Adding Derivatives to the Corporate Law Mix

23 Pages Posted: 19 Oct 2000  

Frank Partnoy

University of San Diego School of Law

Date Written: November 1999

Abstract

This article analyzes how financial innovation, particularly the development of the derivatives market, has changed basic corporate law concepts, in two primary ways. First, derivatives have altered fundamental notions of fiduciary duty. Corporations are able to slice and dice cash flows in so many novel ways that it no longer makes sense to speak of a fiduciary duty owed by managers and directors to shareholders. Options theory contributes principally to this analysis. Second, derivatives lurk beneath the surface in a variety of corporate law cases, in ways that illuminate and challenge the legal rules established in those cases. For example, in the well-known case of Smith v. Van Gorkom, an option to purchase shares can be analyzed using finance theory in ways that contribute to an understanding of the court's duty of care discussion and provide additional insight into the behavior of the parties. In similar ways, derivatives are "uncovered" in other cases.

Suggested Citation

Partnoy, Frank, Adding Derivatives to the Corporate Law Mix (November 1999). Georgia Law Review, 2000. Available at SSRN: https://ssrn.com/abstract=245553 or http://dx.doi.org/10.2139/ssrn.245553

Frank Partnoy (Contact Author)

University of San Diego School of Law ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
619-260-2352 (Phone)
619-260-4180 (Fax)

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