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Full-Text Articles in Business Law, Public Responsibility, and Ethics
Fiduciary Discretion, D. Gordon Smith, Jordan C. Lee
Fiduciary Discretion, D. Gordon Smith, Jordan C. Lee
Faculty Scholarship
Discretion is an important feature of all contractual relationships. In this Article, we rely on incomplete contract theory to motivate our study of discretion, with particular attention to fiduciary relationships. We make two contributions to the substantial literature on fiduciary law. First, we describe the role of fiduciary law as “boundary enforcement,” and we urge courts to honor the appropriate exercise of discretion by fiduciaries, even when the beneficiary or the judge might perceive a preferable action after the fact. Second, we answer the question, how should a court define the boundaries of fiduciary discretion? We observe that courts often …
Contractually Adopted Fiduciary Duty, D. Gordon Smith
Contractually Adopted Fiduciary Duty, D. Gordon Smith
Faculty Scholarship
The Delaware Supreme Court recently referred to “contractually adopted fiduciary duties.” Although some commentators, including Larry Ribstein, view fiduciary duties as a type of contract term, the notion of contractually adopted fiduciary duties is incoherent. The need to opt in to fiduciary duties would arise in only two circumstances: (1) fiduciary relationships that do not invoke fiduciary duties without contractual authorization, and (2) nonfiduciary relationships in which the parties wish to invoke fiduciary duties that would otherwise be absent. The first category of relationships does not exist, as courts impose fiduciary duties when the structure of a relationship indicates that …
The Dystopian Potential Of Corporate Law, D. Gordon Smith
The Dystopian Potential Of Corporate Law, D. Gordon Smith
Faculty Scholarship
The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. This paper is part of a debate on the audacious question, Can Corporate Law Save …
The "Branding Effect" Of Contracts, D. Gordon Smith
The "Branding Effect" Of Contracts, D. Gordon Smith
Faculty Scholarship
In his case study of the MasterCard IPO and its predecessor piece on the Google IPO, Victor Fleischer claims to find evidence of a branding effect of legal infrastructure. The branding effect is not aimed at reducing the potential for opportunism by a counterparty to a contract, but rather at increasing the attractiveness of a product to present and future users or improving the image of a company in the eyes of regulators, judges, and juries. In this essay commenting on Fleischer's work, I endorse the notion that deal structures have branding effects and position Fleischer's work within a larger …
The Exit Structure Of Venture Capital, D. Gordon Smith
The Exit Structure Of Venture Capital, D. Gordon Smith
Faculty Scholarship
Venture capital contracts contain extensive provisions regulating exit by the venture capitalists. In this Article, Professor Smith employs financial contracting theory in conjunction with original data collected from 367 venture-backed companies to analyze these exit provisions. He concludes that the combination of exit provisions in a typical venture capital relationship serves to lock venture capitalists into the investment during the initial stage. In later stages of the relationship, the venture capitalists acquire increasing control over exit by securing additional seats on the board of directors and by obtaining contractual exit rights. The result is a sophisticated transfer of control from …
The Exit Structure Of Strategic Alliances, D. Gordon Smith
The Exit Structure Of Strategic Alliances, D. Gordon Smith
Faculty Scholarship
Today, many biotechnology firms use strategic alliances to contract with other companies. This article contends that the governance structure of these alliances - specifically, the contractual board - provides an integrated restraint on opportunism. While an alliance agreement's exit structure could provide a check on opportunism by allowing the parties to exit at will, such exit provisions also can be used opportunistically. Most alliance agreements, therefore, provide for contractual lock in of the alliance partners, with only limited means of exit. Lock in, of course, raises its own concerns, and the contractual board - which typically is composed of representatives …
Independent Legal Significance, Good Faith, And The Interpretation Of Venture Capital Contracts, D. Gordon Smith
Independent Legal Significance, Good Faith, And The Interpretation Of Venture Capital Contracts, D. Gordon Smith
Faculty Scholarship
Venture capital contracts are inherently incomplete. When interpreting such contracts, courts could deal with the expectations of parties formally by inquiring only about the plain meaning of the contract or qualitatively by enforcing the presumed expectations of the parties, regardless of whether those expectations are expressed in the contract. The Delaware courts have opted for a formal approach. In doing so, they appear to be engaged in an effort to force contracting parties toward completeness. While the duty of good faith appears to respond to the inevitable incompleteness of contracts, the courts largely ignore this duty in preferred stock cases. …
The Critical Resource Theory Of Fiduciary Duty, D. Gordon Smith
The Critical Resource Theory Of Fiduciary Duty, D. Gordon Smith
Faculty Scholarship
This Article proposes a new theory to unify the law of fiduciary duty. The prevailing view holds that fiduciary law is atomistic, arising for varied reasons in established categories of cases (such as trustee-beneficiary and director-shareholder) and ad hoc in relationships where one person trusts another and becomes vulnerable to harm as a result. By contrast, the critical resource theory of fiduciary duty holds that every relationship properly designated as fiduciary conforms to the following pattern: one party (the fiduciary) acts on behalf of another party (the beneficiary) while exercising discretion with respect to a critical resource belonging to the …
Toward A New Theory Of The Shareholder Role: A Sacred Space In Corporate Transactions, Robert B. Thompson, D. Gordon Smith
Toward A New Theory Of The Shareholder Role: A Sacred Space In Corporate Transactions, Robert B. Thompson, D. Gordon Smith
Faculty Scholarship
Corporate law expresses a profound ambiguity toward the role of shareholders. Courts announce that shareholders are critical to the theory that legitimates the exercise of power - by directors and officers over vast aggregations of property that they do not own. At the same time shareholders have a very difficult time actually making any corporate decisions. In this Article, we strive to define a new role for shareholders by drawing on economic theories of the firm and the structure of corporate law. More particularly we examine the role of shareholders in hostile corporate takeovers, the area where the interests of …
Team Production In Venture Capital Investing, D. Gordon Smith
Team Production In Venture Capital Investing, D. Gordon Smith
Faculty Scholarship
Entrepreneurs and venture capitalists engage in team production. Inherent in team production is an incentive problem: team members have an incentive to shirk. The incentive to shirk derives from the inability to monitor team members perfectly and compensate them based on productivity. Economic models of team production teach that solutions to shirking must involve (1) a principal (2) with authority to break the budget by realigning the claims of team members through use of a penalty or a bonding arrangement (3) based only on observations of team output, not on monitoring of individual inputs. This paper analyzes the team production …
A Proposal To Eliminate Director Standards From The Model Business Corporations Act, D. Gordon Smith
A Proposal To Eliminate Director Standards From The Model Business Corporations Act, D. Gordon Smith
Faculty Scholarship
The Committee on Corporate Laws of the Business Section of the American Bar Association recently adopted amendments to the section of the Model Business Corporation Act (MBCA) enunciating standards of director performance. In place of the current section 8.30, which has been adopted by 42 states, the Committee has adopted two sections - one defining a standard of conduct and one defining a standard of liability for corporate directors. This paper argues that these new standards do not achieve the goals of bifurcation. Moreover, if adopted and used, the new standards will engender confusion and possibly inequitable results. This paper …
The Shareholder Primacy Norm, D. Gordon Smith
The Shareholder Primacy Norm, D. Gordon Smith
Faculty Scholarship
Corporate directors have a fiduciary duty to make decisions in the best interests of the shareholders. This aspect of fiduciary duty is often called the shareholder primacy norm. Legal scholars generally assume that the shareholder primacy norm is a major factor considered by boards of directors of publicly traded corporations in making ordinary business decisions and that changing the shareholder primacy norm would have an effect on the substance of those decisions. This Article challenges this view and argues that the shareholder primacy norm was never equipped to mediate conflicts between shareholders and nonshareholder constituencies of a corporation. The origins …
Venture Capital Contracting In The Information Age, D. Gordon Smith
Venture Capital Contracting In The Information Age, D. Gordon Smith
Faculty Scholarship
Most venture capitalists provide services to their portfolio companies beyond capital investment. Although these services form an important part of the bargain between the venture capitalists and the entrepreneur, they are rarely specified or even capable of specification in venture capital contracts. This article examines the moral hazard and adverse selection problems facing entrepreneurs who hire venture capitalists to provide value-added services and describes the role of the market for venture capitalist reputation in addressing those problems. Further, the Article speculates about whether advances in information technology - specifically, the World Wide Web - are likely to improve the efficiency …
Corporate Governance And Managerial Incompetence: Lessons From Kmart, D. Gordon Smith
Corporate Governance And Managerial Incompetence: Lessons From Kmart, D. Gordon Smith
Faculty Scholarship
Modern corporate governance scholars often extol an activist role by institutional investors in directing corporate activity. Widely viewed as a solution to the collective action problems that inhibit such activism by individual investors, institutional investors are praised for adding value to corporations through their participation in the decision making process. The ouster of Joseph Antonini as Chief Executive Officer of Kmart Corporation in 1995 might be taken as a vindication of this view, because substantial evidence indicates that institutional investors played a crucial role in influencing Kmart's board of directors to remove him. In this Article, Professor Smith challenges this …