Business Organizations Law Commons^™

Response To The European Commission's Report On The Application Of The Takeover Bids Directive, Peter Böckli, Paul L. Davies, Eilis Ferran, Guido Ferrarini, José M. Garrido Garcia, Klaus J. Hopt, Alain Pietrancosta, Katharina Pistor, Rolf Skog, Stanislaw Soltysinski, Jaap W. Winter, Eddy Wymeersch

Faculty Scholarship

This paper contains the European Company Law Experts' response to the report of the European Commission of 28 June 2012 on the application of the Takeover Bids Directive of 2004 and the reform initiatives announced. For evaluating these initiatives the rationale of the mandatory bid rule is relevant (exit rationale, control premium rationale and undistorted choice rationale). On this basis the paper discusses each of the concerns raised by the European Commission: 1) The concept of "acting in concert": The ECLE are of the opinion that a uniform concept for the Takeover Bids Directive, the Transparency Directive and the Acquisition …

Making Corporate Governance Codes More Effective: A Response To The European Commission's Action Plan Of December 2012, Peter Böckli, Paul L. Davies, Eilis Ferran, Guido Ferrarini, José M. Garrido Garcia, Klaus J. Hopt, Alain Pietrancosta, Katharina Pistor, Markus Roth, Rolf Skog, Stanislaw Soltysinski, Jaap W. Winter, Eddy Wymeersch

Faculty Scholarship

This paper contains the European Company Law Experts' response to one of the main issues raised in the European Commission’s Action Plan of 12 December 2012, namely how to make corporate governance codes more effective. The concept of “codes’ effectiveness” has two meanings: effectiveness of the comply-explain mechanism (disclosure effectiveness) and level of adoption of the codes’ recommendations themselves (substantive effectiveness). The ECLE believes that it is of crucial importance to keep the advantages of regulation by codes while finding adequate improvements of the quality of the reports and the explanations. The relationship between the content of corporate governance codes …

Economics Of Bankruptcy – Introduction, Edward R. Morrison

Faculty Scholarship

This essay surveys important contributions to the economics of bankruptcy. It is an introductory chapter for a forthcoming volume (from Edward Elgar Press) that compiles the work of legal scholars as well as economists working in the field of corporate finance. The essay begins with the foundational theories of Baird, Jackson, and Rea and then collects scholarly work extending, testing, or revising those theories. At various points I identify questions that merit further study, particularly empirical testing.

A Precedent Built On Sand: Norcon V. Niagra Mohawk, Victor P. Goldberg

Faculty Scholarship

Under the common law, a contracting party could only demand assurance of performance if the other party was insolvent. If a party had reasonable grounds for insecurity, the UCC Section 2-609 allowed it to demand adequate assurance even if the counterparty were solvent. The Restatement (Second) adopted the same rule for non-goods. In NorCon v. Niagara Mohawk the New York court extended the adequate assurance doctrine for some non-goods contracts. Although the decision seems to imply that there is some relation between the NorCon facts and its conclusion as to the law, there is none. Relying primarily on material available …

Mapping The Future Of Insider Trading Law: Of Boundaries, Gaps, And Strategies, John C. Coffee Jr.

Faculty Scholarship

The current law on insider trading is remarkably unrationalized because it contains gaps and loopholes the size of the Washington Square Arch. For example, if a thief breaks into your office, opens your files, learns material nonpublic information, and trades on that information, he has not breached a fiduciary duty and is presumably exempt from insider trading liability. But drawing a line that can convict only the fiduciary and not the thief seems morally incoherent. Nor is it doctrinally necessary.

The basic methodology handed down by the Supreme Court in SEC v. Dirks and United States v. O'Hagan dictates (i) …

Responsible Shares And Shared Responsibility: In Defense Of Responsible Corporate Officer Liability, Amy J. Sepinwall

Studio for Law and Culture

When a corporation commits a crime, whom may we hold criminally liable? One obvious set of defendants consists of the individuals who perpetrated the crime on the corporation’s behalf. But according to the responsible corporate officer (RCO) doctrine – a doctrine that is growing more widespread – the state may also prosecute and punish those corporate executives who, although perhaps lacking “consciousness of wrongdoing,” nonetheless have “a responsible share in the furtherance of the transaction which the statute outlaws.” In other words, the RCO doctrine imposes criminal liability on the executive who need not have participated in her corporation’s crime; …

Conscience, Incorporated, James D. Nelson

Ira M. Millstein Center for Global Markets and Corporate Ownership

Do business corporations have free exercise rights? This question has become critically important in recent challenges to the Affordable Care Act’s so-called “contraception mandate.” A host of businesses selling ordinary goods and services claim that they cannot be compelled to provide employees with insurance that covers contraception. Courts have divided over whether corporations can assert rights of conscience, and existing theoretical accounts fail to provide guidance on this question.

This Article offers a new normative framework for evaluating corporate claims of conscience. Drawing on theories of conscience and collective rights, it develops a “social theory” of conscience that explains how …

Private Equity And Executive Compensation, Robert J. Jackson Jr.

Faculty Scholarship

After the financial crisis, Congress directed regulators to enact new rules on C EQ pay at public companies. The rules would address the possibility that directors of public conpani es put ranagers'interests ahead of shareholderswhen setting executive pay. Yet little is known about how CEOs are paid in companies whose directors have undivided loyalty to shareholders. These directors car be fbund in companies owned by private equity firms-the savvy investors long renowned for their ability to maximize shareholier value. this Artic. presents the first study of how CEO pay in companies owned by private equity firms differs from CEO pay …

The Agency Costs Of Agency Capitalism: Activist Investors And The Revaluation Of Governance Rights, Ronald J. Gilson, Jeffrey N. Gordon

Faculty Scholarship

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to "the agency costs of agency capitalism." This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low-cost diversified investment vehicles. A new set of agency costs arises because in addition to divergence between the interests of record owners and the …

Codes Of Corporate Governance: A Review, Nolan Haskovec

Ira M. Millstein Center for Global Markets and Corporate Ownership

The U.S. was one of the first nations in the world to concern itself with the governance of its publicly-listed corporations. But it stopped well short of developing authoritative general standards of corporate governance. By contrast, many of the world’s other markets have by now agreed to some sort of ‘official’ principles for the governance of their quoted companies.

A key reason often cited for why the U.S. lacks a single, authoritative national code of corporate governance2 is the general resistance to centralized regulation of corporate law, which is subject to state rather than federal statutes. But several other major …

Dichotomy No Longer? The Role Of The Private Business Sector In Educating The Future Russian Legal Professions, Philip Genty

Faculty Scholarship

In his 1916 work The Law: Business or Profession?, Julius Henry Cohen describes an American legal system in which uniform standards for regulating, disciplining, and educating the profession are just beginning to be developed, albeit unevenly. In discussing the differences between a business and a profession, he argues that a profession requires a uniform set of standards to guide it in matters of ethics, as well as a system of rigorous legal education that includes a firm grounding in these ethical principles.

Perhaps most surprising for a book written in the early twentieth century – long before the …

Corporate Control And Credible Commitment, Ronald J. Gilson, Alan Schwartz

Faculty Scholarship

The separation of control and ownership – the ability of a small group effectively to control a company though holding a minority of its cash flow rights – is common throughout the world, but also is commonly decried. The control group, it is thought, will use its position to consume excessive amounts of project returns, and this injures minority shareholders in two ways: there is less money and the controllers are not maximizing firm value. To the contrary, we argue here that there is an optimal share of the firm that compensates the control group for monitoring managers and otherwise …

Federalizing Fiduciary Duty: The Altered Scope Of Officer Fiduciary Duty Following Orderly Liquidation Under Dodd-Frank, Dorothy S. Lund

Faculty Scholarship

The financial crisis of 2008 ushered in a new era of regulatory reform in the United States. The failure of several large banks prompted Congressional scrutiny ofthe U.S. bank regulatory system. Many critics highlighted the government's failure to intervene to prevent Lehman Brothers' insolvency, which resulted in economic turmoil not yet resolved. Against this backdrop, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") in July 2010.

Dodd-Frank mandates institutional changes to minimize economic instability and establishes regulatory processes to guide the government's response to future bank failures. At the heart of the regulation is the Orderly …

Corporate Governance And Executive Compensation In Financial Firms: The Case For Convertible Equity-Based Pay, Jeffrey N. Gordon

Faculty Scholarship

Unlike the failure of a nonfinancial firm, the failure of a systemically important financial firm will reduce the value of a diversified shareholder portfolio because of economy-wide reductions in expected returns and a consequent increase in systematic risk. Thus, diversified shareholders of a financial firm generally internalize systemic risk, whereas managerial shareholders and blockholders do not. This means that the governance model drawn from nonfinancial firms will not fit financial firms. Regulations that limit risk-taking by financial firms can thus provide a benefit, rather than necessarily impose a cost, for the typical diversified public shareholder. Managerial shareholding also gives rise …

The Measure Of A Mac: A Quasi-Experimental Protocol For Tokenizing Force Majeure Clauses In M&A; Agreements, Eric L. Talley, Drew O'Kane

Faculty Scholarship

This paper develops a protocol for using a familiar data set on force majeure provisions in corporate acquisitions agreements to tokenize and calibrate a machine-learning algorithm of textual analysis. Our protocol, built on regular expression (RE) and latent semantic analysis (LSA) approaches, serves to replicate, correct, and extend the hand-coded data. Our preliminary results indicate that both approaches perform well, though a hybridized approach improves predictive power further. Monte Carlo simulations suggest that our results are generally robust to out-of-sample predictions. We conclude that similar approaches could be used more broadly in empirical legal scholarship, especially including in business law.

The Future Of European Company Law, Peter Böckli, Paul L. Davies, Eilis Ferran, Guido Ferrarini, José M. Garrido Garcia, Klaus J. Hopt, Alain Pietrancosta, Katharina Pistor, Rolf Skog, Stanislaw Soltysinski, Jaap W. Winter, Eddy Wymeersch

Faculty Scholarship

This paper contains the views of the European Company Law Experts (ECLE) on the future of European company law. The paper accompanies the responses of the European Company Law Experts to the European Commission’s Consultation on the future of European Company Law of spring 2012. In the first part of the paper we set out our views on the objectives of European company law and in the following parts we discuss how the European Commission should proceed with rule making in the field of company law.

Delaware Court Of Chancery: Change, Continuity – And Competition, John C. Coffee Jr.

Faculty Scholarship

For Delaware, it is the best of times and the worst of times. The institutional prestige of the Delaware Court of Chancery has never been higher. Under the leadership of Chancellors Allen, Chandler and Strine, the court has converted many (and possibly most) of the academics, who once tended to be skeptical of Delaware. Academics and practitioners alike have been impressed by both the depth and thoughtfulness of the court of chancery's decisions and the hardworking style of its vice chancellors (who regularly seem able to turn out lengthy decisions in days that would take many federal circuit courts months …

Fragmentation Nodes: A Study In Financial Innovation, Complexity, And Systemic Risk, Kathryn Judge

Faculty Scholarship

This Article resents a case study in how complexity arising from the evolution and proliferation of a financial innovation can increase systemic risk. The subject of the case study is the securitization of home loans, an innovation which played a critical and still not fully understood role in the 2007-2009 financial crisis. The Article introduces the term "fragmentation node" for these transaction structures, and it shows how specific sources of complexity inherent in fragmentation nodes limited transparency and flexibility in ways that undermined the stability of the financial system. In addition to shedding new light on the processes through which …

Are Institutional Investors Part Of The Problem Or Part Of The Solution?: Key Descriptive And Prescriptive Questions About Shareholders, Ben W. Heineman Jr., Stephen Davis

Ira M. Millstein Center for Global Markets and Corporate Ownership

Over the last twenty years, institutional investors have owned an increasing share of public equity markets — more than 70 percent of the largest 1,000 companies in the United States in 2009, for example. Over the past two years, in response to failures of some boards of directors and business leaders, shareholders, including institutional investors, have been given increased powers to participate in — or have disclosures about — discrete spheres of governance in publicly held corporations. Moreover, during this same period, and in multiple jurisdictions, there have been increasing calls from both the public and private sectors for institutional …

Chairmanship: The Effective Chair-Ceo Relationship: Insight From The Boardroom, Elise Walton

Ira M. Millstein Center for Global Markets and Corporate Ownership

This paper examines the role of the corporate Chair in the context of one of the most important relationships the Chair has – his or her relationship with the company’sCEO. To approach the topic, the Chairmen’s Forum sponsored a research effort to interview experienced Chairs,CEOs and stakeholders. After the Forum agreed on the project, a research plan was designed and approved by the sponsors. Key interview questions and interview candidates were reviewed and approved. The main areas of the interview included: background experience with the two roles; successful situations and what worked; challenges and what didn’t work; how a relationship …

Contract, Uncertainty, And Innovation, Ronald J. Gilson, Charles F. Sabel, Robert E. Scott

Faculty Scholarship

Contract today increasingly links entrepreneurial innovations to the efforts and finance necessary to transform ideas into value. In this chapter, we describe the match between a form of contract that “braids”1 formal and informal contractual elements in novel ways and the process by which innovation is pursued.

A Model Of Optimal Corporate Bailouts, Antonio E. Bernardo, Eric L. Talley, Ivo Welch

Faculty Scholarship

We analyze incentive-efficient government bailouts within a canonical model of intra-firm moral hazard. Bailouts exacerbate the moral hazard of firms and managers in two ways. First, they make them less averse to failing. Second, the taxes to fund bailouts dampen their incentives. Nevertheless, if third-party externalities from keeping the firm alive are strong, bailouts can improve welfare. Our model suggests that governments should use bailouts sparingly, where social externalities are large and subsidies small; eliminate incumbent owners and managers to improve a priori incentives; and finance bailouts through redistributive taxes on productive firms instead of forcing recipients to repay in …

“Corporation Law Is Dead”: The Mystery Of Corporation Law At The Height Of The American Century, Harwell Wells

Studio for Law and Culture

In 1962, the corporation law scholar Bayless Manning famously wrote that “[C]orporation law, as a field of intellectual effort, is dead in the United States.” Looking back, most scholars have agreed with Manning, concluding that corporation law from the 1940s to the 1970s was stagnant, only rescued from its doldrums by the triumph of the theory of the firm and modern finance in the 1980s. This paper takes a new look at American corporate law during this time, asking why scholars believed corporation law was “dead” at the same time that the American corporation had seized the commanding heights of …

Kiobel And Corporate Immunity Under The Alien Tort Statute: The Struggle For Clarity Post-Sosa, Dorothy S. Lund

Faculty Scholarship

In September 2010, a two-judge Second Circuit majority ruled that corporations are immune from liability under the Alien Tort Statute (“ATS”). This statute, which grants aliens access to federal district courts, has emerged as a controversial tool for international norm enforcement in the last thirty years. The unexpected decision to foreclose corporate liability has generated a wave of criticism from human rights activists and international law scholars who claim that the decision is grounded in a fundamental misunderstanding of international law.

This commentary examines the Kiobel decision against other recent interpretations of the ATS, especially those following the Supreme Court’s …

Economic Crisis And Share Price Unpredictability: Reasons And Implications, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Faculty Scholarship

The volatility of share returns for individual companies increased sharply during the recent financial crisis. The larger part of this increase was due to a dramatic rise – five fold as measured by variance – in idiosyncratic risk. We find that this pattern repeats itself during each major economic reversal going back 85 years. Because idiosyncratic risk is what is involved, this increase cannot be explained by changes in predictions concerning the future course of the economy as a whole.

Our first goal is to explain why difficult economic times, which are defined in terms of market wide phenomena, make …

Corporations, Corruption, And Complexity: Campaign Finance After Citizens United, Richard Briffault

Faculty Scholarship

Few campaign finance cases have drawn more public attention than the Supreme Court's decision in Citizens United v. FEC. The Court's invalidation of a sixty-year-old federal law – and comparable laws in two dozen states – banning corporations from engaging in independent spending in support of or opposition to candidates strongly affirms the right of corporations to engage in electoral advocacy. Critics – and most, albeit not all, of both the popular and academic commentary on the decision has been critical – have condemned the idea that corporations enjoy the same rights to spend on elections as natural persons. …

Contract Interpretation Redux, Alan Schwartz, Robert E. Scott

Faculty Scholarship

Contract interpretation remains the largest single source of contract litigation between business firms. In part this is because contract interpretation issues are difficult, but it also reflects a deep divide between textualist and contextualist theories of interpretation. While a strong majority of U.S. courts continue to follow the traditional, "formalist" approach to contract interpretation, some courts and most commentators prefer the "contextualist" interpretive principles that are reflected in the Uniform Commercial Code and the Second Restatement. In 2003, we published an article that set out a formalist theory of contract interpretation to govern agreements between business firms. We argued that, …

Corporate Political Speech: Who Decides, Lucian A. Bebchuk, Robert J. Jackson Jr.

Faculty Scholarship

The Supreme Court spoke clearly this Term on the issue of corporate political speech, concluding in Citizens United v. FEC' that the First Amendment protects corporations' freedom to spend corporate funds on indirect support of political candidates. 2 Constitutional law scholars will long debate the wisdom of that holding, as do the authors of the two other Comments in this issue.3 In contrast, this Comment accepts as given that corporations may not be limited from spending money on politics should they decide to speak. We focus instead on an important question left unanswered by Citizens United: who should have the …

Panel 3: Bankruptcy & Restructuring Of Financial Institutions, Barry E. Adler, William A. Ackman, Marcia L. Goldstein, Arthur J. Gonzalez, Michael J. Krimminger, Edward R. Morrison

Faculty Scholarship

Barry Adler: Thank you all for being here. It is an honor for me to be on this panel and an honor to moderate it. Let me introduce our panel before we get started. William A. Ackman, the founder and CEO of Pershing Square Capital Management; Marsha Goldstein, a partner and chair of the business finance and restructuring department at Weil, Gotshal; the Honorable Arthur Gonzalez, a judge in the U.S. Bankruptcy Court for the Southern District of New York; and Ed Morrison, the Harvey Miller Professor of Law and Economics at Columbia Law School. Also on this panel is …

Locating Innovation: The Endogeneity Of Technology, Organizational Structure, And Financial Contracting, Ronald J. Gilson

Faculty Scholarship

There is much we do not understand about the "location" of innovation: the confluence, for a particular innovation, of the technology associated with the innovation; the innovating firm's size and organizational structure; and the financial contracting that supports the innovation. This Essay suggests that these three indicia are determined simultaneously and discusses the interaction among them through four examples of innovative activity whose location is characterized by tradeoffs between pursuing the activity in an established company, in a smaller, earlier-stage company, or some combination of the two. It first considers the dilemma faced by an established company in deciding whether …