• Selected
• Entire List

Abstract:
This article analyzes and evaluates the Sarbanes-Oxley Act and related legal changes and speculates as to how they are affecting director and officer conduct. On paper, the legal changes are notable but not earthshaking. A standard law and economics approach would suggest that changes in conduct should be relatively modest. Actual changes in conduct seem to be greater than the standard approach can explain, for two reasons. First, people are often subject to cognitive biases. The great attention paid to recent scandals and Sarbanes-Oxley, combined with a tendency to over-emphasize small risk and recent events, may be provoking an over-reaction to a perceived legal threat that in actuality is quite probably small. Second, Sarbanes-Oxley is helping strengthen a norm of active, independent director supervision of officers which was already emerging before the Act. In focusing on the effect of the law on norms, the paper emphasizes that corporations control agency costs and misbehavior not just through monitoring mechanisms, but also through self-control mechanisms that depend on agents obeying their fiduciary duties because they believe it is the right thing to do, rather than because they fear punishment if they do not.

Sarbanes-Oxley, fiduciary duty, officers, directors, agency

Abstract:
After the latest Disney decision, good faith seemed poised to take on a new and prominent role, either as an independent duty or as a component of one of the traditional fiduciary duties, loyalty or care. In the next case to arise, Stone v. Ritter, the Delaware Supreme Court quite specifically characterized the duty of good faith as part of the duty of loyalty. The Court also characterized Caremark, until then a paradigmatic duty of care case, as a duty of loyalty case. In our view, the court in Stone v. Ritter got it right, and indeed, should have gone further. It should have expanded more on the analytic underpinnings of the duty of good faith and better set the stage for a broader use of the doctrine in addressing the many cases involving problematic conduct by directors and officers that don't implicate the duty of loyalty as that duty has traditionally been conceived.

In our essay, we propose a way of understanding how good faith fits within the broader context of Delaware fiduciary duty cases. We see potential cases as arrayed along a continuum. At one end are traditional care cases; in these cases, the only conflict between directors and the corporation arises from the natural human tendency to not work as hard or carefully as one might when one is not reaping all the fruits of one's labors. At the other end are the traditional loyalty cases, where a decision-maker has a material pecuniary interest that directly conflicts with that of the corporation - for instance, where a director or officer is selling land to the corporation. In between are cases where director or officer objectivity is impaired, but less so than in traditional loyalty cases. The emerging law of good faith helps courts deal with such cases. We suggest that this law is developing at two levels of abstraction. Particular clusters of cases develop detailed guidance for certain recurring problematic situations - the adoption of takeover defenses, board responses to shareholder derivative suits, the approval of executive compensation, and so on. At the same time, a more general doctrine of good faith is emerging that helps courts deal with more unique circumstances or with emerging problematic business practices; the more general doctrine provides an expressive handle on which to ground future holdings and encourage the development of appropriate norms.

corporate governance, good faith, fiduciary duty, duty of loyalty, duty of care

Abstract:
Recent scholarship has begun to assess the role of intellectual property rights in the theory of the Coasean firm. Some of this scholarship has looked at the effects of intellectual property on decisions to "make or buy" inputs to production. Other scholarship has looked at the effects of intellectual property on allocation of resources between employees and the firm. In this paper, we integrate these two lines of scholarship, positing a "Goldilocks hypothesis" for the proper disposition of intellectual property rights. We argue that to properly allocate resources within the firm, property rights must be calibrated so as to avoid on the one hand misappropriation of firm resources when rights are inadequate, and on the other hand dissipation of employee incentives when rights are excessive. Similarly, we argue that in order to properly manage transactions costs at the edge of firms, property rights must be calibrated so as to avoid on the one hand inefficient integration into the firm of specialized functions when property rights are inadequate, and on the other hand a fragmented anti-commons of specialty firms when property rights are excessive. Thus, we conclude that in order to contribute to the efficient structure of firms, intellectual property rights can be neither too weak nor too strong, but must be constituted "just right."

intellectual property, patent, copyright, trade secrecy, theory of the firm

Abstract:
The basic remedy for breach of a bargain contract is expectation damages, which puts the injured party where she would have been had the contract been performed. It is generally accepted that the expectation measure provides efficient incentives to a bargain-promisor. Beginning about twenty years ago, however, law-and-economics scholars developed a model of damages which showed that the expectation measure can provide inefficient incentives to a bargain-promisee. The theory is that the expectation measure insures the promisee's reliance, and may thereby cause the promisee to overrely - that is, to invest more heavily in reliance than efficiency requires. The theory of overreliance is not limited in its application to the expectation measure, but it is most salient to that measure, just because the expectation measure is the gold standard in a bargain context.

The model upon which the theory of overreliance is based provides an extremely important insight into damages. As time went on, however, law-and-economics scholars started to lose sight of the fact that the model was just that, a model, and began to widely assume, explicitly or implicitly, that the expectation measure not only can but does provide inefficient incentives to promisees. The objective of this Article is to rehabilitate the expectation measure of damages, by showing that when institutional considerations are taken into account the theory of overreliance has virtually no real-world application. In the great majority of cases, overreliance normally cannot occur, because of the way in which the expectation measure is applied in specific contexts, because of the economics of transactions, or both. Overreliance is also unlikely to occur even in most of the residual cases, because as a result of litigation risks and litigation costs the standard expectation measure does not insure the promisee's reliance. There are a few remaining real-world cases in which overreliance might occur. In principle, the standard expectation measure could be modified to prevent overreliance in those few cases. However, the benefits of such a modification would be very low, partly because overreliance is so unlikely occur, and partly because where overreliance does occur it is likely to involve only small, marginal increments. In contrast, the costs of a modified expectation measure would be very high, because of the direct costs that would be entailed in applying the theory of overreliance to actual cases, and the indirect effect of those costs on the behavior of contracting parties.

Abstract:
Since the landmark State Street decision of the United States Court of Appeals for the Federal Circuit, patentable subject matter has encompassed business methods, including tax investment strategies. Patents provide approximately twenty years of exclusive rights in the claimed method, in return for public disclosure in a published patent. Typically, the efficacy of specialized investment strategies will be diminished as they become generally known and so widely practiced; for this reason, many tax investment methods have been implemented under confidentiality agreements in order to prevent them from becoming widely practiced. However, patenting of such strategies may allow them to be practiced without confidentiality agreements, as the exclusive rights in the patent prevent the method from being generally adopted.

We examine the effects of the shift from confidentiality to exclusive rights by drawing upon our previous work regarding intellectual property and the theory of the firm. The theory of the firm predicts several effects of such a shift from use of confidentiality to use of patents, due to the potentially lowered transactions costs associated with the patent. For example, partner firms that are necessarily affiliated with investment transactions formerly had to be prevented from unauthorized use of knowledge gained in the transaction. This could be accomplished by means of confidentiality agreements, but such agreements are cumbersome and difficult to enforce. The high costs of negotiating, policing, and enforcing confidentiality agreements may have created pressure to bring as much of the transaction as possible in house. Patenting of the transactions may lower such costs, allowing more of the transaction to be outsourced.

Similarly, patenting may have an effect on the hiring, retention, and mobility of employees involved in such transactions. Employees who were skilled at such transactions formerly may have had difficulty changing firms, as they would be unable to take with them specific transactional skills learned under confidentiality agreements, or even describe such skills to a new employer. Patenting of the transactions removes the veil of confidentiality, allowing employees to discuss their skills with potential employers, even if the specific transactions cannot be used by the new employer. Assuming that tax shelter patents will be with us so long as there are business method patents, and that business method patents are for all practical purposes here to stay, we discuss the likely outcomes that tax shelter patents will have on the structure of investment firms and the mobility of skilled employees between such firms.

patents, business methods, investment strategy, tax shelters, taxation, tax patents, intellectual property, theory of the firm

Abstract:
This paper examines how the Supreme Court's decision in Lawrence v. Texas (the gay sodomy case) affects laws regulating other forms of sexual behavior, focusing in particular on consensual adult incest. It engages in and compares two kinds of inquiries: formalist and realist. The formalist inquiry attempts to make sense of Lawrence using traditional legal materials. One must identify the implicated individual liberty interest and examine the extent to which the interest is constitutionally protected. The paper identifies three basic approaches to identifying liberty interests, all with some support in the Court's history. The "conservative Burkean" approach recognizes a right only if it can be clearly shown that the our society has specifically and widely acknowledged the right for a long time. The "Millian" approach forbids the state from regulating behavior which directly affects only those who engage in it and does not harm anyone else. The "liberal Burkean" approach looks to our history and is unwilling to impose a simple general harm principle, but is willing to allow that over time we may come to recognize new sorts of interests that should be protected. The paper argues that the Court has taken a Goldilocks position: conservative Burkeanism is too restrictive, Millianism is too expansive, and liberal Burkeanism is just right. After identifying the liberty interest, one must identify the state's interests in regulating that behavior. Lawrence is ambiguous as to what level of scrutiny applies to the government's asserted interests. The formalist analysis ends by comparing the individual liberty interest with the asserted state interests. Several interests might justify laws against consensual adult incest, including the risk of genetic defects, protecting relations within the family from becoming overly-sexualized, and reinforcing moral norms. All of these justifications have problems, though. The formalist analysis is indeterminate, but suggests that core forms of incest are probably constitutional, although laws against incest between cousins and perhaps against incest between step-relatives may be more vulnerable to judicial review.

The realist inquiry views the Court as a political institution and asks how it is likely to respond to future cases given both the preferences of its members and the political constraints which they face. This inquiry suggests that the Court is less likely to strike down incest laws than sodomy laws, both because there is no major political group attempting to repeal incest laws and because general social norms against incest have weakened less than those against sodomy, although that may be less true for non-core forms of incest such as incest between cousins. The realist inquiry thus also suggests that the Court would not strike down the core incest laws, and this conclusion seems firmer than the formalist analysis. If the Court ever does protect incest, it will happen only when most Americans are unwilling to throw people in jail for that behavior.

Lawrence, incest, sodomy, liberty, substantive due process, formalism, realism

Abstract:
Shareholder bylaws limiting or directing board action raise a tough and fascinating question of statutory interpretation under state law as well as an important policy question. In particular, over the last decade shareholders have sought to use bylaws to limit poison pills and to grant shareholders access to the corporate proxy materials to nominate directors. This paper argues that an expansive, although not unlimited, shareholder power to enact bylaws is both a plausible interpretation of Delaware's statutory scheme and desirable as a policy matter. Shareholder bylaws that set general rules of corporate governance and procedure should be valid unless more specific statutory provisions remove a specific matter from the bylaw power. Applied to poison pill and proxy access bylaws, both are valid under the general analysis, although poison pill bylaws may not be valid due to a more specific provision of Delaware law. The SEC should require boards to include bylaw proposals unless the particular proposal is clearly invalid under relevant state law. Board bylaws and certificate provisions could limit shareholder bylaws in some corporations, but it is likely that in many corporations boards will not be willing or able to enact such limits.

bylaws, proxy access, shareholder nominations, poison pills

Abstract:
This Article questions the widespread scholarly view that maximizing economic efficiency should be the sole goal of the intellectual property and antitrust laws. We propose that the law should also encourage a fair division of the economic surplus, at least by considering it as a tiebreaker when the dictates of economic efficiency are ambiguous or controversial.

We begin by surveying some challenges that have been made to the theoretical underpinnings of exclusive reliance on economic efficiency, but go on to argue that, even on the terms of welfarism, some regard for distributive fairness is appropriate. First, since fairness is a widely shared social value, rules that promote a fair distribution of the economic surplus are likely to mimic what rational people would voluntarily have agreed to ex ante. Therefore, rules that favor fairness take into account the fact that a fair distribution is a social good for which people are willing to bargain. Second, rules based on fairness often lead to the economically efficient result even on welfarist terms. For example, where there are increasing returns to scale, potential producers and customers would agree ex ante to a fair division of surplus. Such an ex ante agreement makes it easier for producers to gain a critical toehold in the market, fosters expansion, and allows consumers to receive more benefits from economies of scale. Therefore, a rule that favors fairness when the economically efficient rule is ambiguous may itself be the efficient rule.

The Article concludes with an exploration of how a tiebreaker rule in favor of fairness would affect the analysis of intellectual property issues. The first conclusion is that there should be a legal presumption in favor of open standards except where efficiency concerns clearly dictate otherwise. The second conclusion is that the law should disfavor price discrimination and similar conduct by rights holders, again with the qualification that efficiency concerns may override this presumption.

Fairness, intellectual property, antitrust, open standards, price discrimination

Abstract:
This article assesses the recent Disney decisions, and argues that on the facts presented, the decision was probably correct. However, the court squandered an opportunity: to develop and articulate an appropriate doctrinal approach for the issues the case presented. The case was an excellent opportunity for courts to provide some means to constrain executive compensation, and more generally to address problems caused by "structural bias," the cozy relationship directors may have with officers (and, less often, controlling shareholders). In such cases, there is no breach of the duty of loyalty as that duty has been articulated. However, the duty of care rubric doesn't seem properly applicable either. What the directors have done isn't to simply be careless; rather, they seem to have gone through some motions of decision making when their decision was, given their ties to the officers, a foregone conclusion. The court created space for a separate doctrine of good faith, but it provided little guidance as to how that doctrine might work, even in cases like Disney itself. We suggest an extension of the duty of good faith that could provide a bit more bite. Plaintiffs should be allowed to demonstrate bad faith with a two-part showing: (1) the decision occurred within an environment of structural bias, and (2) influenced by that structural bias, the directors were grossly negligent in making the decision. Even if a court were to follow our suggestion, most cases would turn out as they historically have, with defendant victories. But we think that articulation by the courts of a doctrine contemplating more scrutiny for decisions made in an environment of structural bias may help fuel a Caremark-like shift in norms and practices, directed by a combination of legal and extra-legal forces.

good faith, structural bias, fiduciary duty, executive compensation

Abstract:
Most corporate law scholars who suggest reforming executive compensation worry about corporate governance problems that arise out of poor compensation design. Most politicians who suggest reforming executive compensation seem as or more worried about growing economic inequality. This essay briefly considers two arguments justifying legal scholars in ignoring the concern with inequality. The first argument says that we should address inequality concerns only through tax and transfer policy. This essay responds that politics may dictate sometimes trying to reduce inequality through other means as well. The second argument claims that high pay for the top executives of public corporations has played only a small role in the growth of economic inequality. This essay finds this argument much more persuasive, but suggests reasons why further empirical investigation may still show that reforming executive compensation may be a modestly important part of a broader package of reforms to reduce inequality.

executive compensation, inequality, corporate governance

Abstract:
Through the Sarbanes-Oxley Act ("SOx"), Congress appeals to two groups, regulators and private actors. Most of the new duties and liabilities that SOx creates have limited legal substance, advancing little beyond previous rules. However, we must look further to see how regulators and private actors are responding. The SEC's rulemaking efforts directly required under SOx have not been inspiring, but SOx has helped prod the SEC into rulemaking which potentially could prove more important than all of the provisions of SOx combined: rules giving shareholders the ability to nominate directors using the corporation's proxy tools. The New York Stock Exchange and Nasdaq, prodded by the SEC in an atmosphere dominated by political pressure which led to SOx, have passed rules concerning director independence and board committee structure and miscellaneous other topics. Three recent cases suggest Delaware is deferring less to director decisions. These responses illustrate the complexity of corporate law rulemaking today. Congress ultimately has the ability to set the rules, but usually lacks the expertise and inclination. SOx showed that it may now have the inclination, though the expertise is still questionable. In response, other regulators are creating new rules.

SOx also appeals to corporate officers and the directors and other gatekeepers who supposedly monitor them (this paper focuses on officers and directors). The ultimate point of most of the new rules is to induce officers and directors to act more carefully and conscientiously. Conventional law and economic analysis suggests a cynical response: companies will respond with formalities, but individuals will not work harder and more faithfully. However, fearful overreaction or strengthened norms of good behavior may lead to a more earnest, substantive response. Evidence to date suggests a complicated mix of cynicism and earnestness.

Finally, SOx appeals, that is, it is an appealing reform. The new rules and induced behavioral changes supplement and strengthen an emerging system of a strong, monitoring board. The process by which new rules have emerged helps enhance its appeal: although Congress has made a highly visible show of action, it has actually left it up to better-informed regulators and private actors to determine the detailed response to the scandals. This process has left much discretion in the hands of the best-informed parties, while inducing them to make needed reforms out of fear that if they do not, worse laws will follow.

Abstract:
Antitrust opinions rely heavily on economic analysis but little on statutory text. Surprisingly, this text-free mode of interpretation is warmly endorsed by leading textualists such as Justice Scalia and Judge Easterbrook. We argue that their approach to antitrust is irreconcilable with their general theories of statutory interpretation. Their theory is that the antitrust texts are essentially lacking in content, operating as a delegation of policymaking authority to courts. We undertake a close textualist analysis of the Sherman Act and later antitrust statutes. For the conscientious textualist, the statutory texts are far from being blank checks. For instance, textualists have analyzed common law terms in other statutes far more cautiously than they interpreted section 1 of the Sherman Act, either applying the majority view of the state courts at the time of enactment or choosing among current variants of state common law. Nor do the texts of the antitrust statutes evidence a delegation to the courts - on the contrary, the only clear delegation of antitrust authority is to the FTC. Thus, textualists either need to rethink their theory of statutory interpretation or reconsider their allegiance to contemporary antitrust doctrine.

antitrust, textualism, statutory interpretation

Abstract:
This paper is a review and critique, in dialogue form, of Fairness versus Welfare, by Louis Kaplow and Steven Shavell. It raises a number of concerns about the book. Kaplow and Shavell argue that all normative legal policymaking arguments should be grounded in a welfarist approach, that is, they should focus only on how different policies will affect human welfare. They produce a formal argument that any fairness theory (which they define as a theory which does not rely exclusively on welfare) will under some circumstances prefer a policy which makes everyone worse off, and hence we should reject all fairness theories.

The book's argument is tautological and convincing only to those whose intuitions already favor welfare over fairness; indeed, Kaplow and Shavell's formal proof of the inconsistency between fairness and welfare can equally validly be used to argue that one should follow a fairness approach rather than the welfarist approach which Kaplow and Shavell prefer. Kaplow and Shavell argue that consistency requires that if one rejects fairness in favor of welfare in the examples they present, then one is committed to rejecting fairness in favor of welfare in all instances. However, there are other, well-known examples where utilitarian and welfarist approaches lead to objectionable results - Kaplow and Shavell's notion of consistency suggests that we should therefore reject welfarism in all instances. Kaplow and Shavell try to explain away intuitions favoring fairness as having an evolutionary origin - in most instances, fairness intuitions and norms advance efficiency. Kaplow and Shavell suggest that therefore when the fairness norms and efficiency conflict, efficiency should triumph. The paper argues that such evolutionary explanations are not always right, and even when they are, we may have other reasons to follow fairness norms anyway. Moreover, the link between fairness norms and efficiency suggests reasons why universal adoption of a welfare approach may reduce welfare.

Fairness, welfare, utilitarianism, Pareto efficiency

Abstract:
The New Corporate Governance in Theory and Practice, a new book by Stephen Bainbridge, pulls together the leading arguments for director primacy that Bainbridge has made in a series of articles. In his core argument, Bainbridge uses theoretical work by Kenneth Arrow to explain the attractions of the separation of ownership and control with a centralized hierarchy headed by a board of directors. Bainbridge posits that achieving an optimal tradeoff between authority and accountability is the central problem of corporate law. He uses a key passage from Arrow to argue that in making this tradeoff, lawmakers should always make a presumption in favoring of preserving managerial authority. This paper examines Bainbridge's argument, and shows that he does not succeed in justifying this presumption. Arrow's argument does persuasively show why rules that lead to constant review of all board decisions would effectively eliminate board authority, and that this would be unattractive. However, none of the major pro-accountability reform proposals currently in play comes even close to eliminating board authority. Arrow's argument is not able to tell us whether reform in favor of somewhat more accountability at the expense of some, but far from a total, loss in authority is a good idea or not. That is, Bainbridge's use of Arrow does not help us determine the wisdom of current reform proposals. Bainbridge's attempt to use Arrow thus falls far short of his target. Bainbridge has other, less original, arguments which supplement his core argument for board authority. This paper considers the leading supplementary arguments as well, and also finds them wanting. The paper ultimately moves beyond a critique of Bainbridge to argue more affirmatively for greater accountability for boards.

corporate governance, authority, accountability, director primacy, Arrow, Bainbridge, Delaware, Journal, Corporate Law, Stephen, Bainbridge, Kenneth, Arrow, director, primacy

Abstract:
The success of Chinese township-village enterprises (TVEs) poses a puzzle for a property rights approach to the theory of the firm, since no one really holds well-defined, transferable property rights to control and claim the residual profits of TVEs. TVEs also pose a second puzzle: in the last five or seven years, they have started to experience serious problems, despite reforms which have improved TVEs from a property rights perspective. This paper takes ideas from property rights and institutional approaches to economics and examines whether those ideas can help explain both of these puzzles. As to the first puzzle, reforms in the seventies and eighties created product market competition and gave local governmental officials and TVE managers enough of a stake in the success of the enterprises to encourage investment in them. TVEs were less imperfect than their leading alternatives, state-owned enterprises and private enterprises, the latter of which faced much discrimination. As to the second puzzle, although property rights reforms have improved TVE performance, reforms reducing the discrimination against private enterprises have made them more attractive.

The paper also draws four general lessons from the TVE experience about the relationship between property rights and economic development. First, defining property rights properly is important to development, but other institutions (e.g. norms, financial institutions, capital markets, labor markets, political structure) are also quite important. Second, would-be reformers need to carefully consider the political constraints facing proposed changes in property rights. Third, property rights reforms are at least as much the effect of economic development as they are its cause. Fourth, the development path followed may affect the end states which can be feasibly reached.

Township-village enterprises, property rights, economic development, institutional theory, theory of the firm

Abstract:
The paper compares the effects of corporate constituency statutes versus employee involvement in corporate governance, using a simple model to consider interactions between shareholders, employees, and managers. Both constituency statutes and employee governance tend to lead to a redistribution from shareholders to employees. However, constituency statutes do so at the cost of weakening limits on managerial misbehavior, thereby reducing social welfare. In contrast, employee governance strengthens the limits on managerial misbehavior, and hence is potentially more desirable than constituency statutes.

corporate governance, constituency statutes, employee governance

Abstract:
The paper compares the effects of corporate constituency statutes versus employee involvement in corporate governance, using a simple model to consider interactions between shareholders, employees, and managers. Both constituency statutes and employee governance tend to lead to a redistribution from shareholders to employees. However, constituency statutes do so at the cost of weakening limits on managerial misbehavior, thereby reducing social welfare. In contrast, employee governance strengthens the limits on managerial misbehavior, and hence is potentially more desirable than constituency statutes.

Abstract:
Recent contributions to the literature on U.S. corporate federalism question whether any competition between states actually exists for corporate charters. The existence of network effects calls into question whether serious competition is possible or even desirable. This paper argues that network effects do limit competition, but some competition does remain, and it is desirable. One benefit is that competition provides a range of laws, with differing laws appealing to differing business organizations.

State competition also still encourages increased legal innovation and adaptation. It is probably true that most states other than Delaware do not actively compete to become a destination for corporate charters. However, all states still have good reasons for updating their corporate laws to better serve the companies which do incorporate within their jurisdiction. Delaware has strong incentives to respond to improvements made by other states. All states also get an important informational benefit from state competition - they can observe how forty-nine other states are adapting their laws, and how companies respond to those changes.

The federal government also makes much important corporate law, and the threat of federal intervention limits what Delaware can do. Since the federal government is likely to be somewhat less pro-management than Delaware, its presence helps stop overly pro-managerial developments in state law while still leaving room for much lawmaking and experimentation at the state level. The federal system of incorporation thus does a rather elegant job of achieving the efficiencies of network effects while still remaining dynamic and flexible. But the achievement is always messy and ambiguous, because there is no good way to achieve everything which we would like to achieve in setting corporate law.

Corporate law, federalism, network effects, state competition

Abstract:
For decades, American legal scholars have debated over the implications of allowing corporations to choose in which state they will incorporate, irrespective of where they do business. Until recently the debate has centered almost exclusively on whether the managers who choose where to incorporate have incentive to choose a state whose laws favor managers to the disadvantage of shareholders (the "race to the bottom" thesis) or whether their incentives are to choose states whose laws treat shareholders properly (the "race to the top" thesis). Recently, some scholars have questioned whether the state charter competition process will necessarily lead to an optimal choice from the point of view of corporate decisionmakers, whatever the incentives of those decisionmakers might be. The presence of a variety of network effects may cause corporations to incorporate in a state which already has taken the lead in the charter race, even if some other states might offer better substantive law. For instance, corporations may prefer a state which has a well-developed, and hence more predictable, body of corporate law, or they may prefer to appear before judges who from much experience are familiar with corporate law matters. These effects may cause the whole system to get stuck with sub-optimal laws dominating.

This paper takes the presence of significant network effects in corporate charter competition as a given. It then asks whether allowing competition between states is an attractive option, and how much competition is best. Even if network effects create the possibility of getting stuck with a sub-optimal dominant state, allowing competition may improve the odds of reaching a good corporate legal system. The paper presents a very simple model of charter competition as a way to start thinking about the issues involved. Within that model, some competition tends to lead to better results than no competition at all. However, more competition is not necessarily better than less, and a very large amount of competition may be as bad as no competition at all.

The paper considers many questions that remain quite open in this area. It concludes by posing the question of how to make empirical recommendations where theory and empirical evidence suggest no clear answers. It suggests that little change from the present structure is likely, and that critics have yet to make a persuasive case for such change.

Delaware, state competition, corporate charters, network effects, lock-in, race to the bottom, path dependence

Abstract:
Economists and scholars in law and economics typically assume that preferences are exogenous; that is, that the policies being considered will not change the preferences of economic actors. This assumption is wrong for many policies that law and economics scholars study. This essay examines some of the consequences for normative analysis if we instead assume that preferences are endogenous. It describes some of the puzzles that occur, and classifies them in two categories: adaptive preferences, and maladaptive preferences. Adaptive preferences occur as people adapt to the status quo in ways that call into question whether we should really honor their preferences - doing so may justify a status quo that is quite problematic. Maladaptive preferences occur as people fail to correctly predict and adapt to the environment, thereby hurting themselves. There are a variety of partial responses to these puzzles that we can use within the welfare economics tradition. Some possible responses include: Pareto self-improvements, no-regret improvements, scrubbed-up preferences, Becker's approach to utility functions, and constrained efficiency. None of these concepts on its own fully solves our problems. Indeed, even collectively they fall short. Still, these concepts help. They allow us to analyze pragmatically in many circumstances where the puzzles of endogenous preferences arise.

endogenous preferences, welfare, adapative preferences, maladaptive preferences, Pareto self-improvement

Abstract:
Corporate law scholarship has long debated the extent to which corporate law rules are default or mandatory. It has paid less attention to corporate law's "altering rules," which prescribe what a corporation must do for its attempt at opting out of a given default rule to be recognized as legally valid. Altering rules may be more or less sticky, that is, they may make it easier or harder to opt out of a given default rule. They also help allocate authority among corporate constituency groups. Descriptively, a focus on altering rules provides a more detailed and nuanced understanding of the contours of corporate law than the simple default/mandatory dichotomy. Normatively, a focus on altering rules allows us to see that in many cases it may be desirable to make it moderately hard to opt out of some default rules. This provides more regulatory guidance and shareholder protection than a Teflon altering rule, but still leaves the law more flexible than with mandatory rules. After introducing a variety of useful distinctions and considering the main policy factors that argue for more or less sticky altering rules, the paper applies the altering rule concept to a variety of corporate law issues: bylaws versus charters, supermajority rules, sunset provisions, the duty of loyalty, the doctrine of independent significance, reincorporation, close corporation rules, public corporation rules, and the choice between corporate law and other sorts of business association law. The altering rule concept thus provides a unifying perspective on many parts of the law. It also suggests a more complicated and nuanced picture than a simplistic version of corporate law contractarianism. If they are persistent enough corporations can indeed opt out of most of the rules that corporate law sets for them, but in many instances we do not make it very easy to do so. Corporate law thereby plays a much stronger guiding role than the simple contractarian picture would suggest.

default rules, altering rules, corporate governance, contractarian, enabling statutes

Abstract:
This paper argues for employee primacy in corporate governance. "Employee primacy" has two elements: ultimate employee control over the corporation, and an objective function of maximizing employee welfare. In methodology, the argument draws upon both economics, but understood more broadly than in most corporate law scholarship, and upon civic republican ideas. The paper presents four different arguments favoring employee primacy. (1) Employee primacy is likely to create the most surplus within the corporation due to incentive effects and the wealth of information that employees possess. (2) Corporations characterized by employee primacy are more likely to be socially responsible, and hence generate fewer negative externalities, than corporations characterized by shareholder primacy. (3) Employee primacy will lead to a more egalitarian distribution of wealth and political power. (4) Employee primacy will produce citizens better fit to participate within a political democracy.

shareholder primacy, employee primacy, law and economics, civic republicanism, theory of the firm, corporate social responsibility, redistribution, endogenous preferences

Abstract:
This paper considers how some recent developments affect our understanding of the relative superiority of our mixed federal system of corporate lawmaking as compared with either a purely state system or a purely national one. The mixed federal system can potentially capture the gains of efficiency, flexibility, and responsiveness from state competition, while using the threat, and occasional reality, of federal intervention to reduce the tendency to managerialism of Delaware. The paper argues that on the whole this story fits the reaction to the corporate scandals of the nineties. The Sarbanes-Oxley Act moved regulation in a less managerialist direction, and Delaware courts have responded, albeit subtly.

The paper also considers evidence for counter-stories. It may be that federal intervention has gone too far, and led to a worse outcome than the states on their own would have achieved. Some claim that Sarbanes-Oxley is an example of such federal over-reach. That might be true, but the evidence to date does not clearly support such a conclusion. On the other side, the ongoing leading role of Delaware in corporate lawmaking might be inhibiting the system from reacting as well as a purely national system would. The paper considers this possibility in the context of developments in the regulation of shareholder access to corporate proxy material for making board nominations. This skirmish remains in progress, but the latest battle, the Second Circuit opinion in AFSCME v. AIG, suggests the mixed federal system is working pretty well.

Sarbanes Oxley, corporate governance, federalism, proxy voting, securities law, corporate law

Abstract:
Recent contributions to the literature on United States (U.S.) corporate federalism question whether states compete at all for corporate charters. Network effects call into question whether serious competition is possible or desirable. This paper argues that federalism in establishing corporate law nonetheless remains both possible and desirable. One benefit is that federalism provides a range of laws, with differing laws appealing to differing business organizations.

Federalism also encourages increased legal innovation and adaptation. It is probably true that most states other than Delaware do not actively compete to become a destination for corporate charters. However, all states still have good reasons for updating their corporate laws to better serve the companies which do incorporate within their jurisdiction. Delaware has strong incentives to respond to improvements made by other states. All states also get an important informational benefit from federalism - they can observe how forty-nine other states are adapting their laws and how companies respond to those changes. Delaware's dominance does make it more prone to favor the interests of managers and less prone to consider the interests of other constituencies such as employees. However, the threat of intervention by national actors such as Congress, the Securities and Exchange Commission (SEC), and stock exchanges helps prevent Delaware from becoming too managerialist in its laws.

corporate law, federalism, race to the bottom

Abstract:
Written as part of a symposium on the Delaware General Corporation Law in the twenty-first century, this paper suggests four reforms to the DGCL. Each of these reforms would help solidify the ability of shareholders to effectively adopt bylaws that regulate decisionmaking procedure and corporate governance. The four reforms are:

* Amend section 109(b), and perhaps 141(a), to clarify that bylaws may set procedural and governance rules, but may not be used to make substantive business decisions; * Amend section 141(a) to provide that shareholder bylaw or certificate provisions which limit board discretion thereby shield the board from fiduciary duty liability for actions required or prohibited by the provisions; * Amend section 157(a) to clarify that bylaws may limit or regulate the ability of boards to adopt poison pills; and * Amend section 109 to clarify that if a shareholder bylaw so specifies, the board may not amend or repeal that bylaw.

The first, third, and fourth changes are arguably already the rule under existing law, but there is much uncertainty under that law, and these changes would bring more clarity. The second change responds to the Delaware Supreme Court's recent decision in CA, Inc. v. AFSCME Employees Pension Plan.

Delaware, Journal, Corporate, Law, bylaws, corporate governance, shareholder, CA, Inc. v. AFSCME Employees Pension Plan, 109(b), 141(a), 157(a), 109, poison pills

Abstract:
Coase’s theory of the firm has become a familiar tool to analyze the structure and organization of businesses. Such analyses have increasingly focused on property based theories of the firm, including intellectual property. In previous work we have discussed the application of this model to patents, copyrights, and trade secrets. Here we take up the theory of the firm with regard to trademarks, which act as signals of firm reputation, and so have application and effects that differ substantially from other forms of intellectual property. Using the framework from our previous analyses, we examine the propensity of trademarks to lower transactions costs between firms, as well as within firms, suggesting that such doctrines will have significant effects on the size and structure of the firm.

trademark, intellectual property, reputation, Coase, theory of the firm, franchise

Abstract:
Corporate law has done a very bad job on executive pay: executives have been rewarded for stellar performance that turned out to be anything but stellar, and shareholders have had no meaningful recourse. Indeed, there are many other such cases, where there is no breach of the fiduciary duties of care and loyalty, but the board's behavior nevertheless smacks of a classic agency problem known as structural bias.

We argue that law on the books and as enforced is not well situated to deal with structural bias. What shows some promise is the marshaling of extra legal forces that effectively extend Delaware corporate law, constituting a penumbra. Corporate directors' behavior is very much influenced by what is in the penumbra.

The penumbra is importantly influenced by the Delaware corporate judiciary's participation in the corporate law debate in fora other than the courtroom. Law firm memos to clients play an important role too, conveying both the court holdings and the dicta as advice to clients. The penumbra also includes the many voices participating in the corporate governance debate through shareholder proposals, court cases brought about shareholder proposals, the views of corporate governance activists involved in the debate. While the penumbra is not an unambiguous good - certainly, actors with problematic self-interests may be among those helping shape it - it provides an important counterweight to the directors' ability to prefer their own interests over those of their principals, the corporation and its shareholders.

executive compensation, social norms, structural bias

Abstract:
Copyright law, the Supreme Court has said, is a valid speech restriction. But even valid speech restrictions (such as libel law, obscenity law, and the like) are still subject to the various "First Amendment Due Process" procedural rules. One of them is the Bose Corp. v. Consumers Union independent appellate review rule: When a jury or a trial judge finds that speech falls within an unprotected category of speech, the court of appeals must review that finding de novo, rather than just for clear error. The same also applies on motions for summary judgment and for judgment notwithstanding the verdict.

In copyright cases, though, the courts of appeal generally review findings that speech copies expression, and not just idea, only for clear error. This, we argue, presumptively violates the Bose rule; and, we argue, there's no significant difference between copyright law and the other speech restrictions that rebuts this presumption. The copyright law clear error review rule must give way to the First Amendment-mandated de novo review rule.

From this doctrinal point, we draw two broader points: (1) At least according to First Amendment theory, independent appellate review is supposed to refine the legal tests, making them clearer and more predictable. If that hypothesis is true, this could be particularly valuable for copyright's "idea-expression" dichotomy, which is notoriously vague. (2) On the other hand, if it's false - if we end up being skeptical about the value of independent review in clarifying the idea-expression test -- this might give us reason to think again about independent appellate review, and perhaps First Amendment Due Process more generally.