards will get less rewarding, Houston Chron., Mar. 21, 2011, http://www.chron.com/disp/story.mpl/business/7485201.html; Dakin Campbell, Wells Fargo Halts Enrollment in Debit-Card Rewards, Citing New U.S. Rules, Bloomberg, Mar. 25, 2011, http://www.bloomberg.com/news/2011-03-25/wells-fargo-halts-enrollment-in-debit-card-rewards-citing-new-u-s-rules.html.

[16] Aparajita Saha-Bubna, Banks May Cap Debit Purchases to Combat New Rules, Wall St. J., Mar. 10, 2011, http://online.wsj.com/article/SB10001424052748704399804576193320313890728.html.

[17] 157 Cong. Rec. S1780 (daily ed. Mar. 17, 2011) (statement of Sen. Dick Durbin).

[18] McGrane, supra note 1.

[19] Maya J. Randall, Bill Would Delay Fed’s Debit-Card Fee Rule, Wall St. J., Mar. 16, 2011, http://online.wsj.com/article/SB10001424052748704662604576202882193685332.html.

[20] See Understanding the Federal Reserve’s Proposed Rule on Interchange Fees: Implications and Consequences of the Durbin Amendment Before the Subcomm. On Fin. Insts. of the H. Comm. on Fin. Insts. and Consumer Credit, 112th Cong. (statement of David Seltzer, Treasurer of 7-Eleven Inc.), available at http://financialservices.house.gov/media/pdf/021711seltzer.pdf.

[21] “The Wall Street Journal reported the cycle as follows: as late as 1995, debit card use was minuscule; by 2000, debit transactions were still only a small fraction of credit card transactions; yet, by the end of 2008, Visa debit card volume had overtaken credit card volume by number of transactions . . . Simultaneously, consumers cut back sharply on the use of checks. Total check volume fell five percent per year each year from 2000 to 2006. By 2005, aggregate debit card transaction value exceeded the sum of aggregate cash and check transaction value for retailers.” Amended Complaint for Plaintiff at 18 ¶51, TCF Nat’l Bank v. Bernanke, 2011 WL 864074 (D.S.D. Jan. 27, 2011) (No. 4:10-cv-04149-LLP).

[22] Report of Professor Kevin M. Murphy, at 2, TCF Nat’l Bank v. Bernanke, 2011 WL 864074 (D.S.D. Feb. 15, 2011) (No. 4:10-cv-04149-LLP).

[23] Id.

[24] Debit Interchange Fee Study Act of 2011, S. 575, 112th Cong. (2011) (allowing two years for the study); Consumers Payment System Protection Act, H.R. 1081, 112th Cong. (2011) (allowing one year for the study).

[25] Thecla Fabian, Foes Will Need 60 Senate Votes to Repeal, Delay Durbin Amendment, Sen. Durbin Says, Banking Daily (BNA) (Mar. 25, 2011).

[26] See Cheyenne Hopkins, Bills Introduced That Would Delay Debit-Interchange Restructuring, CardLine, Mar. 18, 2011, http://bit.ly/erCFPX.

Preferred citation: Brandon Gold, Durbin Sticks to Guns, Chooses Slurpees Over Consumers: An Overview of the Durbin Amendment and Its Potential Adverse Impact on Consumers, 1 Harv. Bus. L. Rev. Online 64 (2011), https://journals.law.harvard.edu/hblr//?p=1123.

Corporate Reorganization as Corporate Reinvention: Borders and Blockbuster in Chapter 11

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