A Procedural Focus on Unlimited Shareholder Liability

In a recent article we criticized the traditional case for limiting shareholder liability for corporate torts and developed the case for an alternative rule of pro rata shareholder liability for tort damages exceeding a corporation\u27s net worth. We concluded by challenging the proponents of limited liability to provide further justification for their position. Two scholars accepted our challenge: Professor Janet Cooper Alexander, writing in this issue of the Harvard Law Review, and Professor Joseph A. Grundfest, writing in the Yale Law Journal

Hands-Tying Contracts: Book Publishing, Venture Capital Financing, and Secured Debt

It is common practice in the publishing industry for a publisher to agree to print a well-established author\u27s next book long before it is written-often, indeed, before the author has more to show than a one- or two-page prospectus. What is more, these agreements commonly award the author a large advance against prospective royalties and occasionally commit the publisher as well to a large promotion budget or first printing. Such contracts raise an obvious question: Why do publishers not wait until they have read and evaluated the completed manuscript before committing themselves to invest heavily in its publication? Nor is the publishing industry the only arena in which investors leap before they look. Venture capitalists often leave voting control over a start-up firm with an entrepreneur who invests relatively little money of his own. Similarly, limited partners in a venture capital fund often commit themselves in advance to invest in all the fund\u27s future projects rather than reserve the right to evaluate those projects after the fund\u27s managers have proposed them

The End of History for Corporate Law

Much recent scholarship has emphasized institutional differences in corporate governance, capital markets, and law among European, American, and Japanese companies. Despite very real differences in the corporate systems, the deeper tendency is toward convergence, as it has been since the nineteenth century. The basic law of corporate governance-indeed, most of corporate law-has achieved a high degree of uniformity across developed market jurisdictions, and continuing convergence toward a single, standard model is likely. The core legal features of the corporate form were already well established in advanced jurisdictions one hundred years ago, at the turn of the twentieth century. Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centered ideology of corporate law among the business, government, and legal elites in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well

Do the Capital Markets Compel Limited Liability? A Response to Professor Grundfest

We had hoped that our recent article exploring a rule of pro rata shareholder liability for corporate torts would spark renewed interest in the limited liability doctrine. Indeed, we concluded that article by inviting limited liability proponents to redress the balance of the argument. We therefore enthusiastically welcome the spirited defense of limited liability offered by Professor Joseph Grundfest in this issue of The Yale Law Journal and by his colleague, Professor Janet Cooper Alexander, in a forthcoming article in the Harvard Law Review. We predicted in our original article that the strongest arguments supporting limited liability would have little to do with the particular concerns of corporate law or the requirements of the corporate form. Rather, they were likely to rest on a belief that investors would be able to evade a pro rata liability regime, or that the difficulties of extraterritorial enforcement would preclude effective adoption of such a regime in any single jurisdiction. Judging from the arguments of our critics, our prediction was on the mark. For what these critics do not argue is as important to us as what they do. Although we take the criticisms of Professors Grundfest and Alexander seriously, we remain unconvinced. In this Response, we attempt to show that Professor Grundfest\u27s description of the difficulties of enforcing a pro rata liability rule against public shareholders are less daunting than he suggests. We respond to Professor Alexander in greater detail elsewhere

The Essential Role of Organizational Law

In every developed market economy, the law provides for a set of standard-form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard-form contracts among the parties who participate in an enterprise-including, in particular, the organization\u27s owners, managers, and creditors. It is therefore natural to ask what more, if anything, these entities offer. Do they-as the current literature increasingly implies-play essentially the same role performed by privately supplied standard-form contracts, just providing off-the-rack terms that simplify negotiation and drafting of routine agreements? Or do the various legal entities provided by organizational law permit the creation of relationships that could not practicably be formed by contract alone? In short, what, if any, essential role does organizational law play in modern society

Rewarding Outside Directors

While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards. In this Article, we consider the use of rewards to motivate director vigilance. Measures to enhance director liability are commonly perceived to be too costly. We, however demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs. We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors. We conclude by providing preliminary sketches of two alternative reward regimes. While this Article focuses on outside directors, the implications of our analysis extend to other gatekeepers as well

Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights

The law of every jurisdiction defines a set of well-recognized forms that property rights can take and restricts the creation of property rights that deviate from those forms. We argue that these restrictions serve not to standardize rights as others have argued but rather to aid verification of the ownership of rights offered for conveyance. We explore the feasible verification rules for property rights and illustrate the relationship between those rules and the structure of rights they support in the principal fields of property, including use rights to real and personal property, security interests, legal entities, and intellectual property. We offer a simple calculus for assessing the efficiency of alternative property rights regimes. We define clearly the difference between property rights and contract rights, clarify the connection between property rights and property rules, and illuminate the limits on specific performance as a contract remedy