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Abstract:
In Russia and elsewhere, proponents of rapid, mass privatization of state-owned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn't happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the self-dealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren't privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful privatization of large firms.

Abstract:
Despite the apparent divergence in institutions of governance, share ownership, capital markets, and business culture across developed economies, the basic law of the corporate form has already achieved a high degree of uniformity, and continued convergence is likely. A principal reason for convergence is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders, including noncontrolling shareholders. This consensus on a shareholder-oriented model of the corporation results in part from the failure of alternative models of the corporation, including the manager-oriented model that evolved in the U.S. in the 1950's and 60's, the labor-oriented model that reached its apogee in German co-determination, and the state-oriented model that until recently was dominant in France and much of Asia. Other reasons for the new consensus include the competitive success of contemporary British and American firms, the growing influence worldwide of the academic disciplines of economics and finance, the diffusion of share ownership in developed countries, and the emergence of active shareholder representatives and interest groups in major jurisdictions. Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the "end of history" for corporate law.

The ideology of shareholder primacy is likely to press all major jurisdictions toward similar rules of corporate law and practice. Although some differences may persist as a result of institutional or historical contingencies, the bulk of legal development worldwide will be toward a standard legal model of the corporation. For the most part, this development will enhance the efficiency of corporate laws and practices. In some cases, however, jurisdictions may converge on inefficient rules, as when the universal rule of limited shareholder liability permits shareholders to externalize the costs of corporate torts.

Abstract:
This article is the first chapter of "The Anatomy of Corporate Law: A Comparative and Functional Approach." The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law.

As the book's introductory chapter, this article describes the functions and boundaries of corporate law. We first detail the economic importance of the corporate form's hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. We then identify the major agency problems that attend the corporate form, and that, therefore, corporate law must address: conflicts between managers and shareholders, between controlling and minority shareholders, and between shareholders as a class and non-shareholder constituencies of the firm such as creditors and employees. In our view, corporate law serves in part to accommodate contract and property law to the corporate form and, in substantial part, to address the agency problems that are associated with this form. Corporate law includes not only the law of public and private companies (such as the German GmbH and the French SARL) but also much of what is traditionally considered to be securities regulation. Each of these bodies of law safeguards the scope of business discretion for corporate controllers while also restricting this discretion where the risk of opportunism vis-a-vis shareholder and non-shareholder constituencies is particularly acute.

In addition to Chapter 1, Chapter 2 of the Anatomy of Corporate Law, "Strategies for Mitigating Agency Problems" will be available (full text) on the SSRN.

The abstracts for Chapter 3: The Basic Governance Structure; Chapter 4: Creditor Protection; Chapter 5: Related Party Transactions; Chapter 6: Significant Corporate Actions; Chapter 7: Control Transactions; Chapter 8: Issuers and Investor Protection; Chapter 9: Beyond the Anatomy will also be available on the SSRN.

Corporation, agency problem, corporate law, corporate regulation, corporate governance, securities law, limited liability

Abstract:
This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. We describe the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, we analyze the consequences and agency costs of these arrangements. In particular, we show that they have the potential to create very large agency costs—costs that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies. The agency costs of these structures, we suggest, are also likely to exceed the agency costs of attending highly leveraged capital structures. Finally, we put forward an agenda for research concerning structures separating control from cash flow rights.

Pyramids, dual-class, cross-ownership, cash flow nights, votes, agency costs, corporate governance, law and finance

Abstract:
In every developed market economy, the law provides for a set of standard form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this essay we ask whether organizational law serves, in addition, some more essential role, permitting the creation of relationships that could not practicably be formed just by contract.

The answer we offer is that organizational law goes beyond contract law in one critical respect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries - a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: it involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of singular importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law - which is essentially a property-law-type function - has largely escaped notice, much less analysis, in both the legal and the economics literature.

Asset partitioning, legal entities, limited liability, property rights

Abstract:
In every developed market economy, the law provides for a set of standard form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this essay we ask whether organizational law serves, in addition, some more essential role, permitting the creation of relationships that could not practicably be formed just by contract.

The answer we offer is that organizational law goes beyond contract law in one critical respect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries ? a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: it involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of singular importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law ? which is essentially a property-law-type function ? has largely escaped notice, much less analysis, in both the legal and the economics literature.

Abstract:
This study elucidates the origins of entityshielding, a term that refers to rules that protect a firm's assets from thepersonal creditors of its owners. Following a discussion of the economicbenefits and costs of entity shielding, a survey of four Western commercialsocieties (ancient Rome, medieval and Renaissance Italy, early modern England,and the contemporary United States) is conducted in order to trace theevolution of entity shielding. Although Roman law used entity shielding sparingly, medieval Italy embracedweak entity shielding while resisting strong shielding for general-purposecommercial firms due to cost factors. In seventeenth-century England, theexpanding jurisdiction of nationwide courts andthe development ofpartnership and trust law led to the rise of entity shielding under Englishlaw. In the United States today, a confluence of legal, accounting, and valuationdevelopments has made the costs of protecting creditors and owners manageablefor even the smallest limited liability companies and closely heldcorporations. Clearly, cost factors have played a prominent role in thedevelopment of entity shielding throughout Western history.(SAA)

Legal protection, Limited liability companies (LLC), Asset management, Firm ownership, Legal systems

Abstract:
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call entity shielding, is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-à-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th-19th centuries, and the United States from the 19th century to the present.

Abstract:
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call "entity shielding," is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-a-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th-19th centuries, and the United States from the 19th century to the present.

Corporations, Partnerships, Companies, History of the Firm, Entity Shielding, Limited Liability, Legal Entities, Bankruptcy

Abstract:
This article is the second chapter of a book authored by R. Kraakman, P. Davies, H. Hansmann, G. Hertig, K. Hopt, H. Kanda, and E. Rock, "The Anatomy of Corporate Law: A Comparative and Functional Approach," (Oxford University Press 2004). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law.

"Agency Problems and Legal Strategies" establishes the analytical framework for the book as a whole. After further elaborating the agency problems that motivate corporate law, this chapter identifies five legal strategies that the law employs to address these problems. Describing these strategies allows us to more accurately map legal similarities and differences across jurisdictions. Some legal strategies are "regulatory" insofar as they directly constrain the actions of corporate actors: for example, a standard of behavior such as a director's duty of loyalty and care. Other legal strategies are "governance-based" insofar as they channel the distribution of power and payoffs within companies to reduce opportunism. For example, the law may accord direct decision rights to a vulnerable corporate constituency, as when it requires shareholder approval of mergers. Alternatively, the law may assign appointment rights over top managers to a vulnerable constituency, as when it accords shareholders - or in some jurisdictions, employees - the power to select corporate directors. Finally, the law may attempt to shape the incentives of managers or controlling shareholders, as when it regulates compensation or prescribes an equal treatment norm such as the rule that dividends must be paid out ratably.

In addition to Chapter 2, Chapter 1 "What is Corporate Law" is available in full text on the SSRN at http://ssrn.com/abstract=568623.

The abstracts for Chapter 3: The Basic Governance Structure; Chapter 4: Creditor protection (http://ssrn.com/abstract=568823); Chapter 5: Related Party Transactions; Chapter 6: Significant Corporate Actions; Chapter 7: Control Transactions; Chapter 8: Issuers and Investor Protection; Chapter 9: Beyond the Anatomy are also/will be available on the SSRN.

Agency, agency cost, agency problem, appointment rights, decision rights, control rights, regulation, corporate governance, equal treatment, trustee, mandatory disclosure

Abstract:
Twenty years ago we published a paper, "The Mechanisms of Market Efficiency," that sought to describe the institutional underpinnings of price formation in the securities market. Since that time, financial economics has moved forward on many fronts. The sub-discipline of behavioral finance has struggled to bring yet more descriptive realism to the study of financial markets. Two important questions are (1) how much has this new discipline changed our understanding of the efficiency and nature of the institutional mechanisms that set price in financial markets; and (2) how far does this discipline carry novel implications for the regulation of financial markets or corporate behavior more generally? We argue that, despite its heavy reliance on the psychology of cognitive bias, the principal contribution of behavioral finance is to enrich our understanding of market institutions rather than to present us with a fundamentally new paradigm of market behavior. In particular, the cognitive limitations of individual investors or noise traders are likely to matter to pricing behavior to the extent that they interact with - and are not offset by - the arbitrage mechanism in the market. The most important contribution of behavioral finance lies in sharpening our understanding of the limitations of the arbitrage mechanism. Even when cognitive bias does not have clear implications for securities prices, however, it may have important implications for policy. These implications are unlikely to arise in the area of corporate takeovers, as some have claimed, but they do arise in areas akin to consumer protection, as where cognitive bias might lead unsophisticated investors to construct dangerously undiversified retirement portfolios.

Abstract:
This paper develops a "self-enforcing" approach to drafting corporate law for emerging capitalist economies, based on a case study: a model statute that we helped to develop for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The paper describes the contextual features of emerging economies that make importing statutes from developed countries inappropriate, including the prevalence of controlled companies and the weakness of institutional, market, cultural, and legal constraints. Against this backdrop, we argue that the best legal strategy for protecting outside investors in emerging economies while simultaneously preserving the discretion of companies to invest is a self-enforcing model of corporate law. The self-enforcing model structures decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the examples of self-regulatory statutory provisions are a mandatory cumulative voting rule for the selection of directors, which assures that minority blockholders in controlled companies have board representation, and dual shareholder- and board-level approval procedures for self-interested transactions. The paper also examines how one can induce voluntary compliance and structure remedies in emerging economies, as well as the implications of the self-enforcing model for the ongoing debate over the efficiency of corporate law in developed economies.

Abstract:
It is easy sport to criticize the Delaware takeover cases as inconsistent with the empirical evidence, each other, and a sensible allocation of power between managers and shareholders. We in fact believe all of these things. Here, however, we offer a more sympathetic account of the core Delaware takeover cases. We argue that they reflect an often unstated "hidden value" model, in which a firm's true value is visible to corporate directors but not to shareholders or potential acquirers. We explore the assumptions needed to make the hidden value model internally consistent, and contrast those assumptions to those that underlie to a "visible value" model in which shareholders and potential acquirers are well informed about firm value or can be made so through disclosure by the target's board. (One outcome of carefully stating the hidden value model's assumptions is to expose the model's problems.) We also address and reject a "control premium" theory, sometimes invoked by the Delaware courts, in which control is a corporate asset that the law protects by imposing Revlon duties on the target's board. Assuming that the Delaware courts continue to embrace hidden value, we argue that takeover decisions should, at a minimum, be governed by a bilateral decision-making structure, in which a target board's initial decision to approve an acquisition, block a takeover bid, or choose one bidder over another must be approved or rejected by shareholders. Under this approach, target boards could adopt modest deal protections and say "no" to a takeover bid by adopting a poison pill, but could not say "never" by using a staggered board to block a bid after the bidder wins a proxy contest. The courts must also strictly limit efforts by target boards to stuff the ballot box or otherwise alter shareholder vote outcomes.

Abstract:
The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance. However, less is known about the institutional and personal correlates of CEO turnover. In this study, we find two CEO characteristics interact with turnover: tenure and ownership. We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns - "owners" (who have large personal shareholdings) and "managers" (who have smaller holdings). The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions. Turnover of all kinds is low during a CEO's first four years on the job. In contrast, once a CEO reaches his fifth year, retirements begin a multi-year increase and exits via merger exhibit a large one-year spike. These term effects are strongest for relatively young CEOs, and appear to be independent of such factors as firm performance or retirement norms. We also find that deals and retirements are partially related, but partially distinct, modes of CEO turnover in other respects, which are similar along some dimensions but sharply different along others.

CEO tenure, CEO turnover, acquisitions, retirement, CEO shareholdings, S&P 500 companies

Abstract:
The law of every jurisdiction defines a set of well-recognized forms that property rights can take, and burdens the creation of property rights that deviate from those conventional forms. In this respect, property law differs from contract law, which generally leaves parties free to craft contractual rights in any form they wish.

The law's restrictions on the forms of property rights have recently been rationalized as establishing an "optimal standardization" of property rights into a limited number of discrete forms to facilitate communication of the content of those rights to third parties. We argue, in contrast, that the law's limitations on property rights take the form, not of standardization, but rather of regulation of the notice required to establish different types of property rights. These limitations serve, not to facilitate communication of the content of rights, but to facilitate verification of ownership of the rights offered for conveyance. Property law generally addresses this verification problem by presuming that all property rights in an asset are held by a single owner, subject to the exception that a division of rights is enforceable if there is adequate notice to subsequent owners. Because the benefits of divided property rights are often low and the costs of verifying those rights are often high, property law takes an unaccommodating approach to all but a few basic categories of partial property rights.

In the course of developing our analysis, we offer a simple and clear characterization of the distinction between property rights and contract rights. We explore the varieties of verification rules by which the law establishes the forms of notice required to establish property rights, and illustrate the close relationship between verification rules and the forms of property rights that those rules support. We set out conditions for assessing the efficiency of alternative property rights regimes, and discuss the extent to which that efficiency calculus is actually reflected in property law. We survey some of the principal categories of partial property rights - including security interests, legal entities, coordinating rights in real and personal property, and intellectual property - showing how the structure of those rights reflects limits on the feasible verification rules. We also seek to clarify the relationship between property rights and contract rights, the connection between property rights and property rules, and the limits on specific performance as a remedy in contract.

property, contract, property rights, contract rights, verification, notice, numerus clausus

Abstract:
While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards. In this Paper, we consider the use of rewards to motivate director vigilance. Measures to enhance director liability are commonly perceived to be too costly. We, however, demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs. We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors. We conclude by providing preliminary sketches of two alternative reward regimes. While this paper focuses on outside directors, the implications of our analysis extend to other gatekeepers as well.

independent directors, liability, gatekeepers

Abstract:
This article is the first chapter of the second edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press, 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded.

As the book's introductory chapter, this article describes the functions and boundaries of corporate law. We first detail the economic importance of the corporate form's hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. We then identify the major agency problems that attend the corporate form, and that, therefore, corporate law must address: conflicts between managers and shareholders, between controlling and minority shareholders, and between shareholders as a class and non-shareholder constituencies of the firm such as creditors and employees. In our view, corporate law serves in part to accommodate contract and property law to the corporate form and, in substantial part, to address the agency problems that are associated with this form. We next consider the role of law in structuring corporate affairs so as to achieve these goals: whether, and to what extent standard forms - as opposed, on the one hand, to private contract, and on the other, to mandatory rules - are needed, and the role of regulatory competition. Whilst the ‘core’ features of corporate law are present in all - or almost all - legal systems, different systems have made different choices regarding the form and content of many other aspects of their corporate laws. To assist in explaining these, we review a range of forces that shape the development of corporate law, including domestic share ownership patterns. These forces operate differently across countries, implying that in some cases, complementary differences in corporate laws are functional. However, other such differences may be better explained as a response to purely distributional concerns.

In addition to Chapter 1, Chapter 2 of the Anatomy of Corporate Law (2nd ed.), Agency problems, Legal Strategies, and Enforcement is also available (full text) on SSRN at http://ssrn.com/abstract=1436555.

Corporation, agency problem, corporate law, corporate regulation, corporate governance, securities law, limited liability, regulatory competition, mandatory rules, comparative corporate law, evolution of corporate law

Abstract:
This article was written for a symposium on the occasion of the 25th anniversary of Martin Lipton's 1979 article, Takeover Bids in the Target's Boardroom. In our view, Takeover Bids is a Burkean take on a messy Schumpeterian world that, during 1980s, reached its apex in Drexel Burnham's democratization of finance through the junk bond market. But the irony is that today, long after the Delaware Supreme Court has adopted many of Lipton's views, there is a new market for corporate control that no longer poses the threats - or supports the opportunities - that the market of the 1980s created. Today's strategic bidders and their targets share the same boardroom views. And for precisely this reason, "just say no" is no longer the battle cry that it once was. It stirred the crowds in the past precisely because hostile takeovers could be credibly depicted as a sweeping threat to the status quo - a claim that no one would make about today's strategic bidders. The market for corporate control now is a process of peer review, rather than an instrument of systemic change. What is lost as a result is just what, in the conservative view, has been gained: the capacity of the market for corporate control to ignite the dynamism that in our view has served the U.S. economy so well. Although Lipton may still lose today's battle to allow targets to just say no to intra-establishment takeovers, he will still have won the larger war. For now, at least, boardrooms are insulated from much of the force of a truly Schumpeterian market in corporate control of the sort we briefly glimpsed during the 1980s.

Takeovers, defensive tactics

Abstract:
The many legal forms for business organisations that first appeared in the United States during the last thirty years - the limited liability company (LLC), the limited liability partnership (LLP), the limited liability limited partnership (LLLP) and the statutory business trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business organisation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of the continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction. This article first develops this argument in terms of the trade-off between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention, that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

corporations; partnerships; organizations; history; limited liability companies; legal entities; asset partitioning

Abstract:
The many legal forms for business organizations that first appeared in the U.S. during the last thirty years - the Limited Liability Company (LLC), the Limited Liability Partnership (LLP), the Limited Liability Limited Partnership (LLLP), and the statutory Business Trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business corporation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights, and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of a continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction.

The essay first develops this argument in terms of the tradeoff between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention - that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

Corporations, Partnerships, Organizations, History, Limited Liability Companies, Legal Entitites, Asset Partitioning

Abstract:
This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book (click on the download document button below), or one or more of its parts. It contains three parts:

(1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263141

(2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263142

(3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263143

Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com

The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037

Abstract:
This article is the second chapter of the second edition of "The Anatomy of Corporate Law: A Comparative and Functional Approach," by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded.

"Agency Problems and Legal Strategies" establishes the analytical framework for the book as a whole. After further elaborating the agency problems that motivate corporate law, this chapter identifies five legal strategies that the law employs to address these problems. Describing these strategies allows us to more accurately map legal similarities and differences across jurisdictions. Some legal strategies are "regulatory" insofar as they directly constrain the actions of corporate actors: for example, a standard of behavior such as a director's duty of loyalty and care. Other legal strategies are "governance-based" insofar as they channel the distribution of power and payoffs within companies to reduce opportunism. For example, the law may accord direct decision rights to a vulnerable corporate constituency, as when it requires shareholder approval of mergers. Alternatively, the law may assign appointment rights over top managers to a vulnerable constituency, as when it accords shareholders - or in some jurisdictions, employees - the power to select corporate directors. We then consider the relationship between different enforcement mechanisms - public agencies, private actors, and gatekeeper control - and the basic legal strategies outlined. We conclude that regulatory strategies require more extensive enforcement mechanisms - in the form of courts and procedural rules - to secure compliance than do governance strategies. However, governance strategies, for efficacy, require shareholders to be relatively concentrated so as to be able to exercise their decisional rights effectively.

In addition to Chapter 2, Chapter 1, "What is Corporate Law?," is available in full text on the SSRN at http://ssrn.com/abstract=1436551

Agency, agency cost, agency problem, appointment rights, decision rights, control rights, regulation, corporate governance, equal treatment, trustee, mandatory disclosure, enforcement, private enforcement, public enforcement, gatekeeper control

Abstract:
This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 or one or more of its parts. It contains three parts:

(1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from the download button below.

(2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263142

(3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263143

Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com

The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037

Abstract:
This piece provides our amicus curiae brief in the case of American Federation of State, County & Municipal Employees Pension Plan v. American International Group, which is now under consideration by the Second Circuit Court of Appeals. In this case, a shareholder submitted a proposal to amend the company's bylaws to require the company in certain circumstances to place candidates nominated by shareholders on the company's ballot, and the company sought to exclude this proposal from the ballot. We suggest in our amicus curiae brief that companies should not be allowed to exclude form the company ballot bylaw amendments concerning corporate elections. Prohibiting companies from doing so, we argue, is required by a reasonable interpretation of the proxy rules and necessary to advance the policy goals underlying the rules. As an appendix to the brief we attach a letter to the SEC sent by forty-eight law professors including ourselves that expresses a similar position.

Corporate elections, shareholder voting, proxy contests, access to the ballot, by-laws, by-law amendments, proxy fights, proxy contests, corporate governance, agency costs

Abstract:
This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 or one or more of its parts. It contains three parts:

(1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263141

(2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from the download button below.

(3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263143

Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com

The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037

Abstract:
Two decades ago, the Virginia Law Review published our article "The Mechanisms of Market Efficiency" (MOME), in which we tried to discern the institutional underpinnings of financial market efficiency. We concluded that the level of market efficiency with respect to a particular fact depends on which of several market mechanisms - universally informed trading, professionally informed trading, derivatively informed trading, and uninformed trading operates to reflect that fact in market price. Revisiting our article is particularly appropriate today. A new framework for evaluating the efficiency of the stock market, called "behavioral finance," and a growing number of empirical studies pose a serious challenge to the Efficient Markets Hypothesis. Twenty years have made us appropriately more skeptical of the efficiency of those institutions.

Market efficiency, financial market efficiency, universally informed trading, professionally informed trading, derivatievly informed trading, uninformed trading, behavioral finance, efficients markets hypothesis, securities and exchange, capital asset prices, capital markets, valuation

Abstract:
This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 or one or more of its parts. It contains three parts:

(1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263141

(2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263142

(3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book at the download button below.

Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com

The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037

Abstract:
This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. We describe the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, we analyze the consequences and agency costs of these arrangements. In particular, we show that they have the potential to create very large agency costs - costs that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies. The agency costs of these structures, we suggest, are also likely to exceed the agency costs of attending highly leveraged capital structures. Finally, we put forward an agenda for research concerning structures separating control from cash flow rights.

Abstract:
Summarizing the many thoughtful papers presented at this conference is a difficult task for an outside observer of European law reform. In lieu of bad comments on good papers, I offer instead my own observations on several of the conference's principal themes.

Creditor Protection, Company Law, Europe, European Company Law, Symposium Max Planck Institute, Ludwig Maximilians University

Abstract:
In this article we examine the structure of the legal regime that should govern a corporation's liability for crimes and intentional torts committed by its managers and other employees. This issue has gained much salience recently as reform initiatives increasingly replace strict liability with nuanced regimes that mitigate liability when firms undertake to monitor employees, and to investigate and report wrongdoing. In addition to inducing optimal activity levels, this article identifies four enforcement functions that corporate liability must often discharge: (1) inducing firms to sanction culpable agents; (2) inducing firms to thwart wrongdoing through preventive technologies and procedures; (3) inducing optimal policing measures such as monitoring, investigating, and reporting misconduct; and (4) and ensuring that employees find credible threats by firms to implement these policing measures. Our analysis reveals that neither traditional strict liability nor duty-based liability can induce firms to monitor, investigate or report wrongdoing optimally. We recommend that the law impose a mixed regime on firms instead. In the special case where firms can always credibly threaten to police their employees, a kind of sliding -- or adjusted -- form of strict liability appears to be the optimal mixed regime. In the general case, however, the optimal mixed regime is a form of composite liability, which holds firms strictly liable for all their agents' wrongs but substantially reduces this liability whenever firms satisfy their monitoring, investigation, and reporting duties. Employing our analysis, we analyze recent liability reform efforts, including the United States Sentencing Guidelines Governing the Sentencing of Organizations, prosecution guidelines for environmental crimes, and environmental audit privileges. We show that although the Guidelines are a step in the right direction, they do not provide firms with optimal incentives to police their employees. In addition, we are critical of the Environmental Protection Agency's new guidelines governing prosecutions of environmental crimes for similar reasons. Finally, we demonstrate that a composite liability regime is likely to be superior to the solution favored by some states of combining an environmental audit privilege with traditional vicarious strict liability for environmental wrongdoing.