The Enduring Ambivalence of Corporate Law

Prevailing theories of corporate law tend to rely heavily on strong claims regarding the corporate governance primacy and legitimacy of either the board or the shareholders, as the case may be. In this article I challenge the descriptive power of these theories as applied to widely held public corporations and advance an alternative, arguing that corporate law is, and will remain, deeply ambivalent - both doctrinally and morally - with respect to three fundamental and related issues: the locus of ultimate corporate governance authority, the intended beneficiaries of corporate production, and the relationship between corporate law and theachievement of the social good. Part I begins with a brief discussion of our long-standing misgivings regarding the status of the corporation as an entity, arguing that concerns regarding the potential negative consequences of permitting human beings to act behind the veil of a distinct legal person are as old as the corporate form itself. I then turn to an examination of prevailing theories of corporate governance in part II, arguing that they exhibit substantial shortcomings as descriptive theories due to their inability to account for fundamental elements of corporatelaw as it actually exists. Based upon a re-examination of the roles and powers of shareholders and directors in the public corporation across various doctrinal contexts, I conclude in part III that corporate law is, and will remain, deeply ambivalent. In so doing I draw upon utilitarianism - corporate law\u27s implicit moral theory - to describe more clearly the nature and degree of corporate law\u27s commitment to shareholder wealth maximization. Corporate law\u27s weak utilitarian commitment to shareholder wealth maximization, I argue, reflects real but incomplete confidence in the consistency of shareholders\u27 incentives and interests with those of the larger public - an uncertainty reinforced by the corporate form\u27s lack of legitimacy or practical ability to articulate an authoritative conception of the social good. I then turn to the rise of institutional shareholders in part IV, assessing their effects on the issues discussed in the article, and in part V offer some brief reflections on the implications of my analysis for an important doctrinal debate cutting to the heart of corporate governance: the scope of the shareholders\u27 authority to enact bylaws affecting the business and affairs of the corporation. Ultimately it is suggested that corporate law\u27s fundamental ambivalence represents a keen awareness of the limitations and pitfalls inevitably attendant upon this mode of human organization, and that awareness of this core characteristic ought to be brought to bear upon the corporate governance debate

Shareholder Bylaws and the Delaware Corporation

Much like hostile tender offers in the 1980s and 1990s, shareholder bylaws purporting to limit board authority in key areas of corporate governance are, once again, forcing Delaware\u27s courts to grapple with the fundamental nature of the corporate form. In this (short) essay written for a roundtable discussion at the 2009 Annual Meeting of the Southeastern Association of Law Schools, I discuss CA, Inc. v. AFSCME Employees Pension Plan - the 2008 opinion in which the Delaware Supreme Court began to define the nature and scope of the shareholders\u27 bylaw authority. In CA, Inc. the court held that a proposed bylaw requiring reimbursement of shareholders\u27 proxy expenses under specified circumstances was a proper subject for shareholder action under the Delaware General Corporation Law, but that such a mandatory bylaw would nevertheless violate Delaware common law by forcing the board to breach its fiduciary duties if the board concluded that reimbursement would not promote the company\u27s interests. Commentators have criticized the court\u27s fiduciary duty-based analysis as excessively vague and indeterminate. I argue here that the court\u27s reliance on fiduciary duties in this context reflects not a failed attempt at clarity so much as a decided effort to maintain ambiguity. Just like in hostile takeover cases, which forced the court to address the scope of the shareholders\u27 unilateral power to sell the company, one cannot meaningfully analyze the scope of the shareholders\u27 unilateral power to write the rules of corporate governance without defining the nature and purpose of the corporation itself. However, given the lack of statutory guidance on the core questions of corporate power and purpose, Delaware judges have consistently - and understandably - remained reluctant to grapple with these issues in a clear and decisive way. Absent legislative intervention, we can expect a bylaw jurisprudence exhibiting a theoretical obscurity and hands-off posture reminiscent of Delaware\u27s takeover jurisprudence - a trend already evidenced by the holding in CA, Inc

The Changing Face of Money

In this essay I argue that widespread failure to comprehend the intrinsic nature of modern money loomed large in the recent crisis, and that broader comprehension of its meaning is a precondition for effective post-crisis reforms. First, I provide a brief history of money, emphasizing its gradual divergence from inherent value. I then consider the value of today’s dollar in economic, legal and psychological terms, arguing that each perspective conveys a single over-arching lesson—that better comprehending our money requires better comprehending ourselves. The introspection that this exercise demands reveals with unique clarity some of the critical lessons of the crisis and its aftermat

Corporate Governance Reform in a Time of Crisis

In this article I argue that crisis-driven corporate governance reform efforts in the United States and the United Kingdom that aim to empower shareholders are misguided, and offer an explanation of why policymakers in each country have reacted to the financial crisis as they have. I first discuss the risk incentives of shareholders and managers in financial firms, and examine how excessive leverage and risk-taking in pursuit of short-term returns for shareholders led to the crisis. I then describe the far greater power and centrality that U.K. shareholders have historically possessed relative to their U.S. counterparts, and explore historical and cultural factors explaining this distinction - notably that the more robust U.K. welfare state has deflected political pressure to accommodate non-shareholders\u27 interests within the corporate governance system, while the opposite has occurred in the United States. This, I argue, looms large in the observed crisis responses. The U.K. initiatives reflect reinforcement of the more shareholder-centric status quo, while the U.S. initiatives reflect a populist backlash against managers, fueled by middle class anger and fear in a far less stable social welfare environment. I conclude with a discussion of corporate governance challenges facing U.S. and U.K. policymakers following the crisis

Hemispheric Integration and the Politics of Regionalism: The Free Trade Area of the Americas (FTAA)

This article examines negotiations toward a Free Trade Area of the Americas (FTAA). It seeks to discern what key negotiating parties want out of such an agreement, and the means through which they have sought to achieve their disparate goals. The United States and Brazil, in particular, have employed complex negotiating strategies in order to gain theupper hand - strategies prompted by a variety of economic and political dynamics at domestic andsubregional levels. These dynamics include the significant pressure exerted on U.S. policy-makers by constituent groups sensitive to globalization\u27s impact on labor and the environment, as well as the challenge Brazil faces in maintaining a stable subregional bloc through which to exert greater negotiating leverage in the FTAA process. Consonant with insights of liberal international relations theorists and multi-level game theorists, it is observed that the FTAA negotiations are significantly constrained by political dynamics at multiple levels of organization, and that these constraints will be major determining factors in the outcome of the process. Ultimately, the article argues that while potential gains from trade in the Western Hemisphere would be of great consequence, the long-term significance of an FTAA would be its precedential value for future trade negotiations at all levels - in domestic, bilateral, regional, and multilateral fora

Is the Corporate Director\u27s Duty of Care a \u27Fiduciary\u27 Duty? Does It Matter?

While reference to fiduciary duties (plural) is routinely employed in the United States as a convenient short-hand for a corporate director\u27s duties of care and loyalty, other common-law countries generally treat loyalty as the sole fiduciary duty. This contrast prompts some important questions about the doctrinal structure for duty of care analysis adopted in Delaware, the principal jurisdiction of incorporation for U.S. public companies. Specifically, has the evolution of Delaware\u27s convoluted and problematic framework for evaluating disinterested board conduct been facilitated by styling care a fiduciary duty? If so, then how should Delaware lawmakers and judges respond moving forward? In this Essay I argue that styling care a fiduciary duty has impacted Delaware\u27s duty of care analysis in ways that are not uniformly positive. Historically, loyalty has been aggressively enforced, while care has hardly been enforced at all - the former approach aiming to deter conflicts of interest through probing analysis of entire fairness, while the latter aims to promote entrepreneurial risk-taking through a hands-off judicial posture embodied in the business judgment rule. Conflation of these differing concepts as fiduciary duties, however, has facilitated a tendency toward over-enforcement of care, periodically threatening to impair entrepreneurial risk-taking until arrested by a countervailing legislative or judicial response. Additionally, their conflation threatens to erode the duty of loyalty by fueling the contractarian argument that the sole utility of such fiduciary duties is to fill contractual gaps, and that corporations therefore ought to possess latitude to opt out of loyalty to the degree already permitted with respect to care. While I concede that there may be good reasons not to abruptly recharacterize Delaware\u27s duty of care as non-fiduciary, I conclude that the analytical problems described in this Essay can otherwise be remedied only through a statutory provision more clearly distinguishing these differing duties and enforcement strategies. Specifically, I advocate a statutory damages rule declaring once and for all that monetary damages may be imposed on a corporate director for loyalty, but not care, breaches - an approach effectively discarding much of Delaware\u27s multi-layered and convoluted mode of care analysis, while insulating the duty of loyalty from future erosion

Power and Purpose in the Anglo-American Corporation

The article discusses the impact of a shareholder-centric and market-oriented approach to corporate governance among public business firms in the U.S. and Great Britain. It mentions that both countries have more common similarities in terms of corporate governance systems and business cultures. It affirms that despite such similarities, both countries\u27 corporate governance system differs on how they relate to external regulations that can affect their relationships among stakeholders

Good Faith in \u3cem\u3eRevlon\u3c/em\u3e-Land

The Delaware Supreme Court has set a very high hurdle for plaintiffs challenging directors\u27 good faith in the sale of a company. In Lyondell Chemical Company v. Ryan, the court held that unconflicted directors could be found to have breached the good faith component of their duty of loyalty in the transactional context only if they knowingly and completely failed to undertake, and utterly failed to attempt to discharge their duties. In this essay I argue that the Lyondell standard effectively imports into the transactional context the exacting standard previously applied in the oversight context — a move clearly aimed at substantially limiting directors\u27 liability exposure for conscious disregard of duty. Part I of the essay traces the evolution of the good faith concept over recent decades, including the Delaware Supreme Court\u27s acceptance in its 2006 Disney opinion of a formulation of non-exculpable bad faith conduct by unconflicted directors in the employment context involving intentional and conscious disregard of duty. Part II contrasts this strict state of mind requirement with an even stricter standard applied later that year in Stone v. Ritter to establish bad faith in the board oversight context. I then turn to Lyondell, where the Delaware Supreme Court in 2009 extended the exacting standard of Stone to the transactional context. Commentary on Lyondell has suggested that the decision effectively forecloses monetary liability for unconflicted directors in the transactional context. I argue in Part III, however, that while the opinion undoubtedly limits directors\u27 liability exposure, it is amenable to a reading that preserves some limited capacity for the good faith component of the duty of loyalty to discipline boards in the sale of a company

Managing Corporate Federalism: The Least-Bad Approach to the Shareholder Bylaw Debate

Over recent decades, shareholders in public corporations have increasingly sought to augment their own power – and, correlatively, to limit the power of boards – through creative use of corporate bylaws. The bylaws lend themselves to such efforts because enacting, amending, and repealing bylaws are essentially the only corporate governance actions that shareholders can undertake unilaterally. In this Article I examine the contested nature of bylaws, the fundamental issues of corporate power and purpose that they implicate, and the differing ways in which state and federal lawmakers and regulators may impact the debate regarding the scope of the shareholders\u27 bylaw authority. The Article first discusses various dimensions of corporate governance historically addressed in the bylaws, and the controversial uses to which bylaws have been put by shareholders seeking greater corporate governance power, focusing on Delaware – the jurisdiction of incorporation for most public companies. I then turn to the ways in which rules of corporate governance are generated in our federal legal system, including the complex and evolving mechanisms through which state and federal lawmakers and regulators interact. In particular, I evaluate the SEC\u27s process for assessing whether shareholder proposals to amend bylaws must be included in a public company\u27s proxy statement, as well as the recently created process through which Delaware permits SEC certification of contested issues of state law directly to the Delaware Supreme Court – a process the SEC has already used in evaluating the excludability of a proposed shareholder bylaw amendment. I conclude that this process threatens to substantially distort the evaluation and evolution of the shareholders\u27 bylaw authority by presenting the Delaware Supreme Court with proposed bylaws to be assessed in the abstract – an awkward posture resulting in the sacrifice of important values reflected in the ripenessdoctrine, and abandonment of the presumption of validity that ordinarily favors enacted bylaws. I then consider who ought to determine the scope of permissible shareholder bylaws, concluding that there is no perfect approach because none of the relevant state and federal actors dominates with respect to both political legitimacy and expertise – the SEC possessing neither, while Congress possesses the former and Delaware the latter. I argue, however, that the least-bad approach would be to remove the SEC from the process entirely, leaving these matters to Delaware in the first instance, subject to potential intervention by Congress. The pragmatic means of achieving this outcome would be a strict SEC policy of refusal to permit exclusion from the proxy of proposed shareholder bylaws prompting competing opinions of Delaware counsel. This approach would eliminate the distortion introduced by SEC certification, permitting resolution of the fundamental issues at stake in a more organic and better informed manner through traditional Delaware litigation