Law Commons^™

Duty And Diversity, Chris Brummer, Leo E. Strine, Jr.

Vanderbilt Law Review

In the wake of the brutal deaths of George Floyd and Breonna Taylor, lawmakers and corporate boards from Wall Street to the West Coast have introduced a slew of reforms aimed at increasing Diversity, Equity, and Inclusion (“DEI”) in corporations. Yet the reforms face difficulties ranging from possible constitutional challenges to critical limitations in their scale, scope, and degree of legal obligation and practical effects.

In this Article, we provide an old answer to the new questions facing DEI policy and offer the first close examination of how corporate law duties impel and facilitate corporate attention to diversity. Specifically, we …

Team Production Theory Across The Waves, Brian R. Cheffins, Richard Williams

Vanderbilt Law Review

Team production theory, which Margaret Blair developed in tandem with Lynn Stout, has had a major impact on corporate law scholarship. The team production model, however, has been applied sparingly outside the United States. This article, part of a symposium honoring Margaret Blair’s scholarship, serves as a partial corrective by drawing on team production theory to assess corporate arrangements in the United Kingdom. Even though Blair and Stout are dismissive of “shareholder primacy” and the U.K. is thought of as a “shareholder-friendly” jurisdiction, deploying team production theory sheds light on key corporate law topics such as directors’ duties and the …

Fiduciary Duties And Corporate Climate Responsibility, Cynthia A. Williams

Vanderbilt Law Review

Corporate-law scholarship for decades has been occupied with agency costs and how to mitigate them. But when I teach the basic business organizations class, starting with agency law and looking at the fiduciary duties of care, loyalty, and full disclosure of any agent to her principal, we explore both costs and benefits of agency relationships. I do so by introducing Ronald Coase’s theory of the firm. Using an example close to most second-year law students’ experience, that of buying a suit for interviews, I contrast Brooks Brothers establishing its own factories (the “make” decision) with Brooks Brothers using supply chains, …

Team Production Revisited, William W. Bratton

Vanderbilt Law School Faculty Publications

This Article reconsiders Margaret Blair and Lynn Stout’s team production model of corporate law, offering a favorable evaluation. The model explains both the legal corporate entity and corporate governance institutions in microeconomic terms as the means to the end of encouraging investment, situating corporations within markets and subject to market constraints but simultaneously insisting that productive success requires that corporations remain independent of markets. The model also integrates the inherited framework of corporate law into an economically derived model of production, constructing a microeconomic description of large enterprises firmly rooted in corporate doctrine but neither focused on nor limited by …

Federal Corporate Law And The Business Of Banking, Morgan Ricks, Lev Menand

Vanderbilt Law School Faculty Publications

The only profit-seeking business enterprises chartered by a federal government agency are banks. Yet there is barely any scholarship justifying this exception to state primacy in U.S. corporate law.

This Article addresses that gap. It reinterprets the National Bank Act (NBA) the organic statute governing national banks, the heavyweights of the financial sec- tor-as a corporation law and recovers the reasons why Congress wrote this law: not to catalyze private wealth creation or to regulate an existing industry, but to solve an economic governance problem. National banks are federal instrumentalities charged with augmenting the money supply-- a delegated sovereign privilege. …

Dodge V. Ford: What Happened And Why?, Mark J. Roe

Vanderbilt Law Review

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly and needed much cash for the just-begun construction of the River Rouge factory, which was said to be the world’s largest when completed. Second, to stymie union organizers and to motivate his new assembly-line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker buy-in. And, third, if Ford explicitly justified his acts as in …

Foreword--Comparative Corporate Law & Governance, Dan W. Puchniak, Randall S. Thomas

Vanderbilt Journal of Transnational Law

Despite the challenges posed by Covid-19, especially for the student editors of the Journal, this special issue has been published on time and has been superbly edited. On behalf of the authors, NUS Law, and the Law & Business Program of Vanderbilt Law School, we would like to express our sincere appreciation to the editor in chief, Joshua D. Minchin, and the entire editorial team of the Vanderbilt Journal of Transnational Law for their remarkable skill, effort, and dedication in these challenging times. Your performance gives us great hope that the future is extremely bright.

The Misuse Of Tobin’S Q, Robert Bartlett, Frank Partnoy

Vanderbilt Law Review

In recent years, scholars have addressed the most important topics in corporate law based on a flawed assumption: that the ratio of the market value of a corporation’s securities to their book value is a valid measure of the value of the corporation. The topics have included staggered boards, incorporation in Delaware, shareholder activism, dual-class share structures, share ownership, board diversity, and other significant aspects of corporate governance. We trace the history of this flawed assumption, and document how it emerged from Tobin’s q, a concept from an unrelated area in macroeconomics. We show that scholars have misused Tobin’s q, …

Management Succession In Korea: Tunneling, Semi-Tunneling, And The Reaction Of Corporate Law, Kyung-Hoon Chun

Vanderbilt Journal of Transnational Law

Recently in Korea, certain issues of corporate law became the subjects of fierce political debates unlike many other jurisdictions where corporate law issues generally remain in the exclusive realm of professionals and academics. This Article begins with the question of why corporate law issues attracted so much political attention in Korea and whether such political attention actually helped improve the corporate law. In pursuing the answers to such questions, this Article identifies a recurring pattern: (i) existence of strict rules against seeking private benefits; (ii) various clever measures to circumvent such rules; (iii) failure of the courts to regulate such …

The Trouble With Corporate Conscience, James D. Nelson

Vanderbilt Law Review

Accomplished corporate law scholars claim that modern businesses need an infusion of morality. Disappointed by conventional regulatory responses to recurring corporate scandal, these scholars argue that corporate conscience provides a more fruitful path to systemic economic reform. In Burwell v. Hobby Lobby, which held that for-profit businesses can claim religious exemptions from general laws, the Supreme Court gave this notion of corporate conscience added momentum. Emboldened by the Court's embrace of business goals extending beyond shareholder profit, proponents of a moralized marketplace now celebrate corporate conscience as an idea whose time has come. This Essay criticizes the leading arguments for …

Delaware's Retreat, Randall Thomas, James D. Cox

Vanderbilt Law School Faculty Publications

The 1980’s is appropriately considered the Golden Age of Delaware corporate law. Within that era, the Delaware courts won international attention by not just erecting the legal pillars that frame today’s corporate governance discourse but by interjecting a fresh perspective on the rights of owners and the prerogatives of managers. Four decisions stand out within a melodious chorus of great decisions of that era - Revlon , Inc. v. MacAndrews & Forbes Holding, Inc., Weinberger v. UOP, Inc., Unocal Corp. v. Mesa Petroleum Co., and Blasius Industries, Inc. v. Atlas Corporation. We refer collectively to the decisions as the Golden …

The Shifting Tides Of Merger Litigation, Randall Thomas, Matthew D. Cain, Jill Fisch, Steven D. Solomon

Vanderbilt Law School Faculty Publications

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award. We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger …

Constitutionalizing Corporate Law, Elizabeth Pollman

Vanderbilt Law Review

The Supreme Court has recently decided some of the most important and controversial cases involving the federal rights of corporations in over two hundred years of jurisprudence. In rulings ranging from corporate political spending to religious liberty rights, the Court has dramatically expanded the zone in which corporations can act free from regulation. This Article argues these decisions represent a doctrinal shift, even from previous cases granting rights to corporations. The modern corporate rights doctrine has put unprecedented weight on state corporate law to act as a mechanism for resolving disputes among corporate participants regarding the expressive and religious activity …

Quieting The Shareholders' Voice, Randall Thomas, James D. Cox, Fabrizio Ferri

Vanderbilt Law School Faculty Publications

No abstract provided.

Say On Pay Around The World, Randall Thomas, Christoph Van Der Elst

Vanderbilt Law School Faculty Publications

Shareholders have long complained that top executives are overpaid by corporate directors irrespective of their performance. Largely powerless to stop these practices, in 2002, they prevailed upon the U.K. Parliament to adopt legislation requiring public companies to permit their shareholders to have a mandatory, non-binding vote on the compensation of their top executives (Say on Pay). Since that time, there has been a wave of such legislation enacted in countries around the world, including the U.S., Australia, Belgium, the Netherlands, and Sweden, while Switzerland, Germany and France appear to be moving rapidly in the same direction. In this article, we …

Delaware Law As Lingua Franca: Theory And Evidence, Brian Broughman, Jesse Fried, Darian Ibrahim

Vanderbilt Law School Faculty Publications

Why would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law, as well as the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a “lingua franca” for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 VC-backed startups, we find evidence consistent with this lingua-franca explanation. Indeed, the lingua-franca effect appears to be more important than other factors that …

Shareholder Voting In An Age Of Intermediary Capitalism, Paul H. Edelman, Randall S. Thomas, Robert B. Thompson

Vanderbilt Law School Faculty Publications

Shareholder voting is a key part of contemporary American corporate governance. As numerous contemporary battles between corporate management and shareholders illustrate, voting has never been more important. Yet, traditional theory about shareholder voting, rooted in concepts of residual ownership and a principal/agent relationship, does not reflect recent fundamental changes as to who shareholders are and their incentives to vote (or not vote). In the first section of the article, we address this deficiency directly by developing a new theory of corporate voting that offers three strong and complementary reasons for shareholder voting. In the middle section, we apply our theory …

The Role Of Independent Directors In Startup Firms, Brian Broughman

Vanderbilt Law School Faculty Publications

This Article develops a new theory to explain the widespread use of independent directors in the governance of startup firms. Privately held startups often assign a tie-breaking board seat to a third-party independent director. This practice cannot be explained by the existing corporate governance literature, which relies on diffuse ownership and passive investment-features unique to the publicly traded firm. To develop an alternative theory, I model a financing contract between an entrepreneur and a venture capital investor. I show that allocating a tie- breaking vote to an unbiased third party can prevent opportunistic behavior that would occur if the firm …

Arrow's Theorem And The Exclusive Shareholder Franchise, Grant Hayden, Matthew Bodie

Vanderbilt Law Review

The doctrine of shareholder primacy has received substantial attention from its legions of proponents, its indefatigable opponents, and even its disinterested observers. The notion that a corporation should be run in the interests of its shareholders is the theoretical foundation upon which modern corporate law stands. Almost all empirical study in corporate law is premised on a notion of shareholder primacy, and these results would lose much of their meaning if the theory were somehow disproved. Perhaps most importantly, shareholders do in fact have primacy of place within the corporation, as they alone generally have the right to elect the …

A Fresh Look At Director "Independence": Mutual Fund Fee Litigation And "Gartenberg" At Twenty-Five, Lyman Johnson

Vanderbilt Law Review

Today, the concept of the "independent" director is widely, if not universally, regarded as critical to the healthy governance of public corporations.' The concept remains fiercely contested, however, in the governance of investment companies, including mutual funds. This resistance appears on two fronts, one of which is quite visible, while the other is often overlooked. The more obvious battle over director independence has occurred in response to the Securities and Exchange Commission's ("SEC's") rulemaking effort to alter the standard for granting certain regulatory privileges under the Investment Company Act (the "Act").' The SEC, among its other reforms, sought to limit …

A Prescription To Retire The Rhetoric Of "Principles-Based Systems" In Corporate Law, Securities Regulation, And Accounting, Lawrence A. Cunningham

Vanderbilt Law Review

This Article corrects widespread misconception about whether complex regulatory systems can be described fairly as either "rules-based" or "principles-based" (also called "standards-based'). Promiscuous use of these labels has proliferated in the years since the implosion of Enron Corp. Users show an increasing habit of celebrating systems dubbed principles-based and scorning those called rules-based. While the concepts of rules and principles (or standards) are useful to classify individual provisions, they are not scalable to the level of complex regulatory systems. The Article uses examples from corporate law, securities regulation, and accounting to illustrate this problematic phenomenon. To describe or design systems …

Clearing Away The Mist: Suggestions For Developing A Principled Veil Piercing Doctrine In China, Bradley C. Reed

Vanderbilt Journal of Transnational Law

It was less than thirty years ago that China stood economically isolated from the rest of the world. Times have certainly changed. Today China's economy is one of the fastest growing in the world, and Western businesses are inundating the country to access the abundance of cheap labor. Corporate activity is progressing, yet it was only twelve years ago that China enacted its first corporate law which officially recognized the concept of limited liability. And it was not until less than a year ago that China recognized one of the most important (and most often litigated) corporate law doctrines: piercing …

From Fretting Takeovers To Vetting Cfius: Finding A Balance In U.S. Policy Regarding Foreign Acquisitions Of Domestic Assets, Gaurav Sud

Vanderbilt Journal of Transnational Law

Merger law in the United States has historically relied on a system of private ordering with as little intervention from the federal government as possible. This scheme lies in stark contrast to the merger law of many other developed nations and, as such, has become a trademark of U.S. corporate law. Recent events, however, have brought into question the system's desirability in cross-border transactions where foreign entities are investing in U.S. assets. Proponents of reform argue that the federal government should become more involved in the approval process for these transactions given increased concerns of national security, while opponents argue …

Symbiotic Federalism And The Structure Of Corporate Law, Marcel Kahan, Edward Rock

Vanderbilt Law Review

Enron. Worldcom. Adelphia. Global Crossing. Tyco. Corporate scandals have made the front pages. Congress has gotten in the act. Members have held numerous hearings, given speeches, and, ultimately, passed the Sarbanes-Oxley Act. The Securities and Exchange Commission ("SEC") has been busy writing regulations and leaning on the stock exchanges to modify their listing requirements, all in order to restore "investor confidence." Federal prosecutors have indicted executives of Enron, Worldcom, and Adelphia and their minions in the auditing and investment banking industries. State officials have also been active. Several states have passed statutes that resemble or go beyond the strictures of …

A New Approach To Corporate Choice Of Law, Jens Dammann

Vanderbilt Journal of Transnational Law

The state of incorporation doctrine, which now applies both in the United States and in the European Community, allows corporations to choose the state law governing their internal affairs by incorporating in the appropriate state. Most scholars believe that this freedom to choose benefits both shareholders and society as a whole. Against this background, an obvious question is whether the state of incorporation doctrine is really the most efficient way of granting corporations the right to choose. In this Article, the Author argues that while there are sound reasons for retaining the state of incorporation doctrine as one mechanism for …

What Is Corporate Law's Place In Promoting Societal Welfare?: An Essay In Honor Of Professor William Klein, Randall Thomas

Vanderbilt Law School Faculty Publications

This is a short essay on what should be the fundamental criterion used to evaluate corporate law. I argue that the overall goal of good corporate law should be to assist private parties to create wealth for themselves and the economy in a manner that does not inflict uncompensated negative externalities upon third parties. Private businesses that produce goods and services should be encouraged by the state because creating greater wealth is generally beneficial to society. Corporate law can act as a helpful precondition for faster economic growth by protecting the parties' expectations, encouraging savings and investment, reducing transaction costs, …

A Team Production Theory Of Bankruptcy Reorganization, Lynn M. Lopucki

Vanderbilt Law Review

In the year before United Airlines filed for bankruptcy reorganization, the firm lost $3.2 billion. Fierce competition in the airline industry prevents United from stemming its losses solely through increases in revenues. Costs will have to be cut. The necessary expense reductions could come from reductions in employee pay and benefits, reductions in the amounts owing to creditors (which reduce interest expense), or both. Which should it be? United's situation is complicated by the fact that its employees own 55 percent of its stock and that their wage levels are protected by a collective bargaining agreement. But if we assume …

The Business Judgment Rule As Abstention Doctrine, Stephen M. Bainbridge

Vanderbilt Law Review

The business judgment rule is corporate law's central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders. Increasingly, moreover, versions of the business judgment rule are found in the law governing the other types of business organizations, ranging from such common forms as the general partnership to such unusual ones as the reciprocal insurance exchange. Yet, curiously, there is relatively little agreement as to either the theoretical underpinnings of or policy justification for the rule. This gap in our understanding has important doctrinal implications. As this paper demonstrates, a string of recent decisions by the Delaware supreme court …

The Globalization (Americanization?) Of Executive Pay, Randall Thomas, Brian R. Cheffins

Vanderbilt Law School Faculty Publications

In the United States, the remuneration packages of top executives are characterized by a strong emphasis on pay-for-performance and by a highly lucrative "upside." There is much discussion of the possibility that executive pay practices will globalize in accordance with this pattern. This Article assesses whether such convergence is likely to occur. After surveying briefly the key components of managerial remuneration and after examining the essential elements of the "U.S. pay paradigm," the Article considers market-oriented dynamics that could constitute a "global compensation imperative." These include wider dispersion of share ownership, more cross-border hiring of executives, growing international merger and …

700 Families To Feed: The Challenge Of Corporate Citizenship, Tara J. Radin

Vanderbilt Journal of Transnational Law

When Howard Lutnick, CEO of Cantor Fitzgerald, was first interviewed after September 11, 2001, a tragedy that devastated his firm and stole the life of his brother, Lutnick stated that he now had "700 families to feed." The view that he expressed was that his firm was responsible to the families of the wage earners lost in the tragedy, even though the firm was not responsible for the events that had occurred. Such assumed corporate responsibility, consistent with a stakeholder-based approach to management, is often considered to conflict with the law. The purpose of this Article is to demonstrate that …