Law Commons^™

The Long Road Back: Business Roundtable And The Future Of Sec Rulemaking, Jill E. Fisch

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The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

This article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. Toward that end, the essay questions …

Managing Expectations: Does The Directors' Duty To Monitor Promise More Than It Can Deliver?, Lisa Fairfax

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This article grapples with whether we are expecting too much from the duty of oversight. The directors’ oversight duty refers to directors’ responsibility to actively monitor corporate officers, employees, and corporate affairs. Directors breach their oversight duty when officers and employees engage in wrongdoing that causes harm to the corporation and that wrongdoing can be attributed to directors’ failure to monitor. In other words, oversight liability holds directors liable for their failure to act under circumstances where it can be proven that directors should have acted and their actions could have prevented corporate harm.

The significance of directors’ oversight duty …

The Destructive Ambiguity Of Federal Proxy Access, Jill E. Fisch

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After almost seventy years of debate, on August 25, 2010, the SEC adopted a federal proxy access rule. This Article examines the new rule and concludes that, despite the prolonged rule-making effort, the new rule is ambiguous in its application and unlikely to increase shareholder input into the composition of corporate boards. More troubling is the SEC’s ambiguous justification for its rule which is neither grounded in state law nor premised on a normative vision of the appropriate role of shareholder nominations in corporate governance. Although the federal proxy access rule drew an unprecedented number of comment letters and is …

Shareholder Eugenics In The Public Corporation, Edward B. Rock

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In a world of active, empowered shareholders, the match between shareholders and public corporations can potentially affect firm value. This article examines the extent to which publicly held corporations can shape their shareholder base. Two sorts of approaches are available: direct/recruitment strategies; and shaping or socialization strategies. Direct/recruitment strategies through which “good” shareholders are attracted to the firm include: going public; targeted placement of shares; traditional investor relations; the exploitation of clientele effects; and de-recruitment. “Shaping” or “socialization” strategies in which shareholders of a “bad” or unknown type are transformed into shareholders of the “good” type include: choice of domicile; …

The Bizarre Law & Economics Of 'Business Roundtable V. Sec', Grant M. Hayden, Matthew T. Bodie

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Corporations are legal entities designed to foster certain kinds of collective economic activity. The decisionmaking power within a corporation ultimately rests with a board of directors elected by shareholders. Shareholders, however, do not use anything like a conventional ballot in these elections; instead, they fill out a “proxy ballot,” delivered to them by the incumbent board. This proxy ballot lists only the incumbent board’s chosen nominees, very often the board members themselves. If a shareholder wants to run for director or propose another nominee for the board, she needs to provide all other shareholders with a separate proxy ballot — …

Who Should Talk? What Counts As Employee Voice And Who Stands To Gain, Aditi Bagchi

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This symposium piece responds to an article by Kenneth G. Dau-Schmidt titled "Promoting Employee Voice in the American Economy: A Call for Comprehensive Reform." Professor Schmidt argues in favor of increasing employee voice in corporate governance. In this reply, Professor Bagchi distinguishes between "hard voice," "soft voice" and information rights as three variants of employee voice. She casts doubt on the material benefits from Professor Dau-Schmidt's proposals, which focus on hard and soft voice, to either employees or corporate stakeholders more broadly. The present focus of corporate governance on the relationship between shareholders and managers, to the exclusion of employees, …

Board Diversity Revisited: New Rationale, Same Old Story, Lisa Fairfax

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Recently, board diversity advocates have relied on market- or economic-based rationales to convince corporate America to increase the number of women and people of color in the boardroom, in lieu of moral or social justifications. This shift away from moral or social justifications has been deliberate, and it stems from a belief that corporate America would better respond to justifications that centered on the corporate bottom line. However, recent empirical data reveals that despite the increased reliance on, and apparent acceptance of, market- or economic-based rationales for board diversity, there has been little change in actual board diversity. This Article …

The Model Business Corporation Act At Sixty: Shareholders And Their Influence, Lisa Fairfax

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In the sixty years since the Committee on Corporate Laws (Committee) promulgated the Model Business Corporation Act (MBCA), there have been significant changes in corporate law and corporate governance. One such change has been an increase in shareholder activism aimed at enhancing shareholders’ voting power and influence over corporate affairs. Such increased shareholder activism (along with its potential for increase in shareholder power) has sparked considerable debate. Advocates of increasing shareholder power insist that augmenting shareholders’ voting rights and influence over corporate affairs is vital not only for ensuring board and managerial accountability, but also for curbing fraud and other …

Inside-Out Corporate Governance, David A. Skeel Jr., Vijit Chahar, Alexander Clark, Mia Howard, Bijun Huang, Federico Lasconi, A.G. Leventhal, Matthew Makover, Randi Milgrim, David Payne, Romy Rahme, Nikki Sachdeva, Zachary Scott

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Until late in the twentieth century, internal corporate governance—that is, decision making by the principal constituencies of the firm—was clearly distinct from outside oversight by regulators, auditors and credit rating agencies, and markets. With the 1980s takeover wave and hedge funds’ and equity funds’ more recent involvement in corporate governance, the distinction between inside and outside governance has eroded. The tools of inside governance are now routinely employed by governance outsiders, intertwining the two traditional modes of governance. We argue in this Article that the shift has created a new governance paradigm, which we call inside-out corporate governance.

Using the …

The Uneasy Case For The Inside Director, Lisa Fairfax

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In the wake of recent scandals and the economic meltdown, there is nearly universal support for the notion that corporations must have independent directors. Conventional wisdom insists that independent directors can more effectively monitor the corporation and prevent or otherwise better detect wrongdoing. As the movement to increase director independence has gained traction, inside directors have become an endangered species, relegated to holding a minimal number of seats on the corporate board. This Article questions the popular trend away from inside directors by critiquing the rationales in favor of director independence, and assessing the potential advantages of inside directors. This …

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

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The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means …

Virtual Shareholder Meetings Reconsidered, Lisa Fairfax

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In 2000 Delaware enacted a statute enabling corporations to host meetings solely by electronic means of communication rather than in a physical location. Since that time, several states have followed Delaware's lead, and the American Bar Association has proposed changing the Model Business Corporation Act to provide for some form of virtual shareholder meetings. Many states believed that such meetings would prove to be an important device for shareholders who desire to increase their voice within the corporation. Instead, very few companies have taken advantage of the ability to host such meetings. This Article provides some data on state statutes …

Clawbacks: Prospective Contract Measures In An Era Of Excessive Executive Compensation And Ponzi Schemes, Miriam A. Cherry, Jarrod Wong

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In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of …

Arrow's Theorem And The Exclusive Shareholder Franchise, Grant M. Hayden, Matthew T. Bodie

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In this essay, we contest one of the main arguments for restricting corporate board voting to shareholders. In justifying the limitation of the franchise to shareholders, scholars have repeatedly turned to social choice theory—specifically, Arrow’s theorem—to justify the exclusive shareholder franchise. Citing to the theorem, corporate law commentators have argued that lumping different groups of stakeholders together into the electorate would result in a lack of consensus and, ultimately, the lack of coherence that attends intransitive social choices, perhaps even leading the corporation to self-destruct. We contend that this argument is misguided. First, we argue that scholars have greatly overestimated …

Shareholder Democracy On Trial: International Perspective On The Effectiveness Of Increased Shareholder Power, Lisa Fairfax

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Shareholder democracy - efforts to increase shareholder power within the corporation - appears to have come of age, both within the United States and abroad. In the past few years, U.S. shareholders have worked to strengthen their voice within the corporation by seeking to remove perceived impediments to their voting authority. These impediments include classified boards, the plurality standard for board elections, and the inability to nominate directors on the corporation's ballot. Shareholders' efforts have also extended to seeking a voice on the compensation of corporate officers and directors. Advocates of shareholder democracy believe that such efforts are critical to …

Making The Corporation Safe For Shareholder Democracy, Lisa Fairfax

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This article considers the effect that increased shareholder activism may have on non-shareholder corporate stakeholders such as employees and consumers. One of the most outspoken proponents of increased shareholder power has argued that such increased power could have negative repercussions for other corporate stakeholders because it would force directors to focus on profits without regard to other interests. This article critically examines that argument. The article acknowledges that increased shareholder power may benefit some stakeholders more than others, and may have some negative consequences. However, this article demonstrates that shareholders not only have interests that align with other stakeholders, but …

Governance In The Ruins, David A. Skeel Jr.

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What gets an economy up and running after a catastrophic war or a period of oppressive rule? While there are nearly as many answers to these questions as experts, one of the most prominent for the past century has been law. Nearly every page of Law and Capitalism, a remarkable new book by Curtis Milhaupt and Katharina Pistor, stands in implicit or explicit dissent from the prevailing view. Milhaupt and Pistor’s countermodel begins a matrix consisting of two axes. The first contrasts a purely protective regime on one end, with a pervasively “coordinative” approach on the other. The second axis …

Human Freedom And Two Friedmen: Musings On The Implications Of Globalization For The Effective Regulation Of Corporate Behavior, Leo E. Strine Jr.

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In this essay, which was delivered as the Torys Lecture at the University of Toronto, Vice Chancellor Strine considers the implications of globalization for the effective regulation of corporate behavior affecting interests other than those of stockholders against the backdrop of the West’s political and economic experience. He concludes that consistent with prior experience, the globalization of corporate markets will require a corresponding expansion of the polity to protect those aspects of human freedom that are affected in important ways by corporate behavior. As a practical matter, this means that if the U.S. and other Western nations wish to limit …

Hedge Funds In Corporate Governance And Corporate Control, Marcel Kahan, Edward B. Rock

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Hedge funds have become critical players in both corporate governance and corporate control. In this article, we document and examine the nature of hedge fund activism, how and why it differs from activism by traditional institutional investors, and its implications for corporate governance and regulatory reform. We argue that hedge fund activism differs from activism by traditional institutions in several ways: it is directed at significant changes in individual companies (rather than small, systemic changes), it entails higher costs, and it is strategic and ex ante (rather than intermittent and ex post). The reasons for these differences may lie in …

The Expressive Function Of Directors’ Duties To Creditors, Jonathan C. Lipson

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This Article offers an explanation of the “doctrine” of directors’ duties to creditors. Courts frequently say—but rarely hold—that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These cases are puzzling for at least two reasons. First, they link fiduciary duty to priority in right of payment, effectively treating creditors as if they were shareholders, at least for certain purposes. But this ignores the fact that priority is a complex and volatile concept. Moreover, contract and other rights at law usually protect creditors, even (especially) when a firm is distressed. It …

Self-Handicapping And Managers’ Duty Of Care, David A. Hoffman

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This symposium essay focuses on the relationship between managers' duty of care and self-handicapping, or constructing obstacles to performance with the goal of influencing subsequent explanations about outcomes. Conventional explanations for failures of caretaking by managers have focused on motives (greed) and incentives (agency costs). This account of manager behavior has led some modern jurists, concerned about recent corporate scandals, to advocate for stronger deterrent measures to realign manager and shareholder incentives. * Self-handicapping theory, by contrast, teaches that bad manager behavior may occur even when incentives are well-aligned. Highly successful individuals in particular come to fear the pressure of …

Legitimacy And Corporate Governance, Cary Coglianese

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Parallels between corporate governance and state governance appear to be growing. This essay focuses on the suggestion that corporate governance is becoming structured much more like public government in certain ways. This shift may well be helpful for enhancing credibility and confidence in capital markets, but it also raises important questions. Will reforms enacted in the post-Enron era limit managers' discretion to innovate, take risks, and respond quickly to changing economic circumstances? How far should society go in imposing on corporations the kinds of procedures found commonly in democratic governments?

Toward Common Sense And Common Ground? Reflections On The Shared Interests Of Managers And Labor In A More Rational System Of Corporate Governance, Leo E. Strine Jr.

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In this essay, Vice Chancellor Strine reflects on the common interests of those who manage and those who labor for American corporations. The first part of the essay examines aspects of the current corporate governance and economic environment that are putting management and labor under pressure. The concluding section of the essay identifies possible corporate governance initiatives that might — by better focusing stockholder activism in particular and corporate governance more generally on long-term, rather than short-term, corporate performance — generate a more rational system of accountability, that focuses on the durable creation by corporations of wealth through fundamentally sound, …

Compensating Power: An Analysis Of Rents And Rewards In The Mutual Fund Industry, William A. Birdthistle

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The allegations of malfeasance in the investment management industry - market timing, late trading, revenue sharing, and several others - involve a broad range of mutual fund operations. This Article seeks to explain the common source of these irregularities by focusing upon a trait they share: the practice of investment advisers' capitalizing upon their managerial influence to increase assets under management in order to generate greater fees from those assets. This Article extends theories of executive compensation into the context of investment management to understand the extraction of rents by mutual fund advisers. Investment advisers, as collective groups of portfolio …

A New Player In The Boardroom: The Emergence Of The Independent Directors' Counsel, Geoffrey C. Hazard Jr., Edward B. Rock

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Over the last thirty years, the independent directors have occasionally been represented by independent counsel. Instances include: special litigation committees reviewing derivative suits; independent committees in parent subsidiary mergers and MBOs; and internal investigations of misconduct. We predict that, with the additional legal requirements imposed on independent directors by the Sarbanes Oxley Act and related changes to SEC rules and Stock Exchange listing requirements, the independent directors, especially those on the Audit Committee, increasingly will be represented on a continuing basis by independent legal counsel. Out of this will emerge a new figure in the board room: the Independent Directors' …

Creditors' Ball: The "New" New Corporate Governance In Chapter 11, David A. Skeel Jr.

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In the 1980s and early 1990s, many observers believed that the American corporate bankruptcy laws were desperately inefficient. The managers of the debtor stayed in control as "debtor in possession" after filing for bankruptcy, and they had the exclusive right to propose a reorganization plan for at least the first four months of the case, and often far longer. The result was lengthy cases, deteriorating value and numerous academic proposals to replace Chapter 11 with an alternative regime. In the early years of the new millennium, bankruptcy could not look more different. Cases proceed much more quickly, and they are …

Corporate Constitutionalism: Antitakeover Charter Provisions As Pre-Commitment, Marcel Kahan, Edward B. Rock

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Constitutions constitute a polity and create and entrench power. A corporate constitution - the governance choices incorporated in state law and the certificate of incorporation - resembles a political constitution. Delaware law allows parties to create corporations, to endow them with perpetual life, to assign rights and duties to "citizens" (directors and shareholders), to adopt a great variety of governance structures, and to entrench those choices. In this Article, we argue that the decision to endow directors with significant power over decisions whether and how to sell the company is a constitutional choice of governance structure. We then argue that …