Law Commons^™

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 Jr.

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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 and make …

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

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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 settlements …

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

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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.

Making Sustainability Disclosure Sustainable, Jill E. Fisch

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Sustainability is receiving increasing attention from issuers, investors and regulators. The desire to understand issuer sustainability practices and their relationship to economic performance has resulted in a proliferation of sustainability disclosure regimes and standards. The range of approaches to disclosure, however, limit the comparability and reliability of the information disclosed. The Securities & Exchange Commission (SEC) has solicited comment on whether to require expanded sustainability disclosures in issuer’s periodic financial reporting, and investors have communicated broad-based support for such expanded disclosures, but, to date, the SEC has not required general sustainability disclosure.

This Article argues that claims about the relationship …

Social Activism Through Shareholder Activism, Lisa Fairfax

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In 1952, the SEC altered the shareholder proposal rule to exclude proposals made “primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The SEC did not reference civil rights activist James Peck or otherwise acknowledge that its actions were prompted by Peck’s 1951 shareholder proposal to Greyhound for desegregating seating. Instead, the SEC indicated that its change simply reflected a codification of a position the SEC staff had taken in 1945.

Today, the shareholder proposal rule has evolved, giving way to several amendments that now enable shareholders to submit proposals on the proxy statement …

From Apathy To Activism: The Emergence, Impact, And Future Of Shareholder Activism As The New Corporate Governance Norm, Lisa M. Fairfax

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The conventional and long-held view that public company shareholders are, and should be, rationally apathetic is waning. Today, public company shareholders are active. Such shareholders have actively sought to increase their voting power and influence over director elections and other important corporate matters. These shareholders not only have been voting, but they also have been voting against management preferences. Moreover, public company shareholders increasingly have begun to request, and in some instances demand, that corporate officers and directors engage with them around a range of issues. The shift away from shareholder apathy reflects a radical departure from the traditional corporate …

Toward A Horizontal Fiduciary Duty In Corporate Law, Asaf Eckstein, Gideon Parchomovsky

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Fiduciary duty is arguably the single most important aspect of our corporate law system. It consists of two distinct sub-duties—a duty of care and a duty of loyalty—and it applies to all directors and corporate officers. Yet, under extant law, the duty only applies vertically, in the relationship between directors and corporate officers and the firm. At present, there exists no horizontal fiduciary duty: directors and corporate officers owe no fiduciary duty to each other. Consequently, if one of them fails her peers, they cannot seek direct legal recourse against her even when they stand to suffer significant reputational and …

Intermediated Securities Holding Systems Revisited: A View Through The Prism Of Transparency, Thomas Keijser, Charles W. Mooney Jr.

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This chapter explains several benefits of adopting transparent information technology systems for intermediated securities holding infrastructures. Such transparent systems could ameliorate various prevailing problems that confront existing tiered, intermediated holding systems, including those related to corporate actions (dividends, voting), claims against issuers and upper-tier intermediaries, loss sharing and set-off in insolvency proceedings, money laundering and terrorist financing, and privacy, data protection, and confidentiality. Moreover, transparent systems could improve the functions of intermediated holding systems even without changes in laws or regulations. They also could provide a catalyst for law reform and a roadmap for substantive content of reforms. Among potential …

The New Titans Of Wall Street: A Theoretical Framework For Passive Investors, Jill E. Fisch, Asaf Hamdani, Steven Davidoff Solomon

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Passive investors — ETFs and index funds — are the most important development in modern day capital markets, dictating trillions of dollars in capital flows and increasingly owning much of corporate America. Neither the business model of passive funds, nor the way that they engage with their portfolio companies, however, is well understood, and misperceptions of both have led some commentators to call for passive investors to be subject to increased regulation and even disenfranchisement. Specifically, this literature takes a narrow view both of the market in which passive investors compete to manage customer funds and of passive investors’ participation …

Quasi Governments And Inchoate Law: Berle's Vision Of Limits On Corporate Power, Elizabeth Pollman

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In honor of the Berle X Symposium, this essay gives prominence to key writings of the distinguished corporate law scholar Adolf A. Berle, Jr. from the 1950s and 60s. By the early 1950s, Berle had rejoined academic life after years in government service. When he returned to scholarly writing, Berle repeatedly highlighted the problem of economic power in corporations. He wrote about this as both an issue of “bigness” as an absolute matter and relative to particular industries in terms of concentration. He conceded that history had vindicated the late Professor E. Merrick Dodd’s view that directors of large corporations …

Citizens United As Bad Corporate Law, Leo E. Strine Jr., Jonathan Macey

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In this Article we show that Citizens United v. FEC, arguably the most important First Amendment case of the new millennium, is predicated on a fundamental misconception about the nature of the corporation. Specifically, Citizens United v. FEC, which prohibited the government from restricting independent expenditures for corporate communications, and held that corporations enjoy the same free speech rights to engage in political spending as human citizens, is grounded on the erroneous theory that corporations are “associations of citizens” rather than what they actually are: independent legal entities distinct from those who own their stock. Our contribution to the literature …

Corporate Oversight And Disobedience, Elizabeth Pollman

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Over a decade has passed since landmark Delaware corporate law decisions on oversight responsibility, and only a small handful of cases have survived a motion to dismiss. Scholars have puzzled over what it means to have the potential for corporate accountability lodged within the duty of good faith, but almost never brought to fruition in terms of trial liability.

This article explores the public-regarding purpose of the obedience and oversight duties in corporate law and provides a descriptive account of how they are applied in practice. The Article argues that the fidelity to external law required by the duty of …

The Problem Of Sunsets, Jill E. Fisch, Steven Davidoff Solomon

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An increasing percentage of corporations are going public with dual class stock in which the shares owned by the founders or other corporate insiders have greater voting rights than the shares sold to public investors. Some commentators have criticized the dual class structure as unfair to public investors by reducing the accountability of insiders; others have defended the value of dual class in encouraging innovation by providing founders with insulation from market pressure that enables them to pursue their idiosyncratic vision.

The debate over whether dual class structures increase or decrease corporate value is, to date, unresolved. Empirical studies have …

Startup Governance, Elizabeth Pollman

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Although previously considered rare, over three hundred startups have reached valuations over a billion dollars. Thousands of smaller startups aim to follow in their paths. Despite the enormous social and economic impact of venture-backed startups, their internal governance receives scant scholarly attention. Longstanding theories of corporate ownership and governance do not capture the special features of startups. They can grow large with ownership shared by diverse participants, and they face issues that do not fit the dominant principal-agent paradigm of public corporations or the classic narrative of controlling shareholders in closely held corporations.

This Article offers an original, comprehensive framework …

Labor Interests And Corporate Power, Matthew T. Bodie

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Labor unions exert significant power through collective bargaining, pension fund investing, and political advocacy. But in each of these areas, unions face inherent structural limitations that severely constrain these powers. Workers need participation rights in corporate governance to overcome the multiplicity of forces arrayed against them. And rather than obviating the need for unions, worker corporate power would facilitate a different kind of labor representation — a transition to labor power that advocates for occupational interests and forms coalitions across the shifting political interests of different worker groups.

Mootness Fees, Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon, Randall Thomas

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In response to a sharp increase in litigation challenging mergers, the Delaware Chancery Court issued the 2016 Trulia decision, which substantively reduced the attractiveness of Delaware as a forum for these suits. In this Article, we empirically assess the response of plaintiffs’ attorneys to these developments. Specifically, we document a troubling trend—the flight of merger litigation to federal court where these cases are overwhelmingly resolved through voluntary dismissals that provide no benefit to the plaintiff class but generate a payment to plaintiffs’ counsel in the form of a mootness fee. In 2018, for example, 77% of deals with litigation were …

All On Board? Board Diversity Trends Reflect Signs Of Promise And Concern, Lisa Fairfax

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This Article argues that while there is considerable reason to be optimistic about the possibility that board diversity efforts will create meaningful change in the number of women who occupy board positions, that optimism must be tempered by certain trends suggesting that the board diversity effort will continue to confront challenges. The recently enacted California law mandating board diversity has the potential to significantly increase board diversity not only at those companies that fall within the law’s purview, but also with respect to other companies that may be motivated to increase their board diversity efforts as a result of the …

Tech, Regulatory Arbitrage, And Limits, Elizabeth Pollman

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Regulatory arbitrage refers to structuring activity to take advantage of gaps or differences in regulations or laws. Examples include Facebook modifying its terms and conditions to reduce the exposure of its user data to strict European privacy laws, and Uber and other platform companies organizing their affairs to categorize workers as non-employees. This essay explores the constraints and limits on regulatory arbitrage through the lens of the technology industry, known for its adaptiveness and access to strategic resources. Specifically, the essay explores social license and the bundling of laws and resources as constraining forces on regulatory arbitrage, and the legal …

Corporate Disobedience, Elizabeth Pollman

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Corporate law has long taken a dim view of corporate lawbreaking. Corporations can be chartered only for lawful activity. Contemporary case law characterizes intentional violations of law as a breach of the fiduciary duties of good faith and loyalty. While recognizing that rule breaking raises significant social and moral concerns, this Article suggests that corporate law and academic debate have overlooked important aspects of corporate disobedience. This Article provides an overview of corporate disobedience and illuminates the role that it has played in entrepreneurship and legal change. Corporations violate laws for a variety of reasons, including as part of efforts …

Reconstructing The Corporation: A Mutual-Control Model Of Corporate Governance, Grant M. Hayden, Matthew T. Bodie

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The consensus around shareholder primacy is crumbling. Investors, long assumed to be uncomplicated profit-maximizers, are looking for ways to express a wider range of values in allocating their funds. Workers are agitating for greater voice at their workplaces. And prominent legislators have recently proposed corporate law reforms that would put a sizable number of employee representatives on the boards of directors of large public companies. These rumblings of public discontent are echoed in recent corporate law scholarship, which has cataloged the costs of shareholder control, touted the advantages of nonvoting stock, and questioned whether activist holders of various stripes are …

Worker Participation, Sustainability, And The Puzzle Of The Volkswagen Emissions Scandal, Matthew T. Bodie

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In September 2015, Volkswagen's "clean diesel" technology was exposed as a sham. Not only were the company's vehicles discharging dangerously high levels of nitrogen oxide, but VW had intentionally rigged its emissions systems to cheat on environmental tests. In the wake of resignations and criminal investigations, the company's governance system came under justifiable attack. Were VW's famously worker-friendly governance policies to blame? This Chapter examines the root causes of the emissions scandal and concludes that VW's governance culture suffered from dictatorial leadership as well as a cozy relationship between management and labor leaders. This culture of complacency led to a …

Corporate Governance Beyond Economics, Elizabeth Pollman

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In recent years, changes to state and federal law have increased pressure on corporate law to serve as an ordering mechanism for interests and values beyond economics. On the federal front, two U.S. Supreme Court cases have put existing corporate law in a new quasi-constitutional light. In the landmark decisions of Citizens United v. FEC and Burwell v. Hobby Lobby Stores, Inc., the Supreme Court has pointed to state corporate law as the mechanism for ordering political and religious activity. In addition, Congress, the SEC, and federal courts have been embroiled in battles about the scope and appropriateness of regulating …

Jury Trial Disparities Between Class Actions And Shareholder Derivative Actions In State Courts, Ann M. Scarlett

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Class actions and shareholder derivative lawsuits are both forms of representative litigation that historically had to be brought in the equity courts to be decided by a judge, rather than in the common-law courts to be decided by a jury. In 1938, the federal courts merged law and equity by passing the Federal Rules of Civil Procedure, which allowed both legal and equitable claims to be heard within the same civil action. After law and equity merged, the Supreme Court interpreted the Seventh Amendment’s preservation of the right to jury trial as including not just actions recognized at common law, …

A Global System Of Work, A Global System Of Regulation?: Crowdwork And Conflicts Of Law, Miriam A. Cherry

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On-demand platforms are changing and reshaping our conceptions of both the firm and the work relationship in far-reaching and critical ways, allowing companies to hire workers and to seek customers across national boundaries. Confronted with low pay, wage theft, and other problematic working conditions, gig workers around the world have turned to the courts, attempting to invoke the protections of traditional labor and employment law. While some commentators believe existing forms of labor and employment regulations can stretch to cover on-demand work, others have called for new legal initiatives specifically crafted for online platforms. The goal of this paper is …

The Corporation Reborn: From Shareholder Primacy To Shared Governance, Grant M. Hayden, Matthew T. Bodie

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The consensus around shareholder primacy is crumbling. Investors, long assumed to be uncomplicated profit-maximizers, are looking for ways to express a wider range of values in allocating their funds. Workers are agitating for greater voice at their workplaces. And prominent legislators have recently proposed corporate law reforms that would put a sizable number of employee representatives on the boards of directors of large public companies. These rumblings of public discontent are echoed in recent corporate law scholarship, which has cataloged the costs of shareholder control, touted the advantages of nonvoting stock, and questioned whether activist holders of various stripes are …