Law Commons^™

Initiation Payments, Scott Hirst

Faculty Scholarship

Many of the central discussions in corporate governance, including those regarding proxy contests, shareholder proposals, and other activism or stewardship, can be understood as a single question: Is there under-initiation of corporate changes that investors would collectively prefer?

This Article sheds light on this question in three ways. First, the Article proposes a theory of investor initiation, which explains the hypothesis that there is under-initiation of collectively-preferred corporate change by investors. Even though investors collectively prefer that certain corporate changes take place, the costs to any individual investor from initiating such changes through high-cost proxy contests, or even low-cost shareholder …

How Much Do Investors Care About Social Responsibility?, Scott Hirst, Kobi Kastiel, Tamar Kricheli-Katz

Faculty Scholarship

Perhaps the most important corporate law debate over the last several years concerns whether directors and executives should manage the corporation to maximize value for investors or also take into account the interests of other stakeholders and society. But, do investors themselves wish to maximize returns, or are they willing to forgo returns for social purposes? And more broadly, do market participants, such as investors and consumers, differ from donors in the ways in which they prioritize monetary gains and the promotion of social goals?

This project attempts to answer these questions with evidence from an experiment conducted with 279 …

The Failure Of Market Efficiency, William Magnuson

Faculty Scholarship

Recent years have witnessed the near total triumph of market efficiency as a regulatory goal. Policymakers regularly proclaim their devotion to ensuring efficient capital markets. Courts use market efficiency as a guiding light for crafting legal doctrine. And scholars have explored in great depth the mechanisms of market efficiency and the role of law in promoting it. There is strong evidence that, at least on some metrics, our capital markets are indeed more efficient than they have ever been. But the pursuit of efficiency has come at a cost. By focusing our attention narrowly on economic efficiency concerns—such as competition, …

Big Three Power, And Why It Matters, Scott Hirst, Lucian Bebchuk

Faculty Scholarship

This Article focuses on the power and corporate governance significance of the three largest index fund managers commonly referred to collectively as the “Big Three.” We present current evidence on the substantial voting power of the Big Three and explain why it is likely to persist and, indeed, further grow. We show that, due to their voting power, the Big Three have considerable influence on corporate outcomes through both what they do and what they fail to do. We also discuss the Big Three’s undesirable incentives both to underinvest in stewardship and to be excessively deferential to corporate managers.

In …

Climate Change As Systemic Risk, Barnali Choudhury

Articles & Book Chapters

Hindsight tells us that COVID-19, thought by former President Trump and others to have come out of nowhere, is more aptly labelled a “gray rhino” event, one that was highly probable and preventable. Indeed, despite considerable evidence of the impending threats of pandemics, for the most part, governments failed to prepare for the pandemic, resulting in wide-scale social and economic losses.

The lessons from COVID-19, however, should remind us of the perils of ignoring gray rhino risks. Nowhere is this more apparent than with climate change, a highly probable, high impact threat that has largely been ignored to date. Despite …

Federal Corporate Law And The Business Of Banking, Morgan Ricks, Lev Menand

Vanderbilt Law School Faculty Publications

The only profit-seeking business enterprises chartered by a federal government agency are banks. Yet there is barely any scholarship justifying this exception to state primacy in U.S. corporate law.

This Article addresses that gap. It reinterprets the National Bank Act (NBA) the organic statute governing national banks, the heavyweights of the financial sec- tor-as a corporation law and recovers the reasons why Congress wrote this law: not to catalyze private wealth creation or to regulate an existing industry, but to solve an economic governance problem. National banks are federal instrumentalities charged with augmenting the money supply-- a delegated sovereign privilege. …

Cleaning Corporate Governance, Jens Frankenreiter, Cathy Hwang, Yaron Nili, Eric L. Talley

Faculty Scholarship

Although empirical scholarship dominates the field of law and finance, much of it shares a common vulnerability: an abiding faith in the accuracy and integrity of a small, specialized collection of corporate governance data. In this paper, we unveil a novel collection of three decades’ worth of corporate charters for thousands of public companies, which shows that this faith is misplaced.

We make three principal contributions to the literature. First, we label our corpus for a variety of firm- and state-level governance features. Doing so reveals significant infirmities within the most well-known corporate governance datasets, including an error rate exceeding …

Commercial Law Intersections, Giuliano Castellano, Andrea Tosato

All Faculty Scholarship

Commercial law is not a single, monolithic entity. It has grown into a dense thicket of subject-specific branches that govern a broad range of transactions and corporate actions. When one of these events falls concurrently within the purview of two or more of these commercial law branches - such as corporate law, intellectual property law, secured transactions law, conduct and prudential regulation - an overlap materializes. We refer to this legal phenomenon as a commercial law intersection (CLI). Some notable examples of transactions that feature CLIs include bank loans secured by shares, supply chain financing arrangements, patent cross-licensing, and blockchain-based …

Law And The Blockchain, Usha Rodrigues

Scholarly Works

All contracts are necessarily incomplete. The inefficiencies of bargaining over every contingency, coupled with humans’ innate bounded rationality, mean that contracts cannot anticipate and address every potential eventuality. One role of law is to fill gaps in incomplete contracts with default rules. The blockchain is a distributed ledger that allows the cryptographic recording of transactions and permits “smart” contracts that self-execute automatically if their conditions are met. Because humans code the contracts of the blockchain, gaps in these contracts will arise. Yet in the world of “smart contracting” on the blockchain, there is no place for the law to step …

The Corporate Purpose Of Social License, Hillary A. Sale

Georgetown Law Faculty Publications and Other Works

This Article deploys the sociological theory of social license, or the acceptance of a business or organization by the relevant communities and stakeholders, in the context of the board of directors and corporate governance. Corporations are generally treated as “private” actors and thus are regulated by “private” corporate law. This construct allows for considerable latitude. Corporate actors are not, however, solely “private.” They are the beneficiaries of economic and political power, and the decisions they make have impacts that extend well beyond the boundaries of the entities they represent.

Using Wells Fargo and Uber as case studies, this Article explores …

Regulating Fintech, William Magnuson

Faculty Scholarship

The financial crisis of 2008 has led to dramatic changes in the way that finance is regulated: the Dodd-Frank Act imposed broad and systemic regulation on the industry on a level not seen since the New Deal. But the financial regulatory reforms enacted since the crisis have been premised on an outdated idea of what financial services look like and how they are provided. Regulation has failed to take into account the rise of financial technology (or “fintech”) firms and the fundamental changes they have ushered in on a variety of fronts, from the way that banking works, to the …

The Evolution Of Entrepreneurial Finance: A New Typology, J. Brad Bernthal

Publications

There has been an explosion in new types of startup finance instruments. Whereas twenty years ago preferred stock dominated the field, startup companies and investors now use at least eight different instruments—six of which have only become widely used in the last decade. Legal scholars have yet to reflect upon the proliferation of instrument types in the aggregate. Notably missing is a way to organize instruments into a common framework that highlights their similarities and differences.

This Article makes four contributions. First, it catalogues the variety of startup investment forms. I describe novel instruments, such as revenue-based financing, which remain …

Corporate Governance Reform In Post-Crisis Financial Firms: Two Fundamental Tensions, Christopher Bruner

Scholarly Works

The manner in which financial firms are governed directly impacts the stability and sustainability of both the financial sector and the "real" economy, as the financial crisis and associated regulatory reform efforts have tragically demonstrated. However, two fundamental tensions continue to complicate efforts to reform corporate governance in post-crisis financial firms. The first relates to reliance on increased equity capital as a buffer against shocks and a means of limiting leverage. The tension here arises from the fact that no corporate constituency desires risk more than equity does, and that risk preference only tends to be stronger in banks, and …

Economic Crisis And The Integration Of Law And Finance: The Impact Of Volatility Spikes, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Faculty Scholarship

The 2008 financial crisis raised puzzles important for understanding how the capital market prices common stocks and in turn, for the intersection between law and finance. During the crisis, there was a dramatic fivefold spike, across all industries, in "idiosyncratic risk" – the volatility of individual-firm share prices after adjustment for movements in the market as a whole.

This phenomenon is not limited to the most recent financial crisis.This Article uses an empirical review to show that a dramatic spike in idiosyncratic risk has occurred with every major downturn from the 1920s through the recent financial crisis. It canvasses three …

Corporate Control And Idiosyncratic Vision, Zohar Goshen, Assaf Hamdani

Faculty Scholarship

This Article offers a novel theory of corporate control. It does so by shedding new light on corporate-ownership structures and challenging the prevailing model of controlling shareholders as essentially opportunistic actors who seek to reap private benefits at the expense of minority shareholders. Our core claim is that entrepreneurs value corporate control because it allows them to pursue their vision (i.e., any business strategy that the entrepreneur genuinely believes will produce an above-market rate of return) in the manner they see fit. We call the subjective value an entrepreneur attaches to her vision the entrepreneur’s idiosyncratic vision. Our framework identifies …

Progressive Legal Thought, Herbert J. Hovenkamp

All Faculty Scholarship

A widely accepted model of American legal history is that "classical" legal thought, which dominated much of the nineteenth century, was displaced by "progressive" legal thought, which survived through the New Deal and in some form to this day. Within its domain, this was a revolution nearly on a par with Copernicus or Newton. This paradigm has been adopted by both progressive liberals who defend this revolution and by classical liberals who lament it.

Classical legal thought is generally identified with efforts to systematize legal rules along lines that had become familiar in the natural sciences. This methodology involved not …

Downstream Securities Regulation, Anita Krug

All Faculty Scholarship

Securities regulation wears two hats. Its “upstream” side governs firms in connection with their obtaining financing in the securities markets. That is, it regulates firms’ and issuers’ offers and sales of securities, whether in public offerings to retail investors or in private offerings to institutional investors. Its “downstream” side, by contrast, governs financial services providers, who assist with investors’ activities in those markets. Their services include providing advice regarding securities investments, as investment advisers do; aggregating investors’ assets for purposes of enabling those investors to invest their assets collectively, as mutual funds do; and acting as “middlemen” between buyers and …

Myths About Shareholder Value, Faith Stevelman

Articles & Chapters

The concept of unitary "shareholder value" and its reflection in nearterm stock prices formed the centrepiece of contemporary corporate governance up to the 2008 financial crisis. The crisis has elicited both more critical and clearer, book-length accounts of the relationship of law, corporate governance and finance. The concepts analysed in Lynn Stout's The Shareholder Value Myth are considered herein, as part of a commentary on the continuing evolution of academic corporate law and governance.

The Model Business Corporation Act At Sixty: Shareholders And Their Influence, Lisa Fairfax

All Faculty Scholarship

In the sixty years since the Committee on Corporate Laws (Committee) promulgated the Model Business Corporation Act (MBCA), there have been significant changes in corporate law and corporate governance. One such change has been an increase in shareholder activism aimed at enhancing shareholders’ voting power and influence over corporate affairs. Such increased shareholder activism (along with its potential for increase in shareholder power) has sparked considerable debate. Advocates of increasing shareholder power insist that augmenting shareholders’ voting rights and influence over corporate affairs is vital not only for ensuring board and managerial accountability, but also for curbing fraud and other …

A Behavioral Framework For Securities Risk, Tom C.W. Lin

UF Law Faculty Publications

This article provides the first critical analysis and redesign of the existing securities risk disclosure framework given new insights from the emerging, interdisciplinary field of behavioral economics. Disclosure is the principle at the heart of federal securities regulation. Beneath that core principle of disclosure is the basic assumption that the reasonable investor is the idealized über-rational person of neoclassical economic theory. Therefore, once armed with the requisite information investors presumably can protect themselves through rational choice. Descriptively, however, real investors are not like their rational, neoclassical kin. This article examines this incongruence between the idealized rational investor and the imperfect …

A Short History Of Tontines, Kent Mckeever

Faculty Scholarship

A tontine is an investment scheme through which shareholders derive some form of profit or benefit while they are living, but the value of each share devolves to the other participants and not the shareholder's heirs on the death of each shareholder. The tontine is usually brought to an end through a dissolution and distribution of assets to the living shareholders when the number of shareholders reaches an agreed small number.

If people know about tontines at all, they tend to visualize the most extreme form – a joint investment whose heritable ownership ends up with the last living shareholder. …

Too Big To Fail, Too Blind To See, Tom C.W. Lin

UF Law Faculty Publications

Too Big to Fail by Andrew Ross Sorkin offers a meticulous re-telling of one of the most important periods in recent history. As regulators, bankers, lawyers, scholars, and other interested parties sift through the rubble in search of knowledge about the crash, Too Big to Fail serves both as a chronicle of the recent past and a cautionary tale for the immediate future. Acknowledging past missteps, uncovering root causes, and correcting systemic shortcomings to prevent similar failure is arguably the key economic and regulatory challenge of our time. Part I of this Essay summarizes key episodes of the financial crisis …

The Enduring Ambivalence Of Corporate Law, Christopher M. Bruner

Scholarly Works

Prevailing theories of corporate law tend to rely heavily on strong claims regarding the corporate governance primacy and legitimacy of either the board or the shareholders, as the case may be. In this article I challenge the descriptive power of these theories as applied to widely held public corporations and advance an alternative, arguing that corporate law is, and will remain, deeply ambivalent - both doctrinally and morally - with respect to three fundamental and related issues: the locus of ultimate corporate governance authority, the intended beneficiaries of corporate production, and the relationship between corporate law and theachievement of the …

Good Faith, State Of Mind, And The Outer Boundaries Of Director Liability In Corporate Law, Christopher M. Bruner

Scholarly Works

The Delaware General Corporation Law was amended in 1986 to permit shareholder-approved exculpatory charter provisions shielding corporate directors from monetary liability for certain fiduciary duty breaches not including (among other things) breaches of the duty of loyalty and acts not in good faith. This article examines the development of corporate fiduciary duty doctrine in Delaware leading up to and following this statutory amendment, focusing particularly on the Delaware courts' evolving conception of the meaning anddoctrinal status of the good faith concept employed in recent cases to permit a non-exculpable cause ofaction for conscious nonfeasance.

The article argues that Delaware's good …

Legal Ground Rules In Coordinated And Liberal Market Economies, Katharina Pistor

Faculty Scholarship

This chapter seeks to explain the affinity between the nature of economic systems: coordinated market economies (CMEs) and liberal market economies (LMEs) on the one hand, and legal origin (civil vs common law systems) on the other. It starts with the simple observation that LMEs tend to be common law jurisdictions, and CMEs civil law jurisdictions. It proposes that the affinity between economic and legal system offers important insights into the foundations of different types of market economies and, in particular, differences in the scope of the state vs the powers of the individual. The main argument is that the …

Teaching Corporate Law From An Option Perspective, Peter H. Huang

Publications

No abstract provided.

Corporate Finance, Corporate Law And Finance Theory, Peter H. Huang, Michael S. Knoll

Publications

No abstract provided.

Cross-Border Bank Branching Under The Nafta: Public Choice And The Law Of Corporate Groups, Eric J. Gouvin

Faculty Scholarship

This Article examines a question left unresolved after the negotiation of the North American Free Trade Agreement (NAFTA): whether the banks of the member countries should be permitted to engage in the business of banking in the other member countries simply by branching across national borders. Under present law, the United States permits branching subject to extensive restrictions, while Canada and Mexico permit access to their banking markets only by acquisition or establishment of institutions chartered in their countries. While the NAFTA does not provide for unfettered branching across national borders, article 1403(3) of the NAFTA left the issue of …

Thoughts Evoked By "Accounting And The New Corporate Law", Ted J. Fiflis

Publications

No abstract provided.

Responsibility Of Investment Bankers To Shareholders, Ted J. Fiflis

Publications

No abstract provided.