Law Commons^™

Are Passive Index Funds Active Owners? Corporate Governance Consequences Of Passive Investing, Giovanni Strampelli

San Diego Law Review

The exponential rise of mutual funds designed to track stock indices has been one of the drivers behind the re-concentration of ownership of listed companies in the United States. Because of the high concentration of the passive index funds industry, the three leading passive fund managers—BlackRock, Vanguard, and State Street—make up an increasingly important component of the shareholder base of listed companies. In spite of this however, it remains questionable whether they are actually interested in playing an active role in the corporate governance of investee companies. In fact, although passive investors are, by definition, focused on the long term …

Dual-Class Shares In Singapore – Where Ideology Meets Pragmatism, Pey Woan Lee

Research Collection Yong Pung How School Of Law

This article seeks to understand the rationale for and potential implications of the introduction of dual class shares (DCS) in Singapore. It does so by first considering the theoretical as well as evidential arguments for and against the use of DCS, followed by a survey on the reception (or otherwise) of such structures in four common law jurisdictions with vibrant capital markets, viz., Canada, the United States, United Kingdom and Hong Kong. It observes that the chief argument cited by business founders to justify the use of DCS structures is the desire to enhance a firm’s long-term profitability by shielding …

The Public Cost Of Private Equity, William Magnuson

William J. Magnuson

This Article presents a theory of the corporate governance costs of private equity. In doing so, it challenges the common view that private equity’s governance structure has resolved, or at least significantly mitigated, one of the fundamental tensions in corporate law, that is, the conflict between management and ownership. The Article argues that this widespread perception about the corporate governance benefits of private equity overlooks the many ways in which the private equity model, far from eliminating agency costs, in fact exacerbates them. These governance costs include compensation structures that incentivize excessive risk-taking, governance rights that provide investors with few …

Board Independence As A Panacea To Tunnelling? An Empirical Study Of Related Party Transactions In Hong Kong And Singapore, Christopher C. H. Chen, Wai Yee Wan, Wei Zhang

Research Collection Yong Pung How School Of Law

In this article, we examine a general question: is the legal transplantation of corporate governance rule effective in curtailing agency costs? Entering into the 21st century, we have seen reforms of corporate governance standards in the Far East since the Asian Financial Crisis in 1997, including in Hong Kong and Singapore. These reforms built on the Anglo-American model of corporate governance in the UK and US supported by broad academic literature of connecting better corporate governance with firm value and identifying the association of tunneling or wrongdoings with poor corporate governance practices. The idea is also to provide more checks-and-balances …

The Diminishing Duty Of Loyalty, Julian Velasco

Journal Articles

Fiduciary duties comprise an integral part of corporate law. It is generally understood that directors owe the corporation and its shareholders two fiduciary duties: the duty of care and the duty of loyalty. Although both duties are firmly established in corporate law, they are not treated equally. It is generally understood that the duty of loyalty is enforced far more rigorously than the duty of care. The justification for this dichotomy is twofold. First, differential treatment is appropriate because of the relative urgencies of the underlying subject matter: loyalty issues pose greater risks than do care issues. Second, the deference …

Trapped In A Metaphor: The Limited Implications Of Federalism For Corporate Governance, Robert B. Ahdieh

Robert B. Ahdieh

Trapped in a metaphor articulated at the founding of modern corporate law, the study of corporate governance has - for some thirty years - been asking the wrong questions. Rather than a singular race among states, whether to the bottom or the top, the synthesis of William Cary and Ralph Winter’s famous exchange is better understood as two competitions, each serving distinct normative ends. Managerial competition advances the project that has motivated corporate law since Adolf Berle and Gardiner Means - effective regulation of the separation of ownership and control. State competition, by contrast, does not promote a race to …

The (Misunderstood) Genius Of American Corporate Law, Robert B. Ahdieh

Robert B. Ahdieh

In this Reply, I respond to comments by Bill Bratton, Larry Cunningham, and Todd Henderson on my recent paper - Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance. I begin by reiterating my basic thesis - that state competition should be understood to have little consequence for corporate governance, if (as charter competition's advocates assume) capital-market-driven managerial competition is also at work. I then consider some of the thoughtful critiques of this claim, before suggesting ways in which the comments highlight just the kind of comparative institutional analysis my paper counsels. Rather than a stark choice …

The Law And Finance Of Initial Coin Offerings, Aurelio Gurrea-Martinez, Nydia Remolina Leon

Research Collection Yong Pung How School Of Law

The rise of new technologies is changing the way companies raise funds. Along with the increase of crowdfunding in recent years, the use of Initial Coin Offerings (ICOs) has emerged more recently as a new form to raise capital. Companies in the United States raised more than $4 billion in 2017 and over $6.3 billion were raised through ICOs in the first three months of 2018. In a typical ICO, a company receives cryptocurrencies in exchange for certain rights embodied in “tokens”, whose nature, treatment and implications are generating controversy among securities regulators around the world.

Shareholder Litigation And Corporate Disclosure: Evidence From Derivative Lawsuits, Thomas Bourveau, Yun Lou, Rencheng Wang

Research Collection School Of Accountancy

Using the staggered adoption of universal demand (UD) laws in the United States, we study the effect of shareholder litigation risk on corporate disclosure. We find that disclosure significantly increases after UD laws make it more difficult to file derivative lawsuits. Specifically, firms issue more earnings forecasts and voluntary 8-K filings, and increase the length of management discussion and analysis (MD&A) in their 10-K filings. We further assess the direct and indirect channels through which UD laws affect firms' disclosure policies. We find that the effect of UD laws on corporate disclosure is driven by firms facing relatively higher ex …

Defying The Tone At The Top: An Analysis On The Effects Of Board Characteristics On The Level Of Tax Avoidance Across Philippine Publicly Listed Firms, John Ryan G. Ledesma, Chester T. Herrera, Sharlene Camille A. Li, Angelo A. Unite, Ailyn A. Shi, Michael J. Sullivan

Angelo King Institute for Economic and Business Studies (AKI)

Over the years, the growing culture of tax avoidance among multinational companies around the world has shed light on the importance of improving corporate governance mechanisms. In the Philippines, poor tax collection due to tax leakages has contributed to chronic fiscal deficits in the country. The literature argues that good corporate governance mechanisms (e.g., the structure of the board of directors) play a significant role in ensuring that the management acts in the best interest of the firm and shareholders, thus eventually helping to mitigate the incidences of corporate tax avoidance. Specifically, agency theory argues that the presence of more …

Whistling In The Wind: Why Federal Whistleblower Protections Fall Short Of Their Corporate Governance Goals, Meera Khan

University of Miami Business Law Review

Teetering on the line between hero and villain, whistleblowers have a remarkably unusual role in contemporary American society. Those who blow the whistle on public sector activities, like Edward Snowden and the Watergate Scandal’s “Deep Throat”, are often vilified in history as treasonous and unprincipled rogues. In the private sector, however, whistleblowers are seen as moral compasses for corporate behavior, and are even afforded federal protections for speaking out against internal malfeasance. The piecemeal evolution of whistleblower legislation including the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 created regulatory and enforcement …

Do Institutional Owners Monitor? Evidence From Voting On Connected Transaction Proposals In Hong Kong-Listed Companies, Félix E. Mezzanotte, Simon Fung

Michigan Business & Entrepreneurial Law Review

The conventional view in Hong Kong has been that institutional owners tend to be passive owners and that they do little to monitor the companies’ management. We investigated whether the presence of institutional owners in Hong Kong-listed companies was associated with greater monitoring of management through dissent voting by hand-collecting information for a sample (n= 96) of connected transaction proposals (“CT proposals”) and of their voting outcomes, as announced in the Stock Exchange of Hong Kong during the period from 2012–14. Our study shows that voting approval rates on CT proposals were lower (i.e. greater dissent voting) when institutional owners …

The Public Cost Of Private Equity, William Magnuson

Faculty Scholarship

This Article presents a theory of the corporate governance costs of private equity. In doing so, it challenges the common view that private equity’s governance structure has resolved, or at least significantly mitigated, one of the fundamental tensions in corporate law, that is, the conflict between management and ownership. The Article argues that this widespread perception about the corporate governance benefits of private equity overlooks the many ways in which the private equity model, far from eliminating agency costs, in fact exacerbates them. These governance costs include compensation structures that incentivize excessive risk-taking, governance rights that provide investors with few …

Third-Party Institutional Proxy Advisors: Conflicts Of Interest And Roads To Reform, Matthew Fagan

University of Michigan Journal of Law Reform

With the rise of institutional activist investors in recent decades—including a purported 495 activist campaigns against U.S. corporations in 2016 alone—the role that third-party institutional proxy advisors play in corporate governance has greatly increased. The United States Office of Government Accountability estimates that clients of the top five proxy advisory firms account for about $41.5 trillion in equity throughout the world. For several years, discussions have developed regarding conflicts of interest faced by proxy advisors. For example, Institutional Shareholder Services, the top proxy advisory firm in the world, frequently provides advice to institutional investors on how to vote proxies while …

To Understand Us V. Microsoft, Consider 'Acme V. Shamrock', Peter B. Rutledge, Amanda W. Newton

Popular Media

The February 27, 2018, Supreme Court argument in United States v. Microsoft Corp. raises profound questions about issues of executive power, corporate governance, technology, judicial power and international affairs. At stake for the government is the scope of its investigative authority to obtain information located in a foreign country, irrespective of that country’s laws. At stake for Microsoft is its ability to organize its international corporate affairs and the predictability of the laws that will govern those affairs. This article analyzes the potential effects of this critical Supreme Court case.

Contested Visions: The Value Of Systems Theory For Corporate Law, Tamara Belinfanti, Lynn A. Stout

Cornell Law Faculty Publications

Despite the dominant role corporations play in our economy, culture, and politics, the nature and purpose of corporations remains hotly contested. This conflict was brought to the fore in the recent Supreme Court opinions in Citizens United and Hobby Lobby. Although the prevailing narrative for the past quarter-century has been that corporations “belong” to shareholders and should pursue “shareholder value,” support for this approach, which has been justified as essential for managerial accountability, is eroding. It persists today primarily in the form of the argument that corporations should seek “long-term” shareholder value. Yet, as this Article shows, when shareholder value …

Atrocities By Corporate Actors: A Historical Perspective, Michael J. Kelly

Case Western Reserve Journal of International Law

The article focuses on developments in international criminal law in addressing corporate human rights violations.

Liberals Vs Romantics: Challenges Of An Emerging Corporate International Criminal Law, Carsten Stahn

Case Western Reserve Journal of International Law

Holding bystanders and corporate agents accountable for international crimes is often at the periphery of international criminal justice. Based on its liberal foundations, international criminal law has traditionally been strongly centered on individual agency. In the industrialist cases after World War II, individual criminal responsibility was used to demonstrate and sanction corporate involvement in crime. Ideas of corporate criminal responsibility have been voiced in the post-war era and in the context of the negotiations of the Statute. In recent years, they have witnessed a renaissance in several contexts: the jurisprudence of the Special Tribunal for Lebanon, the Malabo Protocol of …

Corporate Engagement With Public Policy: The New Frontier Of Ethical Business, Caroline Kaeb

Case Western Reserve Journal of International Law

The article explains that a normative framework for corporate engagement with public policy is required as part of the evolving corporate responsibility paradigm.

Greater Expectations: Strategies For Effective Board Meeting Preparation, Jonathan Kim, Marcel Bucsescu

Ira M. Millstein Center for Global Markets and Corporate Ownership

Directors face an increasingly complex environment in which their businesses operate. That complexity can present opportunities for corporations that adapt, and also places new pressures on boards to respond effectively. One strategy for directors to consider is to adapt their approaches to preparing for board meetings by focusing not just on company specific reporting and decisions, but also by acting as the “eyes and ears” for management on key issues for the company. This article makes practical suggestions for directors to consider as they approach their board meeting preparation with this broader view in mind.

Environmental And Social Sustainability In The Boardroom, Jon Lukomnik

Ira M. Millstein Center for Global Markets and Corporate Ownership

The last 10 years has seen a remarkable shift in the attention and importance of social and environmental issues for public corporations. This has meant an increased focus by boards on these important matters.

Climate change, human rights, corporate political influence, and inequality are just some of the issues that are being raised by shareholders and other stakeholders. As calls for corporate transparency grow, how boards incorporate these issues into their decision making processes, disclose them, and address them from a risk perspective will continue to garner attention.

The Changing Landscape Of The Capital Markets, Barbara Krumsiek

Ira M. Millstein Center for Global Markets and Corporate Ownership

Much has been made of the rise of activist hedge funds over the past five years. But the shifts in the makeup of the investor community run much deeper than that, impacting both capital formation and capital deployment.

From the proliferation of hedge funds and the emergence of SRI and other new investment strategies, to the massive shift of funds to passive investors, the intermediation of the investment chain, and the concentration of ownership in the largest institutional investors, understanding the trend lines in the capital markets is integral to understanding where governance and the performance of public corporations goes …

The Shifting Tides Of Merger Litigation, Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon, Randall S. Thomas

All Faculty Scholarship

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award.

We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger …

Too-Big-To-Fail Shareholders, Yesha Yadav

Vanderbilt Law School Faculty Publications

To build resilience within the financial system, post-Crisis regulation relies heavily on banks to fund themselves more fully by issuing equity. This reserve of value should buttress failing banks by providing a mechanism to pay off creditors and depositors and preserve the health of financial markets. In the process, shareholders are wiped out. Scholars and policymakers, however, have neglected to examine which equity investors, in fact, are purchasing bank equity and taking on the default risk of U.S. banks. This Article addresses this question. First, it shows that five asset managers - BlackRock, Vanguard, State Street Global Advisors, Fidelity and …

The Shifting Tides Of Merger Litigation, Randall Thomas, Matthew D. Cain, Jill Fisch, Steven D. Solomon

Vanderbilt Law School Faculty Publications

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award. We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger …

From Corporate Law To Corporate Governance, Ronald J. Gilson

Faculty Scholarship

In the 1960s and 1970s, corporate law and finance scholars gave up on their traditional approaches. Corporate law had become “towering skyscrapers of rusted girders, internally welded together and containing nothing but wind.” In finance, the theory of the firm was recognized as an “empty box.” This essay tracks how corporate law was reborn as corporate governance through three examples of how we have usefully complicated the inquiry into corporate behavior. Part I frames the first complication, defining governance broadly as the company’s operating system, a braided framework of legal and non-legal elements. Part II adds a second complication by …

Criminally Bad Management, Samuel W. Buell

Faculty Scholarship

Because of their leverage over employees, corporate managers are prime targets for incentives to control corporate crime, even when managers do not themselves commit crimes. Moreover, the collective actions of corporate management — producing what is sometimes referred to as corporate culture — can be the cause of corporate crime, not just a locus of the failure to control it. Because civil liability and private compensation arrangements have limited effects on management behavior — and because the problem is, after all, crime — criminal law is often expected to intervene. This handbook chapter offers a functional explanation for corporate criminal …

Distributed Ledgers, Traceable Shares, And The Division Of Power In Corporate Law, Christopher M. Bruner

Scholarly Works

Review of Traceable Shares and Corporate Law, 113 Nw. U. L. Rev. __ by George S. Geis (forthcoming 2018)

Does Shareholder Voting Matter? Evidence From The Takeover Market, Paul Mason, Usha Rodrigues, Mike Stegemoller, Steven Utke

Scholarly Works

Voting rights are a basic shareholder-protection mechanism. Outside of the core voting requirements state law imposes (election of directors and votes on fundamental changes), federal law grants shareholders additional voting rights. But these rights introduce concomitant costs into corporate governance. Each grant of a voting right thus invites the question: is the benefit achieved worth the cost the vote imposes?

The question is not merely a theoretical one. Recently the SEC, concerned about Nasdaq’s potential weakening of shareholder voting protections, has lamented that little evidence exists on the value of the shareholder vote. This Article provides that evidence. It examines …

Governance By Contract: The Implications For Corporate Bylaws, Jill E. Fisch

All Faculty Scholarship

Boards and shareholders are increasing using charter and bylaw provisions to customize their corporate governance. Recent examples include forum selection bylaws, majority voting bylaws and advance notice bylaws. Relying on the contractual conception of the corporation, Delaware courts have accorded substantial deference to board-adopted bylaw provisions, even those that limit shareholder rights.

This Article challenges the rationale for deference under the contractual approach. With respect to corporate bylaws, the Article demonstrates that shareholder power to adopt and amend the bylaws is, under Delaware law, more limited than the board’s power to do so. As a result, shareholders cannot effectively constrain …