Legal Theory Blog

Hovenkamp on Ownership and Control

Herbert J. Hovenkamp (University of Iowa - College of Law) has posted Neoclassicism and the Separation of Ownership and Control on SSRN.  Here is the abstract:

"Separation of ownership and control" is a phrase whose history will forever be associated with Adolf A. Berle and Gardiner C. Means' The Modern Corporation and Private Property (1932), as well as with Institutionalist economics, Legal Realism, and the New Deal. Within that milieu the large publicly held business corporation became identified with excessive managerial power at the expense of stockholders, social irresponsibility, and internal inefficiency. Neoclassical economists both then and ever since have generally been critical, both of the historical facts that Berle and Means purported to describe and of the conclusions that they drew. In fact, however, within neoclassical economics the separation of ownership and control has always been an essential element of efficient corporate governance and corporate finance. This paper explores the history of the concept of separation of ownership and control within neoclassical economics, starting with Yale economist Irving Fisher's separation theorem developed early in the twentieth century, which held that a corporation's profit function could not be derived from shareholders' utility functions; Ronald Coase's The Nature of the Firm (1937), which applied purely marginalist analysis to the determinants of the horizontal and vertical structure of the corporation; and then to the great corporate finance theorems of the 1950s and 1960s. These concluded that ownership and debt are nothing more than alternative, fungible sources of capital, and that a profitable stock ownership strategy involves no knowledge whatsoever about the firms in which purchasers are investing. Within this model "separation of ownership and control" actually understates the degree of separation. A better phrase would be "separation of ownership and awareness."

Hockett on Waiver of Attorney-Client Privilege in Corporate Litigation

Robert C.  Hockett (Cornell University - School of Law) has posted Valuing the Waiver:  The Real Beauty of Ex Ante Over Ex Post on SSRN.  Here is the abstract:

Irony abounds in connection with demands and proposals made, in the wake of the Enron, Worldcom, and other corporate scandals, that firms be required or encouraged to waive attorney-client privilege. Justice Department officials speak to the importance of "getting at the truth" as trumping firms' interest in confidential internal communications as a prerequisite to compliance with law. They do so notwithstanding their own contrary arguments made on behalf of the secretive Bush administration that employs them. Corporate officers, for their part, speak as though Ralph Nader were the Attorney General when they denounce waiver proposals. They do so notwithstanding the business-friendly nature of the Bush administration. In this essay I suggest that, since what is actually at stake in these waiver debates is value for shareholders, the securities markets, if informationally efficient, are the most apt evaluators of particular firms' waivers of privilege. Provided that the semi-strong form of the efficient capital markets hypothesis is indeed well supported as the literature suggests, share-price response to voluntary ex ante waiver will be the optimal indicator of whether, and how much, waivers of privilege inure to the good or the ill of particular firms.

Bebchuk & Fried on Stealth Compensation

Lucian Arye Bebchuk and Jesse M. Fried (Harvard Law School and University of California, Berkeley - School of Law) have posted Stealth Compensation via Retirement Benefits on SSRN.  Here is the abstract:

This Article analyzes an important form of stealth compensation provided to managers of public companies. We show how boards have been able to camouflage large amounts of executive compensation through the use of retirement benefits and payments. Our study illustrates the significant role that camouflage and stealth compensation play in the design of compensation arrangements. It also highlights the importance of having information about compensation arrangements not only publicly available but also communicated in a way that is transparent and accessible to outsiders.

To improve the transparency of executives' retirement payments and benefits, we propose several changes in current disclosure requirements. Among other things, firms should be required to report to investors each year the dollar value of all the retirement benefits to which their executives become entitled. For example, firms should disclose to investors the annual buildup in the actuarial value of executives' retirement plans, as well as the tax savings reaped by executives at the company's expense through the use of deferred compensation arrangements. Firms should also disclose to investors each year the present value of all the retirement benefits their top executives have accumulated.

Bigler & Tillman on Defects in Stock Issuances

C. Stephen Bigler (Richards, Layton & Finger) & Seth Barrett Tillman (United States District Court, PA) have posted Void or Voidable? - Curing Defects in Stock Issuances Under Delaware Law on SSRN.  Here is the abstract:

It is not unusual for practitioners reviewing a Delaware corporation's stock records to find omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Examples of such omissions and defects are limitless, but not infrequently found examples include the absence of board resolutions authorizing the issuance of stock shown by the transfer books as having been issued, the absence of evidence that issuances were properly authorized by the requisite votes of the board or, if required, by the stockholders, the absence of evidence that the consideration to have been received by the corporation in exchange for the stock was in fact received, the issuance of more shares than were authorized by the certificate of incorporation at the time, the issuance of stock prior to the filing of the charter amendment or certificate of designations authorizing or creating the stock, and similar procedural and substantive irregularities. Not infrequently, these defects occurred some time ago, and the stock in question may have changed hands multiple times since issuance.

Confronted with such irregularities, most corporate lawyers' first instinct would be to attempt to correct the defect through board and, if necessary, stockholder, ratification of the defective issuance, with the intent of putting the parties in the positions they thought they were in prior to discovering the irregularity. However, Delaware courts have not always viewed defects in stock issuances as being curable by ratification. In a number of leading cases, the Delaware Supreme Court has treated the statutory formalities for the issuance of stock as substantive prerequisites to the validity of the stock being issued, and has determined that failure to comply with such formalities renders the stock in question void. A finding that stock is void means that defects in it cannot be cured, whether by ratification or otherwise. Thus, practitioners finding defects in stock issuances are put in the uncomfortable position of having to make a judgment whether the defect is one that renders the stock void, in which case ratification is not an option, or voidable, in which case ratification is an option. Unfortunately, the decisions issued by the Delaware courts have not afforded certainty in this critical area. Indeed, a recent decision of the Court of Chancery acknowledges that although "Delaware law is replete with cases" discussing the void-voidable distinction, the law as to when and whether a defective stock issuance can be cured "is not as clear as it could be."

This article analyzes the reasons for this lack of clarity, and proposes some solutions which would benefit buyers and sellers of corporate stock. We begin by examining the legal requirements applicable to stock issuances. Next, we discuss the foundation of the doctrinal distinction between void and voidable stock. We then discuss the cases where courts have found stock to have not been issued in accordance with these legal requirements, and whether such finding has resulted in the stock being found void or voidable. We also consider the purposes, principles and policies of certain provisions of Article 8 of the Uniform Commercial Code, designed to validate, in most circumstances, certain defects in stock in the hands of innocent purchasers for value. Interestingly, these provisions of the UCC have not been frequently discussed in the court cases that have considered whether stock is void or voidable, and the cases that have discussed them refer to them as setting forth an equitable rather than a legal principle - which is ultimately not helpful to corporate lawyers who opine on legal, not equitable, matters.

In conclusion, we suggest that the policy underlying Article 8 of the Uniform Commercial Code to validate stock in the hands of innocent purchasers for value, notwithstanding technical defects in its issuance, should be recognized as a principle of law, not solely as a principle of equity, and should be applied by the Delaware courts as such. As a result, technical defects relating to statutory formalities should not lead to a finding of void stock, but at worst to voidable stock. Cure or ratification should be permitted except in cases where the issuance violates the directors' duty of loyalty or otherwise would be inequitable. Such a rule would allow practitioners to opine as to the validity of a corporation's outstanding stock where the stock was issued defectively but the defect cured, subject to a standard exception for fiduciary duties and other equitable matters, and would eliminate the risk that stock held in the trading markets or otherwise held by innocent purchasers for value might be deemed void.

Bainbridge on Affirmative Action for Shareholders

Stephen M. Bainbridge (University of California, Los Angeles - School of Law) has posted There is No Affirmative Action for Minorities, Shareholder and Otherwise, in Corporate Law on SSRN.  Here is the abstract:

I review and comment herein on Anupam Chander's article, Minorities, Shareholder and Otherwise, 113 Yale L.J. 119 (2003). My critique focuses mainly on his underlying premise or, to put it another way, on showing that his analysis of corporate law doctrine is fundamentally flawed. Chander argues that, unlike constitutional law, "corporate law places minorities at the heart of its endeavor." Central to his project is an empirical claim that corporate law has an "elaborate framework" for "minority interests in the corporation." I argue that Chander's theoretical construct rests on a doctrinal foundation of sand. He persistently overstates the extent to which corporate law protects minority shareholders, while understating the freedom that law gives majority shareholders.

Highly recommended.

Singer on Corporate Responsibility

Joseph William Singer (Harvard Law School) has posted Corporate Responsibility in a Free and Democratic Society (Case Western Reserve Law Review, Vol. 58, 2009) on SSRN.  Here is the abstract:

Do corporations have any social responsibilities? Those who have argued both sides of this debate have failed to focus their attention sufficiently on the common law rules governing market relations, especially the law of torts, contracts, and property. This article argues that these three foundational legal institutions are all premised on a fundamental obligation of attentiveness. Actors are obligated to attend to the likely consequences of their actions on others and refrain from actions that impose unreasonable risks of harm or which impose harms that individuals are entitled to be protected against. If this is so, then the argument that corporations cannot reasonably respond to vague duties of social responsibility becomes less powerful, given the pervasive duties of all market actors to consider whether they could justify their harm-producing conduct to an impartial decision maker - in other words, whether they could explain their actions as reasonable. We want clear rules to give us guidelines about what we are and are not allowed to do. But we also want a fuzzy edge of substantive standards to induce us to think before we act - to be attentive to the ways in which our actions affect others. Such fuzzy edges create appropriate incentives to think about the effects of one's actions on others and to consider the judgments that others would make about the justice or appropriateness of our own conduct, given the impact it will have on others who, after all, have equal rights. And we care so much about this that we have enshrined it in the basic law governing the market system.

Ribeiro on the WTO & Corporate Social Responsibility

Gustavo Ribeiro (Indiana University Bloomington) has posted Navigating Turbulent Waters Connecting the World Trade Organization (WTO) and Corporate Social Responsibility (CSR) (Indiana Journal of Global Legal Studies, Forthcoming) on SSRN.  Here is the abstract:

This paper uses the metaphor of a fisherman's journey into the World Trade Organization (WTO) and Corporate Social Responsibility (CSR) "seas" to explore the relation between them. It is intended to be an introductory paper to the reader seeking a basic understanding of this relationship. An argument can be made that the WTO and CSR waters are not connected at all: the WTO is an intergovernmental organization regulating rights and duties of members (mainly states), while CSR concerns non-governmental initiatives dealing with corporate behavior, such as voluntary codes of conduct and certification processes of social and environmental standards. However, this paper explores the existence of potential straits connecting the seas and provides encounters with the sea creatures that represent the relevant jurisprudence informing the debate.

Dent on Business Lawyers as Enterprise Architects

George W. Dent Jr. (Case Western Reserve Law School) has posted Business Lawyers as Enterprise Architects on SSRN.  Here is the abstract:

In 1984 Ronald Gilson published Value Creation by Business Lawyers: Legal Skills and Asset Pricing. It began: "What do business lawyers really do? Embarrassingly enough, at a time when lawyers are criticized with increasing frequency as nonproductive actors in the economy, there seems to be no coherent answer." He dismissed lawyers' own answer that "they 'protect' their clients, that they get their clients the 'best' deal." He also rejected the academic literature which offered a laundry list of roles the business lawyer plays: "a counselor, planner, drafter, negotiator, investigator, lobbyist, scapegoat, champion, and, most strikingly, even as a friend." Dissecting the corporate acquisition as his specimen, Gilson concluded that lawyers add value as "transaction cost engineers." In particular, lawyers bridge the parties' divergent expectations about returns on the asset to be transferred by drafting an earnout which makes the price contingent on its returns between the signing of the deal and the closing; and overcome lack of information (principally of the buyer) by arranging efficient production and verification of information. From these findings Gilson also recommended that legal education for business practice downgrade traditional subjects (like analysis of appellate cases and knowledge of relevant regulatory law) in favor of corporate finance and transaction cost economics.

In the succeeding 24 years Gilson and others refined his thesis, but no one fundamentally challenged it. This literature about what corporate lawyers do (the "received model") is too narrow. This article takes a wider and deeper perspective. Part I describes the received model. Part II exposes several problems with that model. Part III offers a fuller vision showing that business lawyers perform a greater range of activities using a larger set of skills than in the received model. Although these activities and skills are extremely varied, it is less accurate to say that business lawyers are transaction cost engineers than that they are enterprise architects. Part IV discusses the implications of this revised model for legal education. It argues that, although a knowledge of corporate finance and transaction cost economics is useful for some business lawyers, it is more important that they understand the obstacles to optimizing the performance of business entities and the contractual mechanisms available to overcome these obstacles. They also need specific behavioral skills, including how to negotiate when all parties are trying to build mutual trust and confidence.

Brummer on Corporate Law Preemption

Chris Brummer (Vanderbilt University - School of Law) has posted Corporate Law Preemption in an Age of Global Capital Markets (Southern California Law Review, Vol. 81, 2008) on SSRN. Here is the abstract:

At the heart of the extensive literature on corporate law federalism is the belief that federalism engenders regulatory competition and federalization eliminates it. Federalism, a mode of governance where states act as providers of corporate law, is said to drive states to compete for charters. By contrast, federalization, which occurs when the federal government promulgates law, preempts state-level competition. Consequently, scholars who believe that regulatory competition promotes the provision of "good" laws have long railed against federal securities statutes like Sarbanes-Oxley that nationalize elements of traditional (state) corporate law. Meanwhile, other scholars have lauded preemptive securities regulation arguing that federal intervention prevents the dismantling of regulatory standards and a race to the bottom.

This Article argues that both sides of the debate mistake the impact of federalization on the market for corporate law. Drawing on recent legal and empirical scholarship, this Article shows that as a descriptive matter the domestic market for corporate law is in some regards animated less by competition than what is an increasingly international market for securities law. States do not generally compete vigorously to attract charters due to Delaware's longstanding domination of the market and other supply-side disincentives. On the other hand, national securities regulators face intense pressure to provide cost-effective rules to draw foreign issuers to their home markets. These observations suggest that where federal regulators preempt, they are engaged in what can be considered a "doubled race." First, they must monitor for market failure and ensure that Delaware, the dominant supplier of corporate charters, provides sound corporate law. And second, they must themselves cope with the onslaught of competition from other national regulators seeking to attract securities transactions. As a result, preemption is a weaker counterweight to any competition arising among states than many scholars have anticipated.

Ripken on Multiple Corporate Personalities

Susanna Kim Ripken (Chapman University School of Law) has posted Multiple Personalities Incorporated: Accepting the Multi-Dimensional Personhood of the Modern Corporation on SSRN. Here is the abstract:

One of the most intriguing debates in corporate law is over the personhood of corporations. For years, corporate theorists have tried to construct a complete and coherent theory of the corporate person. Some have argued that the corporation is merely a fictional, artificial person that exists only as a concession of state law. Others have asserted that the corporation is a real, independent person that has an ontological existence and identity of its own. The popular theoretical paradigm today is that the corporation is neither an artificial nor a real person; it is merely a nexus of contracts among the entity's various individual participants. Proponents of this contractual model, which is rooted in neoclassical economic theory, believe they have won the competition for the single best definition of the corporate person. This article argues that the current preoccupation with the contractual elements of the corporation obscures the complex reality of the multiple personas and functions of the modern corporation.

In this article, Professor Ripken takes a unique inter-disciplinary approach to the conundrum of corporate personhood. Professor Ripken draws upon theories from several different schools of academic thought to shed light on the questions: what is the corporation, and how should it be regulated by the law? The article demonstrates that the corporation can be viewed independently through the lenses of philosophy, moral theory, political science, sociology, psychology, organizational theory, theology, and economics, all of which highlight separate but essential features of the corporate person.

Professor Ripken argues that the law should incorporate a multi-dimensional view of corporations, even if conflicting descriptions and norms may produce seemingly inconsistent legal rules. Consistency, clarity, and coherency in the law are overrated. Ambiguity is valuable when it more closely reflects reality and produces balanced legal results that mediate between legitimate alternatives. By demonstrating the many different ways the corporate person can be perceived, this article rejects the idea that there is a single best theory of the corporation and instead recommends the adoption of a multi-dimensional model of the corporate person.