Business Organizations Law Commons^™

A Team Production Theory Of Bankruptcy Reorganization, Lynn M. Lopucki

Vanderbilt Law Review

In the year before United Airlines filed for bankruptcy reorganization, the firm lost $3.2 billion. Fierce competition in the airline industry prevents United from stemming its losses solely through increases in revenues. Costs will have to be cut. The necessary expense reductions could come from reductions in employee pay and benefits, reductions in the amounts owing to creditors (which reduce interest expense), or both. Which should it be? United's situation is complicated by the fact that its employees own 55 percent of its stock and that their wage levels are protected by a collective bargaining agreement. But if we assume …

Reforming Corporate Governance: What History Can Teach Us, Margaret M. Blair

Vanderbilt Law School Faculty Publications

In this Article, I turn to the history of corporate law for insight into the role that the corporate form plays in the organization of business enterprises. I then draw implications from this history for thinking about circumstances and situations in which corporate directors should have unimpeded control over business decisions, versus situations in which shareholders should have more input and control over business decisions. In Part I, I review historical evidence of the rapid growth in demand for the corporate form to organize businesses in the United States during the early nineteenth century. I compare the law that governed …

The Business Judgment Rule As Abstention Doctrine, Stephen M. Bainbridge

Vanderbilt Law Review

The business judgment rule is corporate law's central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders. Increasingly, moreover, versions of the business judgment rule are found in the law governing the other types of business organizations, ranging from such common forms as the general partnership to such unusual ones as the reciprocal insurance exchange. Yet, curiously, there is relatively little agreement as to either the theoretical underpinnings of or policy justification for the rule. This gap in our understanding has important doctrinal implications. As this paper demonstrates, a string of recent decisions by the Delaware supreme court …

The New Look Of Shareholder Litigation: Acquisition-Oriented Class Actions, Robert B. Thompson, Randall S. Thomas

Vanderbilt Law Review

Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation and outnumber derivative suits by a wide margin.

Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with …

Should Directors Reduce Executive Pay?, Randall Thomas

Vanderbilt Law School Faculty Publications

This paper examines internal pay disparities in American public corporations and argues that wide gaps between the top and bottom of the pay scale can, in certain circumstances, directly and adversely affect firm value, that corporate boards should be informed about these effects, and that they should, in some cases, reduce internal pay differentials to address them. In support of this thesis, it analyzes numerous empirical studies that have shown that wide disparities in corporate pay scales can adversely affect firm value. These studies demonstrate that, at many types of organizations, as internal pay differentials grow, employees and lower level …

Business Litigation And Cyberspace: Will Cyber Courts Prove An Effective Tool For Luring High-Tech Business Into Forum States?, Jacob A. Sommer

Vanderbilt Law Review

From beginning to end businesses are wed to the law. The life of a corporation typically begins with the filing of articles of incorporation with the secretary of state' and ends with either a merger into another corporation or dissolution. At every point in a corporation's life cycle, the American legal system places its imprimatur on the corporation's activities and governance. Inevitably, because of the sophisticated nature of business and frequent encounters with the law, businesses become engaged in their fair share of litigation and must resort to the judicial system for resolution.

Business, especially high-tech business, moves very quickly, …

On Virtue And Peace: Creating A Workplace Where People Can Flourish, Caryn L. Beck-Dudley, Steven H. Hanks

Vanderbilt Journal of Transnational Law

In this Article, Professors Beck-Dudley and Hanks explore the virtues necessary for individuals to flourish within a business organization. Through this exploration, they conclude that modern discussions of business ethics fail to account for the value and virtue of peaceableness. Then, focusing on the freedom from conflict aspect of peaceableness, they use Champion Paper Products, Sartell Minnesota Paper Mill, as a case study in the significant improvements in human flourishing and organizational performance that can occur when management and labor choose peaceable solutions to labor conflicts.

Healthy Organizations And The Link To Peaceful Societies: Strategies For Implementing Organizational Change, Jeannette Jackson, Maria Coolican

Vanderbilt Journal of Transnational Law

This Article focuses on the impact that the organizational structure of a corporation can have on fostering a peaceful outside world. In this Article, the Authors argue that if an organization is structured to meet the needs of its employees and also cares about its employees and their needs, then the employees will behave civilly and respectfully. Furthermore, the Authors argue that the organization structured in such fashion will then be conducive for healthy organizational growth and positive conflict resolution. The Article posits that families, schools, religious organizations, social groups, and business organizations all have the potential of contributing to …

Locking In Capital: What Corporate Law Achieved For Business Organizers In The Nineteenth Century, Margaret M. Blair

Vanderbilt Law School Faculty Publications

This Article argues that corporate status became popular in the nineteenth century as a way to organize production because of the unique manner in which incorporation permitted organizers to lock in financial capital. Unlike participants in a partnership, shareholders in an incorporated enterprise could not extract capital from the firm without explicit approval of a board of directors charged with representing the interests of the incorporated entity, even when that interest might sometimes conflict with the interests of individual shareholders. While this ability to lock in capital has occasionally led to abuses, the ability to commit capital generally helped promote …

Managers' Fiduciary Duty Upon The Firm's Insolvency: Accounting For Performance Creditors, Alon Chaver, Jesse M. Fried

Vanderbilt Law Review

A corporation's managers generally owe a fiduciary duty to the corporation and its shareholders. Legal scholars interpret this duty as requiring the managers to maximize shareholder value. When a firm is solvent, the obligation to maximize shareholder value tends to give managers an incentive to deploy firm assets efficiently-that is, in a way that maximizes total value.

When a firm is insolvent, however, the duty to maximize shareholder value could lead managers to take actions that reduce the value of debt more than they increase the value of equity and therefore reduce total value. Accordingly, a number of courts have …

Why A Board? Group Decisionmaking In Corporate Governance, Stephen M. Bainbridge

Vanderbilt Law Review

This Article begins by briefly describing the role of the board both in law and in practice. Part II explores the distinction be- tween consensus and authority as modes of institutional decision- making. As hierarchical institutions, corporations rely far more heavily on authority than on consensus. Yet, at the apex of the hierarchy is a collegial body that functions mainly by consensus.

Part III is the core of the Article. In order to evaluate corporate law's preference for collective decisionmaking, we need to know whether group decisionmaking is superior to that of individuals. A wealth of experimental data suggests that …

Megafirms, Randall Thomas, Stewart J. Schwab, Robert G. Hansen

Vanderbilt Law School Faculty Publications

This paper documents and explains the amazing growth of the largest firms in law, accounting, and investment banking. Scholars to date have used various supply-side theories to explain the growth, and have generally examined only one industry at a time. We give the first demand-side explanation of firm growth, and show how the explanation is similar for firms in all "project" industries. We show that law plays an important role in determining industry structure. Among the areas we cover are the growth of Multi-Disciplinary Practice firms. We argue that the issues surrounding MDPs can best be understood by looking more …

Whither The Race? A Comment On The Effects Of The Delawarization Of Corporate Reorganizations, Robert K. Rasmussen, Randall S. Thomas

Vanderbilt Law Review

The war is over and Delaware has won. The "Delawarization" of bankruptcy law appears complete. The reorganization of a large, publicly held corporation under Chapter 11 of the Bankruptcy Code today will more likely take place in the Delaware Bankruptcy Court than in any other jurisdiction.' The bankruptcy judges and lawyers in Delaware are no doubt pleased with this state of affairs, while many of their counterparts in other jurisdictions look to Delaware with envy. While few question that Delaware is the preferred forum for public corporations seeking to reorganize, it remains hotly contested whether that is a good thing. …

Should Shareholders Have A Greater Say Over Executive Pay??, Randall S. Thomas, Brian R. Cheffins

Vanderbilt Law School Faculty Publications

Executive pay arrangements in Britain's publicly quoted companies have been subjected to much criticism in recent years. Proposals that shareholders should have a greater direct say over managerial remuneration have been a by-product of the concerns expressed. Debate on this point, however, has been largely speculative. This is because there is little evidence available in the United Kingdom indicating how shareholders would exercise any new powers they might be given. This paper addresses the evidentiary gap by drawing upon the experience in the United States, where empirical work indicates that shareholder voting only operates as a potential check when pay …

The Debt-Equity Distinction In A Second-Best World, Katherine Pratt

Vanderbilt Law Review

This Article discusses the time-honored but outdated tax law distinction between corporate debt and equity. Economic and legal commentators and the Treasury Department have made various proposals to eliminate the debt-equity distinction. The theory of the second best posits that eliminating an economic distortion does not necessarily increase efficiency if other economic distortions remain.' Policymakers cannot simply assume that eliminating the distortionary debt-equity distinction will automatically increase efficiency because other distortions in the income tax will remain. This Article evaluates a number of the proposals to eliminate the debt-equity distinction, taking into account numerous distortions that are likely to remain …

Shareholder Oppression In Close Corporations: The Unanswered Question Of Perspective, Douglas K. Moll

Vanderbilt Law Review

The doctrine of shareholder oppression protects the close corporation minority stockholder from the improper exercise of majority control.! Nevertheless, when a close corporation minority shareholder asserts that the majority shareholder has acted "oppressively" towards him, the minority's chance of success may very well depend on the perspective from which shareholder oppression is viewed. Consider the following two decisions:

In Priebe v. O'Malley, the controlling shareholders of a close corporation terminated the employment of Myron Priebe, a minority shareholder, for "unsatisfactory" work performance.! Priebe sued, asserting that the termination amounted to oppressive conduct! The trial court noted that "Priebe was not …

The Determinants Of Shareholder Voting On Stock Option Plans, Randall S. Thomas, Kenneth J. Martin

Vanderbilt Law School Faculty Publications

Over the past decade, executive compensation has become a controversial topic. Increasingly, corporate boards of directors are confronted by angry shareholder groups over the size and composition of executive pay packages. One of the most important focal points for these tensions arises when shareholders are asked by the board to approve the creation of new stock option plans, or the amendment of existing plans. This article seeks to identify the factors that lead shareholders to support or oppose stock option plans. We examine the justifications for the widespread use of stock options and identify several benefits from stock option plans …

Corporate Liability, Risk Shifting, And The Paradox Of Compliance, William S. Laufer

Vanderbilt Law Review

The evolution of corporate criminal law is explained by the shifting risks of liability and loss between corporations and their agents in accommodating the illogic of vicarious liability. A vivid example of the effects of this risk shifting is seen with the recent emergence of the good citizen corporation movement. This movement en- courages prosecutors with vast discretion to leverage indictments and convictions of subordinate agents, resort to civil and administrative actions against large and medium-sized corporations in place of criminal indictments, compromise agent indemnification, and enforce corporate self-regulation through elaborate plea agreements. Not surprisingly, organizations tend to conceive of …

A Team Production Theory Of Corporate Law, Margaret M. Blair, Lynn A. Stout

Vanderbilt Law School Faculty Publications

Contemporary corporate scholarship generally assumes that the central economic problem addressed by corporation law is getting managers and directors to act as loyal agents for shareholders. We take issue with this approach and argue that the unique legal rules governing publicly-held corporations are instead designed primarily to address a different problem - the "team production" problem - that arises when a number of individuals must invest firm-specific resources to produce a nonseparable output. In such situations team members may find it difficult or impossible to draft explicit contracts distributing the output of their joint efforts, and, as an alternative, might …

Team Production In Business Organizations: An Introduction, Margaret M. Blair, Lynn A. Stout

Vanderbilt Law School Faculty Publications

For the past two decades, legal and economic scholarship has tended to assume that the central economic problem addressed by corporation law is getting managers and directors to act as faithful agents for shareholders. There are other important economic problems faced by business firms, however. This article introduces a Symposium that explores one of those alternate economic problems: the problem of "team production". Team production problems can arise whenever three conditions are met: (1) economic production requires the combined inputs of two or more individuals; (2) at least some of these inputs are "team-specific," meaning they have a significantly higher …

On The Threshold Of The Adoption Of Global Antibribery Legislation, Barbara C. George, Kathleen A. Lacey, Jutta Birmele

Vanderbilt Journal of Transnational Law

This Article will (1) briefly discuss domestic U.S. anti-corruption efforts through a review of the substantive content of the 1977 FCPA and its 1988 amendments; (2) evaluate indicators of changes in domestic attitudes and policies toward business corruption as evidenced by the breadth and scope of recent increased enforcement activities of DOJ and the SEC; (3) analyze the factors causing recent changes in international attitudes and policies toward business corruption; and (4) examine the resulting international efforts to combat business corruption by governmental and non-governmental organizations, financial standard setting organizations, and financial institutions.

An Evolutionary Theory Of Corporate Law And Corporate Bankruptcy, David A. Skeel, Jr.

Vanderbilt Law Review

In this Article, Professor Skeel argues that the important recent literature exploring historical and political influences on American corporate law has neglected a crucial component of corporate governance: corporate bankruptcy. Only by appreciating the complementary relationship between corporate law and corporate bankruptcy can we understand how corporate governance operates in any given nation.

To show this, the Article contrasts American corporate governance with that of Japan and Germany. America's market-driven corporate governance can only function effectively if the bankruptcy framework includes a manager-driven reorganization option. The relational shareholding that characterizes Japanese and German corporate governance, by contrast, requires a much …

A Contractarian Defense Of Corporate Philanthropy, Margaret M. Blair

Vanderbilt Law School Faculty Publications

Statutory and case law make it clear that corporate officers and directors have very wide discretion to direct reasonable amounts of corporate resources toward artistic, educational, and humanitarian causes, even if those causes have only a remote connection (or no obvious connection at all) to the business goals and profitability of the firm. This stance of the law has been defended primarily by reference to an "entity" theory of the firm. By contrast, contractarian legal scholars, who view the corporation in terms of a principal-agent model, with shareholders as principles, and officers and directors as their agents, have argued that …

Policing Corporate Crime: The Dilemma Of Internal Compliance Programs, Michael Goldsmith, Chad W. King

Vanderbilt Law Review

In recent years, federal and state laws have sought to promote good corporate citizenship by encouraging business entities to establish internal compliance programs designed to avoid-or at least detect-illicit conduct. The most significant impetus toward effective internal corporate policing occurred in 1991, when the United States Sentencing Guidelines (Sentencing Guidelines) made the existence of an "effective" internal compliance program the sine qua non for receiving leniency upon conviction. As a result, corporations nationwide have sought to establish compliance programs that qualify for preferred treatment under federal law. Such programs, however, have produced an unanticipated dilemma for many businesses: when a …

Is The Cross-Guarantee Constitutional?, Jennifer J. Alexander

Vanderbilt Law Review

Banks play a unique and important role in our economy. They serve tremendously useful economic functions; for this reason, our society has become irretrievably dependent upon them. Banks safe- guard our life savings and business profits, and provide capital to those who need it to buy, invest, or grow.' Although these functions could be performed without an intermediary-private citizens may freely lend their cash to other private citizens who need it-banks are viewed as safer and more efficient controllers of cash flow. They allow depositors to pool their cash resources collectively in one institution; then, retaining a relatively low amount …

The Separate Tax Status Of Loan-Out Corporations, Mary Lafrance

Vanderbilt Law Review

When professionals and other persons who offer their goods and/or services to the public conduct their businesses through corporations, the Treasury has acknowledged that for federal income tax purposes it must treat those corporations as separate and distinct from their controlling shareholder- employees, even where there is only a single shareholder-employee, provided that the corporation has a business purpose and the taxpayer consistently respects the corporate form. However, the Treasury has refused to accord equal dignity to incorporated workers who offer their services not to the public at large but to a single recipient or a small number of recipients. …

Unpacking Limited Liability: Direct And Vicarious Liability Of Corporate Participants For Torts Of The Enterprise, Robert B. Thompson

Vanderbilt Law Review

The corporate form limits the liability of shareholders and other participants arising from the enterprise. This broad insulation shields corporate participants not only from vicarious liability for the acts of others, but even from liability for some of their own acts taken in the corporate name. The liability that is avoided does not disap- pear into a black hole; it falls onto another person. If the liability is shifted to a tort victim, the use of the corporate form seems particularly troublesome, permitting the enterprise to externalize part of the cost of doing business. This limitation seems inconsistent with the …

Shift Of Fiduciary Duty Upon Corporate Insolvency: Proper Scope Of Directors' Duty To Creditors, Laura Lin

Vanderbilt Law Review

In the wake of the debt binge of the 1980s, the number of financially distressed corporations has increased dramatically.' Because a struggling company rarely ceases operations overnight, directors still need to make investment and operational decisions concerning the best use of the company's existing assets. This need remains whether the firm will regain profitability or will be liquidated. Financial distress also intensifies conflicts of interest between shareholders and creditors. Indeed, when these constituencies are unable to recover their investments in the corporation because of insufficient assets, both shareholders and creditors have incentives to maximize their individual returns regard- less of …

From Legitimacy To Logic: Reconstructing Proxy Regulation, Jill E. Fisch

Vanderbilt Law Review

On October 16, 1992, after a comprehensive review of its system of proxy regulation and after two separate amendment proposals that drew more than 1700 letters of comment from the public, the Securities and Exchange Commission (the "Commission" or the "SEC") voted to reform the federal proxy rules. The reforms were "intended to facilitate shareholder communications and to enhance informed proxy voting, and to reduce the cost of compliance with the proxy rules for all persons engaged in a proxy solicitation.' The SEC explained the amendments by stating that the rules were "impeding shareholder communication and participation in the corporate …

The Lemonade Stand: Feminist And Other Reflections On The Limited Liability Of Corporate Shareholders, Theresa A. Gabaldon

Vanderbilt Law Review

The sultriness that was summer in D.C. blanketed the pedestrians returning to Capitol Hill. Trickling toward home through air that passively resisted, I almost overlooked a shape emerging from the haze of my own street. It might have been some atmospherically-induced apparition; rather, there, in the 1990s, in front of a well-kept urban rowhouse with door adorned by yuppie wreath, sat an immaculate child, seraphically presiding over a linen-covered table bearing a pitcher made of Tupperware. His neatly lettered sign, presumably prepared by an invisible caregiver in endorsement of his enterprise, read "Lemonade - 50 Cents."

The little boy with …