Business Organizations Law Commons^™

Corporate Governance And Economic Efficiency: When Do Institutions Matter?, Ronald J. Gilson

Faculty Scholarship

Until the 1980s, corporate governance was largely the province of lawyers. It was a world of specific rules – more or less precise statutory requirements governing shareholder meetings, the election of directors, notice requirements and the like – that were essentially unrelated to what corporations actually do. From this perspective, the corporation's productive activity was simply a black box onto which standard governance structures were superimposed with little effect on what took place within. Corporate law was "trivial" or, as Bayless Manning so evocatively portrayed it, simply "great empty corporation statutes – towering skyscrapers of rusted girders internally welded together …

When Should An Offer Stick? The Economics Of Promissory Estoppel In Preliminary Negotiations, Avery W. Katz

Faculty Scholarship

The purpose of this Article is to examine the doctrine of promissory estoppel, as it applies in the context of preliminary negotiations, from the viewpoint of the economic theory of rational choice. This is part of a larger project that attempts to understand better the regulatory role of contract formation law generally. From a regulatory vantage point, estoppel and related legal doctrines operate as economic regulations; they shape the bargaining process by influencing the negotiators' incentives to make and to rely on preliminary communications. As with all economic regulations, however, some rules do better than others at promoting efficient exchange, …

Corruption Of The Class Action: The New Technology Of Collusion, John C. Coffee Jr.

Faculty Scholarship

Professor Coffee's article, an oral version of which was given at the Cornell Mass Torts conference, is appearing in the Columbia Law Review. However, because commentators in this volume have responded to it, he has authorized the following summary of his views.

Shareholder Dividend Options, Zohar Goshen

Faculty Scholarship

This Article proposes a legal norm that shifts discretion over dividend policy from managers to the capital markets (i.e., shareholders). State corporate law could effect such a shift by adopting a rule that mandates shareholder control over the dividend decision. The rule would require every firm to adopt an option mechanism that, at predetermined dates, provided each of the firm's shareholders with the right to select either cash or stock dividends in an amount equal to the shareholder's pro rata share of the firm's earnings. For instance, the law might require that, once a year, the firm offer to each …

Competition Versus Consolidation: The Significance Of Organizational Structure In Financial And Securities Regulation, John C. Coffee Jr.

Faculty Scholarship

It's as predictable as the swallows' return to Capistrano. At the outset of each new Administration, a Presidential Task Force proposes a restructuring of the federal administrative agencies. New developments in rapidly evolving markets, it is argued, require a consolidation of agencies to generate a broader perspective, to create a "level playing field," and to end the possibility of a "race to the bottom" (to the extent that market participants can opt for one regulatory system over another). The proposal draws little overt criticism, but turf-conscious agencies quietly mobilize their constituencies to oppose the reform. The first sign of trouble …

The Mythology Of Article 9, Robert E. Scott

Faculty Scholarship

Debt Collection as Rent Seeking marks an important moment in contemporary jurisprudence: the transformation of David Carlson from trenchant, fire-in-the-belly, no-holds-barred critic to abstract-modeling, implausible-assuming, game-theorizing, law and economics maven. On that basis alone, it is a great read.

Re-Engineering Corporate Disclosure: The Coming Debate Over Company Registration, John C. Coffee Jr.

Faculty Scholarship

Statutory obsolescence is the fate of all legislation. At some point in the natural "life cycle" of any statute, courts tend to move from purposive statutory construction, focused on the actual legislative intent, to greater deference towards administrative expertise as they implicitly recognize that the original legislative intent no longer fits the contemporary institutional landscape. Given that the federal securities laws were passed during the 1930s, they have now entered the geriatric zone where their possible obsolescence must be considered. Some academics have already called for the SEC's elimination on precisely this basis. Practitioners complain about the "metaphysical" and "hypertechnical" …

The Sec And The Institutional Investor: A Half-Time Report, John C. Coffee Jr.

Faculty Scholarship

Nothing that the Securities and Exchange Commission ("SEC") has done in recent years has been as controversial or significant as its efforts to reform the proxy rules to permit greater communication among shareholders. Nothing that it has undertaken recently has also been left as incompletely or equivocally realized as these same efforts. That the SEC's efforts at facilitating shareholder communication have been controversial and significant is by now a commonplace observation. That they are incomplete and equivocal requires more explanation. Although the discovery that an agency is behaving inconsistently is hardly a revelation, more than politics appears to be at …

Insider Trading Deterrence Versus Managerial Incentives: A Unified Theory Of Section 16(B), Merritt B. Fox

Faculty Scholarship

Part I of this article assesses the social costs of a crude rule of thumb. Because section 16(b) applies to a given class of paired transactions, it deters both transactions based on inside information and transactions not so based. Each time section 16(b) is stretched to include a class of paired transactions, it deters some additional innocent transactions. This side effect will take the form of officers' and directors' purchasing fewer shares in their own companies and refusing to accept as large a portion of their compensation in a form based on share price. There are strong theoretical and empirical …

Thinking To Be Paid Versus Being Paid To Think, Merritt B. Fox

Faculty Scholarship

In the first chapter of The Economic Structure of Corporate Law, Frank Easterbrook and Daniel Fischel make an arresting statement:

... [P]eople who are backing their beliefs with cash are correct; they have every reason to avoid mistakes, while critics (be they academics or regulators) are rewarded for novel rather than accurate beliefs. Market professionals who estimate these things wrongly suffer directly; academics and regulators who estimate wrongly do not pay a similar penalty. Persons who wager with their own money may be wrong, but they are less likely to be wrong than are academics and regulators, who are wagering …

Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, John C. Coffee Jr., Bernard S. Black

Faculty Scholarship

A central puzzle in understanding the governance of large American public firms is why most institutional shareholders are passive. Why would they rather sell than fight? Until recently, the Berle-Means paradigm – the belief that separation of ownership and control naturally characterizes the modern corporation – reigned supreme. Shareholder passivity was seen as an inevitable result of the scale of modern industrial enterprise and of the collective action problems that face shareholders, each of whom owns only a small fraction of a large firm's shares.

A paradigm shift may be in the making, however. Rival hypotheses have recently been offered …

Decoupling Sales Law From The Acceptance-Rejection Fulcrum, Jody S. Kraus

Faculty Scholarship

The determination of whether the buyer has accepted or rejected goods provides the sales law solution to the problems of allocating burden of proof, assigning duties to salvage goods in failed transactions, and reducing systematic undercompensation. But one doctrine is unlikely to provide the best solution to each of these distinct problems. Decoupling the rules addressing burden of proof, salvage, and undercompensation from the doctrines of acceptance and rejection, and thus from one another, would significantly improve sales law.

This strategy has a distinguished precedent in the history of sales law. Karl Llewellyn based his objection to the doctrine of …

Institutions As Relational Investors: A New Look At Cumulative Voting, Jeffrey N. Gordon

Faculty Scholarship

The hostile takeover may have become a receding memory, but the problem that the market in corporate control purported to address nevertheless remains. In a world of imperfect competition, the product, capital, and managerial markets may temporarily indulge suboptimal performance by a firm's managers. As cases such as GM, Sears, American Express, and IBM illustrate, a firm with a substantial franchise and substantial financial reserves can sustain deteriorating economic performance over a significant period, resulting in a long slow slide of economic values. Shareholders and society generally will benefit from a mechanism that replaces the firm's incumbent managers well before …

The Politics Of Article 9, Robert E. Scott

Faculty Scholarship

In the ongoing debate concerning the efficiency and social value of Article 9 of the Uniform Commercial Code, two points are beyond dispute. First, asset-based financing has undergone an enormous transformation since the enactment of Article 9. The most vivid illustration of this is the dramatic increase in the number and size of firms that rely on secured credit as their principal means of financing both ongoing operations and growth opportunities. Previously, with a few exceptions (such as factoring and trust receipts), secured financing principally had served second-class markets as the "poor man's" means of obtaining credit. Now, it has …

Investment Companies As Guardian Shareholders: The Place Of The Msic In The Corporate Governance Debate, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Comparative corporate governance is both necessary and hard. Recent scholarship has identified the political and historical contingency of the American pattern of corporate governance. The Berle-Means corporation, with its separation of management and risk bearing and the attendant agency conflict between managers and shareholders, is now widely recognized as being as much a creature of the American pattern of law and politics as the handiwork of neutral market forces. This recognition underscores the need to place the American experience in a comparative perspective. Other patterns of corporate governance can provide both insights into the operation of our own and a …

What Difference Does It Make Whether Corporate Managers Have Public Responsibilities?, William H. Simon

Faculty Scholarship

Alan Wolfe's thoughtful paper resonates with what I think we should call the Washington and Lee School of corporate jurisprudence.' It elaborates on that School's brilliant intellectual history of legal theorizing about the corporation and on its powerful critique of conservative arguments against managerial responsiveness to nonshareholder interests.

It also shares, I fear, a tendency to overestimate the practical stakes of abstract concepts of the corporation and fiduciary duties. This tendency takes three forms: first, a historical picture that portrays recent developments as a promising departure rather than business-as-usual; second, an assumption that certain abstract conceptions of the corporation (for …

New Myths And Old Realities: The American Law Institute Faces The Derivative Action, John C. Coffee Jr.

Faculty Scholarship

Nothing in The American Law Institute's (ALI) Principles of Corporate Governance: Analysis and Recommendations (Principles) proved more controversial than the effort to develop fair and balanced standards for the derivative action. Only the topic of corporate takeovers seems to evoke an equally intense level of emotion among corporate lawyers. Not surprisingly then, Part VII (Remedies) of the Principles attracted the same attention from critics that a lightning rod does in a thunderstorm.

Unlike other ALI Restatements, however, the Principles also encountered a professional opposition, which lobbied against its adoption, both inside and outside the ALI, on behalf of various outside …

Understanding The Japanese Keiretsu: Overlaps Between Corporate Governance And Industrial Organization, Ronald J. Gilson, Mark J. Roe

Faculty Scholarship

We aim here for a better understanding of the Japanese keiretsu. Our essential claim is that to understand the Japanese system – banks with extensive investment in industry and industry with extensive cross-ownership – we must understand the problems of industrial organization, not just the problems of corporate governance. The Japanese system, we assert, functions not only to harmonize the relationships among the corporation, its shareholders, and its senior managers, but also to facilitate productive efficiency.

The Political Ecology Of Takeovers: Thoughts On Harmonizing The European Corporate Governance Environment, Ronald J. Gilson

Faculty Scholarship

Economic policy debate in the United States during the 1980s focused on the dynamics of bidder and target tactics in hostile takeovers. Confronted with the largest transactions in business history, financial economists took advantage of developments in econometric techniques to conduct virtually real time studies of the impact on firm value of each new bidder tactic and target defense. For courts and lawyers, hostile takeovers subjected standard features of corporate law to the equivalent of a stress x-ray, revealing previously undetected doctrinal cracks. Congress held seemingly endless hearings on the subject, although managing to enact only relatively innocuous tax penalties …

Corporate Law: What Is The Impact Of New Ali Proposals On Shareholder Litigation, John C. Coffee Jr., Michael P. Dooley

Faculty Scholarship

When the American Law Institute's Corporate Governance Project meets this month, one of the most hotly debated agenda items is likely to be its new rules governing shareholder litigation, which are now up for final approval.

The proposed change means that corporate boards will now have to prove in court that a decision to dismiss a shareholder claim alleging self-dealing was in the corporation's best interest. In addition, the requirement for a formal "demand" on the board by shareholders will be uniform, rather than subject to excuse, as it is under Delaware law and in the majority of states.

Drafters …

Benign Restraint: The Sec's Regulation Of Execution Systems, David M. Schizer

Faculty Scholarship

To the handful of traders who founded the New York Stock Exchange (NYSE) in 1792 – and perhaps even to the securities traders of the 1960's – today's securities markets would be virtually unrecognizable. New communications and data processing technologies, the globalization of investment portfolios, and a surge in trading volume have created new needs and possibilities. As a result, revolutionary advances have occurred in the design and performance of execution systems: the technologies (computers, telephones, modems) and formats (auction-based stock exchanges, dealer-based "over-the-counter" markets, computerized single price auctions) that traders use to conduct trades. These advances enable trades on …

Bondholder Coercion: The Problem Of Constrained Choice In Debt Tender Offers And Recapitalizations, John C. Coffee Jr., William A. Klein

Faculty Scholarship

The past decade saw the flourishing of risky, high-yield corporate debt, often called "junk" bonds. Too many companies took on too much debt, and the chickens are now coming home to roost as these bonds have begun to default with increasing frequency.The magnitude of the problem is potentially enormous; by one estimate, $318 billion of debt has either defaulted already or trades at yields indicating the market's skepticism that it will be repaid on maturity.

Facing the prospect of default, corporate issuers are seeking to restructure or recapitalize their financial structures at a correspondingly increased pace. The market force driving …

Reinventing The Outside Director: An Agenda For Institutional Investors, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Managerialist rhetoric puts the institutional investor between a rock and a hard place. The institutional investor is depicted as a paper colossus, alternatively greedy and mindless, but in all events a less important corporate constituency than that other kind of investor, the "real" shareholder. The unspoken corollary is that, regardless of the institution's investment strategy, its interests may appropriately be ignored.

An institution that trades stock frequently is considered a short-term shareholder without a stake in the future of the corporation. According to the familiar argument, the short-term shareholder has no more legitimate claim on management's attention than does a …

Corporations, Markets, And Courts, Jeffrey N. Gordon

Faculty Scholarship

The times they are a changin'. Vanguard firms of the 1980s takeover boom have announced associate layoffs and salary freezes because business is down. Bankruptcy and corporate reorganization are the hot new specialties as reflected in law school class size and law firm entrepreneurialism. Acquisition activity has fallen dramatically from the halcyon days of the 1980s. The gargantuan headline-grabbing hostile bid is now rare. In particular, the "boot-strap, bust-up" highly leveraged transaction that so engaged the passions of corporate managers and raiders now seems part of the history of corporate finance rather than its future.

Many forces have played a …

How The Proxy Rules Discourage Constructive Engagement: Regulatory Barriers To Electing A Minority Of Directors, Ronald J. Gilson, Lilli A. Gordon, John Pound

Faculty Scholarship

During the 1980s, both sides of the hostile takeover controversy viewed proxy contests in terms that bordered on the mythical. Those made uneasy by the takeover phenomenon, especially management, held out proxy contests as an alternative, almost utopian mechanism through which a civilized debate about corporate strategy and structure could be held. As the Delaware Supreme Court put it, "[if the stockholders are displeased with the actions of their elected representatives [in blocking a hostile takeover], the powers of corporate democracy are at their disposal to turn the board out.” In contrast, those who believed that takeovers were necessary to …

Unlimited Liability And Law Firm Organization: Tax Factors And The Direction Of Causation, Ronald J. Gilson

Faculty Scholarship

In a recent issue of this Journal, Carr and Mathewson (1988) test a model of the impact of limited and unlimited liability regimes on the nature of firms by comparing the performance of law firms operated as partnerships and sole proprietorships (and therefore subject to unlimited liability) with that of law firms operated as corporations (and therefore subject to limited liability).

Shareholder Initiative: A Social Choice And Game Theoretic Approach To Corporate Law, Jeffrey N. Gordon

Faculty Scholarship

When it comes to specific business matters, it seems that an objecting shareholder can do no more than offer a "precatory" resolution that provides shareholder advice on the issue. Adoption of such a resolution obviously sends a strong signal to management, as do informal contacts by important shareholders, that a management seeking to avoid a control contest may be well-advised to heed. Nevertheless, management can ignore such expressions of shareholder. preference and, indeed, can pursue policies and extraordinary transactions that it knows shareholders would reject. Thus for the large public corporation the pattern of delegation gives management virtually unbounded decisionmaking …

Corporate Successors Under Strict Liability: A General Economic Theory And The Case Of Cercla, Merritt B. Fox

Faculty Scholarship

P undertakes an activity subject to strict liability that creates a risk of harm to others. The activity harms V. Before the harm becomes apparent, however, P sells its assets to S for cash and dissolves. Should V be entitled to compensation from S in P's stead? If the talk of corporate lawyers is to be believed, concern over this seemingly technical question is having a substantial impact on the salability of billions of dollars of productive assets.

With the growth of products liability litigation, state courts have given the issue of successor liability increasing attention over the last decade. …

Privatization In Eastern Europe: Impractical, But Not Impossible, Andrzej Rapaczynski

Faculty Scholarship

The most important thing that must be understood by anyone thinking about Eastern European privatization is that the word "privatization," although correct, is somewhat misleading. It is misleading because it brings to mind the operations performed in many other countries where state-owned companies have been sold to private individuals. It is very important to understand that the significance of privatization and the practicality of privatization in Eastern Europe are quite different. The most important thing is that the main task of privatization is not to transfer ownership from one party to another-like that successfully done in England-but rather to create …

Liquidity Versus Control: The Institutional Investor As Corporate Monitor, John C. Coffee Jr.

Faculty Scholarship

Within academia, paradigm shifts occur regularly, some more important than others. As the takeover wave of the 1980s ebbs, a significant shift now appears to be in progress in the way the public corporation is understood. Above all, the new thinking emphasizes that political forces shaped the modern corporation. While the old paradigm saw the structure of the corporation as the product of a Darwinian competition in which the most efficient design emerged victorious, this new perspective sees political forces as constraining that evolutionary process and possibly foreclosing the adoption of a superior organizational form. Thus, my colleague Professor Mark …