Business Organizations Law Commons^™

Validating Valuation: How Statistical Learning Can Cabin Expert Discretion In Valuation Disputes, Andrew C. Baker, Jonah B. Gelbach, Eric L. Talley

Faculty Scholarship

This article challenges conventional methods used in financial valuation across transactional and litigation domains. We show that conventional valuation methods allow for considerable discretion, making it possible for each side’s experts to submit dramatically varying valuations simply by choosing among facially reasonable values of parameters that must be selected to carry out conventional valuations. We use large-scale empirical simulations powered by real-world data to demonstrate the scope of such discretion. We next consider several alternatives based on data-driven machine learning approaches, and show that they offer both approximately unbiased estimates of valuation and substantially reduced variability in valuation results. Consequently, …

Sticky Charters? The Surprisingly Tepid Embrace Of Officer-Protecting Waivers In Delaware, Jens Frankenreiter, Eric L. Talley

Faculty Scholarship

This article examines the response to Delaware’s much-heralded 2022 legal reform that permitted corporations, for the first time, to adopt charter provisions exculpating corporate officers from liability for breaching their fiduciary duty of care. Contrary to widespread predictions that corporate actors would swiftly adopt officer exculpation provisions, our analysis — using both traditional and generative artificial intelligence (AI) methods — reveals a surprisingly low rate of uptake, over three years after the reform’s enactment.

Our study makes both methodological and substantive contributions. Methodologically, we present a novel application of large language models (LLMs) to identify and interpret technical clauses in …

Disproportionate Influence: Rethinking Control In American Corporate Governance, Dhruv Aggarwal, Ofer Eldar

Northwestern University Law Review

Corporate law has undergone a gradual transformation. Founding chief executive officers (“founder-CEOs”) and activist hedge funds increasingly dominate leading American corporations despite owning well short of a majority of shares. Founder-CEOs, through personal brands or dual-class voting structures, control firms despite having minority stakes; activist hedge funds, with single-digit holdings, press for major governance changes. We argue that these two types of shareholders, often treated as opposites, both dominate corporations through disproportionate influence rather than majority ownership. We describe these investors who dictate corporate policy through disproportionate influence as high-influence shareholders.

Delaware’s doctrinal response to high-influence shareholders has been inconsistent, …

Denizens Of Dexit: Why Controlled Companies Are The First To Leave The First State, Jack Kanzler

Michigan Business & Entrepreneurial Law Review

A series of high-profile companies announcing plans to leave the state of Delaware and reincorporate out of state has sparked many commentators to predict a coming wave of corporate exodus from the First State called “DExit.” This paper seeks to explore the DExit “movement” with a particular focus on “controlled companies” and the recent doctrinal developments that have created a perception that Delaware law has become hostile to such governance arrangements. I will begin by discussing a brief history of Delaware’s corporate law and its current role in the American corporate legal system. I will then move to a robust …

Uncertainty In Business Judgment: How A Divide Between Delaware's Judiciary And Legislature Has Changed Corporate Law, Andrea Safran

William & Mary Business Law Review

In response to controversial Chancery Court decisions, the Delaware Legislature rushed to amend the Delaware Code in order to reinforce the business judgment rule. As the foremost business court in the nation, every Chancery Court decision is thoroughly scrutinized by the corporate world, so when the court goes against normal business practices, corporations grow wary in their trust of the State. Thus ensues a scramble by the State to pass legislation that will protect corporate interests. With these recent decisions, however, the Chancery Court may have lost its footing, and Delaware could soon see a mass corporate exodus with the …

The Arbitration Web Ensnaring Every Consumer: The Next Evolution In Corporate Strategy To Compel Arbitration, Michael Conklin

Maine Law Review

This first-of-its-kind Article uses a novel hypothetical to explore the expanding role of compelled arbitration. The hypothetical involves numerous large corporations agreeing to cross-reference each other in their arbitration agreements, thus attempting to create a massive arbitration web ensnaring nearly every American and allowing corporations to compel arbitration against parties with whom they never interacted. This Article presents the case that courts might enforce such a scheme based on the judicial trend toward ever-expanding compelled arbitration jurisprudence, the docket-clearing incentives faced by judges, existing case law allowing some non-signatories to enforce arbitration agreements, the strong assumption in favor of arbitration, …

The Lost Origins Of Antitrust, William Magnuson

Faculty Scholarship

Over the last decade, the once-sleepy field of antitrust has suddenly sprung to the forefront of public attention. The digitalization of the economy, the expansion of Big Tech, and the rise of platform monopolies have all raised deep questions about the nature of corporate power and law’s capacity to constrain it. Some scholars have argued that antitrust enforcement must be reinvigorated in substance and broadened in scope in order to combat rapidly rising economic inequality. Others have argued that antitrust law is ill-equipped to address these broad moral issues and instead must be re-focused on its traditional principles of consumer …

Coming Disruptions In Corporate Law, Douglas Sarro, Edward J. Waitzer

All Papers

Corporate law’s dynamism precludes bold predictions about its future. Instead, we set out to highlight principles relevant to its trajectory and frame looming, unresolved issues. In that vein, artificial intelligence and other digital technologies raise considerable new opportunities for directors to enhance their oversight and for shareholders to be better informed and make more meaningful use of their governance rights. At the same time, the potential for wide-scale automation of corporate activities via these technologies amplifies corporate power and resulting risks of harm, adding new urgency to past prescriptions for rethinking the relationship between corporate and other areas of law …

The Boundaries Of Corporate Politicking, Ashlee A. Paxton-Turner

Law Faculty Publications

As corporations become red brands and blue brands (whether purposely or accidentally), they are participating in the American political landscape in ways distinct from lobbying and political spending. Specifically, corporations are increasingly making statements or launching ad campaigns that appear to support one side (or the other) of a political or social debate. This Article refers to that activity as “corporate politicking.” Unlike political spending or lobbying, corporate politicking lacks a legal definition and is far less regulated—whether internally or externally.

This Article’s central contribution is an administrable framework to demarcate corporate politicking from other corporate activities and decisions. It …

Corporate Law's Duty Of Data Loyalty, Andy Serwin, Neil Richards, Woodrow Hartzog, Ryan Durrie

Faculty Scholarship

Privacy law used to be a relatively tidy field, involving a few interesting but discrete topics like press disclosures of private facts, wiretapping, and the processing of personal data by internet companies. But as the digital revolution continues to disrupt area after area of human activity and software “is eating the world,” the core concerns of privacy law such as “when is it appropriate to process personal data?” have similarly entered field after field. Today, most fields of law, including discrimination law, antitrust, and international law, have found it necessary to reckon with the questions of informational harm and power …

Purpose And Nonprofit Enterprise, Cathy Hwang, Dorothy S. Lund

Faculty Scholarship

Nonprofit enterprise is responsible for a large share of economic activity across the globe. And yet, leading theories fail to explain why nonprofit business survives and even thrives across a vast number of industries, ranging from artificial intelligence to beer brewing, despite an absence of shareholder control. Indeed, as shareholder ownership and intervention rights have become the core component of successful corporate governance, this success is all the more surprising.

This Essay offers a novel “purposeful enterprise” theory to explain the puzzling success of nonprofit enterprises. Drawing on research in behavioral economics and organizational science, it argues that organizational purpose …

Book Review - Board-Shareholder Dialogue: Policy Debate, Legal Constraints And Best Practices Edited By Luca Enriques And Giovanni Strampelli, Cambridge, Cup, 2024, 574 Pp., £130.00 (Hardback) Isbn: 9781009360760, Martin Petrin

Articles & Book Chapters

No abstract provided.

Leaving Delaware? The Essential Role Of Specialized Corporate Courts, Zohar Goshen, Tomer S. Stein

Faculty Scholarship

Following the Delaware Court of Chancery’s invalidation of Elon Musk’s fifty-six- billion-dollar compensation package, Tesla moved its incorporation from Delaware to Texas. Shortly thereafter, Delaware’s legislature, seeking to protect Delaware’s dominant incorporation position, passed the most sweeping corporate law amendments in fifty years.

Both supporters of Musk and defenders of Delaware’s judiciary have accused each other of partisanship, but neither side has addressed the central question: What is the role of specialized corporate courts?

This Essay presents a novel theory of why such courts are necessary. Corporate disputes are distinct because they arise within ongoing relationships between shareholders and management, …

Toward A Dynamic View Of Corporate Purpose, Dorothy S. Lund

Faculty Scholarship

Scholars debating the corporation’s role in society generally advance the view that there is only one desirable orientation for corporations and their management. Specifically, proponents of a stakeholder governance model contend that focusing management on a broad set of corporate constituents maximizes overall welfare, while advocates of a shareholder-centric directive counter that prioritizing shareholders creates social welfare by rendering the firm most profitable. This Article offers another view: It suggests that the welfare-maximizing purpose for corporations could change depending on external economic conditions, which both of these positions assume away. Specifically, shareholder primacy is likely to promote welfare in a …

The Market Value Of Partisan Balance, Brian D. Feinstein, Daniel J. Hemel

Northwestern University Law Review

For the past century, Delaware’s constitution has provided that no more than a bare majority of judges on the state’s courts may hail from the same political party. Some scholars and jurists theorize that Delaware’s commitment to a politically balanced judiciary increases the state’s attractiveness to out-of-state corporations and adds value to Delaware-chartered firms. These claims echo a larger literature in law and the social sciences positing that ideological diversity improves decisional quality. Recently, a series of federal court decisions in the case of Adams v. Carney put these claims to the test. In December 2017, a federal district court …

Reassessing Corporate Philanthropy From A Tax Perspective, David I. Walker

Faculty Scholarship

U.S. corporations make and deduct charitable contributions in excess of $20 billion annually. This Article reassesses corporate philanthropy from a tax perspective, asking first whether the federal tax subsidy for corporate philanthropy is greater than the subsidy for the alternative stakeholder philanthropy, as some commentators have previously found. The answer: it depends. The relative degree of subsidy depends on corporate and individual tax rates, obviously, but also on the incidence of corporate philanthropy, i.e., who bears the cost, which is generally unclear, as well as other details, such as whether individual stakeholders itemize deductions. At current tax rates, however, any …

Do Ais Dream Of Electric Boards?, Robert J. Rhee

Northwestern University Law Review

When artificial intelligence (AI) acquires self-awareness, agency, and unique intelligence, it will attain ontological personhood. Management of firms by AI would be technologically and economically feasible. The law could confer upon AI the status of legal personhood, as it did upon traditional business firms in the past, thus dispensing with the need for inserting AI as property within the legal boundary of a firm. As a separate and distinct entity, AI could function independently as a manager in the way that legal or natural persons do today: i.e., AI as director, officer, partner, member, or manager. Such a future is …

The Merging Of Ownership And Control, Tomer S. Stein

Scholarly Works

What if shareholders controlled every decision their company makes? This seemingly simple idea threatens to upend the modern corporation.

Shareholders own the corporation and directors and officers manage the corporation—a “separation of ownership and control” that has become a defining characteristic of our modern economy. As per conventional wisdom, the law enables separation of ownership and control by not prohibiting owners and employees from exercising their contractual freedom to hire and work for one another.

This Article demonstrates that this widely held view is incomplete and detrimental to the economy. Much of the economic activity that utilizes the corporate form …

Altering Rules: The New Frontier For Corporate Governance, Gabriel Rauterberg, Sarath Sanga

Faculty Scholarship

Corporate law has taken a contractarian turn. Shareholders are increasingly contracting around its foundational rules — statutory rights, the fiduciary duty of loyalty, even the central role of the board — and Delaware courts are increasingly enforcing these contracts. In the one case where they did not, the legislature swiftly overruled the decision and adopted a new statutory provision permitting boards to completely cede their powers to a shareholder by contract. These developments have sparked a polarized debate, with some calling for a return to mandatory rules, while others push for total contractual freedom.

We argue, however, that the best …

Fixing Mfw: Fairness And Vision In Controller Self-Dealing, Zohar Goshen, Assaf Hamdani, Dorothy S. Lund

Faculty Scholarship

The legal regime governing controlling shareholders relies on the ability of Delaware courts to police conflicted transactions under the stringent "entire fairness" standard of review. This review involves both implicit valuation – evaluating the transaction process, and explicit valuation – assessing the fairness of the transaction's financial terms. This Article reveals a critical flaw in this regime: courts cannot reliably engage in valuation when the transaction involves an entrepreneur's idiosyncratic vision for the company. As a result, there is a gaping hole in Delaware's framework for policing the fairness of controller transactions.

Delaware courts have developed guardrails to avoid judicial …

The Problem Of Purpose In Corporate Law, Grant M. Hayden, Matthew T. Bodie

Faculty Journal Articles and Book Chapters

For the last half century, shareholder primacy has reigned as the dominant definition of corporate purpose, as to both the purpose of individual companies and corporate law more generally. Recently, however, the Business Roundtable, the American Law Institute’s Restatement of the Law: Corporate Governance, and many business and legal academics have developed new answers to explain why we have corporations, and the ends to which their massive economic powers should be directed. This Essay endeavors to reframe the focus of the debate beyond purpose itself into the realm of actual governing power. In order to be meaningful, purpose needs governance. …

A Democratic Participation Model For Corporate Governance, Grant M. Hayden, Matthew T. Bodie

Faculty Journal Articles and Book Chapters

Corporate law is in the grip of a fundamental conundrum: whether corporations should seek only to serve shareholders or instead attend to the interests of all stakeholders. The doctrine of shareholder primacy, which focuses the corporation’s attention on the goal of maximizing shareholder wealth, has been startingly successful, capturing the theory and practice of corporate governance for roughly fifty years. But recently the costs of this monomaniacal focus on the financial interests of one set of corporate participants have become clearer. At a time when the original reasons for restricting the corporate franchise to shareholders have been shown to rest …

Texas, Delaware, And The New Controller Primacy, Christine Hurt

Faculty Journal Articles and Book Chapters

In January 2024, Elon Musk, CEO of Tesla, Inc., initiated the process of moving Tesla’s state of incorporation from Delaware to Texas, citing concerns over Delaware corporate law. The move sparked discussions about the dominance of Delaware corporate law and its recent rulings, with critics accusing Court of Chancery judges of favoring shareholder interests over controller innovation and managerial discretion.

The shift away from Delaware is set against a backdrop of increasing judicial scrutiny in the Delaware Court of Chancery, where plaintiffs have recently seen successes in litigation against controlling shareholders, corporate directors, and officers. Concerns over Delaware’s evolving legal …

Numerus Clausus No More: A Fundamental Shift In Delaware Corporate Law, Usha Rodrigues

Scholarly Works

This Essay applies Thomas Merrill and Henry Smith’s theory of numerus clausus—the idea that a limited menu of legal forms reduces transaction costs—to the world of business entities. Historically, investors had a straightforward choice: the decentralized general partnership or the centralized corporation, each with predictable governance and liability rules. Even innovations like the LLC, benefit corporation, and L3C merely expanded the list of standard options, preserving a clear, finite set of organizational forms.

But recent changes in Delaware corporate law have shattered this standardization norm. The addition of Section 122(18) to the Delaware General Corporation Law, combined with increasing reliance …

Green Dividends: A Case Study In Green Dividends And The Conditions For Private Ordering Solutions, Anne M. Tucker

Scholarly Works

This Essay introduces a novel private ordering solution to facilitate corporate investments in pro-social and environmental initiatives: Green dividends. Green dividends are an optional increase in shareholder dividends that are returned to the company to be reinvested in environmental initiatives or kept by a shareholder. Green dividends pose an alternative to the current gridlocked debate that corporations can’t, won’t, shouldn’t, and shouldn’t even try to act in pro-social or environmental ways. Turning the common refrains on their head converts each narrative into an element for a successful private ordering solution: authority, accountability, shareholder buy-in, and government-backed enforcement. With Green dividends, …

Charting New Frontiers: A Legal Literature Review Of Social Entrepreneurship And Impact Investing 2018–2023, Anne M. Tucker, Deborah Burand

Scholarly Works

This Article surveys 177 articles published in U.S. law reviews and journals between 2018–2023 that contribute to the fields of social enterprise, social finance and impact investing. The Article extends our earlier legal literature review of the same fields from 2007-2017.Our collective 17-year review of this span of legal literature documents the legal issues examined by scholars with respect to the development of sophisticated alternative business forms, like the Delaware Public Benefit Corporation; the growth in impact investing; the enduring academic interest in corporate purpose; and the effects that developments related to ESG and corporate sustainability are having on the …

Gen Y More Black Corporate Directors, Chaz Brooks

Scholarly Articles in Law Reviews & Journals

Corporate diversity has been in the spotlight for decades. Recent efforts have followed years of legal scholarship, arguments on the business rationale for greater diversity, and more recently, the racial unrest during the summer of 2020. Called by some, a “racial reckoning,” the summer of 2020 catalyzed many corporate declarations on the importance of diversity, and more to the point of this article, the necessity of righting the economic disadvantages of Black Americans. This article looks specifically at one intervention by a corporate player following summer 2020, Nasdaq’s volley to increase corporate diversity through required disclosure. This article reviews the …

Majority Rules, Andrew Verstein

Northwestern University Law Review

The “disinterested and independent majority” is one of the most important concepts in corporate law. Corporate actions are almost immune to legal challenge if a suitable majority of directors stands ready to approve it.

Scholars have extensively debated the proper meaning and effect of “disinterested and independent,” but no such literature analyzes “majority.” As a matter of arithmetic, how do we compute whether a given set of directors contains a suitable majority? While seemingly innocuous, the concept of a majority means different things to different courts. Indeed, there may be no majority rule for majority independence. The Article charts and …

Enforcing Legacy Environmental Liabilities For Offshore Oil And Gas Infrastructure, Martin Lockman, Romany M. Webb

Sabin Center for Climate Change Law

For more than a century, American fossil fuel companies have extended their operations offshore to exploit the vast oil and gas reserves that lie under the seafloor. Since 1953, the Department of the Interior (DOI) has operated a complex system of offshore leasing that allows private oil and gas companies to operate in federal waters. DOI’s leasing regime requires companies to plug wells, remove offshore platforms, and generally return their operation sites to a safe and stable condition when their leases end. This process, known as “decommissioning,” can cost tens or hundreds of millions of dollars for each offshore platform. …

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 …