For Whom Corporate Leaders Bargain

At the center of a fundamental and heated debate about corporate purpose, an increasingly influential view (which we refer to as “stakeholderism”) advocates giving corporate leaders increased discretionary power to serve all stakeholders and not just shareholders. Supporters of stakeholderism argue that its application would address growing concerns about the impact of corporations on society and the environment. By contrast, critics of stakeholderism argue that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. This Article presents novel empirical evidence that can contribute to resolving this key debate.

       Following a stakeholderist framework, the constituency statutes adopted by more than thirty U.S. states authorize corporate leaders to give weight to stakeholder interests when considering a sale of their company. Using hand-collected data, we study how corporate leaders in fact used their stakeholderist discretion in transactions governed by such statutes in the past two decades. In particular, we provide a detailed analysis of more than one hundred transactions governed by such statutes in which corporate leaders negotiated a company sale to a private equity buyer.

       We find that corporate leaders used their discretion to obtain gains for shareholders, executives, and directors. However, despite the clear risks that private equity acquisitions often posed for stakeholders, corporate leaders generally did not use their discretion to negotiate for any stakeholder protections. Indeed, in the small minority of cases in which some stakeholder protections were formally included, they were generally cosmetic and practically inconsequential.

       Beyond the implications of our findings for the long-standing debate on constituency statutes, these findings also provide important lessons for the ongoing debate on stakeholderism. At a minimum, stakeholderists should identify the causes for constituency statutes’ failure to deliver stakeholder benefits in the analyzed transactions and examine whether embracing stakeholderism would not similarly fail to produce such benefits. After examining alternative explanations for our findings, we conclude that the most plausible explanation lies in corporate leaders’ incentives not to protect stakeholders beyond what would serve shareholder value. Our findings thus indicate that stakeholderism cannot be relied on to produce its purported benefits for stakeholders. Stakeholderism therefore should not be supported as an effective way for protecting stakeholder interests, even by those who deeply care about stakeholders.

Tracing the Diverse History of Corporate Residual Claimants by Sung Eun (“Summer”) Kim

Postscript | Corporate Law
Tracing the Diverse History of Corporate Residual Claimants
by Sung Eun (“Summer”) Kim*

Vol. 95, Postscript (Jan 2022)
95 S. Cal. L. Rev. Postscript 43 (2022)

Keywords: Corporate Law, Residual Rights

The conventional understanding in corporate law is that shareholders are the residual claimants of corporations because they own the residual right to profits. Based on this understanding, shareholders are entitled to a host of corporate law rights and protections—including the right to vote and fiduciary duty protections. However, a review of the origin and history of residual claimant theory shows that the theory originally envisaged a broad conception of the residual claim that goes beyond profits, leading to a diverse array of stakeholders being the residual claimants of corporations over time. Depending on which of the theories of rent, interest, wages, or profit was adopted, each of the landlord, capitalist, laborer, and entrepreneur has been considered the residual claimant of the corporation. This history shows that the prevailing view of shareholders as the exclusive residual claimants of the corporation is a relatively recent understanding and that the historical record supports a more diverse conception of the residual claimant. In that sense, residual claimant analysis is better understood as a theory for the stakeholder model of the firm than the shareholder primacy model, as it is presently understood.

* Professor of Law, University of California, Irvine School of Law. I am grateful to Mehrsa Baradaran, Joshua Blank, Jill Fisch, Vic Fleischer, Jonathan Glater, Alex Lee, Jennifer Koh Lee, Stephen Lee, Christopher Leslie, Omri Marian, L. Song Richardson, and Arden Rowell for reading prior versions of this Article and providing helpful comments. I also benefitted from the opportunity to present and receive feedback on this project at the Trans-Pacific Business Law Dialogue (September 2020) and the University of Florida Business Law Conference (November 2020). Tianmei Ann Huang and Nick Nikols provided extraordinary research assistance, and Vivian Liu, Mindy Vo, Elizabeth Bell, and Jessica Block of the Southern California Law Review Postscript team, Deborah Choi, and Matthew Perez provided superb editorial assistance. Any errors are my own.

The Corporate Purpose of Social License by Hilary A. Sale*

Article | Corporate Law
The Corporate Purpose of Social License
by Hillary A. Sale*

94 S. Cal. L. Rev. 789 (2021)

Keywords: Corporate Law, CSR, Social License

This Article deploys the sociological theory of social license, or the acceptance of a business or organization by the relevant communities and stakeholders, in the context of the board of directors and corporate governance. Corporations are generally treated as “private” actors and thus are regulated by “private” corporate law. This construct allows for considerable latitude. Corporate actors are not, however, solely “private.” They are the beneficiaries of economic and political power, and the decisions they make have impacts that extend well beyond the boundaries of the entities they represent.

Using Wells Fargo and Uber as case studies, this Article explores how the failure to account for the public nature of corporate actions, regardless of whether a “legal” license exists, can result in the loss of “social” license. This loss occurs through publicness, which is the interplay between inside corporate governance players and outside actors who report on, recapitulate, reframe and, in some cases, control the company’s information and public perception. The theory of social license is that businesses and other entities exist with permission from the communities in which they are located, as well as permission from the greater community and outside stakeholders. In this sense, businesses are social, not just economic, institutions and, thus, they are subject to public accountability and, at times, public control. Social license derives not from legally granted permission, but instead from the development of legitimacy, credibility, and trust within the relevant communities and stakeholders. It can prevent demonstrations,

boycotts, shutdowns, negative publicity, and the increases in regulation that are a hallmark of publicness—but social license must be earned with consistent, trustworthy behavior. Thus, social license is bilateral, not unilateral, and should be part of corporate strategy and a tool for risk management and managing publicness more generally.

By focusing on and deploying social license and publicness in the context of board decision-making, this Article adds to the discussions in the literature from other disciplines, such as the economic theory on reputational capital, and provides boards with a set of standards with which to engage and address the publicness of the companies they represent. Discussing, weighing, and developing social license is not just in the zone of what boards can do, but is something they should do, making it a part of strategic, proactive cost-benefit decision-making. Indeed, the failure to do so can have dramatic business consequences.


*. Associate Dean for Strategy, Agnes Williams Sesquicentennial Professor of Law, and Professor of Management at Georgetown University. Thanks go to Olivia Brown, Hollie Chenault, Claire Creighton, Samantha Glazer, and Jing Xu at Georgetown and Kelsey Bolin and Colin Pajda from Washington University for their invaluable research assistance, and to Brian Tamanaha, Bob Thompson, Don Langevoort, Michael Diamond, Urska Velikonja, Saul Levmore, David Hyman, Bob Rasmussen, Cynthia Williams, Bill Buzbee, Marty Lipton, Elizabeth Pollman, Andrew Tuch and the Georgetown and Michigan Law Faculties.

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The Giant Shadow of Corporate Gadflies by Kobi Kastiel and Yaron Nili

Article | Corporate Governance
The Giant Shadow of Corporate Gadflies

by Kobi Kastiel* and Yaron Nili†

From Vol. 94, No. 3
94 S. Cal. L. Rev. 569 (2021)

Keywords: Corporate Law, Shareholders, Corporate Social Responsibility

Modern-day shareholders influence corporate America more than ever before. From demanding greater accountability of executives, to lobbying for a variety of social and environmental policies, shareholders today have the power to alter how American companies are run. Amazingly, a small group of individual shareholders wields unprecedented power to set corporate agendas and stands at the epicenter of our contemporary corporate governance ecosystem. In fact, the power of these individuals, known as “corporate gadflies,” continues to rise.
Corporate gadflies present a puzzling reality. Although public corporations in the United States are increasingly owned by large institutional investors, much of their corporate governance agenda has been and is still dominated by a handful of individuals who own tiny slivers of most large companies. How does an economy with corporate equity in the trillions of dollars cede so much governance power to corporate gadflies? More importantly, should it? Surprisingly, scholars have paid little attention to the role of corporate gadflies in this ever-changing governance landscape.
This Article is the first to address the giant shadow that corporate gadflies cast on the corporate governance landscape in the United States. The Article makes three contributions to the literature. First, using a comprehensive dataset of all shareholder proposals submitted to the S&P 1500 companies from 2005 to 2018, it offers a detailed empirical account of both the growing power and influence that corporate gadflies wield over major corporate issues and of gadflies’ power to set governance agendas. Second, the Article uses the context of corporate gadflies to elucidate a key governance debate over the role of large institutional investors in corporate governance. Specifically, the Article underscores the potential concerns raised by the activity of corporate gadflies and questions the current deference of institutional investors to these gadflies regarding the submission of shareholder proposals. Finally, the Article proposes policy reforms aimed at reframing the current discourse on shareholder proposals and potentially sparking a new line of inquiry regarding the role of investors in corporate governance.

*. Assistant Professor of Law, Tel Aviv University; Research Fellow and Lecturer on Law, Harvard Law School Program on Corporate Governance.

†. Associate Professor of Law, University of Wisconsin Law School and Smith-Rowe Faculty Fellow in Business Law. For helpful comments and suggestions, the Authors would like to thank Albert Choi, Asaf Eckstein, Yuval Feldman, Jesse Fried, Eric Goodwin, Zohar Goshen, Assaf Hamdani, Sharon Hannes, Cathy Hwang, Rob Jackson, Adi Libson, Amir Licht, Ehud Kamar, Kate Litvak, Dorothy Lund, James McRitchie, Gideon Parchomovsky, Ed Rock, Sarath Sanga, Bernard Sharfman, Eric Talley and the participants of the Rethinking the Shareholder Franchise Conference at the University of Wisconsin, the 2020 National Business Law Scholars Conference, the 2020 Annual Meeting of the Israeli Private Law Association, the Faculty Lunch Seminar at Tel Aviv University, the law and economics and empirical studies workshops at Bar Ilan University, the Securities and Exchange Commission, the Missouri Law School Faculty Colloquium, the BYU Law 2020 Winter Deals Conference, the University of Florida 2020 Business Law Conference, and the Soshnick Colloquium on Law and Economics at Northwestern Pritzker School of Law. Maya Ashkenazi, Katie Gresham, Gabrielle Kiefer, James Kardatzke, Chris Kardatzke, Tom Shifter, Maayan Weisman, and Gretchen Winkel provided valuable research assistance.

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How the States Can Tax Shifted Corporate Profits: An Application of Strategic Conformity by Darien Shanske

Article | Tax Law
How The States Can Tax Shifted Corporate Profits: An Application of Strategic Conformity
by Darien Shanske*

From Vol. 94, No. 2
94 S. Cal. L. Rev. 251 (2021)

Keywords: Tax Law, Corporate Law, State Law


The combination of pandemic, recession and federal dysfunction has put severe fiscal strain on the states. Given the scale of the crisis and the essential nature of the services now being cut, it would be reasonable for states to contemplate inefficient—and even regressive—revenue-raising measures. Yet surely they should not start with such measures. They should start with making the efficient and progressive improvements to their revenue systems that they should have made anyway.

Improving the taxation of the profits of multinational corporations—the topic of this Article—represents a reform that would be efficient, progressive, and relatively straightforward to administer. Not only would such a reform thus represent good tax policy, but it would also raise significant revenue. And, if substantial revenue, efficiency, progressivity and administrability are not sufficiently motivating, then I will also add that it would be particularly appropriate to make these changes during the pandemic so as to raise revenue from those best able to pay during the current crisis.

To be sure, the argument that states can and should tax multinational corporations more has the whiff of paradox. After all, there is general consensus that no nation-state is currently taxing multinational corporations very effectively and, further, that subnational governments are in an even worse position to do so. This is because multinational corporations can exploit the mobility of capital even more easily between parts of the same country. Nevertheless, I will argue that the American states find themselves in a particularly strong position to do better at taxing multinational corporations and this is in part precisely because of the missteps made at the federal level.

The Tax Cuts and Jobs Act (“TCJA”), passed in December 2017, contained several provisions, including rules concerning Global Intangible Low-Taxed Income (or “GILTI”), that were meant to combat income stripping. The GILTI provision identifies foreign income likely to have been shifted out of the United States and subjects it to U.S. tax.

In this Article, I argue that the states should and can tax GILTI income. The basic policy argument is simple: states should not miss a chance to protect their corporate tax bases. The amount of revenue at stake is not trivial; it could be as high as $15 billion per year for the states as a whole or the equivalent of a 30% boost in corporate tax collections.

The basic legal argument is also simple: it cannot be the case—and it is not the case—that states need to take corporations at their word as to where their income is earned. If the states can make a reasonable argument that nominally foreign income has in fact been shifted out of the United States, then their choices as to their tax system should be respected.

This Article makes several other core arguments. First, the Article argues that returning to mandatory worldwide combination as a complete alternative to GILTI conformity would be preferable to GILTI conformity alone. Second, the Article argues that offering taxpayers a choice between GILTI conformity and worldwide combination is preferable to GILTI conformity alone.

Finally, this Article places all these issues in a larger framework of strategic conformity. As with GILTI, the states should look for other opportunities where they can take advantage of federal miscues while also advancing sound tax policy.

* Professor, UC Davis School of Law. Many thanks to audiences at the Association of Mid- Career Tax Professors, the NorCal Tax Roundtable, the University of Minnesota Law School Perspective on Taxation Lecture Series and to Eric Allen, Revuen Avi-Yonah, Kimberly Clausing, Steven Dean, Peter Enrich, Michael Fatale, David Gamage, Mark Gergen, Kristen Hickman, Ken Levinson, Michael Mazerov, Amy Monahan, Susie Morse, Michael Simkovic and Adam Thimmesch. I am particularly grateful to David Gamage who coauthored some shorter pieces on which this Article is based. All opinions and mistakes are my own.


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Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance by Michal Barzuza, Quinn Curtis & David H. Webber

Article | Corporate Law
Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance

by Michal Barzuza,* Quinn Curtis† & David H. Webber‡

Vol. 93, No.6 (February 2021)
93 S. Cal. L. Rev. 1243 (2020)

Keywords: ESG Activism, Index Fund, Corporate Governance 


Major index fund operators have been criticized as ineffective stewards of the firms in which they are now the largest shareholders. While scholars debate whether this passivity is a serious problem, index funds’ generally docile approach to ownership is broadly acknowledged. However, this Article argues that the notion that index funds are passive owners overlooks an important dimension in which index funds have demonstrated outspoken, confrontational, and effective stewardship. Specifically, we document that index funds have taken a leading role in challenging management and voting against directors in order to advance board diversity and corporate sustainability. We show that index funds have engaged in a pattern of competitive escalation in their policies on environmental, social, and governance (“ESG”) issues. Index funds’ confrontational and competitive activism on ESG issues is hard to square with their passive approach to more conventional corporate governance questions.

To explain this dichotomy in approaches, we argue that index funds are locked in a fierce contest to win the soon-to-accumulate assets of the millennial generation, who place a significant premium on social issues in their economic lives. With fee competition exhausted and returns irrelevant for index investors, signaling a commitment to social issues is one of the few dimensions on which index funds can differentiate themselves and avoid commoditization. For index funds, the threat of millennial migration to another fund is more significant than the threat of management retaliation. Furthermore, managers themselves, we argue, face intense pressure from their millennial employees and customers to respond to their social preferences. This three-dimensional millennial effect—as investors, customers, and employees—we argue, is an important development with the potential to provide a counterweight to the wealth-maximization paradigm of corporate governance.

We marshal evidence for this new dynamic, situate it within the existing literature, and consider the implications for the debate over index funds as shareholders and corporate law generally.



*. Professor of Law, University of Virginia School of Law. For useful comments and suggestions, we are grateful to Steve Bainbridge, Ryan Bubb, Emiliano Catan, George Geis, Scott Hirst, Kate Judge, Dorothy Lund, Alma Oliar, Ariel Porat, Adriana Robertson, Mark Roe, Leo Strine, Andrew Tuch, and participants at the Association of American Law Schools Annual Meeting—Business Associations Section, the UVA/UCLA Corporate & Securities Law Conference, Tel Aviv Corporate Governance Seminar, Tel Aviv Law & Economics Workshop, Tulane Corporate & Securities Law Round Table, University of Chicago Law School Faculty Workshop, and Corporate Law Academic Webinar Series. The authors wish to acknowledge excellent research assistance from Brianna Isaacson and Jordan Voccola.

†. Professor of Law, University of Virginia School of Law.

‡. Associate Dean for Intellectual Life and Professor of Law, Boston University School of Law.

Corporate Law as Myth by Jonathan R. Macey

Article | Corporate Law
Corporate Law as Myth
by Jonathan R. Macey*

Vol. 93, Article (December 2020)
93 S. Cal. L. Rev. Article 923 (2020)

Keywords: Fundamental Rules of Corporate Law, Fundamental Principles, Myth 


This Article shows that a variety of fundamental rules of corporate law are based on myth. The Article explains that the myths on which corporate law is based play an important role in attracting public acceptance and support for what otherwise would likely be unpopular and controversial regulations. Thus, one can view the role played by myth in corporate law in a particular context as having either positive or negative characteristics depending on one’s opinion of the social value of the underlying legal rule that is being buttressed and affirmed by the myth.

Four political and sociological myths that continue to play important roles in law are examined. These are: (1) the myth that corporations are owned by their shareholders and represent ownership interests in businesses rather than mere financial claims on the cash flows of those businesses, coupled with certain political (voting) rights that protect those claims; (2) the “shareholder value myth,” that corporate officers and directors are legally required to maximize firm value; (3) that subsidiary companies are entirely independent from and not subject to the control of their parent companies and must remain so in order for the parent company to avoid liability for the contract and tort debts of the subsidiary under various alter ego and piercing the corporate veil theories of corporate law; and (4) the legal regulation of insider trading is justified because of the necessity of creating a “level playing field” among participants in financial markets. Reasonable people can disagree about whether the role played by these myths is normatively positive or negative in each of these contexts.


*. Sam Harris Professor of Corporate Law, Corporate Finance & Securities Regulation, Yale Law School. I am grateful for comments from Logan Beirne, Zach Liscow, Josh Macey, Belisa A. Pang, Amanda Rose, Leo Strine, and Andrew Verstein. I received valuable research assistance from Maria Nozadze.

The Law of Corporate Investigations and the Global Expansion of Corporate Criminal Enforcement

Article | Corporate Law
The Law of Corporate Investigations and the Global Expansion of Corporate Criminal Enforcement 
by Jennifer Arlen* & Samuel W. Buell†

From Vol. 93, No. 4 (September 2020)
93 S. Cal. L. Rev. 697 (2020)

Keywords: Corporate Investigations, Corporate Criminal Enforcement

The United States model of corporate crime control, developed over the last two decades, couples a broad rule of corporate criminal liability with a practice of reducing sanctions, and often withholding conviction, for firms that assist enforcement authorities by detecting, reporting, and helping prove criminal violations. This model, while subject to skepticism and critiques, has attracted interest among reformers in overseas nations that have sought to increase the frequency and size of their enforcement actions. In both the United States and abroad, insufficient attention has been paid to how laws controlling the conduct of corporate investigations are critical to regimes of corporate criminal liability and public enforcement. Doctrines governing self-incrimination, employee rights, data privacy, and legal privilege, among other areas, largely determine the relative powers of governments and corporations to collect and use evidence of business crime, and thus the incentives for enforcers to offer settlements that reward firms for private efforts to both prevent and disclose employee misconduct. This Article demonstrates the central role that the law controlling corporate investigations plays in determining the effects of corporate criminal liability and enforcement policies. It argues that discussions underway in Europe and elsewhere about expanding both corporate criminal liability and settlement policies—as well as conversations about changes to the U.S. system—must account for the effects of differences in investigative law if effective incentives for reducing corporate crime are, as they should be, a principal goal.

*. Norma Z. Paige Professor of Law, New York University, and Faculty Director, Program on Corporate Compliance and Enforcement,

†. Bernard M. Fishman Professor of Law, Duke University, The authors would like to thank the following people for their thoughtful discussions of foreign law and for comments on earlier drafts of this article: Miriam Baer, Giovani Bakaj, Rachel Barkow, Leonardo Borlini, Nicolas Bourtin, Michael Bowes, Lincoln Caylor, Bruno Cova, Frederick Davis, Kevin Davis, Grainne de Burca, Mark Dsouza, Luca Enriques, Cindy Estlund, Samuel Estreicher, Jens Frankenreiter, Alejandro Turienzo Fernandez, Jose Carlos Abissamra Filho, Matthew Finkin, Jonathan Fisher, Garth Fitzmaurice, Stavros Gadinis, Brandon Garrett, Martin Gelter, Avi Gesser, John Gleeson, Lisa Griffin, Lawrence Helfer, Daniel Hund, Mary Inman, Rani John, Kathryn Judge, Sung Yong Kang, Issa Kohler-Hausmann, Keith Krakauer, Judy Krieg, Mattias Kumm, Katja Langenbucher, Maximo Langer, Joshua Larocca, Penelope Lepeudry, Alun Milford, Mariana Pargendler, Katharina Pistor, Peter Pope, Pablo Quinones, Daniel Richman, Veronica Root, Jacqueline Ross, Jason Schultz, Catherine Sharkey, Nicola Selvaggi, Margot Seve, Peter Solmssen, Tina Söreide, Katherine Strandburg, Nico van Eijk, Thomas Weigend, Spoerr Wolfgang, Yohimitsu Yamauchi, Bruce Yannett, and participants in workshops at Boston College Law School, Cambridge University, Columbia Law School, The London School of Economics, New York University School of Law, The Norwegian School of Economics, Oxford University, University College London, and the University of Texas School of Law. The authors also would like to thank their research assistants for their excellent work: Marc-Anthony de Boccard, Alex Dayneka, Janosch Niklas Engelhardt, Christina Faltermeier, Estelle Houser, Anais Kebir, Charlotte Robin, Marcin Sanetra, Koichi Sekine, Jonathan Silverstone, Melanie Simon, William Taylor, Michael Treves, and Benjamin Wylly.

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