Law Commons^™

Why The Board Is Broken, Tamar Frankel, Joseph Anton

Faculty Scholarship

Boards of Directors are anachronistic to major companies in the 21^st century. Boards had their origin in an era when oversight was easily executed. Corporate directors were controlling shareholders or their nominees. As companies became truly public, directors were nominated by the chief operating officers and served as their advisers. Large companies needed the resources of outsiders to lend their collective genius in an era when outside knowledge, data, and experience were expensive to collect. But as businesses grew larger, the Board's responsibility as representative of the shareholders' interests became more important as well. To advise and supervise enormous …

Changing Paradigms: The Liability Of Corporate Groups In Germany, René Reich-Graefe

Faculty Scholarship

The German law on affiliated companies and groups of companies ("Konzernrecht"), as embodied in the German Stock Corporation Act of 1965, as amended ("Aktiengesetz"), has often been credited for its innovative approach to the dichotomy of liability strategies relevant to corporate groups-viz., the traditional concept of entity liability based on the fundamental doctrine of the legal separateness of the corporate entity and, accordingly, resulting in a limitation of investor liability as the rule, and discrete and rare occurrences of what is almost poetically designated the "piercing of the corporate veil" ("DurchgriffshaJtung") as narrow and reluctantly crafted exceptions, and the more …

Conflicts Of Interest In Publicly-Traded And Closely-Held Corporations: A Comparative And Economic Analysis, Zohar Goshen

Faculty Scholarship

Conflicts of interest in corporate law can be addressed by two main alternatives: a requirement of a majority of the minority vote or the imposition of duties of loyalty and fairness. A comparison of Delaware, the UK, Canada, and Israel reveals that while the conflicts of interest problem within publicly-traded corporations receives different treatment in the different jurisdictions — either a fairness rule or a majority of the minority rule — closely-held corporations receive the same treatment of an imposition of duties of loyalty and fairness. This article explains this finding, demonstrating that determining which of these rules is adopted …

Of Legal Transplants, Legal Irritants, And Economic Development, Katharina Pistor, Daniel Berkowitz

Faculty Scholarship

The collapse of the socialist system has given way to unprecedented economic and legal reforms in the former socialist countries. Over the past decade they have enacted new legislation in all areas of the law, drawing heavily on legal models from developed market economies, including common law and civil law countries. While the transplanted laws now on the books is largely consistent with Western practice, the enforcement of these new laws is often ineffective (Berkowitz, Pistor, and Richard, 2003).

Innovation In Corporate Law, Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, Mark D. West

Faculty Scholarship

In most countries large business enterprises today are organized as corporations. The corporation with its key attributes of independent personality, limited liability and free tradeability of shares has played a key role in most developed market economies since the 19th century and has made major inroads in emerging markets. We suggest that the resilience of the corporate form is a function of the adaptability of the legal framework to a changing environment. We analyze a country's capacity to innovate using the rate of statutory legal change, the flexibility of corporate law, and institutional change as indicators. Our findings suggest that …

Endowment Effects Within Corporate Agency Relationships, Jennifer H. Arlen, Matthew L. Spitzer, Eric L. Talley

Faculty Scholarship

Behavioral economics is an increasingly prominent field within corporate law scholarship. A particularly noteworthy behavioral bias is the "endowment effect" – the observed differential between an individual's willingness to pay to obtain an entitlement and her willingness to accept to part with one. Should endowment effects pervade corporate contexts, they would significantly complicate much common wisdom within business law, such as the presumed optimality of ex ante agreements. Existing research, however, does not adequately address the extent to which people manifest endowment effects within agency relationships. This article presents an experimental test for endowment effects for subjects situated in an …

The Evolution Of Corporate Law: A Cross- Country Comparison, Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, Mark D. West

Faculty Scholarship

The importance of law and legal institutions for economic development is widely acknowledged today. The invention of credit mechanisms to support long-distance trade has been hailed as one of the preconditions for the development of capitalism in Europe. The corporate form is regarded as another milestone for industrialization, the creation of viable market economies, and ultimately economic prosperity. Many former socialist countries quickly enacted new corporate codes or revived their pre-World War Two ("WWII") legislation. The failure of major privatization efforts to enhance enterprise efficiency is attributed to weaknesses in corporate governance, of which the corporate law is a crucial …

Voting (Insincerely) In Corporate Law, Zohar Goshen

Faculty Scholarship

Voting lies at the center of collective decision-making in corporate law. While scholars have identified various problems with the voting mechanism, insincere voting — in the forms of strategic voting and conflict of interests voting — is perhaps the most fundamental. This article shows that insincere voting distorts the voting mechanism at its core, undermining its ability to determine transaction efficiency. As further demonstrated, strategic and conflict of interests problems frequently coincide with one another: voting strategically often means being in conflict, and many fact patterns present aspects of both problems. Finally, this article claims that although the two problems …

The Direction Of Corporate Law: The Scholars' Perspective, John C. Coffee Jr., Richard A. Booth Marbury Research Professor Of Law, R. Franklin Balotti, David C. Mcbride, Edward P. Welch

Faculty Scholarship

Transcript of a panel on a scholar's approach to corporation law.

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 …

The Shaping Force Of Corporate Law In The New Economic Order, Jeffrey N. Gordon

Faculty Scholarship

My topic for this Allen Chair lecture is the shaping force of corporate governance in the new economic order. It is easy to think of corporate law as an arcane field with mysterious terms and peculiar rules, ultimately of interest only to those who are prepared to bill at least 2000 hours a year to unravel its complexities. This is the view that there is a pointless mystery about shareholders, directors, common stocks, debentures, and the bizarre creature my class encountered recently, a convertible exchangeable cumulative preferred stock; and that ultimately corporate law and practice consists of the expert manipulation …

The Folklore Of Investor Capitalism, John C. Coffee Jr.

Faculty Scholarship

Ideally, Thurman Arnold should review this book. In his The Folklore of American Capitalism, Arnold dissected the ideology and rationalizations by which the business community of an earlier day defended its legitimacy and perquisites. Michael Useem, a sociologist at the Wharton School, also has an interest in the ideology of the business community: how corporate managers view the new institutional investors, how they justify resistance, and the tensions and inconsistencies between their critiques of money managers and their own behavior. This is an underutilized perspective (which law and economics inherently tends to overlook), and Useem is at his best …

Controlling Strategic Voting: Property Rule Or Liability Rule, Zohar Goshen

Faculty Scholarship

Strategic voting – situations where voters place their votes according to their assessment of how other voters will behave rather than according to their actual preference – results in distorted decisionmaking. Strategic voting can cause the company to lose desired transactions and can also be used to coerce voters into accepting alternatives they would have otherwise rejected. An analysis of the various types of strategic voting situations which arise in corporate law demonstrates the author's argument that strategic voting is inherent in the voting mechanism, regardless of the type of group involved or of the decision being made. Maintaining a …

Fired Employees And/Or Frozen-Out Shareholders (An Essay), Deborah A. Schmedemann

Faculty Scholarship

The thesis of this essay can be stated as follows: Shareholder-employees should be able to recover for loss of employment, within the cause of action provided by corporate law, where the termination violates public law, breaches the agreement among the shareholders, or is unsupported by legitimate business purposes. In Part II, this essay presents the employment model, including the paradigm of employment that the law builds on, the starting premise of employment law, the roles of private and public law, and the remedies afforded for violations of an employee's rights. In Part III, this essay develops the corporate model, discussing …

"Presumptions And Burdens Of Proof As Tools For Legal Stability And Change, Tamar Frankel

Faculty Scholarship

Presumptions and burdens of proof are used, among other purposes, to maintain legal stability and at the same time effect change. By imposing the burden of proof on the party asserting a certain outcome, courts can calibrate burdens of proof and substantive rules until experience points to rule retention or amendment. As agents of change, presumptions and burdens of proof are far more flexible and less brittle than rules.¹

This Article tells the story of presumptions and burdens of proof in litigation between corporate shareholders and managements. This litigation is replete with volatile presumptions and innovative burdens of proof, …

Whose Law Is It Anyway?, Susan P. Koniak

Faculty Scholarship

What can and should be the role of private groups in creating and maintaining law? What can and should be the relationship between law-giver and law-receiver? These fundamental questions haunt each of the essays that make up Corporate Lawbreaking and Interactive Compliance (hereinafter Corporate Lawbreaking).' These questions, though not the explicit focus of the book, are questions to which the essayists and editors of this book are speaking whether they realize it or not. Seen as a series of discussions on the role of non-state groups in creating and maintaining law, this book is provocative and worth reading. Some of …

Corporations, Markets, And Courts, Jeffrey N. Gordon

Faculty Scholarship

The times they are a changin'. Vanguard firms of the 1980s takeover boom have announced associate layoffs and salary freezes because business is down. Bankruptcy and corporate reorganization are the hot new specialties as reflected in law school class size and law firm entrepreneurialism. Acquisition activity has fallen dramatically from the halcyon days of the 1980s. The gargantuan headline-grabbing hostile bid is now rare. In particular, the "boot-strap, bust-up" highly leveraged transaction that so engaged the passions of corporate managers and raiders now seems part of the history of corporate finance rather than its future.

Many forces have played a …

Why Not Good Faith?-The Foibles Of Fairness In Closely Held Corporations, Daniel S. Kleinberger

Faculty Scholarship

This essay describes the contours of the shareholder’s duty to be fair and explores some of the problems caused by the law’s imprecision in defining the duty of fairness. Because this duty is best understood as a rejection of old norms, part one of this essay describes the traditional doctrines of intra-corporate responsibility. Part two describes the special characteristics of a close corporation and outlines how those characteristics pushed close corporation law to new concepts of fairness and shareholder duties. Part three attempts to delineate those duties of fairness and also to highlight some of the dangers that arise when …

The Mandatory Structure Of Corporate Law, Jeffrey N. Gordon

Faculty Scholarship

It has become standard in the law and economics literature to refer to the corporation as a "nexus of contracts." On this view, the corporate entity is nothing more than a gathering point for a series of contracts, express and implied, among assorted actors: shareholders, bondholders, managers, employees, suppliers and customers, for example. This view rankles some sensibilities, because the economists' conception of a "contract" as an arrangement between two or more actors supported by reciprocal expectations and behavior is far broader than the lawyer's conception, which focuses on the existence of judicially cognizable duties and obligations. Thus the lawyer, …

The Mandatory/Enabling Balance In Corporate Law: An Essay On The Judicial Role, John C. Coffee Jr.

Faculty Scholarship

A half-filled glass of water can be described as either half full or half empty. The structure of American corporate law – partly enabling, partly mandatory in character – can be viewed in much the same way. Some commentators see American corporate law as primarily composed of mandatory rules that the shareholders themselves cannot waive or modify, In their view, this mandatory component compensates both for the absence of true bargaining among the parties and for the inevitable divergence of interests between the principals (the shareholders) and their agents (the managers and directors). Conversely, other commentators, to whom this Article …

Coming Of Age In A Corporate Law Firm: The Economics Of Associate Career Patterns, Ronald J. Gilson, Robert H. Mnookin

Faculty Scholarship

The traditional American corporate law firm, long an oasis of organizational stability, in recent years has been the subject of dramatic change. The manner in which firms divide profits, perhaps the most revealing aspect of law firm organization because it displays the balance the firm has selected between risk-sharing and incentives, has changed in a critical way. From a long standing reliance on seniority that emphasizes risk-sharing, profit division is shifting to a system based on the productivity of individual partners that emphasizes incentives. With what seems to be only a short time lag from the change in how profits …

No Exit?: Opting Out, The Contractual Theory Of The Corporation, And The Special Case Of Remedies, John C. Coffee Jr.

Faculty Scholarship

Aloof and insular as corporate law often seems, it cannot remain uninfluenced for very long by developments in the mainstream of American civil law. In that mainstream, there is today flowing a strong, swift current called "tort reform." As currents go, this one is remarkably broad and perhaps a little shallow, but on it floats a number of diverse legislative proposals – ceilings on liability, restrictions on attorneys' fees, greater reliance on alternative methods of dispute resolution, restrictions on joint and several liability and contribution, and the curtailment of punitive damages. All of these proposals flow from the same wellspring: …

The Future Of Corporate Federalism: State Competition And The New Trend Toward De Facto Federal Minimum Standards, John C. Coffee Jr.

Faculty Scholarship

What sensible compromise can be struck between Bill Cary's and Ralph Winter's views of the competition among states for corporate charters? This is the relevant question to ask in response to Professor Romano's stimulating paper, because if one ends in an intermediate position between Cary and Winter (as she does and as I do), then one needs to focus on the protections shareholders should be accorded both to protect them from exploitation at the hands of a state pursuing tax revenues and from excessive regulation by a state whose regulatory efforts are intended in fact to realize ulterior objectives unrelated …

Insider Trading As Victimless Crime, Gary S. Lawson

Faculty Scholarship

Insider Trading as Victimless Crime

Few corporate-governance issues arouse as much indignation in the general press as insider trading. Allowing executives to reap trading profits based on their knowledge of internal corporate developments is widely viewed as grossly unfair-though it is not always clear who is victimized by this unfairness. Sometimes the companies that the insiders work for suffer harm, but other times they welcome the trading. Outside shareholders may envy the profits of inside traders, but proving that they are harmed by the practice is much more difficult. On the whole, the most common grievance against insider trading is …

Sharing Among The Human Capitalists: An Economic Inquiry Into The Corporate Law Firm And How Partners Split Profits, Ronald J. Gilson, Robert H. Mnookin

Faculty Scholarship

Large corporate law firms seem to be in a state of extraordinary flux. Success and failure are both on the rise. Large firms appear to supply a substantial and growing proportion of the legal services consumed by American business enterprises and to hire a significant fraction of the graduating classes of elite American law schools. Moreover, the last twenty years have witnessed a remarkable expansion in both the number of large firms and the absolute size of the biggest. But accompanying this striking success, there are also signs of serious institutional instability. During the last few years, several previously successful …

Efficient Markets, Costly Information, And Securities Research, Jeffrey N. Gordon, Lewis A. Kornhauser

Faculty Scholarship

Courts, administrative policy makers and legal scholars have widely embraced the theory that well-developed markets are efficient. In this Article, Professors Gordon and Kornhauser cast doubt on the wisdom of reliance on the efficient market hypothesis as applied to various areas of corporate law. Their charge is that legal decision makers and scholars have misunderstood the assumptions and limitations of the theory and have neglected recent critical economics scholarship. Professors Gordon and Kornhauser begin by detailing the assertions of the hypothesis in relation to the workings of securities markets, focusing on various asset pricing models used to test the hypothesis …

A Structural Approach To Corporations: The Case Against Defensive Tactics In Tender Offers, Ronald J. Gilson

Faculty Scholarship

Tender offers present an obvious and inherent conflict of interest between management and shareholders. On the one hand, an offer provides shareholders with the opportunity to sell their shares for a substantial premium over market price. On the other hand, the tender offer is the principal mechanism by which management can be forcibly unseated from control. It should thus come as no surprise that management often resists outsiders' efforts to direct tender offers at its shareholders. The form of that resistance, however, is somewhat surprising. Because the tender offer is the only form of corporate acquisition addressed directly to the …