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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Too Big to Be Activist – Article by John D. Morley

Article | Corporate Law
Too Big to Be Activist
by John D. Morley*

From Vol. 92, No. 6 (September 2019)
92 S. Cal. L. Rev. 1407 (2019)



Big investment managers, such as Vanguard and Fidelity, have accumulated an astonishing amount of common stock in America’s public companies—so much that they now have enough corporate votes to control entire industries. What, then, will these big managers do with their potential power?

This Article argues that they will do less than we might think. And the reason is paradoxical: the biggest managers are too big to be activists. Their great size creates intense internal conflicts of interest that make aggressive activism extremely difficult or even impossible.

The largest managers operate hundreds of different investment funds, including mutual funds, hedge funds, and other vehicles that all invest in the same companies at the same times. This structure inhibits activism, because it turns activism into a source of internal conflict. Activism by one of a manager’s funds can damage the interests of the manager’s other funds. If a BlackRock hedge fund invests in a company’s equity, for instance, at the same time a BlackRock mutual fund invests in the company’s debt, then any attempt by either fund to turn the company in its favor will harm the interests of the other fund. The hedge fund and mutual fund might similarly come into conflict over the political and branding risks of activism and the allocation of costs and profits. Federal securities regulation and poison pills can create even  more conflicts, often turning activism by a hedge fund into serious legal problems for its manager’s entirely passive mutual funds. A big manager, in other words, is like a lawyer with many clients: its advocacy for one client can harm the interests of another.

The debate about horizontal shareholding and index fund activism has ignored this truth. Research on horizontal ownership tends to treat a manager and its funds as though they were a single unit with no differences among them. Traditional analyses of institutional shareholder activism tend to go the opposite direction, treating mutual funds as though they were totally independent with no connection to other funds under the same management.

By introducing a subtler understanding of big managers’ structures, I can make sense of shareholder activism more clearly. Among other things, I show why aggressive activism tends to come entirely from small managers—that is, from the managers whose potential for activism is actually the weakest.

*. Professor of Law, Yale Law School. E-mail: I thank Mark Andriola, Aslihan Asil, Eli Jacobs, John Jo, and Alex Resar for excellent research assistance. For helpful conversations and comments, I thank Vince Buccola, Florian Ederer, Marcel Kahan, Roy Katzovicz, Chuck Nathan, Roberta Romano, Dorothy Shapiro, Robert Zack, and workshop participants at the American Law and Economics Association Annual Meeting, Northwestern University Law and Economics Workshop, NYU Institute for Corporate Governance and Finance Corporate Governance Roundtable, UCLA Law School, and the Wharton School Department of Legal Studies and Business Ethics.


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The Undesirability of Mandatory Time-Based Sunsets in Dual Class Share Structures: A Reply to Bebchuck and Kastiel – Postscript (Comment) by Bernard S. Sharfman

From Volume 93, Postscript (April 2019)


The Undesirability of Mandatory Time-Based Sunsets in Dual class Share Structures: A Reply to Bebchuk and Kastiel

Bernard S. Sharfman[*]

In a 2017 Virginia Law Review article, The Untenable Case for Perpetual Dual-Class Stock,[1] Professors Lucian Bebchuk and Kobi Kastiel argued that time-based sunset provisions (the forced unification of shares into one share structure with equal voting rights after a certain period of time) should be a mandatory feature of dual class share structures (classes of common stock with unequal voting rights). This article has recently been used as authority by the Council of Institutional Investors (“CII”) to petition to the NASDAQ Stock Market (“NASDAQ”) and the New York Stock Exchange (“NYSE”) to amend their listing standards.[2] The requested amendments would require companies seeking to go public with dual class shares to include in their certificates of incorporation a time-based sunset provision that would go into effect no more than seven years after the initial public offering (“IPO”) unless minority shareholders vote to extend it up to an additional seven years.[3] This delayed unification based on a shareholder vote is incorporated in Bebchuk and Kastiel’s argument.[4]

This Article, which is based on comment letters I sent in response to the CII’s petitions,[5] argues that such a mandatory provision would be extremely unwise and harmful to our most important public companies and their shareholders, current as well as future. As a creation of private ordering, the absence of time-based sunset provisions in dual class share structures serves a significant value enhancing purpose. It prevents the risk that a premature and therefore sub-optimal unification of shares may occur. This risk has so far been ignored by those advocating for the implementation of a mandatory time-based sunset provision. As subsequently discussed, this risk has been ignored because their analysis lacks an appreciation for how the positive skewness in stock market returns negatively impacts the value of mandatory time-based sunset provisions.

I.In the Face of Private Ordering, Why the Controversy?

Market realities do not allow most companies to enter the public markets with dual class shares[6] and not every company with dual class shares is able to omit a time-based sunset provision.[7] This differentiation between IPOs is the result of private ordering. In the words of former SEC Commissioner Troy Paredes, private ordering is the freedom provided by corporate law that “allows the internal affairs of each corporation to be tailored to its own attributes and qualities, including its personnel, culture, maturity as a business, and governance practices.”[8] As several scholars have noted, “observed governance choices are the result of value maximizing contracts between shareholders and management.”[9]

Specific to dual class shares, Adena Friedman, President and CEO of Nasdaq, Inc. has said the following:

One of America’s greatest strengths is that we are a magnet for entrepreneurship and innovation. Central to cultivating this strength is establishing multiple paths entrepreneurs can take to public markets. Each publicly-traded company should have flexibility to determine a class structure that is most appropriate and beneficial for them, so long as this structure is transparent and disclosed up front so that investors have complete visibility into the company. Dual class structures allow investors to invest side-by-side with innovators and high growth companies, enjoying the financial benefits of these companies’ success.[10]

In sum, private ordering creates a strong presumption that the absence of time-based sunset provisions in many dual class share structures is value enhancing and should not be interfered with by regulatory authorities.

Unfortunately, this does not end the story. There are a number of institutional investors, such as public pension funds and investment advisers to mutual funds, as well as corporate governance activists and commentators, who analyze corporate governance arrangements not through the lens of private ordering but through the lens of shareholder democracy or empowerment.[11] This can cause one to lose sight of what is really important: making sure corporate governance arrangements are used to maximize the wealth of shareholders. It also leads to attacks on private ordering and calls for limitations on its use.

In the case of dual class shares, the attacks have been strong and impactful. For example, the two leading index providers, S&P Dow Jones Indices and FTSE Russell, have succumbed to the pressure and have taken steps to exclude dual class shares from their indices.[12] More recently, as found in the CII proposal described above, the attacks on dual class shares have focused on the absence of time-based sunset provisions in IPOs and the call for their mandatory inclusion.

II.The Argument for Mandatory Time-Based Sunset Provisions

Zohar Goshen and Assaf Hamdani argue that talented insiders may possess an “idiosyncratic vision” that allows their companies to earn excess returns.[13] Idiosyncratic vision is a term coined by Zohar Goshen and Assaf Hamdani and has two parts:

First, it reflects the parts of the entrepreneur’s business idea that outsiders may be unable to observe or verify. This could be because the entrepreneur cannot persuade investors that she is the best person to continue running the firm or that her business plan will produce superior returns. Second, it reflects the above-market pecuniary return expected by the entrepreneur, which, if the business succeeds, will be shared on a pro rata basis between the entrepreneur and investors. Importantly, idiosyncratic vision need not concern an innovation or new invention: as long as the entrepreneur has a plan that she subjectively believes will result in above-market returns, she has idiosyncratic vision.[14]

Therefore, it is not unreasonable to argue that dual class share structures add value by protecting talented insiders from the interference and distraction caused by restive and uninformed shareholders.[15] For example, back in 2012, Mark Zuckerberg faced a lot of criticism for his decision to have Facebook purchase Instagram for an expected closing price of $1 billion.[16] This acquisition occurred just one month before the company issued its dual class shares to the public.[17] To add fuel to the fire, Zuckerberg entered into the agreement without informing his board of directors.[18] To make matters worse, the price of Facebook stock fell like a rock shortly after its IPO, down 54% after four months of public trading.[19] As late as July 2015, analysts were still wondering if the acquisition would earn money for Facebook.[20]

During that time period, without a dual class share structure to protect him, Zuckerberg may have felt quarterly pressure to prove that he had made the right decision, thereby leading him into poor decisionmaking.[21] Moreover, the board may eventually have had second thoughts about allowing the very young Zuckerberg to retain operational control of the company.[22] Instagram is now estimated to have a market value of over $100 billion.[23]

Nevertheless, it is reasonable to argue that the value of a leader’s idiosyncratic vision erodes over time.[24] Even if it doesn’t erode over a leader’s lifetime, the leader’s mortality will surely put an end to his or her competitive advantage. The point being that once this value approaches zero, the value of the dual class structure will also approach zero. Moreover, if the governance arrangement is simply used to allow the controller to act opportunistically, then the shares would trade at a discount to their unification price.

It is also reasonable to argue that a company leader, who has decided to sell most of his or her shares over time and retain only a minority of the company’s shares outstanding, may avoid the unification of shares even though the value of the dual class share structure has passed and unification would yield a premium. The purpose of such a strategy would be to retain voting control of the company. To retain control, the controller would sell his or her shares with low voting power but retain shares with high voting power. This gap between share ownership and voting power is commonly referred to as the “wedge.”[25]

As Professors Bebchuk and Kastiel explain, the reason for the controller’s resistance to unification, even though the benefits of a dual class structure have passed, is “that the controller would capture only a fraction of the efficiency gains [of unification], which would be shared by all shareholders, but would fully bear the cost of forgoing the private benefits of control associated with the dual class structure.”[26] And indeed, empirical evidence appears to bear this out,[27] even though Professors Jill Fisch and Steven Solomon have taken issue with the methodologies that are used in these studies.[28] Nevertheless, it would appear that the problem of controllers wanting to delay unification, even though unification would provide a boost to the share price, is a valid concern for those investing in dual class shares without time-based sunset provisions.

In sum, based on the analysis found in this Part, the inclusion of a time-based sunset provision makes some sense. However, to come to the conclusion that they must be mandatory in every single dual class share structure one must go farther and rebut the strong presumption that private ordering is value enhancing for shareholders. To rebut this presumption, strong evidence of some sort of irrationality or market failure must be found when market participants refuse to include time-based sunset provisions in IPOs. As discussed in Part III, such evidence does not exist.

III.An Explanation for the Persistent Absence of Time-Based Sunset Provisions

It can be assumed that the downside of dual class shares without time-based sunset provisions as discussed in Part II is now common knowledge to market participants. Evidence for this is the recently reported increase in the use of time-based sunset provisions.[29] Yet, dual class share structures without such provisions remain in the majority.[30] For example, the Lyft IPO included a provision requiring unification upon the death or total disability of the last of the co-founders (event-based sunset provision), but not a time-based sunset provision.[31] Therefore, there must be something missing in the prior analysis that makes the absence of such a provision appealing to market participants. That missing element can be found in the path-breaking work of Professor Henrick Bessembinder.[32]

Professor Bessembinder observed that there is a significant amount of positive skewness in the returns of individual public companies that have made up the stock market from July 1926 to December 2016.[33] He found that “in terms of lifetime dollar wealth creation” (“accumulated December 2016 value in excess of the outcome that would have been obtained if the invested capital had earned onemonth Treasury bill returns”)[34] “the best-performing 4% of listed companies explain the net gain for the entire US stock market since 1926, as other stocks collectively matched Treasury bills.”[35] His results also showed that the sum of the individual contributions to lifetime dollar wealth creation provided by the top 50 companies represented almost 40% of total lifetime dollar wealth creation.[36] Thus, the returns earned by a relatively small number of best-performing companies were critical to the stock market earning returns above short-term Treasuries.

The understanding that positive skewness exists in stock market returns means that investors are best served if those select few firms that are expected to be the best performers in terms of returns are provided governance arrangements that give them the best shot of reaching their optimum. Governance arrangements can support this objective by making sure that the leadership skills that exist in a company at the time of its IPO are given the maximum opportunity to be utilized. This is likely why only a few select firms are provided dual class share structures without time-based sunset provisions.

While not every company that has a dual class structure without a time-based sunset provision will hit the highest of heights, the results appear to bear out that this private ordering strategy has been highly successful. Included in Bessembinder’s top fifty list of wealth creators are four companies with dual class share structures without time-based sunset provisions: Alphabet, Facebook, Berkshire Hathaway,[37] and Comcast. If Bessembinder were to rerun the numbers through 2018, it appears that another such company, Nike, would also be in the top fifty or very close to it. It is also interesting to note that these highly successful companies vary significantly in terms of the number of years from the date when they first went public with dual class shares and that in most cases the number of years out are significantly greater than seven: Alphabet (fifteen years), Facebook (seven years), Berkshire Hathaway (twenty-three years), Comcast (forty-one years), and Nike (thirty-eight years).

As of March 19, 2019, the current market values of these five best performers are quite mind-boggling: Alphabet ($835 billion), Facebook ($461 billion), Berkshire Hathaway ($505 billion), Comcast ($180 billion), and Nike ($110 billion). Together, these five companies have a market value of over $2 trillion. No wonder market participants and investors are willing to provide a small select number of firms with dual class shares that omit time-based sunset provisions. The absence of these provisions are a small price to pay—the lost returns resulting from delayed unification—for helping to make sure that those companies that are expected to be the stock market’s best performers are allowed to reach their full wealth creating potential.

Yes, on average dual class shares may persist too long without time-based sunset provisions, creating a situation where eventually a very small number of dual class shares companies that have not failed, been acquired, or have not gone through a process of voluntary unification, may have common stock that trades below their unification price. It is interesting to note that these companies are so few in number that supporters of mandatory time-based sunset provisions can only point to one that is of any significance: Sumner Redstone’s control of CBS and Viacom through National Amusements Inc.[38] However, this is not what market participants are interested in when negotiating such a governance arrangement in an IPO with dual class shares. They are willing to take the risk of delayed unification if it provides the maximum opportunity for a leader’s idiosyncratic vision to result in that company generating large asymmetric returns.

Finally, the idea of having a mandatory shareholder vote to determine if a dual class share structure should continue for up to another seven years creates new governance problems and does not solve the problem of premature unification. First, such a requirement puts pressure on a company’s leadership to make the objective of its decisionmaking the maintenance of its voting control, not the leveraging of the leader’s idiosyncratic vision for the economic benefit of its shareholders. This cannot be beneficial for shareholders or the company.

Second, according to Professors Fisch and Solomon, “[a]ny expectation that a vote of existing minority shareholders will function efficiently to identify situations in which there is value to retaining a dual class structure is highly problematic.”[39] Shareholders suffer from the problems of asymmetric information and the simple inability to make the proper evaluation of a leader’s idiosyncratic vision.[40] This leaves shareholders in the position of having the knowledge that ending the dual class share structure will expose the shares to the market for corporate control and hedge fund activism, an expected positive for the company’s share price, without being able to evaluate the cost. Since the greater risk to shareholders is cutting off the dual class share structure too soon, assuming it is a company that is still implementing the leader’s idiosyncratic vision which will lead to above market returns, this makes a shareholder vote on ending the dual class structure an extremely high-risk proposition for both the company’s shareholders and its leadership.


How the governance arrangements of IPOs are determined is best handled by market participants through the process of private ordering. If the market is concerned about dual class share structures creating family dynasties, then it will at least include an event-based sunset provision such as unification upon the death or disability of the controller. Consistent with that approach, the argument made by Professors Bebchuk and Kastiel, as reflected in the petitions presented by the CII to the NASDAQ and NYSE, will disrupt private ordering and lead to harmful results for dual class share companies and their investors. Professors Fisch and Solomon articulated these concerns in the following manner:

[A] one-size fits all approach to sunsets–like that proposed by the CII ... does not make sense. The time frame necessary for realization of [a] company’s goals is likely to vary depending on the company based on factors like the company’s maturity at the IPO stage, the duration of its business model, and the time required to develop its products or services and bring them to market.[41]

As provided by private ordering, the omission of a time-based sunset provision in dual class share structures has a defined and obvious benefit, protecting the idiosyncratic vision possessed by those companies that have been identified as possibly turning into one of the stock market’s best performers. These are the companies that allow the stock market to generate overall returns that are greater than short-term treasury rates. The cost of delayed unification for a handful of companies may be significant on an individual basis but in terms of the stock market as a whole, the effect appears de minimus. In sum, even if the implementation of a mandatory one-size-fits-all sunset provision only results in inhibiting one company from becoming the next Alphabet or Facebook, it is one company too many.

[*] *. Bernard S. Sharfman is chairman of the Main Street Investors Coalition Advisory Council, an associate fellow of the R Street Institute, and a member of the Journal of Corporation Law’s editorial advisory board. Mr. Sharfman would like to thank Attorney David Berger and Professors John C. Coates IV, Jill Fisch, and Benjamin Means for their helpful comments on the letters that serve as the foundation for this Article. The opinions expressed here are the author’s alone and do not represent the opinions of the commentators or the official position of any organization that the author is associated with.

 [1]. Lucian A. Bebchuk & Kobi Kastiel, The Untenable Case for Perpetual Dual-Class Stock, 103 Va. L. Rev. 585 (2017).

 [2]. Letter from the Council of Institutional Inv’rs, to John Zecca, Senior Vice President, Gen. Counsel North America and Chief Regulatory Officer, NASDAQ Stock Mkt. (Oct. 24, 2018), The CII sent an identical letter to the NYSE. Letter from Council of Institutional Inv’rs, to Elizabeth King, Chief Regulatory Officer, Intercontinental Exch., Inc. (Oct. 24, 2018),

 [3]. It is important to differentiate between a time-based sunset provision and an event-based sunset provision. The latter is tied to a specific event such as the death or disability of the controller or the departure of the controller from the company.

 [4]. Bebchuk & Kastiel, supra note 1, at 623.

 [5]. Letters from Bernard S. Sharfman to John Zecca, Senior Vice President, Gen. Counsel North America and Chief Regulatory Officer, NASDAQ Stock Mkt. (Mar. 21, 2019) and to Elizabeth King, Chief Regulatory Officer, Intercontinental Exch. Inc. (Mar. 21, 2019), Please note that this Article shares much of the same textual language as found in these letters. Given that the reader has this upfront knowledge, this Article will not continuously footnote quotes and cites from those letters. 

 [6]. In 2017, a banner year for IPOs with dual class share structures, only 19% of total IPOs had such a structure. Dual-Class IPO Snapshot: 2017–2018 Statistics, Council of Institutional Inv. (Jan. 2, 2019) [hereinafter Dual-Class IPO Snapshot], 20Stats%20for%20Website.pdf. In 2018, only 11% had dual class shares. Id.

 [7]. CII reported that in 2018 5 out of 15 IPOs with dual class share structures had time-based sunset provisions. Id.

 [8]. Troy A. Paredes, Comm’r, U.S. Sec. & Exch. Comm’n, Statement at Open Meeting to Propose Amendments Regarding Facilitating Shareholder Director Nominations (May 20, 2009),

 [9]. David Larcker et al., The Market Reaction to Corporate Governance Regulation, 101 J. Fin. Econ. 431, 431 (2011).

 [10]. Adena Friedman, The Promise of Market Reform: Reigniting America’s Economic Engine, Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (May 18, 2017),

 [11]. Shareholder democracy and empowerment are two intertwined concepts. Shareholder democracy was a term coined in the 1940s that “carried the normative message that greater shareholder participation in corporate governance was both possible and desirable.” Harwell Wells, A Long View of Shareholder Power: From the Antebellum Corporation to the Twenty-First Century, 67 Fla. L. Rev. 1033, 1069 (2015). It is currently associated with the idea of one-share, one-vote. See Usha Rodrigues, The Seductive Comparison of Shareholder and Civic Democracy, 63 Wash. & Lee L. Rev. 1389, 1390 (2006). Shareholder empowerment is essentially the leveraging of shareholder democracy by certain institutional investors. How this concept is to be understood in practice has been powerfully articulated by Delaware Supreme Court Chief Justice Leo Strine:

[T]here is only one set of agents who must be constrained—corporate managers—and the world will be made a better place when corporations become direct democracies subject to immediate influence on many levels from a stockholder majority comprised not of those whose money is ultimately at stake, but of the money manager agents who wield the end-users’ money to buy and sell stocks for their benefit.

Leo E. Strine, Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 Colum. L. Rev. 449, 451 (2014).

 [12]. See FTSE Russell Voting Rights Consultation Next Steps, FTSE Russell Group 3 (July 2017), Steps.pdf (explaining that the FTSE Russell bars companies from inclusion in its benchmark indexes unless more than 5% of the voting rights are in the hands of public shareholders); see also Minimum Voting Rights Hurdle, v1.3, FTSE Russell Group (Nov. 2018), downloads/Minimum_Voting_Rights_Hurdle_FAQ.pdf; Press Release, S&P Dow Jones Indices, S&P Dow Jones Indices Announces Decision on Multi-Class Shares and Voting Rules (July 31, 2017), (announcing that the S&P Dow Jones Indices has decided to exclude all new dual class share offerings, including Snap, Inc.’s, from the S&P Composite 1500 and its components, the S&P 500, S&P MidCap 400, and S&P SmallCap 600).

 [13]. Zohar Goshen & Assaf Hamdani, Corporate Control and Idiosyncratic Vision, 125 Yale L.J. 560 (2016).

 [14]. Id. at 567.

 [15]. See id. at 590 (“Uncontestable and indefinite control provides the entrepreneur with maximum ability to realize her idiosyncratic vision . . . .”).

 [16]. Facebook, Inc., Quarterly Report (Form 10-Q) (Sept. 30, 2012),

 [17]. Bernard S. Sharfman, A Private Ordering Defense of a Company’s Right to Use Dual Class Share Structures in IPOs, 63 Vill. L. Rev. 1, 1415 (2018).

 [18]. Id.

 [19]. Id.

 [20]. Id.

 [21]. Id.

 [22]. Id.

 [23]. Emily McCormick, Instagram Is Estimated to Be Worth More than $100 Billion, Bloomberg (June 25, 2018),

 [24]. See Bebchuk & Kastiel, supra note 1.

 [25]. Id. at 592.

 [26]. Bebchuk & Kastiel, supra note 1, at 592–93. The private benefits of control may include the hiring of family members instead of more qualified outsiders, self-dealing, or usurping a corporate opportunity. Id. at 603.

 [27]. See Martijn Cremers, Beni Lauterbach & Anete Pajuste, The Life-Cycle of Dual Class Firm Valuation 3538 (European Corp. Governance Inst. Fin. Working Paper No. 550, 2018),; Hyunseob Kim & Roni Michaely, Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Voting 26 (European Corp. Governance Inst. Fin. Working Paper No. 590, 2019),

 [28]. See Jill E. Fisch & Steven Davidoff Solomon, The Problem of Sunsets, B.U. L. Rev. (forthcoming 2019) (manuscript at 11), According to Professors Fisch and Solomon, “[t]he primary issue with finance studies of dual class stock is selection effects, namely that the companies that select into dual class structures differ, in important ways, from companies that adopt single class structures.” Id.

 [29]. CII reported that in 2018 five out of 15 IPOs with dual class share structures had time-based sunset provisions. See Dual-Class IPO Snapshot, supra note 6.

 [30]. Id.

 [31]. Lyft, Inc., Registration Statement (Form S-1) at 55 (Mar. 1, 2019), For an excellent discussion of the sunset provisions found in the Lyft IPO, see Lucian A. Bebchuk & Kobi Kastiel, The Perils of Lyft’s Dual-Class Structure, Harv. L. Sch. F. on Corp. Governance and Fin. Reg. (Apr. 3, 2019),

 [32]. Hendrik Bessembinder, Do Stocks Outperform Treasury Bills? 129 J. Fin. Econ. 440, 44041 (2018).

 [33]. Id. at 440.

 [34]. Id. at 454 tbl.5.

 [35]. Id. at 440.

 [36]. Id. at 454 tbl.5.

 [37]. Berkshire Hathaway is unusual in that it created its dual class share structure through the issuance of Class B shares when it was already a public company and constructively controlled by Warren Buffet. See Berkshire Hathaway, Inc., Prospectus (Form 424B4) at 35 (May 9, 1996), []. Prior to the issuance of the Class B shares, Warren Buffet owned 40.2% of the Class A shares and shared voting power over an additional 3.1% of Class A shares. See Berkshire Hathaway, Inc., Proxy Statement (Form DEF 14A) at 5 (May 6, 1996), Over time, Mr. Buffet has used the dual class share structure to reduce his economic interest in Berkshire Hathaway to 16.5% of the common stock outstanding but has retained constructive control by continuing to hold a 31.4% voting interest through his continued investment in Class A shares. See Berkshire Hathaway, Inc., Proxy Statement (Form DEF 14A) at 7 (May 4, 2019),

 [38]. Bebchuk & Kastiel, supra note 1, at 58788.

 [39]. Fisch & Solomon, supra note 28, at 19.

 [40]. Id. at 20.

 [41]. Id. at 17.