Category Archives: Corporate Law

Corporate Social Measures

Jul 23, 2021 Tom C.W. LinCorporate Law

Tom C.W. Lin

Many of today’s investors are not just seeking positive financial returns. They are also seeking positive social impact. Not surprisingly, businesses and entrepreneurs have responded in kind with numerous investment offerings, corporate initiatives, and business ventures to promote social benefit. This shift in capital markets and corporate governance is perhaps most reflected in the incredible growth of environmental, social, and governance (ESG) investments and the increasing activism of America’s largest companies on some of the most pressing social issues of our time.

This shift away from pure profit-seeking towards profit-seeking plus social impact has been the subject of much debate. Less debatable is the sustained and significant nature of this sea change. One critical question that arises in the discussions surrounding this development is how best to compare and measure the efficacy of corporate actions for the betterment of society.

Two engaging, recent articles offer sensible approaches to addressing this critical question. The first article, Measuring Corporate Virtue—and Vice by Professors Paul Brest and Colleen Honigsberg presents a comprehensive general construct for benchmarking ESG performance. The second article, Equality Metrics by Professors Veronica Root Martinez and Gina-Gail S. Fletcher provides a more targeted proposal to address the specific problem of racial inequity in businesses. Each of these articles is distinct in their subject and scope of focus, but both fundamentally share the belief that business can play an important and more effective role in addressing certain social challenges. Continue reading "Corporate Social Measures"

Law and (Which?) Entrepreneurship

Jun 16, 2021 Li-Wen LinCorporate Law

Li-Wen Lin

We often hear that entrepreneurship is important to the economy. But what exactly is “entrepreneurship”? There is a broad and growing literature connecting institutions with entrepreneurship in the fields of law, economics, finance, and business generally. Legal scholars in this field typically focus on the role of “law” and treat “entrepreneurship” as a taken-for-granted concept that does not need any discussion. Yet, it is important to recognize that researchers in the broader non-legal literature on the relationship between institutions and entrepreneurship have been struggling to define and measure “entrepreneurship.” Empirical research that measures entrepreneurship inaccurately may lead to flawed conclusions including legal policy recommendations.

In their article, Measuring Entrepreneurship: Do Established Metrics Capture Schumpeterian Entrepreneurship?, Henrekson and Sanandaji evaluate different country-level measures of entrepreneurship and find that virtually all the widely-used metrics fail to capture high-impact Schumpeterian entrepreneurship – the kind of entrepreneurship that policymakers hope for. Continue reading "Law and (Which?) Entrepreneurship"

Why Shareholder Primacy Persists

May 21, 2021 Da LinCorporate Law

Da Lin

Indictments of shareholder primacy have grown increasingly common. Confronted with the pressing challenges of climate change, structural racism, and the spread of disinformation, legal scholars are revisiting the timeworn question of the purpose of a corporation and its standard answer: to maximize shareholder wealth. For the most part, this discussion has rigidly centered on the role of corporate law. Do cases like Dodge v. Ford and eBay v. Newmark require corporations to have a shareholder-oriented purpose? Is shareholderism the inevitable consequence of laws that place the power to elect corporate directors in the hands of shareholders alone?

Dorothy Lund and Elizabeth Pollman’s thought-provoking new article, The Corporate Governance Machine,¹ reminds us however that shareholder primacy is actually the product of a complex system, of which the law is just one component. The “corporate governance machine,” as they define it, is the “governance system in the United States composed of law, markets, and culture that orients corporate decision-making toward shareholders.” Lund and Pollman argue that law may in fact “be the least important” force propelling this machine in its current direction. Market players, such as proxy advisors, stock exchanges, and ratings agencies, as well as entities that propagate cultural norms, such as professional education and media institutions, bear substantial responsibility for amplifying and reinforcing shareholder primacy. Continue reading "Why Shareholder Primacy Persists"

If It Is Discoverable, It May Count: From Shareholder Rights to Inspect Books and Records to Implementing Caremark Duties

Apr 22, 2021 Robert RosenCorporate Law

Robert Rosen

It is well known that corporate compliance departments’ effectiveness depends on the quality of information they receive.¹ In A New Caremark Era: Causes and Consequences, Professor Roy Shapira argues that providing information to attorneys for plaintiffs also can enhance compliance. Delaware courts have broadened and are broadening shareholder inspection rights, interpreting DGCL §220. When plaintiff attorneys take advantage of this procedural change, their cases can survive motions to dismiss. Shapira traces out the substantive consequences of this expansion of access: It puts teeth into their Caremark arguments.

Demonstrating a confidence in their abilities to prevent fishing expeditions and quickly dismiss strike suits, and generally to engage in what Shapira calls “micro-management,” Delaware courts minimize the costs to corporations of expanding discovery. Also demonstrating a confidence in corporations’ abilities to properly respond to discovery requests, Delaware courts also have found that the absence of records can demonstrate a violation of Caremark duties. As a result, corporations increasingly will paper their decision-making. Even if this is only window-dressing, Shapira insightfully explains that when it is known that these papers are discoverable, internal compliance will be enhanced. Continue reading "If It Is Discoverable, It May Count: From Shareholder Rights to Inspect Books and Records to Implementing Caremark Duties"

Index Funds and Millennial Assets

Mar 22, 2021 Christopher M. BrunerCorporate Law

Christopher M. Bruner

Index funds have become a subject of intense scrutiny, first and foremost, because they are enormous. BlackRock, Vanguard, and State Street – the “big three,” with several trillion dollars in assets under management collectively – control around one-quarter of the stock of the S&P 500 companies. Accordingly, there is keen interest in understanding how they exercise the rights associated with that mountain of stock. As a threshold matter, why exert themselves at all, when their passive management model thrives on low fees, and therefore low costs? And why, despite these incentives, have they become increasingly vocal on sustainability-related matters, sometimes described as “environmental, social, and governance” (ESG) issues? As Michal Barzuza, Quinn Curtis, and David Webber argue in the paper cited above, the answer may relate to an overlooked dimension of the competition among these major institutions – the urgent effort to attract Millennial assets.

Whereas actively managed funds aim to beat the market, and accordingly compete on performance, index funds simply aim to match the market, and accordingly compete on price. Index funds cannot sell underperforming stocks because, by definition, they track a particular index, and they would seem to lack any straightforward incentive to engage in activism because this drives up costs and correlatively diminishes the competitiveness of their fees. As the authors acknowledge, this view of the matter is consistent with evidence showing that “index funds vote their proxies, but rarely initiate shareholder action, and have small – but growing – corporate governance operations.” Continue reading "Index Funds and Millennial Assets"

Corporate Law in Paradise

Feb 23, 2021 Omari SimmonsCorporate Law

Omari Simmons

William Moon’s thought-provoking recent paper, Delaware’s New Competition, examines whether there exists an international market for corporate law. Moon’s paper captures a trend in which certain offshore jurisdictions are emerging as corporate lawmakers and attracting publicly traded firms. Specifically, the paper analyzes how a small group of island nations, or “havens”, are developing legal infrastructures that attract public companies. It explores how and why foreign nations might compete for a market share of “American” corporations.

Paper’s Central Findings

Moon’s paper moves beyond the domestic charter competition narrative centered on Delaware to explore its international and comparative dimensions. The popular view of offshore incorporation is that it is largely driven by tax considerations. (Pp. 1417–18.) Moon considers another aspect of the jurisdictional product bundle: corporate law. Continue reading "Corporate Law in Paradise"

A Case for Breaking the Money Trust

Jan 29, 2021 Saule T. OmarovaCorporate Law

Saule T. Omarova

History is the key to understanding U.S. banking law and regulation. History also repeats itself. Professor Art Wilmarth’s new book sheds new light on these oft-repeated propositions. It tells a multi-layered, richly textured story of how the rise of U.S. universal banks – diversified financial conglomerates clustered around publicly-backed banks – led both to the Great Depression of the 1930s and the Great Recession of the post-2008 era. On that basis, it makes a case for breaking up today’s universal banks and shadow banks and reestablishing the legal wall separating banking from the capital markets.

The book has been eagerly anticipated by all of us in the banking law and financial regulation academic community. Professor Wilmarth has devoted much of his long and fruitful scholarly career to studying the dysfunctional effects of excessive conglomeration in the U.S. banking sector. His knowledge of the subject is unparalleled (as some of us often joke, Art has probably forgotten more banking law than we will ever manage to learn!). Taming the Megabanks brings all of that immense knowledge into a compelling narrative of a decades-long process that gave us today’s corporate behemoths: Citigroup, JPMorgan, Bank of America, and a few other familiar names. Continue reading "A Case for Breaking the Money Trust"

The Lost History of Women Stockholders and the Modern Corporation

Dec 18, 2020 Charles O'KelleyCorporate Law

Charles O’Kelley

In her working paper, Corporate Governance and the Feminization of Capital, Sarah C. Haan unearths the lost history of female shareholding and the crucial role gender bias and stereotypical depictions of women may have played in the creation of a corporate law system and ideology that promoted managerialism—to the benefit of white males. From the beginning of the twentieth century to the start of the Great Depression, corresponding with the rapid rise to dominance of the modern corporation, women had grown from an insignificant portion of the nation’s stockholders to a majority in many publicly traded firms; by the mid-1950s women were a numerical majority of all owners of publicly-traded stock. In the two decades before the Great Depression, reformers worried about the looming influence of the emerging modern corporation, and many advocated protecting and reinforcing shareholder power as the appropriate antidote.

The Great Market Crash of 1929 and the election of Franklin Roosevelt in November of 1932 provided the crisis and the opportunity to remodel corporate governance. However, rather than increasing the shareholder governance role, corporate theorists and policymakers preferred laws and legal institutions that fostered and supported managerialism. Haan convincingly argues that the path taken corresponded with gender-biased beliefs concerning the capabilities and appropriate roles of men and women, and that Berle and Means’ The Modern Corporation and Private Property (“The Modern Corporation”), published in the summer of 1932, played and continues to play a central role in how corporate law is theorized and understood. Continue reading "The Lost History of Women Stockholders and the Modern Corporation"

Central Banks’ Distribution, Revisited

Nov 16, 2020 Anna GelpernCorporate Law

Anna Gelpern

Fifteen years ago, U.S. legal scholarship treated central banks like the neglected stepchildren of bank regulation and administrative law: hardly anyone wrote about them, and no one who did not work for them seemed to care. The financial crisis that began in 2007 put the Federal Reserve, the Bank of England, and the European Central Bank in the middle of national and global crisis response strategies, and instantly made central banks the center of attention in a rich and fast-growing legal literature that continues to attract exciting new scholars.

Nonetheless, ceding central banks to economists for so long turned out to be costly: lawyers have spent much of the last decade fleshing out the underlying assumptions and basic terms of the debate, and deciding whether and how to assimilate economists’ theories of central banking into their own. The foundational question of distribution—how central banks’ monetary policy and financial stability activities distribute resources and allocate losses from crises among constituents—has lingered especially awkwardly over this area.

The slightly-stylized standard view associates distribution with fiscal policy, politics and legislatures. In this view, monetary and financial stability policies of the sort conducted by central banks do not distribute: they are for everyone at once, no one in particular, and best left to independent technocrats. This standard view is increasingly at odds with public perceptions of central banks as purveyors of bailouts for the few and peanuts for the rest. The disjunction can become a big political problem, freshly salient in the face of the multi-trillion-dollar response to the COVID-19 pandemic. The pandemic response again put central banks at the center, and took me back to Nadav Orian Peer’s pre-pandemic article situating the Federal Reserve at the intersection of political battles over corporate concentration, regional and sectoral development and, of course, money. Continue reading "Central Banks’ Distribution, Revisited"

The Corporation as Regulatory Partition and the Veil Peeking Exception

Oct 16, 2020 Elizabeth PollmanCorporate Law

Elizabeth Pollman

It is time to retire the term “veil piercing” from debates about corporate rights. Scholars have been drawn to the veil piercing language because of the tendency of courts to ignore the separate legal personality of a corporation when determining whether it may assert a particular constitutional or statutory right. For example, in Burwell v. Hobby Lobby Stores, Inc., the Supreme Court looked to the religious beliefs of the shareholders in allowing the corporation to claim protection under the Religious Freedom Restoration Act. Yet cases like Hobby Lobby, in which shareholders assert a corporate right to avoid an otherwise applicable law or regulation, are quite different from veil piercing cases in which creditors seek to access shareholder assets in satisfaction of a corporation’s debt. These deviations from following the general rule of “corporate separateness” are analytically and functionally distinct.

In her forthcoming article, Veil Peeking: The Corporation As a Nexus for Regulation, Professor Mariana Pargendler gives us new language for discussing the variety of circumstances in which the law looks behind the corporation or disregards its separate legal personality. Pargendler starts by reviewing the concept of asset partitioning as an essential characteristic of the corporate form. Over the past two decades, distinguished scholars have illuminated the importance of asset partitioning for establishing the key corporate features of entity shielding, limited liability, and capital lock-in. But, as Pargendler explains, the partitioning between the assets of the corporation and those of its shareholders is only one dimension of corporate separateness. Corporate legal personality also separates the legal or regulatory spheres of the corporation from its shareholders—she terms this “regulatory partitioning.” And when the general rule of separate legal or regulatory spheres is disregarded, and shareholder rights or detriments are imputed to the corporation, she calls this “veil peeking.”

The article is at once both creative and classic. It nimbly draws connections between diverse areas of law such as antitrust, discrimination, and tax, to observe a basic yet important characteristic of the corporate form: it exists in a separate legal sphere from its shareholders. That is, the legal rights, duties, privileges, and detriments of a shareholder are generally not projected onto the corporation, which instead has its own separate existence that functions as a nexus for regulation. Continue reading "The Corporation as Regulatory Partition and the Veil Peeking Exception"