Category Archives: Corporate Law

Litigation and Corporate Social Bankruptcy

Jul 31, 2023 Tom C.W. LinCorporate Law

Tom C.W. Lin

It is often said that crisis reveals character. In adversity, an individual’s values and integrity are tested and brought into the light – to shrink or steel in the crucible of calamity and conflict. Perhaps the same can be said of corporations and corporate governance in crisis.

In a forthcoming article, Silencing Litigation Through Bankruptcy, Professors Pamela Foohey and Christopher Odinet offer an insightful, critical view of how some corporations have responded to crisis by using bankruptcy law to silence survivors, exacerbate injuries, and hurt the public in the face of significant litigation. Through a thoughtful examination of businesses and other organizations using the bankruptcy code as a sword to cruelly suppress rather than a shield to carefully reorganize, the article makes a persuasive case for rethinking and reforming legal and business practices during crisis. In doing so, the article informs, expands, and challenges the ways one thinks about corporate governance. Continue reading "Litigation and Corporate Social Bankruptcy"

Toward A Non-Binary Vision of Disclosure Regulation

Jun 30, 2023 Joan MacLeod HeminwayCorporate Law

Joan MacLeod Heminway

Public company law and practices in the United States are rooted in line-item and gap-filling disclosure regulation. Although the precise place and value of disclosure in business law and regulation has been—and (appropriately) continues to be—debated, mandatory disclosure has been a cornerstone of the U.S. federal securities laws applying to public companies since the enactment of the Securities Act of 1933. Together with liability (including antifraud) provisions and substantive regulation, mandatory disclosure rules have been one of the three core regulatory tools employed at the federal level to promote capital formation and fair, honest markets for securities, while at the same time providing core protections for investors.

At its core, Lisa Fairfax’s Dynamic Disclosure: An Exposé on the Mythical Divide Between Voluntary and Mandatory ESG Disclosure embraces mandatory disclosure rules in the spirit in which they have been enacted and employed in U.S. federal securities regulation. The article also, however, articulates the independent and cooperative value of voluntary disclosure as an important piece of the regulatory puzzle. In essence, Fairfax suggests that “the modern publicness of corporate information has eroded the walls between voluntary and mandated disclosure, making it impossible not to consider voluntary disclosure as an integral aspect of mandated disclosure and the overall disclosure regime in which corporations operate.” Importantly, Fairfax illustrates this proposition in the context of one of the most hotly contended areas of current regulatory debate: ESG (environmental, social, and governance) disclosures, including the U.S. Securities and Exchange Commission’s climate change disclosure proposal. Her insightful and diplomatic treatment of the subject matter is a breath of fresh air in ongoing debates about both the regulation of ESG disclosures specifically and mandatory disclosure as a component of securities regulation more generally. Continue reading "Toward A Non-Binary Vision of Disclosure Regulation"

Even Small Banks Can Pose Systemic Risk

May 30, 2023 Da LinCorporate Law

Da Lin

Professors Jeremy Kress and Matthew Turk’s warning that “too-big-to-fail” megabanks are not the only source of systemic risk to the banking system has proved prescient. Shortly before its collapse on March 10, 2023, Silicon Valley Bank (SVB) had approximately $209 billion in total assets. SVB was the sixteenth largest bank in the U.S., but it still fell below the size threshold that automatically triggered an enhanced regulatory regime. Until it failed, SVB was not regulated as a “systemically important” bank because it was not big enough. Yet two days after it closed, federal regulators invoked the “systemic risk exception” after determining that they needed to rescue the uninsured depositors of SVB and the even-smaller Signature Bank to prevent destabilizing the broader financial sector.

In Too Many to Fail: Against Community Bank Deregulation, Kress and Turk foreshadow the error of equating “systemically important” with “too-big-to-fail.” The article is an incisive response to the sweeping efforts since 2010 to ease the regulatory burden on small and midsize banks, which culminated in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. It argues that this deregulatory push has been premised on three widely held but mistaken myths: (1) smaller banks cannot propagate systemic risk; (2) post-financial crisis reforms overly burdened smaller banks; and (3) smaller banks require special regulatory relief or advantages to compete with too-big-to-fail counterparts. Continue reading "Even Small Banks Can Pose Systemic Risk"

Corporate Culture is Complicated

Mar 27, 2023 Robert RosenCorporate Law

Robert Rosen

In the 2022 Annual Review of Financial Economics, Jillian Grennan, with lead author Gary B. Gorton and Alexander K. Stentefis, document studies by economists that use “corporate culture” to explain M & A choices and consequences, individual and business risk-taking, as well as corporate malfeasance.¹ Such research has been propelled by new data sets and methods. For example, employee grievances and networks are now revealed on the web and natural language processing now translates texts into cultural elements. Work in this mode also emerges because much remains to be explained about corporate decisions after the usual analysis under the property rights and agency cost paradigms. Grennan and her co-authors propose corporate culture as a new “theoretical paradigm” for corporate finance research.²​

The problem with this paradigm, as the authors note is that “culture” is an “omnibus term.” Unpacked, it includes “values, norms, conventions, shared beliefs, customs, traditions, symbols, rituals, knowledge, identity, ideologies, identities, and shared mental models.”  Corporate culture includes everything from employee perceptions of managers’ ethics (positively associated with Tobin’s Q) to stock options for rank-and-file employees (positively correlated with financial misreporting).³​ Mathematical representations of corporate culture are few in number.  We have measurements of company reputations, homogeneous beliefs across the company, and managerial preferences. But these tell us little. Researchers have shown us that “employees’ firsthand impressions of the manager’s instructions, along with their secondhand interpretations from communicating with each other about the manager’s instructions, together shift the observed culture away from the manager’s intended one.” Furthermore, there also is “within-person cultural diversity”–individuals believe contradictory things. Consequently, despite reviewing research that finds correlations between “cultural” changes and financial decisions, the authors call for “More theoretical work on corporate culture.”

Fortunately, Jillian Grennan takes steps to developing such a theory in her book chapter with Kai Lin, Corporate Culture: A Review and Directions for Future Research. They begin by noting that in the 1950’s, anthropologists assembled a list of 164 different definitions of societal culture. They draw on sociological theory to describe culture as part of the informal institutional structure of firms. They understand that culture has two faces:  meaning-creating and behavioral patterning. The expectations employees have about “how they need to behave to fit in and succeed in their firm” are part of corporate culture. Changes in such expectations are then studied to understand the dynamics of corporate culture. Continue reading "Corporate Culture is Complicated"

Improving Diversity Disclosures

Feb 16, 2023 Omari SimmonsCorporate Law

Omari Simmons

Atinuke Adediran’s insightful article, Disclosing Corporate Diversity, advances the contemporary discussion by examining the legacy and limitations of extant and proposed corporate diversity disclosure approaches. She proposes an alternative diversity disclosure regime based on more comprehensive statistical and forward-looking elements to inspire tangible changes.¹

Over 50 years ago, Ralph Nader and a group of Washington lawyers challenged General Motors Company (GM) over such critical concerns as product safety, environmental impact, and diversity.² The 1970 Project on Corporate Responsibility sought shareholder approval of several resolutions. One would have expanded the board to include three directors nominated by constituent groups of employees and consumers. Another would have required GM to publish information on its auto safety, pollution control, and minority hiring policies.³ Continue reading "Improving Diversity Disclosures"

All the Roads to the Stock Exchange

Jan 26, 2023 Anna GelpernCorporate Law

Anna Gelpern

Corporate finance and public finance have a history of sharing market infrastructure, legal forms, and colorful terms (as when an infamous distressed debt trader used “United States’ security” to mean junk). The history of sharing invites reasoning by analogy, which often morphs into genealogy and positions 19th century London as the primordial soup for today’s market institutions. It is a sensible research strategy—London was and is a fruitful place—but formal similarities sometimes obscure critical context and alternative genealogies, leaving lawyers to ponder apparently meaningless clauses and pointless transactional techniques. Enter historians.

Marc Flandreau has a large body of solo and co-authored work about the London Stock Exchange, whose dominant market position and evolving governance practices over the course of the 19th century backstopped financial globalization, colonial expansion, and economic development. Two of Flandreau’s recent papers resonate in particularly intriguing ways with contemporary challenges. Both deal with the problem of inter-creditor equity and seemingly ineffectual contracts. This review will focus on the first, more developed paper. The second is mentioned briefly in closing—” target=”_blank” rel=”noopener noreferrer”>watch this space. Continue reading "All the Roads to the Stock Exchange"

Teaching Corporate Law in the Shadow of the Great Acceleration

Nov 3, 2022 Charles O'KelleyCorporate Law

Charles O’Kelley

A key problem for corporate directors and a key concern of modern corporation law is the creation and maintenance of management systems designed to identify and optimally reduce the firm’s exposure to internal misconduct and foreseeable external risk. In recent years, that problem has come to include concern for the implications of climate change and globalization. Yet Society and its institutions, including corporations, were inadequately prepared for the Covid-19 pandemic. Why were we so unprepared, and what are the implications of the pandemic for corporation law going forward? To understand the implications of the pandemic, we must understand how it unfolded, what tools were in place to combat it, and how key actors responded to the crisis. While we each experienced the pandemic, and are still living in its shadow, a detailed overarching understanding of what happened would be missing but for a magnificent history of the present, Adam Tooze, Shutdown: How Covid Shook the World’s Economy (2021) (“Shutdown”). The history detailed in Shutdown, though not focused on corporation law as such, reads and can be understood as an extension of the crisis in corporation law theory that was unfolding as the pandemic struck.

For the last decade of the twentieth century and most of the current century, corporate law could be taught comfortably by reference to a near universally recognized governing doctrine. The end of history for corporate law was at hand. Rejecting Adolf Berle’s mid-twentieth-century understanding, corporations were now viewed not as social institutions, but as nexuses of private contracts united by one overriding purpose – the maximization of shareholder value. The role of the board of directors and subordinate officers was not to serve stakeholders or society, other than indirectly, but to pursue shareholders’ wealth-maximization interests. Correspondingly, state corporation law, including common law fiduciary duties, as well as federal securities laws, could best be understood as guardrails designed and implemented to ensure that neither directors nor officers misused their power to pursue ends unrelated to, or counter to, shareholder value maximization. While there was room in this formulation to talk about corporate social responsibility or the importance of stakeholders, such conversations were generally understood to be tangential to a proper understanding of corporation law. Continue reading "Teaching Corporate Law in the Shadow of the Great Acceleration"

The Complicated Business of Corporate Purpose

Oct 5, 2022 Bill BrattonCorporate Law

Bill Bratton

There has been a subtle shift in the standard academic account of shareholder primacy. The touchstone citation for shareholder primacy used to be Jensen and Meckling’s famous 1976 paper on the theory of the firm. This has been displaced by Milton Friedman’s equally famous takedown of corporate social responsibility in 1970 on the pages of the Sunday New York Times.   The shift in the citation pattern follows a shift in the leading discussion points. Where people once worried that agency costs were burning up billions of dollars of shareholder value, now, with agency cost containment and the emergence of ESG investing along with movement towards social welfare enhancement as corporate purpose, shareholders sacrifice their own returns for the greater good (or at least make gestures in that direction). A formidable task results for academic corporate law. It needs to reconstruct its own paradigm to explain and justify this turn to social responsibility. Friedman as a result emerges as the fundamental theory-giver rather than as a “but cf.” cite in a footnote describing corporate social responsibility as a related but irrelevant policy discussion.

Friedman’s New York Times essay expanded on a handful of pages in his book on political economy, Capitalism and Freedom, first published in 1962.  We there come across a structural observation heretofore missing in discussions about ESG, corporate purpose, and the voting habits of institutional shareholders. Friedman turned to CSR in a chapter on monopoly, observing that the manager of a corporate entity operating as a pure competitor had no room to worry about CSR. The managers of a producer possessing monopoly power, in contrast, had rents to dispose of and allocative choices to make. CSR concerns are thereby conceptually tied to and perhaps limited by market power.

It is a powerful point. Kudos to Mark Roe for bringing it to bear on today’s governance discussion in his forthcoming article, Corporate Purpose and Corporate Competition. Continue reading "The Complicated Business of Corporate Purpose"

Partisanship and Corporate Law

Sep 5, 2022 Tom C.W. LinCorporate Law

Tom C.W. Lin

America is beset with partisan politics. The brinkmanship, dysfunction, and policies that emanate from political partisanship touch so much of American life, law, and society. Increasingly and prominently, businesses have been drawn into partisan debates on issues like gender equality, gun violence, reproductive rights, racial justice, and climate change. Many executives, investors, employees, activists, and other stakeholders now expect American businesses to play an active role in addressing many of society’s toughest challenges in the face of political institutions that too often seem too partisan to meaningfully confront those challenges. In response to a new wave of corporate social activism, national and local political leaders have both admonished and applauded businesses for their attempts to address social issues.

This new wave of corporate social activism has prompted many important questions and reexaminations of core issues at the critical intersection of business, law, and politics. One such foundational question is political partisanship’s impact on corporate law.

In a forthcoming article, Is Corporate Law Nonpartisan?, Professors Ofer Eldar and Gabriel Rauterberg offer an in-depth, fair minded examination of partisanship’s effects on corporate law and corporate lawmaking. Through a thoughtful study, that carefully weaves quantitative and qualitive analyses, the article offers a persuasive explanation of how partisanship may have contributed to key differences in state corporate laws and how safeguards against partisanship have contributed to Delaware’s sustained dominance in the competition for corporate charters. Continue reading "Partisanship and Corporate Law"

Not All Retail Investors Are Passive

Jul 25, 2022 Da LinCorporate Law

Da Lin

Corporate governance debates tend to dismiss “Main Street” individual investors as irrelevant. The traditional archetype of the corporation presumes that individual shareholders are apathetic because they own small stakes and confront collective action challenges. In the modern corporate landscape, individual shareholders are overshadowed by their institutional counterparts, who hold near-majority stakes in most public companies. Stories about individual investors tend to highlight their idiosyncratic goals or their distracting irrationality. Think of Charles Pillsbury, who bought a single share of Honeywell in order to campaign to end Honeywell’s munitions production for the Vietnam War. Or the recent meme stock craze, which was widely reported to be driven by “amateur” investors trading on social media hype instead of corporate fundamentals.

But there are important exceptions to this generalization, as Kobi Kastiel and Yaron Nili remind us in their article, The Giant Shadow of Corporate Gadflies. The article brings to the fore the underappreciated role that “corporate gadflies” play in promoting good corporate governance (at least from a shareholder-centric perspective). Kastiel and Nili describe gadflies as “small, ‘pesky’ individual shareholders who are engaged in the submission of massive numbers of shareholder proposals.” There are just a handful of gadflies in existence today, including William and Kenneth Steiner, John Chevedden, the Rossi family, and the husband-and-wife team of James Ritchie and Myra Young. Continue reading "Not All Retail Investors Are Passive"