The SEC and the Courts' Cooperative Policing of Related Party Transactions

A transaction between a corporation and its director or officer (a "related party transaction") presents conflicts of interest that could harm, or alternatively, could also benefit the corporation. To sort beneficial related party transactions from detrimental ones, the current legal regime relies on both ex ante screening and ex post litigation. Disclosure plays an essential role in both stages. Based on a set of hand-collected data on actual disclosures from Fortune top fifty companies, this Article casts doubt on the effectiveness of the current regulation of related party transactions. The ambiguity of the federal securities regulations leaves too much room for manipulation. An approving committee of each company exercises considerable discretion not only over which proposed transactions to approve, but also over which transactions to disclose to its shareholders and what information to include in the disclosures

Governance by Dividends

For dual-class companies, which offer two or more classes of stock with differential voting rights, stock dividends have become a potent weapon for corporate boards to reallocate voting control without shareholder intervention. For example, the board of CBS Corporation proposed to distribute voting stock to all shareholders to drastically dilute the controlling shareholders' voting power. In contrast, the Google board issued new nonvoting stock to all shareholders to perpetuate the controlling shareholders' lock on control. In both cases, the proportional distribution of the identical stock seemingly treats all shareholders equally, but it has a starkly unequal impact on each class's voting power. Are such governance changes by stock dividends within board discretion? The level of board discretion in making stock dividends is primarily governed by each company's corporate charter. This Article presents the original, hand-collected data of charter provisions on stock dividends from 237 dual-class companies. The analysis of the charter provisions shows diverse approaches to stock dividends across companies, and it is unclear how much contractual freedom on stock dividends should be allowed. At the same time, courts have long treated dividends as subject to boards' business judgment and declined to second-guess their substantive merits if they are allocated pro rata. Given the potential impact on corporate governance, the need for a distinctive treatment of stock dividends is long overdue

Shareholder Voice in Corporate Charter Amendments

State corporate laws require shareholder approval for corporate charter amendments, but only the board of directors has the power to propose how to amend charters. The directors' exclusive power over charter amendment proposals creates a potential for managerial opportunism by refusing to propose amendments that empower shareholders or by pursuing amendments that favor managers. While shareholder approval can theoretically serve as a check against such opportunism, dispersed shareholders' rational apathy and collective action problems, can also prevent them from being effective monitors. Prior scholarship has thus viewed charter amendments with suspicion, but there has been no systematic, empirical examination to confirm or refute the possibilities of managerial opportunism. Based on hand-collected data on charter amendments of the top 250 U.S. companies over the past twenty-one years, this Article demonstrates that the recent trend of shareholder engagement has enabled them not only to check management-initiated amendments, but also to pressure directors into proposing shareholder-initiated amendments. Concerns over managerial opportunism, however, remain valid, as the data reveal subtle ways in which directors have preempted shareholders' voice with compromised terms. This Article updates our theoretical understanding of corporate charter amendments by reflecting the new dynamic with shareholder engagement, as well as normatively claims that state and federal authorities should secure even-handed procedures so as to give both shareholders and managers a meaningful voice in the charter amendment process

Competition and Corporate Governance: Teaming Up to Police Tunneling

Is the extraction of private benefits by the firm’s controllers only an issue for minority or non-controlling shareholders? Korea’s treatment of such conduct (often called “tunneling”) provides useful insights to this question. Tunneling by controlling shareholders, which has traditionally been the concern of corporate governance law and policy in the U.S., is further subject to scrutiny under competition law (Undue Support Clause) in Korea. This Article discusses a real world example of an intersection between competition law and corporate governance policy from a comparative perspective. The history of the Undue Support Clause challenges the common perception that a corporate governance malady has nothing to do with competition law (or vice versa). Although this is not a complete survey of all the intricacies that can arise when competition and corporate governance intersect with one another, Korea’s experience with the Undue Support Clause provides an invaluable opportunity to reevaluate the relationship between the two policies and draw valuable insights for other jurisdictions, including the U.S., that tend to turn a blind eye towards harm inflicted outside of the firm by tunneling

Contractarian Theory and Unilateral Bylaw Amendments

Corporate directors have been utilizing a potent mechanism in dealing with shareholder activism and shareholder litigation: the right to unilaterally amend corporate bylaws. Directors have exercised this right, for instance, to impose various requirements on who can nominate a director or call a special shareholder meeting, or to designate an exclusive forum where the shareholders can bring suit. Based on the theory that corporate charters and bylaws constitute a "contract" between the shareholders and the corporation, courts have blessed many of the bylaws that directors have unilaterally adopted. This Article examines the contractarian theory by drawing a parallel between amending charters and bylaws on the one hand and amending contracts on the other; and by comparing the right to unilaterally amend corporate bylaws with the right to unilaterally modify contracts. The Article shows how contract law imposes various limitations on the modifying party's discretion. The Article also compares the standard contractual relationship with that of the shareholders and the corporation more generally and uncovers several important differences that could make shareholders (particularly, minority shareholders) more vulnerable to counterparty (directors' and controlling shareholder's) opportunism. For example, unlike contracting parties who have the right to terminate the contractual relationship or opt out of undesirable modifications, shareholders lack the right of termination or opt-out. As a possible solution, the Article considers various mechanisms, including giving the shareholders the right of optional redemption, more robust disclosure, the right to vote (including the right to elect or replace directors), and subjecting bylaw amendments to more active judicial oversight

Relational Enforcement of Stock Exchange Rules

Stock exchanges, as regulating entities supervised by the Securities and Exchange Commission (SEC), have wielded their rulemaking power on various corporate governance issues, ranging from the independent board committee requirement adopted in 2003 to the board diversity requirement approved in 2021. Simultaneously, as for-profit corporate entities, major stock exchanges have been competing against each other to attract and retain more companies. This dual status of stock exchanges - as regulators and as profit-driven entities - brings into question the stock exchanges' incentive to enforce their own rules against listed companies. What happens if a listed company violates stock exchange rules

Active Firms and Active Shareholders: Corporate Political Activity and Shareholder Proposals

This article reveals the positions of corporations not only as active players in politics but also as targets of activist shareholders with opposing political preferences. We examine whether a firm's political orientation, as measured by its political spending, serves as a driver of shareholder proposal submissions, one manifestation of shareholder activism. Using data on S&P 500 companies for 1997-2014, we find that the divergence in political orientation between shareholders and corporate management is strongly associated with the number of submissions of shareholder proposals on environmental or social issues. Firms that contribute more to the Republican Party are more likely to be targeted by nonindividual, Democratic-Leaning shareholders. This pattern remains even after controlling for firms' records of corporate social responsibility and Labor relations. This finding implies that corporate political spending prompts shareholders with strong political preferences to target firms on the opposite end of the political spectrum

Relational Enforcement of Stock Exchange Rules

Stock exchanges, as regulating entities supervised by the Securities and Exchange Commission (SEC), have wielded their rulemaking power on various corporate governance issues, ranging from the independent board committee requirement adopted in 2003 to the board diversity requirement approved in 2021. Simultaneously, as for-profit corporate entities, major stock exchanges have been competing against each other to attract and retain more companies. This dual status of stock exchanges — as regulators and as profit driven entities — brings into question the stock exchanges\u27 incentive to enforce their own rules against listed companies. What happens if a listed company violates stock exchange rules? As the first study that offers an analysis of original hand collected data on 838 enforcement actions by stock exchanges in 2019, this Article finds that (1) stock exchanges\u27 detection of noncompliance is mostly on the failure to meet mechanical criteria, such as the $1.00 minimum stock price requirement; (2) listed companies tend to self-report violations of corporate governance requirements before the stock exchanges detect them; and (3) even after noncompliance is detected, stock exchanges tend to extend cure periods and rarely impose the only substantive sanction for stock exchange rule violations: delisting. Focusing on stock exchanges\u27 corporate governance requirements for listed companies, our analysis of S&P 1500 companies\u27 board composition data shows that most companies diligently comply with the stock exchanges\u27 requirements despite this low likelihood of detection and enforcement. This Article argues that this curious coexistence of lax enforcement and diligent compliance can be explained as an extension of the relational contract theory to the relationship between a regulator and a regulated. Competition among stock exchanges makes a long-term, interactive relationship between stock exchanges and their listed companies valuable to both sides. The fact that the stock exchanges\u27 enforcement mechanism relies on a single, drastic measure of terminating the relationship (i.e., delisting) and that listed companies\u27 noncompliance rarely triggers delisting incentivize cooperative compliance between the regulator and the regulated. Such relational enforcement of stock exchange rules indicates that where there is an extended regulatory relationship that offers a substantial benefit to the regulated entity, diligent compliance can be regulated entity, diligent compliance can be expected even in the absence of rigorous, formal policing

Realigning Stockholder Inspection Rights

Access to corporate infom1ation plays a pivotal role in stockholder litigation. One key to that access is stockholders' statutory right to inspect a corporation's books and records prior to filing litigation, enshrined in the Delaware General Corporation Law's Section 220. In the context of derivative actions brought by a stockholder on behalf of a company, Section 220 takes on an even greater importance. For years, Delaware courts have urged stockholder plaintiffs to use all the "tools at hand" to gather information before filing a derivative complaint to strengthen their allegations. One of those tools, Section 220's inspection rights, has become all but a requirement for most successful derivative actions. Yet two recent shifts in the case law present unique challenges for both corporate defendants and stockholder plaintiffs involving statutory inspection rights

Taking Compliance Seriously

How can we ensure corporations play by the "rules of the game"-that is, laws encouraging firms to avoid socially harmful conduct? Corporate compliance programs play a central role in society's current response. Prosecutors give firms incentives-through discounts to penalties-to implement compliance programs that guide and monitor employees' behavior. However, focusing on the incentives of firms overlooks the perspective of managers, who decide how much firms invest in compliance