Jonathan R. Macey
This Article examines the perspective on insider trading in Frank Easterbrook and Daniel Fischel’s classic work, The Economic Structure of Corporate Law, comparing it with the perspectives the authors have taken in other work on the topic in which the Book’s authors did not coauthor with each other. While Easterbrook and Fischel have similar conceptions about the meaning of “fairness” in securities regulation and corporate law, their differing assumptions about the efficacy of the contracting process within the corporation explain their disagreements about what insider trading law should look like.
Both Easterbrook and Fischel correctly view material inside information as a form of property right. And they correctly identify the firm that generates or “invents” the information as the owner of that property right. Similarly, both Easterbrook and Fischel are consistently sympathetic to the concept that insider trading should be the subject of intra-firm contracting.
Unlike Easterbrook, Fischel predicts that intra-firm contracts regarding insider trading would be highly permissive if public companies were allowed to enter into such contracts. This seems unlikely. Companies go to great lengths to keep certain kinds of information secret, and they routinely fire employees who trade on material nonpublic information.
Finally, Easterbrook & Fischel’s contract-based analysis serves to elucidate the core problem in current insider trading litigation, which is how to deal with tippee liability, in which an insider intentionally “tips” or provides material nonpublic information to an outsider while knowing that the outsider either planned to trade on the information or was highly likely to trade on the information.
The Easterbrook and Fischel analysis forces those evaluating the legality of this tip to consider whether the tip provided any benefit to the corporation whose information was tipped. For example, it might be the case that, absent tipping, a company would be unable to attract coverage by stock market analysts, whose coverage can improve the liquidity and the value of the companies whose shares are being traded. In such cases it would be consistent with Easterbrook and Fischel’s contractual perspective for companies to permit the disclosure by insiders to tippees as a quid pro quo for those tippees’ willingness to provide a continuous two-sided market in the shares of the company.
Jonathan R. Macey, Insider Trading: Easterbrook and Fischel and Easterbrook vs. Fischel, 1 U. Chi. Bus. L. Rev. 363 (2022).