The Death of Corporate Law

53 Pages Posted: 2 May 2018 Last revised: 9 May 2019

See all articles by Zohar Goshen

Zohar Goshen

Columbia University - Law School; Ono Academic College Faculty of Law

Sharon Hannes

Tel Aviv University - Buchmann Faculty of Law

Date Written: April 30, 2017

Abstract

For decades, corporate law played a pivotal role in regulating corporations across the United States. Consequently, Delaware, the leading state of incorporation, and its courts came to occupy a central and influential position in corporate law and governance. This, however, is no longer the case: The compositional shift in equity markets from retail to institutional ownership has relocated regulatory power over corporations from courts to markets. Corporate law has, as a result, and as illustrated by the declined role of the Delaware courts, lost its pride of place and is now eclipsed by shareholder activism.

What explains the connection between the rise of institutional ownership and the death of corporate law? We answer this question by unpacking the relationship between market dynamics and the role of corporate law. Our analysis uncovers a critical, yet hitherto unnoticed, insight: The more competent shareholders become, the less important corporate law will be. Increases in shareholder competence reduce management agency costs, intensify market actors’ preference for private ordering outside of courts, and, ultimately, drive corporate law into the shadow.

Keywords: Corporate Law, Corporate Governance, Delaware Courts, Institutional Investors, Hedge Fund Activism, Control Rights, Corporate Litigation, Principal Costs, Agency Costs, Incomplete Contracts, Contract Design, Enforcement

JEL Classification: K20, K22, K41, G32, G34

Suggested Citation

Goshen, Zohar and Hannes, Sharon, The Death of Corporate Law (April 30, 2017). New York University Law Review, Vol. 94, No. 263, 2019; European Corporate Governance Institute (ECGI) - Law Working Paper No. 402/2018; Columbia Law and Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=3171023 or http://dx.doi.org/10.2139/ssrn.3171023

Zohar Goshen (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-9760 (Phone)
212-854-7946 (Fax)

Ono Academic College Faculty of Law

104 Zahal St.
Kiryat Ono, 55000
Israel

HOME PAGE: http://www.ono.ac.il

Sharon Hannes

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv 69978, IL
Israel

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