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Abstract: Insider trading is one of the most controversial aspects of securities regulation, even among the law and economics community. One set of scholars favors deregulation of insider trading, allowing corporations to set their own insider trading policies by contract. Another set of law and economics scholars, in contrast, contends that the property right to inside information should be assigned to the corporation and not subject to contractual reassignment. Deregulatory arguments are typically premised on the claims that insider trading promotes market efficiency or that assigning the property right to inside information to managers is an efficient compensation scheme. Public choice analysis is also a staple of the deregulatory literature, arguing that the insider trading prohibition benefits market professionals and managers rather than investors. The argument in favor of regulating insider trading traditionally was based on fairness issues, which predictably have had little traction in the law and economics community. Instead, the economic argument in favor of mandatory insider trading prohibitions has typically rested on some variant of the economics of property rights in information. A comprehensive bibliography is included.
Abstract: Recent years have seen a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The logic of these proposals is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm's performance and to make changes in the board's composition when performance lagged. In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.
corporate governance, corporation law, shareholders, voting rights, institutional investors
Abstract: Insider trading likely is one of the most common forms of securities fraud, yet it remains one of the most controversial aspects of securities regulation among legal (and economic) scholars. This paper provides a comprehensive overview of both the law of insider trading and the contested economic analysis thereof. The paper adopts a historical approach to the doctrinal aspects of insider trading, beginning with turn of the 20th Century state common law, and tracing the prohibition's evolution up to the most recent U.S. Supreme Court decisions under Rule 10b-5. The paper then reviews the debate between those scholars favoring deregulation of insider trading, allowing corporations to set their own insider trading policies by contract, and those who contends that the property right to inside information should be assigned to the corporation without the right of contractual reassignment. The paper also reviews the public choice analysis of insider trading to show that the prohibition benefits market professionals and corporate managers rather than investors.
Insider trading, securities fraud
Abstract: The default statutory model of corporate governance contemplates not a single hierarch but rather a multi-member body that acts collegially. Why? This article reviews evidence that group decisionmaking is often preferable to that of individuals, focusing on evidence that groups are particularly likely to be more effective decisionmakers in settings analogous to those in which boards operate. Most of this evidence comes not from neo-classical economics, but from the behavioral sciences. In particular, cognitive psychology has a long-standing tradition of studying individual versus group decisionmaking. This article contends that behavioral research, taken together with various strands of new institutional economics, sheds considerable light on the role of the board of directors. In addition, the analysis has implications for several sub-regimes within corporate law. Are those sub-regimes well-designed to encourage optimal board behavior? Two such sub-regimes are surveyed here: First, the seemingly formalistic rules governing board decisionmaking processes turn out to make considerable sense in light of the experimental data on group decisionmaking. Second, the adverse consequences of judicial review for effective team functioning turns out to be a partial explanation for the business judgment rule.
Abstract: Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decisionmaker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail? On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. This article argues that control - the power and right to exercise decisionmaking fiat - is vested neither in the shareholders nor the managers, but in the board of directors. According to this "director primacy" model, the corporation is a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus of the various contracts making up the corporation. As a positive theory of corporate governance, director primacy thus claims that fiat - centralized decisionmaking - is the essential attribute of efficient corporate governance. As a normative theory of corporate governance, director primacy claims that resolving the resulting tension between authority and accountability is the central problem of corporate law. On the ends question, prior scholarship has tended to favor either shareholder primacy or various forms of stakeholderism. Again, director primacy rejects both approaches. Although shareholder primacy and the shareholder wealth maximization norm are often conflated, one can have the latter without necessarily endorsing the former. Hence, this article argues that director decisionmaking primacy can be reconciled with a contractual obligation on the board's part to maximize the value of the shareholders' residual claim.
Abstract: The business judgment rule is corporate law's central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders. Increasingly, moreover, versions of the business judgment rule are found in the law governing the other types of business organizations, ranging from such common forms as the general partnership to such unusual ones as the reciprocal insurance exchange. Yet, curiously, there is relatively little agreement as to either the theoretical underpinnings of or policy justification for the rule. This gap in our understanding has important doctrinal implications. As this paper demonstrates, a string of recent decisions by the Delaware supreme court based on a misconception of the business judgment rule's role in corporate governance has taken the law in a highly undesirable direction. Two conceptions of the business judgment rule compete in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions. This view is increasingly widely accepted, especially by some members of the Delaware supreme court. The other conception treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions. The distinction between these conceptions matters a great deal. Under the former, for example, it is far more likely that claims against the board of directors will survive through the summary judgment phase of litigation, which at the very least raises the settlement value of shareholder litigation and even can have outcome-determinative effects. Like many recent corporate law developments, the standard of review conception of the business judgment rule is based on a shareholder primacy-based theory of the corporation. This article extends the author's recent work on a competing theory of the firm, known as director primacy, pursuant to which the board of directors is viewed as the nexus of the set of contracts that makes up the firm. In this model, the defining tension of corporate law is that between authority and accountability. Because one cannot make directors more accountable without infringing on their exercise of authority, courts must be reluctant to review the director decisions absent evidence of the sort of self-dealing that raises very serious accountability concerns. In this article, the author argues that only the abstention version of the business judgment rule properly operationalizes this approach.
business judgment rule, board of directors, corporate law
Abstract: This essay, "In Defense of the Shareholder Wealth Maximization Norm, appeared in the Symposium on New Directions in Corporate Law published in volume 50 of the Washington & Lee Law Review. This essay was written as a reply to an article in the same symposium by Professor Ronald M. Green - "Shareholders as Stakeholders: Changing Metaphors of Corporate Governance," 50 Wash. & Lee. L. Rev. 1409 (1993) - in which Professor Green criticized the dominant view of corporate governance, according to which directors have a fiduciary duty to maximize shareholder wealth. In sharp contrast, this essay argues that the principle of shareholder wealth maximization is both a valid positive account of corporate law and also a legitimate normative proposition. The essay is grounded in a contractarian approach to corporate governance. The essay begins by observing that in the nexus of contracts theory the concept of ownership goes out the window, along with its associated economic and ethical baggage. Consequently, the traditional justification for shareholder wealth maximization - i.e., that shareholders own the corporation - is unavailing. There is a considerable difference between showing that the traditional private property model is inadequate, however, and showing that we should adopt a new decisionmaking norm to which corporate officers and directors must conform their behavior. The essay then identifies and critiques the two principal normative arguments running through Professor Green's article. First, Green treats the limited liability rule as a privilege conferred by society, in return for which society can demand socially responsible corporate behavior. My essay points out that this is little more than a revival of the long-dead concession theory of corporate governance. Second, Green contends that limited liability is a mechanism through which shareholders harm nonshareholders by externalizing certain costs onto them. Although this is a more substantial argument, my essay contends that it is not persuasive. Although limited liability does permit such externalities, Green's proposed solution - i.e., allowing/requiring directors to consider the effects of their decisions on nonshareholder constituencies of the corporation - is highly flawed. Such a multi-constituency fiduciary duty would be unworkable, at best, and would significantly increase the agency costs inherent in the separation of ownership and control.
Abstract: This brief essay was prepared for a forthcoming symposium on Directive 2003/6/EC of the European Parliament and of the Council, which inter alia mandates a uniform regulatory regime for insider trading among EU member states. In this essay, I review the evolution of insider trading law in the United States for the benefit of EU observers in connection with the on-going process of member state implementation of the Directive. Although legal liability for insider trading in the United States is based on the federal securities regulation statutes, most notably Rule 10b-5 under the Securities Exchange Act of 1934, the prohibition of insider trading in fact exists almost independently of the relevant statutes. Instead, the law of insider trading has evolved through a series of judicial opinions in a process more closely resembling common law adjudication rather than statutory interpretation. Taken together, the statutes and case law provide a comprehensive scheme of insider trading regulation upon which EU member states usefully may draw in implementing the Directive. As the essay explains, however, the ad hoc process by which U.S. law evolved has created a number of doctrinal problems that the member states would do well to avoid.
Insider Trading
Abstract: This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements. In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights. Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule. Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.
corporations, corporate governance, shareholders, stockholders, institutional investors, board of directors, managers, voting
Abstract: Prepared for a conference on the Sarbanes-Oxley Act (a.k.a. the "Public Company Accounting Reform and Investor Protection Act" of 2002), this Article focuses on the professional responsibility rules promulgated by the Securities and Exchange Commission under Section 307 of the Act. According to the theoretical model of corporate governance espoused by all business corporation statutes, a corporation is to be run by its board of directors for the benefit of its shareholders. In practice, however, corporations frequently are run by their top managers for the benefit of those managers. A number of recent trends have empowered boards of directors vis-a-vis management. As this Article's review of the statutory text and its legislative history demonstrates, Congress intended the Sarbanes-Oxley Act to further that trend. We further demonstrate that Section 307 should be understood as part of the Act's overall anti-managerialist intent. Congress sought to enlist legal counsel in strengthening the board. Specifically, Congress directed the SEC to create an up the ladder reporting requirement pursuant to which a firm's legal counsel would report evidence of misconduct to the board of directors, thereby redressing one of the information asymmetries between boards and managers. This Article argues that, as a normative matter, Sarbanes-Oxley Section 307 was well-intentioned. As a practical matter, however, Section 307 seems unlikely to effect significant changes in corporate governance. In our view, the nature of legal practice, the largely unchanged relationship between lawyers and managers, and the problematic approach taken by the SEC to implementing Section 307 suggest that the new legal regime is unlikely to result in significantly better information flows within the corporate hierarchy.
board of directors, corporate governance, legal ethics, managerialism, securities regulation
Abstract: The corporate law doctrine of limited liability has been much written about, but veil piercing as such has gotten far less academic scrutiny. This article addresses that lacuna, offering a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be justified and, accordingly, advocates abolishing the doctrine. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large. Veil piercing thus has costs, but no social pay-off. Veil piercing tries to do too much. Allocating liability within a corporate group controlled by a publicly held corporation involves far different policy considerations than does holding liable the individual shareholders of a closely held corporation. These tasks should be unbundled. Intra-corporate group liability issues should be dealt with as a species of enterprise liability, while the liability of individual shareholders is the proper subject of veil piercing law. So defined and delimited, the survival of veil piercing is difficult--if not impossible--to defend. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading shareholders to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question--did the defendant-shareholder do anything for which he or she should be held directly liable. Did the shareholder commit fraud, which led a creditor to forego contractual protections? Did the shareholder use fraudulent transfers or insider preferences to siphon funds out of the corporation?
Abstract: The corporate law doctrine of limited liability has been much written about, but veil piercing as such has gotten far less academic scrutiny. This article addresses that lacuna, offering a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be justified and, accordingly, advocates abolishing the doctrine. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large. Veil piercing thus has costs, but no social pay-off. Veil piercing tries to do too much. Allocating liability within a corporate group controlled by a publicly held corporation involves far different policy considerations than does holding liable the individual shareholders of a closely held corporation. These tasks should be unbundled. Intra-corporate group liability issues should be dealt with as a species of enterprise liability, while the liability of individual shareholders is the proper subject of veil piercing law. So defined and delimited, the survival of veil piercing is difficult-if not impossible-to defend. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading shareholders to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question-did the defendant-shareholder do anything for which he or she should be held directly liable. Did the shareholder commit fraud, which led a creditor to forego contractual protections? Did the shareholder use fraudulent transfers or insider preferences to siphon funds out of the corporation?
Limited liability
Abstract: In his important book, STRONG MANAGERS, WEAK OWNERS, Professor Mark Roe questioned whether Berle and Means were correct in assuming that the separation of ownership and control is an inherent aspect of large public corporations. Roe contends that dispersed ownership was not the inevitable consequence of impersonal economic forces, but rather the result of a series of political decisions motivated by a fear of concentrated economic power. The implication of this thesis, of course, is that while economic forces shaped modern corporate governance, they did so within the parameters set by law. As such, the governance structure of U.S. public corporations may not be optimal in an absolute sense, but only relative to the set of possibilities defined by our legal system. This essay quibbles with portions of Roe's analysis. Its primary thrust, however, is to question STRONG MANAGERS' premises regarding institutional investor activism. The essay argues that institutional investors will not - and should not be allowed to - become active agents in corporate governance.
Institutional investors, corporate governance, board of directors
Abstract: Under the New York Stock Exchange's (NYSE) aegis, a blue ribbon panel has proposed new listing standards that would, inter alia, significantly increase the role of independent directors in public corporations. Despite the considerable hullabaloo surrounding the report's release, however, the report's recommendations in fact consist of little more than the warmed-over rejects of past corporate governance "reform" initiatives. This essay critiques the key director independence provisions of the NYSE Committee's report. The essay argues that those proposals are not supported by the evidence on director performance and, moreover, adopt an undesirable one size fits all approach. Firms have unique needs and should be free -- as state law now allows -- to develop unique accountability mechanisms carefully tailored for the firm's special needs. The SEC should not be further empowered to use its "raised eyebrow" regulatory powers as a vehicle to federalize corporate law. For all of these reasons, the NYSE should reject the Committee's proposals and leave development of corporate governance to state law and market forces.
stock exchanges, corporate governance, independent directors
Abstract: Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.
corporate governance, corporation law, shareholders, voting rights
Abstract: Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.
Abstract: In corporate law scholarship, two basic models have long competed: managerialism and shareholder primacy. Managerialist theories treat the corporation as a bureaucratic hierarchy dominated by professional managers. Shareholder primacy theory formerly argued that shareholders own the corporation and, accordingly, directors and officers are mere stewards of the shareholders' interests. A more recent variant, which arguably is the dominant model in today's scholarship, rejects the idea of ownership as irrelevant to the firm as a nexus of contracts. Yet, shareholders retain a privileged position among the corporation's constituencies, because their contract with the firm has ownership-like features, including the right to vote and the fiduciary obligations of directors and officers. The chief criteria for any model of the corporation must be the model's ability to predict the separation of ownership and control, the institutional governance structures following from their separation, and the legal rules responsive to their separation. Shareholders, who are said to own the firm, have virtually no power to control either its day-to-day operation or its long-term policies. Instead, the firm is controlled by its board of directors and subordinate managers, whose equity stake is often small. On close examination, neither managerialism nor shareholder primacy adequately explains the corporate governance features that follow from the separation of ownership and control. This article develops an alternative model-director primacy. In this model, the corporation is a vehicle by which the board of directors hires various factors of production. Hence, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus for the various contracts making up the corporation. The board's powers flow from that set of contracts in its totality and not just from shareholders. In developing this analysis, the Article uses as its principal foil the so-called "connected contracts" model recently put forward by UCLA law professors Gulati, Klein, and Zolt.
Boards of Directors, Shareholders, Nexus of Contracts
Abstract: Pay Without Performance: The Unfulfilled Promise of Executive Compensation by Harvard law professor Lucian Bebchuk and UC Berkeley law professor Jesse Fried is an important contribution to the literature on executive compensation. Bebchuk and Fried's positive account of executive compensation is entirely managerialist; i.e., they argue that top management of public corporations so thoroughly control the board of directors that the former are able to extract compensation packages from the latter far in excess of that which would obtain under arms'-length bargaining. In this review essay, I argue that Bebchuk and Fried overstate the extent to which management controls the compensation process. I also argue that they have not made a convincing case for the reforms to corporate governance they propose.
corporations, corporate governance, board of directors, executive compensation
Abstract: This article argues that the colloquial understanding of path dependence offers a heuristically powerful metaphor for grappling with the problem of regulating insider trading. The metaphor focuses attention on the proper issues-how did the law arrive at its present form, what paths are available for the future, which of those paths are feasible, and what costs would be entailed in choosing one of the various feasible alternatives over the others. A pragmatic answer to those questions begins with the recognition that insider trading is more closely akin to the class of problems dealt with by state corporate law than that dealt with by federal securities law. The article argues the law has gone too far down the federal regulatory path to turn back, however. Settled expectations and interests of both the regulators and the regulated, institutional competence, the status quo bias, and comparative advantages all argue for preserving the prohibition as a species of federal common law. The article therefore proposes a legal regime that is sensitive to the competing policy and doctrinal concerns that pervade this area of the law, while also taking into account the path dependent nature of the present prohibition. The article then turns to an analysis of the Supreme Court's recent decision in United States v. O'Hagan, 117 S. Ct. 2199 (1998), arguing that the court failed to grapple with the very serious doctrinal and policy issues presented to it. In developing that argument, the article also contends that O'Hagan sheds light on interpretation of Supreme Court opinions in technical statutory areas. Because the justices are subject to bounded rationality, and their incentive system does not reward developing institutional expertise in such areas, the court is generally not competent to address such issues. As a result, the court appears to defer to specialists in the field. Although deference to expert opinion is a rational response to the conditions under which the justices must operate, such deference may lead the court astray when the experts to whom they defer are also parties to an adversary proceeding before the court, as was the case in O'Hagan. Although further research will be necessary to fully develop this theory of Supreme Court decision making, the present analysis is highly suggestive and, in conjunction with the path dependence metaphor, provides an important aid for understanding the Supreme Court's insider jurisprudence.
Abstract: The collapse of Enron and WorldCom, along with only slightly less high profile scandals at numerous other U.S. corporations, has reinvigorated the debate over state regulation of corporate governance. Post-Enron, politicians and pundits called for federal regulation not just of the securities markets but also of internal corporate governance. As Congress and market regulators began implementing some of those ideas, there has been a creeping - but steady - federalization of corporate governance law. The NYSE'S new listing standards regulating director independence is one example of that phenomenon. Other examples appeared to little public debate in the sweeping Sarbanes-Oxley legislation. Taken individually, each of Sarbanes-Oxley's provisions constitutes a significant preemption of state corporate law. Taken together, they constitute the most dramatic expansion of federal regulatory power over corporate governance since the New Deal. No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.
corporations, corporate governance, federalism
Abstract: Where the contract between a corporation and one of its creditors is silent on some question, should the law invoke fiduciary duties as a gap filler? In general, the law has declined to do so. There is some precedent, however, for the proposition that directors of a corporation owe fiduciary duties to bondholders and other creditors once the firm is in the vicinity of insolvency. Courts embracing the zone of insolvency doctrine have characterized the duties of directors as running to the corporate entity rather than any individual constituency. This approach is incoherent in practice and insupportable in theory. Courts should focus on whether the board has an obligation to give sole concern to the interests of a specific constituency of the corporation. Concern that shareholders will gamble with the creditors' money is the principal argument for imposing a duty on the board running to creditors when the corporation is in the vicinity of insolvency. On close examination, however, this argument proves unpersuasive. It is director and manager opportunism, rather than strategic behavior by shareholders that is the real concern. Because bondholders and other creditors are better able to protect themselves against that risk than are shareholders, there is no justification for imposing such a duty. This article also argues that the zone debate is much ado about very little. The only cases in which the zone of insolvency debate matters are those to which the business judgment rule does not apply, shareholder and creditor interests conflict, and a recovery could go to directly to those who have standing to sue. In those cases, as this Article explains, there is a strong policy argument that creditors should be limited to whatever rights the contract provides or might be inferred from the implied covenant of good faith.
corporation, corporate governance, board of directors, fiduciary duties, insolvency, creditors, shareholders
Abstract: This brief essay explores Catholic social thought on corporate governance. Human dignity and freedom are central principles of Catholic social thought. This essay argues that preserving the economic freedom of corporations to pursue wealth is an essential part of effective means for achieving human freedom. To the extent prudential judgments about corporate regulation are required, the Church and civil society should strive towards a nuanced balancing of freedom and virtue.
corporate governance, catholic social thought
Abstract: Although the question of whether international corporate governance is converging on the U.S. model remains contested, there is general agreement as to the nature of that U.S. model. Specifically, virtually all participants in the convergence debate assume that U.S. corporate law is based on a norm of shareholder primacy. This assumption is wrong. U.S. corporate law is far more accurately described as a system of director primacy than one of shareholder primacy. In this essay, the author argues that the comparative corporate governance literature's erroneous understanding of the U.S. model distorts both the positive and normative aspects of the convergence debate. On the positive side, if we use the extent of shareholder primacy as our metric, we end up with a distorted estimate of the extent to which systems have converged. On the normative side, corporate governance is a potentially important instrument by which to increase the economy's efficiency. In recent years, elite U.S. corporate law scholars have played a significant role in "reforming" the corporate laws of transition economies. If the goal is to export the U.S. model, on the assumption of its superiority, we do those economies no good - and may do much harm - by exporting the wrong model. Hence, we are constrained to examine the normative question: Does it matter? Is director primacy superior to shareholder primacy? This essay acknowledges that investor participation in corporate governance has economic benefits, but argues that director primacy is preferable on balance.
Abstract: Mandatory disclosure is a defining characteristic of U.S. securities regulation. Issuers selling securities in a public offering must file a registration statement with the SEC containing detailed disclosures, and thereafter comply with the periodic disclosure regime. This regime has been highly controversial among legal academics. Some scholars argue market forces will produce optimal levels of disclosure in a regime of voluntary disclosure, while others argue that various market failures necessitate a legal mandatory disclosure system. To date, however, both sides in this debate have assumed, inter alia, that market actors rationally pursue wealth maximization goals. In contrast, this paper draws on the emergent behavioral economics literature to ask whether systematic departures from rationality, such as herd behavior or the status quo bias, might result in a capital market failure. The paper concludes that such a market failure could occur, especially in emerging markets, but also contends that one should not jump to the conclusion that legal intervention in the form of a mandatory disclosure system is necessary, especially insofar as the highly evolved U.S. capital markets are concerned. The paper concludes with a cautionary note against the potential for behavioral economics to be glibly invoked as a justification for government intervention.
Abstract: Prepared for my text Corporation Law and Economics (Foundation Press forthcoming 2002), this article briefly summarizes the salient characteristics of limited liability companies. Using a transaction cost economics framework, the article explains how structuring a business as a LLC can create value. The article discusses taxation of LLCs, their organizational flexibility, and the limited liability they provide members. While transactional lawyers could provide clients with pass through taxation, relatively informal decisionmaking, restricted membership, and limited liability, they could do so only by substantially modifying the default rules governing corporate operation. From the client's perspective, extensive modifications of the default statutory rules are always problematic. Acceptable modifications must be bargained out, which is costly and may result in disagreements that prevent the relationship from ever getting off the ground. Agreed-upon modifications must be spelled out in detail to reduce the risk of future disagreements and, even if this is done, disputes over the parties' intent may nevertheless arise. By providing a set of default rules meeting these criteria, the LLC statute allows many small business relationships to adopt the statutory rules "off-the-rack."
limited liability
mandatory disclosure, securities regulation, behavioral economics
Abstract: Participatory management--the philosophy of involving employees in corporate decisionmaking--arguably is the most important industrial relations phenomenon of the last three decades. It has been endorsed by such disparate figures as President Bill Clinton and Pope John Paul II. Thousands of U.S. firms have adopted one form of employee involvement or another. Insofar as the academic literature on participatory management is concerned with normative questions, it is dominated by calls for some form or another of government-mandated employee participation in corporate decisionmaking. Normative analyses of participatory management by pro-mandate scholars have developed two justifications for government intervention: One sounds in the language of economics, typically arguing that participatory management is an efficient system of organizing production that is nevertheless being thwarted by various market failures requiring governmental correction. I have explored this argument elsewhere, concluding that government-mandated employee involvement cannot be justified on economic grounds [Stephen M. Bainbridge, Privately Ordered Participatory Management: An Organizational Failures Analysis, Del. J. Corp. L. (forthcoming 1998)]. In this Article, I evaluate the other set of pro-mandate arguments; namely, the claim that employees have a right to participate in corporate governance. On close examination, much of the normative literature on employee participation amounts to little more than "rights talk," i.e., political rhetoric dressed up in legal and/or moral rights terminology. For ideologically motivated proponents of employee participation, this is a useful debating tactic because our culture's fixation with individual rights imbues any rights-based claim with an air of legitimacy and incontrovertibility. Using rights-based terminology to phrase the question, however, often impedes or even precludes meaningful analysis. The task before us is thus two-fold. First, we must subject the claim that employees have a right to participate in corporate governance to a rigorous process of specification and assessment. Second, we must ask whether this right--as so specified--merits codification into positive law. I have two principal foils in this article. The first is Roman Catholic social teaching on work and capitalism, which offers the most fully realized statement of natural law principles applicable to the problem at hand. The second is a body of literature to which I will refer as secular humanist. This literature consists mainly of rights talk drawing on precepts of humanistic psychology. Although scholars approaching the problem from this angle thus are not working within a natural law paradigm, their work deserves examination both because it has certain superficial similarities with Catholic social teaching and because it represents the other dominant theory upon which rights-based claims are made in support of government-mandated participatory management. Although both the relevant Catholic social teachings and secular humanist arguments are complex and nuanced, both fairly can be said to emphasize two basic claims. First, participation is asserted to be an essential mechanism for full development of human personality. Self-realization and self-actualization are the conceptual engines driving this claim. Second, participation is posited to be an essential feature of human dignity. I have identified three basic ways in which participation might be related to human dignity: Participation may promote trust between employers and employees. Participation promotes workplace democracy. Participation rights protect employees from opportunistic conduct by employers. I argue only the latter theory rises to the level of plausibility, and it cannot justify government-mandated employee participation.
Abstract: The prohibition of insider trading in U.S. federal securities law typically is justified on fairness or equity grounds. Predictably, these arguments have had little traction in the law and economics community. At the same time, however, law and economics scholars have not coalesced around a single view of the prohibition; instead, competing economic arguments generated an extensive debate that is still active. Those law & economics scholars who favor deregulation of insider trading typically argue that efficiency is the sole basis for analyzing a legal regime, and that the prohibition lacks any rational economic basis. This article critiqued two pro deregulation arguments: (1) the effect of insider trading on the pricing of securities and (2) the claim that insider trading is an efficient compensation scheme. The article found neither argument persuasive. Those who favor regulating insider trading typically respond either by rejecting the claim that efficiency is the controlling criterion or by attempting to show that the prohibition is justifiable on efficiency grounds. The pro regulation arguments critiqued herein include: (1) insider trading injures the firm whose securities were traded; (2) insider trading injures shareholders of the firm whose securities were traded; and (3) insider trading violates norms of fairness. In sum, this article contended that neither side had carried the field, but suggested that the argument in favor of regulation probably was winning at the time. The article concludes with some observations on the concept of efficiency as a normative principle.
Abstract: Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to affect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question - did the defendant - LLC member do anything for which he or she should be held directly liable?
corporation, limited liability, limited liability company
Abstract: The Securities and Exchange Commission (SEC) recently proposed a set of amendments to its proxy rules intended to provide shareholders of public corporations with a limited ability to nominate candidates for a corporation's board of directors and to have their nominee placed on the corporation's own proxy statement and card. This essay reviews the principal features of the proposal and identifies several issues remaining for resolution. The essay concludes that the SEC likely has authority to adopt the proposal, but argues that the costs the rule will impose on corporations outweigh any likely benefits from greater shareholder democracy.
SEC, proxies, boards of directors, shareholders
Abstract: Prepared for a conference and text on Slovenian corporate governance, this article examines the corporate governance role of the large institutional investors that dominate the stockownership of privatized Slovenian corporations. In contrast to the U.S. model in which ownership and control is separated, stockownership is widely dispersed, and shareholder power is diffuse, as famously described by Berle and Means, the privatization process resulted in highly concentrated ownership of Slovenian corporations. The question presented here is whether such concentration is desirable. The article acknowledges that shareholder activism on the part of large institutional investors offers some economic benefits by potentially constraining agency costs, but contends that those benefits come at too high a cost. Two lines of argument are pursued. First, there is a substantial risk that large shareholders will use their control to self-deal or otherwise disadvantage minority shareholders. Experience teaches that the risk of self-dealing is especially significant in transition economies, such as Slovenia. Second, the U.S. model of separated ownership and control, dispersed stockownership, and diffuse shareholder control offers significant efficiency advantages. Neither shareholders nor any other constituency have the information or the incentives necessary to make sound decisions on either operational or policy questions. Overcoming the collective action problems that prevent meaningful shareholder involvement would be difficult and costly. Accordingly, shareholders will prefer to irrevocably delegate decisionmaking authority to some smaller group; namely, the board of directors. Given the significant virtues of discretion, preservation of managerial discretion should always be the null hypothesis. The separation of ownership and control mandated by U.S. corporate law has precisely that effect. The further constraints on shareholder activism provided by U.S. securities law, accordingly, likely have a strong efficiency justification. The article then provides a doctrinal overview of those constraints. Four specific aspects of U.S. securities law are examined: (1) disclosure requirements pertaining to large holders; (2) shareholder voting and communication rules; (3) insider trading laws; and (4) short swing profits rules. The article concludes by summarizing the comparable provisions of Slovenian law, noting that Slovenian law in many respects parallels the U.S. model. Unfortunately, continued state ownership and the political influence of large holders cast doubt on whether Slovenia will muster the will to meaningfully constrain the power of its institutional investors.
Abstract: Corporations frequently make use of precommitment strategies. Examples include such widely used devices as negative pledge covenants and change of control clauses in bond indentures, fair price shark repellents, no shop and other exclusivity provisions in merger agreements, mandatory indemnification bylaws, and so on. This paper argues that poison pills also can be understood as a form of precommitment, by which the board of directors commits to a policy intended either to negotiate a high acquisition price or to maintain the corporation's independence. In Quickturn Design Sys., Inc. v. Mentor Graphics Corp., the Delaware supreme court invalidated a no hand poison pill on grounds that a board of directors lacks authority to adopt such devices. In doing so, the court misinterpreted relevant Delaware law. It unjustifiably called into question the validity of a host of corporate precommitment strategies. Finally, and perhaps most troublingly, it called into question the central tenet of Delaware corporate law; namely, the plenary authority of the board of directors. This article argues that the Delaware supreme court's decision was wrong both as a doctrinal and a policy matter. There simply is no firebreak between the sorts of board self-disablement deemed invalid by Quickturn and the host of other precommitment strategies routinely used by corporate boards of directors. The Delaware supreme court's conclusion that the former are invalid for lack of statutory authority thus threatens to invalidate all of the latter. The article concludes by arguing that the Delaware supreme court should have analyzed the no hand pill under standard fiduciary duty principles rather than creating a new prophylactic ban on precommitment strategies.
poison pill, precommitment, board of directors, corporate law
Abstract: In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation is not a passive instrumentality in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders. Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not.
Delaware, journal, corporate, law, Bainbridge, Unocal, abuse of authority, board of directors, primacy, takeover
Abstract: In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation "is not a passive instrumentality" in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains "the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders." Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: On the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making. On the other hand, because directors are obligated to maximize shareholder wealth, there must mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out those cases in which directors have abused their authority from those in which directors have not.
corporate governance, takeovers, tender offers
Abstract: Turning 5 is a major milestone, whether one is talking about a child, a wedding anniversary, or a piece of legislation. As the Sarbanes-Oxley Act approaches age 5, it's appropriate to look back at how the Act has affected American businesses and also to look forward to assess future trends. After all, the Sarbanes-Oxley Act had the biggest impact on American business of any federal securities legislation since the New Deal. Understanding how Sarbanes-Oxley works and the demands it makes on corporations is especially critical for directors and managers of smaller public corporations. Until recently, the smallest public corporations have been partially insulated from the full costs of complying with the Act by Securities and Exchange Commission (Commission or SEC) rules deferring full application of SOX to such firms. The SEC has announced, however, that this limited regulatory relief will be coming to an end within the next two years. Accordingly, it appears that all public corporations will be required to fully comply Sarbanes-Oxley by 2008 at the latest. Managers and directors of small public corporations thus now face the same questions SOX has long posed for the largest companies: How do they comply with SOX? How does SOX affect relations within the firm? Should the company go private (a.k.a. "going dark") so as to avoid the need to comply with SOX. A practical guide to SOX basics thus could not be more timely. This is not a book for lawyers or accountants. I don't want you to get bogged down in legal or accounting technicalities. Rather, it is a non-technical, "plain English" guide for the managers and directors of the 13,000 or so thousand publicly held corporations subject to Sarbanes-Oxley, as well as the managers and directors of the thousands of large closely held corporations considering raising capital via an IPO, which would subject them to SOX, or otherwise facing market pressures to at least partially comply with SOX. The downloadable paper includes the Table of Comments and Chapter 1 of The Complete Guide to Sarbanes-Oxley.
Sarbanes-Oxley, SOX, corporate governance, corporation law, securities law, securities regulation
Abstract: This essay traces the evolution of insider trading jurisprudence, focusing on the three iconic Supreme Court decisions: Chiarella, Dirks, and O'Hagan. The essay argues that all three cases were seriously flawed because each failed to cohere as to either policy or doctrine. Just as a child might break his toy by attempting to force a square peg into a round hole, the Supreme Court made a hash of insider trading law (and Rule 10b-5 generally) by attempting to force insider trading into a paradigm - securities fraud - that does not fit.
insider trading
Abstract: This essay was prepared for presentation as a lecture to the Hoover Institution. In it, I focus on three areas in which the Public Company Accounting Reform and Investor Protection Act, popularly known as the Sarbanes-Oxley Act (SOX), has proven especially problematic. First, the legal ethics rules added to the Act at the last minute have proven incapable of dealing with the incentives that condition lawyers to turn a blind eye to client misconduct. Second, the structure Congress chose for the Public Company Accounting Oversight Board (PCAOB), the accounting oversight board created by SOX, turns out to have serious constitutional defects. Finally, and most importantly, corporate compliance costs have gone up far more than anyone anticipated and are staying up far longer than even Cassandra might have predicted. Worse yet, these costs disproportionately impact smaller public corporations, which are an important engine of economic growth. Taken together, these three areas of concern highlight why Congress should think twice before trying instant legislation in the future.
Sarbanes-Oxley, corporate governance, securities regulation
Abstract: American industrial enterprises long organized their production processes in rigid hierarchies in which production-level employees had little discretion or decision making authority. Recently, however, many firms have adopted participatory management programs purporting to give workers a substantially greater degree of input into corporate decisions. Quality circles, self-directed work teams, and employee representation on the board of directors are probably the best-known examples of this phenomenon. These forms of workplace organization have garnered considerable attention from labor lawyers and economists, but relatively little from corporate law academics. This is unfortunate, both because the tools routinely used by corporate law academics have considerable application to the problem and because employee participation is ultimately a question of corporate governance. According to conventional academic wisdom, perceptions of procedural justice are important to corporate efficiency. Employee voice promotes a sense of justice, increasing trust and commitment within the enterprise and thus productivity. Workers having a voice in decisions view their tasks as being part of a collaborative effort, rather than as just a job. In turn, this leads to enhanced job satisfaction, which, along with the more flexible work rules often associated with work teams, results in a greater intensity of effort from the firms workers and thus leads to a more efficient firm. Although this view of participatory management has become nearly hegemonic, the academic literature nevertheless remains somewhat vague when it comes to explaining just why employee involvement should have these beneficial results. In contrast, my article presents a clear explanation of why some firms find employee involvement enhances productivity and, perhaps even more important, why it fails to do so in some firms. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchial structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchial structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking.
Abstract: Smith v. Van Gorkom arguably was the most important corporate law decision of the 20th century. The supreme court of a state widely criticized for allegedly leading the race to the bottom held that directors who make an uninformed decision face substantial personal liability exposure. In so doing, the court breathed new life into the law of fiduciary duties.
For example, Van Gorkom presaged Unocal's significant expansion of judicial review of corporate takeovers. Indeed, a Van Gorkom-based inquiry into whether the board was fully informed remains a key component of the Unocal methodology. Likewise, Van Gorkom laid the foundation for the subsequent Caremark decision and the resulting expansion of judicial inquiry into whether the board of directors exercised proper oversight of its subordinates. In fact, most of the modern edifice of corporate fiduciary duties rests in some degree on the Van Gorkom decision.
The perception that the decision had significantly increased director liability exposure drove dramatic changes in the D&O liability insurance market. In turn, important legislative initiatives soon followed, including the now nearly universal liability limiting charter provisions authorized by Delaware General Corporation Law § 102(b)(7).
Not surprisingly, the case generated great controversy and, in fact, continues to do so. Did the Trans Union board of directors actually deserve the criticism heaped upon it by the Delaware Supreme Court? Does the Court's decision actually deserve the criticism heaped upon it by most commentators? This essay provides the back story to this remarkable decision and concludes that the gist of the decision is sound.
board of directors, business judgment rule, Van Gorkom, Trans Union, corporate governance, Delaware
Abstract: Prepared for a symposium on the role business and legal ethics played in the Enron, WorldCom, and other recent corporate governance scandals, and the relationship (if any) between business ethics and the legal profession's rules of professional responsibility, this paper examines the changes effected by Section 307 of the "Public Company Accounting Reform and Investor Protection Act" (popularly known as the Sarbanes-Oxley Act). Section 307 commanded the Securities and Exchange Commission to develop rules of professional conduct for lawyers appearing and practicing before it. The paper argues that Section 307 and the SEC's rules thereunder do too little to address the strong incentives lawyers have to refrain from antagonizing the corporate managers who hire and fire them. The paper uses tournament theory to explore the incentives of lawyers in large corporate law firms and in-house legal departments. (The paper is deliberately agnostic on the much debated question of whether tournament theory is a valid model or simply a useful metaphor.) Lawyers who win the tournament develop a set of skills, attitudes, and cognitive biases that systematically skew their analysis of client conduct. Hence, both rational choice theory and behavioral economics predicts that such lawyers will turn a blind eye to client misconduct.
tournaments, business ethics, legal ethics, corporate governance, securities regulation
Abstract: Prepared for a conference on faith-based investing practices, this essay critiques Catholic social teaching on corporate social responsibility. Specifically, the essay focuses on one of the policy recommendations made by the U.S. Bishops in their pastoral letter on economic justice, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy. In that letter, the Bishops addressed the so-called stakeholder debate; i.e., whether decisionmaking by directors of public corporations should take into account the interests of corporate constituencies other than shareholders. This essay focuses on the Bishops' position as matter of public policy rather than as a matter of theology. The essay evaluates three ways in which the Bishops' position might be translated into public policy: (1) directors could be given nonreviewable discretion to make trade-offs between shareholder and stakeholder interests; (2) directors could be given reviewable discretion to make such trade-offs; or (3) directors could be required to make such trade-offs subject to judicial (or regulatory) oversight. None of these approaches is an improvement on current law; to the contrary, all are worse. The first approach would be toothless, the second would increase agency costs, and the third would either prove unworkable or pose an unwarranted threat to economic liberty (or both).
Abstract: In any negotiated corporate acquisition, there is a substantial risk that the deal will not be consummated. Changes in the business environment occasionally may lead the target board to renege. Another party may approach the target board with an alternative, presumably higher-priced, acquisition proposal; indeed, target management might initiate negotiations with a second party before presenting the initial bid to the shareholders. Alternatively, a competing bidder may directly present its proposal to target shareholders by making a tender offer for their shares. The exclusive merger agreement is intended to discourage the target board from reneging on the merger agreement or, at the least, to reimburse the initial bidder's up-front costs if the deals does not go through. The operative provisions of exclusive merger agreements may be conveniently divided into two basic categories: performance promises, such as a no-shop agreement; and lock-ups and cancellation fees. Any analysis of such provisions must begin with a recognition that there is a potential conflict of interest in all negotiated acquisitions. This article contends that the standards of review courts apply to exclusive merger agreements have failed to adequately address that conflict of interest. Accordingly, this article proposes a framework for analysis of such provisions. Specifically, the article explains that performance promises should be routinely enforced. In contrast, lock-ups and cancellation fees should be more closely scrutinized. Indeed, as a prophylactic measure, the article proposes that lock-ups or cancellation fees exceeding 10 percent of the transaction's value generally should be invalidated.
merger, stock lock-up, asset lock-up
Abstract: This essay is nominally a review of Progressive Corporate Law (Lawrence E. Mitchell ed. 1995). However, it uses the book principally as a jumping off point for a critique of the strain of left communitarianism that has recently emerged in corporate law scholarship. The essay begins with a review of left communitarian critique of the nexus of contracts model of the firm and of rational choice. Because the arguments on both sides are well-developed in the literature, the essay focuses on the specific spin given the debate by Progressive Corporate Law's authors. The remainder of the essay is devoted to exploring the emerging communitarian theory of the firm. In the course of doing so, however, I also begin developing an explicitly conservative version of the law & economics account of corporate law. The essay looks to the intellectual tradition that runs from Edmund Burke to Russell Kirk to articulate an alternative to both the left communitarianism of progressive corporate law scholars and the classical liberalism embraced by many practitioners of law and economics.
Abstract: The basic building blocks of post-privatization Slovenian corporate governance differ rather dramatically from those of the United States. Slovene corporations are characterized by highly concentrated ownership dominated by state-controlled funds and other institutional investors. In addition, Slovene corporation law provides for a two-tier board of directors (similar to the German codetermination system) in which employees are entitled to representation on both the management and supervisory boards. This article provides an analysis of these features, exploring possible reforms in Slovenian law that might enhance the effectiveness of Slovene boards of directors.
Abstract: Prepared for a Stanford Law Review symposium, this essay comments on an article by Harvard Professors Bebchuk, Coates, and Subramanian; namely, Lucian Ayre Bebchuk et al., The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 STAN. L. REV. (forthcoming). Bebchuk, Coates, and Subramanian's data demonstrate that (1) the incidence of staggered boards has increased substantially in the last two decades and (2) most, if not all, of this increase can be linked to the staggered board's utility as a takeover defense. In response, they offer a policy prescription "stated simply" as: "Courts should not allow managers to continue blocking a takeover bid after they lose one election conducted over an acquisition offer". It is this recommendation and the normative foundations on which it is premised, rather than the minutiae of their empirical analysis and theoretical models, which are the focus of this comment. Like much of modern academic commentary on corporate law, Bebchuk, Coates, and Subramanian's policy recommendation rests on the principle of shareholder primacy. In contrast, this comment argues that corporate law is better understood as a system of director primacy in which the board of directors is not a mere agent of the shareholders, but rather is a sort of Platonic guardian serving as the nexus of the various contracts making up the corporation. The comment concludes by proposing a director primacy-based standard for reviewing the tandem use of classified boards and poison pills as an alternative to Bebchuk, Coates, and Subramanian's proposed prophylactic bar on their use.
corporations, corporate governance, takeovers, takeover defenses, board of directors
Abstract: Judicial opinions in securities fraud class actions frequently do not conform to standard theories of adjudication. Instead of the complex modes of legal reasoning predicted by standard models, decisions in this area commonly rely on rules of thumb-decisionmaking heuristics or shortcuts. To the extent prior literature has focused on the use of decisionmaking heuristics in adjudication, commentators have emphasized procedural shortcuts, such as the doctrine whereby courts refuse to address issues that have not been squarely argued. In contrast, the heuristics we identify are substantive law doctrinal rules of thumb enabling a judge to avoid analysis of a case's full complexities. This distinction is significant. Procedural shortcuts do not affect the evolution of substantive legal doctrines, except as to produce no doctrine. Substantive heuristics, however, not only become doctrine but can come to dominate the on-going evolution of substantive law. We suggest that the desire to avoid complexity is an important factor in explaining the emergence of a number of the newer doctrines in the securities area. Underlying all of these doctrines are assumptions about either, (a) investor responses to information or (b) managerial responses to incentives. The standard approaches used by commentators in the area would be to explain either why the assumptions are accurate or why they are not and how they should be corrected. What we suggest, however, is that the real puzzle thus is that federal judges are claiming-at least implicitly-both a level of expertise about the workings of markets and organizations that, in some areas, not even the most sophisticated researchers in financial economics and organizational theory have reached. Federal judges, however, are far from being experts in these areas. As a group, they have little expertise on the topics of markets and organizational behavior. Further, they are consistently faced with overwhelming caseloads where only a small fraction of cases are securities cases. As a result, there is little opportunity to develop expertise in the area. Finally, judges are known to delegate much of the work of drafting their decisions to their law clerks, who are typically recent law school graduates. Generalizing from the securities regulation context, we contend that standard theories of adjudication are flawed because they fail to adequately account for institutional constraints. Drawing on the tools of new institutional economics (bounded rationality, transaction costs, and agency costs), we tell a story about recent doctrinal developments in the lower federal courts in the area of securities class actions. The story highlights the link between doctrinal developments and the characteristics of the institutions that produce them. That story is then extended to the contexts of the Supreme Court and the Delaware state courts. Our claim is that the institutional perspective provides insights into the evolution of doctrine that today's dominant models fail to provide.
Abstract: Congress intended that the Insider Trading Sanctions Act of 1984 should increase the deterrent effect of the insider trading prohibition without changing the substantive common law governing insider trading cases. Towards that end, the Act created a civil penalty of up to three times the profit gained, or loss avoided, through trading while in possession of material nonpublic information. This article examines the Act and considers its probable effect on insider trading. the article begins with an historical overview of the development of the insider trading prohibition. The article then discusses the adoption of the Act and examines its provisions in the context of then-existing law. Finally, the article criticizes the Act, suggesting that it will not have the deterrent effect anticipated by its drafters, and examines the possible effects of the ITSA on the further development of the federal insider trading prohibition.
Abstract: In Stone v. Ritter, 911 A.2d 362 (Del. 2006), two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation's employees for law compliance. As to the former, Stone puts to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that although good faith may be described colloquially as part of a 'triad' of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. 911 A.2d at 370. Nevertheless, this holding may not matter much, because the Stone court makes clear that acts taken in bad faith breach the duty of loyalty. As a result, instead of being split out as a separate fiduciary duty, good faith has been subsumed by loyalty. In this sense, Stone looks like a compromise between those scholars and jurists who wanted to elevate good faith to being part of a triad of fiduciary duties and those who did not, with the former losing as a matter of form, and the latter losing as a matter of substance. As to the duty of oversight, Stone confirmed former Chancellor William Allen's dicta in Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), that the fiduciary duty of care of corporate directors includes an obligation for directors to take some affirmative law compliance measures. In Stone, the Delaware Supreme Court confirmed that Caremark articulates the necessary conditions for assessing director oversight liability. Stone, 911 A.2d at 365. This article argues that the convergence of good faith and oversight is one of those unfortunate marriages that leaves both sides worse off. New and unnecessary doctrinal uncertainties have been created. This article identifies those uncertainties and suggests how they should be resolved.
corporation, corporate governance, board of directors, good faith, oversight, Caremark, Delaware corporate law
Abstract: Shareholders of U.S. corporations historically tended towards rational apathy. Holding small blocks that were unable to affect the outcome of the vote and faced with the considerable costs associated with gathering sufficient information to make an informed decision, they adopted the so-called Wall Street Rule (it was easier to switch than fight). In the last 15 years or so, a growing number of commentators and investor activists have claimed that the rising importance of institutional investors has the potential to reshape the field by empowering shareholders to become active players in corporate governance.
This paper situates investor activism in the so-called director primacy theory of corporate governance. In so doing, it demonstrates that the separation of ownership and control typical of U.S. public corporations has significant efficiency benefits. It then argues that shareholder activism threatens to undermine the advantages of director primacy without offering significant countervailing gains.
Accordingly, the paper concludes that pending regulatory proposals to expand shareholder governance rights should be viewed with suspicion.
institutional investors, shareholder activism, corporate governance, director primacy
Abstract: Prepared for a festschrift in honor of Philip Selznick, this essay looks back at his 1969 book Law, Society, and Industrial Justice. The focus is on employee participation in corporate decisionmaking. Taking an interdisciplinary approach (law and sociology), Selznick treats employee involvement as a means to an end; namely, industrial justice. In this model, employee participation is channeled through the collective bargaining system, especially the grievance arbitration process. Participation through such means is desirable, Selznick posits, because it promotes employee self-actualization, confers legitimacy on the enterprise, and protects employees from opportunism. Although acknowledging that LSIJ was an important scholarly work, this essay argues that the decline of private sector collective bargaining and the move towards alternative forms of participatory management calls into question the continuing vitality of Selznick's argument. The essay concludes that a transaction costs economics-based approach to employee involvement is far more revealing than Selznick's sociology-based model, in that it offers generalized predictions about the function of employee involvement that have proven explanatory over time.
Abstract: American industrial enterprises long were organized as rigid hierarchies in which production-level employees had little discretion or decision making authority. Recently, however, many firms have adopted participatory management programs purporting to give workers a substantially greater degree of input into corporate decisions. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchical structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchical structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking. On its face, this account implies no affirmative public policy beyond appropriate enabling rules. Yet, many academics and government leaders nevertheless propose mandating some form of participatory management. Drawing on several strands of economic analysis, including game theory and public choice, this paper concludes that such proposals are unwarranted.
Abstract: Although the prohibition on taking of organizational opportunities is well established, the standards applied to this problem in corporate law disputes are vague and imprecise. Corporate directors and officers lack clear guidance as to when a particular business venture may be taken for themselves or must first be offered to the corporation. In this article, I review the relevant Delaware case law, focusing on the ambiguities inherent therein. I then offer a proposed alternative regime, providing greater certainty and predictability.
corporate opportunity doctrine, fiduciary duties, directors, officers
Abstract: In the 1980s, many corporations adopted disparate voting rights plans (also known as dual class stock plans) to concentrate voting control in the hands of incumbent managers and their allies. At most adopting firms, such plans were intended mainly to deter unsolicited takeover bids. Incumbent managers who cannot be outvoted, after all, cannot be ousted. In 1988, the Securities and Exchange Commission adopted rule 19c-4 pursuant to a claim of regulatory authority under Section 19(c) of the Securities Exchange Act of 1934. Rule 19c-4 purported to amend the listing standards of the self-regulatory organizations (i.e., the major stock exchanges and NASDAQ) so as to prohibit most forms of dual class stock. The United States Court of Appeals for the District of Columbia Circuit, however, subsequently invalidated rule 19c-4 as exceeding the scope of the SEC's delegated authority. This article reviews the history of dual class stock and stock exchange listing standards affecting it. The article then demonstrates that the D.C. Circuit was correct in concluding that the SEC lacked authority to adopt rule 19c-4. Finally, the article proposed an alternative exchange listing standard that responded to the conflict of interest inherent when management proposes a dual class stock recapitalization.
Abstract: This essay is the foreword to a forthcoming Liberty Fund collection of Henry Manne's writings on insider trading. The piece is introductory and descriptive, rather than analytical and normative, providing an overview of Manne's thought.
insider trading, Henry Manne
Abstract: These remarks were presented to the Penn Law and Economic Institute's Chancery Court Program on Say on Pay: A Positive Contribution To Corporate Effectiveness and Accountability Or An Unprincipled and Costly Incursion Into Director Authority? Proponents of H.R.1257 or similar federal legislation entitling shareholders to vote on executive compensation must carry their burden of proving three distinct claims: First, that there is an executive compensation problem justifying legislative intervention. Second, say on pay is an effective solution to the problem. Third, that any such legislative intervention should be imposed at the federal level. If any of these claims fail, the case for a federal say on pay law collapses. In these remarks, I hope to demonstrate that none of the three holds up to close examination.
executive compensation, board of directors, shareholders, activists
Abstract: The financial crisis of 2008 revealed serious and widespread risk management failures throughout the business community. Shareholder losses attributable to absent or poorly implemented risk management programs are enormous.
Efforts to hold corporate boards of directors accountable for these failures likely will focus on so-called Caremark claims. The Caremark decision asserted that a board of directors has a duty to ensure that appropriate "information and reporting systems" are in place to provide the board and top management with "timely and accurate information." Although post-Caremark opinions and commentary have focused on law compliance programs, risk management programs do not differ in kind from the types of conduct that traditionally have been at issue in Caremark-type litigation.
Risk management failures do differ in degree from law violations or accounting irregularities. In particular, risk taking and risk management are inextricably intertwined. Efforts to hold directors accountable for risk management failures thus threaten to morph into holding directors liable for bad business outcomes. Caremark claims premised on risk management failures thus uniquely implicate the concerns that animate the business judgment rule's prohibition of judicial review of business decisions. As Caremark is the most difficult theory of liability in corporate law, risk management is the most difficult variant of Caremark claims.
board of directors, risk management, enterprise risk management, oversight, Caremark
Abstract: This essay was written for a forthcoming festschrift in honor of my UCLA School of Law colleague, coauthor, and friend William A. Klein. The conference is organized around Bill's claim that corporate law scholarship would benefit if scholars were more explicit about the normative criteria that motivate their analyses and policy recommendations. In pursuit thereof, Bill's "criteria project" identifies four broad categories of "criteria for good corporate laws": (1) fairness; (2) efficiency; (3) legitimacy and accountability; and (4) administrability. Within each broad category, one then finds a number of specific criteria. Scholars are then asked to identify those criteria that inform their work. In this essay, I argue that the criteria project lacks an overall conception of the corporation. I further argue that one's selection of evaluative criteria cannot be appraised in isolation from the concepts of the corporation informing that selection. Hence, I echo a call made two decades ago by Professor Roberta Romano for scholars to be more explicit in setting out their "normative theory of the corporation and its place in the polity."
corporate law
Abstract: The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington have created an environment in which proponents of expanded shareholder corporate governance rights are making considerable progress. Even before the crisis hit, of course, there had been a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The crisis, however, has given them new momentum. The logic behind the shareholder empowerment project is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm’s performance and to make changes in the board’s composition when performance lagged. In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.
Abstract: Nonshareholder constituency statutes permit directors to consider the effects of their decisions on a variety of nonshareholder interests, such as employees, customers, suppliers, and local communities. Although highly controversial within the corporate law academy, such statutes are on the books in well over half the states and are likely to remain so for the foreseeable future. Because the statutes offer surprisingly little guidance to directors faced with corporate decisions or to courts faced with reviewing those decisions, however, courts urgently need a coherent interpretation of the statutes. But coherence alone is not enough; courts must also be faithful to the legislative intent behind the statutes. Courts cannot ignore the statutes, wish them away, or fairly interpret them as having no meaning or impact. This article therefore proposes an interpretation of nonshareholder constituency statutes that is faithful to the apparent legislative intent while also maintaining continuity with well-established principles of director fiduciary duties. The proposed approach distinguishes between two basic categories of director decisions: (i) operational issues, such as plant closings; and (ii) structural decisions, such as takeovers. The latter pose a much more serious conflict of interest for directors than do the former and therefore demand closer scrutiny. Accordingly, while arguing that director decisions with respect to operational matters should be conducted under the business judgment rule, the article argues that director decisions in the structural setting should be reviewed under a variant of the conditional business judgment rule developed by the Delaware supreme court in Unocal Corp. v. Mesa Petroleum Co.
corporate social responsibility, nonshareholder constituency statutes, statutory interpretation, corporate takeovers
Abstract: On April 16, 2008, the author received the UCLA School of Law's Rutter Award for Excellence in Teaching. This essay consists of a revised and extended version of the remarks he gave on that occasion. In it, he addresses his progression from frustrated Socratic teacher to happy lecturer and his aspirations for incorporating new technologies into his teaching. He also reflects on the subject of his teaching - the American corporation - and argues that being a business lawyer is a very real form of public interest lawyering.
Socratic method, legal education, public interest law
Abstract: In a 1992 colloquy held in the pages of the Business Lawyer, Professors Louis Loss and Elliott Weiss debated the scope of liability under section 12(2) of the Securities Act of 1933. Following the United States Supreme Court's decision in Gustafson vs. Alloyd Co., the Business Lawyer invited Professor Stephen Bainbridge to substitute for Professor Loss as the defender of a broad interpretation of section 12(2) [subsequently re-numbered section 12(a)(2)]. In this article, Bainbridge argues that the Gustafson decision limited liability under section 12(2) to misrepresentations and omissions committed in connection with public offerings of securities. Bainbridge criticizes the Gustafson decision on a variety of grounds, including its inconsistency with prior precedent, the text of the statute, and the Act's legislative history.
Abstract: Since 1950, more than 11,500 sex abuse claims have been filed against priests and other agents of the Roman Catholic Church. The eventual direct costs to the Catholic Church of the priest abuse litigation are predicted to range from $2 to $3 billion. The corporate structure of the Church under civil law can have a substantial impact on the ability of priest sex abuse claimants to recover on favorable judgments or settlements. In many U.S. dioceses, all Church assets are owned by a single corporation, typically a corporation sole, by virtue of which the local bishop becomes the legal titleholder of all Church-affiliated property in the diocese. The dominant view is that all assets of such dioceses, including those of individual parishes and other so-called juridic persons, are available to satisfy tort judgments against the diocese. Some dioceses, however, long have separately incorporated at least some of their affiliated juridic persons. In response to the priest sex abuse liability crisis, there is a growing trend for diocesan assets to be divided among multiple incorporated entities. Although separate incorporation of diocesan assets implicates a number of legal doctrines, alter ego claims likely will play a central role in any litigation seeking to reach the assets of such corporations for the benefit of diocesan creditors. There is no constitutional bar to a court using the alter ego doctrine to treat a diocese and its separately incorporated parishes as a single enterprise for liability purposes in the priest sex abuse scandal litigation (or any other dispute, for that matter). The analysis in this paper, however, suggests that appropriate cases for invoking the alter ego doctrine in this context will be few and far between. Two entities will be treated as alter egos where (1) one entity exercises such a high degree of control that the other has effectively lost its separate existence and (2) the controlling entity has abused its power of control in an unjust or inequitable manner. As to the former prong, a diocesan bishop who comports himself in accordance with the requirements of canon law is unlikely to exercise the requisite degree of day to day control over a separately incorporated parish. As to the latter prong, the courts have discretion to consider the potentially severe deleterious impact of liability on the ability of innocent parties to exercise religious practices implicating constitutionally protected values. In other words, while the Free Exercise and Establishment clauses do not bar judicial application of the alter ego doctrine to churches, the values protected by those provisions appropriately may be weighed in the balance. Given the ready availability of alternative doctrines better suited to the problems at hand, particularly fraudulent transfer law, there case against invoking alter ego in this context thus becomes quite strong.
religious corporation, limited liability, enterprise liability
Abstract: At a May 2007 Roundtable on The Federal Proxy Rules and State Corporation Law, the Securities and Exchange Commission posed the following question for discussion: What should be the relationship of federal and state law with respect to shareholders' voting rights and ability to govern the corporation? To answer that question, this essay reviews the legislative history of Section 14(a) and of the Securities Exchange Act generally, as well as the leading judicial precedents. It concludes that, as a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance standards is a matter for state corporation law. The author was an invited panelist at the May 7th Roundtable and submitted this essay as his written comments.
shareholders, stockholders, voting rights, SEC, securities, federalism, competitive federalism, proxy voting, proxies
Abstract: In his essay, Toward Common Sense and Common Ground?, Delaware Vice Chancellor Leo Strine seeks to identify common concerns of corporate management, labor, and shareholders. In so doing, Strine endorses a vision of the corporation as "a social institution that, albeit having the ultimate goal of producing profits for stockholders, also durably serves and exemplifies other societal values." Accordingly, he directs our attention to the prospects of creating "a corporate governance structure that better fosters [the corporation's stakeholders'] mutual interest in sustainable economic growth." There is much that is admirable in Strine's analysis of what ails corporate governance and his proposals for reform, as well as much that is debatable. In this brief comment, I identify three aspects of Strine's analysis that strike me as underdeveloped. First, what do we mean when we call the corporation "a social institution"? Second, do managers and laborers really have common interests threatened by shareholders? Finally, even if Strine's search for common ground is a worthwhile project, is corporate law and governance the appropriate arena in which to find it? Taken together, these issues raise serious questions about the viability of Strine's project.
corporation, corporate governance, management, labor, shareholders
Abstract: There is growing political support for adopting a 'Say on Pay' requirement for executive compensation - that is, shareholders must sign off on executive compensation. This paper examines three premises fundamental to the 'Say on Pay; movement: that current executive compensation is unjustifiably high, that federal legislation is required to address that high compensation, and that federal legislation would be effective in this aim. The paper finds that all three claims are problematic.
federalism, say on pay, h.r. 1257, executive compensation, corporate governance, principal-agent dilemma, director primacy, shareholder activism
Abstract: Following the Supreme Court's decision in Edgar v. MITE Corp., striking down portions of Illinois' takeover laws, a number of commentators predicted that state efforts to regulate takeovers could no longer be successful. However, a number of states have adopted new laws in the wake of MITE, seeking to provide a continuing role for the states in the tender offer field. This article examines three such attempts: Maryland, Ohio and Pennsylvania. These three statutes represent a variety of approaches to the problems of takeover regulation and provide a basis for a model of constitutionally permissible state regulation. The article examines the three statutes, and concludes with a suggested analytical model for constitutional adjudication in this context.
Abstract: This essay reviews The Nature of the Common Law by Melvin A. Eisenberg (Harvard University Press, 1988). Professor Eisenberg's stated goal therein "is to develop the institutional principles that govern the way in which the common law is established in our society." In the course of doing so, Eisenberg addresses the functions of courts in American society, modes of legal reasoning and the process of overturning prior precedents. Yet Eisenberg never loses sight of his central thesis, namely that "all common law cases are decided under a unified methodology, and under this methodology social propositions always figure in determining the rules the courts establish and the way in which those rules are extended, restricted, and applied." According to the reviewer (UCLA law professor Stephen M. Bainbridge), The Nature of the Common Law is one of the most thought-provoking books ever written on common law adjudication. Eisenberg's belief in social morality as a workable guide to decisionmaking surely invites further debate. So too does his concomitant belief that law is more than merely the personal moral and policy preferences of the judge. Indeed, one might almost say that The Nature of the Common Law deserves to be controversial, for Eisenberg has given us a report that is both normatively appealing and descriptively accurate. The Nature of the Common Law succeeds because it is both an attractive vision of how courts should function and a perspicuous account of the real world in which courts actually function.
Abstract: On repeated occasions in the post-war period, the cumulative effects of policy mistakes, recessions, inflation, and other economic problems have made it difficult for sovereign debtors to service their external debt. Unlike a domestic U.S. private debtor, who may resort to formal bankruptcy procedures in the event of insolvency, a defaulting sovereign debtor has no formal mechanism for triggering a restructuring of its debt. In some cases, sovereign debtors have resorted to a moratorium on debt payments. This article argues that U.S. courts ought to give effect to such moratoria under the international law principle of comity. Using standard game theory methodology (the so-called "creditors dilemma" variant of the famous "prisoners dilemma"), the article argues that creditors of such debtors would agree in advance to give effect to such a moratorium provided it neither repudiated the sovereign's debts not gave preference to certain creditors. A legal test for granting comity to sovereign debt moratoria is therefore proposed.
Abstract: I review and comment herein on Anupam Chander's article, Minorities, Shareholder and Otherwise, 113 Yale L.J. 119 (2003). My critique focuses mainly on his underlying premise or, to put it another way, on showing that his analysis of corporate law doctrine is fundamentally flawed. Chander argues that, unlike constitutional law, "corporate law places minorities at the heart of its endeavor." Central to his project is an empirical claim that corporate law has an "elaborate framework" for "minority interests in the corporation." I argue that Chander's theoretical construct rests on a doctrinal foundation of sand. He persistently overstates the extent to which corporate law protects minority shareholders, while understating the freedom that law gives majority shareholders.
corporation, shareholder rights, minority shareholder, controlling shareholder
Abstract: In this short essay for a forthcoming symposium, I comment on the North Dakota Publicly Traded Corporations Act. North Dakota hopes that the Act will empower it to compete with Delaware in the market for corporate charters. In my view, North Dakota is doomed to failure. If state chartering competition is a race to the bottom, managers will prefer Delaware to North Dakota because the former facilitates the extraction of private rents. If state competition is a race to the top, investors will prefer the director primacy approach taken by Delaware to the shareholder primacy one adopted by North Dakota. Either way, North Dakota loses.
corporation, corporate statute, race to the bottom, race to the top, Delaware, North Dakota, Public Corporation Act
Abstract: Prepared for a symposium on teaching corporate law, this essay is an exercise in applied theory of the firm. The essay focuses on a well-known California Supreme Court partnership law decision, Kovacik v. Reed, which deals with the allocation of capital losses in a dissolving partnership in which one of the partners contributed only capital and the other contributed only services. Although the Uniform Partnership Act requires both partners to share capital losses equally, absent contrary agreement, the California court relieved the service partner of any obligation to contribute towards capital losses. Using the hypothetical bargain methodology, as well as other familiar contractarian analytical tools, the essay concludes that there is no compelling economic justification for the Kovacik result. To the contrary, the arbitrariness of the line drawn by Kovacik, the resulting tertiary costs, and the (limited) bargain-forcing potential of the UPA regime all point towards the latter as the preferable default. To be sure, the question remains a close one. Indeed, that very closeness is precisely why Kovacik is such a wonderful pedagogical tool. It allows one to explore the nexus of contracts model in a close and critical fashion. In keeping with the theme of the conference for which it is intended, the emphasis in this essay is on Kovacik as a classroom tool for evaluating the utility of contractarianism. As such, it will be of interest to legal educators interested in law and economics-based pedagogy. In addition, because the problem has considerable doctrinal interest in its own right, the analysis should be of interest to legal scholars interested in partnership law.
Abstract: A 2004 study of the results of stock trading by United States Senators during the 1990s found that that senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to - and were using - material nonpublic information about the companies in whose stock they trade.
Under current law, it is uncertain whether members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.
This article analyzes present law to determine whether members of Congress, Congressional employees, and other federal government employees can be held liable for trading on the basis of material nonpublic information. It argues that there is no public policy rationale for permitting such trading and that doing so creates perverse legislative incentives and opens the door to corruption. The article explains that the Speech and Debate Clause of the U.S. Constitution is no barrier to legislative and regulatory restrictions on Congressional insider trading. Finally, the article critiques the current version of the STOCK Act, proposing several improvements.
insider trading, Congress
Abstract: The rise of the institutional investor has been hailed as a corrective to the principal-agent problem for publicly held firms. It is argued that, because institutions typically own larger blocks than individuals and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors can play a far more active role in corporate governance than dispersed shareholders. This article argues that institutional investors simply assume the role of agent, instead of the managers. Moreover, some institutional investors - e.g., labor groups, "ethical funds," government employee pension funds - may have interests other than simply increasing the firm's value. So the rise of institutional investors may not improve the position of dispersed shareholders.
shareholder, Securities and Exchange Commission, proxy access, Delaware Code, corporate decisionmaking, American corporations, principle-agent, corporate law, shareholder activism, authority-based decisionmaking, board of directors, institutional investors, union funds, pension funds
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