The Corporation’s Place in Society

The vast majority of economic activity is now organized through corporations. The public corporation is usurping the state’s role as the most important institution of wealthy capitalist societies. Across the developed world, there is increasing convergence on the shareholder-owned corporation as the primary vehicle for creating wealth. Yet nothing like this degree of convergence has occurred in answering the fundamental questions of corporate capitalism: What role do corporations serve? What is the goal of corporate law? What should corporate managers do? Discussion of these questions is as old as the institutions involved

The Separation of Voting and Control: The Role of Contract in Corporate Governance

The default rules of corporate law make shareholders’ control rights a function of their voting power. Whether a director is elected or a merger is approved depends on how shareholders vote. Yet, in private corporations shareholders routinely alter their rights by contract. This phenomenon of shareholder agreements—contracts among the owners of a firm— has received far less attention than it deserves, mainly because detailed data about the actual contents of shareholder agreements has been lacking. Private companies disclose little, and shareholder agreements are thought to play a trivial or nonexistent role in public companies. I show that this is false—fifteen percent of corporations that went public in recent years did so subject to a shareholder agreement. With this dataset in hand, I show the dramatic extent to which these shareholders redefine their control rights by contract. Shareholders restrict the sale of shares and waive aspects of the duty of loyalty. Above all, however, shareholders use their agreements to bargain with each other over votes for directors, and to bargain with the corporation itself for other control rights, such as vetoes over major corporate actions. In essence, while statutory corporate law makes control rights a function of voting power, shareholder agreements make control rights a function of contract instead, separating voting and control. Studying this phenomenon raises new questions of doctrine, theory, and empirics that go to foundational issues in corporate law. Is it desirable to let shareholders redesign corporate control rights wholesale by contract? What law should govern their contracts when they do so? I provide a novel account of shareholder agreements’ use in public firms, before offering preliminary views on their welfare effects, implications for corporate theory, and on their governing law, which remains strikingly underdeveloped

Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers

For centuries, the duty of loyalty has been the hallowed centerpiece of fiduciary obligation, widely considered one of the few “mandatory” rules of corporate law. That view, however, is no longer true. Beginning in 2000, Delaware dramatically departed from tradition by granting incorporated entities a statutory right to waive a crucial part of the duty of loyalty: the corporate opportunities doctrine. Other states have since followed Delaware’s lead, similarly permitting firms to execute “corporate opportunity waivers.” Surprisingly, more than fifteen years into this reform experiment, no study has attempted to either systematically measure the corporate response to these reforms or evaluate the implications of that response. This Article offers the first broad empirical investigation of the area. Contrary to conventional wisdom, we find that well over one thousand public corporations have adopted waivers—often with capacious scope and reach. The Article thus establishes a central empirical fact that is an important baseline for further discussion: Public corporations have an enormous appetite for contracting out of the duty of loyalty when freed to do so. This analysis also sheds light on the high-stakes normative debate around the relationship between fiduciary principles and freedom of contract. What types of corporations choose to contract around default rules? When they do so, do such measures tend to bolster or thwart shareholder welfare? The Article develops an efficient contracting approach to explain why corporations—and their share- holders—might favor tailoring the duty of loyalty and presents evidence assessing the merits of Delaware’s experiment

What is the Law\u27s Role in a Recession?

In March 2020, the world faced not only a public health emergency but also one of the most profound shocks to the global economy in the modern era — a shock deeper and broader than any other in eighty years. Never before had virtually all of the world’s economies suffered a contraction at the same time (Tooze, p. 5). Global output decreased by nearly 3.4% in 2020, the largest contraction since the Second World War. The United States saw the largest recorded demand shock in its history (-32.9%), and the unemployment rate peaked around 15% during 2020, higher than at any point during the Great Recession

Assessing Transnational Private Regulation of the OTC Derivatives Market: ISDA, the BBA, and the Future of Financial Reform

For the last twenty years, the dominant narrative of the over-the-counter derivatives market has been one of absent regulation, deregulation, and regulatory conflict, predictably resulting in disaster. This Article challenges this narrative, arguing that the global derivatives market has been subject to pervasive and harmonized regulation by what should be recognized as transnational private regulators. Recognizing the reality of widespread transnational private regulation of derivatives has significant implications, which this Article explores. Appreciating the actual regulatory status quo is essential if policymakers are to correctly diagnose problems, avoid past regulatory errors, and plan effective remedies. There are also advantages to relying on private transnational regulation, as increased governmental effort to regulate the OTC derivatives space may undermine and fracture existing regulation. To be sure, private transnational regulation carries risks that have sometimes materialized, such as the manipulation of LIBOR. Thus, this Article also evaluates best practices in regulating through transnational private governance

Is Corporate Law Nonpartisan?

Only rarely does the United States Supreme Court hear a case with fundamental implications for corporate law. In Carney v. Adams, however, the Supreme Court had the opportunity to address whether the State of Delaware’s requirement of partisan balance for its judiciary violates the First Amendment. Although the Court disposed of the case on other grounds, Justice Sotomayor acknowledged that the issue “will likely be raised again.” The stakes are high because most large businesses are incorporated in Delaware and thus are governed by its corporate law. Former Governors and Chief Justices of Delaware lined up to defend the state’s “nonpartisan” approach to its judiciary. The case raises the question of why nonpartisanship is taken to be an advantage for Delaware and whether the processes by which corporate law is made are generally politically partisan or not. Despite these developments, however, the place of political partisanship in corporate law has been largely overlooked. This Article offers a framework for analyzing the role of political partisanship in corporate law. It begins by showing that there is suggestive evidence of a relationship between political partisanship and the substance of corporate law at the state level. When corporate law materially differs across states, those differences are often predicted by which party controls the state’s government. Political party entrepreneurs also agitate for corporate law reforms at the state level. Yet, Delaware adopts a conspicuously nonpartisan approach to corporate law. As is widely observed, how Delaware makes corporate law, from its constitution, to its legislature, to its judiciary, is unusual. It is designed to insulate that law from political partisanship. More surprisingly, this began when Delaware first became a leading home to incorporations a century ago. In fact, the same thing was true of New Jersey during its brief period of prominence before Delaware. Why? We suggest that the answer relates to corporate law’s central debate regarding the “market for corporate law.” In the United States, the internal affairs doctrine allows corporations to choose the state whose corporate law governs them by incorporating in the jurisdiction of their choice. This doctrine produces a form of regulatory competition that is structurally biased to produce a winner that favors “demand-side” interests, i.e., the interests of corporate decision-makers themselves. Understanding this dynamic has been one of corporate law’s foundational concerns. We complement that literature by arguing that nonpartisanship provides a competitive advantage in Delaware’s quest to appeal to these interests. Delaware’s approach enables it to afford great weight to the interests of nationally diverse and heterogeneous shareholders and makes it less likely that the state will sacrifice shareholders’ interests to please local constituents. The internal affairs doctrine thus indirectly works to favor incorporations to a state with a nonpartisan approach. Our framework also offers new insights into the debate on the federalization of corporate law and the Supreme Court litigation. Specifically, we argue that within First Amendment jurisprudence, the Supreme Court can and should carefully consider its ruling’s effects on Delaware nonpartisanship

What is the Law’s Role in a Recession?

The last two years have seen astonishing changes to how fiscal and monetary authorities in the developed world manage the economy. In the face of the largest global economic contraction since World War II, governments embarked on massive campaigns of economic stimulus, far outpacing the response to the Global Financial Crisis. Central banks similarly engaged in financial intervention on a scale not seen in eighty years. Over roughly a year, the Federal Reserve alone doubled its asset holdings from around $4 trillion to$8 trillion, making for arguably the most aggressive expansion of the United States’ money supply since the Federal Reserve’s founding in 1913. The three largest central banks in the developed world - the Bank of Japan, the European Central Bank, and the Fed now hold almost $25 trillion in assets - more than the total assets of the United States’ commercial banking sector. In this Review Essay, we explore the idea of “expansionary legal policy” - the use of courts, administration, and regulation to stimulate overall demand for goods and services during recessions. The dramatic financial market events of 2020 and innovations in the practice of fiscal and monetary policy provide a fertile ground for exploring this idea in the context of the regulation of commercial banking. In particular, we argue that perhaps the single legal institution with the greatest ability to use discretion to stimulative effect are banking regulators. The most obvious way to do this is through the exercise of discretion to loosen capital requirements on banks, allowing them to grow in size and activity during recessions. This practice has a checkered history, however. As a result, we sketch an analytical framework for when banking regulators should use their administrative discretion to loosen capital requirements on banks during recessions and thus stimulate the economy. We suggest that both the nature of a crisis (as economic, rather than financial), and the nature of capital forbearance (based on riskless, rather than risk-sensitive assets) are essential preconditions for sound “expansionary banking policy.” We also highlight how developments in macroeconomic management should invite us to rethink basic issues of institutional design in central banking

Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers

For centuries, the duty of loyalty has been the hallowed centerpiece of fiduciary obligation, widely considered one of the few “mandatory” rules of corporate law. That view, however, is no longer true. Beginning in 2000, Delaware dramatically departed from tradition by granting incorporated entities a statutory right to waive a crucial part of the duty of loyalty: the corporate opportunities doctrine. Other states have since followed Delaware’s lead, similarly permitting firms to execute “corporate opportunity waivers.” Surprisingly, more than fifteen years into this reform experiment, no study has attempted to either systematically measure the corporate response to these reforms or evaluate the implications of that response. This Article offers the first broad empirical investigation of the area. Contrary to conventional wisdom, we find that well over one thousand public corporations have adopted waivers – often with capacious scope and reach. The Article thus establishes a central empirical fact that is an important baseline for further discussion: Public corporations have an enormous appetite for contracting out of the duty of loyalty when freed to do so. This analysis also sheds light on the high-stakes normative debate around the relationship between fiduciary principles and freedom of contract. What types of corporations choose to contract around default rules? When they do so, do such measures tend to bolster or thwart shareholder welfare? The Article develops an efficient contracting approach to explain why corporations – and their shareholders – might favor tailoring the duty of loyalty and presents evidence assessing the merits of Delaware’s experiment

The New Public/Private Equilibrium and the Regulation of Public Companies

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other benefits. This was a descriptive reality, but it had important normative implications as well. An identifiable class of large, growing firms went public, and they generally went public for a reason they shared: raising capital. As a result, regulatory interventions imposed on the category of “public companies” had a coherent target. We argue that firms’ going public decisions are now shaped by a much larger and more varied set of factors. These factors are complex, cross-cutting, and impact firms considering going public in very heterogeneous ways. This complexity results from several developments and we emphasize two. First, it is a result of the fact that while the public/private divide was created by securities law, public and private markets now provide two widely different ecologies for firms, which profoundly shape firms’ governance as well as the issuance and trading of their shares. Second, long-term advances in the ease of capital raising in private markets have made it possible for firms to remain private indefinitely and have diminished or eliminated the capital-raising advantages of public markets. The result of this latter change has been rightly called a “new equilibrium.” In that equilibrium, fewer and older firms go public, while other successful firms remain private indefinitely. In this equilibrium, capital raising is no longer the primary reason firms go public. Rather, we argue, firms go public due to one or more of the many other features of the public market’s ecology. The normative implication of this new equilibrium is to reduce the coherency of the regulation of public companies. The benefits and costs of being public (or private) apply unevenly to firms eligible to go public. Instead, to a greater degree firms now face idiosyncratic, company-specific tradeoffs between being public or private, and they often go public for reasons unrelated to the original design of the public/private divide. Regulations imposed on public firms are likely to not only be increasingly under- and over-inclusive, but also to apply to a class of companies whose coherency as an economic phenomenon may be increasingly suspect

The New Public/Private Equilibrium and the Regulation of Public Companies

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other benefits. This was a descriptive reality, but it had important normative implications as well. An identifiable class of large, growing firms went public, and they generally went public for a reason they shared: raising capital. As a result, regulatory interventions imposed on the category of “public companies” had a coherent target. We argue that firms’ going public decisions are now shaped by a much larger and more varied set of factors. These factors are complex, cross-cutting, and impact firms considering going public in very heterogeneous ways. This complexity results from several developments and we emphasize two. First, it is a result of the fact that while the public/private divide was created by securities law, public and private markets now provide two widely different ecologies for firms, which profoundly shape firms’ governance as well as the issuance and trading of their shares. Second, long-term advances in the ease of capital raising in private markets have made it possible for firms to remain private indefinitely and have diminished or eliminated the capital-raising advantages of public markets. The result of this latter change has been rightly called a “new equilibrium.” In that equilibrium, fewer and older firms go public, while other successful firms remain private indefinitely. In this equilibrium, capital raising is no longer the primary reason firms go public. Rather, we argue, firms go public due to one or more of the many other features of the public market’s ecology. The normative implication of this new equilibrium is to reduce the coherency of the regulation of public companies. The benefits and costs of being public (or private) apply unevenly to firms eligible to go public. Instead, to a greater degree firms now face idiosyncratic, company-specific tradeoffs between being public or private, and they often go public for reasons unrelated to the original design of the public/private divide. Regulations imposed on public firms are likely to not only be increasingly under- and over-inclusive, but also to apply to a class of companies whose coherency as an economic phenomenon may be increasingly suspect