VOLUME 14 • ISSUE 1 • PRINT
E O.G.: UNMASKING WHY GOVERNANCE IS THE MOST IMPORTANT COMPONENT OF ESG
Lisa M. Fairfax
Environmental, Social, and Governance (“ESG”) is now dominating the corporate landscape. ESG encompasses a broad array of “Environmental” issues such as climate change, “Social” issues ranging from workplace safety and child labor practices to diversity, equity, and inclusion (“DEI”) initiatives, and “Governance” matters related to shareholder voting rights and board composition.ESG has impacted the behavior of actors across the corporate ecosystem. Shareholders, asset managers, and financial institutions are increasingly demanding that corporations provide more ESG disclosure and make more concrete ESG commitments. Boards have become increasingly focused on ESG oversight, and have increasingly prioritized selecting new directors who have ESG expertise. Corporations have ramped up their ESG engagement, contributing to the steady rise in voluntary ESG disclosure and new ESG commitments, policies, and practices.
VOLUME 14 • ISSUE 2 • PRINT
THE HOLDING FOREIGN COMPANIES ACCOUNTABLE (HFCA) ACT: A CRITIQUE
Jesse M. Fried & Tamar Groswald Ozery
The 2020 Holding Foreign Companies Accountable (HFCA) Act will force China-based firms to delist from U.S. exchanges if China fails to permit audit inspections during a two-year period. The Act also requires such firms, as soon as China blocks such inspections, to disclose ties to the Chinese party-state. We first explain why the delisting provisions, while well-intentioned, may well harm U.S. investors. We then turn to the disclosure provisions, explaining that they appear to be motivated by a desire to name-shame Chinese firms rather than to protect investors. While China-based firms do pose unique risks to U.S. investors, the Act fails to mitigate—and may well exacerbate—these risks.
VOLUME 14 • ISSUE 2 • PRINT
THE NEW CORPORATE LAW OF CORPORATE GROUPS
Mariana Pargendler
How does corporate law treat legal entity boundaries in groups of companies? This is a critical question given that large corporations typically have hundreds of subsidiaries. Investigating the treatment of this question in key jurisdictions over time reveals a critical, but thus far overlooked, development in corporate law around the globe. Corporate law rules of internal governance increasingly overcome entity boundaries and apply on a pass-through basis, such as by allowing shareholders of a parent company to sue subsidiary directors, inspect subsidiary books and records, and approve major asset sales by subsidiaries. This phenomenon, which can be described as the rise of “entity transparency” in corporate law, reflects a gradual trend that has accelerated in the twenty-first century. Interestingly, there appears to be little direct correlation between a jurisdiction’s willingness to disregard entity boundaries to enforce shareholder rights, on the one hand, and to impose liability on shareholders for the benefit of creditors, on the other. The Article then offers an economic account for the distinct treatment of corporate separateness vis-à-vis shareholders and creditors, and explores the broader theoretical and normative ramifications of its analysis. The rise of entity transparency in corporate law underscores the importance of unbundling different dimensions of corporate separateness, challenges the view that overcoming entity boundaries between parent companies and subsidiaries invariably requires extraordinary circumstances, and has implications for a wide array of legal issues across various areas of law.
VOLUME 14 • ISSUE 2 • PRINT
THE MAKING AND MEANING OF ESG
Elizabeth Pollman
ESG is one of the most notable trends in corporate governance, management, and investment of the past two decades. It is at the center of the largest and most contentious debates in contemporary corporate and securities law. Yet few observers know where the term comes from, who coined it, and what it was originally aimed to mean and achieve. As trillions of dollars have flowed into ESG-labeled investment products, and companies and regulators have grappled with ESG policies, a variety of usages of the term have developed that range from seemingly neutral concepts of integrating “environmental, social, and governance” issues into investment analysis to value-laden notions of corporate social responsibility or preferences for what some have characterized as “conscious” or “woke” capitalism.
VOLUME 14 • ONLINE
THE FALLACY OF COMPLETE CORPORATE SEPARATENESS
Mariana Pargendler1Full Professor of Law, Fundação Getulio Vargas School of Law in São Paulo; Global Professor of Law, New York University School of Law. I am grateful to Henrique Arake, George Georgiev, Carlos Portugal Gouvêa, Burt Neuborne, Elizabeth Pollman, Mario Schapiro, Richard Squire, Robert Thompson, and participants in the workshop on “Hidden Fallacies in Corporate Law and Financial Regulation,” the Bocconi-Oxford Junior Scholars Workshop on Corporate Law and Finance, the Droit & Croissance Workshop, and the Wharton Legal Studies Seminar for helpful comments and suggestions.
Legal discourse about business entities has displayed a logical fallacy regarding the consequences of corporate separateness. A fallacy of equivocation occurs when a term is used with one meaning in the premise and with another meaning in the conclusion. Legal personality undoubtedly provides a separate—in the sense of distinct—nexus for the imputation of legal rights and duties. This, however, does not mean that corporations are or should be treated as legally separate—in the sense of insulated—from shareholders in all contexts. Moreover, legal insulation between corporations and shareholders for some purposes (e.g., limited liability) does not necessarily entail insulation for other purposes (e.g., the application of a contractual or regulatory scheme). In effect, there is significant, if varying, permeability between the legal spheres of corporations and shareholders across different areas of law, including corporate law. Rather than a nonconductor that always isolates the legal spheres of the corporation and related parties, legal personality operates as a semi-permeable membrane. Nevertheless, the recurrent fallacy of complete corporate separateness has obscured and hampered the development of legal doctrine in several contexts.
VOLUME 13 • ISSUE 2 • PRINT
THE 401(K) CONUNDRUM IN CORPORATE LAW
Natalya Shnitser
This Article discusses how as institutional investors like BlackRock, Vanguard, and State Street have accumulated ever larger stakes in U.S. public companies, their voting behavior has come under increasing scrutiny. Scholarship analyzing voting by institutional investors—and particularly mutual funds—has focused on the passivity of mutual funds as shareholders and their reluctance to vote against the preferences of management. While scholars have explored a variety of theories for such deference, a recurring explanation has emphasized that the largest fund managers also have business lines that offer services to 401(k) retirement plans sponsored by U.S. companies. Accordingly, numerous scholars have advanced the theory that institutional investors—and particularly mutual funds—have been deferential to corporate management out of fear of losing the corporations’ retirement plan business.
VOLUME 12 • ONLINE
THE ILLUSION OF SUCCESS: A CRITIQUE OF ENGINE NO. 1’S PROXY FIGHT AT EXXONMOBIL
Bernard S. Sharfman2Bernard S. Sharfman is a research fellow at the Law & Economics Center at George Mason University’s Antonin Scalia Law School, a Senior Corporate Governance Fellow at the RealClearFoundation, and a member of the editorial advisory board of the Journal of Corporation Law. The research associated with this writing was funded by a generous grant from the Law & Economics Center at George Mason University’s Antonin Scalia Law School. The opinions expressed here are the author’s alone and do not represent the official position of the Law & Economics Center or any other organization with which he is currently affiliated. Mr. Sharfman would like to thank J.B. Heaton, Brian Cheffins, Andrew Jennings, Robert J. Rhee, Marc T. Moore, Alex Platt, Jeffrey N. Gordon, Andrew R. Johnston, and Leo E. Strine, Jr. for their helpful comments.
With less than $40 million worth of Exxon Mobil Corporation common stock in hand, Engine No. 1 executed a proxy fight that succeeded in getting three of its four nominated directors elected to the board of the company. This victory was viewed as a success by environmentalists and ESG investors. However, this victory was illusionary as a closer look reveals an absence of accomplishment. The hedge fund activism of Engine No. 1 did not provide a roadmap for the company to improve its financial performance or specific recommendations on how it could transition from a global leader in oil and gas production to a global leader in the production of clean energy. Also, there is no evidence that Engine No. 1 has served as a corrective mechanism (correcting managerial inefficiencies) at the company consistent with this Article’s theory of hedge fund activism. Moreover, and perhaps most importantly, Engine No. 1 may have created a deadly distraction in our global fight against climate change, a fight that should be taken on by governments all over the world, not hedge fund activists.
VOLUME 12 • ISSUE 1 • PRINT
SHIFTING INFLUENCES ON CORPORATE GOVERNANCE: CAPITAL MARKET COMPLETENESS AND POLICY CHANNELING
Ronaldo J. Gilson and Curtis J. Milhaupt
Corporate governance scholarship is typically portrayed as driven by single factor models, for example, shareholder value maximization, director primacy or team production. These governance models are Copernican; one factor is or should be the center of the corporate governance solar system. In this essay, we argue that, as with binary stars, the shape of the governance system is at any time the result of the interaction of two central influences, which we refer to as capital market completeness and policy channeling. In contrast to single factor models, which reflect a stable normative statement of what should drive corporate governance, in our account the relation between these two governance influences is dynamic.
VOLUME 12 • ISSUE 2 • PRINT
FRAMING THE ISSUES: BOARD DIVERSITY AND CORPORATE PURPOSE
Joel Seligman
This article makes three key claims. First, Board diversity has a long pedigree and has long involved far more than gender, minority, and LGBTQ+ representation. Second, corporate purpose–long described by state corporate law concepts such as those associated with Dodge v. Ford as a primary purpose to generate profits for shareholders–is wrongly conceived in a period dominated by federal securities and other statutes with broader social purposes, many of which do not emphasize shareholder profits. Properly conceived, corporate purpose today is an amalgam of state corporate law’s primary objective of maximizing shareholder profits and federal social purposes which apply regardless of shareholder profitability, including wealth and income allocation through the tax system, environmental protection, labor and health laws, and mandatory disclosure, and independent directors on audit and compensation committees requirements under federal securities laws. Third, much of the debate over greater board diversity is best understood by focusing on the hard question of how much of corporate social objectives is better achieved through regulatory means rather than changes on the board. Nonetheless, two types of diversity are most wisely pursued today: first, gender, minority, and LGBTQ+ representation and second, the creation of corporate boards in leading United States corporations entirely composed of outside or independent directors.
VOLUME 12 • ISSUE 2 • PRINT
BOARD COMMITTEE CHARTERS AND ESG ACCOUNTABILITY
Lisa M. Fairfax
In the last few years, we have witnessed a sharp increase in corporate attention on environmental, sustainability, and governance (“ESG”). This increase has been propelled and buttressed by pressure from an ever-widening array of large and influential shareholders, as well as non-shareholder stakeholders, prompting many to assert that ESG has gone “mainstream.” The steep rise in corporate focus on ESG has inevitably prompted discourse around accountability as we seek to ensure that corporations deliver on their ESG goals and commitments. A wide range of accountability measures has been discussed, proposed, and even implemented, from increased ESG disclosure to tying ESG goals to CEO compensation.
VOLUME 11 • ISSUE 1 • PRINT
AN EFFICIENCY ANALYSIS OF DEFENSIVE TACTICS
Ronald J. Gilson & Alan Schwartz
For thirty-five years, courts and scholars have been divided over the effects of defensive tactics in the market for corporate control. Strong defensive tactics locate authority to accept a hostile bid in the target’s board. The board can bargain for a higher takeover price than uncoordinated shareholders could realize, but high takeover prices may reduce shareholder returns by reducing the likelihood of receiving a bid. The Delaware Courts themselves disagree. The Delaware Chancery Court would locate ultimate decision authority in the tar- get’s shareholders, while the Supreme Court, by permitting strong defensive tac- tics, allocates extensive power to the target’s board. Though the Supreme Court’s view settles the legal issue in Delaware for now, the normative debate among scholars and decision makers regarding whether the shareholders or the board should decide remains unresolved.
VOLUME 10 • ISSUE 2 • PRINT
HOW HORIZONTAL SHAREHOLDING HARMS OUR ECONOMY—AND WHY ANTITRUST LAW CAN FIX IT
Einer Elhauge
Empirical evidence that horizontal shareholding has created anticompetitive effects in airline and banking markets have produced calls for antitrust enforcement. In response, others have critiqued the airline and banking studies and argued that antitrust law cannot tackle any anticompetitive effects from horizontal shareholding. I show that new economic proofs and empirical evidence, ranging far beyond the airline and banking studies, show that horizontal shareholding in concentrated markets often has anticompetitive effects. I also provide new analysis demonstrating that critiques of the airline and banking market level studies either conflict with the evidence or, when taken into account, increase the estimated adverse price effects from horizontal shareholding. Finally, I provide new legal theories for tackling the problem of horizontal shareholding. I show that when horizontal shareholding has anticompetitive effects, it is illegal not only under Clayton Act §7, but also under Sherman Act §1. In fact, the historic trusts that were the core target of antitrust law were horizontal shareholders. I further show that anticompetitive horizontal shareholding also constitutes an illegal agreement or concerted practice under EU Treaty Article 101, as well as an abuse of collective dominance under Article 102. I conclude by showing that horizontal shareholding not only lessens the market concentration that traditional merger law can tolerate, but also means that what otherwise seem like non-horizontal mergers should often be treated as horizontal. Those implications for traditional merger analysis become even stronger if we fail to tackle horizontal shareholding directly.
VOLUME 10 • ISSUE 2 • PRINT
COMPETING FOR VOTES
Kobi Kastiel & Yaron Nili
Shareholder voting matters. It can directly shape a corporation’s governance, operational and social policies. But voting by shareholders serves another important function—it produces a marketplace for votes where management and dissidents compete for the votes of the shareholder base. The competition over shareholder votes generates ex ante incentives for management to perform better, to disclose information to shareholders in advance, and to engage with large institutional investors.
VOLUME 10 • ISSUE 2 • PRINT
FEDERAL FORUM PROVISIONS AND THE INTERNAL AFFAIRS DOCTRINE
Dhruv Aggarwal, Albert H. Choi, & Ofer Eldar
A key question at the intersection of state and federal law is whether corporations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doc- trine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions that restrict rights under federal law. In March 2020, the Delaware Supreme Court overturned the Chancery’s decision in Salzberg v. Sciabacucchi, holding that in addition to “internal” affairs, charters and bylaws can regulate “intra-corporate” affairs, including choosing the forum for Securities Act claims.
VOLUME 10 • ONLINE
HUMAN LEADERSHIP IN A HIGHLY REGULATED AND TECH-RELIANT CORPORATE ENVIRONMENT
Timo Matthias Spitzer, LL.M. (Wellington)3Board Member and Adjunct Professor at the Institute for Law and Finance, Goethe University Frankfurt. The author would like to thank his team, in particular Cedric Liesens, Kajetan Sitko and Lukasz Lorent, as well as Julia Bayón Pedraza for being a role model and true leader. Kudos to the Association of Corporate Counsel, the International Bar Association and The Legal 500 for providing a forum for the global legal in-house community.
We are living in times of drastic change and global legal, economic, and political turmoil, hoping for the best but expecting the worst. A focus on the shareholder may drive managers toward profit maximization, often with limited incentives to include environmental, governance, and social factors into corporate decisions. Crises show the need for human leadership with integrity to realign companies with stakeholders besides the shareholder, including the wider society.
VOLUME 8 • ISSUE 1 • PRINT
CAN RESTITUTION SAVE FRAGILE SPIRELESS NETWORKS?
Ariel Porat & Robert E. Scott
This Article examines the dramatic increase in business networks in recent decades and considers whether the law can play a useful role in supporting the efficient functioning of these inter-firm relationships for coordination and cooperation. Repeat play, reputational sanctions, and norms of trust and reciprocity are the common explanations for the flourishing of networks in many industries and places. But the evidence also shows that a certain class of networks often fails to survive or function effectively and beneficial cooperation among these network members is impaired. These fragile networks develop organically without a controlling party or hierarchy at the center of the network to facilitate network formation. Lacking a controlling entity, they are “webs without any spider.” Clusters of industrial districts are traditional examples of this class of networks. More recently, the information revolution has stimulated a dramatic increase in another type of “spiderless” network: networks of strategic alliances are now a common means of organizing collaborations among firms in high technology and R&D intensive settings. In both types of spiderless networks there are no legal mechanisms to control moral hazard and free riding risks during the period of network formation and operation. We show how in theory the law could support spiderless networks by allowing firms who externalize benefits to other firms in the network to recover for those benefits. Practical considerations may limit the implementation of a full-blown right of restitution. Nevertheless, by recognizing a limited right to recover for uncompensated costs and benefits in appropriate cases, the law can function as a background norm for sharing costs and benefits among network members, motivating them to overcome daunting coordination problems. We consider several implementation issues, show how they might be resolved, and apply our analysis to a set of well-known spiderless networks.
VOLUME 8 • ISSUE 1 • PRINT
CONCENTRATED OWNERSHIP AND LONG-TERM SHAREHOLDER VALUE
Albert H. Choi
Corporate ownership structure with a controlling shareholder is wide- spread around the world. Conventional accounts of concentrated ownership warn against controlling shareholders’ abusive exercise of control and extrac- tion of “private benefits” at the expense of minority shareholders. These accounts, however, are in sharp contrast with the success achieved by many firms with concentrated ownership and the resurgent popularity of dual class struc- ture (which separates voting rights from rights to profits) with uncontested control, as evidenced by Google, Facebook, and many others. This Article attempts to reconcile the empirical evidence with the existing theory by demonstrating how a moderate amount of private benefits of control can actually enhance long- term value by inducing commitment and investment by the controlling shareholder. On the downside, because private benefits of control are less sensitive to firm performance, they can undermine the controlling shareholder’s incentive to maximize firm value. On the upside, because private benefits of control are non- transferrable (they are “private” and illiquid), they create a lock-in effect, making the controlling shareholder more likely to stay with the firm for the long-term and care about the firm’s long-term reputation and performance. The analysis renders a number of implications. For instance, this Article shows that achieving the optimal balance may require a formal separation of voting rights from rights to profits, as is done in a dual class structure. This can explain why certain founders are taking their companies public with a dual class structure even though such structure is considered to be inefficient and can lead to lower proceeds from equity sale. It also renders a normative argument that, instead of a categorical ban, a more nuanced approach towards such mechanisms, such as heightened judicial scrutiny, could be superior.
VOLUME 8 • ISSUE 1 • PRINT
IS SAY ON PAY ALL ABOUT PAY? THE IMPACT OF FIRM PERFORMANCE
Jill Fisch, Darius Palia & Steven Davidoff Solomon
The Dodd-Frank Act of 2010 mandated a number of regulatory reforms including a requirement that large U.S. public issuers provide their shareholders with the opportunity to cast a non-binding vote on executive compensation. The “say on pay” vote was designed to rein in excessive levels of executive compensation and to encourage boards to adopt compensation structures that tie executive pay more closely to performance. Although the literature is mixed, many studies question whether the statute has had the desired effect. Shareholders at most issuers overwhelmingly approve the compensation packages, and pay levels continue to be high.
Although a lack of shareholder support for executive compensation is relatively rare, say on pay votes at a number of issuers have reflected low levels of shareholder support. A critical question is what factors drive a low say on pay vote. In other words, is say on pay only about pay?
VOLUME 8 • ISSUE 1 • PRINT
INEFFICIENT TAILORING: THE PRIVATE ORDERING PARADOX IN CORPORATE LAW
Michal Barzuza
The conventional wisdom in corporate law posits that private ordering has an important virtue: it allows firms to efficiently tailor governance terms to their particular needs. This virtue is routinely advanced to justify the largely “enabling” structure of U.S. corporate law, and to oppose “one-size-fits-all” mandatory regulation.
This Article argues that private ordering frequently produces inefficient tailoring of corporate governance terms—firms that need governance constraints are precisely the ones that do not volunteer to implement them. In theory, the conventional approach assumes that these firms will implement constraints voluntarily because otherwise they would be disciplined by market forces. Yet such reliance on market discipline has an inherent paradox: the firms that would benefit most from governance constraints are precisely the ones that are subject to weak market discipline.
Evidence from myriad studies and contexts suggests that firms’ needs for constraints are often not, or negatively, correlated with having them. For example, the inclination to cross-list on US exchanges is negatively correlated with controlling shareholders’ private benefits, and with the cross-listing premium; firms that benefitted from independent directors were precisely the ones that did not have them prior to SOX; managers of firms that investors believed would benefit most from proxy access were precisely those who were most likely to contest them; Nevada’s lax fiduciary duties attract firms that are prone to financial reporting failures. The Article concludes with implications for data interpretation and corporate law policy.
VOLUME 8 • ISSUE 2 • PRINT
INDIVIDUAL AUTONOMY IN CORPORATE LAW
Elizabeth de Fontenay
The field of corporate law is riven with competing visions of the corporation. This Article seeks to identify points of broad agreement by negative implication. It examines two developments in corporate law that have drawn widespread criticism from corporate law scholars: the Supreme Court’s recognition of corporate religious rights in Burwell v. Hobby Lobby and the Nevada legislature’s decision to eliminate mandatory fiduciary duties for corporate directors and officers. Despite their fundamental differences, both resulted in expanding individual rights or autonomy within the corporation—for shareholders and managers, respectively.
VOLUME 8 • ISSUE 2 • PRINT
RETHINKING CORPORATE LAW DURING A FINANCIAL CRISIS
Yair J. Listokin and Inho Andrew Mun
Since the Financial Crisis of 2008, most reform measures and discussions have asked how the law of financial regulation could be improved to prevent or mitigate future crises. These discussions give short shrift to the role played by corporate law during the Financial Crisis of 2008 and other financial crises. One critical regulatory tool during the crisis was “regulation by deal,” in which healthy financial firms (“acquirers”) would hastily acquire failing firms (“targets”) to mitigate the crisis. The deals were governed by corporate law, so corporate law played an outsize role in the response to the crisis. But few observers have asked how corporate law—in addition to financial regulation—should govern dealmaking in financial crises. To fill in this gap, this Article focuses on the role played by corporate law during the Financial Crisis of 2008, and asks whether corporate law should be different during a financial crisis than in ordinary times. Using an externality framework—the failure of a systemically important firm can harm the entire economy, and not just the shareholders of the failed firm—this Article identifies a key problem with the current corporate law regime as applied in financial crises: the shareholder value maximization principle as applied to failing target companies. This principle, manifested in the form of shareholder voting rights on mergers and board fiduciary duties to shareholders, is inapplicable to systemically important target firms whose failure would have enormous negative externalities on the rest of the economy. This Article contends that corporate law as applied to systemically important, failing target firms during crises should change as follows: (1) replace shareholder merger voting rights with appraisal rights, and (2) alter fiduciary duties so that directors and officers of those failing target firms consider the interests of the broader economy.
VOLUME 8 • ONLINE
THE HIGH COST OF FEWWER APPRAISAL CLAIMS IN 2017: PREMIA DOWN, AGENCY COSTS UP
Matthew Schoenfeld
This Article considers the preliminary results of an ongoing effort to discourage appraisal litigation. Since the August 2016 reforms to the Delaware appraisal statute, Chancery has issued a slew of at-or-below merger price appraisal opinions in cases such as Clearwire and PetSmart, while simultaneously pinioning fiduciary litigation by reiterating the principles of Corwin. The result—as one would expect when costs are raised and benefits are reduced—has been that fewer deals are being challenged via appraisal: In 1H 2017, the number of deals challenged fell by 33%. Those who successfully advocated for curbs on the practice had argued that appraisal claims lowered deal premia by incenting buyers to withhold top dollar, thereby hurting nonappraising shareholders. On their view, curtailment of appraisal should have sent premia upwards. But year-to-date the average U.S. target premium of 22.4% is the lowest of any year in recent history. The average target premium in 2Q 2017 of 19.3% was the single-lowest of the fifty prior quarterly observations; thus far, 3Q 2017, at 19.6%, is tracking as the second-lowest. Amid the pronounced decline in merger premia, change-in-control payouts have expanded as a percentage of transaction value. When analyzed in concert with other measures indicative of agent rent-seeking—such as target premium to 52-week high over varying periods—the evidence points to a substantial transfer of value from target shareholders to selling chief executive officers (CEOs), who have adapted to an environment rendered more permissive by the weakening of the shareholder litigation “check” that had formerly restrained such behavior.
VOLUME 7 • ISSUE 1 • PRINT
GONE BUT NOT FORGOTTEN: DOES (OR SHOULD) THE USE OF SELF-DESTRUCTING MESSAGING APPLICATIONS TRIGGER CORPORATE GOVERNANCE DUTIES?
Laura Palk
This Article examines the prevalent use of ephemeral, self-destructing messaging applications in publicly traded companies, and whether such use violates existing securities regulations, corporate preservation duties, and fiduciary obligations. Seemingly, the business judgment rule immunizes officers and directors from liability resulting from the use of transitory media, prohibiting shareholder-plaintiffs from successfully maintaining lawsuits and necessitating regulatory intervention. Current jurisprudential thought severely constrains a shareholder-plaintiff’s ability successfully to hold officers and directors accountable for their lack of corporate oversight and their failure to disclose material information, including risks associated with the types of information systems a company uses in its daily operations. Regulatory intervention is needed to ensure the board, external auditors, and the trading public may assess the extent to which such media jeopardizes the company’s finances, risk posture, and cybersecurity, and provide plaintiffs with a viable avenue of redress for lackadaisical oversight.
VOLUME 5 • ISSUE 2 • PRINT
PROTECTING PUBLIC SHAREHOLDERS: THE CASE OF GOOGLE’S RECAPITALIZATION
Paul Lee
The recent mid-stream recapitalization of Google introducing a class of non-voting shares raises certain questions about controlling shareholder opportunism and the adequacy of our current system in protecting the rights of public shareholders. This Note argues that the settlement of the class action suit on behalf of Google’s public shareholders did not do enough to address the harm they suffered, and examines options for how the law in Delaware may be adapted to provide adequate protection for public shareholders.
VOLUME 5 • ONLINE
CHANGING MANAGEMENT IN THE FACE OF SHAREHOLDER ACTIVISM: ISSUES TO CONSIDER
Melissa Sawyer and Matt Friestedt
Recently it has become relatively common for shareholder activists to advocate for changes in senior management, not just changes in board composition. In the face of this pressure, some companies have announced changes to their leadership teams. These changes can create strife in the boardroom and tension among employees. Leadership transitions also raise a number of disclosure and other legal issues that companies should take into account if a board decides to respond to activism in this manner. This article provides a checklist of issues that regularly arise in these situations.
VOLUME 4 • ISSUE 2 • PRINT
MAKING IT EASIER FOR DIRECTORS TO “DO THE RIGHT THING”?
Leo E. Strine, Jr.
Some scholars argue that managers should take constituencies other than stockholders into account when running a corporation, and refuse to put short- term profit for stockholders over the best interests of the corporation’s employees, consumers, and communities, as well as the environment and society generally. In other words, they argue that managers should “do the right thing,” while ignoring that in the current corporate accountability structure, stockholders are the only constituency given any enforceable rights, and thus are the only one with substantial influence over managers. Few commentators have pro- posed real solutions that would give corporate managers more ability and greater incentives to consider the interests of other constituencies.
VOLUME 3 • ISSUE 1 • PRINT
DO OUTSIDE DIRECTORS FACE LABOR MARKET CONSEQUENCES? A NATURAL EXPERIMENT FROM THE FINANCIAL CRISIS
Steven M. Davidoff, Andrew C.W. Lund, and Robert Schonlau
VOLUME 4 • ISSUE 1 • PRINT
THE CASE FOR AN UNBIASED TAKEOVER LAW (WITH AN APPLICATION TO THE EUROPEAN UNION)
Luca Enriques, Ronald J. Gilson, and Alessio M. Pacces
VOLUME 4 • ISSUE 1 • PRINT
MISSING THE FOREST FOR THE TREES: A NEW APPROACH TO SHAREHOLDER ACTIVISM
Yaron Nili
Shareholder activism has dominated corporate governance literature for the last decade. However, despite the abundance of research focusing on specific manifestations of activism, there is a dearth of literature tackling shareholder activism as a whole. This article puts forward a novel theory situating shareholder activism within a more complete framework, treating activism as a collection of diverse models that differ by motives, tools, and structures. This paper provides a more complete perspective on activism—an analytical understanding of activism as a model rather than an investigation of specific occurrences thereof—and a demonstration that different models of activism are present both in the U.S. and around the globe. In this way, the paper responds to calls from academia, practitioners, and the U.S. legislature for potential regulatory changes aimed at shareholder activism.
VOLUME 3 • ISSUE 1 • PRINT
IMPROVING DIRECTOR ELECTIONS
Bo Becker and Guhan Subramanian
VOLUME 3 • ISSUE 1 • PRINT
WHO CALLS THE SHOTS? HOW MUTUAL FUNDS VOTE ON DIRECTOR ELECTIONS
Stephen Choi, Jill Fisch, and Marcel Kahan
VOLUME 3 • ISSUE 1 • PRINT
AMERICA’S CHANGING CORPORATE BOARDROOMS: THE LAST TWENTY-FIVE YEARS
Jay W. Lorsch
VOLUME 3 • ISSUE 1 • PRINT
TOWARDS THE DECLASSIFICATION OF S&P 500 BOARDS
Lucian Bebchuk, Scott Hirst, and June Rhee
VOLUME 2 • ISSUE 1 • PRINT
CORPORATE GOVERNANCE, POLITICS, AND THE SEC
Edward F. Greene
Publicly held corporations typically solicit votes or consents by proxy from their shareholders with respect to any proposed action requiring shareholder approval. This solicitation process involves the SEC because of its statutory role in overseeing disclosure in a company’s proxy statement.1 During this process, the SEC acts as a gatekeeper that decides under its rules whether shareholders’ proposals must be included in a company’s proxy statement at the company’s expense.
VOLUME 2 • ISSUE 1 • PRINT
THE CORPORATE SHAREHOLDER’S VOTE AND ITS POLITICAL ECONOMIC, IN DELAWARE AND IN WASHINGTON
Mark J. Roe
VOLUME 2 • ISSUE 1 • PRINT
THE POLITICIZATION OF CORPORATE GOVERNANCE: BUREAUCRATIC DISCRETION, THE SEC, AND SHAREHOLDER RATIFICATION OF AUDITORS
J. Robert Brown, Jr.
VOLUME 2 • ONLINE
WHAT IS THE PRACTICAL IMPORTANCE OF DEFAULT RULES UNDER DELAWARE LLC AND LP LAW?
Mohsen Manesh
Despite much academic debate, it is now well settled that in Delaware at least, corporate law differs from unincorporated alternative entity law in one fundamental respect. Under Delaware corporate law, fiduciary duties are mandatory. These duties, owed by the managers of a corporation to the shareholders of the firm, in general cannot be waived or modified by contract. Under Delaware law governing limited liability companies (LLCs) and limited partnerships (LPs), however, fiduciary duties are merely default duties. Although managers of these alternative entity firms owe fiduciary duties, these duties may be modified or even wholly eliminated by the terms of the alternative entity governing agreement.
VOLUME 2 • ONLINE
DODD-FRANK, COMPENSATION RATIOS, AND THE EXPANDING ROLE OF SHAREHOLDERS IN THE GOVERNANCE PROCESS
J. Robert Brown, Jr.
Congress, in adopting the Dodd-Frank Act, sought to correct some of the abuses believed to have contributed to the financial crisis of 2008-2009. Executive compensation was one of them. Formulas used to determine compensation were thought to promote a short-term perspective that encouraged excessive risk taking. As a result, financial regulators were given the authority to review compensation practices for risk. Likewise, the Act sought to strengthen the integrity of the compensation approval process and to increase clawbacks of performance-based compensation following certain restatements.
VOLUME 1 • ONLINE
CITIZENS UNITED AND THE NEXUS-OF-CONTRACTS PRESUMPTION
Stefan J. Padfield
Citizens United v. Federal Election Commission has been described as “one of the most important business decisions in a generation.” In Citizens United, the Supreme Court of the United States invalidated section 441(b) of the Federal Election Campaign Act of 1971 as unconstitutional. That section prohibited corporations (and unions) from financing “electioneering communications” (speech that expressly advocates the election or defeat of a candidate) within 30 days of a primary election. The five Justices in the majority rested their holding on the assertion that “Government may not suppress political speech on the basis of the speaker’s corporate identity.” In reaching this conclusion, the majority relied on a view of the corporation fundamentally as an “association of citizens.”
VOLUME 1 • ONLINE
DISTILLING THE DEBATE ON PROXY ACCESS
David Page
In August 2010, the SEC issued its final rule on proxy access, which gives shareholders the right to place director nominees directly on the company’s proxy card, thereby sparing shareholders a large part of the expense of waging a traditional proxy contest. This rulemaking, and the SEC’s subsequent decision in October to delay implementing the rule pending a challenge from the Business Roundtable, has fueled a vigorous debate on the merits of proxy access and the details of its implementation. Some of the arguments made by commentators and academics are particularly interesting and useful in framing the contours of the debate.
VOLUME 1 • ONLINE
THE RISE AND FALL OF THE PROXY ACCESS IDEA: A NARRATIVE
Laurenz Vuchetich
Every person involved in the creation or exercise of any discipline tends to strive toward absolutes. Is the idea of proxy access a step closer to immaculate corporate governance? According to the most recent actions of its introducers, it is not—or at least not yet.