Business Law, Public Responsibility, and Ethics Commons^™

Berle And The Entrepreneur, Charles R.T. O'Kelley

Seattle University Law Review

In the first and last four chapters (“the Five Chapters”) of The Modern Corporation and Private Property, Adolf Berle, Jr. describes in sweeping terms a fundamental transformation of the American economy. . . . Writing more than ten years before Berle, another seminal scholar, Frank Knight . . . developed a theory of the entrepreneur as part of his larger effort to more carefully explain the theoretical underpinnings of a free-market economy. . . . Given Knight’s prominence and the fact that Knight apparently reached dramatically different conclusions than did Berle concerning the consequences flowing from separation of ownership …

The Birth Of Corporate Governance, Harwell Wells

Seattle University Law Review

Part I of this Article briefly examines the concept of “corporate governance” and argues for dating the concept’s origins to the debates of the 1920s. Part II then moves on to examine early scholarly and popular discussions of the separation of ownership and control. After surveying the historical developments that produced the recognizably modern corporate economy around the turn of the century, it examines early scholarly and popular discussions of the separation of ownership and control, focusing on three major thinkers, Louis D. Brandeis, Walter Lippmann, and Thorstein Veblen. It argues that, while each of these authors examined the separation …

Monitoring To Reduce Agency Costs: Examining The Behavior Of Independent And Non-Independent Boards, Anita Anand, Frank Milne, Lynnette Purda

Seattle University Law Review

Berle and Means’s analysis of the corporation—in particular, their view that those in control are not the owners of the corporation—raises questions about actions that corporations take to counter concerns regarding management’s influence. What mechanisms, if any, do corporations implement to balance the distribution of power in the corporation? To address this question, we analyze boards of directors’ propensity to voluntarily adopt recommended corporate governance practices. Because board independence is one way to enhance shareholders’ ability to monitor management, we probe whether firms with independent boards of directors (which we define as boards with either an independent chair or a …

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

Seattle University Law Review

The Modern Corporation & Private Property is a paradigm-shifting analysis of the modern corporation. The book is perhaps best known for the insights of Berle and Means about the separation of ownership from control and the consequences of that separation for the allocation of power within the corporation. The Berle and Means story focuses on the shareholder as the owner of the corporation. Berle and Means saw the mechanism of centralized management—in which the shareholder retains the economic interest but not the control rights associated with ownership—as threatening the conception of shareholder interests in terms of property rights. In particular, …

The Modern Corporation As Social Construction, Mark S. Mizruchi, Daniel Hirschman

Seattle University Law Review

Classic works, Mark Mizruchi and Lisa Fein argued, share a particular fate. Authors often cite classic works without reading them—or without reading them carefully. . . . Yet perhaps no single work fits the above description better than one of the most important books on the large corporation ever published: Adolf Berle and Gardiner Means’s The Modern Corporation and Private Property. One can speculate that few works in the social sciences have been as often cited and as little read. As a consequence, we would expect The Modern Corporation to be a good candidate for either selective interpretation or …

Backdated Stock Options Ownership Impact On The Corporation, Management, & Shareholders, Karen Cascini, Alan Delfavero

WCBT Faculty Publications

In the post-Sarbanes-Oxley Act (SOx) world, there has been an unprecedented crackdown on fraudulent activity occurring within corporate America. During recent years, many companies have granted stock options to their executives and employees as part of compensation packages. While the issuance of stock options as a component of compensation is considered to be a legal practice, corruption has taken this corporate resource to unlawful heights. Recently, numerous corporations have been in the news for potentially backdating stock options. Accordingly, the purpose of this paper is to distinguish between legal and illegal aspects of backdating stock options, and to examine the …

Corporate Power In The Public Eye: Reassessing The Implications Of Berle’S Public Consensus Theory, Marc T. Moore, Antoine Rebérioux

Seattle University Law Review

We analyze Berle’s overall corporate governance project in accordance with what we see as its four core sub-themes: (A) the limitations of external market forces as a constraint on managerial decision-making power; (B) the desirability of internal (corporate) over external (market) actors in allocating corporate capital; (C) civil society and the public consensus as a continuous informal check on managerial decision-making power; and (D) shareholder democracy (as opposed to shareholder primacy or shareholder wealth maximization) as a socially instrumental institution. We seek to debunk the popular misconception that Berle’s early work was a defense of the orthodox shareholder primacy paradigm …

Tracking Berle’S Footsteps: The Trail Of The Modern Corporation’S Last Chapter, William W. Bratton, Michael L. Wachter

Seattle University Law Review

Readers game enough to work through all three hundred pages of The Modern Corporation and Private Property looking for insights on corporate law today encounter two, apparently contradictory, lines of thought. One line, set out in Books II and III, resonates comfortably with today’s shareholder-centered corporate legal theory. Here the book teaches that even as ownership and control have separated, managers should function as trustees for the shareholders and so should exercise their wide-ranging powers for the shareholders’ benefit. The other line of thought emerges in Books I and IV, where The Modern Corporation encases this shareholder trust model in …

Rethinking The Separation Of Ownership From Management In American History, Kenneth Lipartito, Yumiko Morii

Seattle University Law Review

In <em>The Modern Corporation and Private Property</em>, Adolf Berle and Gardiner Means would use AT&T as a prime example of what they saw as a dangerous new trend, the replacement of ownership-based capitalism with giant corporations controlled by a small group of propertyless managers. Indeed, AT&T became Berle and Means’ favorite example. . . . As we shall see, however, the claim that AT&T was a leading example of the separation of ownership from management is incomplete. More importantly, the common interpretation of Berle and Means’ work is mistaken, placing the emphasis incorrectly on the number of shareholders and reading …

Berle’S Vision Beyond Shareholder Interests: Why Investment Bankers Should Have (Some) Personal Liability, Claire Hill, Richard Painter

Seattle University Law Review

This essay, published in a symposium on the work of Adolf Berle, approaches the Berle-Dodd debate from the perspective that corporate managers have responsibilities beyond pursuing the interests of shareholders. Stock based executive compensation, designed to align managers’ interests with those of shareholders, has, in the investment banking industry in particular, failed to avert, and may have caused, managers (in this case, bankers) to take excessive risks that in the present financial crisis inflicted great damage on creditors and on society as a whole. We describe here the broad outlines of a proposal that we will discuss in future publications …

Enumerating Old Themes? Berle’S Concept Of Ownership And The Historical Development Of English Company Law In Context, Lorraine E. Talbot

Seattle University Law Review

This paper offers some tentative suggestions as to why Berle’s work has been read and interpreted so selectively in the United Kingdom. I suggest that this must be partly attributable to the historical developments in English company law that entrenched the notion of shareholder ownership claims. Specifically, unincorporated associations’ normative values—that members are owners and there is no distinction between small organizations with no share dispersal and large organizations with wide share dispersal—have a continuing influence on this entrenched notion of shareholder ownership claims. First, I provide an overview of the origins of English company law. Next, I address how …

The Case Against Exempting Smaller Reporting Companies From Sarbanes-Oxley Section 404: Why Market-Based Solutions Are Likely To Harm Ordinary Investors, John Orcutt

Law Faculty Scholarship

Section 404 is arguably the most controversial provision of Sarbanes-Oxley (“SOX”). The controversy focuses on whether Section 404’s substantial compliance costs exceed the statute’s benefits, with no consensus on Section 404’s cost-effectiveness. If Section 404 turns out to be cost-ineffective, the companies that are most threatened are smaller companies, as cost-ineffective regulations tend to disproportionately harm smaller companies. This Article considers whether Congress and the SEC should exempt smaller reporting companies from Section 404 compliance, as that would allow for a market-based resolution to the uncertain value of Section 404 for smaller reporting companies. Smaller reporting companies would be relieved …

What Happens In Vegas Doesn't Always Stay In Vegas: Nevada Corporations Enjoy A Disproportionate Share Of Sec Trading Suspensions, Anthony J. Cataldo Ii, Peter F. Oehlers, Robert C. Scanlon

Accounting Faculty Publications

No abstract provided.

Public Ownership. Firm Governance, And Litigation Risk, Eric L. Talley

Faculty Scholarship

Many going-private transactions are motivated – at least ostensibly – by the desire to escape the burdens and costs of public ownership. Although these burdens have many purported manifestations, one commonly cited is the risk of litigation, which may be borne both directly by the firm and/or its fiduciaries or reflected in director and officer insurance premia funded at company expense. An important issue for the "litigation risk" justification of privatization is whether alternative (and less expensive) steps falling short of going private – such as governance reforms – may augur sufficiently against litigation exposure. In this Article, I consider …

The Dystopian Potential Of Corporate Law, D. Gordon Smith

Faculty Scholarship

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. This paper is part of a debate on the audacious question, Can Corporate Law Save …

Understanding The ‘Corporate’ In Corporate Social Responsibility, Barak D. Richman, Aaron K. Chatterji

Faculty Scholarship

No abstract provided.

Some Peer-To-Peer, Democratically And Voluntarily Produced Thoughts About 'The Wealth Of Networks: How Social Production Transforms Markets And Freedom,' By Yochai Benkler, Ann Bartow

Law Faculty Scholarship

In this review essay, Bartow concludes that The Wealth of Networks: How Social Production Transforms Markets and Freedom by Yochai Benkler is a book well worth reading, but that Benkler still has a bit more work to do before his Grand Unifying Theory of Life, The Internet, and Everything is satisfactorily complete. It isn't enough to concede that the Internet won't benefit everyone. He needs to more thoroughly consider the ways in which the lives of poor people actually worsen when previously accessible information, goods and services are rendered less convenient or completely unattainable by their migration online. Additionally, the …

Sarbanes-Oxley's Structural Model To Encourage Corporate Whistleblowers, Richard E. Moberly

BYU Law Review

No abstract provided.

Nonprofit Takeovers: Regulating The Market For Mission Control, Dana Brakman Reiser

BYU Law Review

No abstract provided.

The "Branding Effect" Of Contracts, D. Gordon Smith

Faculty Scholarship

In his case study of the MasterCard IPO and its predecessor piece on the Google IPO, Victor Fleischer claims to find evidence of a branding effect of legal infrastructure. The branding effect is not aimed at reducing the potential for opportunism by a counterparty to a contract, but rather at increasing the attractiveness of a product to present and future users or improving the image of a company in the eyes of regulators, judges, and juries. In this essay commenting on Fleischer's work, I endorse the notion that deal structures have branding effects and position Fleischer's work within a larger …

On Public Versus Private Provision Of Corporate Law, Gillian K. Hadfield, Eric L. Talley

Faculty Scholarship

Law in modern market societies serves both democratic and economic functions. In its economic function, law is a service, a means of enhancing the value of transactions and organizations. Yet modern market economies continue to rely on the state, rather than the market, to provide this service. This paper investigates whether private provision of law may be superior to public provision. We look in particular at corporate law, where there is a substantial literature exploring the efficiency implications of "regulatory competition" and compare this competition with market competition between private providers. Drawing from the well-known framework of spatial models of …

The Exit Structure Of Venture Capital, D. Gordon Smith

Faculty Scholarship

Venture capital contracts contain extensive provisions regulating exit by the venture capitalists. In this Article, Professor Smith employs financial contracting theory in conjunction with original data collected from 367 venture-backed companies to analyze these exit provisions. He concludes that the combination of exit provisions in a typical venture capital relationship serves to lock venture capitalists into the investment during the initial stage. In later stages of the relationship, the venture capitalists acquire increasing control over exit by securing additional seats on the board of directors and by obtaining contractual exit rights. The result is a sophisticated transfer of control from …

Spare The Rod, Spoil The Director? Revitalizing Directors' Fiduciary Duty Through Legal Liability, Lisa M. Fairfax

Faculty Scholarship

It appears that our society has tacitly agreed to spare corporate directors any significant legal liability—which includes both financial and incarceration—for failing to perform their duties as board members. Thus, over the last twenty years, there has been a virtual elimination of legal liability—particularly in the form of financial penalties—for directors who breach their fiduciary duty of care. This is true despite the fact that we entrust directors with the awesome responsibility of monitoring all of America's corporations as well as the officers and agents within those corporations. More surprisingly, this tacit agreement against legal liability for directors has persisted …

The Exit Structure Of Strategic Alliances, D. Gordon Smith

Faculty Scholarship

Today, many biotechnology firms use strategic alliances to contract with other companies. This article contends that the governance structure of these alliances - specifically, the contractual board - provides an integrated restraint on opportunism. While an alliance agreement's exit structure could provide a check on opportunism by allowing the parties to exit at will, such exit provisions also can be used opportunistically. Most alliance agreements, therefore, provide for contractual lock in of the alliance partners, with only limited means of exit. Lock in, of course, raises its own concerns, and the contractual board - which typically is composed of representatives …

A New Interpretation Of The Contemporaneous Ownership Requirement In Shareholder Derivative Suits: In Re Bank Of New York Derivative Litigation And The Elimination Of The Continuing Wrong Doctrine, Terence L. Robinson Jr.

BYU Law Review

No abstract provided.

The Unique Benefits Of Treating Personal Goodwill As Property In Corporate Acquisitions, Darian M. Ibrahim

Faculty Publications

Corporate acquisition talks may not get far if buyer and seller disagree over transaction structure, which can have significant after-tax effects. But the parties may have overlooked an item that, due to its potential tax treatment, could be the key to facilitating the acquisition. That item is the selling shareholder's "personal goodwill."

Personal goodwill exists when the shareholder's reputation, expertise, or contacts gives the corporation its intrinsic value. It is most likely to be found in closely held businesses, especially those that are technical, specialized, orprofessional in nature or have few customers and suppliers. If personal goodwill is treated as …

Thinking Like A Deal Lawyer, Tina L. Stark

Journal of Legal Education

No abstract provided.

Understanding New Hampshire’S Rule 4.2 As Applied To Corporate Litigants: An Explanation And Suggestions For Improvement, Heather Menezes

The University of New Hampshire Law Review

[Excerpt] “Consider this scenario: an attorney represents a client in litigation against a corporation. The attorney gets a call from an employee of that corporation and the employee says, “Everything in your complaint is absolutely correct.” However excited the attorney is to speak with this person, the Rules of Professional Conduct constrain whom the attorney can talk to if a corporation is involved in the pending litigation. In New Hampshire, any attorney can quickly find that Rule 4.2 prohibits contact with a represented party.1 But is this corporate employee a represented party? Even after reading the comment to the rule …

Independent Legal Significance, Good Faith, And The Interpretation Of Venture Capital Contracts, D. Gordon Smith

Faculty Scholarship

Venture capital contracts are inherently incomplete. When interpreting such contracts, courts could deal with the expectations of parties formally by inquiring only about the plain meaning of the contract or qualitatively by enforcing the presumed expectations of the parties, regardless of whether those expectations are expressed in the contract. The Delaware courts have opted for a formal approach. In doing so, they appear to be engaged in an effort to force contracting parties toward completeness. While the duty of good faith appears to respond to the inevitable incompleteness of contracts, the courts largely ignore this duty in preferred stock cases. …

Worker Ownership In Enron's Wake - Revisiting A Community Development Tactic, Peter R. Pitegoff

Faculty Publications

Worker ownership of business enterprise has long been touted as a vehicle for community economic development. Employee stock ownership plans in leveraged buy-outs, ESOPs and broad-based stock options in going concerns, and worker cooperatives in selected sectors - the experience has varied widely in goals, method, and outcome.

This Article reflects on the continued utility of worker ownership as a component of community development and calls attention to contrasts with conventional corporate governance and goals. Rather than an end in itself or just another way of doing business, worker ownership can be a vital element of a broader job creation, …