Law and Economics Commons^™

The Non-Binding Bind: Reframing Precatory Stockholder Proposals Under Delaware Law, Kyle A. Pinder

Michigan Business & Entrepreneurial Law Review

Rule 14a-8 under the Securities Exchange Act of 1934 allows stockholders to submit proposals for inclusion in a company’s proxy materials. The rule assumes that Delaware law provides stockholders with the right to submit non-binding proposals for stockholder approval. But as many have observed, this assumption lacks a firm basis in state law, particularly in Delaware. If such a right exists, a stockholder conducting its own proxy solicitation could submit numerous precatory proposals, including those advancing narrow or special interests. This article concludes that, under Delaware law, stockholders do not have an inherent right to submit precatory proposals. Accordingly, a …

Navigating The Eu’S Corporate Sustainability Due Diligence Directive: Strategic Implications For Us Companies, Silvia Ciacchi, Michael Faure, Sharon Oded

Michigan Business & Entrepreneurial Law Review

The European Union’s (“EU”) Corporate Sustainability Due Diligence Directive (“CSDDD” or the “Directive”) introduces new human rights and environmental obligations that reshape global corporate governance. This paper explores its impact on US companies, with a particular focus on compliance strategies under both direct and indirect applicability. It contrasts tactical compliance, which emphasizes risk mitigation while meeting minimum legal requirements, against strategic compliance, where companies use sustainability to gain a competitive edge in the market.

This paper highlights how varying enforcement levels across EU Member States may incentivize companies to “forum shop” or choose jurisdictions with more relaxed enforcement. It also …

Reverse Breakup Fees And Antitrust Approval, Albert H. Choi, Abraham L. Wickelgren

Law & Economics Working Papers

The paper examines the antitrust implications of use of reverse breakup (termination) fees in mergers. By promising to pay a reverse breakup fee to the target if the proposed merger does not get the necessary antitrust approval, the acquirer can signal to the antitrust authority that the merger is more likely to be pro-competitive. A large reverse breakup fee can also function as a commitment device by the acquirer to spend more resources in case the merger is challenged by the antitrust authority. While the first, signaling function is efficiency enhancing, the second, commitment function can lead to an efficiency …

Enforcing The Community Reinvestment Act, Jeremy C. Kress, Jeffery Y. Zhang

Law & Economics Working Papers

Nearly fifty years after the Community Reinvestment Act of 1977 (CRA) required banks to serve low- and moderate-income (LMI) areas, the systematic exclusion of disadvantaged communities from the mainstream financial system persists. This Article identifies a novel explanation for the CRA's limited impact: its enforcement mechanisms are ineffective.The CRA operates through two enforcement channels. Regulators must (1) consider a bank's CRA record when the bank seeks permission to merge or expand, and (2) publish periodic assessments of each bank's CRA performance. Using twenty years of CRA data, we show that neither enforcement mechanism works as intended. Banks strategically increase CRA …

Law And The Self-Coordinating Market Idea, Sanjukta Paul

Articles

Much of the focus of the live Symposium was on comparing existing scholarship associated with two intellectual communities. I have no objection to that enterprise in the abstract, though I think it is a bit premature where law and political economy (LPE) is concerned and sets up an apples-to-oranges comparison to the decades-old streams of work and thinking in law and economics (L&E). But I would rather use the privilege of the space in this written Symposium to sketch what I believe is the ultimate substantive nub of contestation in this conversation about the core subject matter of “the economy” …

Is Delaware Different? Stockholder Lawyering In The Court Of Chancery, Jessica Erickson, Adam C. Pritchard, Stephen J. Choi

Law & Economics Working Papers

Delaware corporate law relies on stockholder litigation to police corporate misconduct. Judges in turn use attorneys’ fees to shape the incentives of the lawyers who pursue this litigation. This system of corporate accountability has come under increased scrutiny in recent years, with a series of decisions causing several high-profile companies to leave Delaware and prompting lawmakers to call for reform. Yet little empirical evidence exists about how Delaware judges set the attorneys’ fee awards that sustain this enforcement system. Using a hand-collected dataset of stockholder suits filed in the Court of Chancery, this Article offers the most comprehensive empirical analysis …

Who Gets A Seat At The Table? Stakeholder Participation In Sec Rulemaking, Yuliya Guseva, Irena Hutton, Adam C. Pritchard, Joseph Grundfest

Law & Economics Working Papers

We study how public participation shapes financial regulation using a novel dataset of 453 SEC rules proposed between 1995 and 2024. We collect over 81,000 public comments and 5,600 meetings between regulators and stakeholders related to those rules. Using large language models, we identify participants and extract structured measures of comment content and tone. We document asymmetries in stakeholder participation: retail investors dominate comment volume with shorter submissions, while institutional actors engage primarily through detailed comments and meetings with the SEC officials. Input from sophisticated stakeholders is more likely to be incorporated into the final rule release and informs rule …

Effects Of The Reverse Charge Mechanism On Vat Gaps, Albrecht Bohne, James R. Hines Jr., Antonios Koumpias, Annalisa Tassi

Law & Economics Working Papers

The purpose of this paper is to evaluate the effect of reverse-charge mechanism (RCM) implementation on VAT compliance using an overall, countrylevel measure of VAT compliance, the VAT gap. The VAT gap is defined as the overall difference between expected and realized VAT revenues and is a broader measure than outcomes employed in previous research, incorporating all types of VAT evasion. Exploiting the staggered adoption of RCM across Europe and the size of industries targeted by RCM, we compare changes in the VAT gap before and after RCM implementation. Evidence from difference-in-differences, event study, and heterogeneous treatment effects estimators indicates …

Designing Contract Modification, Albert H. Choi, George G. Triantis

Articles

For long-term commercial contracts, modification tends to be the norm rather than the exception. While modification often takes place in response to an arrival of new information, contracting parties frequently modify the terms in response to a shift in bargaining power. In this Article, we explain how the flexibility to renegotiate in response to a shift in bargaining power can facilitate long-term contracting and thereby beneficial reliance investments and risk allocation. The prospect of modification can induce contracting parties who expect their bargaining power to improve, such as from the emergence of outside opportunities, to enter into contracts earlier and …

Read But Not Understood? An Empirical Analysis Of Consumer Comprehension In Homeowners Insurance, Daniel Schwarcz, Brenda J. Cude, Kyle D. Logue, German Marquez Alcala

Articles

Modern contract law assumes that consumers meaningfully assent to the standard forms that govern their daily lives. However, this assumption is widely regarded as a legal fiction for two key reasons: first, most consumers do not read standard forms, and second, even those who do often struggle to fully comprehend their terms and implications. Although the lack of consumer reading has been well documented through empirical research, consumers’ ability to comprehend standard-form contracts has received surprisingly little attention.

This Article addresses the latter issue by empirically examining whether providing excerpts from the dominant standard-form homeowners insurance policy improves consumer understanding …

Merger Remedies Unbound, Dhruv Aggarwal, Albert H. Choi, Geeyoung Min

Articles

How should foundational contract law doctrines apply to corporate mergers? This Article argues that recent changes in Delaware law grant parties expansive contractual freedom to define their preferred remedies in merger agreements, untethered from the limits imposed by traditional contract law. A new provision in the Delaware corporate code, or the Delaware General Corporation Law (DGCL), permits penalty clauses in merger agreements, notwithstanding the traditional “anti-penalty doctrine” that forbids punitive liquidated damages in contracts. Delaware courts have also shown deference to specific performance provisions, treating them as presumptively enforceable commitments instead of retaining their traditional judicial discretion over the choice …

Liability For Non-Disclosure In Ipos, Albert H. Choi, Kathryn E. Spier

Articles

A privately-informed entrepreneur may withhold material information from prospective investors who may sue the firm ex post for (alleged) non-disclosure. Absent liability, the entrepreneur has an excessive incentive to withhold bad news and pursue socially-wasteful projects. Liability deters inefficient non- disclosure and prevents capital misallocation. Any damage award received by investors is partially offset by a reduction in equity value. Depending on the likelihood of court error and litigation cost, the socially-optimal damage award may be either zero or the minimum necessary for full deterrence. The private incentive to waive liability may be socially excessive or insufficient. Positive and normative …

Mobility-Restricting Covenants In Business Contracts: The Case Of Franchising, Francine Lafontaine, Lorenzo G. Luisetto, J. J. Prescott

Law & Economics Working Papers

Several studies show that restrictive covenants in employment contracts, such as noncompete agreements, may affect employees in detrimental ways, including by reducing mobility and suppressing wages. While such concerns are real, these clauses also have the potential to serve legitimate business purposes by helping companies protect valuable information, which can encourage investment and training and enhance social welfare. This paper explores the use of several types of covenants, including noncompetes but also confidentiality and post-relationship non-recruitment clauses, in franchise contracts, an important and accessible category of business contracts. Many of these contracts impose restrictive covenants on franchisees but also on …

Repealing Reorgs, Reuven S. Avi-Yonah

Law & Economics Working Papers

Under the Supreme Court's opinion in Moore, it is likely that realization is essential for defining income as a constitutional matter. Therefore, when a transaction involves realization, it should presumptively be taxable unless there are very good reason for nonrecognition of gain. Given this reality, there are good reasons for Congress to consider repealing tax-free reorganizations and the other nonrecognition rules of the corporate tax, primarily for non-tax reasons. Acquisitive A, B, and C reorganizations and acquisitive section 351 transactions typically are used for large public corporations to acquire startups, which encourages monopolies. Triangular mergers raise corporate governance concerns …

Limits Of Contingent Convertible Bonds: Evidence From The Credit Suisse Collapse, Albert H. Choi, Jacob Gerszten, Jeffery Y. Zhang

Law & Economics Working Papers

In the aftermath of the Global Financial Crisis, regulators encouraged banks to issue contingent convertible bonds ("CoCos") to improve the issuing bank's stability. Banks around the world have issued more than $1 trillion worth of CoCos to date. Yet it is unclear whether CoCos have achieved their intended goal of improving stability. Leveraging the unexpected banking panic in March 2023, we show that issuing banks fared worse-as measured by abnormal equity returns and probabilities of default. We also examine market dynamics after 2023 and find that the largest banks have continued to issue CoCos with similar contractual terms, though issuer …

Is Confidential Supervisory Information Material To Investors? Evaluating The Conflict Between Banking And Securities Law, Peter Conti-Brown, Patrick M. Corrigan, Jeffery Y. Zhang

Law & Economics Working Papers

A central goal of modern US securities law is the transparency of corporate information through mandatory public disclosures. This goal is in tension with a central goal of banking law, namely, the practice of preserving opacity of the information exchanged between banks and bank supervisors to ensure the safety and soundness of individual banks and the entire banking system. That informational opacity in banking known as "confidential supervisory information" (CSI) applies equally to all banks, whether or not they sell securities subject to public disclosure requirements. The disclosure of CSI is prohibited by law and practice, with dire consequences for …

Facebook Decision Enables Irs To Seek - Cwi Enforcement Against Meta, Stephen L. Curtis, Reuven S. Avi-Yonah, David G. Chamberlain

Law & Economics Working Papers

In this report, the authors explain how the Tax Court's recent decision in the Facebook transfer pricing case - although widely viewed as a victory for the taxpayer, Meta Platforms Inc.- could instead be a Pyrrhic victory because it enables the IRS to pursue a potentially substantial periodic adjustment against the company. The views expressed in this report are solely the authors' and do not necessarily reflect those of any other person or institution.

Too Scared To Use: Living Wills And Orderly Liquidation Of Too-Big-To-Fail Financial Institutions, Jeffery Y. Zhang

Law & Economics Working Papers

The term “too big to fail” became ubiquitous following the 2007-2008 Global Financial Crisis. Lawmakers, regulators, and scholars wondered if there was a better way forward than issuing an array of ad hoc bailout packages to large financial institutions. Congress, in enacting the Dodd-Frank Act, sought to address the concern by creating a new regulatory framework to resolve large financial institutions in an orderly manner.

First, Congress required too-big-to-fail institutions to file “living wills,” essentially planning documents that describe the institution’s path to a safe failure under the Bankruptcy Code—a failure that would not impact system-wide financial stability. Second, Congress …

Prosecutor Transparency Project: Racial Disparities Study (Washtenaw County, Michigan), Grady Bridges, J. J. Prescott

Law & Economics Working Papers

This report investigates and estimates racial disparities in prosecutorial decision-making in the Washtenaw County Prosecutor’s Office (WCPO) from 2017 to 2022. The analysis relies on currently available data resources at the WCPO and examines decision-making at four different junctures in the prosecutorial process: 1) case approval (i.e., warrant authorization) and charge selection, 2) habitual-offender designation (under Michigan law), 3) plea bargaining, and 4) diversion and deferral opportunities. Racial disparities appear most visibly at the earliest stages of the criminal justice process, with People of Color substantially overrepresented in the warrant requests the WCPO receives from law enforcement. The data further …

From Relic To Relevance, The Resurgence Of Tariffs, Reuven S. Avi-Yonah, Doron Narotzki, Tamir Shanan

Law & Economics Working Papers

Modern legal scholarship has largely relegated tariffs to economic analysis, overlooking their legal and policy significance. This article challenges that view by examining tariffs as a potential pillar of fiscal policy, exploring their viability as a revenue source alongside or in place of traditional income and corporate taxation. While historically central to U.S. government funding, tariffs diminished in importance with the rise of income taxation and trade liberalization. However, their recent resurgence as a tool for trade protection raises broader questions about their role in national economic strategy. This article critically assesses the feasibility of a tariff-based tax system, drawing …

Why Financial Crises Recur, Gary B. Gorton, Jeffery Y. Zhang

Law & Economics Working Papers

Financial crises have occurred around the world for over two centuries. These crises have been so costly and frequent that one wonders why governments cannot prevent them from recurring despite repeated, wide-ranging attempts at legislation, regulation, supervision, and enforcement.

In this article, we argue that lawmakers repeatedly act in two ways that may appear to be intuitive but are actually detrimental to system-wide stability. First, lawmakers fail to understand that “banks”—both traditional banks and shadow banks—produce runnable short-term debt, unlike other firms in the economy. To produce short-term debt, banks operate with opacity. Yet a regulatory framework based on secrecy …

Crypto Regulation In The Time Of Trump, Lawrence J. Trautman

Michigan Technology Law Review

Donald Trump’s election as president during November 2024 results in perhaps the most dramatic philosophical change in approach to governmental regulation in over ninety years. The Great Depression of the 1930s created a need for regulatory reform and resulted in the advent of such new regulatory frameworks as the U.S. Securities and Exchange Commission (SEC). It has been the purpose of the SEC to create and nurture efficient securities markets enabling vibrant capital formation while preventing fraud upon the investing public. At issue is the contrast between the regulatory regime in place since 1933-34 and the Trump Administration’s desire to …

Remedies For Non-Disclosure In Asset Sales: Voidance Vs. Damages, Albert H. Choi, Kathryn E. Spier

Law & Economics Working Papers

This paper analyzes the problems of non-disclosure in the context of an asset sale between a buyer and a seller. The seller can have important information about the asset and can opportunistically decide not to disclose that information to the buyer, and the buyer may sue the seller ex post for remedy. The buyer and the court have a choice over different types of remedy. The paper considers three different remedy regimes: (1) no liability; (2) voidance; and (3) damages. Under voidance, the buyer can rescind the transaction (return the asset and get the price back), while with damages, the …

No Trade Wars Without Taxation -Who's To Blame, And What Comes Next?, Domenico Imparato, Reuven S. Avi-Yonah, Doron Narotzki

Law & Economics Working Papers

As tariff policy once again shapes U.S. trade strategy, this article makes a foundational claim: trade wars are, at their core, tax wars. Against the backdrop of escalating economic tensions with the United States’ trade partners, this article argues that tariffs cannot be understood apart from the fiscal architecture that sustains them. What appears to be protectionism often masks deeper structural asymmetries in the U.S. tax system.

The discussion proceeds through three interrelated dimensions: reshoring production, promoting fair trade, and raising revenue. In each, the interaction between tariffs and the tax system reveals deeper distortions. U.S. export mechanisms such as …

Merger Remedies Unbound, Dhruv Aggarwal, Albert H. Choi, Geeyoung Min

Law & Economics Working Papers

How should foundational contract law doctrines apply to corporate mergers? This Article argues that recent changes in Delaware law grant parties expansive contractual freedom to define their preferred remedies in merger agreements, untethered from the limits imposed by traditional contract law. A new provision in the Delaware corporate code permits penalty clauses in merger agreements, departing from the traditional “anti-penalty doctrine” that forbids punitive liquidated damages in contract. Delaware courts have also shown deference to specific performance provisions, treating them as presumptively enforceable commitments instead of retaining their traditional judicial discretion over the choice of remedies. Given that Delaware law …

Out Of Sight, Out Of Mind: Nearby Branch Closures And Small Business Growth, Benjamin Ranish, Andrea Stella, Jeffery Y. Zhang

Law & Economics Working Papers

Since 2010, the total number of commercial bank branches in the United States has decreased by about 20%. Do branch closures meaningfully affect economic activity? We investigate the impact of branch closures on small businesses, whose access to credit may be facilitated through local relationships with banks. Using exogenous variation in closures related to mergers and acquisitions, we show that the closure of nearby bank branches leads to decreased small business employment growth and entry while increasing business exit. Our results are robust to variations in our measure of employment, proximity, and construction of the instrument. We use subsample analyses …

Retaliatory Taxation, Reuven S. Avi-Yonah

Law & Economics Working Papers

This paper discusses the Trump administration's potential use of section 891 and pending legislation to apply retaliatory taxes to foreign countries that impose "discriminatory or extraterritorial" taxation on US multinationals.

Build Public Renewables, Again, Sandeep Vaheesan

Michigan Law Review

A review of The Price Is Wrong: Why Capitalism Won’t Save the Planet. By Brett Christophers.

Was The Niit A Treaty Override?, Reuven S. Avi-Yonah

Law & Economics Working Papers

Three court decisions have recently addressed the interaction of the Net Investment Income Tax (NIIT) and US tax treaties. The issue was whether the treaty provided an independent basis for crediting a foreign tax against the NIIT, because no such credit is available under the Code. First, in Toulouse, the Tax Court held that there was no treaty based credit. Second, in Christensen, the Court of Federal Claims held that a treaty-based credit was available, distinguishing Toulouse. Third, in Bruyea, the Court of Federal Claims issued a broader opinion that allowed the credit. Importantly, Bruyea addressed an issue that was …

A Perfect Storm: Executive Orders And Tax Law, Reuven S. Avi-Yonah, J.J. Wang

Law & Economics Working Papers

Since it came into office, the Trump administration has issued a series of executive orders that affect many areas of the government. One such area is taxation. In two orders issued on his first day in office President Trump rejected the participation of the United States in the Organization for Economic Cooperation and Development (OECD)`s global minimum corporate tax project and threatened to impose tax countermeasures on countries that adopt "extraterritorial or discriminatory" taxes. Two days later, the Republican members of the House Ways and Means Committee introduced legislation to the same effect. A month later, the president issued another …