Corporate Finance Commons^™

The Non-Binding Bind: Reframing Precatory Stockholder Proposals Under Delaware Law, Kyle A. Pinder

Michigan Business & Entrepreneurial Law Review

Rule 14a-8 under the Securities Exchange Act of 1934 allows stockholders to submit proposals for inclusion in a company’s proxy materials. The rule assumes that Delaware law provides stockholders with the right to submit non-binding proposals for stockholder approval. But as many have observed, this assumption lacks a firm basis in state law, particularly in Delaware. If such a right exists, a stockholder conducting its own proxy solicitation could submit numerous precatory proposals, including those advancing narrow or special interests. This article concludes that, under Delaware law, stockholders do not have an inherent right to submit precatory proposals. Accordingly, a …

Solving The Proxy Advisory Problem: Minimum Regulation For Maximum Competition, Dominic P. Keilty

Michigan Business & Entrepreneurial Law Review

The proxy advisory industry is often criticized on two primary accounts: the lack of accountability for informational accuracy in the development of voting standards and the conflicts of interest faced by advisors when they make proxy voting recommendations on issuers to which they have previously provided corporate governance consulting services. The industry has also been accused of having “anemic” levels of competition, since only two advisors command a vast majority of the market share. While much has been written about curtailing the prevalence and effects of proxy advisor conflicts of interest through increased regulation, the regulatory route toward increased informational …

Creditors, Shareholders, And Losers In Between: A Failed Regulatory Experiment, Albert H. Choi, Jeffery Zhang

Articles

In the aftermath of the 2007–08 Global Financial Crisis, regulators encouraged many of the world’s largest banks to hold a new type of regulatory instrument with the goal of improving their safety and soundness. The regulatory instrument was known as a “CoCo,” short for contingent convertible bond. CoCos are neither debt nor equity. They are something in between, designed to give the bank a shot in the arm during times of stress. Many of the largest international banks have issued CoCos worth hundreds of billions of dollars. After more than ten years—a decade that includes the collapse of Credit Suisse …

Unveiling Misconceptions Of Tunneling: Market Capitalization-Based Analysis, Sang Yop Kang

Michigan Business & Entrepreneurial Law Review

In internal transactions between affiliated companies, there are two opposite directions of wealth-transfer: (1) in the “forward transfer of wealth” (FTW), the wealth-transfer arises from an affiliated company where a controller’s “economic interest” (i.e., “cash-flow right”) is smaller relative to another affiliated company where the controller’s economic interest is larger; (2) in the “reverse transfer of wealth” (RTW), the wealth-transfer arises from an affiliated company where a controller’s economic interest is larger relative to another affiliated company, where the controller’s economic interest is smaller. This Article puts forward a new finding that the extent of internal-transaction tunneling is affected not …

Contractual Remedies In Mergers: Lessons From Crispo V. Musk, Dhruv Aggarwal, Albert H. Choi, Geeyoung Min

Law & Economics Working Papers

The Delaware Chancery Court recently restricted a merger target's ability to recover damages on behalf of its shareholders from a breaching buyer. This paper investigates the impact of the decision. First, we present a theoretical analysis to generate empirical predictions. Second, we show that the decision led to a decrease in the firm value of targets in mergers governed by Delaware law. Third, we hand-collect relevant provisions from merger agreements and find that the agreements governed by Delaware law increasingly include target-friendly non-price terms after the decision. We also present evidence suggesting deal price responds to the inclusion of novel …

Retail Investors And Corporate Governance: Evidence From Zero-Commission Trading, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Law & Economics Working Papers

We examine the effects of the sudden abolition of trading commissions by major online brokerages in 2019, which lowered stock market entry costs for retail investors, on corporate governance. Firms already popular with retail investors experienced positive abnormal returns around the abolition of commissions. Firms with positive abnormal returns in response to commission-free trading subsequently saw a decrease in institutional ownership, a decrease in shareholder voting, and a deterioration in environmental, social, and corporate governance (ESG) metrics. Finally, these firms were more likely to adopt bylaw amendments to reduce the percentage of shares needed for a quorum at shareholder meetings. …

Protecting The Sovereign's Money Monopoly, Gary B. Gorton, Jeffery Zhang

Articles

Sovereign states have held a monopoly over the production of circulating money for well over a century. Governments, not private entities, issue circulating money. The advent of stablecoins—privately issued digital money that can circulate—raises the question of the sovereign’s money monopoly from the grave. Should private money circulate alongside sovereign money in the twenty-first century? We argue against coexistence to preserve financial stability and monetary sovereignty.

Through the lens of economic theory, we explore the coexistence question by revisiting the original debates that led to the sovereign’s money monopoly in England, the United States, Canada, and Sweden. In each case, …

Taxation And Corporate Governance, Reuven S. Avi-Yonah, Ariel Siman

Articles

Legal and economic scholars have examined the intersection between corporate governance and taxation; however, recent legal scholarship has generally focused on the interplay between director compensation, management measures in the face of the market for corporate control, and the double taxation of inter-corporate dividends. Other aspects of the relationship between corporate governance and taxation have received limited attention. This article aims to fill this gap in the literature. First, this paper discusses the corporate agency problem and the existing justifications for the corporate tax. Second, this paper argues that the corporate tax can be justified on the ground that it …

Meme Corporate Governance, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Articles

Can retail investors revolutionize corporate governance and make public companies more responsive to social concerns? Beginning in 2021, there was a dramatic influx of retail investors into the shareholder base of “meme” stock companies such as GameStop, AMC, and Bed Bath & Beyond. Observing the unprecedented, coordinated trading among retail investors, scholars and practitioners predicted that the influx of retail investors would reduce the power of large institutional investors and democratize corporate governance. These predictions were driven by three factors: generational, with assumptions that millennial and Gen Z investors would challenge corporate management; societal, reflecting growing discontent with slow progress …

Pricing Corporate Governance, Albert Choi

Articles

Scholars and practitioners have long theorized that by penalizing firms with unattractive governance features, the stock market incentivizes firms to adopt the optimal governance structure at their initial public offerings (IPOs). This theory, however, does not seem to match with practice. Not only do many IPO firms offer putatively suboptimal governance arrangements, such as staggered boards and dual-class structures, but these arrangements have been gaining popularity among IPO firms. This Article argues that the IPO market is unlikely to provide the necessary discipline to incentivize companies to adopt the optimal governance package. In particular, when the optimal governance package differs …

Meme Corporate Governance, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Law & Economics Working Papers

Can retail investors revolutionize corporate governance and make public companies more responsive to social concerns? The U.S. stock market offered an unusual experiment to test the impact of retail investors in 2021, when there was a dramatic influx of retail investors into the shareholder base of companies such as GameStop and AMC. The meme surge phenomenon elicited a variety of reactions from scholars and practitioners. While some worried that affected companies’ share prices were becoming disjointed from their financial fundamentals, others predicted that retail shareholders will reduce the power of large institutional investors and democratize corporate governance. This Article presents …

The Meme Stock Frenzy: Origins And Implications, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Law & Economics Working Papers

In 2021, several publicly traded companies, such as GameStop and AMC, became “meme stocks,” experiencing a sharp rise in their stock prices through a dramatic influx of retail investors into their shareholder base. Analyses of the meme stock surge and its implications for corporate governance have focused on the idiosyncratic creation of online communities around particular stocks during the COVID-19 pandemic. In this Article, we argue that the emergence of meme stocks is part of longer-running digital transformations in trading, investing, and governance. On the trading front, the sudden abolition of commissions by major online brokerages in 2019 reduced entry …

All Stick And No Carrot? Reforming Public Offerings, Stephen J. Choi, Adam C. Pritchard

Law & Economics Working Papers

The SEC heavily regulates the traditional initial public offering. Those regulatory burdens fuel interest in alternative paths for private companies to go public, “regulatory arbitrage.” The SEC’s response to the emergence of alternatives, most recently SPACs and direct listings, has been to suppress them by imposing heightened liability under Section 11 of the Securities Act. The SEC’s treatment of the traditional IPO regulatory process as a one-size-fits-all regime ignores the weaknesses of this process, in particular the informational inefficiency of the book-building process. In this essay we argue that the agency’s focus in regulating issuers going public should be on …

Liability For Non-Disclosure In Equity Financing, Albert H. Choi, Kathryn E. Spier

Law & Economics Working Papers

The paper analyzes the effects of holding firms liable for non-disclosure of material information when raising capital. We develop a model in which a privately-informed entrepreneur can choose to withhold information from prospective investors when issuing and selling stock and the investors can bring suit against the firm ex post for (alleged) non-disclosure. The damage payment received by the investors is partially offset by the reduced value of their equity stake. The analysis shows that the equilibrium depends on, among others, (1) the amount of personal capital the entrepreneur has to commit, (2) the frequency with which the entrepreneur is …

Initial Public Offering And Optimal Corporate Governance, Albert H. Choi

Law & Economics Working Papers

This paper examines the long-standing debate over whether firms have a market-based incentive to adopt optimal governance provisions at their initial public offering (IPO). Various scholars and practitioners have argued that firms that offer stock to the public with suboptimal governance structure will be penalized by the market through a lower IPO price. At the same time, others have documented empirical evidence that many IPO firms have putatively suboptimal governance provisions, such as anti-takeover provisions and dual class structure, and many, especially those with dual-class structure, enjoy a market premium at their IPO. This paper attempts to bridge this gap. …

Controlling Externalities: Ownership Structure And Cross-Firm Externalities, Dhammika Dharmapala, Vikramaditya S. Khanna

Law & Economics Working Papers

In recent years, debates over the social purpose of corporations have taken center stage amidst rising concern about externalities (such as those associated with climate change and harmful speech) generated by firms. A key motivation is the claim that government regulation and liability regimes appear not to be functioning sufficiently well to force firms to internalize these externalities. There is thus rising interest in exploring alternative mechanisms. In particular, a rapidly growing body of scholarship argues that index funds increasingly approximate diversified “universal owners” with incentives to maximize portfolio value (and thus to internalize cross-firm externalities). However, much of this …

A Case For Higher Corporate Tax Rates, Edward G. Fox, Zachary D. Liscow

Law & Economics Working Papers

In this report, Fox and Liscow argue that, while conventional wisdom holds that we should lower taxes on corporations because of international competition, two recent changes militate in favor of higher corporate taxes, which would close the deficit, fund social programs, and reduce inequality. First, changes in tax law have increasingly targeted the corporate tax at economic “rents,” the supersized returns that businesses receive when they enjoy advantages like market power. Because taxing rents is progressive and does little to harm economic activity, a higher rate is justified. Second, shifts in the American economy have allowed companies to earn more …

Is Corporate Integration A Good Idea?, Reuven S. Avi-Yonah, David Burton, Curtis Dubay, David S. Miller, Steven T. Miller, Stuart L. Rosow, Eric Toder, Alan D. Viard, Richard A. Westin

Other Publications

In general, I believe that integration is advisable as a way of addressing the biases of the classical system against using the corporate form, in favor of retaining earnings, and in favor of debt financing.

In terms of the bias against the corporate form, dividend deduction is as good as dividend exemption or imputation. In all three cases, there is only one level of tax imposed, at the shareholder level for dividend deduction or imputation, and at the corporate level for dividend exemption. If the top shareholder tax rate is higher than the corporate tax rate, both imputation and dividend …