Business Organizations Law Commons^™

Unequal Ownership, Ofer Eldar, Rory Van Loo

Faculty Scholarship

Market concentration and weak competition do not just lead to lower efficiency but also result in corporate profits flowing primarily to wealthy households that own a disproportionate share of public corporations. We demonstrate that this is a growing distributional problem not only due to familiar reasons in the literature, most notably shifts in market power, but also due to changes in the socio-economic makeup of ownership. Over the past twenty years, households in the bottom 90 percent of wealth have seen their share of stock ownership decline by half. That is, the ownership of corporations has become increasingly concentrated among …

Rebalancing Retirement: How 401(K) Plans Exacerbate Inequality And What We Can Do About It, Quinn Curtis, Leo E. Strine, David H. Webber

Faculty Scholarship

Incentives for individuals to save for retirement currently total 1.5% of US GDP. For that substantial investment, we get a system that actually deepens wealth inequality. The top 10% of earners capture 60% of the associated tax benefits, and employer matching contributions disproportionately favor the highest earners. Although defined contribution plans have long been subject to non-discrimination requirements aimed at ensuring that benefits do not accrue predominantly to the wealthiest participants, these rules have little bite. In an irony, we estimate that the entire 401(k) system would fail the non-discrimination test that every employer offering such a plan is expected …

Anticompetitive Directors, Lane Miles, Mark A. Lemley, Rory Van Loo

Faculty Scholarship

Antitrust scholars have virtually ignored the question of who controls corporations by sitting on their boards of directors. We show that the problem of who sits on boards of directors is considerably greater than previously believed. Drawing on a new dataset spanning both public and private companies across multiple industries, we find evidence that individual board members sit simultaneously on boards of competitors throughout the economy, despite such “interlocking directorates” being illegal under antitrust law. Many of these individuals are senior directors at private equity, venture capital, and other firms investing in the competing firms on whose boards they sit. …

Corporate Scenarios: Drawing Lessons From History, Madison Condon

Faculty Scholarship

As corporations are increasingly pressed to reveal information about their exposure to climate-related risks, they are often asked to undertake and disclose the outcome of “scenario analysis.” In this exercise, corporations, including financial institutions, examine how their business would fare under different pathways the future may take. One oft-used scenario, for example, is the International Energy Agency’s “Net-Zero by 2050: A Roadmap for the Energy Sector.” This Essay presents a history of the use of scenarios as a corporate planning tool, particularly in the oil industry, arguing that it is key for understanding our present moment and the role of …

The Hidden Cost Of Venture Capital, Emilie Aguirre

Faculty Scholarship

Founders, employees, consumers, and even funders increasingly expect businesses to pursue social goals alongside financial performance. Yet even the most committed firms have found it difficult to maintain social performance over time. Scholars in economics, management, and law have put forth several explanations for this “mission drift,” including inappropriate governance, poor management, lack of genuine commitment, and threat of takeovers. Puzzlingly, research to date primarily focuses on later-stage firms, even though the events and decisions that take place in a firm’s early stages can critically impact retention of its social performance.

Drawing from over five years of qualitative field research …

Shareholder Litigation In Delaware: An Empirical Investigation, James D. Cox, Randall S. Thomas, Lynn Bai

Faculty Scholarship

The empirical study of shareholder litigation in state courts is a seriously underexamined subject. To remedy this gap, we collected data on all 4,741 fiduciary duty complaints filed in the Delaware Court of Chancery over a sixteen-year period, from January 1, 2004, to December 31, 2019. After removing the duplicative cases consolidated into a lead complaint, the number of unique complaints was reduced to 2,958 in our dataset. In our coding, we examined over one hundred variables (with many variables being further subdivided into as many as eight subvariables) for each of these cases, including information about the parties, claims, …

The 2023 Merger Guidelines: An Assessment, Herbert Hovenkamp, Tim Wu, James Keyte

Faculty Scholarship

The 2023 Merger Guidelines1 are ten months old, but they still need some unpacking. To help our readers think through the issues that the Guidelines raise, Antitrust magazine asked two experienced legal scholars — Professors Tim Wu and Herbert Hovenkamp — to discuss the Guidelines with Antitrust editorial board member James Keyte. This discussion took place on May 28, 2024. The transcript has been edited for length and readability.

Evolving Corporate Philanthropy, David I. Walker

Faculty Scholarship

With the rise of corporate ESG initiatives and public benefit corporations, corporate philanthropy is evolving from an emphasis on cash contributions (contributional philanthropy) to an emphasis on adjusting operations to advance the public good (operational philanthropy). All forms of corporate philanthropy are controversial, but this article evaluates the impact of this evolution on the relative benefits and concerns of corporate philanthropy, arguing that the shift in emphasis towards operational philanthropy increases the comparative advantage of corporate philanthropy, increases agency costs, both simplifies and complicates shareholder primacy concerns, and increases the difficulty of prescriptively regulating corporate philanthropy through the tax code …

The Surprising Survival – So Far – Of The Corporate Contribution Ban, Richard Briffault

Faculty Scholarship

In Citizens United v. Federal Election Commission, the Supreme Court invalidated the longstanding ban on the expenditure of corporate funds in federal election campaigns. In so doing, the Court dismissed outright an argument that had long been the foundation for the restriction of corporate money in election campaigns — that, due to the “substantial aggregations of wealth amassed by the special advantages which go with the corporate form[,]” corporate money poses a distinct threat to the integrity of democracy. Instead, viewing corporations as essentially “associations of citizens,” Citizens United determined that “the First Amendment does not permit Congress to …

Giant Asset Managers, The Big Three, And Index Investing, Dorothy S. Lund, Adriana Z. Robertson

Faculty Scholarship

A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost interchangeably by both academics and practitioners. This shorthand emerged in the foundational scholarship in this area, and while it may remain useful in certain contexts, its casual use obscures important features of the market and contributes to misperceptions. In this chapter, we demonstrate that it is a mistake to equate passive investing with index …

Getting Merger Guidelines Right, Keith N. Hylton

Faculty Scholarship

This paper is on the new Merger Guidelines. It makes several arguments. First, that the Guidelines should be understood as existing in a political equilibrium. Second, that the new structural presumption of the Merger Guidelines (HHI = 1,800) is too strict, and that an economically reasonable revision in the structural presumption would have increased rather than decreased the threshold. Whereas the new Guidelines lowers the threshold to HHI 1,800 from HHI 2,500, an economically reasonable revision would have increased the threshold to HHI 3,200. I justify this argument using a bare-bones model of Cournot competition. Third, it seems unlikely, …

Impact Ipsa Loquitur: A Reverse Hand Rule For Consumer Finance, Edward Janger, Susan Block-Lieb

Faculty Scholarship

No abstract provided.

The Brussels Effect And The Extraterritoriality Of Delaware Corporate Law, William J. Moon

Faculty Scholarship

This essay explores possible shareholder claims in the United States that may arise  if and when member states of the European Union implement the proposed Directive  on Corporate Sustainability Due Diligence. As a doctrinal matter, legal compliance  obligations for corporations incorporated in Delaware extend beyond the borders of  the United States. Under Delaware law, shareholders can bring viable fiduciary suits  against directors and officers when corporations violate applicable “positive law.”  This jurisprudence, principally aimed at ascertaining whether directors and officers  betrayed shareholders by engaging in or facilitating lawbreaking, is not limited to  complying with American law. As Delaware corporations expand …

Public Primacy In Corporate Law, Dorothy S. Lund

Faculty Scholarship

This Article explores the malleability of agency theory by showing that it could be used to justify a “public primacy” standard for corporate law that would direct fiduciaries to promote the value of the corporation for the benefit of the public. Employing agency theory to describe the relationship between corporate management and the broader public sheds light on aspects of firm behavior, as well as the nature of state contracting with corporations. It also provides a lodestar for a possible future evolution of corporate law and governance: minimize the agency costs created by the divergence of interests between management and …

Transaction-Specific Tax Reform In Three Steps: The Case Of Constructive Ownership, Thomas J. Brennan, David M. Schizer

Faculty Scholarship

Similar investments are often taxed differently, rendering our system less efficient and fair. In principle, fundamental reforms could solve this problem, but they face familiar obstacles. So instead of major surgery, Congress usually responds with a Band-Aid, denying favorable treatment to some transactions, while preserving it for others. These loophole-plugging rules have become a staple of tax reform in recent years. But unfortunately, they often are ineffective or even counterproductive. How can Congress do better? As a case study, we analyze Section 1260, which targets a tax-advantaged way to invest in hedge funds. This analysis is especially timely because a …

"Don't Go Chasing Waterfalls": Fiduciary Duties In Venture Capital Backed Startups, Sarath Sanga, Eric L. Talley

Faculty Scholarship

We develop a model of venture capital contracting and use it to evaluate an emergent set of judicial precedents in corporate law, which we label the Trados doctrine. In our model, founders hold common stock, while venture capital investors hold convertible preferred stock. We show that preferred shareholders have inefficient incentives to liquidate low-valued firms and to continue high-valued firms, while common shareholders inefficiently favor the opposite. The extent of incentive misalignment depends on the firm’s intrinsic and outside valuations, and it is most severe around preferred shareholders’ liquidation preference and conversion point. Although legal liability rules can rectify these …

Beyond Profit Motives, William J. Moon

Faculty Scholarship

Why do corporations exist? Generations of legal scholars have debated both the origins of business corporations and their purpose.1 Professor Stephen Bainbridge’s new book The Profit Motive: Defending Shareholder Value Maximization is a substantial contribution to this literature and an essential read for anyone who wishes to better understand a controversy that has an immense impact on how movers and shakers of today’s largest corporations make decisions.

Equity For Intermediaries: The Resolution Of Financial Firms In Bankruptcy And Bank Resolution, Edward Janger

Faculty Scholarship

No abstract provided.

Mythical Adverse Effect, Naveen Thomas

Faculty Scholarship

No abstract provided.

The Thrusts And Parries Of Policy Arguments, Scott Hirst

Faculty Scholarship

Anyone who has ever put forward a policy proposal has heard the response, “if it ain’t broke, don’t fix it.” But despite the ubiquity of this attack on policy proposals, there has been little sustained inquiry into how the attack works and how it can be defended. The goal of this Article is to identify policy attacks like this, and to show their underlying logical structure, and how they function to attack policy proposals. The Article demonstrates this approach by considering three generic attacks on policy proposals, which I refer to as ain’t broke attacks, partial framing attacks, and dollar …

Reexamining Enron's Regulatory Consequences, Steven L. Schwarcz

Faculty Scholarship

The downfall of Enron Corporation often epitomizes corporate fraud. One of the world’s fastest growing and most inventive companies, Enron had engaged in a range of complex structured hedging transactions designed to achieve accounting rather than operating results. Its principal motivation, though, was to avoid the risk of incurring financial-statement losses that could impair its credit rating and thereby destroy its primary business of derivatives-based energy trading.

Enron’s management has been criticized for engaging in these structured hedging transactions, and some of its managers were sent to jail. This symposium article concerning “Business and Financial Crimes” attempts to set forth …

Specialist Directors, Yaron Nili, Roy Shapira

Faculty Scholarship

What determines the effectiveness of corporate boards? Corporate legal scholars usually approach this question by focusing on directors’ incentives, such as counting how many directors are independent or whether the roles of the CEO and Chair are separated. Yet on the ground, the focus has been shifting to directors’ skill sets and experience. Investors, regulators, and courts are now pressuring companies to appoint directors with specific types of expertise. In response, more and more companies are adding what we term “specialist directors”: a DEI director, a climate director, a cyber director, and so on. These changes in board composition could …

Corporate Compliance's Achilles Heel, Miriam Baer

Faculty Scholarship

No abstract provided.

Initiation Payments, Scott Hirst

Faculty Scholarship

Many of the central discussions in corporate governance, including those regarding proxy contests, shareholder proposals, and other activism or stewardship, can be understood as a single question: Is there under-initiation of corporate changes that investors would collectively prefer?

This Article sheds light on this question in three ways. First, the Article proposes a theory of investor initiation, which explains the hypothesis that there is under-initiation of collectively-preferred corporate change by investors. Even though investors collectively prefer that certain corporate changes take place, the costs to any individual investor from initiating such changes through high-cost proxy contests, or even low-cost shareholder …

What’S Scope 3 Good For?, Madison Condon

Faculty Scholarship

Opposition to the Securities and Exchange Commission’s (“SEC”) new rule on updated climate risk reporting has focused on one category of disclosures as particularly objectionable: Scope 3 emissions.⁷ Otherwise known as “supply chain emissions,” Scope 3 emissions have been voluntarily reported by a growing number of companies since the term was invented as part of the Greenhouse Gas Protocol in 2001.⁸ They include all the emissions both up and downstream of a corporations’ own activities: the emissions of the privately-owned factory that produced the shoes Target sells, as well as the emissions you burn while driving to the …

Gamestopped: How Robinhood’S Gamestop Trading Halt Reveals The Complexities Of Retail Investor Protection, Neal Newman

Faculty Scholarship

Should brokers have the unfettered right to restrict investor trading? GameStop, a brick-and-mortar video game retailer, had been experiencing declining revenues since 2016. However, GameStop saw its share price climb almost 1000 percent in the span of a one- week period from January 21, 2021 to January 27, 2021 due to retail investors buying significant amounts of GameStop shares during that period. Melvin Capital, a hedge fund, ended up losing billions as they were betting that GameStop shares would lose value instead of increase—a practice referred to as short selling. On January 28, 2021, brokers inexplicably halted trading on GameStop …

Is Corporate Law Nonpartisan?, Ofer Eldar, Gabriel Rauterberg

Faculty Scholarship

Only rarely does the United States Supreme Court hear a case with fundamental implications for corporate law. In Carney v. Adams, however, the Supreme Court had the opportunity to address whether the State of Delaware’s requirement of partisan balance for its judiciary violates the First Amendment. Although the Court disposed of the case on other grounds, Justice Sotomayor acknowledged that the issue “will likely be raised again.” The stakes are high because most large businesses are incorporated in Delaware and thus are governed by its corporate law. Former Delaware governors and chief justices lined up to defend the state’s …

Inflation, Market Failures, And Algorithms, Rory Van Loo

Faculty Scholarship

Inflation is a problem of tremendous scale. But the leading response to inflation-raising interest rates-also poses economic risks. Raising interest rates rapidly may increase unemployment and heighten the chance of recession. This Article argues that there is a better way to think about antiinflation policy. Rather than defaulting to interest rate hikes that harm markets, policymakers should prioritize laws that lower prices while improving markets. Most importantly, there is evidence that businesses have raised prices by colluding with one another, exploiting consumers' behavioral and informational limits, and lobbying for protectionist laws that block competition. Artificial intelligence pricing algorithms and dark …

The Millennial Corporation: Strong Stakeholders, Weak Managers, Michal Barzuza, Quinn Curtis, David H. Webber

Faculty Scholarship

In a prior paper, Shareholder Value(s): Index Fund ESG Activism and The New Millennial Corporate Governance, we argued that the index funds’ sudden shift towards socially-responsible investment, after decades of ignoring or opposing it, was driven by the competition to manage growing Millennial wealth. In our view, the main contribution of that paper was identifying sharp differences between Millennials and prior generations over investment, consumption, and employment. It has now become clear that this contribution has implications far beyond index-fund environmental, social and governance (“ESG”) activism and is in fact completely transforming the corporate world, marking a fundamental shift in …

The Article Iii "Party" And The Originalist Case Against Corporate Diversity Jurisdiction, Mark Moller, Lawrence B. Solum

Faculty Scholarship

Federal courts control an outsize share of big-ticket corporate litigation. And that control rests, to a significant degree, on the Supreme Court’s extension of Article III’s Diversity of Citizenship Clause to corporations. Yet, critics have questioned the constitutionality of corporate diversity jurisdiction from the beginning.

In this Article and a previous one, we develop the first sustained critique of corporate diversity jurisdiction.

Our previous article demonstrated that corporations are not “citizens” given the original meaning of that word. But we noted this finding alone doesn’t sink general corporate diversity jurisdiction. The ranks of corporate shareholders include many undoubted “citizens.” And …