Business Organizations Law Commons^™

Human Equity? Regulating The New Income Share Agreements, Shu-Yi Oei, Diane Ring

Vanderbilt Law Review

A controversial new financing phenomenon has recently emerged. New "income share agreements" ("ISAs") enable an individual to raise funds by pledging a percentage of her future earnings to investors for a certain number of years. These contracts, which have been offered by entities such as Fantex, Upstart, Pave, and Lumni, raise important questions for the legal system: Are they a form of modern-day indentured servitude or an innovative breakthrough in human financing? How should they be treated under the law? This Article comprehensively addresses the public policy and legal issues raised by ISAs and articulates an analytical approach to evaluating …

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 Derivative Nature Of Corporate Constitutional Rights, Margaret M. Blair

Vanderbilt Law School Faculty Publications

This Article engages the two hundred year history of corporate constitutional rights jurisprudence to show that the Supreme Court has long accorded rights to corporations based on the rationale that corporations represent associations of people from whom such rights are derived. The Article draws on the history of business corporations in America to argue that the Court’s characterization of corporations as associations made sense throughout most of the nineteenth century. By the late nineteenth century, however, when the Court was deciding several key cases involving corporate rights, this associational view was already becoming a poor fit for some corporations. The …

Boards Of Directors As Mediating Hierarchs, Margaret M. Blair

Vanderbilt Law School Faculty Publications

In June of 2014, the board of directors of Demoulas Supermarkets, Inc.-better known as Market Basket, a mid-sized chain of grocery stores in New England-decided to oust the man who had been CEO for the previous six years, Arthur T. Demoulas.' Most likely, the board of directors did not anticipate what happened next: Thousands of employees, customers, and fans of Market Basket boycotted the stores and staged noisy public protests asking the board to reinstate "Arthur T., The reaction by employees and customers made what had been a simmering, nasty, intrafamily feud within the closely held Market Basket chain into …

Shareholder Voting In An Age Of Intermediary Capitalism, Paul H. Edelman, Randall S. Thomas, Robert B. Thompson

Vanderbilt Law School Faculty Publications

Shareholder voting is a key part of contemporary American corporate governance. As numerous contemporary battles between corporate management and shareholders illustrate, voting has never been more important. Yet, traditional theory about shareholder voting, rooted in concepts of residual ownership and a principal/agent relationship, does not reflect recent fundamental changes as to who shareholders are and their incentives to vote (or not vote). In the first section of the article, we address this deficiency directly by developing a new theory of corporate voting that offers three strong and complementary reasons for shareholder voting. In the middle section, we apply our theory …

The Case For A Market In Debt Governance, Yesha Yadav

Vanderbilt Law Review

Scholars have long lamented that the growth of modern finance has given way to a decline in debt governance. According to current theory, the expansive use of derivatives that enable lenders to trade away the default risk of their loans has made these lenders uninterested, even reckless, when it comes to exercising creditor discipline. In contrast to current theory, this Article argues that such derivatives can prove a positive and powerful influence in debt governance. Theory has overlooked those who sell credit protection to lenders and assume default risk on the borrower. These protection sellers are left holding the economic …

Managing Systemic Risk In Legal Systems, J.B. Ruhl

Vanderbilt Law School Faculty Publications

The American legal system has proven remarkably robust even in the face vast and often tumultuous political, social, economic, and technological change. Yet our system of law is not unlike other complex social, biological, and physical systems in exhibiting local fragility in the midst of its global robustness. Understanding how this “robust yet fragile (RYF) dilemma operates in legal systems is important to the extent law is expected to assist in managing systemic risk, the risk of large local or even system-wide failures in other social systems. Indeed, legal system failures have been blamed as partly responsible for disasters such …

The Supercharged Ipo, Victor Fleischer, Nancy Staudt

Vanderbilt Law Review

A new innovation on the IPO landscape has emerged in the last two decades, allowing owner-founders to extract billions of dollars from newly public companies. These IPOs-labeled supercharged IPOs-have been the subject of widespread debate and controversy: lawyers, financial experts, journalists, and members of Congress have all weighed in on the topic. Some have argued that supercharged IPOs are "brilliant, just brilliant," while others have labeled them "underhanded" and "bizarre."

In this Article, we explore the supercharged IPO and explain how and why this new deal structure differs from the more traditional IPO. We then outline various theories of financial …

Business, Human Rights, And The Promise Of Polycentricity, Jamie D. Prenkert, Scott J. Shackelford

Vanderbilt Journal of Transnational Law

Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises (SRSG) John Ruggie referred to the "Protect, Respect, and Remedy" Framework (PRR Framework) and the UN Guiding Principles on Business and Human Rights (Guiding Principles) as a polycentric governance system. However, the exact meaning of this phrase has not been very carefully elucidated. This Article analyzes that description in the context of the deep and varied body of literature on polycentric governance and evaluates the PRR Framework in that light. In particular, this Article uses a case-study approach, analyzing the emerging polycentric …

What Should We Do About Multijurisdictional Litigation In M&A Deals?, Randall S. Thomas

Vanderbilt Law Review

Companies and their investors have been battling over the value of representative shareholder litigation since at least the 1940s. Investors argue that managerial agency costs are high and that class actions and derivative suits are key shareholder monitoring mechanisms that they can deploy to keep managers in line. Companies, on the other hand, believe that the plaintiffs' bar drives representative litigation claims, as agency costs in contingency fee suits make the lawyer the real party in interest. Over the past several decades, there have been numerous skirmishes between these two sets of actors, manifesting themselves, for example, in congressional debates …

Fee Shifting And The Free Market, Jonathan T. Molot

Vanderbilt Law Review

It is uncontroversial that litigation is too expensive. Controversy abounds, however, over who is to blame and what is to be done about the problem. Plaintiffs and defendants each accuse the other of pursuing weak or meritless litigation positions that inflict needless expense. This Article suggests that regardless of who is correct-and who is more often at fault-the same set of solutions may be available to assuage the problem. The Article embraces a combination of procedural reforms and market mechanisms designed to improve matters for both sides and to make it less likely that a party with a meritorious litigation …

The Market For Preclusion In Merger Litigation, Sean J. Griffith, Alexandra D. Lahav

Vanderbilt Law Review

Delaware dominates the corporate law market.' More than half of all public companies and over sixty percent of the Fortune 500 are incorporated in Delaware. These companies are subject to Delaware's corporate law regardless of where their businesses are physically located. Although academics continue to debate whether it is good or bad, they have long agreed that Delaware's dominance is a result of its law and its judiciary. As a corollary, it was widely understood that Delaware courts decided most cases involving Delaware corporations. The discovery that litigation involving these corporations very often takes place outside of Delaware therefore came …

The First Year Of "Say On Pay" Under Dodd-Frank: An Empirical Analysis And Look Forward, Randall Thomas, James F. Cotter, Alan R. Palmiter

Vanderbilt Law School Faculty Publications

Using voting data from the first year of say-on-pay votes under Dodd- Frank, we look at the patterns of shareholder voting in advisory votes on exec- utive pay. Consistent with the more limited say-on-pay voting before Dodd- Frank, we find that shareholders in the first year under Dodd-Frank generally gave broad support to management pay packages. But not all pay packages received strong shareholder support. At some companies, management suf- fered the embarrassment of failed say-on-pay votes-that is, less than fifty per- cent of their company's shareholders voted in favor of the proposal. In particular, we find that poorly performing …

Making Money: Leverage And Private Sector Money Creation, Margaret M. Blair

Vanderbilt Law School Faculty Publications

In the wake of the financial crisis of 2008-2009, practitioners and theorists in law, finance, and economics are rethinking our theories about how the financial sector influences the real economy. In particular, they are reexamining the linkages among financial innovation, supply of credit and money, monetary policy, bubbles, financial stability, and economic growth. One of the key issues that is being reconsidered is the dynamics of how banks and other financial institutions drive credit creation and credit allocation, and how these factors, in turn affect the performance of the macroeconomy. In this article, I argue that, by providing an alternative …

Dodd-Frank's Say On Pay: Will It Lead To A Greater Role For Shareholders In Corporate Governance?, Randall S. Thomas, Alan R. Palmiter, James F. Cotter

Vanderbilt Law School Faculty Publications

"Say on pay" gives shareholders an advisory vote on a company's pay practices for its top executives. Beginning in 2011, Dodd-Frank mandated such votes at public companies. The first year of "say on pay" under the new legislation may have changed the dialogue and give-and-take in the shareholder-management relationship at some companies, particularly on the question of executive pay.

We study the evolution of shareholder voting on "say on pay" - beginning in 2006 as a fledgling shareholder movement to get "say on pay" on the corporate ballot, evolving as a handful of companies and later the financial firms receiving …

Selectica Resets The Trigger On The Poison Pill: Where Should The Delaware Courts Go Next?, Paul H. Edelman, Randall S. Thomas

Vanderbilt Law School Faculty Publications

Since their invention in 1982, shareholder rights plans have been the subject of intense controversy. Rights plans, or as they are known more pejoratively “poison pills,” enable a target board to “poison” a takeover attempt by making it prohibitively expensive for a bidder to acquire more than a certain percentage of the target company’s stock (until recently 15-20%). Not surprisingly, some commentators view rights plans as an inappropriate means of shifting power from shareholders to the board of directors.

In this Article, we critically examine Delaware law on the use of shareholder rights plans and propose a new approach to …

Public(Ly Oriented) Companies: B Corporations And The Delaware Stakeholder Provision Dilemma, Steven J. Haymore

Vanderbilt Law Review

During his 2007 commencement address at Harvard University, Bill Gates called on the graduates to invent "a more creative capitalism" where "we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities." A number of entrepreneurs, including those that started online bookstore Better World Books ("BWB"), are doing their best to create a more creative capitalism. BWB sells approximately 10,000 books a day and brought in $30 million in revenue in 2010. BWB sells its products to return a profit …

Economics, Politics, And The International Principles For Sound Compensation Practices: An Analysis Of Executive Pay At European Banks, Guido Ferrarini, Maria C. Ungureanu

Vanderbilt Law Review

In this Article, we submit that the compensation structures at banks before the financial crisis were not necessarily flawed and that recent reforms in this area largely reflect already existing best practices. In Part I we review recent empirical studies on corporate governance and executive pay at banks and suggest that there is no strong support for regulating bankers' compensation structures. We also argue that detailed regulation of incentives would subtract essential decisionmaking powers from boards of directors and make compensation structures too rigid.

In Part II we note that political support for regulating bankers' pay has been strong and …

Comparing Ceo Employment Contract Provisions: Differences Between Australia And The United States, Jennifer G. Hill, Ronald W. Masulis, Randall S. Thomas

Vanderbilt Law Review

This study compares CEO employment contracts across two common law countries: the United States and Australia. Although the regulatory regimes of these jurisdictions enjoy many comparable features, there are also some important institutional differences in terms of capital market, tax, and regulatory structures, which are discussed here. Debate has raged in the United States on the issue of whether executive compensation is efficient and determined at arm's length, or skewed by a power imbalance between managers and shareholders. A comparative analysis of the kind undertaken in our study provides an additional perspective on the optimal contracting and managerial power models …

Insider Trading And Ceo Pay, M. Todd Henderson

Vanderbilt Law Review

This Article presents evidence showing that boards of directors "bargain" with executives about the profits they expect to make from trades in firm stock. The evidence suggests that executives whose trading freedom increased using Rule 10b5-1 trading plans experienced reductions in other forms of pay to offset the potential gains from trading. There are two potential benefits from trading-portfolio optimization and informed trading profits- and this Article allows us to isolate them. The data show that boards pay executives in a way that reflects the profits they are expected to earn from informed trades. It also casts some doubt on …

Evolving Executive Equity Compensation And The Limits Of Optimal Contracting, David I. Walker

Vanderbilt Law Review

Executive equity compensation in the United States is evolving. At the turn of the millennium, stock options dominated the equity pay landscape, accounting for over half of the aggregate ex ante value of senior executive pay at large public companies, while restricted stock and similar compensation accounted for only about ten percent. Beginning in 2006, stock grants have displaced options as the single largest component of senior executive compensation at these firms. Accompanying this shift has been increased variation among companies in their relative emphasis on stock and options in equity pay packages. Both phenomena provide an opportunity for a …

Executive Compensation Consultants And Ceo Pay, Martin J. Conyon

Vanderbilt Law Review

This Article surveys recent empirical studies on the relation between compensation consultants and CEO pay. The economic rationale for using executive compensation consultants is that they supply valuable data, information, and professional expertise to client firms. However, critics argue that the consultant's independence might be compromised because of conflicts of interest arising from the cross selling of business services or because of the consultant's desire to obtain repeat business. The emergent empirical evidence suggests that pay consultants are important in explaining executive compensation, although the findings are sometimes mixed and the precise effects of consultants on pay are yet to …

Paying For Advice: The Role Of The Remuneration Consultant In U.K. Listed Companies, Ruth Bender

Vanderbilt Law Review

Compensation consultants are an integral part of the process of determining executive pay in large listed companies. This study reports interview-based research with protagonists in setting executive compensation in twelve FTSE 350 companies and addresses why the consultants are used, what they do, and how they are perceived.

Consultants have several important roles. Firstly, they act as experts, providing market data and advising on plan design and implementation. Because of this role, they not only guide their clients as to the requirements of the market, they also help create those selfsame market practices and norms. They also have a role …

Symposium On Executive Compensation Keynote Address, Kenneth R. Feinberg

Vanderbilt Law Review

I want to thank Richard Nagareda for inviting me to Vanderbilt; he's an old friend. I am very honored to return to Vanderbilt. I taught a course at Vanderbilt, and I loved teaching here. I loved going to the Country Music Hall of Fame and learning more about Patsy Cline and Johnny Cash. Really, it was great. I've already received an invitation from Dean Jim Bradford to come back to the business school and the law school and to participate in an interdisciplinary look at executive compensation. I hope to return. But when I saw that the Vanderbilt Law Review …

Executive Compensation In The Courts: Board Capture, Optimal Contracting, And Officers' Fiduciary Duties, Randall Thomas, Harwell Wells

Vanderbilt Law School Faculty Publications

This Article proposes a new approach to monitoring executive compensation. While the public seems convinced that executives at public corporations are paid too much, so far attempts to rein in executive compensation have met with little success. Several approaches have been tried - requiring large pay packages to consist predominantly of incentive pay, new procedures for approving pay, mobilization of public outrage at giant compensation packages. None, however, has stemmed the growth of executive compensation, or convinced opponents of large pay packages that such pay is either fair or deserved. Here we suggest a new approach, one that turns to …

Outsourcing Modularity, And The Theory Of The Firm, Margaret M. Blair, Erin O'Hara O'Connor, Gregg Kirchhoefer

Vanderbilt Law School Faculty Publications

Firms have increasingly moved productive activities from within to outside the firm through outsourcing arrangements. According to some estimates, the value of outsourcing contracts has been nearly 100 billion dollars per year since 2004. Firm outsourcing happens for a number of reasons, including to save labor costs, capture the benefits of regulatory arbitrage, and take advantage of economies of scale in the provision of firm needs. We review a number of outsourcing contracts for evidence that contract techniques are used to help modularize the relationship between the firm and its service provider. Consistent with what modularity theory might predict, some …

Hedge Fund Regulation Via Basel Iii, Wulf A. Kaal

Vanderbilt Journal of Transnational Law

This Article is a rejoinder to a recent comment by Professor Romano on an earlier paper I coauthored with Christian Kirchner. Professor Romano suggests regulatory arbitrage, rather than the targeted regulation of bank lending to hedge funds under Basel II, as a hedge against systemic failure. I contend that it was not harmonization through Basel II but rather the profitability of certain assets and business strategies that caused banks to hold similar assets and engage in similar strategies. In particular, I find that the increasing role of hedge funds in the credit derivatives market, in combination with the market's recent …

Shotgun Weddings: Director And Officer Fiduciary Duties In Government-Controlled And Partially-Nationalized Corporations, David M. Barnes

Vanderbilt Law Review

Corporate law considers the affairs of a corporation to be private activity. The prevailing concept of the firm is a nexus of private contract rights among participants in an economic enterprise. But for many U.S. auto and financial services corporations, the events of the fall of 2008 and the winter of 2009 turned this presumption on its head. The U.S. government's $700 billion bailout injected an alien actor-the United States Treasury-into this once-private enterprise. The bailout enabled the Treasury to take a direct equity stake in many of the nation's struggling auto and financial services corporations. In the fall of …

Subverting Shareholder Rights: Lessons From News Corp.'S Migration To Delaware, Jennifer G. Hill

Vanderbilt Law Review

Convergence theory and shareholder empowerment represent two major debates in contemporary corporate governance. A pervasive underlying assumption in these debates is that a high level of corporate governance homogeneity exists within the common law world in relation to shareholder rights. This Article challenges that assumption through a detailed case study of the decision by News Corporation ("News Corp.") to move from Australia to Delaware. As events surrounding News Corp.'s reincorporation illustrate, although there are undoubtedly basic similarities between corporate law in the United States and in other common law jurisdictions, there are also fascinating, but underappreciated, differences.

In late 2007, …

Iss Recommendations And Mutual Fund Voting On Proxy Proposals, Randall S. Thomas, James Cotter, Alan Palmiter

Vanderbilt Law School Faculty Publications

This article analyzes mutual fund voting data from 2003-2008, the first five proxy seasons for which this data is available, and seeks to identify the extent to which mutual funds vote consistently with the voting recom- mendations of RiskMetrics' ISS Corporate Governance Services (ISS). We compare voting by mutual funds to voting by all shareholders during this time period and then focus on mutual fund voting on non-election and non-routine proxy proposals-both those submitted by management and by shareholders. The questions we examine are: (1) Over the past five voting seasons, have mutual funds (and shareholders generally) voted on proxy …