Tag: Corporate Governance

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

Facebook Twitter

View Full PDF

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 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

Facebook Twitter

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.

View Full PDF

KastielNili_Final

A Transactional Genealogy of Scandal: From Michael Milken to Enron to Goldman Sachs – Article by William W. Bratton & Adam J. Levitin

From Volume 86, Number 4 (May 2013)
DOWNLOAD PDF

Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “ABACUS” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together—a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.

The SPE remains mysterious and poorly understood despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through preset instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real-world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality.

 

86_783

Investment Company as Instrument: The Limitations of the Corporate Governance Regulatory Paradigm – Article by Anita K. Krug

From Volume 86, Number 2 (January 2013)
DOWNLOAD PDF

U.S. regulation of public investment companies (such as mutual funds) is based on a notion that, from a governance perspective, investment companies are simply another type of business enterprise, not substantially different from companies that produce goods or provide (noninvestment) services. In other words, investment company regulation is founded on what this Article calls a “corporate governance paradigm,” in that it provides a significant regulatory role for boards of directors, as the traditional governance mechanism in business enterprises, and is “entity centric,” focusing on intraentity relationships to the exclusion of super-entity ones. This Article argues that corporate governance norms, which came to dominate U.S. investment company regulation as a result of the unique history of U.S. investment companies, are poorly-suited to achieve the goals of investment company regulation. In particular, the corporate governance paradigm has given rise to a number of regulatory weaknesses, which stem from investment advisers’ effective control over investment company boards of directors and courts’ deference to state corporate law doctrine in addressing investors’ grievances. Accordingly, investment company regulation should acknowledge that investment companies are not merely another type of business enterprise with the same challenges and tensions arising from the separation of ownership and control that appear in the traditional corporate context. Toward that end, this Article contends that policymakers should view, and regulate, investment companies as an avenue through which investment advisers provide financial services (investment-advisory services, in particular) to investors–and should view investment company shareholders more as advisory customers than as equity owners of a firm. This “financial services” model of regulation moves past the entity focus of corporate governance norms and, therefore, permits dispensing with governance by an “independent” body such as the board of directors. More importantly, if adopted, this model would remedy some of the more significant problems plaguing U.S. investment company regulation.

 

86_263

Process over Structure: An Organizational Behavior Approach to Improving Corporate Boards – Article by Nicola Faith Sharpe

From Volume 85, Number 2 (January 2012)
DOWNLOAD PDF

History has shown that the scholarly and regulatory focus on board composition and structure is a dangerously incomplete solution to the problems that have caused recent corporate failures. The media and corporate scholars have assigned much of the blame for the 2008 financial crisis and the Enron-era corporate scandals to corporate boards. The conventional diagnosis of these ills is that boards were largely at fault because they failed to effectively monitor corporate officers. Unfortunately the conventional diagnosis of the problem is incomplete and the policy prescriptions flowing from this faulty diagnosis are unlikely to address the very real problems that continue to plague corporate governance.

The principal problem is that most regulatory attempts fail to adequately consider an essential step in understanding the board’s relationship to corporate failure: the process by which boards monitor corporate performance. By relying on insights from a robust organization behavior literature, this Article demonstrates that the processes boards employ to undertake their monitoring function are in need of significant improvement. In other words, how boards engage in management monitoring should be the focus of corporate regulatory reform, more so than who sits on boards or how boards are structured.

 

85_261

Governance in the Breach: Controlling Creditor Opportunism – Article by Jonathan C. Lipson

From Volume 84, Number 5 (July 2011)
DOWNLOAD PDF

Firms rarely go from solvency to Chapter 11 in an instant. Instead, the slide into bankruptcy will be marked by a period (the “zone of distress”) that begins with the breach of a lending contract and ends, perhaps months or even years later, with either a formal bankruptcy case or some other resolution, such as a nonbankruptcy restructuring or liquidation. In this period, the firm’s governance will be up for grabs. Doctrinally, state corporate law gives directors the power and responsibility to manage the firm for the benefit of shareholders, subject to fiduciary review. In fact, however, real control shifts away from directors and shareholders to creditors. Yet, the law offers little to check this control. Creditors are not generally viewed as fiduciaries, and so they owe their borrowers neither duties of care nor loyalty. In theory, regulation or contract could channel creditor conduct in the zone of distress, but three fundamental changes in the dynamics among distressed firms and their investors have weakened these constraints.

 

84_1035