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Abstract:
Hedge funds have become critical players in both corporate governance and corporate control. In this article, we document and examine the nature of hedge fund activism, how and why it differs from activism by traditional institutional investors, and its implications for corporate governance and regulatory reform. We argue that hedge fund activism differs from activism by traditional institutions in several ways: it is directed at significant changes in individual companies (rather than small, systemic changes), it entails higher costs, and it is strategic and ex ante (rather than intermittent and ex post). The reasons for these differences may lie in the incentive structures of hedge fund managers as well as in the fact that traditional institutions face regulatory barriers, political constraints, or conflicts of interest that make activism less profitable than it is for hedge funds. But the differences may also be due to the fact that traditional institutions pursue a diversification strategy that is difficult to combine with strategic activism.

Although hedge funds hold great promise as active shareholders, their intense involvement in corporate governance and control also potentially raises two kinds of problems: The interests of hedge funds sometimes diverge from those of their fellow shareholders; and the intensity of hedge fund activism imposes substantial stress that the regulatory system may not be able to withstand. The resulting problems, however, are relatively isolated and narrow, do not broadly undermine the value of hedge fund activism as a whole, and do not warrant major additional regulatory interventions.

The sharpest accusation leveled against activist funds is that activism is designed to achieve a short-term payoff at the expense of long-term profitability. Although we consider this a potentially serious problem that arguably pervades hedge fund activism, we conclude that a sufficient case for legal intervention has not been made. This conclusion results from the uncertainties about whether short-termism is in fact a real problem and how much hedge fund activism is driven by excessive short-termism. But, most importantly, it stems from our view that market forces and adaptive devices taken by companies individually are better designed than regulation to deal with the potential negative effects of hedge fund short-termism while preserving the positive effects of hedge-fund activism.

Corporations, Organizations, Hedge-Fund Activism, Corporate Governance, Hedge Funds, Securities Regulation, Short-Term Payoff

Abstract:
This Article explores the relationship between takeovers, legal doctrines, and private ordering. The authors first argue that the sanctioning of the poison pill and the "just say no" defense by Delaware courts was far less consequential than feared by its critics and hoped for by its proponents. Rather, market participants adapted to these legal developments by embracing two adaptive devices - greater board independence and increased incentive compensation - which had the effect of transforming the pill, a potentially pernicious governance tool, into a device that is plausibly in shareholders' interest. Interestingly, however (and, for critics of the pill, disconcertingly), market participants neither tried to change the law or to opt out of it. The authors then place these developments in a broader perspective. It draws a distinction between bilateral devices - which enjoy support from both stockholders and managers - and unilateral devices and argues that bilateral devices are more likely to be welfare enhancing, more stable, are privileged by Delaware law, and tend to further Delaware's status as leading domicile for public corporations. Greater board independence and increased incentive compensation are examples of such bilateral devices. The authors conclude by examining why Delaware courts embraced the poison pill (at the time, a largely unilateral device, albeit one with bilateral features) and how they should deal with the use of pills by companies with staggered boards.

Takeovers, Poison Pills, Corporate Governance

Abstract:
Never has voting been more important in corporate law. With greater activism among shareholders and the shift from plurality to majority voting for directors, the number of close votes is rising. But is the basic technology of corporate voting adequate to the task? In this Article, we first examine the incredibly complicated system of US corporate voting, a complexity that is driven by the underlying custodial ownership structure, by dispersed ownership and large trading volumes, and by the rise in short-selling and derivatives. We identify three ways in which things predictably go wrong: pathologies of complexity; pathologies of ownership; and pathologies of misalignment of interests. We then discuss the current legal treatment of these pathologies and consider a variety of directions for reform, ranging from incremental modifications to fundamental redesign. We show that, absent a fundamental reconstruction of the ownership structure, the existing system will continue to be noisy, imprecise and disturbingly opaque. The problems with the existing system pose fundamental challenges for both proponents of direct shareholder democracy, who advocate more extensive voting rights for shareholders, and for proponents of indirect shareholder democracy, who advocate deference to a board of directors the legitimacy of which ultimately also rests on shareholder elections.

shareholder elections, technology of corporate voting, voting systems, ownership structure, legitimacy

Abstract:
This article explores the links between a country's venture capital industry, the location of the IPO exit option and U.S. securities regulation. I argue that one observes two interestingly different models of IPO exit: the Taiwan model in which IPO exit is on the domestic stock exchange; and the Israeli model in which IPO exit is on the NASDAQ. For countries that choose or end up with the NASDAQ exit route, U.S. securities regulation facilitates the process in an interesting but little noted way. By drawing a distinction between "U.S. issuers" and "foreign private issuers," and by imposing reduced disclosure obligations on the latter, the regulatory structure provides a clean way of self identifying as an American company, even when the company's main centers of activity are off-shore. As I detail, Israeli venture capital fueled companies take full advantage of this regulatory option and are viewed by the investor community as regular, Silicon Valley technology companies.

Venture capital, corporate identity, securities regulation, IPO exit routes, Israeli venture capital

Abstract:
Activist hedge funds have transformed how bondholders respond to violations of their contractual rights. Insurance companies and mutual funds, the traditional investors in bonds, often slept on their rights and turned active only little and late. Hedge funds, by contrast, seek out opportunities for activism in order to make profits. In the wake of their activism, hedge funds have not only benefitted themselves, but their fellow bondholders as well.

Alas, the remedy scheme for violations of bondholders rights - in particular, the centrality of the acceleration remedy - introduces its own set of imperfections. When treasury interest rates have increased or the stock price of a company that has issued convertible bonds has declined, acceleration generates a windfall: bondholders receive compensation in excess of the harm associated with the violation. In these cases, activists will spend excessive resources in detecting and pursuing potential claims and companies have excessive incentives to stave off potential violations. When treasury rates have declined, the tables are turned, and bondholder rights are underenforced.

Whether this selective enforcement has generated aggregate benefits for bondholders and companies in the short term is unclear. Over the long term, however, the market will adjust to hedge fund activism by changing other terms in corporate bond indentures. In particular, we suggest that the contractual remedy scheme be revised by giving companies an expanded defeasance option and offering bondholders a make-whole premium upon acceleration, which would reduce, respectively, the incentives for overenforcement and underenforcement.

Banking and Finance, Contracts, Corporations, Economics, Law and Economics, Hedge funds, bondholders, contractual rights, acceleration remedy, defeasance option, make-whole premium

Abstract:
Black and Gilson have argued that "venture capital can flourish especially - and perhaps only - if the venture capitalist can exit from a successful portfolio company through an initial public offering (IPO), which requires an active stock market." But nothing in the Black and Gilson analysis requires that the exit option be a domestic capital market. In this Article, I use the phenomenon of Israeli high tech companies going public on the NASDAQ as a case study to explore the connection between a venture capital industry and domestic capital markets in a world of global capital and product markets.

Abstract:
In this paper, we argue that chief executive officers of publicly-held corporations in the United States are losing power to their boards of directors and to their shareholders. This loss of power is recent (say, since 2000) and gradual, but nevertheless represents a significant move away from the imperial CEO who was surrounded by a hand-picked board and lethargic shareholders. After discussing the concept of power and its dimensions, we document the causes and symptoms of the decline in CEO power in several areas: share ownership composition and shareholder activism; governance rules and the board response to shareholder activism; regulatory changes related to shareholder voting; changes in the board of directors; and executive compensation. We argue that this decline in CEO power represent a long-term trend, rather than a temporary response to economic and political conditions. The decline in CEO power has several important implications, including implications with respect to the possibility of a regulatory backlash against certain newly empowered shareholder groups, the type of persons who will serve on corporate boards in the future, the type of shareholder initiatives that will be introduced and the corporate response to them, the convergence of corporate laws across countries, and the source of resistance to acquisitions and the legal regulation of target defenses.

Public corporations, chief executive officers, CEO power, boards of directors, shareholder activism, corporate governance rules, executive compensation, regulatory backlash, shareholder initiatives

Abstract:
This article provides a theory of the relation between legal and non legally enforceable rules and standards in the corporation, and then uses that theory to analyze a variety of prominent features of corporate law. In the first part, we draw on recent developments in the theory of the firm to identify key problems facing participants in the firm. In developing this approach, we combine the "property rights" strand in the theory of the firm with the transaction cost approach. From this perspective, the main issue is solving the related problems of coordinating activities, choosing the firm's assets, and developing appropriate incentives for specific investments. In part II, we argue that the firm so understood will largely be governed through "norms," by which we mean "non-legally enforceable rules and standards" (NLERS). Indeed, the raison d'etre of firms is to replace legal/contractual governance of relations with NLERS. Using this framework, in part III, we analyze the duty of loyalty. In part IV, we analyze the duty of care and the business judgement rule, and a variety of other puzzling features of corporate law.

From our perspective, corporate law can be understood as a remarkably sophisticated mechanism for facilitating governance by NLERS. Centralized management is used to determine the assets over which the corporation must have residual rights of control and to develop a governance structure for protecting the match-investments of insiders in these assets. Legal rules provide the default settings through which centralized management operate and prohibit non pro rata distributions (a combination of ex ante rules and the ex post duty of loyalty), which pushes controlling shareholders to maximize the value of the firm.

Having established an "incentive compatible" legal form that facilitates NLERS governance, the law must be careful not to
undermine that governance by midstream interference. Here, the duty of care and the business judgment rule are critical. The
business judgement rule acts as a jurisdictional rule that facilitates a self governing NLERS relationship by preventing parties from turning to third party adjudicators. As such, it plays a role very similar to the role of the employment at will doctrine in employment law and for the same reasons. This analysis provides an explanation for why the duty of care, despite its appearance, does not function as a negligence rule, and why liability for directorial malpractice is so much less common than liability for other forms of professional malpractice, such as, legal or medical.

The principal contexts in which the BJR does not apply are situations in which NLERS governance breaks down, generally because of last period temptations to defect. The difference in the ability of NLERS to govern midstream and end games provides the key to understanding a variety of corporate law puzzles. These puzzles include: the asymmetry between the legal standards governing purchases and sales of assets; the asymmetry between judicial review over decisions to resist all bids for control ("just say no") versus the review of sales of control; and the demand requirement in derivative litigation.

Abstract:
In the public debate sparked by the corporate scandals of the last years, Delaware has been strikingly absent. In contrast to the high profile activity of Congress, the Securities and Exchange Commission, the stock exchanges, federal prosecutors, and even state law enforcement officials, Delaware has been largely mute: no legislation; no rule-making; no criminal investigations; few headlines. In this Article, we use Delaware's relative passivity during this latest episode of corporate law-making as a starting point in the analysis of the shape of American corporate federalism and Delaware's place within it.

We argue that Delaware long ago opted for what we will call a "classical" or "19th-century" common law model of corporate law-making. In Delaware, corporate law is largely judge-made; judicial opinions are filled with quasi-deterministic reasoning; statutory law is comparatively narrow and rarely subject of partisan disputes; the judiciary as well is relatively non-partisan and has claim to technical expertise; and the law is enforced through litigation brought by private parties. We view these traits through the lens of the institutional and political landscape in which Delaware must operate. This landscape is characterized by a federalist system in which Delaware's regulatory powers co-exist with, and can be constrained by, the powers of the federal government. In this system, Delaware is faced with the threat that populist pressures will lead to a federal preemption of Delaware corporate law and thus eradicate the huge profits Delaware derives from being the domicile of choice for public-traded U.S. corporations. By creating and enhancing an apolitical gloss over Delaware's corporate law, the various traits we identify help shield Delaware against this threat. At the same time, the scope of Delaware's corporate law is designed to minimize conflicts by assuring that Delaware has the requisite personal jurisdiction over defendants to enforce its law effectively and that the prevailing conflict rules point to substantive Delaware law as applicable to a corporate law dispute.

But this classical model of law making carries with it intrinsic limitations. Specifically, legal change is slow, standard-based and incremental. Faced with the recent corporate scandals, calls for action, and Sturm und Drang, Delaware reacted accordingly: Basically, it does nothing until cases are brought. Any more pro-active response by Delaware actors would have threatened to undermine the political legitimacy achieved by Delaware's commitment to the classical common law model. But because the classical common law style, together with jurisdictional and conflict rules, constrain Delaware, federal law is needed to complement Delaware's. In that respect, the relation between federal law and Delaware law is symbiotic, rather than antagonistic: Delaware is happy to have federal law pick up the slack and thereby reduce the likelihood that ineffective regulation produces a populist backlash.

corporate law-making, Delaware, federalism

Abstract:
Over the last thirty years, the independent directors have occasionally been represented by independent counsel. Instances include: special litigation committees reviewing derivative suits; independent committees in parent subsidiary mergers and MBOs; and internal investigations of misconduct. We predict that, with the additional legal requirements imposed on independent directors by the Sarbanes Oxley Act and related changes to SEC rules and Stock Exchange listing requirements, the independent directors, especially those on the Audit Committee, increasingly will be represented on a continuing basis by independent legal counsel. Out of this will emerge a new figure in the board room: the Independent Directors' Counsel. We examine the advantages and disadvantages of adding this new actor in the boardroom, and consider issues posed and implications for corporate law and legal ethics.

Sarbanes Oxley, directors, legal ethics, corporate governance

Abstract:
Constitutions constitute a polity and create and entrench power. A corporate constitution - the governance choices incorporated in state law and the certificate of incorporation - resembles a political constitution. Delaware law allows parties to create corporations, to endow them with perpetual life, to assign rights and duties to "citizens" (directors and shareholders), to adopt a great variety of governance structures, and to entrench those choices.

In this Article, we argue that the decision to endow directors with significant power over decisions whether and how to sell the company is a constitutional choice of governance structure. We then argue that it is, on theoretical and empirical grounds, a perfectly intelligible choice: shareholders reasonably might opt for board entrenchment - implemented, for example, by means of a staggered board - in order to enable a board to employ selling strategies more effectively and thus to increase the premium shareholders receive when the company is sold. Such a decision is a kind of pre-commitment whereby shareholders, by binding themselves ex ante, may be able to improve their collective position ex post.

After examining how shareholders can entrench particular governance structures under Delaware law, we examine two issues that arise once shareholders have chosen to entrench a governance structure: the question of incomplete implementation that arises in cases such as Blasius and Liquid Audio; and the questions when and whether changed circumstances justify ex post judicial negation of shareholders' prior commitments.

Abstract:
We argue that the close corporation form is uniquely suited to enterprises with a high density of match specific assets, particularly where the assets are not yet fully developed, as in an omelet factory. The corporate law limitations on exit, combined with the corporate law rules against non pro rata distributions, largely prevent opportunistic behavior by the majority shareholder towards the minority. By locking both into the enterprise, the majority shareholder, in maximizing its own wealth, also maximizes the wealth of the minority. The projects are given the opportunity to develop without concern that parties could threaten to remove their capital in order to secure a greater share of the profits. Indeed, as we show, many of the persistent features of the stylized close corporation can best be understood as self-enforcing mechanisms to protect the participants from opportunistic behavior by fellow participants. Starting from this view of close corporations, we analyze the classic problem(s) of minority oppression in the close corporation. We argue that minority oppression can best be understood as a combination of two separate and separable dimensions, with two distinct legal responses. The first dimension is a version of precisely the same problem that, in employment law, arises under the heading of "employment at will," and is best handled with the same judicial passivity, absent explicit agreements to the contrary. To do otherwise is unnecessary and threatens to undermine the self-enforcing structure in place.

The second dimension of the problem is fundamentally different from employment at will, and involves attempts by the controlling shareholder to make non pro rata distributions of firm assets. Here, we show that vigorous judicial enforcement of a prohibition on such distributions, including the vigorous protection of ancillary rights to information, is necessary to enforce norms of non-opportunism. We further show that courts are much better at sorting out issues of this sort than employment at will type issues because doing so does not require either relying on unverifiable factors, nor valuing assets that the courts cannot value.

Out of our appreciation of the beauty of the close corporation form comes the implication that courts further the purposes of the close corporation when they hold narrowly within the corporate form and avoid ad hoc adjudication of substance. In this model of the close corporation, courts remain passive in the face of the employment issues that animate many bitter close corporation cases. By contrast, courts take an active role in blocking the attempts by majority shareholders to enter into self-dealing transactions with the corporation as a way around the sacred prohibitions on non pro-rata distributions.

Abstract:
The Bear Stearns/JP Morgan Chase merger placed Delaware between a rock and a hard place. On the one hand, the deal's unprecedented deal protection measures - especially the 39.5% share exchange agreement - were probably invalid under current Delaware doctrine because they rendered the Bear Stearns shareholders' approval rights entirely illusory. On the other hand, if a Delaware court were to enjoin a deal pushed by the Federal Reserve and the Treasury and arguably necessary to prevent a collapse of the international financial system, it would invite just the sort of federal intervention that would undermine Delaware's role as the de facto provider of U.S. corporate law.

Faced with a choice between undermining the delicate and subtle balance struck between managers and shareholders and standing in the way of the imperatives of national and international economic policy, Delaware found a third way that avoided both horns of the dilemma: it took advantage of a pending New York action to stay the Delaware action and avoid making any decision at all. In this article, we tell this story, analyzing the doctrinal issues under Delaware corporate and procedural law, and discussing the implications of this episode for our understanding of the landscape of US corporate law making.

corporate takeovers, Federal Reserve, Treasury Department, intervention, deal protection measures, Delaware courts, corporations, Delaware corporate and procedural law, conflict of laws, financial collapse, mergers and acquisitions, corporate charter competition

Abstract:
I examine the connection between the discursive dilemma and corporate law. The discursive dilemma (or doctrinal paradox) is a distinctive social choice problem that was first identified by Kornhauser and Sager and later used as the basis for a theory of organizational personality by Pettit. I examine the ways in which the corporate form prevents the emergence of the discursive dilemma in the firm context and the extent to which the presence of the discursive dilemma can provide the foundation for a theory of corporate personality.

discursive dilemma and corporate law, doctrinal paradox, corporate personality

Abstract:
How does a country achieve a public capital market in which firms can raise capital from investors? In seeking clues and hypotheses, I look back to the dawn of the public corporation in the United States. The battles for control of the Erie Railroad, known as the "Scarlet Woman of Wall Street", a reference to its ill repute, stand at the symbolic center of these developments.

The battles for control, which waxed and waned between 1868 and 1872, involved the titan of the transportation age, Cornelius Vanderbilt, the brilliant and notorious stock market manipulator and takeover entrepreneur, Jay Gould, the largest and most powerful railroad of the era, the Pennsylvania, control over rail transportation to New York City, and the politics and courts of New York, Pennsylvania and Ohio. It was played out in the securities markets, the courts, the legislatures and the newspapers, and attracted the attention, and condemnation, of some of the leading commentators of the day.

Rereading this history from the vantage point of the end of the twentieth century, several features are striking. First, the battles are remarkably familiar: they are recognizably modern battles for control over a widely held corporation. Second, many of the tactics utilized are now illegal. Finally, surprising connections emerge between antitrust, federalism and the emergence of public capital markets.

Abstract:
Corporate Charter competition has become an increasingly international phenomenon. The thesis of this article is that this development in the corporate law requires a greater focus on the corporate tax law. We first demonstrate how a tax system's capacity to distort the international charter market depends both upon its approach to determining corporate location and the extent to which it taxes foreign source corporate profits. We also show, however, that it is not possible to remove all distortions through modifications to the tax system alone. We present instead two alternative methods for preserving an international charter market. The first best solution involves severing the markets for corporate law and corporate tax law through coordination of locational rules under each regime, with a "place of incorporation" rule for corporate law and a "real seat" rule for corporate tax. The second best solution relies on a properly designed federal structure. The crucial design elements for such a federal system are the allocation of substantive law between the federal and subfederal levels, corporate and corporate tax locational rules, and the taxation of corporate migration and foreign source corporate profits. With due attention to these details, an international charter market can be protected from the potentially distorting effects of corporate taxation, but only if considerable care is taken. In the final part of the paper we apply our analysis to the United States, Canada, the European Union, and Israel, and show how difficult it is, in the real world, to separate corporate charter and corporate tax competition.

reincorporation, corporate charter competition, corporate tax, international charter market, severing markets, place of incorporation, real seat

Abstract:
Hedge funds have become critical players in both corporate governance and corporate control. In this article, we document and examine the nature of hedge fund activism, how and why it differs from activism by traditional institutional investors, andits implications for corporate governance and regulatory reform. We argue that hedge fund activism differs from activism by traditional institutions in several ways: it is directed at significant changes in individual companies (rather than small, systemic changes), it entails higher costs, and it is strategic and ex ante (rather thanintermittent and ex post). The reasons for these differences may lie in the incentive structures of hedge fund managers as well as in the fact that traditional institutions face regulatory barriers, political constraints, or conflicts of interest that make activism less profitable than it is for hedge funds. But the differences may also be due to the fact that traditional institutions pursue a diversification strategy that is difficult to combine with strategicactivism.Although hedge funds hold great promise as active shareholders, their intense involvement in corporate governance and control also potentially raises two kinds ofproblems: The interests of hedge funds sometimes diverge from those of their fellowshareholders; and the intensity of hedge fund activism imposes substantial stress that theregulatory system may not be able to withstand. The resulting problems, however, are relatively isolated and narrow, do not broadly undermine the value of hedge fundactivism as a whole, and do not warrant major additional regulatory interventions.The sharpest accusation leveled against activist funds is that activism is designedto achieve a short-term payoff at the expense of long-term profitability. Although weconsider this a potentially serious problem that arguably pervades hedge fund activism,we conclude that a sufficient case for legal intervention has not been made. Thisconclusion results from the uncertainties about whether short-termism is in fact a realproblem and how much hedge fund activism is driven by excessive short-termism. But,most importantly, it stems from our view that market forces and adaptive devices taken by companies individually are better designed than regulation to deal with the potentialnegative effects of hedge fund short-termism while preserving the positive effects ofhedge-fund activism.

Abstract:
This Essay on Eric Posner's "Law and Social Norms" examines the extent to which signaling theory can provide a model for understanding non-legally enforced cooperation within institutions. After reviewing the signaling model upon which Posner's book is based, we take the employment relationship in firms as a case study. We argue that while signaling theory may be useful in explaining the formation of that relationship, it does not provide a basis for understanding its observed regularities, or of the very limited role played by the legal rules in rendering the relationship "incentive compatible." We conclude that our analysis and Posner's focus on different aspects of similar phenomena and are complementary rather than competing theories.

Abstract:
What functions does the existing mandatory disclosure system serve? In this article, I argue that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed practical and formal asymmetry between the ease of entry into the SEC system and the difficulty of exit from it. I then consider the implications of this credible commitment view for the various proposals on securities disclosure in a global capital market, and the tradeoffs between the potential benefits of increasing competition among suppliers of disclosure regulation and the potential loss of the ability of any system to offer credible commitment.

Mandatory Disclosure, Securities Disclosure, Credible Commitment, Disclosure Regulation

Abstract:
In this diagnosis of the difficulties of Corporate Law's "duty of care" illustrated by Smith v. Van Gorkom, we argue that the problem is an example of the potential for mischief inherent in legal transplants. Historically, the "duty of care" was transplanted into Corporate Law from the law of Trusts and Agency. The key issue that has bedeviled the Delaware courts and the drafters of the Model Business Corporation Act has been the question whether directors - like trustees and agents - should bear legal liability for negligence. We argue that the difficulties that this issue has presented for corporate law arise because the concept was transplanted across the market/firm boundary, without recognition that that boundary represents a choice between third party judicial enforcement of market transactions and non-legal self-governance within firms. While a negligence based duty of care may be sustainable (with difficulty) for market actors like trustees, it becomes impossible once a relationship is brought within the firm.

Duty of Care, Directors' Liability, Negligence, Governance, Van Gorkom

Abstract:
We argue that the close corporation form is uniquely suited to enterprises with a high density of match specific assets, particularly where the assets are not yet fully developed, as in an omelet factory. The corporate law limitations on exit, combined with the corporate law rules against non pro rata distributions, largely prevent opportunistic behavior by the majority shareholder towards the minority. By locking both into the enterprise, the majority shareholder, in maximizing its own wealth, also maximizes the wealth of the minority. The projects are given the opportunity to develop without concern that parties could threaten to remove their capital in order to secure a greater share of the profits. Indeed, as we show, many of the persistent features of the stylized close corporation can best be understood as self enforcing mechanisms to protect the participants from opportunistic behavior by fellow participants. Starting from this view of close corporations, we analyze the classic problem(s) of minority oppression in the close corporation. We argue that minority oppression can best be understood as a combination of two separate and separable dimensions, with two distinct legal responses. The first dimension is a version of precisely the same problem that, in employment law, arises under the heading of "employment at will," and is best handled with the same judicial passivity, absent explicit agreements to the contrary. To do otherwise is unnecessary and threatens to undermine the self enforcing structure in place.

The second dimension of the problem is fundamentally different from employment at will, and involves attempts by the controlling shareholder to make non pro rata distributions of firm assets. Here, we show that vigorous judicial enforcement of a prohibition on such distributions, including the vigorous protection of ancillary rights to information, is necessary to enforce norms of non-opportunism. We further show that courts are much better at sorting out issues of this sort than employment at will type issues because doing so does not require either relying on unverifiable factors, nor valuing assets that the courts cannot value.

Out of our appreciation of the beauty of the close corporation form comes the implication that courts further the purposes of the close corporation when they hold narrowly within the corporate form and avoid ad hoc adjudication of substance. In this model of the close corporation, courts remain passive in the face of the employment issues that animate many bitter close corporation cases. By contrast, courts take an active role in blocking the attempts by majority shareholders to enter into self-dealing transactions with the corporation as a way around the sacred prohibitions on non pro-rata distributions.

Abstract:
What functions does the existing mandatory disclosure system serve? In this article, I argue that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed asymmetry between the ease of entry into the SEC system and the difficulty of exit from it. I then consider the implications of this credible commitment view for the various proposals on securities disclosure in a global capital market, and the tradeoffs between the potential benefits of increasing competition among suppliers of disclosure regulation and the potential loss of the ability of any system to offer credible commitment.

Abstract:
We generalize the internal labor markets (ILM) analysis of the employment relationship to provide a comprehensive model of the relationships among employees, capital providers (particularly shareholders), and the firm. We start by showing that all are variable claimants and all participate in governance, but that the characteristic differences in the payment streams and governance rights of employees and shareholders can be explained by differences in the four principal industrial organization (IO) factors -- investments in match, asymmetry of information, risk aversion and transaction costs. In arriving at these results, we analyze the ways in which employees are typically variable but not residual claimants and why making employees residual claimants over the relevant set of assets, while providing strong incentives for maximizing the value of those assets, is typically not incentive compatible. Our principal conclusions are the following. First, the ownership rights of shareholders have direct parallels in the employment relationship, with the difference between the two parallel tracks reflecting the parties' ability to gain from investments in match, their willingness to trade off higher return for greater risk and their incentive-compatible solutions to the problems of asymmetric information and transaction costs. Second, in terms of the four critical IO factors, the shareholder/managers of the closely held corporation share many features with employees in the classic internal labor market, and that the characteristic arrangements that emerge strongly resemble the solutions of the ILM. Finally, we show that both relationships are fundamentally different from the relationship between the publicly held firm and its suppliers of equity capital, and that the arrangements between shareholders and the publicly held firm are the limit case in which investments in match approach zero.

Abstract:
The paper provides a detailed examination of the evolution of Delaware corporate law in the regulation of management buyouts as a case study for understanding, more generally, how Delaware corporate law uses fiduciary duties to influence managers to act in the interests of shareholders. The goal of the paper is to understand better how corporate law works, that is, the mechanism by which corporate law constrains managers. The paper argues that the Delaware cases can best be understood as attempts to create social norms for senior managers, directors and the lawyers who advise them. The paper then sketches out (preliminarily) how these norms are transmitted to the principal actors (managers, directors and lawyers), drawing on the "A Memorandum to our Clients" genre, extrajudicial judicial utterances, and popular and trade press accounts. I then consider the implications of this reconceptualization for a variety of issues in corporate law, including: the consistency of the relative unpredictability of Delaware corporate law and its (presumed) superiority; the difference that the reconceptualization makes in how lawyers advise clients; and the role and value of shareholder litigation.