Showing papers on "Principal (commercial law) published in 1998"

Low balling, legal liability and auditor independence

Abstract: We construct a dynamic multi-agent moral hazard model to analyze the interactions among the firm owner, the manager and the auditor. Moral hazard may arise in hierarchical agency because a rational monitoring agent may accept a side payment from the monitored agent for misrepresenting information to the principal. This multi-agent moral hazard problem is the essence of the concern for auditor independence. We show that a "lowballing" compensation scheme and the auditor's legal liability constitute an efficient dynamic contracting mechanism for hierarchical agency. In particular, low balling serves as a substitute for legal liabilities for maintaining auditor independence. Low balling reduces the transaction costs associated with the audit engagement relative to the flat-fee structure and can actually improve auditor independence.

Risk Attitudes and the Shift of Liability from the Principal to the Agent

Abstract: This paper studies the problem of illegal behavior within a principal-agent framework. The agent performs an illegal activity which benefits the principal, and can exert an effort that negatively affects the likelihood of detection of the violation.Two opposite legal regimes are considered: in the first, only the risk neutral principal is strictly liable; in the second, only the risk averse agent is The monetary sanction and the probability of detection function are the same in both cases. Our models shows that shifting the liability upon the risk averse agent reduces the principal net benefit, thus favoring deterrence of wrongdoing; however, it can also either increase or reduce the agent effort in cheating. For a specific model we are able to characterize cases in which a reduction in cheating prevails, and shifting the liability upon the agent has clear-cut beneficial effects on compliance.

Environmental Regulation in the People's Republic of China: The Face of Domestic Law

Abstract: In the post-Mao era, one highly significant dimension of China's official programme of reform and integration into the international economy has been a commitment to legal construction. This commitment has included a sustained effort to fashion a basic corpus of environmental protection law alongside supportive institutions, administrative norms and policies, in order to create a “basic legal system of environmental protection” (huanjing baohu de jiben falii zhidu).' In the eyes of the authorities in the People's Republic of China, such efforts reflect a degree of environmental concern that is unusually strong for a developing society.2 China's achievements, we are often told, must be placed in the context of the considerable difficulties the PRC faces in terms of the pressing need to raise living standards, a serious problem of over-population, a shortage of natural resources, an outdated industrial infrastructure and poor industrial management.3 Of course, viewed comparatively, the PRC's embrace of environmental protection law was somewhat belated,4 only properly commencing after its participation in the 1972 United Nations Conference on the Human Environment held in Stockholm. The subsequent expansion of environmental legislation and enforcement has been some-what erratic. Nevertheless, there appears to be a continuing intent to fashion a substantial body of environmental law, and concern with the construction and revision of this was further enhanced by China's participation in the 1992 UN Conference on Environment and Development, held in Rio de Janeiro. Following this, Premier Li Peng “made a commitment to conscientiously implement resolutions adopted at the Conference”5 and, given the PRC's very substantial size and population, a positive embrace of internationally acceptable standards of environmental welfare is highly significant for future global environmental protection. This article examines the principal features and significance of the PRC's domestic environmental protection law, and considers briefly the implications of the Chinese approach to environmental law for understanding the development of law more generally in post-Mao China.

Contract Renegotiation and Options in Agency Problems

Abstract: This paper studies the ability of an agent and a principal to achieve the first-best outcome when the agent invests in an asset that has greater value if owned by the principal than by the agent. When contracts can be renegotiated, a well-known danger is that the principal can holdup the agent, undermining the agent's investment incentives. We begin by identifying a countervailing effect: Investment by the agent can increase his value for the asset, thus improving his bargaining position in renegotiation. We show that option contracts will achieve the first best whenever this threat-point effect dominates the holdup effect. Otherwise, achieving the first best is difficult and, in many cases, impossible.

The Doctrinal Basis of The Rights of Company Shareholders

Abstract: The concept of ownership is a complex, powerful and controversial idea. In law it explains, justifies and gives moral force to a host of rights and duties as well as serving to legitimate the allocation of wealth and privilege. The influence of this idea is, furthermore, everywhere embodied in the law. In company law, legal and economic conceptions have both rested on and have been shaped by the normative implications of ownership. Historically, ownership was the principal explanation and justification for the central role of shareholders in corporate affairs. As owners, shareholders were entitled to control the management of the company and to the exclusive benefit of the company's activities. Ownership also served to legitimate the corporate form itself. So long as it was owned by individuals the economic and political power of the company was both benign and a bulwark against the intrusion of the state.

Criminal Code of the Russian Federation

Abstract: The 1996 Criminal Code of the Russian Federation replaces the 1960 RSFSR Criminal Code and was adopted by the State Duma on 24 May 1996. It officially entered into force on 1 January 1997. This updated translation contains all amendments up to 1 September 1999. Appended is an index which serves simultaneously as a glossary of the principal terms of Russian criminal law, drawing in part on Butler's earlier translations of the 1958 Fundamental Principles of Criminal Legislation of the USSR and the 1960 RSFSR Criminal Code. The introduction examines criminal law reforms in the Russian Federation, including Russian legal policy toward criminal law. The editor also includes an explanation of how to use the criminal code.

John johnsons letters: the accounting role of tudor merchants' correspondence

Abstract: This article examines the role that correspondence played in the accounting systems of Tudor merchants. Merchants relied heavily on letters as a means of controlling their businesses at a distance by making agents accountable. Written accountability, as well as information for business decisions, was encouraged by agency relationships in mercantile enterprises. The system could be undermined by the breakdown of communication through the negligence of a factor or the lack of involvement by the principal. The time delays between the sending and the receipt of letters, on the one hand, and the procurement and conveyance of goods, on the other, were additional problems.

Don't Ask, Just Tell: Insider Trading after United States V. O'Hagan

Abstract: The United States Supreme Court validated the misappropriation theory in United States v. O'Hagan, but unfortunately rendered a confusing opinion that left many questions unresolved. In this article we discuss the history of the Supreme Court's Section 10(b) jurisprudence as it relates to insider trading, giving particular attention to the Court's insistence prior to O'Hagan that "a material misrepresentation or material failure to disclose," not merely a breach of fiduciary duty, must exist to impose liability under Section 10(b). We then discuss the pervasive inconsistencies among lower courts in interpreting the misappropriation theory, and how the O'Hagan decision does little to clarify this ambiguous body of case law. We also discuss the many scenarios in which it is not certain when a fiduciary relationship exists and when a fiduciary is barred from using his principal's information. On examination of these scenarios, it is clear that the misappropriation theory remains exceptionally vague, particularly as a standard for criminal liability. We further explore how courts can best define the scope of the misappropriation theory. We conclude that Congress or the SEC should act to replace or supplement the misappropriation theory with a clearer definition of when it is and is not illegal for corporate outsiders to trade while in possession of material, nonpublic information.

Maintenance of Capital

Abstract: The principal concern of the law in this area is that the company should get full value for the shares it issues and that having received the money, that money should be kept within the company. Because the members of a company are in control of it, they could make the company transfer all its assets to them. In particular, therefore, money should not be returned to the members of the company, leaving the creditors with an empty shell to rely on when their bills are due to be paid. In this area the original common law rules have, to a considerable extent, been overtaken by statutory rules, many of them introduced by the Companies Acts 1980 and 1981 as a direct result of the European Community’s company law harmonisation programme. These rules are now part of the Companies Act 1985 which consolidated a number of previous Companies Acts.

A Revised Prospectus for a Third Restatement of Agency

Abstract: The article is based on a prospectus submitted to the American Law Institute proposing a new Restatement of Agency, to succeed Restatement (Second) of Agency, which was completed in 1958. Like the prospectus, the article identifies a number of practical and theoretical respects in which Restatement (Second) has been overtaken by subsequent developments. The article begins by distinguishing the definition of agency within legal doctrine from the meanings ascribed to agency in other disciplines, such as economics. The article then sketches the key elements of doctrine within the common law of agency and illustrates contemporary controversies concerning their application. Agency is intellectually distinctive within the law because it focuses on relationships in which one person (the agent), one way or another, is in a position to act with consequences for another person (the principal). Agency doctrine looks inward, to the relationship between the agent and the principal, as well as outward, to the consequences for the agent and principal of the agent's interactions with third parties. The outward looking consequences of agency encompass contracts entered into by the agent as well as the agent's wrongful acts. Much in agency turns on the scope or range of the agent's relationship with the principal. Agency doctrine reaches broadly, defining the legal consequences of choosing to act through another person in lieu of oneself. In a contemporary context, many principals as well as many agents are organizations, themselves networks or chains of agency relationships. A contemporary Restatement should reflect this reality, as well as provide an intellectual framework and a set of doctrinal formulations that enable courts, legal practitioners, and scholars to analyze ongoing and future developments.

The Economics of Organized Crime and Optimal Law Enforcement

Abstract: This paper extends the optimal law enforcement literature to organized crime. We model the criminal organization as a vertical structure where the principal extracts some rents from the agents through extortion. Depending on the principal's information set, threats may or may not be credible. As long as threats are credible, the principal is able to fully extract rents. In that case, the results obtained by applying standard theory of optimal law enforcement are robust: we argue for a tougher policy. However, when threats are not credible, the principal is not able to fully extract rents and there is violence. Moreover, we show that it is not necessarily true that a tougher law enforcement policy should be chosen when in presence of organized crime.

Application of federal law to compounding of prescription orders.

Abstract: A new federal law contains specific edicts as to the ability of pharmacists as well as physicians to engage in "anticipatory compounding" of prescription drug orders. It also establishes under what circumstances a pharmacists or physician may compound or mix a prescription drug that is a "near copy" of one already commercially available. This article discusses some of the principal features of that law, which will affect both the prescriber and the compounder and which becomes effective on November 22, 1998.

The Functions Of Trust Law: A Comparative Legal And Economic Analysis

Abstract: This Article analyzes the functions served by the law of trusts and asks, first, whether the basic tools of contract and agency law could fulfill the same functions and, second, whether trust law provides benefits that are not provided by the law of corporations. The analysis is motivated in part by the increasing interest in the trust -- a familiar feature of common-law jurisdictions -- in a number of civil law countries, and in part by the important role that trusts, such as pension funds and mutual funds, have come to play in capital markets. The article concludes that the important contribution of trust law lies not in its well-recognized role of ordering, via default rules of contract, the relationships among the principal parties to the trust. Rather, the principal benefit of trust law lies in its ordering of relationships between those parties and third parties with whom they deal, relationships that cannot easily be rearranged by contract. Most conspicuously in this respect, trust law allows the parties to the trust to partition off a discrete set of assets for separate treatment in relationships formed with creditors. The essential role of the trust, therefore, is to perform a property law-like, rather than a contract law-like, function. The article also notes the increasing convergence of trust law and corporate law, and asks whether the roles performed by these two legal forms could just as well be served by a single form.

National Implementation Measures of International Humanitarian Law: Some Practical Aspects*

Abstract: From one perspective, the modern development of international humanitarian law has been a remarkable success. Its rules are among the most detailed and extensive of international law. Its principal treaties enjoy almost universal acceptance. For the other side of the picture, one has only to look at what is happening in most recent armed conflicts to realize that serious violations of humanitarian law are rife all over the world. This leads to the conclusion that it is compliance — respect for the rules — which is the major challenge facing humanitarian law today rather than its very existence or the adequacy of its provisions.

Insurance and Catastrophes

Abstract: Catastrophes provide a principal justification for insurance. Traditional conceptions of catastrophes miss three critical elements: (1) Many catastrophes, the liability revolution in the United States for example, are not bolts from the blue. Rather, they develop over many years and result from human activity. (2) Conventional, experienced-based models for assessing losses often smudge the distinction, so critical for catastrophes, between probability and magnitude of loss. (3) Normal insurance contracts, with heavy copayments for small losses but little charge at the margin for large ones, perform poorly when the insured can tradeoff probability and size of loss, a phenomenon we label distribution distortion.

Ascertaining the Statutory Lex Loci Delicti: Certain Difficulties Under the Private International Law (Miscellaneous Provisions) Act 1995

Abstract: The Private International Law (Miscellaneous Provisions) Act 1995 introduced major reform to the common law choice of rule in delict/tort under Scots/English law respectively To all intents and purposes, and in the face of sustained and strong criticism, the Act abandoned the common law rules based on double actionability with exceptions The primary rule under the statute would appear to state that the applicable law is to be based on the general concept of the lex loci delicti It is of some significance for the analysis here that the statute does not in fact utilise that Latin expression as it is indeed unclear that the expression has any technical meaning Indeed, the provisions of the Act seek, but in the end fail, to achieve a greater degree of certainty than that rather nebulous though “right-minded” concept Significantly, a principal objective of the reforms was to ensure that the lex fori no longer played a primary role in choice of law for delictual/tortious claims in private international law Of course, doubts remain as to the likelihood of direct resort to the lex fori via potential escape devices provided for in the Act The two most likely stages for this arise during characterisation and later when the lex fori may be applied qua public policy

Real estate agents and the law: a new net goes fishing

Abstract: Historically the role of the real estate agent has been to act as agent for the principal, usually the vendor, in the sale or lease of property. The agent has earned a commission on the sale by inducing a third party, usually the purchaser, to enter into a binding contract with the principal. Real estate agents are now increasingly finding themselves on the horns of a dilemma in balancing the requirements of their fiduciary relationship with their principal against the third party’s (purchaser's) right to protection under consumer law. The dilemma grows as Western countries, including New Zealand, move toward strengthening consumer rights through statutory law. Courts have repeatedly confirmed the very special nature of the agency relationship, and the protection afforded the principal under the doctrine of ‘utmost good faith’. However, a number of recent landmark decisions confirm the legal responsibility that agents now have under consumer law toward third parties. Whilst agents have always owed a ‘duty of care’ as an ‘expert’ toward third parties recent court decisions appear to place an expectation on the agent to act as steward of the property transaction to ensure the best interests of parties on both sides are met. This trend would seem to imply that the agent is a ‘middleman’ in the process, a role which would appear to be in direct conflict with the traditional/legal relationship of agent acting for and on behalf of one party. This paper will discuss the legislative changes which have occurred and examine some of the recent court decisions which have created the dilemma. The paper will also explore the challenge facing real estate agents in managing their client/customer relationships within an environment of burgeoning legal accountability.

Buyouts in Large Companies

Abstract: We consider legal rules that determine the price at which minority shareholders can be excluded from the corporate enterprise after a change in control. These rules affect investment after such a change as well as the probability of the change itself. Our principal results are that minority shareholders should be given the value that their interest would have had were no later investment made; and that this rule is best implemented, in large companies, by awarding the minority the pre-investment market value of their shares. The former aspect of our proposal is consistent with much current law but is rejected by many modern law reformers; the latter aspect of our proposal is novel.

The Functions Of Trust Law: A Comparative Legal And Economic Analysis

Abstract: This Article analyzes the functions served by the law of trusts and asks, first, whether the basic tools of contract and agency law could fulfill the same functions and, second, whether trust law provides benefits that are not provided by the law of corporations. The analysis is motivated in part by the increasing interest in the trust -- a familiar feature of common-law jurisdictions -- in a number of civil law countries, and in part by the important role that trusts, such as pension funds and mutual funds, have come to play in capital markets. The article concludes that the important contribution of trust law lies not in its well-recognized role of ordering, via default rules of contract, the relationships among the principal parties to the trust. Rather, the principal benefit of trust law lies in its ordering of relationships between those parties and third parties with whom they deal, relationships that cannot easily be rearranged by contract. Most conspicuously in this respect, trust law allows the parties to the trust to partition off a discrete set of assets for separate treatment in relationships formed with creditors. The essential role of the trust, therefore, is to perform a property law-like, rather than a contract law-like, function. The article also notes the increasing convergence of trust law and corporate law, and asks whether the roles performed by these two legal forms could just as well be served by a single form.

Risk management and tort liability

Abstract: The number of road-related tort liability cases in the USA is rising, and the courts across the country are becoming more aware and critical of engineering principles and practices for highway and traffic design, construction, operation, and maintenance. Such lawsuits usually centre on four principal questions: (1) Did a potentially dangerous effect exist? (2) If so, was it a proximate cause of the accident? (3) Did the defendant have actual or constructive knowledge of the hazardous condition? and (4) Did the road user show any contributory negligence? In attempting to answer these questions, US courts have established eight guidelines, which are only general principles, that help to indicate general responsibilities. This paper then discusses relevant concepts of 'risk' and 'risk management'. Five steps in the risk management process are outlined, together with some relevant US legal concepts, including 'tort', negligence', and 'notice of defect'. A risk management system aims to minimise a road agency's total damages from tort liability, and includes crash reduction, loss reduction, defect surveillance, and public relations programmes. The paper also considers simple crash probability calculations, tort liability countermeasures, and three relevant types of highway improvements. For the covering abstract, see IRRD E101115.