THE HOLDING FOREIGN COMPANIES ACCOUNTABLE (HFCA) ACT: A CRITIQUE
Jesse M. Fried & Tamar Groswald Ozery
The 2020 Holding Foreign Companies Accountable (HFCA) Act will force China-based firms to delist from U.S. exchanges if China fails to permit audit inspections during a two-year period. The Act also requires such firms, as soon as China blocks such inspections, to disclose ties to the Chinese party-state. We first explain why the delisting provisions, while well-intentioned, may well harm U.S. investors. We then turn to the disclosure provisions, explaining that they appear to be motivated by a desire to name-shame Chinese firms rather than to protect investors. While China-based firms do pose unique risks to U.S. investors, the Act fails to mitigate—and may well exacerbate—these risks.
BANK RUNS DURING CRYPTO WINTER
Gary B. Gorton & Jeffery Y. Zhang
“Crypto Winter” refers to a systemic event that occurred in the cryptocurrency ecosystem—what we call “crypto space”—in 2022. Crypto space was wracked by plummeting crypto prices, the troubles of a large crypto hedge fund, and runs on many crypto lending platforms. Several large crypto firms went bankrupt. Collectively, everyday people lost billions of dollars. And crypto investors are still feeling the aftershocks.
We begin with two observations: First, despite mass marketing campaigns to the contrary, crypto lending platforms recreated and replicated traditional banking. They were vulnerable to runs because, like all banks, they borrowed short and lent long. This is the essence of banking, so we label these lending platforms “crypto banks.” Second, crypto space was largely circular. Once crypto banks obtained deposits and investments, these firms borrowed, lent, and traded mostly between themselves. As a result, Crypto Winter did not cause the kind of financial turmoil that we witnessed in either 2008 or 2020, nor did it cause an economic recession.
We then sound a warning for regulators. The next generation of crypto firms are linking up with the financial sector, which means their failures will spill over into the real economy. To contain the inevitable growth of systemic risk, regulators should use banking laws to address a banking problem.
THE NEW CORPORATE LAW OF CORPORATE GROUPS
Mariana Pargendler
How does corporate law treat legal entity boundaries in groups of companies? This is a critical question given that large corporations typically have hundreds of subsidiaries. Investigating the treatment of this question in key jurisdictions over time reveals a critical, but thus far overlooked, development in corporate law around the globe. Corporate law rules of internal governance increasingly overcome entity boundaries and apply on a pass-through basis, such as by allowing shareholders of a parent company to sue subsidiary directors, inspect subsidiary books and records, and approve major asset sales by subsidiaries. This phenomenon, which can be described as the rise of “entity transparency” in corporate law, reflects a gradual trend that has accelerated in the twenty-first century. Interestingly, there appears to be little direct correlation between a jurisdiction’s willingness to disregard entity boundaries to enforce shareholder rights, on the one hand, and to impose liability on shareholders for the benefit of creditors, on the other. The Article then offers an economic account for the distinct treatment of corporate separateness vis-à-vis shareholders and creditors, and explores the broader theoretical and normative ramifications of its analysis. The rise of entity transparency in corporate law underscores the importance of unbundling different dimensions of corporate separateness, challenges the view that overcoming entity boundaries between parent companies and subsidiaries invariably requires extraordinary circumstances, and has implications for a wide array of legal issues across various areas of law.
THE MAKING AND MEANING OF ESG
Elizabeth Pollman
ESG is one of the most notable trends in corporate governance, management, and investment of the past two decades. It is at the center of the largest and most contentious debates in contemporary corporate and securities law. Yet few observers know where the term comes from, who coined it, and what it was originally aimed to mean and achieve. As trillions of dollars have flowed into ESG-labeled investment products, and companies and regulators have grappled with ESG policies, a variety of usages of the term have developed that range from seemingly neutral concepts of integrating “environmental, social, and governance” issues into investment analysis to value-laden notions of corporate social responsibility or preferences for what some have characterized as “conscious” or “woke” capitalism.
This Article makes three contributions. First, it provides a history of the term ESG that was coined without precise definition in a collaboration between the United Nations and major players in the financial industry. Understanding this history reveals that key normative choices between promoting shareholder value, limiting corporate externalities, or creating some other social good were not definitively determined in creating the term ESG. Second, the Article identifies and examines the main usages of the term ESG that have developed since its origins. ESG takes on dramatically different meanings varying from factors for integrating in investment analysis or risk management to a synonym for corporate social responsibility, sustainability, or even an ideological preference or political stance provoking backlash. Third, the Article offers an analytical critique of the term ESG and its consequences. It argues that the combination of E, S, and G into one term has provided a highly flexible moniker that can vary widely by context, evolve over time, and collectively appeal to a broad range of investors and stakeholders. These features both help to account for global spread of the term ESG, but also challenges related to the term such as the difficulty of empirically showing a causal relationship between ESG and financial performance, a proliferation of ratings that can seem at odds with understood purposes of ESG, and “sustainability arbitrage.” These challenges fuel critics who assert that ESG engenders confusion and fosters unrealistic expectations and greenwashing that could inhibit corporate accountability or crowd out other solutions to pressing environmental and social issues. These critiques are intertwined with the characteristic flexibility and unfixed definition of ESG that were present from the beginning and ultimately shed light on obstacles for the future of the ESG movement and regulatory reform.
PRIVATIZING DEPOSIT INSURANCE
Christina Parajon Skinner
For the past 90 years, the federal government has provided insurance to bank depositors against the risk of loss associated with a bank’s failure. In many ways, this insurance scheme—managed by the Federal Deposit Insurance Corporation (“FDIC”)—is the bedrock of banking law. FDIC insurance aims to preempt bank runs by ensuring that depositors remain confident in the security of their funds, even when turbulent times hit. In practice, however, FDIC insurance has suffered from one key design flaw—it has never managed to reconcile the tradeoffs between the moral hazard it produces and the financial stability it ensures. In large part, this is due to policymakers’ inability to credibly commit to maintaining the limits on insurance payouts that Congress statutorily sets. Over the past forty years, the cap has consistently been lifted to protect uninsured depositors in each successive banking crisis.
This Article argues for a fundamental reset in deposit insurance law by privatizing insurance for deposits above the FDIC cap. Requiring banks to form private insurance schemes has been attempted in the past on the state and local levels, but lessons from those experiences appear to have been forgotten or misconstrued. Private insurance would put more skin in the game in banking supervision and reduce the taxpayer burden associated with bank resolution, while delivering the same (if not more) confidence than federal deposit insurance alone currently does.