Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance

This article discusses hedge funds activism based on Hirsch- man’s classic. It is argued that hedge funds do not create the loyalty concerns underlying the usual short-termism critique of their activism, because the arbiters of such activism are typically indexed funds, which cannot choose short-term exit. Nevertheless, the voice activated by hedge funds can be excessive for a particular company. Furthermore, this article claims that the short-termism debate cannot shed light on the desirability of hedge funds activism. Neither theory nor empirical evidence can tell whether hedge funds activism leads to short-termism or long-termism. The real issue with activism is a conflict of entrepreneurship, namely a conflict between the opposing views of the activists and the incumbent management regarding in how long an individual company should be profitable. Leaving the choice between these views to institutional investors is not efficient for every company at every point in time. Consequently, this article argues that regulation should enable individual companies to choose whether to curb hedge funds activism depending on what is efficient for them. The recent Europe- an experience reveals that loyalty shares enable such choice, even in the midstream, operating as dual-class shares in dis- guise. However, loyalty shares can often be introduced without institutional investors’ consent. This outcome could be improved by allowing dual-class recapitalisations, instead of loyalty shares, but only with a majority of minority vote. This solution would screen for the companies for which temporarily curbing activism is efficient, and induce these companies to negotiate sunset clauses with institutional investors

Methodology of Law and Economics

Introduction A chapter on the methodology of law and economics, i.e. the economic analysis of law, concerns the methodology of economics. The above quote (Becker 1976, 5) shows that economics should not be defined by its subject, but by its method (also Veljanovski 2007, 19). This method forms the core of our contribution. We discuss several related issues. In his entry on methodology in the Encyclopedia of Law and Economics, Kerkmeester (2000) states that most legal economists follow a pragmatic, eclectic approach and that it is hard to fit them in a particular school. A review of the methodology of law and economics must therefore concentrate on the ideas which are shared by the vast majority of legal economists (Kerkmeester 2000, 383). De Geest defines the use of elements from different schools as the ‘integrated paradigm’, and the predominant approach to law and economics as the ‘mainstream approach’ (De Geest 1994, 459ff, Mackaay 1991, p. 1509). In law and economics, the economic approach operates on two distinct levels. First, human choice is analyzed from an economic point of view. The predominant approach here is the rational choice theory, which we discuss in Section 2. The basic idea of this theory is that human behaviour is analyzed as if people are seeking to maximize their expected utility. The second level of the economic approach is the goals which are attributed to the legal system. In Section 3, we discuss the concept of market failure, which in law and economics is regarded as the primary raison d’être of law. Legal rules are analyzed as instruments to correct market failure, or at least to reduce its adverse consequences. We will briefly illustrate this idea by discussing, among others, competition law, tort law, patent law and consumer law as instruments to counter market power, negative externalities, collective goods and information asymmetry. In Section 4, we discuss the Coase Theorem, which states that the allocation of legal entitlements between market players is irrelevant for efficiency when the parties can transact these entitlements costlessly. Given that transaction costs are positive in the real world, we also pay attention to their implications for regulation. In Section 5, we discuss ‘behavioural law and economics.’ This relatively recent approach is based on insights from cognitive psychology, suggesting that people do not always act rationally. After reviewing the major findings in this field, we elaborate on the consequences for the more traditional approach of the rational choice theory. In Section 6 we conclude

The European Master in Law and Economics: A Program with a Focus on the Economics of the Europeanization and Internationalization of the Law

El Máster Europeo en Derecho y Economía (EMLE) está diseñado para proporcionar a los estudiantes un conocimiento avanzado en el campo del análisis económico del Derecho: la utilización de métodos económicos para explicar y evaluar los efectos de las normas jurídicas divergentes. Ofrece la oportunidad única de unos estudios interdisciplinares en Derecho y Economía en dos o incluso tres universidades europeas y no-europeas. Este programa internacional e interdisciplinar es ofrecido por un consorcio de nueve universidades de países europeos y no-europeos. Los estudiantes que participan en el Programa EMLE obtienen reconocimiento académico en todas las universidades en las que han cursado un trimestre. Esto significa que los estudiantes obtienen dobles o triples titulaciones, dependiendo de su asignación. Todos los títulos están oficialmente reconocidos en todos los países implicados. Cada universidad asociada concede un título de Máster (LL.M. / M.A /M.Sc). El programa proporciona a los estudiantes una comprensión avanzada de los efectos económicos de las leyes divergentes y los prepara para una carrera profesional, por ejemplo, en organizaciones públicas, en despachos de abogados multinacionales o en empresas de consultoría. El Máster Europeo en Derecho y Economía ha sido reconocido como Máster Erasmus Mundus, tanto en la primera (2004-2008) como segunda (2010-2014) convocatorias del programa Erasmus Mundus. En el contexto de los Másters conjuntos europeos, EMLE es uno de los dos Másters en Derecho y uno de los seis Másters en Economía que han obtenido la prestigiosa calificación de Erasmus Mundus

Civil Liability in the EU Corporate Sustainability Due Diligence Directive Proposal: A Law and Economics Analysis

The EU Corporate Sustainability Due Diligence Direc- tive (CSDDD) proposal can be interpreted as an attempt to cope with the underdeterrence of negative external- ities on human rights and the environment depending on the strategic use of limited liability by corporate groups. This article reviews the civil liability proposals by the Commission, the European Parliament, and the Council from this law & economics perspective. The article finds that these liability rules fall short of mak- ing corporations internalize negative externalities by way of due diligence obligations in the group and the supply chains. It is relatively easy for companies that fail to carry out due diligence effectively to avoid the civil liability being considered by the EU legislature