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Abstract:
This paper evaluates the impact of developments in the understanding of asset value pricing for alternative legal standards for takeover defenses: the management discretion and the shareholder rights positions. Both sides place considerable, albeit implicit, reliance on alternative views of the efficiency of financial markets. Developments in finance theory show that when financial markets are only "relatively efficient," stock prices can incorrectly value the corporation at any point in time, at the same time as investors cannot outperform the market on an ongoing basis. I focus on financial market anomalies arising from the failure of the capital asset pricing model to provide a reliable estimate of the market capitalization rate.

In a world of perfectly efficient capital markets, a shareholder choice standard is the dominant policy solution. In such a state, any noncoercive hostile tender offer at a premium to the market price moves assets to more valued uses while offering shareholders enhanced market value. Best of all, it sends a clear signal to all managers to be more faithful to shareholder interests or risk losing their jobs.

But in a world where capital markets are only relatively efficient, the calculus shifts. Successful hostile tender offers could move assets to less valued uses. Shareholders could be paid less than the intrinsic value of the corporation. Worst of all, managers might choose to manage to the financial market anomalies; that is, to adopt otherwise suboptimal business strategies intended to minimize the risks of under-pricing or maximize the probability of over-pricing.

I conclude that the legal standard prevailing in Delaware regarding takeover defenses can be understood as focusing on giving managers the discretion to maximize the value of the corporation. In light of modern finance theory, and the evidence that capital markets are only relatively efficient, this is a plausible way to strike the balance.

takeover defenses, hostile tender offers, intrinsic value of the corporation, shareholder choice, management discretion, anomalies in capital market efficiency

Abstract:
Many corporate law discussants think of themselves as picking up where Adolf Berle and E. Merrick Dodd left off in a famous, precedent-setting debate in the 1930s. The generally accepted historical picture puts Berle in the position of the original ancestor of today's shareholder primacy position while Dodd is cast as the original ancestor of today's corporate social responsibility (CSR). This Article shows that both categorizations amount to mistaken readings of old material outside of its original context. The Article corrects the mistakes, offering new readings of some of corporate law's fundamental texts, texts that recently reached their 75th anniversaries and include Berle's famous book with Gardiner C. Means, The Modern Corporation and Private Property. Seventy-five years ago the normative issue of the day was the appropriate policy response to the crisis of the Great Depression. Both Berle and Dodd addressed the issue from a corporatist perspective which views the corporation as an entity that operates as an organ of the state and assumes social responsibilities. In so doing Berle took on the fundamental question "for whom is the corporation managed" at a time when the answer had crucial implications for social welfare. In answering the question, Berle articulated a political economy that integrated a theory of corporate law within a theory of social welfare maximization. It was a great accomplishment, but it was in a context very different from today's debates about corporate management and responsibility. Accordingly, Berle was not advocating shareholder primacy as we understand it today. Nor is there a strong claim that Berle was a CSR advocate; he never did make the final jump of advocating reorganization of the legal firm as a social welfare maximizer. His unqualified statements on the subject all presupposed a strong regulatory state and a public consensus against a corporate profit maximand. Dodd does not present a clear picture either. Dodd's Depression-era writing, once contextualized, offers only indirect support to today's CSR advocates. He is most plausibly read as a managerialist, and social responsibility within management's discretion is not what CSR tends to be about. The biggest lesson from this analysis is that the shareholder primacy school impairs its own position by making a claim on Berle.

Adolf Berle, E. Merrick Dodd, corporate social responsibility, CSR, shareholder primacy, social welfare

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:
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:
Union membership, as a percentage of the private sector workforce, has been in decline for 50 years. I argue that the cause of this unrelenting decline is due to a single fundamental factor - the change in the United States economy from a corporatist-regulated economy to one based on free competition. Most labor commentators have explained the decline by a confluence of unrelated economic and legal forces. In my approach, to understand the causes of the decline in union membership it is critical to return to the period of the original growth in union power; that is, to the New Deal. In examining the differences in the economy between today and the New Deal, one must look not only to labor law, but also to corporate law and antitrust. For unions to be successful, the goals of labor law need to be consistent with the goals of corporate law and antitrust. While the goals were consistent in the 1930s, they are in conflict today.

Corporations, Economics, Employment Practice, Labor Law, Organizations, Antitrust, Labor Unions, Law and Economics, Union Membership

Abstract:
The Delaware Supreme Court's opinions in Weinberger and Technicolor have left a troublesome uncertainty in defining the proper approach to the valuation of corporate shares. That uncertainty - increasingly important as going private mergers become more frequent - can be resolved by a blend of financial and doctrinal analysis. The primary problem - the potential opportunism by controlling shareholders in timing going private mergers - can be addressed by a more complete understanding of corporate finance. The definition of fair value must include not only the present value of the firm's existing assets, but also the future opportunities to reinvest free cash flow, including reinvestment opportunities identified, even if not yet developed, before the merger. This issue has been incompletely articulated by the courts. On the other hand, value created by the merger that can only be achieved by means of the merger itself - such as reduced costs of public company compliance - should not be included in determining fair value. We also show that except in the case of acquisitions by third parties (where actual sale value, minus synergies, is a useful measure of fair value), hypothetical third party sale value does not and should not ordinarily be taken as a measure of fair value.

Delaware appraisal law, corporate finance, valuation

Abstract:
The implicit minority discount, or IMD, is a fairly new concept in Delaware appraisal law. A review of the case law discussing the concept, however, reveals that it has emerged haphazardly and has not been fully tested against principles that are generally accepted in the financial community. While control share blocks are valued at a premium because of the particular rights and opportunities associated with control, these are elements of value that cannot fairly be viewed as belonging either to the corporation or its shareholders. In corporations with widely dispersed share holdings, the firm is subject to agency costs that must be taken into consideration in determining going concern value. A control block-oriented valuation that fails to deduct such costs does not represent the going concern value of the firm. As a matter of generally accepted financial theory, on the other hand, share prices in liquid and informed markets do generally represent that going concern value, with attendant agency costs factored or priced in. There is no evidence that such prices systematically and continuously err on the low side, requiring upward adjustment based on an implicit minority discount.

Given the lack of serious support for the IMD in finance literature, this Article suggests that the Delaware courts may be relying on the IMD as a means to avoid imposing upon squeezed-out minority shareholders the costs of fiduciary misconduct by the controller. Where either past or estimated future earnings or cash flows are found to be depressed as a result of fiduciary misconduct, however, or where such earnings or cash flows fail to include elements of value that belong to the corporation being valued, the appropriate way to address the corresponding reduction in the determination of fair value is by adjusting those subject company earnings or cash flows upward.

This approach to the problem of controller opportunism is more direct, more comprehensive in its application, and more in keeping with prevailing financial principles, than the implicit minority discount that the Delaware courts have applied in the limited context of comparable company analysis. The Delaware courts can therefore comfortably dispense with resort to the financially unsupported concept that liquid and informed share markets systematically understate going concern value.

corporations, corporate appraisal, implicit minority discount, IMD, control shares, valuation, fair value, controller opportunism

Abstract:
Many look toward enactment of the law reform agenda held out by proponents of shareholder empowerment as a part of the regulatory response to the financial crisis. This Article argues that the financial crisis exposes major weaknesses in the shareholder case. Our claim is that shareholder empowerment delivers management a simple and emphatic marching order: manage to maximize the market price of the stock. And that is exactly what the managers of a critical set of financial firms did in recent years. They managed to a market that focused on increasing observable earnings and, as it turned out, failed to factor in concomitant increases in risk that went largely unobserved. The fact that management bears primary responsibility for the disastrous results does not suffice to effect a policy connection between increased shareholder power and sound regulatory reform. A policy connection instead turns on a counterfactual question: Whether increased shareholder power would have imported more effective risk management in advance of the crisis. We conclude that no plausible grounds exist for making such a case. In the years preceding the financial crisis, shareholders validated the strategies of the very financial firms that pursued high leverage, high return, and high risk strategies and penalized those that did not. It is hard to see how shareholders, having played a role in fomenting the crisis, have a positive role to play in its resolution.

The prevailing legal model of the corporation strikes a better balance between the powers of directors and shareholders than does the shareholder-centered alternative. Shareholder proponents see management agency costs as a constant in history and shareholder empowerment as the only tool available to reduce them. This Article counters this picture, making reference to agency theory and recent history to describe a dynamic process of agency cost reduction. It goes on to show that shareholder empowerment would occasion significant agency costs on its own by forcing management to a market price set in most cases under asymmetric information and set in some cases in speculative markets in which heterogeneous expectations obscure the price’s informational content.

Corporations, corporate governance, financial crisis, law reform, regulatory reform, shareholder wealth maximization, shareholder primacy, risk management, leverage, high risk strategies, balance of power between directors and shareholders, agency costs

Abstract:
This Article makes several contributions to the literature on Delaware appraisal law. We first argue that the "going concern value" standard adopted by the Delaware courts as the measure of "fair value" in share valuation proceedings is superior to its two main competitors, market value and third-party sale value, on grounds of both fairness and efficiency. Application of the going concern value standard has two important consequences. First, it is critical that going concern value be measured in a way that includes not only the present value of the existing assets of the corporation, but also the present value of the reinvestment opportunities available to and anticipated by the firm at the time of merger. Second, going concern value should not include the value of corporate control in a case where the merger creates control through the aggregation of previously dispersed shares. In that case, the benefits created by the aggregation of shares belong to the party that created the increased value.

We address differently, however, the situation where a pre-existing controlling shareholder squeezes out the minority. Our concern here is the potential for a controlling shareholder to acquire the minority shares at a price that fails to reflect the firm's going concern value. Where a controller fails to present a valid discounted cash flow analysis and relies instead on a comparable company analysis that is based solely on historical data, the minority shareholders and the court are deprived of access to projections of future free cash flows of the firm. We therefore advocate that in this situation the courts adopt a penalty default in the form of a presumption that fair value includes the value of control as reflected in comparable company acquisitions. Such a presumption is consistent with common law doctrines of fiduciary duty and the entire fairness standard, as well as adverse evidentiary inferences drawn from failure to produce relevant evidence. The controller as faithful fiduciary can avoid the proposed presumption by preparing and submitting to judicial scrutiny a valid discounted cash flow analysis. The opportunistic controller, on the other hand, is subjected to a fair value determination that amounts to third-party sale value minus synergies.

Corporations, takeovers, squeeze-out mergers, corporate valuation fair value, going concern value, synergies, implicit minority discount, control value, control premium, controlling shareholder, discounted value flow analysis, comparable company analysis, acquisition premium

Abstract:
In this paper I look at unions' future using a historical perspective and focusing on the period of union ascendancy as well as the past few decades when unions have been in decline. We know trends currently in place are unfavorable to unions. What conditions would be favorable? The rise of unions from the 1930s through the early 1950s was due to the convergence of a number of events - an economic policy that attempted to restrict competition beginning in the 1930s, the twin beliefs that labor markets were inherently noncompetitive and/or that individual workplaces were exploitative, and low union premiums. The passage of highly favorable legislation, in the form of the Wagner Act, was a reflection of the idea that unions could actually improve the functioning of labor markets and serve as a countervailing power to big business. Over the past several decades, union density declined because government policy became pro-competitive, it became clearer that labor markets were relatively competitive, HR practices developed that reduced the amount of opportunistic behavior of employers, and unions increased the percentage premium they enjoyed in industries where rents were available. In this environment, the public-good aspect of labor unions - their ability to improve the functioning of labor markets - was called into question. The passage of amendments to the NLRA that were unfavorable to unions was a reflection of this changed sentiment as to the public good aspect of unions as well as to the adoption of pro-competitive market policies in general. Consequently the future trend in union density will depend on the competitiveness of the economy and on the related question of the number of opportunities for unions to fulfill their major goal of either extracting economic rents or remedying market failures that result in exploitative employment relationships.

labor unions, conditions favoring unions, union density

Abstract:
In this paper, I analyze three types of labor market relationships that are prevalent in the economy - the external labor market that exists outside of firms, and the union and nonunion employment relationships that exist inside firms. The parties' relationships in each of these markets are markedly different from one another with respect to their use of contracts versus norms, their enforcement mechanisms, and their reliance on external competitive market pressures. Why do these very distinct forms exist? This paper provides an answer to this question. To be successful, each of the structures has to resolve problems of match-specific assets, asymmetric information, risk aversion, and transaction costs. The paper describes how the terms of the different labor market relationships work to protect the parties' agreements and the extent to which the terms of the agreement can be interpreted as maximizing joint profit. Finally, I address whether the very different enforcement protections are adequate.

Labor market contracting, union versus nonunion, contracts versus norms, enforcement mechanisms

Abstract:
Most regulated industries undergoing deregulation are capital intensive. In the existing cost-of-service regulatory framework the primary concern is that, guaranteed a competitive return on capital, the regulated firm has insufficient incentive to be cost efficient. In deregulating firms within such industries, the return on capital is permitted to vary directly with the firm's performance. Firms that restrain costs and increase revenue can earn higher profits; for those that do not do so, profits fall below levels assured under the prior regulatory regime. The assumptions in deregulating such industries are that the affected firm can control the bulk of its costs, can make decisions with little remaining governmental oversight, and can use high-powered performance pay incentive systems to encourage profit maximization. In addition, it is assumed that regulatory barriers will eventually disappear, allowing for open markets and free competition.

For the United States Postal Service a number of these assumptions do not hold. The Postal Service is labor rather than capital intensive, important postal costs are not directly controlled by the firm, the USPS will remain government-owned, at least in the short term, and barriers to competitive markets will be lowered but not eliminated. Consequently, deregulating the Postal Service using the private sector, price-cap model poses risks that are both unique and considerable. At the same time, regulatory reform in postal markets has some significant advantages over prior experiences in other industries. Most importantly, skepticism about the ability of deregulation to improve competitiveness and market efficiency has proved incorrect. Although far from flawless, deregulation has been, on balance, successful in airlines, trucking, natural gas, and telecommunications. We also have learned that reform legislation need not be technically perfect to achieve positive results. The key is for regulators to begin the process of opening markets to competition and allow market forces to drive the adjustment process. Finally, as discussed elsewhere in this volume, postal deregulation in other countries has achieved positive results. In this paper, we primarily deal with two deviations from the traditional deregulatory model: the Postal Service is labor- rather than capital-intensive and the Postal Service does not directly control important elements in its cost structure.

Abstract:
We compare the efficiency with which management discretion and shareholder choice regulate hostile tender offers. This is the first paper in a long running debate that rigorously compares these legal rules to analyze both the critical informational assumptions and the interplay of those assumptions with principles of financial market efficiency. A critical innovation of our model is its focus on an informed management's choice among alternative corporate policies under the protection of the business judgment rule, but where agency costs exist. We assume that corporate assets and reinvestment opportunities are efficiently priced by financial markets, but that markets never learn the value of foregone investments. In this case, shareholder choice may create an agency problem whereby managers forego positive net present value investments that increase the risk of a hostile bid. We are able to determine analytic conditions under which the expected cost of this agency problem exceeds that of the standard agency problem usually identified with management discretion.

corporate takeovers, corporate governance, management discretion, shareholder choice, market efficiency

Abstract:
Union membership, as a percentage of the private sector workforce, has been in decline for 50 years. The cause of this unrelenting decline is a single, fundamental factor: the change in the United States economy from a corporatist-regulated economy to one based on free competition. Unions are central to a corporatist regime and are peripheral in a liberal pluralist regime.

the rise and decline of unions, michael wachter, unions, union membership, private sector workforce, declines, corporatist, regulated economy, free competition, liberal, liberal pluralist, NIRA, NRA, industry regulation, public interest, deregulation, labor law, corporate law

Abstract:
We investigate the impact of union strength on changes in nonunion wages and employment. The prevailing model in this area is the threat model, which predicts that increases in union strength cause increases in nonunion wages and decreases in nonunion employment. In testing the threat model, we are also testing two alternatives, the crowding and complements models. In contrast to the prediction of the threat model, decreases in the percent organized (reflecting a declining union threat) are associated with increases in the nonunion wage. Furthermore, increases in union wages appear to decrease, rather than to increase, nonunion wages. Evidence on the determinants of intra-industry variation in nonunion wage premia is somewhat more consistent with the crowding model and is strikingly consistent with the complements model of union and nonunion wage determination. Further evidence on the determinants of intra-industry variation in nonunion employment is consistent with the complements model and the threat model; movements in nonunion industry employment are negatively related to changes in proxies for union strength. Thus, the combined evidence supports the complements model, but neither the threat model nor the crowding model.

Abstract:
This study presents a time series analysis of the youth unemployment problem stressing the cohort overcrowding effect, a result of the baby boom induced imbalance between younger and older workers. Several techniques are used to study the problem. First, reduced form unemployment equations are estimated for the disaggregated youth groups. The results indicate that secular swings in female and white youth unemployment rates do track well with the cohort imbalance hypothesis. However, relative increases in black male unemployment remain unexplained by this model. Second, alternative measures of youth employment are developed by treating school enrollment and military service as equivalent to employment. In addition, several employment-to-population ration measures are explored. Third, equations for employment, unemployment, schooling and a residual category are estimated together. This allows one to analyze flows into and out of the four states with respect to changes in explanatory variables.

The results suggest that youth unemployment rates, with the exception of the black male group, peaked in relative terms in the early 1970s. A detailed analysis of the declining labor market position of blacks, however, uncovers puzzling results. Although black male unemployment rates are growing, and employment rates are declining, relative wages and school enrollment rates are increasing. In fact, at least half of the decline in black employment ratios can be associated with increasing school enrollment rates.

Abstract:
No abstract is available for this paper.

Abstract:
Compensation for U.S. Postal Service workers is determined through a process of collective bargaining and mandatory interest arbitration in the event of impasse. The directive of the Postal Reorganization Act is to maintain compensation similar to that awarded for comparable levels of work in the private sector. This paper examines a wide array of evidence to assess the comparability of postal and private sector compensation. The evidence points to a substantial postal premium. Cross-sectional analysis for 1994, controlling for worker characteristics, indicates that bargaining unit postal employees receive wages 28% higher than similar private sector workers. A premium estimate of 34% is obtained following an accounting for occupational skill requirements and working conditions, while inclusion of fringe benefits increases further the size of the premium. Longitudinal evidence from the Postal New Hire Survey, matched CPS panels, and Displaced Worker Surveys indicate wage gains of 30%-40% among postal entrants. Data on quit rates and applicant queues reinforce the conclusion that postal workers receive substantial rents. We explore in depth methodological issues, with particular attention given to the choice of the comparison group with whom postal workers are most directly compared. Many of the issues analyzed here have general applicability to studies of wage comparability.

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:
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:
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:
This article deals with the question of whether the reforms proposed by the labor law traditionalists are desirable on economic grounds, and if not, what types of reform might be offered. The specific proposals include increased job security, increased employee participation in decision making, and reform of the National Labor Relations Act (NLRA). The difficulty for traditional labor law reformers is that they have not yet accepted the challenge of designing proposals for today's more competitive labor and product markets. Until this changes, reform efforts can be shown to be backward steps.