Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice

Abstract

Corporate law theory and practice considers shareholder relations with companies and the implications of ownership separated from control. Yet through the Troubled Asset Relief Program (TARP) bailout and the government’s resultant shareholding, ownership and control at many companies have merged, leaving corporate theory and practice for the financial and automotive sectors in chaos. The government’s $700 billion bailout is a unique historical event; not merely because of its size, but also because of a resulting ripple through corporate scholarship and practice. This Article builds on the Author’s five testimonies before Congress during the financial crisis and implementation of the TARP bailout and his consultation for the Special Inspector General for TARP. It updates the six central theories of corporate law to reveal that none function adequately when considered with a controlling government shareholder that enjoys sovereign immunity from corporate and securities law. From agency theory and nexus of contracts thought to the shareholder/director primacy debate, even to notions of progressive corporate law, existing theory breaks down when a government shareholder is present. After considering corporate theory, the Article offers predictions for how the Treasury Department’s stock ownership reshapes the practice of corporate law. In short, TARP will result in a tectonic shift for current understanding about insider trading, securities class actions, share voting, and state corporate law fiduciary duties. The Article closes with three recommendations. First, that the Treasury take frozen options, an invention explained in the text, rather than equity. Second, that Congress pass legislation establishing a fiduciary duty for the Treasury to maximize the value of its investment, a suggestion that has informed language drafted in legislation introduced by Senator Mark Warner and Senator Bob Corker. And finally, that the Treasury adopt a sales plan for closing out its TARP holdings.

Keywords: AIG, Chrysler, company ownership, Fannie Mae, federal government, Federal Reserve Board, Freddie Mac, GM, GMAC, interest group politics, shareholder control, Treasury Department

JEL Classification: G32, G33, G34, G35, G38, K22