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Reconsidering The Evolutionary Erosion Account Of Corporate Fiduciary Law, William W. Bratton Jan 2021

Reconsidering The Evolutionary Erosion Account Of Corporate Fiduciary Law, William W. Bratton

Faculty Scholarship at Penn Law

This Article reconsiders the dominant account of corporate law’s duty of loyalty, which asserts that the courts have steadily relaxed standards of fiduciary scrutiny applied to self-dealing by corporate managers across more than a century of history—to the great detriment of the shareholder interest. The account originated in Harold Marsh, Jr.’s foundational article, Are Directors Trustees? Conflicts of Interest and Corporate Morality, published in The Business Lawyer in 1966. Marsh’s showing of historical lassitude has been successfully challenged in a recent book by Professor David Kershaw. This Article takes Professor Kershaw’s critique a step further ...


Restoration: The Role Stakeholder Governance Must Play In Recreating A Fair And Sustainable American Economy A Reply To Professor Rock, Leo E. Strine Jr. Dec 2020

Restoration: The Role Stakeholder Governance Must Play In Recreating A Fair And Sustainable American Economy A Reply To Professor Rock, Leo E. Strine Jr.

Faculty Scholarship at Penn Law

In his excellent article, For Whom is the Corporation Managed in 2020?: The Debate Over Corporate Purpose, Professor Edward Rock articulates his understanding of the debate over corporate purpose. This reply supports Professor Rock’s depiction of the current state of corporate law in the United States. It also accepts Professor Rock’s contention that finance and law and economics professors tend to equate the value of corporations to society solely with the value of their equity. But, I employ a less academic lens on the current debate about corporate purpose, and am more optimistic about proposals to change our ...


A Babe In The Woods: An Essay On Kirby Lumber And The Evolution Of Corporate Law, Lawrence Hamermesh Dec 2020

A Babe In The Woods: An Essay On Kirby Lumber And The Evolution Of Corporate Law, Lawrence Hamermesh

Faculty Scholarship at Penn Law

This essay examines the development of corporate law during the time span of the author's career, focusing on the interrelated subjects of valuation, corporate purpose, and shareholder litigation.


Antitrust And Platform Monopoly, Herbert J. Hovenkamp Nov 2020

Antitrust And Platform Monopoly, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Are large digital platforms that deal directly with consumers “winner take all,” or natural monopoly, firms? That question is surprisingly complex and does not produce the same answer for every platform. The closer one looks at digital platforms the less they seem to be winner-take-all. As a result, competition can be made to work in most of them. Further, antitrust enforcement, with its accommodation of firm variety, is generally superior to any form of statutory regulation that generalizes over large numbers.

Assuming that an antitrust violation is found, what should be the remedy? Breaking up large firms subject to extensive ...


Toward Racial Equality: The Most Important Things The Business Community Can Do, Leo E. Strine Jr. Oct 2020

Toward Racial Equality: The Most Important Things The Business Community Can Do, Leo E. Strine Jr.

Faculty Scholarship at Penn Law

In this address, former Chief Justice Strine kicked-off an important series, the Conference on Racial Equity in Corporate Governance, co-sponsored by the Millstein Center for Global Markets and Corporate Governance, Columbia Law School; the Institute for Law & Economics, University of Pennsylvania; the Rock Center for Corporate Governance, Stanford University; and the Stanford Center for Racial Justice, Stanford Law School.

The address explains the importance of institutional investors and corporations contributing to ending the persistent inequality suffered by black Americans. And it focuses on the reality that we would have made huge strides toward closing the race gap if our corporate governance and political systems ...


Competitive Harm From Vertical Mergers, Herbert J. Hovenkamp Oct 2020

Competitive Harm From Vertical Mergers, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

The antitrust enforcement Agencies' 2020 Vertical Merger Guidelines introduce a nontechnical application of bargaining theory into the assessment of competitive effects from vertical acquisitions. The economics of such bargaining is complex and can produce skepticism among judges, who might regard its mathematics as overly technical, its game theory as excessively theoretical or speculative, or its assumptions as unrealistic.

However, we have been there before. The introduction of concentration indexes, particularly the HHI, in the Merger Guidelines was initially met with skepticism but gradually they were accepted as judges became more comfortable with them. The same thing very largely happened again ...


Stewardship 2021: The Centrality Of Institutional Investor Regulation To Restoring A Fair And Sustainable American Economy, Leo E. Strine Jr. Oct 2020

Stewardship 2021: The Centrality Of Institutional Investor Regulation To Restoring A Fair And Sustainable American Economy, Leo E. Strine Jr.

Faculty Scholarship at Penn Law

In this essay, which formed the basis for the luncheon keynote speech at the Rethinking Stewardship online conference presented by the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and ECGI, the European Corporate Governance Institute, the essential, but not sufficient, role of regulation to promote more effective stewardship by institutional investors is discussed. To frame specific policy recommendations that align the responsibilities of institutional investors with the best interests of their human investors in sustainable wealth creation, environmental responsibility, the respectful treatment of stakeholders, and, in particular, the fair pay and treatment of ...


Influence Through Intimidation: Evidence From Business Lobbying And The Regulatory Process, Alex Acs, Cary Coglianese Oct 2020

Influence Through Intimidation: Evidence From Business Lobbying And The Regulatory Process, Alex Acs, Cary Coglianese

Faculty Scholarship at Penn Law

Interest group influence in the policy process is often assumed to occur through a mechanism of exchange, persuasion, or subsidy. Here, we explore how business groups may also exert influence by intimidating policymakers—a form of persuasion, but one based not on the provision of policy information but of political information. We develop a theory where a business firm lobbies a regulator to communicate political information about its capacity to commit to future influence-seeking activities that would sanction the regulator. The regulator assesses the credibility of this message by evaluating the firm’s commitment to lobbying. Guided by our theory ...


The “Value” Of A Public Benefit Corporation, Jill E. Fisch, Steven Davidoff Solomon Oct 2020

The “Value” Of A Public Benefit Corporation, Jill E. Fisch, Steven Davidoff Solomon

Faculty Scholarship at Penn Law

We examine the “value” a PBC form provides for publicly-traded corporations. We analyze the structure of the PBC form and find that other than requiring a designated social purpose it does not differ significantly in siting control and direction with shareholders. We also examine the purpose statements in the charters of the most economically significant PBCs. We find that, independent of structural limitations on accountability, these purpose statements are, in most cases, too vague and aspirational to be legally significant, or even to serve as a reliable checks on PBC behavior. We theorize, and provide evidence, that without a legal ...


Compliance Management Systems: Do They Make A Difference?, Cary Coglianese, Jennifer Nash Aug 2020

Compliance Management Systems: Do They Make A Difference?, Cary Coglianese, Jennifer Nash

Faculty Scholarship at Penn Law

Regulatory compliance is vital for promoting the public values served by regulation. Yet many businesses remain out of compliance with some of the regulations that apply to them—presenting not only possible dangers to the public but also exposing themselves to potentially significant liability risk. Compliance management systems (CMSs) may help reduce the likelihood of noncompliance. In recent years, managers have begun using CMSs in an effort to address compliance issues in a variety of domains: environment, workplace health and safety, finance, health care, and aviation, among others. CMSs establish systematic, checklist-like processes by which managers seek to improve their ...


Fiduciary Law And The Preservation Of Trust In Business Relationships, Brian J. Broughman, Elizabeth Pollman, D. Gordon Smith Aug 2020

Fiduciary Law And The Preservation Of Trust In Business Relationships, Brian J. Broughman, Elizabeth Pollman, D. Gordon Smith

Faculty Scholarship at Penn Law

This chapter explores the role of mandatory fiduciary obligations in preserving trust between business parties. Because contracts are inevitably incomplete, after investment there is always a risk of opportunism. While the parties could try to draft a more detailed agreement prohibiting various forms of opportunism, the very act of haggling over such protections may signal distrust, eliciting costly reactions (defensive measures/hedging/lack of intrinsic motivation) in the counterparty. In the absence of fiduciary protections, a vulnerable party may decide to forgo important protections against opportunism, not because such protections are suboptimal or hard to specify ex ante but because ...


Should Corporations Have A Purpose?, Jill E. Fisch, Steven Davidoff Solomon Aug 2020

Should Corporations Have A Purpose?, Jill E. Fisch, Steven Davidoff Solomon

Faculty Scholarship at Penn Law

The hot topic in corporate governance is the debate over corporate purpose and, in particular, whether corporations should shift their purpose from the pursuit of shareholder wealth to pursuing a broader conception of stakeholder or societal value. We argue that this debate has overlooked the critical predicate questions of whether a corporation should have a purpose at all and, if so, why,

We address these questions by examining the historical, legal and theoretical justifications for corporate purpose. We find that none of the three provides a basis for requiring a corporation to articulate a particular purpose or for a given ...


Appraisal Waivers, Jill E. Fisch Aug 2020

Appraisal Waivers, Jill E. Fisch

Faculty Scholarship at Penn Law

A judicial determination of fair value in a private company can be a difficult and imprecise process. This difficulty coupled with variations in way mergers are negotiated and structured and the potential for conflicts of interest lend uncertainty to appraisal proceedings. As a result, corporate participants have powerful reasons to seek to limit the uncertainty associated with an appraisal proceeding ex ante. The response has been the growing use of shareholder agreements that limit appraisal rights.

Appraisal waivers also offer a potentially attractive solution to a somewhat different concern, the growth of appraisal litigation in publicly traded companies. As with ...


Private Ordering And The Role Of Shareholder Agreements, Jill E. Fisch Aug 2020

Private Ordering And The Role Of Shareholder Agreements, Jill E. Fisch

Faculty Scholarship at Penn Law

Corporate law has embraced private ordering -- tailoring a firm’s corporate governance to meet its individual needs. Firms, particularly venture-capital backed start-ups, are increasingly adopting firm-specific governance provisions such as dual-class voting structures, arrangements to create stable shared control rights among a coalition of minority shareholders, and provisions that limit the permissible fora for shareholder litigation. Courts have broadly upheld these provisions as consistent with the contractual theory of the firm. Commentators too, while finding some governance provisions objectionable, nonetheless support a private ordering approach as facilitating innovation and enhancing efficiency.

Although most analyses of private ordering focus on provisions ...


Caremark And Esg, Perfect Together: A Practical Approach To Implementing An Integrated, Efficient, And Effective Caremark And Eesg Strategy, Leo E. Strine Jr., Kirby M. Smith, Reilly S. Steel Jul 2020

Caremark And Esg, Perfect Together: A Practical Approach To Implementing An Integrated, Efficient, And Effective Caremark And Eesg Strategy, Leo E. Strine Jr., Kirby M. Smith, Reilly S. Steel

Faculty Scholarship at Penn Law

With increased calls from investors, legislators, and academics for corporations to consider employee, environmental, social, and governance factors (“EESG”) when making decisions, boards and managers are struggling to situate EESG within their existing reporting and organizational structures. Building on an emerging literature connecting EESG with corporate compliance, this Essay argues that EESG is best understood as an extension of the board’s duty to implement and monitor a compliance program under Caremark. If a company decides to do more than the legal minimum, it will simultaneously satisfy legitimate demands for strong EESG programs and promote compliance with the law. Building ...


Synthetic Governance, Byung Hyun Anh, Jill E. Fisch, Panos N. Patatoukas, Steven Davidoff Solomon Jul 2020

Synthetic Governance, Byung Hyun Anh, Jill E. Fisch, Panos N. Patatoukas, Steven Davidoff Solomon

Faculty Scholarship at Penn Law

Scholars, practitioners and policymakers continue to debate what constitutes “good” corporate governance. Academic efforts to evaluate the effect of governance provisions such as dual class voting structures, staggered boards of directors and separating the positions of CEO and Chairman of the Board, have produced inconsistent or inconclusive results. The consequence is that the debate over corporate governance is increasingly political and discordant.

We offer a way to address this debate. The rise of index-based investing provides a market-based alternative to governance regulation. Through the creation of bespoke governance index funds, asset managers can offer investors the opportunity to choose an ...


Implicit Communication And Enforcement Of Corporate Disclosure Regulation, Ashiq Ali, Michael T. Durney, Jill E. Fisch, Hoyoun Kyung Jul 2020

Implicit Communication And Enforcement Of Corporate Disclosure Regulation, Ashiq Ali, Michael T. Durney, Jill E. Fisch, Hoyoun Kyung

Faculty Scholarship at Penn Law

This study examines the challenge of implicit communication -- qualitative statements, tone, and non-verbal cues -- to the effectiveness of enforcing corporate disclosure regulation. We use a Regulation Fair Disclosure (Reg FD) setting, given that the SEC adopted the regulation recognizing that managers can convey non-public information privately not just through explicit quantitative disclosures but also through implicit communication. In a high-profile enforcement action, however, the court focused on a literal examination of the manager’s language rather than his positive spin to conclude that the SEC had been “too demanding” in examining the manager’s statements and that its enforcement policy ...


Commercial Law Intersections, Giuliano Castellano, Andrea Tosato Apr 2020

Commercial Law Intersections, Giuliano Castellano, Andrea Tosato

Faculty Scholarship at Penn Law

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 initial coin ...


Private Company Lies, Elizabeth Pollman Mar 2020

Private Company Lies, Elizabeth Pollman

Faculty Scholarship at Penn Law

Rule 10b-5’s antifraud catch-all is one of the most consequential pieces of American administrative law and most highly developed areas of judicially-created federal law. Although the rule broadly prohibits securities fraud in both public and private company stock, the vast majority of jurisprudence, and the voluminous academic literature that accompanies it, has developed through a public company lens.

This Article illuminates how the explosive growth of private markets has left huge portions of U.S. capital markets with relatively light securities fraud scrutiny and enforcement. Some of the largest private companies by valuation grow in an environment of extreme ...


The Cost Of Doing Business: Corporate Crime And Punishment Post-Crisis, Dorothy S. Lund, Natasha Sarin Feb 2020

The Cost Of Doing Business: Corporate Crime And Punishment Post-Crisis, Dorothy S. Lund, Natasha Sarin

Faculty Scholarship at Penn Law

For many years, law and economics scholars, as well as politicians and regulators, have debated whether corporate criminal enforcement overdeters beneficial corporate activity or in the alternative, lets corporate criminals off too easily. This debate has recently expanded in its polarization: On the one hand, academics, judges, and politicians have excoriated the DOJ for failing to send guilty bankers to jail in the wake of the financial crisis; on the other, the DOJ has since relaxed policies aimed to secure individual lability and reduced the size of fines and number of prosecutions.

A crucial and yet understudied piece of evidence ...


Taxing Bitcoin And Blockchains—What The Irs Told Us (And What It Didn’T), David J. Shakow Jan 2020

Taxing Bitcoin And Blockchains—What The Irs Told Us (And What It Didn’T), David J. Shakow

Faculty Scholarship at Penn Law

The IRS recently issued its second description of how it will treat Bitcoin and other blockchain assets. Some of its analysis leaves open questions that invite further consideration, and important issues remain unresolved. Moreover, because the popular Bitcoin blockchain uses a "proof of work" consensus procedure, issues relating to the alternative "proof of stake" procedure have been neglected.


Reversing The Fortunes Of Active Funds, Adi Libson, Gideon Parchomovsky Jan 2020

Reversing The Fortunes Of Active Funds, Adi Libson, Gideon Parchomovsky

Faculty Scholarship at Penn Law

Recent years have witnessed a considerable growth of passive fund at the expense of active funds. This trend picked in 2019, a year that saw passive funds surpass active funds in terms of assets under management. The continuous decline of active funds is a cause for concern. Active funds engage in monitoring of firms and partake of decision-making in companies in their portfolio. The cost of these activities are born exclusively by active funds; the benefits, by contrast, are spread over all shareholders, including passive funds that freeride on the efforts of active funds. The contraction of active funds threatens ...


Distorted Choice In Corporate Bankruptcy, David A. Skeel Jr. Jan 2020

Distorted Choice In Corporate Bankruptcy, David A. Skeel Jr.

Faculty Scholarship at Penn Law

We ordinarily assume that a central objective of every voting process is ensuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big cases are intended to distort, and clearly do distort, the voting process. Restructuring support agreements (RSAs) and “deathtrap” provisions remove creditors’ ability to vote for or against a proposed reorganization simply on the merits.

This Article offers the first comprehensive analysis of these new distortive techniques. One possible solution is simply to ban distortive techniques, as several scholars advocate with ...


The Uncertain Stewardship Potential Of Index Funds, Jill E. Fisch Jan 2020

The Uncertain Stewardship Potential Of Index Funds, Jill E. Fisch

Faculty Scholarship at Penn Law

Regulators and commentators around the world are increasingly demanding that institutional investors engage in stewardship with respect to their portfolio companies. Further, the demand for stewardship has broadened from an expectation that investors engage to reduce agency costs and promote economic value to a call for investors to demand that companies serve a broader range of societal interests and objectives. This chapter considers calls for stewardship in the context of the U.S. capital markets specifically as applied to index funds. It argues that, irrespective of the merits of institutional stewardship generally, the structure of index funds and the business ...


Shareholder Collaboration, Jill E. Fisch, Simone M. Sepe Jan 2020

Shareholder Collaboration, Jill E. Fisch, Simone M. Sepe

Faculty Scholarship at Penn Law

Two models of the firm dominate corporate law. Under the management-power model, decision-making power rests primarily with corporate insiders (officers and directors). The competing shareholder-power model defends increased shareholder power to limit managerial authority. Both models view insiders and shareholders as engaged in a competitive struggle for corporate power in which corporate law functions to promote operational efficiency while limiting managerial agency costs. As scholars and judges continue to debate the appropriate balance of power between shareholders and insiders, corporate practice has moved on. Increasingly, the insider–shareholder dynamic is collaborative, not competitive.

This Article traces the development of insider ...


Corporate Law And The Myth Of Efficient Market Control, William W. Bratton, Simone Sepe Jan 2020

Corporate Law And The Myth Of Efficient Market Control, William W. Bratton, Simone Sepe

Faculty Scholarship at Penn Law

In recent times, there has been an unprecedented shift in power from managers to shareholders, a shift that realizes the long-held theoretical aspiration of market control of the corporation. This Article subjects the market control paradigm to comprehensive economic examination and finds it wanting.

The market control paradigm relies on a narrow economic model that focuses on one problem only, management agency costs. With the rise of shareholder power, we need a wider lens that also takes in market prices, investor incentives, and information asymmetries. General equilibrium theory (GE) provides that lens. Several lessons follow from reference to this higher-order ...


Transactional Scripts In Contract Stacks, Shaanan Cohney, David A. Hoffman Jan 2020

Transactional Scripts In Contract Stacks, Shaanan Cohney, David A. Hoffman

Faculty Scholarship at Penn Law

Deals accomplished through software persistently residing on computer networks—sometimes called smart contracts, but better termed transactional scripts—embody a potentially revolutionary contracting innovation. Ours is the first precise account in the legal literature of how such scripts are created, and when they produce errors of legal significance.

Scripts’ most celebrated use case is for transactions operating exclusively on public, permissionless, blockchains: such exchanges eliminate the need for trusted intermediaries and seem to permit parties to commit ex ante to automated performance. But public transactional scripts are costly both to develop and execute, with significant fees imposed for data storage ...


Toward Fair And Sustainable Capitalism: A Comprehensive Proposal To Help American Workers, Restore Fair Gainsharing Between Employees And Shareholders, And Increase American Competitiveness By Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth And Encouraging Investments In America’S Future, Leo E. Strine Sep 2019

Toward Fair And Sustainable Capitalism: A Comprehensive Proposal To Help American Workers, Restore Fair Gainsharing Between Employees And Shareholders, And Increase American Competitiveness By Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth And Encouraging Investments In America’S Future, Leo E. Strine

Faculty Scholarship at Penn Law

To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including: requiring not just operating companies, but institutional investors, to give appropriate consideration to ...


The Reverse Agency Problem In The Age Of Compliance, Asaf Eckstein, Gideon Parchomovsky Sep 2019

The Reverse Agency Problem In The Age Of Compliance, Asaf Eckstein, Gideon Parchomovsky

Faculty Scholarship at Penn Law

The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their corporation, has had long-lasting impact on corporate law theory and practice. In recent years, however, as federal agencies have stepped up enforcement efforts against corporations, a new problem that is the mirror image of the agency problem has surfaced—the reverse agency problem. The surge in criminal investigations against corporations, combined with the rising popularity of settlement mechanisms including Pretrial Diversion Agreements (PDAs), and corporate plea agreements, has led corporations to sacrifice directors and officers in order to reach ...


Due Process In International Antitrust Enforcement: An Idea Whose Time Has Come, Christopher S. Yoo Sep 2019

Due Process In International Antitrust Enforcement: An Idea Whose Time Has Come, Christopher S. Yoo

Faculty Scholarship at Penn Law

The past year has witnessed an upsurge of international interest in due process in antitrust enforcement, reflected in two new comparative studies and International Competition Network’s (ICN’s) May 2019 adoption of its Recommended Practices for Investigative Process and Framework for Competition Agency Procedures and the Organization for Economic Cooperation and Development (OECD) Competition Committee’s discussion of the Draft Recommendation on Transparency and Procedural Fairness in Competition Law Enforcement in June 2019. This article reviews those developments, traces key differences among them, and looks ahead to what comes next.