Missing Inaction: Internalizing Beneficial Omissions

Are beneficial omissions treated the same as beneficial commissions of the same magnitude? Does it actually matter? In this Article I argue that while scholarship has paid attention to the omission bias in the context of harms (i.e., the discounting of harms caused by omissions relative to harms caused by commissions), it has not considered the omission bias in the context of benefits (i.e., the discounting of benefits caused by omissions relative to benefits caused by commissions). This Article argues not only that we should recognize beneficial omissions, but also that policymakers should pay more attention to beneficial omissions than to either beneficial or harmful commissions

Taking Shareholders\u27 Social Preferences Seriously: Confronting a New Agency Problem

Oliver Hart, Nobel Laureate in Economics for 2016, and economist Luigi Zingales recently published an article justifying companies’ pursuit of social objectives at the expense of profits from within the shareholder primacy framework. This Article highlights an important consequence of this approach: a new agency problem between managers and shareholders regarding social preferences. This Article provides two possible solutions to this agency problem: a bottom-up solution focused on shareholders’ ability to submit proposals on such issues and a top-down solution based on an independent board sub- committee intended to identify social objectives and forward them for shareholder approval

Global Antitakeover Devices

This Article explores a hidden mechanism that insulates management from hostile takeovers and activist intervention: the global antitakeover device ( GAD\u27\u27). A GAD is based on the ability of public firms to mix and match between different forms of regulation by cross-listing on multiple stock exchanges or incorporating in foreign jurisdictions. This action subjects any hostile engagement with these firms to multiple jurisdictions\u27 regulatory frameworks and creates regulatory barriers, complexity, and uncertainty. This Article provides a comprehensive analysis of these GADs, the costs they generate to potential bidders, and the unique features they possess relative to traditional antitakeover devices

Toward the Personalization of Copyright Law

In this Article, we provide a blueprint for personalizing copyright law in order to reduce the deadweight loss that stems from its universal application to all users, including those who would not have paid for it. We demonstrate how big data can help identify inframarginal users, who would not pay for copyrighted content, and we explain how copyright liability and remedies should be modified in such cases

Reversing the Fortunes of Active Funds

In 2019, for the first time in the history of U.S. capital markets, passive funds surpassed active funds in terms of total assets under management. The continuous growth of passive funds at the expense of active funds is a genuine cause for concern. Active funds monitor the management and partake of decision-making in their portfolio companies. Furthermore, they improve price efficiency and managerial performance by engaging in informed trading. The buy/sell decisions of active funds provide other market participants reliable information about the quality of firms. The cost of active investing is significant and it is exclusively borne by active funds; the benefits, by contrast, are spread over all shareholders, including passive funds that free-ride on the efforts of their active peers. Therefore, the contraction of active funds threatens to set back the quality of corporate governance in U.S. firms. This Essay proposes a way to reverse this trend. To preserve the benefits presented by active funds, we explore the possibility of employing tax mechanisms to help defray the extra cost borne by active funds. Perversely, at present, our tax laws exacerbate the problem. Since active funds trade more frequently than passive ones, they face a substantially heavier tax burden. We argue that taxation is the key to leveling the playing field in capital markets.Specifically, we establish a prima facie case for using tax credits to support active funds and enhance their market share. We focus on two types of tax credits: effort-based tax credits and result-based tax credits. Effort-based tax credits would be granted whenever an active fund undertakes prespecified measures to improve corporate governance irrespective of their success. Result-based tax credits would be contingent on the attainment of certain outcomes. The two types are not mutually exclusive and, as we will show, can be combined for maximal effect. Our proposal has three potential advantages over competing initiatives that seek to induce passive funds to become more active. First, taxes constitute a highly effective tool for altering behavior as they transform the underlying motivations of the subject. Second, our proposal has the potential to create a virtuous financial cycle: the expected increase in tax revenues from the improved performance of firms generated by the tax credit should cover the cost of providing the credits. Third, and finally, from a political economy standpoint, our proposal, on account of its noncoercive nature, will not attract opposition from the investment industry and thus stands a realistic chance of being adopted

Are All Risks Created Equal? Rethinking the Distinction Between Legal and Business Risk in Corporate Law

Should corporate legal risk be treated similarly to corporate business risks? Currently, the law draws a clear-cut distinction between the two sources of risk, permitting the latter type of risk and banning the former. As a result, fiduciaries are shielded from personal liability in the case of business risk and are entirely exposed to civil and criminal liability that arises from legal risk-taking. As corporate law theorists have underscored, the differential treatment of business and legal risk is highly problematic from the perspective of firms and shareholders. To begin with, legal risk cannot be completely averted or eliminated. More importantly, decisions involving negligible levels of legal risk might yield significant profits for firms. Thus, the outright ban on legal risk-taking harms shareholders, who would have favored a more nuanced regime to legal risk

Corporate Law for Good People

This article offers a novel analysis of the field of corporate governance by viewing it through the lens of behavioral ethics. It calls for both shifting the focus of corporate governance to a new set of loci of potential corporate wrongdoing and adding new tools to the corporate governance arsenal. The behavioral ethics scholarship emphasizes the large share of wrongdoing generated by good people whose intention is to act ethically. Their wrongdoing stems from bounded ethicality -- various cognitive and motivational processes that lead to biased decisions that seem legitimate. In the legal domain, corporate law provides the most fertile ground for the application of behavioral ethics since it encapsulates many of the features that the behavioral ethics literature found to confound the ethical judgment of good people, such as agency, group decisions, victim remoteness, vague directives and subtle conflict of interests. Bounded ethicality suggests a view of corporate law that is dramatically different than that portrayed by traditional legal and economic theorists. Not only does it suggest that wrongdoing can be committed by well-intentioned people who wish to do right, but also that the biases they display call for a radically different set of legal interventions than those advocated by standard economic theory. If standard theorizing views corporate agents as self-interest maximizers, bounded rationality perceives them as actors with varied and nuanced motivations that could benefit from subtle legal reforms.This Article\u27s assessment of corporate governance through the behavioral ethical lens proceeds in three stages. First, it exposes potential wrongdoing by good people that conventional corporate governance does not address. Second, it suggests novel corporate governance interventions supported by behavioral ethics to address wrongdoing by good people. Third, it identifies existing interventions that according to behavioral ethics analysis may generate unintended adverse effects on the behavior of well-meaning corporate officers and exacerbate wrongdoing instead of mitigating it. As we will show bounded ethicality has important implications for a wide range of topics in corporate governance, such as board structure, independent directors, regulation of institutional investors and proxy advisory firms, the business judgment rule, and corporate and intra-board liability

SPACtivism

In this Essay, we propose a modified version of the SPAC designed to allow the public to participate in the world of corporate activism. Unlike existing SPACs, our version is designed for investments in public companies in order to change their course of action, not in private companies in order to make them go public, and overcomes many of the problems that pertain conventional SPACs. At present, direct investment in activism is reserved to affluent individuals and other professional investors of activist hedge funds. The public at large is barred from directly entering the activist arena. The current model comes at a triple price: first, critics argue that activism in its current form is slanted toward short-termed engagements, possibly neglecting potential profitable long-term engagements. Second, although loud, the current scope of activism is relatively modest. Activist engagements only reach 2.3 percent of the public companies traded on U.S. markets. Third, retail investors cannot directly share in the excess profits stemming from activism. The introduction of the Activist SPAC can change this reality. The Activist SPAC would allow interested retail investors to invest money in a corporation dedicated to Activist engagement. To ensure the success of the enterprise, the future target of the investment would not be made public at the time of the investment. Once the Activist SPAC buys a toehold position in the target and announce its plan, the investors would receive an opportunity to get their money back, should they choose to do so, or go along with the activist plan. As we show in the Essay, setting up Activist SPACs can transform the character of corporate activism by rendering it more attuned to long-term objectives, and is especially fit to pursue ESG goals. It would also give the public a voice in the future world of activism and allow it to share in its benefits directly as well as increase the scope of corporate activism. To enable these advantages, the current regulatory framework must change. We present a blueprint for the introduction of Activist SPACs, analyze the requisite key parameters and explore the legal and regulatory steps required to ensure their success. Innovation is the lifeblood of financial markets. The Activist SPAC may well mark their future path