Law Commons^™

Dual Fiduciaries: Unicorns, Corporate Law And The New Frontier, Anat Alon-Beck

Faculty Publications

Legal and regulatory structures influence the shift in equities in the United States from public markets to private markets, entrepreneurial opportunities and new firm formation. There is a rise in the number of “unicorn” firms, which are privately held venture-capital backed startups that are valued at $1 billion or more. The number of unicorns in the United States and overseas has grown exponentially over the last few years. This chapter discusses the rise of the unicorns and with it the increasing importance of corporate governance and fiduciary duties. There are new vertical and horizontal conflicts among common and preferred shareholders …

The Hidden Cost Of Contracting For Esg: A New Perspective On Private Ordering, Juliet P. Kostritsky, Jillian T. Fox, Blake Spiller

Faculty Publications

Currently, despite the increasing pressure on corporations to account for Environmental Social Governance (ESG) factors in their disclosures and actions, a lack of clarity on the meaning of ESG persists. ESG might be equivalent to stakeholderism, in which companies can sacrifice firm or shareholder market value to serve non-financial values. A second meaning would permit companies to pursue ESG only if it advanced the firm’s financial value. The second meaning poses no new challenges for corporate law.

This Article will address how the lack of clarity on ESG makes it difficult to assess whether a provision in a contract of …

Bargaining Inequality: Employee Golden Handcuffs And Asymmetric Information, Anat Alon-Beck

Faculty Publications

Inaccurate unicorn firm valuation is a well-documented problem in the finance literature. Employees of these large, privately held companies do not have access to fair market valuation or financial statements and, in many cases, are denied access to such reports, even when requested. Unicorn employees are granted equity as a substantial part of their compensation, however due to the inferior position of employees in comparison to the start-up founders and other investors, information shedding light on the value of their equity grants has been withheld, as apparent in recent practices.

Start-up founders, investors, and their lawyers have systematically abused equity …

Mythical Unicorns And How To Find Them: The Disclosure Revolution, Anat Alon-Beck, John Livingstone

Faculty Publications

Our federal and state securities laws are centered around two vital requirements for economic growth: capital formation and investor protection. Section 12(g) sits in the middle of these two concepts by attempting to ensure the latter without jeopardizing the former. However, since the passage of the Jumpstart Our Business Startups (“JOBS”) Act in 2012, exempt capital formation in the unregulated private market has increased dramatically. Companies raise nearly limitless capital from a wide range of sources while remaining outside of the public reporting regime. The overall shift has led to worse corporate governance outcomes, a decline in IPO volume and …

A Duty To Diversify, Anat Alon-Beck, Darren Rosenblum, Michal Agmon-Gonnen

Faculty Publications

Fiduciary duties reflect the central role of leaders in corporate governance. Those with the most responsibility benefit the most from corporate success, but also bear commensurate fiduciary responsibilities. Equality, diversity, and inclusion may seem an odd fit among other fiduciary duties. However, fiduciary duties are where governance imposes the burden of “doing the right thing.” Fiduciary duties involve normatively good behavior that proves essential to ensuring responsible decision-making and achieving positive outcomes for firms.

Corporate law allows, encourages and perhaps, today, even mandates, corporate leaders to do the right thing. Not only does it seem appropriate to ask corporate leaders, …

Untangling Attorney Retainers From Creditor Claims, Cassandra Burke Robertson, Jesse Wynn

Faculty Publications

Clients will often use a retainer to secure an attorney’s representation. But clients in economic distress may have creditors that are eager to access the client’s funds in the attorney’s hands. Attorneys, clients, courts, and regulators have struggled to understand who has the best claim to such retainer funds. In this Article, we attempt to untangle the most common areas of confusion. We conclude that Article 9 of the Uniform Commercial Code (UCC) offers strong protection for an attorney’s interest in client retainers through security interests, even though some courts have misapplied the UCC in this context. Further, we recommend …

Bargaining Inequality: Employee Golden Handcuffs And Asymmetric Information, Anat Alon-Beck

Faculty Publications

Inaccurate unicorn firm valuation is a well-documented problem in the finance literature. Employees of these large, privately held companies do not have access to fair market valuation or financial statements and, in many cases, are denied access to such reports, even when requested. Unicorn employees are granted equity as a substantial part of their compensation, however due to the inferior position of employees in comparison to the start-up founders and other investors, information shedding light on the value of their equity grants has been withheld, as apparent in recent practices.

Start-up founders, investors, and their lawyers have systematically abused equity …

Investment Bankers As Underwriters: Barbarians Or Gatekeepers? A Response To Brent Horton On Direct Listings, Anat Alon-Beck, Robert N. Rapp, John Livingstone

Faculty Publications

Direct listing clearly has the potential to meaningfully disrupt the IPO process. Changes to permit primary offerings via direct listing will help private companies to overcome some of the obstacles imposed by our securities laws and listing rules. Primary offerings by direct listing would allow for a dramatic increase in efficiency in public offerings, providing further incentive for private companies to finally provide liquidity to their shareholders while saving on the tremendous cost associated with a more traditional IPO by eliminating the need for underwriters.

Despite the positive impacts that direct listings will have on the IPO process, in their …

Reconsidering Hostile Takeover Of Religious Organizations, B. Jessie Hill

Faculty Publications

Beginning in 2016, the headlines of major publications began announcing that Donald Trump had successfully completed a “hostile takeover” of the Republican Party. Whether this appraisal is accurate or not, it reflects concern about the associational integrity of a voluntary private organization—the Republican Party—and it suggests that some forms of organizational transformation are problematic. Moreover, the same concern might arise regarding other private associations, including religious associations. Yet, given that some transformation is inevitable and universal within religious and other voluntary organizations, it would be unwarranted to assume that all change within a religious organization is necessarily problematic.

This Article …

2018 Leet Symposium: Fiduciary Duty Corporate Goals, And Shareholder Activism—Introduction, Charles R. Korsmo

Faculty Publications

On November 1, 2018, the Case Western Reserve University Law Review held the 2018 Leet Symposium, bringing together a group of nationally respected corporate law scholars to explore the current state of play between traditional shareholder wealth maximization and modern shareholder environmental and social activism. The Symposium also included a panel on the difficult role of in-house corporate counsel in a world where serving as a zealous advocate for the corporation may conflict with in-house counsel’s compliance function. This issue contains Articles that were presented on the occasion, together with the prepared remarks of the keynote speaker, SEC Commissioner Hester …

Lead Plaintiff Incentives In Aggregate Litigation, Charles R. Korsmo, Minor Myers

Faculty Publications

The lead plaintiff role holds out considerable promise in promoting the deterrence and compensation goals of aggregate litigation. The prevailing approach to compensating lead plaintiffs, however, provides no real incentive for a lead plaintiff to bring claims on behalf of a broader group. The policy challenge is to induce sophisticated parties to press claims not in their individual capacity but instead in a representative capacity, conferring a positive externality on all class members by identifying attractive claims, financing ongoing litigation, and managing the work of attorneys. We outline what an active and engaged lead plaintiff could add to the civil …

Delaware’S Retreat From Judicial Scrutiny Of Mergers, Charles R. Korsmo

Faculty Publications

This Article evaluates recent dramatic developments in Delaware law surrounding merger litigation and concludes that they have gone too far in limiting the ability to challenge managerial wrongdoing in the takeover context. The past three years have seen a sea change in merger litigation, brought on by the twin earthquakes of the Delaware Supreme Court’s decision in Corwin v. KKR and the Delaware Court of Chancery’s decision in In re Trulia. Both of these decisions were inspired by a perceived crisis in merger litigation. By 2015, the percentage of economically significant deals challenged by at least one lawsuit had been …

Selling Stock And Selling Legal Claims: Alienability As A Constraint On Managerial Opportunism, Charles R. Korsmo

Faculty Publications

Scholars have long recognized the importance of market forces as a tool for disciplining the management of public corporations and reducing agency costs. If managers loot or otherwise mismanage the firm, the firm’s stock price will suffer, raising its cost of capital and leaving managers exposed to the threat of a hostile takeover. In recent decades, changing patterns of stock ownership have threatened the viability of this market check on mismanagement. Institutional investors, and particularly index funds, own an increasing portion of publicly traded firms, and face substantial liquidity and other barriers to simply selling their positions. To the extent …

Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations, George W. Dent

Faculty Publications

A debate about corporate governance has long raged over the allocation of power between shareholders and directors. Proponents of “shareholder primacy” believe that the corporate board should be chosen by and accountable to the stockholders rather than dominated by the CEO, as they believe is common now. Advocates of “director primacy” want to limit shareholder power because they believe that shareholders have conflicting objectives, are uninformed, and pressure the directors to sacrifice the long-term health of the company to short-term share price.

The governance of non-profit organizations (“NPOs”) offers an example that illuminates the corporate governance debate. Directors of NPOs …

Corporate Governance: The Swedish Solution, George W. Dent

Faculty Publications

Sweden has changed its corporate governance system by delegating the nomination of corporate directors (and thus, in effect, ultimate control) to committees typically comprising representatives of each company’s largest shareholders. This system gives shareholders a degree of power “that only the most daring corporate governance initiatives in the rest of the world could even imagine.” By all accounts the change has been successful; no one is complaining about it.

In the United States investors have long been kept weak in corporate governance for fear that giving them a major role would damage corporations in numerous ways. The Swedish experience seems …

Terrorism Financing Indicators For Financial Institutions In The United States, Richard K. Gordon

Faculty Publications

At least since the Financial Action Task Force (FATF) first published its Forty Recommendations, financial institutions in FATF-compliant jurisdictions have been required to implement preventive measures that require FIs to identify customers, establish client profiles, monitor for unusual transactions, review those transactions to see if there was suspicion that they involved the proceeds of crime and, if so, report the transaction to the authorities in the form of a suspicious transaction report (STR). When these requirements were first established, neither financial institutions nor their supervisors/regulators had much experience as to what in a client's profile and the client's patterns of …

Organizational Management Of Conflicting Professional Identities, Cassandra Burke Robertson

Faculty Publications

Professionals in the military have suffered criticism for their failure to counter military excess in the so-called "War on Terror" - especially in the area of torture and maltreatment of detainees. Much of the criticism leveled against such professionals has assumed that they were bad actors who were making a conscious choice to avoid the strictures of their code of ethics. This Article counters that narrative by applying identity theory to offer a more situations explanation. It argues that some of these professional failures arise from the cognitive incentives faced by individuals in an organization that rewards organizational deference over …

The Essential Unity Of Shareholders And The Myth Of Investor Short-Termism, George W. Dent

Faculty Publications

The separation of ownership and control publicized by Berle and Means in 1932 persists today. Domination of public companies by self-serving and ineffective executives costs America billions of dollars every year and contributed to the current economic meltdown. Repeated efforts to solve this problem--including the Sarbanes-Oxley Act, expanded disclosure duties, and more stringent requirements for director independence--have had little benefit and have sometimes made matters worse. The flaws in our corporate governance system are a growing problem for America’s economy as disillusioned investors increasingly place their capital in other countries.

Nonetheless, proposals for greater shareholder power have encountered criticisms: various …

For Optional Federal Incorporation, George W. Dent

Faculty Publications

The American economy suffers from the domination of corporations by chief executive officers who exercise control for their own benefit, at considerable cost to shareholders and to efficiency. The costs of this defect are rising as capital flees the United States for a growing number of countries that treat investors better. America’s corporate governance problem began and persists because corporations are franchised by the states, and it is in the economic interest of the states (especially Delaware) to cater to CEOS because they control the choice of state of incorporation. To break this destructive arrangement I propose optional federal incorporation …

Introduction: Corporations And Their Communities, Robert N. Strassfeld

Faculty Publications

No abstract provided.

Academics In Wonderland: The Team Production And Director Primacy Models Of Corporate Governance, George W. Dent

Faculty Publications

This paper examines the Team Production and Director Primacy Models of corporate governance, finds them wanting, and explains why corporate governance is moving toward shareholder primacy and why this will benefit not only investors but the whole American economy.

The director primacy model posits that shareholders are so ill-informed and so divided in their interests that they would self-destruct if they controlled the firm. Accordingly they tie their own hands by ceding control to a board of independent directors. Advocates of the team production theory often agree with the foregoing but stress the importance to the firm of other constituencies, …

Stakeholder Governance: A Bad Idea Getting Worse, George W. Dent

Faculty Publications

Calls for a stakeholder voice in corporate governance never end, as evidenced by the Symposium Corporations and Their Communities to which this paper is a contribution. The demise of labor unions and explosion of executive compensation while the income of most Americans has stagnated over the last several years has precipitated cries for remedial action, some of which include stakeholder governance. Although complaints about deepening inequality are just, other remedies should be pursued. The traditional objections to stakeholder governance remain valid: the interests of stakeholder groups clash not only with those of the shareholders but also with each other, and …

Introduction: Capitalizing On The Success Of Entrepreneurship: Ipos, Private Sales, Tax Aspects, Residual Interest Of Entrepreneurs After Sales Of Ipos, Richard K. Gordon

Faculty Publications

Panel discussion on "Capitalizing on the Success of Entrepreneurship: IPOS, Private Sales, Tax Aspects, Residual Interest of Entrepreneurs after Sales of IPOS" from the "The Canada-United States Law Institute Conference on Comparative Legal Aspects of Entrepreneurship in Canada and the United States" - Cleveland, Ohio April 13-14, 2007.

The Ducks Stop Here? The Environmental Challenge To Federalism, Jonathan H. Adler

Faculty Publications

PIn Solid Waste Association of Northern Cook County v. U.S. Army Corps of Engineers ("SWANCC"), the Supreme Court considered whether federal regulatory authority reaches isolated wetlands and ponds due to the potential presence of migratory birds. In rejecting such an expansive view of federal authority, the Court's majority underlined its devotion to the federalism principles enunciated in Lopez and other recent cases. The federalist majority further reiterated its support for a canon of statutory construction which holds that federal statutes will not be interpreted to intrude into state matters, such as local land-use control, absent a clear statement by Congress. …

The George A. Leet Business Law Symposium: Corporate Governance: Directors Vs. Shareholders? - Introduction, George W. Dent

Faculty Publications

Introducation to The George A. Leet Business Law Symposium: Corporate Governance: Directors vs. Shareholders?, Cleveland, Ohio.

The Descendants Of Fassihi: A Comparative Analysis Of Recent Cases Addressing The Fiduciary Claims Of Disgruntled Constituents Against Attorneys Representing Closely-Held Entities, Matthew Rossman

Faculty Publications

Accordingly, this Article will examine three recent cases closely and then make observations about what these "descendants of Fassihi" say about the state of the law and how they should impact attorney behavior. To provide proper context for this discussion, a short summary of Fassihi and other contemporary responses to the issues raised in Fassihi follows.

Comment: The Case For Real Shareholder Democracy, George W. Dent

Faculty Publications

Comment on presentations at The Georege A. Leet Business Law Symposium: Corporate Governance: Directors v. Shapreholders, Cleveland, Ohio, 2005.

Corporate Governance: Still Broke, No Fix In Sight, George W. Dent

Faculty Publications

Dissatisfaction with the governance of public companies is as old as the public company itself, but public concern about corporate governance is spasmodic. Prior reforms did not cure the ills of corporate governance, and there is little reason to think that the recent spate of reforms will be any more effective. The fundamental problem of corporate governance remains what it has always been: the separation of ownership and control. No reform can succeed unless it overcomes this contradiction. Corporate executives determined to preserve their privileges and a number of scholars deny this claim; in effect, these Panglosses consider the status …

The Role Of Lawyers In Strategic Alliances, George W. Dent

Faculty Publications

No abstract provided.

The George A. Leet Business Law Symposium: The Role Of Lawyers In Strategic Alliances - Introduction, George W. Dent

Faculty Publications

Introducation to The George A. Leet Business Law Symposium: The Role of Lawyers in Strategic Alliances, Cleveland, Ohio.