Law Commons^™

Public Reporting Of Monitorship Outcomes, Veronica Root Martinez

Faculty Scholarship

When a corporation engages in misconduct that is widespread or pervasive, courts, regulators, or prosecutors often insist that the firm obtain assistance from an independent third party — a monitor — to oversee the firm’s remediation effort. The largest firms in the world — from Deutsche Bank, to Volkswagen, to Carnival Cruise Lines — have found themselves having to retain a monitor for corporate misconduct, despite attempts to avoid a monitorship entirely. Traditionally, monitors, or their special master forebearers, were utilized by courts to assist in overseeing compliance with court orders, and their work was both accessible and transparent. As …

Is Corporate Law Nonpartisan?, Ofer Eldar, Gabriel V. Rauterberg

Faculty Scholarship

Only rarely does the United States Supreme Court hear a case with fundamental implications for corporate law. In Camey v. Adams, however, the Supreme Court had the opportunity to address whether the State of Delaware's requirement of partisan balance for its judiciary violates the First Amendment. Although the Court disposed of the case on other grounds, Justice Sotomayor acknowledged that the issue "will likely be raised again." The stakes are high because most large businesses are incorporated in Delaware and thus are governed by its corporate law. Former Delaware governors and chief justices lined up to defend the state's "nonpartisan" …

Enabling Esg Accountability: Focusing On The Corporate Enterprise, Rachel Brewster

Faculty Scholarship

Environmental, social, and governance accountability for companies has become an important topic in popular and academic debate in modern society. The idea that corporations should have ESG goals has been embraced by major investment companies, employees, and many corporations themselves. Yet, less attention has been focused on how corporate enterprise law—which governs how corporations structure their relationships between parent corporations and their subsidiaries—creates or contributes to the ESG concerns that the public has with corporations in the first place. Modern enterprise law allows corporations, particularly those operating across national borders, to use their subsidiaries to avoid responsibility for their public …

Corporate Personhood And Limited Sovereignty, Elizabeth Pollman

All Faculty Scholarship

This Article, written for a symposium celebrating the work of Professor Margaret Blair, examines how corporate rights jurisprudence helped to shape the corporate form in the United States during the nineteenth century. It argues that as the corporate form became popular because of the way it facilitated capital lock-in, perpetual succession, and provided other favorable characteristics related to legal personality that separated the corporation from its participants, the Supreme Court provided crucial reinforcement of these entity features by recognizing corporations as rights-bearing legal persons separate from the government. Although the legal personality of corporations is a distinct concept from their …

A Revised Monitoring Model Confronts Today's Movement Toward Managerialism, James D. Cox, Randall S. Thomas

Faculty Scholarship

There are many lessons to be drawn from the sweep of history. In law, the compelling story repeatedly told is the observable co-movement of law on the one hand, and economic, social, and political changes on the other hand. Aberrations, however, do arise but generally do not persist in the long term. Contemporary corporate law seems to be on the cusp of such an abnormality as legal developments and proposed reforms for corporate law are currently conflicting with the direction in which the host environment is moving. This article identifies a series of contemporary judicial and regulatory corporate governance developments …

The Sec's Shareholder Proposal Rule: Creating A Corporate Public Square, James D. Cox, Randall S. Thomas

Faculty Scholarship

In this Article, we take advantage of this Symposium’s goals to think broadly about the future of Rule 14a-8 of the Securities Exchange Act of 1934, the shareholder proposal rule. We set forth a vision for the rule to address boardroom insularity by likening the shareholder proposal rule as the public square for shareholders. The existence of such a forum would redound to the benefit of investors, officers, and boards of directors as a fount of current and useful information about their investors’ and stakeholders’ concerns.

The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel Rauterberg

Faculty Scholarship

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other …

Whistleblowers: Implications For Corporate Governance, Deborah A. Demott

Faculty Scholarship

Often overlooked in academic accounts of corporate governance and the actors who populate governance structures, whistleblowers are no more visible in formal governance frameworks. Within a corporation, whistleblowers may be lower-rank employees, not directors or officers; they may report perceptions of wrongdoing to others within the corporation or inform governmental or other actors who are externally situated. Nonetheless, it is striking how often retrospective accounts of corporate scandals involve episodes of internal whistleblowing associated with governance and compliance failures. This paper argues that incorporating whistleblowers into formal governance structures could spur more proactive involvement by directors in monitoring compliance with …

Complex Compliance Investigations, Veronica Root Martinez

Faculty Scholarship

Whether it is a financial institution like Wells Fargo, an automotive company like General Motors, a transportation company like Uber, or a religious organization like the Catholic Church, failing to properly prevent, detect, investigate, and remediate misconduct within an organization’s ranks can have devastating results. The importance of the compliance function is accepted within corporations, but the reality is that all types of organizations—private or public—must ensure their members com­ply with legal and regulatory mandates, industry standards, and internal norms and expectations. They must police thousands of members’ compli­ance with hundreds of laws. And when compliance failures occur at these …

Federal Forum Provisions And The Internal Affairs Doctrine, Dhruv Aggarwal, Albert H. Choi, Ofer Eldar

Faculty Scholarship

A key question at the intersection of state and federal law is whether corporations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions …

Individual Autonomy In Corporate Law, Elisabeth De Fontenay

Faculty Scholarship

The field of corporate law is riven with competing visions of the corporation. This Article seeks to identify points of broad agreement by negative implication. It examines two developments in corporate law that have drawn widespread criticism from corporate law scholars: the Supreme Court's recognition of corporate religious rights in Burwell v. Hobby Lobby and the Nevada legislature's decision to eliminate mandatory fiduciary duties for corporate directors and officers. Despite their fundamental differences, both resulted in expanding individual rights or autonomy within the corporation-for shareholders and managers, respectively.

The visceral critiques aimed at these two developments suggest a broadly shared …

Delaware's Retreat: Exploring Developing Fissures And Tectonic Shifts In Delaware Corporate Law, James D. Cox, Randall S. Thomas

Faculty Scholarship

No abstract provided.

Will Delaware Be Different? An Empirical Study Of Tc Heartland And The Shift To Defendant Choice Of Venue, Ofer Eldar, Neel U. Sukhatme

Faculty Scholarship

Why do some venues evolve into litigation havens while others do not? Venues might compete for litigation for various reasons, such as enhancing their judges’ prestige and increasing revenues for the local bar. This competition is framed by the party that chooses the venue. Whether plaintiffs or defendants primarily choose venue is crucial because, we argue, the two scenarios are not symmetrical.

The Supreme Court’s recent decision in TC Heartland v. Kraft Foods illustrates this dynamic. There, the Court effectively shifted venue choice in many patent infringement cases from plaintiffs to corporate defendants. We use TC Heartland to empirically measure …

The Role Of Social Enterprise And Hybrid Organizations, Ofer Eldar

Faculty Scholarship

Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth—particularly, legal forms for hybrid firms—have largely been ineffective. This shortcoming stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. In pursuit of such a theory, this Article focuses on a large class of hybrid organizations that has been effective in addressing development problems, such as increasing access to capital and improving employment …

Corporate Officers As Agents, Deborah A. Demott

Faculty Scholarship

Although officers are crucial to corporate operations, scholarly and theoretical accounts tend to slight officers and amalgamate them with directors into a single category, "managers." This essay anchors officers within the common law of agency-as does black-letter law-which crisply differentiates officers from directors. Understanding that agency is central of the legal account of officers' positions and responsibilities is crucial to seeing why, like directors, officers are fiduciaries, but distinctively so, not as instances of generic "corporate fiduciaries." Officers, like directors, owe duties of loyalty, but also particularized duties of care, competence, and diligence. Additionally, officers' duties of performance encompass two …

Regulatory Competition And The Market For Corporate Law, Ofer Eldar, Lorenzo Magnolfi

Faculty Scholarship

This article develops an empirical model of firms’ choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995- 2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada’s rise is due to the preferences of small firms.Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that …

The Bylaw Puzzle In Delaware Corporate Law, David A. Skeel Jr.

All Faculty Scholarship

In less than a decade, Delaware’s legislature has overruled its courts and reshaped Delaware corporate law on two different occasions, with proxy access bylaws in 2009 and with shareholder litigation bylaws in 2015. Having two dramatic interventions in quick succession would be puzzling under any circumstances. The interventions are doubly puzzling because with proxy access, Delaware’s legislature authorized the use of bylaws or charter provisions that Delaware’s courts had banned; while with shareholder litigation, it banned bylaws or charter provisions that the courts had authorized. This Article attempts to unravel the puzzle.

I start with corporate law doctrine, and find …

The Separation Of Corporate Law And Social Welfare, William W. Bratton

All Faculty Scholarship

A half century ago, corporate legal theory pursued an institutional vision in which corporations and the law that creates them protect people from the ravages of volatile free markets. That vision was challenged on the ground during the 1980s, when corporate legal institutions and market forces came to blows over questions concerning hostile takeovers. By 1990, it seemed like the institutions had won. But a different picture has emerged as the years have gone by. It is now clear that the market side really won the battle of the 1980s, succeeding in entering a wedge between corporate law and social …

Brief Of Professors At Law And Business Schools As Amicus Curiae In Support Of Respondents, James D. Cox, J. Robert Brown Jr., Lyman Johnson, Lawrence W. Treece, Joan Macleod Heminway

Faculty Scholarship

This Amicus Brief was filed with the U.S. Supreme Court on behalf of nearly 50 law and business faculty in the United States and Canada who have a common interest in ensuring a proper interpretation of the statutory securities regulation framework put in place by the U.S. Congress. Specifically, all amici agree that Item 303 of the Securities and Exchange Commission's Regulation S-K creates a duty to disclose for purposes of Rule 10b-5(b) under the Securities Exchange Act of 1934.
The Court’s affirmation of a duty to disclose would have little effect on existing practice. Under the current state of …

Market Information And The Elite Law Firm, Elisabeth De Fontenay

Faculty Scholarship

As a subcategory of contract negotiations, corporate transactions present information problems that have not been fully analyzed. In particular, the literature does not address the possibility that parties may simply be unaware of value-increasing transaction terms or their outside option. Such unawareness can arise even for transactions that attract many competing parties, if the bargaining process is such that (1) the price terms are negotiated and fixed prior to the non-price terms, contrary to the standard assumption; and (2) some of the non-price terms remain private for some period of time.

A simple bargaining model shows that, when such unawareness …

How Corporate Governance Is Made: The Case Of The Golden Leash, Matthew D. Cain, Jill E. Fisch, Sean J. Griffith, Steven Davidoff Solomon

All Faculty Scholarship

This Article presents a case study of a corporate governance innovation—the incentive compensation arrangement for activist-nominated director candidates colloquially known as the “golden leash.” Golden leash compensation arrangements are a potentially valuable tool for activist shareholders in election contests. In response to their use, several issuers adopted bylaw provisions banning incentive compensation arrangements. Investors, in turn, viewed director adoption of golden leash bylaws as problematic and successfully pressured issuers to repeal them.

The study demonstrates how corporate governance provisions are developed and deployed, the sequential response of issuers and investors, and the central role played by governance intermediaries—activist investors, institutional …

Corporate Darwinism: Disciplining Managers In A World With Weak Shareholder Litigation, James D. Cox, Randall S. Thomas

Faculty Scholarship

Because representative shareholder litigation has been constrained by numerous legal developments, the corporate governance system has developed new mechanisms as alternative means to address managerial agency costs. We posit that recent significant governance developments in the corporate world are the natural consequence of the ineffectiveness and inefficiency of shareholder suits to address certain genre of managerial agency costs. We thus argue that corporate governance responses evolve to fill voids caused by the inability of shareholder suits to monitor and discipline corporate managers.

We further claim that these new governance responses are themselves becoming stronger due in part to the rising …

Rethinking Chutes: Incentives, Investment, And Innovation, Simone M. Sepe, Charles K. Whitehead

Cornell Law Faculty Publications

Eighty-two percent of public firms have golden parachutes (or “chutes”) under which CEOs and senior officers may be paid tens of millions of dollars upon their employer’s change in control. What justifies such extraordinary payouts?

Much of the conventional analysis views chutes as excessive compensation granted by captured boards, focusing on the payouts that occur following a takeover. Those explanations, if they ever were complete, miss the mark today. This Article demonstrates, theoretically and empirically, that chutes are less relevant to a firm during a takeover than they are before a takeover, particularly in relation to firms that invest in …

The End Of Class Actions?, Brian T. Fitzpatrick

Vanderbilt Law School Faculty Publications

In this Article, I give a status report on the life expectancy of class action litigation following the Supreme Court's decisions in Concepcion and American Express. These decisions permitted corporations to opt out of class action liability through the use of arbitration clauses, and many commentators, myself included, predicted that they would eventually lead us down a road where class actions against businesses would be all but eliminated. Enough time has now passed to make an assessment of whether these predictions are coming to fruition. I find that, although there is not yet solid evidence that businesses have flocked to …

The Responsible Corporation: Its Historical Roots And Continuing Promise, Larry D. Thompson

Scholarly Works

The article focuses on the on the history of American corporations from the colonization period and its impact on private corporations such as venture capitalism. Topics discussed include legal and sustainable approach to corporate responsibility, role of laws in shaping corporate duties and behavior and devastating effect of excessive dividend payments. It also discusses the cases in which courts refuse to interfere with management's long-term decision making.

Corporate Law And The Limits Of Private Ordering, James D. Cox

Faculty Scholarship

Solomon-like, the Delaware legislature in 2015 split the baby by amending the Delaware General Corporation Law to authorize forum-selection bylaws and to prohibit charter or bylaw provisions that would shift to the plaintiff defense costs incurred in connection with shareholder suits that were not successfully concluded. The legislature acted after the Boilermakers Local 154 Retirement Fund. v. Chevron Corp ATP Tour, Inc. v. Deutscher Tennis Bund, broadly empowered the board vis-à-vis the shareholders through the board’s power to amend the bylaws. Repeatedly the analysis used by each court referenced the contractual relationship the shareholders had through the articles of …

Brief Of Corporate Law Professors As Amici Curie In Support Of Respondents, John C. Coates, Lucian A. Bebchuk, Bernard S. Black, John C. Coffee, James D. Cox, Ronald J. Gilson, Jeffrey N. Gordon, Lawrence Hamermesh, Henry B. Hansmann, Robert J. Jackson Jr., Marcel Kahan, Vikramaditya S. Khanna, Michael Klausner, Reinier H. Kraakman, Donald C. Langevoort, Brian Jm Quinn, Edward B. Rock, Mark J. Roe, Helen S. Scott

Faculty Scholarship

The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt …

The Mess At Morgan: Risk, Incentives And Shareholder Empowerment, Jill E. Fisch

All Faculty Scholarship

The financial crisis of 2008 focused increasing attention on corporate America and, in particular, the risk-taking behavior of large financial institutions. A growing appreciation of the “public” nature of the corporation resulted in a substantial number of high profile enforcement actions. In addition, demands for greater accountability led policymakers to attempt to harness the corporation’s internal decision-making structure, in the name of improved corporate governance, to further the interest of non-shareholder stakeholders. Dodd-Frank’s advisory vote on executive compensation is an example.

This essay argues that the effort to employ shareholders as agents of public values and, thereby, to inculcate corporate …

Addressing Agency Costs Through Private Litigation In The U.S: Tensions, Disappointments, And Substitutes, James D. Cox, Randall S. Thomas

Faculty Scholarship

Many scholars argue that over the past seventy years, shareholder representative litigation has acted as an important policing mechanism of managerial abuses at U.S. public companies. Different types of representative litigation have had their moment in the sun – derivative suits early on, followed by federal securities class actions, and most recently merger litigation – often producing benefits for shareholders, but posing difficult challenges as well. In particular, the benefits are qualified by another concern, the litigation agency costs that surround shareholder suits. This form of agency costs arises since the suits are invariably representative with no requirement that the …

Bankers And Chancellors, William W. Bratton, Michael L. Wachter

All Faculty Scholarship

The Delaware Chancery Court recently squared off against the investment banking world with a series of rulings that tie Revlon violations to banker conflicts of interest. Critics charge the Court with slamming down fiduciary principles of self-abnegation in a business context where they have no place or, contrariwise, letting culpable banks off the hook with ineffectual slaps on the wrist. This Article addresses this controversy, offering a sustained look at the banker-client advisory relationship. We pose a clear answer to the questions raised: although this is nominally fiduciary territory, both banker-client relationships and the Chancery Court’s recent interventions are contractually …