Engineering a venture capital market: lessons from the American experience

The venture capital market and firms whose creation and early stages were financed by venture capital are among the crown jewels of the American economy. Beyond representing an important engine of macroeconomic growth and job creation, these firms have been a major force in commercializing cutting edge science, whether through their impact on existing industries as with the radical changes in pharmaceuticals catalyzed by venture-backed firms commercialization of biotechnology, or by the their role in developing entirely new industries as with the emergence of the internet and world wide web. The venture capital market thus provides a unique link between finance and innovation, providing start-up and early stage firms - organizational forms particularly well suited to innovation - with capital market access that is tailored to the special task of financing these high risk, high return activities

The Political Ecology of Takeovers: Thoughts On Harmonizing the European Corporate Governance Environment

Economic policy debate in the United States during the 1980s focused on the dynamics of bidder and target tactics in hostile takeovers. Confronted with the largest transactions in business history, financial economists took advantage of developments in econometric techniques to conduct virtually real time studies of the impact on firm value of each new bidder tactic and target defense. For courts and lawyers, hostile takeovers subjected standard features of corporate law to the equivalent of a stress x-ray, revealing previously undetected doctrinal cracks. Congress held seemingly endless hearings on the subject, although managing to enact only relatively innocuous tax penalties on particular defensive tactics the public found especially offensive. State legislatures, closer to the political action, acted more substantively, if less wisely. Whether or not takeovers created new wealth they did result in its transfer, and at least one of the parties from whom wealth was transferred – target management – had remarkable influence in state legislatures. When labor also came actively to oppose hostile takeovers, the coalition was virtually unstoppable. The decade saw some thirty-four states pass more than sixty-five major laws restricting corporate takeovers, including states discouraging partial offers and front-end loaded offers. The 1980s have now closed transactionally as well as chronologically. The first quarter of 1991 marked the lowest level of merger and acquisition activity since the first quarter of 1980. The passing of this remarkable decade invites a broader perspective, which can be helpfully thought of as the political ecology of takeovers. An ecological perspective builds on the proposition that phenomena are embedded in interactive systems – a rich web of mutually dependent relationships. Thus, a seemingly independent event cannot be fully evaluated without understanding how it relates to the environmental forces to which it was a response and which, in turn, respond to it. What the narrow focus of the 1980s debate missed was an appreciation of the complex economic corporate governance and political environments in which hostile takeovers are embedded. Corporate acquisitions are a response to real conditions in the economic environment. The choice among acquisition techniques, most importantly between friendly and hostile transactions, depends both upon the economic motivation for the transaction and upon conditions in the corporate governance environment. Finally, conditions in the corporate governance environment are directly influenced by politics; both what is allowed and prohibited is defined, in the first instance, by legislation. My goal in this article is two-fold. I begin by sketching the political ecology of takeovers in the United States – the interaction of economics, corporate governance and politics that shaped the experience of the 1980s. I then make a tentative effort at applying the insights gained from an ecological perspective to the current endeavor to change dramatically the European corporate governance environment through the harmonization of takeover and company law in the European Community. Sheltered by the cloak of political naivete commonly allowed those attempting comparative analysis from a distance, I will argue that an ecological understanding of takeovers suggests a different approach than that reflected so far in the debate over the terms of harmonization. This approach is based on what I term the mutability principle

Controlling Family Shareholders in Developing Countries: Anchoring Relational Exchange

The Law and Finance account of the ubiquity of controlling shareholders in developing markets is based on conditions in the capital market: poor shareholder protection law prevents controlling shareholders from parting with control out of fear of exploitation by a new controlling shareholder who acquires a controlling position in the market. This explanation, however, does not address why we observe any minority shareholders in such markets, or why controlling shareholders in developing markets are most often family-based. This paper looks at the impact of “bad law” on shareholder distribution in a very different way. Developing countries typically provide not only poor minority protection, but poor commercial law generally. Specifically, the paper considers the impact on the distribution of shareholders of conditions in the product market, where the driving legal influence is the quality of commercial law that supports the corporation’s actual business activities, and where the presence of a controlling family shareholder may help support reputation-based trading in a bad commercial law environment

The Devolution of the Legal Profession: a Demand Side Perspective

Economic analysis has not played a significant role in the increasingly intense debate over the decline of professionalism among lawyers.Economists\u27 lack of interest in the issue may be understandable. The lawyers\u27 lament is that the legal profession is devolving into the business of law. That this concern has not captured the economists\u27 attention may reflect only that economists do not view the label business as a pejorative. If becoming a business means efficiently rendering an important service in a competitive environment, then of what is there to complain? Lawyers, more directly concerned with maintaining their professional status, would find little comfort in this explanation for the economists\u27 inattention. From the lawyers\u27 perspective, economists lack appreciation for what is lost in the gap between a business and a profession: the grand Brandesian vision of a public role for lawyers that contemplates a broader professional obligation than to act only in the client\u27s (or the lawyer\u27s) self-interest. Both views – economists\u27 indifference to the lawyers\u27 public oriented vision of professionalism and the disdain students of the legal profession often display for economic analysis – are incomplete in important respects. By applying economic analysis to highlight the critical role of professionalism in the market for legal services, it is possible to demonstrate the importance of both professionalism as a concept and economics as a means to analyze it. To be sure, nothing special is gained from translating standard sociological analyses of the functions of professionalism into economese unless the translation results in new insights.But such insights are in fact available here. An economic perspective suggests an important function of professionalism that has gone largely unobserved under traditional modes of analysis. Additionally, an economic perspective on professionalism helps identify the sources of the quite real pressures on the legal profession\u27s continued ability to perform this function and the quite real limits on the profession\u27s ability to do very much about it. My thesis is that important elements of what have been traditionally understood as professional standards operate not as freerstanding statements describing appropriate behavior by lawyers, or even as paternalistic proclamations concerning lawyers\u27 treatment of clients. Rather, important elements of professional standards serve to cast lawyers in the role of enforcers of agreements among clients. And if this is right, then the continued viability of these elements of professionalism depends not only on the attitude of lawyers, but, more importantly, on the attitude of clients: Will clients still allow lawyers to play the role of enforcer? From this perspective, the threat to professionalism comes from the demand side, not the supply side. The good news for lawyers is that economic analysis of legal professionalism provides some solace – the devolution of the profession may not be our fault. The bad news is that, for precisely the same reason, there may be very real limits on what the profession alone can do to arrest the decline

The Case Against Shark Repellent Amendments: Structural Limitations on the Enabling Concept

The tactical history of the tender offer movement resembles an unrestrained arms race. Faced with offeror assaults in the form of Saturday night specials, various types of bear-hugs, godfather offers, and block purchases, target management responded with equally intriguing defensive tactics: the black book, reverse bear-hug, sandbag, show stopper, white knight, and, drawing directly on military jargon, the scorched earth. But however varied the labels given particular defensive strategies, they share the common characteristic of being responsive: They are available only after an offer is made and the battle for the target\u27s independence joined. From the target\u27s perspective, what was missing from the defensive arsenal was a deterrent – a tactic that would convince a potential offeror not even to attempt the attack, thereby not only saving the target the substantial costs associated with tender offer conflicts but, more importantly, eliminating the not insubstantial risk that all defenses would fail and the offer prove successful. Shark repellent amendments are intended to fill this gap in a prospective target\u27s defenses. The idea is to amend the target\u27s articles of incorporation to make it a less desirable or more difficult acquisition, and thereby to encourage the shark to seek a more appetizing or more easily digested alternative. If successful, however, the tactic is not without cost. To the extent that shark repellent amendments deter potential offerors, they also have the unavoidable effect of preventing shareholder access to offers made at substantial premiums over market price, and at the same time insulating incumbent management from the principal mechanism by which they might be dislodged unwillingly from their positions

Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy

The focus of comparative corporate governance scholarship is shifting from takeovers to controlling shareholders in recognition of the fact that public corporations everywhere but in the U.S. and U.K. are characterized by a shareholder with effective voting control. Debate is now turning to the merits of controlling shareholder systems, both on their own terms and in comparison to the U.S. and U.K. widely held shareholding pattern. To date, the debate has treated the controlling versus widely held distinction as central, disagreeing over whether a particular country owed its characteristic shareholder distribution to the quality of minority shareholder legal protection or to politics. This simple dichotomy is far too coarse to provide an understanding of the diversity of ownership structures and their policy implications. This article complicates the analysis of controlling shareholders and corporate governance by providing a more nuanced taxonomy of controlling shareholder systems. In particular, it distinguishes between efficient and inefficient controlling shareholders, and between pecuniary and non-pecuniary private benefits of control. The analysis establishes that the appropriate dichotomy is between countries with functionally good law, which support companies with both widely held and controlling shareholder distributions, and countries with functionally bad law, which support only controlling shareholder distributions. In this account, the United States and Sweden are the same side, rather than on opposite sides of the dividing line. The articles examines the different understanding of the role of controlling shareholders in corporate governance and the policy implications that flow from a taxonomy that focuses on support of diverse shareholder distributions

Reflections in a Distant Mirror: Japanese Corporate Governance through American Eyes

For the last ten years, Japanese corporate governance has served as a distant mirror in whose reflection American academics could better see the attributes of their own system. As scholars came to recognize that the institutional characteristics of the American and Japanese systems were politically and historically contingent, other countries\u27 approaches became serious objects of study, rather than just way stations on the road to convergence. One learned about one\u27s own system from the choices made by others. As it came to be conceived, the Japanese corporation of the 1980s represented quite a different method of organizing production. Styled the J-form by Masahiko Aoki, the Japanese corporation combined an interlocking set of governance arrangements that supported a different kind of industrial organization. The main bank relationship, coupled with cross shareholdings, supported a management commitment to lifetime employment for an important subset of employees who, in turn, had the proper incentives to invest in the firm specific human capital necessary for a production system geared to horizontal coordination and information sharing. Central to the J-form was a commitment to organizational stability, consistent with what was said to be a Japanese focus on process technologies

Value Creation by Business Lawyers: Legal Skills and Asset Pricing

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. That is not, of course, to say that answers have not been offered; there are a number of familiar responses that we have all heard or, what is worse, that we have all offered at one time or another without really thinking very hard about them. The problem is that, for surprisingly similar reasons, none of them is very helpful

Unlimited Liability and Law Firm Organization: Tax Factors and the Direction of Causation

In a recent issue of this Journal, Carr and Mathewson (1988) test a model of the impact of limited and unlimited liability regimes on the nature of firms by comparing the performance of law firms operated as partnerships and sole proprietorships (and therefore subject to unlimited liability) with that of law firms operated as corporations (and therefore subject to limited liability)