Association of American Law Schools

FEDERAL CORPORATION LAW

Author(s): Manuel F. Cohen
Source: Journal of Legal Education, Vol. 20, No. 4 (1968), pp. 529-537
Published by: Association of American Law Schools
Stable URL: https://www.jstor.org/stable/42891917
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 1968] Roundtable on Business Ass'ns 529

FEDERAL CORPORATION LAW

Manuel F. Cohen *

It are isarebeing
beinga recorded,
pleasure recorded,
and I thinktothat
be and
I willwith
takeI tothink
heartyou
thetoday. that I will I see take that to heart these the proceedings footnote
footnote
which I noted during the luncheon period in Part One of last year's pro-
ceedings containing various committee reports.
On page 37 you will find a footnote which reads as follows: "It is
hoped that some of these reports will be published." There follows a
discussion of certain points of view not contained in the report of the
Curriculum Committee, after which is found the following: "Although
unfortunately Gene Mooney's earthy commentary will have to be deleted
to make his report printable.,,
The time is running. We have two commentators and I do want to
give them a full opportunity to speak. At this point I am in the enviable
position of saying I am prepared to rest after listening to Mr. Corroon
and to Professor Folk. I will stop right here, if Professor O'Neal
would permit me.
Preliminarily, I would like to comment on the statement that Mr. Cor-
roon was in a very unenviable position, sitting between Professor Folk and
the SEC. I must confess he is. But Professor O'Neal said he couldn't
think of anything worse. Well, at the moment I can, and that is bei
at the SEC during these hectic times.
I have been asked to speak to you about current developments in what
has been called federal corporation law. As you know, Congress ha
consistently rejected proposals for a general federal corporation statute
There has developed under the federal securities laws, however, a bo
of decisions which has been described by Judge Friendly as "a feder
common law of corporate responsibility," and by Judge Biggs as "
new federal law of management-shareholder relations." It is to th
body of law I have been asked to address myself this afternoon.
Since there is no general federal corporation law, the basic framework
of the corporations with which the SEC is concerned - the basic stru
ture of the relationships among those who manage and control the cor-
porations and those who invest in their securities - is governed by Stat
law. This means that the application of provisions of federal law i
in many cases dependent on state law.
For example, - and this is one to which Professor Folk has address
himself in his very excellent article, which has provided me with some
* Chairman, Securities Exchange Commission.

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530 Journal of Legal Education [Vol. 20

food for thought - the requirements of the

curities Exchange Act apply only to matters wh
or can be submitted to stockholders for their a
as he pointed out this afternoon and as he elabo
significantly in this regard. I think a comp
North Carolina law and the proposed Delawar
the many variations.
In 1964 the Congress amended the Securitie
to extend the proxy solicitation and other re
listed companies, but also to require that co
formation available to their shareholders prior
whether or not they solicit proxies.
This amendment closed one loophole, but there
in which the disclosures required by the pro
but are not required because of the peculiarities
the in-between status of the company to which
One example which may be of some interest t
with the transfer of a controlling stock intere
annual meetings. It is generally possible, as I
law to replace all or a majority of the directors
holders and therefore without the disclosures t
elicit. Some consideration has already been give
er steps should be taken to close this particular
quirements of our proxy rules.
Before continuing, I would like to note that m
predecessor, Bill Cary, is here, and that I am aw
on his experiences in connection with the en
Acts Amendments of 1964. I think it will prov
of us involved in corporation and securities law
I am also looking forward to the next revis
cause I think it will deal with a variety of new
make an unsurpassable volume even better.
To go back to the proxy rule situation for a
notes in his paper that there is a disparity amo
of questions which are proper subjects for actio
ings.

He also notes in this connection that the new North Carolina corpora-
tion law greatly expands what might be called the "subject matter juris-
diction" of a stockholders' meeting, while the new corporation laws of
other states sharply contract that jurisdiction. This means that the
federally-created right of stockholders to have proposals presented in

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1968] Roundtable on Business Ass'ns 531

the management proxy material may depend in

state of incorporation which the organizers
chosen.

Professor Folk made the interesting suggesti

may have to rethink its rule as a basis for requi
nection with shareholder meetings.
The traditional approach of state corporatio
the stockholders as the owners of the corporatio
officers as the agents selected by the stockholde
for the stockholders' benefit.

The federal laws in the area which we are now discussing, as their
titles and contents suggest, are basically securities laws.
This is interesting in the light of Professor Folk's comment that in
some states policy decisions have been made to keep the corporation stat-
utes strictly company law statutes, and to superimpose additional re-
quirements such as securities laws requirements in other statutes. This
has been going on since the beginning of the century, but I think he is
suggesting a greater emphasis in this area is now taking place.
Under the federal law the starting point is to treat the stockholder as
an actual or potential investor or trader in a marketable commodity, not
as an owner of the business.

The market for securities is in a very real sense a market for informa-
tion. While the ultimate value of a share of stock obviously depends on
the assets and earning power of the company which issued it, its value to
a potential buyer or seller depends to a very great degree not on these
ultimate facts, but on what he is told or otherwise knows about the
corporation.
Therefore, an important emphasis in the federal securities law has
been on requiring public disclosure of material information, an area in
which the states have largely been silent.

I must also add that to put teeth into these disclosure requirements, the
federal laws provide a variety of sanctions, including provisions designed
to prevent corporate managers and other insiders from taking advantage
of their special knowledge or position when dealing with the corporations
which they serve or when dealing in the corporation's securities with
members of the public. These restrictions apply to the same people in the
same circumstances as do the provisions of state corporation law or state
common law which were developed to protect the "owners," if I can use
that expression, from the waste of corporate assets by their managers.
It is this confluence of two essentially different approaches to regulation
of the activities of corporate managers that has raised questions as to

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532 Journal of Legal Education [Vol. 20

the scope and effect of federal corporation law

discussion here today brought these points out in
even if I had several hours to do it.

Some commentators have viewed the development of federal law for

protection of the members of the public, in transactions involving securi-
ties, particularly through rights of action under Section 10(b) of the
Securities Exchange Act and the Commission's Rule 10b-5 as the estab-
lishment of a federal common law of corporations which was not in-
tended or even contemplated by the Congress at the time the original
federal securities laws were enacted. I think there is a certain loose-
ness in the discussions that I have heard and read on this subject which
would even suggest that the Commission did not consider this either
and therefore what the courts have done is to engraft a new set of rules
beyond that which the Congress intended. I don't agree with that either.
The basic theory of jurisprudence under which private rights of ac-
tion under 10b-5 have developed, namely, that a person lias a right to
sue for damages resulting from the violation of a statute enacted to pro-
tect people in his position, had been enunciated by the courts before the
1934 Act was enacted and I cannot assume that the Congress was un-
aware of this fact. Moreover, as many scholars have pointed out, if
the Commission had not provided the vehicle for dealing with this prob-
lem, the courts would have fashioned one. In the last analysis, Rule
10b-5 is merely a proscription against practices which the courts find
inexcusable and unwarranted.

As far as federal securities law is concerned, I venture to suggest that

the current developments in this area are but a natural development of
the statutes which Congress placed on the books, and they have made, and
I hope will continue to make, a notable contribution to public confidence
in our securities markets. I do not wish to debate with you the question
whether one or another decision is correct or whether the reach of Rule
10b-5 is as wide or as limited as some cases or commentators suggest.
Nor do I believe it fruitful to discuss the procedural questions which
have been raised - for example, statutes of limitations, or venue. I do
wish to note, however, that Rule lOb-S is part of a larger scheme, care-
fully drawn by the Congress, to free our capital markets from artificial
and improper activities, to assure necessary investor confidence and thus
to provide a context within which the savings of millions can be properly
chanelled into productive enterprise. I would also say that the scheme
has been reasonably successful in this regard.
Perhaps one difference between this body of federal law and conven-
tional company law at the state level is that the latter is still in many states
based on a legal and economic framework which no longer is consistent

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1968] Roundtable on Business Ass'ns 533

with the realities of change in our economy

action against doctrines which had their beginni
in which stockholders were considered to be active owners in the sense
that their meetings, like the town meetings in New England, would in
fact be important events in the corporation's life, in which basic policy de-
cisions would be made. This was also a time when transactions among
purchasers and sellers usually occurred face to face. Of course we have
not relinquished, nor can we relinquish, this shareholder-management
relationship as an important base for the development of appropriate
rules for the conduct of corporate life and for the proper division of re-
sponsibility. We at the federal level recognize this. We have our proxy
rules, our requirements for annual reports, which merely supplement
what is required at the state level or fill the vacuum that may exist.
But these have also been supplemented by a variety of provisions, more
sophisticated in some ways, more fundamental in others, which reflect
the fact that relationships have become more impersonal, that the public
now deals in vast markets through almost faceless intermediaries, and
that those who undertake to act for investors, - as well as the manage-
ments of the issuing companies - are responsible for fair dealing and the
development of informed markets, free of artificial restraints and ad-
vantages resulting from superior knowledge or position.

I had hoped to discuss with you a subject that is receiving a good deal
of attention in professional circles - the wide disparity between the in-
formation made available incident to public offerings subject to the re-
quirements of the 1933 Act, and the amount of information made avail-
able under the 1934 Act for use in connection with trading in securities.
With your permission, I will pass this problem except for one or two
brief remarks.

First, returning to Professor Folk's concern about in-between com-

panies, I think the 1964 Amendments were a substantial, an incomplete,
step toward a rational distinction between publicly-held and privately-
held corporations.

The problem of drawing an appropriate line between publicly-held and

closed corporations for purposes of regulation is one that has been of
concern to draftsmen of state corporation laws and to the Congress. I
think Professor O'Neal can be sure that there will be a great deal for him
to do for a long time to come. In addition, as most of you know, the
problem has been of concern in many other countries.

At the moment there is a heated debate on this very subject in the

United Kingdom. There has been a second reading in the House of
Lords of a bill introduced by the government. I recommend the debates

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534 Journal of Legal Education [Vol. 20

as reproduced in Hansard to those of you who

subject.
I want to leave this subject by saying that a principal concern of the
Commission continues to be to improve the quantity and quality of in-
formation available to the public concerning the companies subject to the
disclosure requirements of the 1934 Act without imposing undue bur-
dens on those responsible for making that information available. For
example, we have recently proposed some changes to our proxy rules.
We intend to make some further suggestions with respect to our report-
ing requirements.
One commentator has suggested that federal corporation law, if that
is a proper term, is now at its most creative, and therefore its most valu-
able, stage of growth. I wouldn't limit the creative potential of cor-
poration law to the federal scene because, if North Carolina is an in-
dication of what an enlightened bar and the academic fraternity can
persuade the legislature to do, I have great hopes for future developments
in the area of state corporation law.
We must still question whether the development of federal corpora-
tion law has usurped the states' functions or has hampered states' efforts
to develop viable rules.
My own feeling is that the development has taken place generally in
areas in which state law did not and could not provide the type of in-
vestor protection which is essential to informed allocation of savings, so
necessary to the continued growth of our economy.
The securities markets are national in scope, and the actions which
affect the price of securities are in a real sense a matter of national con-
cern, even when they are actions taken by corporate managers under au-
thority which they derive from state law. Most states have not come to
grips with this problem.
I have some very good material here I was going to read, but I am
running out of time. I want to get on to the main subject you asked me
to speak about : What does all of this mean for the law school curricu-
lum? It means that if law students are to acquire a working understand-
ing of the rights and responsibilities of corporate managers and stock-
holders, the course in corporation law should include at least the basic
elements of the federal disclosure and anti-fraud provisions which now
define many of the rights and duties of corporate managers and stock-
holders and which are superimposed on the procedural framework pro-
vided by the state corporation statutes. In the case of a large publicly
held corporation this includes an extensive array of substantive and pro-
cedural requirements in the area of financial reporting and proxy so-
licitation, to name just two.

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1968] Roundtable on Business Ass'ns 535

But I do want to emphasize that even in the smal

matter where situated, the lawyer must bear in m
criminal liability as well as the private and adminis
tion under the provisions of the Securities Act of
offerings, as well as the anti-fraud provisions in t
statutes that form the body of federal corporation
Traditional courses in corporation law often emph
ture and technicalities of the corporate form. B
corporation laws, state or federal, are ultimatel
relationships among groups of people - in this c
managers on the one hand and investors and traders
The generation of the 1930's was concerned with th
ership from control. Much of the law dating fro
as well as state, is based on the view that with the
ship, the principal problems were those between th
and those who manage the enterprise created or de
Today, we are on the threshold of new developm
centers of power, which may change the patterns o
institutional investors.

I might refer here to the work of Adolph Berle. He wrote a volume

a few years ago which was timely and important, called "Power With-
out Property," and which raised a number of important problems. He
wrote another piece, as I recall about the corporative state. His work
foreshadowed the current recognition and discussion concerning the tre-
mendous growth of institutional investors, and the special problems that
growth has created for corporation laws and for the public interest.
In dealing with this new type of problem, we must not overlook the
fact that there has simultaneously been a tremendous growth in the
number of individual stockholders. It is estimated now there are ap-
proximately 20 million shareholders in the United States and by 1970
there will be approximately 30 million.
While some limited percentage of law school graduates will become
corporation lawyers, and represent primarily corporate managers, any
practicing lawyer may be called upon from time to time to represent the
interests of some of the more than 20 million public investors. It is
essential, therefore, that all lawyers have some familiarity with the
body of federal law which has been constructed for the benefit of those
investors. Of course I don't mean to suggest you do all of this in a corpo-
ration law course. But I think that the basics should be developed, more
than has been done thus far.

In this connection, the federal government itself is becoming an impor-

tant workshop in which lawyers and other professionals can develop
20 Journal of Legal Ed. No.4 - 11

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 536 Journal of Legal Education [Vol. 20

their understanding of current problems while

terest. It is heartening to us who have been around
you on the outside have given up substantial income
for further emoluments, and come to Washington
vineyard.

I hope you will encourage your ablest students to come to Washington.

' It is the greatest school in the world. But more important, it will give
each of them an opportunity to learn how to deal with, and perhaps
to assist in resolving, the complex and urgent problems in a manner
which protects and promotes the public interest. These problems seem
to become more urgent and complex every year.
There is one more thing on the curriculum to which I want to speak.
Law schools must increase their emphasis on giving their students
a broad understanding of the relationship of law to other disciplines. I
know that many law schools now require a course in accounting for
students who have had no previous background in the subject. And
some universities offer combined business-law programs which attempt
to combine the training in these different disciplines. But a lot more
work remains to be done. We face complex problems, and a lawyer
who doesn't have some real exposure to these other disciplines cannot
perform the service which his client expects of him.
Moreover, we can no longer limit our sights to state and federal law.
The world is going through another round of reform of company and
financial law. With the development of international financial and
industrial transactions has come a revolution of change all over the
western world; indeed all over the world - East and West.
Just as the period between 1928 and 1935 witnessed a great wave
of reform, we are going through one right now. Many of you have had
some personal participation in these activities. Important changes have
been effected or are proposed in developed and developing countries.
Great Britain, France, Germany, Canada, Australia, South Africa,
Ghana, Israel, Brazil, Pakistan, India, Korea are examples. I wish
to take another moment and mention Canada particularly.
In Canada there is a federal system, but unlike the United States, the
federal government has a statutory federal company law. Nevertheless,
the current reform is being spearheaded by one of the provinces - Ontario
- which has developed a statute which I think is one of the more sophisti-
cated and imaginative in the world today.

This legislation has great significance for all of us, and we study it
very closely.

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1968] Roundtable on Business Ass'ns 537

I would like to make one other point concer

frequently; that there should be no state blue
a national trading market, and that the SEC sh
lems. I do not agree with this argument. I thi
ately provided that the SEC not supersede the st
theory that the states could provide vessels with
I think what is happening in Ontario is a good
mentation within a federal system. And ther
Canada. Of course, I hasten to add, we have si
United States.

Now to return to the curriculum. The distinctive contribution of

American lawyers has been the emphasis on the lawyer as a general ad
viser, relating all of the relevant disciplines and interests in an effort to
reach practical and constructive solutions to business, social and othe
problems. Other countries which, heretofore, have taken a more limited
view of the lawyer's role, are now realizing the untapped potential talent
There is beginning to be an understanding in those countries that lawyer
can be advisers to those responsible for social, economic and industria
development, just as they have been here, and that lawyers in those coun
tries might assume a role closer to that enjoyed by American lawyers
The possibilities in this field and the challenge to American lawyers,
particularly those devoted to academic pursuits, are tremendous.
Tom Farmer, who is the general counsel of AID, spoke on this
general subject at an A.B. A. meeting last summer. Some of you may
be familiar with the points he made about the program being conducted
in Brazil. He also made an eloquent appeal for greater participation b
American lawyers in programs of this nature.
While the SEC is concerned primarily with the domestic scene, we do
have a great many problems and interests in the field of internationa
securities regulation.

I therefore wish to add my own endorsement to what Tom Farmer has

said, that this is a field in which we can export knowledge, know-how
and a point of view which will be of inestimable help to the developing
countries in a particularly effective way.

The responsibility of the law-teaching profession, therefore, is truly

enormous. You must produce men and women capable of working ou
practical and imaginative solutions to the problems of their clients, their
communities, their country, and other countries as well. I do not sug
gest that it can all be done in a course on corporations, but that is a good
place to start.
Thank you.

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