Category Archives: Corporate Law
Sep 8, 2020 Bill BrattonCorporate Law
Vincent S.J. Buccola, Jameson K. Mah, and Tai Zhang,
The Myth of Creditor Sabotage, __
U. Chi. L. Rev. __ (forthcoming), available at
SSRN.I love really good contrarian papers. They teach me things, and they don’t come along very often. Let’s face it, we academics tend to run in herds and our work tends to conform to our herd’s paradigm. Now, there may be more than one herd roaming in a given field—in corporate law we have at least three and maybe more—so that even the most argumentative, tendentious piece is less contrarian than it is directed at an opposing herd’s paradigm. The contrarian paper I have in mind works differently. It takes aim at a basic assumption shared amongst all members of all herds and tells us that that’s not what’s going on at all.
I also love really good papers about derivatives. There are certainly more than a few of these, but they don’t add up to very many given the importance of the subject matter and the concomitant need for investigation and learning. Corporate law professors for the most part don’t want to go there, preferring the comfier and less technically demanding precincts of corporate governance.
“The Myth of Creditor Sabotage,” forthcoming in the University of Chicago Law Review and co-written by Vincent S. J. Buccola, an Assistant Professor at Wharton, Jameson K. Mah, an Investment Analyst at Cyrus Capital Partners, and Tai Zhang, a member of the Wharton class of 2020, hits both of these buttons. It is a really good, deeply contrarian paper about credit derivatives. I knew it was going to be special when the sheer orneriness of the introduction gave me a pleasant jolt. My pleasure grew as the analysis unfolded. Continue reading "Big New Problem Deflated"
Jul 23, 2020 Tom C.W. LinCorporate Law
Yonathan A. Arbel, Payday, 96
Wash. U.L. Rev. 1 (forthcoming 2020), available at
SSRN.
The unfolding pandemic has been an incredible change agent. In business, it has upended the rhythms and routines of work and operations in pedestrian and profound ways. It has accelerated anticipated changes and forced unforeseen changes. It has pushed us to examine and re-examine what was normal and necessary in the old ways we work, in the old operations of our businesses.
In his forthcoming article, Payday, Professor Yonathan Arbel examines the old, longstanding business practice of payday. In particular, he looks into why so many workers only get paid on one day for their continuous daily labor despite numerous advances in financial technology. As he succinctly put it at the start of his article:
While trillions of dollars are exchanged in online transactions—safely, cheaply, and instantaneously—workers still must wait two weeks to a month to receive payments from their employers. In the modern economy, workers are effectively lending money to their employers, as they wait for earned wages to be paid. Continue reading "A New Payday(s)"
Jun 30, 2020 Cristie FordCorporate Law
Luca Enriques, Alessandro Romano & Thom Wetzer,
Network-Sensitive Financial Regulation, 45
J. Corp. L. __ (forthcoming, 2020), available at
SSRN.
It is difficult to know what wisdom from pre-pandemic times will carry forward. One thing that feels very relevant, however, is the notion of applying network-sensitive approaches to regulatory structures that previously were atomistic in orientation. COVID-19 (the global emergency, not the virus) is nothing if not the product of global networks.
It takes some time for the full impact of a new paradigm to be realized. Those of us who have followed the systemic risk literature over the last decade or more will, I think, recognize in “Network-Sensitive Financial Regulation” a more comprehensive embrace of network theory than we have seen so far. Post-crisis recognition of systemically important financial institutions, or SIFIs, has always been somewhat awkwardly bolted onto existing regulatory structures. This is an exceptional article, because it represents a genuine step change in our thinking. It convincingly demonstrates how we might better incorporate network awareness into systemic risk analysis and macroprudential regulation, and then extends its insights further, to the micro level of corporate governance. Continue reading "We’re All in This Together"
Jun 2, 2020 Kenneth S. AbrahamCorporate Law
Tom Baker,
Uncertainty > Risk: Lessons for Legal Thought from the Insurance Runoff Market, 61
B.C. L. Rev. __ (forthcoming 2020), available at
SSRN.
The received wisdom is that insurance can function well in a world of “risk” – the determinable probability of loss — but that insurance can function only poorly, or not at all, in the face of “uncertainty” – the indeterminate probability of loss. This received wisdom colors a lot of thinking, and judicial decision-making, about any number of policy problems, perhaps most prominently about the proper scope of tort liability. If the threat of liability cannot be reduced to a particular probability, the thinking goes, then it will be difficult or impossible to insure against, and part of the point of tort liability, to encourage spreading the risk of loss, will be undermined.
Tom Baker has pioneered the use of qualitative empirical research to shed light on issues in torts, insurance, and insurance law. In this Article, he employs empirical research to call into question the received wisdom regarding the capacity of insurance to function in the face of uncertainty. In an impressive combination of thick description and theoretical insight, he shows how the phenomenon of the insurance “runoff” has been able to function, with increasing frequency and effectiveness, despite the fact that its fundamental purpose is to insure uncertain probabilities of loss. Continue reading "Taking A Lesson From Uncertainty"
May 6, 2020 Da LinCorporate Law
The shareholder base of modern U.S. public companies is diverse. At one end of the spectrum are large asset managers like BlackRock, which by itself has almost $7 trillion in assets under management. At the far other end are ordinary people—so-called “retail” investors. And between these two ends lie a hodgepodge of institutions, including public pension funds, hedge funds, insurance companies, and university endowments. Should corporate law assume that these shareholders all share a common goal?
According to Professor Ann Lipton’s timely and clear-eyed article, Shareholder Divorce Court, the answer is an emphatic “no.” While corporate law has traditionally elided the messy reality of shareholder heterogeneity by assuming that all types of shareholders have the same interest—wealth maximization—the landscape has changed. But as courts in recent years have adjusted and accommodated shareholder preferences that deviate from wealth maximization, they have created a new problem: smaller, less diversified shareholders may now be forced to accept suboptimal transactions that are not designed to promote their interests. Lipton’s account is important. In making her case and exploring how the right of appraisal can be reconfigured to act as a remedy, Lipton excavates yet another consequence of Delaware’s newfound confidence in the efficacy of the shareholder franchise. Continue reading "Corporate Law Can No Longer Ignore Shareholder Heterogeneity"
Apr 7, 2020 Robert RosenCorporate Law
Yuval Feldman, Adi Libson and Gideon Parchomovsky,
Corporate Law for Good People, 115
Nw. U. L. Rev. (2020), available at
SSRN.Corporate law has incorporated some of the sociology of organizations. Often, this is by incorporating the concept of an organization having a culture. The organization’s culture organizes thought by individuals within the organization both by incorporating norms of satisficing and stimulating groupthink. In compliance, “tone at the top” is thought to be necessary. And, the concept of the organization shaping decisions within it explains why pervasiveness replaces mens rea for corporate criminal liability.
For many, organizational sociology is too vague. After all, in 1949, Clyde Kluckhohn demonstrated 73 different meanings that are attached to the concept of “culture.” Although the effects of organizations are apparent, the mechanisms by which organized experience frames individual decision-making are more difficult to understand. This is especially true in a culture, like ours, that prizes the self-determination of individuals. Continue reading "From Group-Think to Thinking about Groups"
Mar 5, 2020 Omari SimmonsCorporate Law
Sarath Sanga,
On the Origins of the Market for Corporate Law, available at
SSRN.Professor Sarath Sanga’s paper titled On the Origins of the Market of the Corporate Law is a thought provoking challenge to popular beliefs concerning the origins of the market for corporate law and state charter competition, that is: (1) Supreme Court jurisprudence helped create a national market for corporate charters; and (2) Delaware became a market leader only because New Jersey (the initial leader) repealed its liberal corporate laws in 1913.
Instead, the paper contends that these two popular claims are wrong. It offers an alternative explanation: organic industrial expansion and interstate commerce led to the emergence of the market for corporate law and that New Jersey declined as a market leader due, in part, to other states copying its laws. Continue reading "History Lessons: Explaining the Origins of Corporate Charter Competition"
Feb 12, 2020 Christopher M. BrunerCorporate Law
Marc T. Moore,
Designing Dual Class Sunsets: The Case for a Transfer-Centered Approach, University College London Faculty of Laws Working Paper No. 9/2019, available at
SSRN.
The optimal balance of power between shareholders and boards of directors in public companies remains one of the most consequential and contested issues in corporate governance, and the debate has only intensified as share ownership has become more concentrated in the United States and U.S.-style shareholder activism has arisen in other capital markets around the world. Against this backdrop, as Marc Moore explores in the paper cited above, dual class stock (DCS) structures “have spread exponentially in recent years across much of America’s public company community,” and “certain jurisdictions that have traditionally been averse to permitting DCSs have come to recognize the potential benefits of taking a more permissive stance” – including Singapore and Hong Kong, two of the world’s most prominent financial centers. In his paper, Moore maps this complex terrain, providing a comparative analysis of various approaches to regulating DCS structures and calibrating associated incentives. Specifically, he focuses on “whether DCSs should be perpetual or rather should terminate (or ‘sunset’) at some point in time,” and “the most appropriate means of determining when and how time-limited DCSs should sunset.”
Moore observes that U.S. tolerance for DCS structures and associated deviation from the one share/one vote approach “would appear to be more international outlier rather than norm,” even relative to the United Kingdom where “London’s traditional capital market norms have proved considerably less tolerant in this regard.” Through a detailed discussion of extant literature, he contrasts proponents’ aim to give management “a degree of strategic breathing space … from the intense pressure exerted by quarterly financial reporting hurdles” with opponents’ concerns regarding various forms of controller agency costs borne by holders of low-voting stock. Continue reading "Dual Class Stock in Comparative Context"
Jan 27, 2020 Anna GelpernCorporate Law
Credit Default Swaps (CDS), like banks, are mind-blowingly simple and potent credit replication machines. Banks replicate their own credit—conjuring gobs of money out of thin air—with a license and a convoluted web of guarantees from the state. CDS can replicate anyone’s credit, with industry-coordinated standard contracts embedded in a tangle of carve-outs, safe harbors, and exemptions from statutes and regulations. The 2007-2009 financial crisis brought a heap of bad press and new regulatory requirements for CDS dealers and trading infrastructure, but did not fundamentally alter the contractual governance paradigm at the heart of this multi-trillion dollar market.
Opportunistic or downright slimy behavior in a space so carefully shielded from substantive regulation can be hard to diagnose, even when it poses an existential threat to the CDS market and could spill beyond it. Recent reports of bad behavior have prompted high-profile lawsuits, contract reforms, and a crop of law review articles revisiting contractual, statutory, and regulatory ecosystems for CDS.
The range of approaches reflects the multifaceted challenge, but can be confusing. Gina-Gail Fletcher’s analysis in Engineered Credit Default Swaps: Innovative or Manipulative? is thoughtful, comprehensive, and a good place to start. Continue reading "Parallel Universe Defaults"
Nov 15, 2019 Bill BrattonCorporate Law
Corporate law has a short historical memory. One result is that conceptual battles that go nowhere get refought, as a look at much of the literature generated in the wake of Citizens United will confirm. There are a few historical classics in the academic literature though. The lead publication in this short stack is Harold Marsh’s Are Directors Trustees? Conflicts of Interest and Corporate Morality, published in The Business Lawyer in 1966. Marsh told a stark story about the decline of the duty of loyalty, which he said went from flat prohibition of self-dealing transactions in 1880 to a general permission subject to judicial fairness review in 1960. Norwood Beveridge challenged Marsh’s description of the early period in a couple of papers published in the 1990s, but the Marsh account has held its place.
Now comes LSE’s (London School of Economics) David Kershaw with a masterful comparative history of corporate fiduciary law in the United States and the United Kingdom, The Foundations of Anglo-American Corporate Fiduciary Law. (The book’s introduction is posted here.) Kershaw seconds Beveridge and dispatches Marsh in a splendid account. The comparison holds the key. Yes, the UK had a prohibition that could be relaxed with a shareholder vote, a prohibition that found its way into the law of a number of US states. But what worked in the UK proved dysfunctional in the US. The conceptual framework of UK corporation law came from partnership, while the US framework came from legislated incorporations. Where the UK had default rules, the US had mandates, with the result that the self-dealing prohibition really was a prohibition here where it was not in the UK. Meanwhile, many states never adopted it and, analogizing to trust law, let officers and directors contract with the company subject to approval by a disinterested director majority. Continue reading "Corporate Law as Law"
