Recent uclalaw_lewps items

A Course Correction for Controlling Shareholder Transactions

Tue, 17 Dec 2024 00:00:00 +0000

A Course Correction for Controlling Shareholder Transactions

Securities Regulation and Big Business

Tue, 17 Dec 2024 00:00:00 +0000

Securities Regulation and Big Business

DExit Drivers: Is Delaware’s Dominance Threatened

Tue, 17 Dec 2024 00:00:00 +0000

DExit Drivers: Is Delaware’s Dominance Threatened

Chapter 11 at the School of Subchapter V: Part II

Tue, 17 Dec 2024 00:00:00 +0000

Chapter 11 at the School of Subchapter V: Part II

Chapter 11 at the School of Subchapter V: Part I

Tue, 17 Dec 2024 00:00:00 +0000

Chapter 11 at the School of Subchapter V: Part I

The SEC as an Entrepreneurial Enforcer

Tue, 17 Dec 2024 00:00:00 +0000

The SEC as an Entrepreneurial Enforcer

Board Control of a Charity’s Subsidiaries: The Saga of OpenAI

Mon, 16 Dec 2024 00:00:00 +0000

Board Control of a Charity’s Subsidiaries: The Saga of OpenAI

Climate Policy Reform Options in 2025

Mon, 16 Dec 2024 00:00:00 +0000

Climate Policy Reform Options in 2025

Do We Need a Restatement of the Law of Corporate Governance?

Thu, 7 Jul 2022 00:00:00 +0000

: The American Law Institute (ALI) has embarked on a Restatement of the Law of Corporate Governance. As with all Restatements, the purpose of the Restatement of corporate law is to clarify “the underlying principles of the common law” that have “become obscured by the ever-growing mass of decisions in the many different jurisdictions, state and federal, within the United States.” Corporate law, however, does not suffer from such problems. In a majority of states, the Model Business Corporation Act provides detailed statutory guidance as to which common law functions, at most, interstitially. In addition, corporate law is virtually unique in being dominated by the law of a single jurisdiction; namely, Delaware. Given the prominence of Delaware law in this field, a Restatement of corporate law is unlikely to be influential.

Corporate Directors in the United Kingdom

Fri, 17 Mar 2017 00:00:00 +0000

Abstract: In the United States, state corporation law uniformly provides that only natural persons may serve as directors of corporations. Corporations, limited liability companies, and other entities otherwise recognized in the law as legal persons are prohibited from so serving. In contrast, the United Kingdom allowed legal entities to serve as directors of a company. In 2015, however, legislation came into force adopting a general prohibition of these so-called corporate directors, albeit while contemplating some exemptions. This article argues that there are legitimate reasons companies may wish to appoint corporate directors. It also argues that the transparency and accountability concerns that motivated the legislation are overstated. The requisite enhancement of transparency and accountability can be achieved without a sweeping ban. Accordingly, this article proposes that Parliament either repeal the ban or,...

Director versus Shareholder Primacy in New Zealand Company Law as Compared to U.S.A. Corporate Law

Tue, 20 Dec 2016 00:00:00 +0000

Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decision maker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail? On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. On the ends question, prior scholarship has tended to favor either shareholder primacy or various stakeholder theories. In contrast, this author has proposed a “director primacy” model in which the board of directors is the ultimate decision maker but is required to evaluate decisions using shareholder wealth maximization as the governing normative rule. Shareholder primacy is widely assumed to be a defining characteristic of New Zealand company law. In assessing that assumption, it is essential to...

Comments on the HHS' Flawed Post-Hobby Lobby Rules

Tue, 20 Dec 2016 00:00:00 +0000

In late August 2014, after suffering a defeat in the Supreme Court Hobby Lobby decision when the Court held that business corporations are "persons" that can "exercise religion," the Department of Health and Human Services ("HHS") proposed new rules defining "eligible organizations." Purportedly designed to accommodate the Hobby Lobby ruling, the proposed rules do not comport with the reasoning of that important decision and they unjustifiably seek to permit only a small group of business corporations to be exempt from providing contraceptive coverage on religious grounds. This comment letter to the HHS about its proposed rules makes several theoretical and practical points about the Hobby Lobby holding and how the proposed rules fail to reflect the Court’s reasoning. The letter also addresses other approaches to avoid in the rulemaking process and argues for rules that, unlike what the HHS has proposed, align with the Supreme Court’s reasoning while being consonant with generally...

The Parable of the Talents

Tue, 20 Dec 2016 00:00:00 +0000

On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished. Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely...

Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal

Tue, 20 Dec 2016 00:00:00 +0000

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called shareholder proposal rule), to not just manage but even micromanage corporate decisions.

The rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micro-management. The rule permits management to exclude proposals on a number of both technical and substantive bases, of which the...

Preserving Director Primacy by Managing Shareholder Interventions

Tue, 20 Dec 2016 00:00:00 +0000

This is a draft chapter for a forthcoming research handbook on shareholder power and activism. This chapter provides an analysis of shareholder activism based on the so-called director primacy model of corporate governance, which argues for a board-centric, rather than a shareholder-centric, understanding of corporate governance.Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.There are strong normative arguments for disempowering shareholders...

Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker

Tue, 20 Dec 2016 00:00:00 +0000

Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering...

Multiple Claims, Ivanhoe and Substantive Consolidation

Mon, 19 Dec 2016 00:00:00 +0000

The Supreme Court's 1935 Ivanhoe decision created the specter of undue multiplication of claims, particularly in bankruptcies that involve large business enterprises conducted through many separate legal entities. Ivanhoe should be overruled on its own facts, but even if it is not, its extension to other situations is indefensible. Until overruled, Ivanhoe is properly limited to creditors secured by nondebtor collateral, foreclosure of which does not give rise to reimbursement or subrogation claims against the bankruptcy estate. While even in that case Ivanhoe overcompensates the creditor, such cases are rare and do not entail large-scale multiplication of claims against bankruptcy estates. If Ivanhoe is so limited, co-debtor liability among insolvent estates can be dealt with through a form of marshaling described in this Article. Otherwise, the practical second-best solution to the multiple claims problem is likely to remain liberal...

Textualism's Failures: A Study of Overruled Bankruptcy Decisions

Mon, 19 Dec 2016 00:00:00 +0000

This Article presents new empirical evidence bearing on the efficacy of textualism as a method of statutory interpretation. The data set consists of all bankruptcy decisions superseded by amendments to the Bankruptcy Code 1978-1998 (N=58), but the results have meaningful implications for theory and practice in interpreting statutes outside the bankruptcy field as well. Analysis of the bankruptcy decisions indicates that the cases subsequently overruled by statute are much more likely to adopt textualist methods of interpretation (p<.001) than randomly selected cases. If rational and efficient development and administration of complex statutory schemes in a manner consistent with democratically selected policies is the primary goal of interpretation, this evidence supports judicial reconsideration of textualism and should reinforce pragmatists' commitment to pragmatic interpretation. Analysis of legislatively overruled bankruptcy decisions also lends insight into other variables...

Creditors' Committees as Estate Representatives in Bankruptcy Litigation

Mon, 19 Dec 2016 00:00:00 +0000

This article defends the longstanding practice of the bankruptcy courts authorizing Creditors' Committees to prosecute specified causes of action on behalf of Chapter 11 bankruptcy estates in particular circumstances against theoretical criticisms of that practice that have emerged in the wake of the decisions in Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1 (2000) and Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. en banc 2003).

Recalibrating Consent in Bankruptcy

Tue, 13 Dec 2016 00:00:00 +0000

In bankruptcy, business realities collide with legal rules that themselves create conflicting rights. Unsurprisingly, accommodations are made. Consent bridges gaps among conflicting legal rules and business realities, justifying pragmatic solutions to problems that could not otherwise be imposed under prevailing legal rules. Consent’s transformative power is so essential to the bankruptcy process, that resort to consent, in principle and in rhetoric, is reflexive in bankruptcy. Manufacturing consent to support practical accommodations, rather than simply mirroring prebankruptcy entitlements, is at the heart of bankruptcy law as it has evolved in the United States. Bankruptcy uses a panoply of tools to generate consent: inertia, ambiguity, proxies, relaxed standards for establishing consent, novel procedures and institutional structures, and new substantive rights. New circumstances in the twenty-first century, and the teachings of experience, require close reexamination of how...

Opinions First - Argument Afterwards

Tue, 13 Dec 2016 00:00:00 +0000

For twenty-five years, the California Supreme Court has operated under a bizarre internal operating procedure that requires majority opinions to be written and agreed to prior to oral argument. This procedure squanders and demeans the parties’ formal opportunity for appellate argument, is inconsistent with traditional common law appellate process, and violates the state and federal Constitutions.

No Conflict

Tue, 13 Dec 2016 00:00:00 +0000

For thirty years, American lawyers have labored under an onerous dis-qualification rule precluding them from being “directly adverse” to a client in a matter unrelated to that on which the client has engaged the lawyer. The rule is ahistorical, idiosyncratic, and has led to anomalous and untoward consequences. It derives from a misconception of the lawyer’s role and duty. It should be abrogated.

The Convergence of Good Faith and Oversight

Thu, 8 Dec 2016 00:00:00 +0000

In Stone v. Ritter, 911 A.2d 362 (Del. 2006), two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation’s employees for law compliance. As to the former, Stone puts to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that “although good faith may be described colloquially as part of a ‘triad’ of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly.” 911 A.2d at 370. Nevertheless, this holding may not matter much, because the Stone court makes clear that acts taken in bad faith breach the duty of loyalty....

Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties

Wed, 7 Dec 2016 00:00:00 +0000

Jeffrie Murphy has noted that “John Rawls claimed that justice is the first virtue of social institutions,” but Murphy then went on to ask “what if we considered agape to be the first virtue? What would law then be like?” When I was asked to contribute a paper on business organization law to a conference organized around Murphy’s question, the conference call immediately brought to mind then-Judge Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced, however hard the abnegation.” The parallels between Cardozo’s framing of the partner’s duties and a standard definition of agape, which holds that it is a “self-renouncing love,” are obvious and striking.What then would partnership fiduciary duty law be like if it were organized around the value of agape? This essay concludes that partners need not love one another, at least as a matter of legal...

A Third Way: Examiners as Inquisitors

Wed, 7 Dec 2016 00:00:00 +0000

“Litigate or settle” is the choice generally available to disputants in American courts, including bankruptcy courts. In authorizing examiners, however, the Bankruptcy Code provides one very specific procedural device peculiarly suited to introduce inquisitorial process into a chapter 11 case. Until recently, examiners were seldom employed, and even when employed were not a true inquisitorial alternative to “litigate or settle.” Rather, examiners would determine the legal sufficiency of a disputed claim but not opine on the merits or undertake to resolve factual disputes. The Tribune chapter 11 case, however, took a different approach to the examiner’s role. While not quite fully embracing an inquisitorial alternative to traditional bankruptcy dispute resolution, Tribune and a series of post-Tribune investigations have shown that inquisitorial methods make sense in certain large bankruptcy cases involving complex legal disputes. It may well be that chapter 11 examiners are...

Fee Shifting: Delaware's Self-Inflicted Wound

Wed, 7 Dec 2016 00:00:00 +0000

In a 2014 opinion (ATP Tour, Inc. v. Deutscher Tennis Bund), the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a non-profit, non-stock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about 50 Delaware corporations adopted such bylaws.

In its 2015 legislative session, however, the Delaware legislature adopted amendments to the Delaware General Corporation Law (S.B. 75) that effectively bans such bylaws. This article argues that this ban is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar, to explain why the Delaware legislature would have inflicted such a serious wound on itself.

This...

The Best of All Possible Worlds? - A Rejoinder to Justice Liu

Wed, 7 Dec 2016 00:00:00 +0000

This Rejoinder defends the thesis of Opinions First -- Argument Afterwards by addressing criticisms raised by Justice Goodwin Liu in his forthcoming article How the California Supreme Court Actually Works: A Reply to Professor Bussel, 61 UCLA Law Review (2014).

A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood

Wed, 7 Dec 2016 00:00:00 +0000

The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods.

On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act.

Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete...

The Problem with Preferences

Wed, 7 Dec 2016 00:00:00 +0000

This paper critiques Brook Gotberg’s recent proposal to reform preference law by creating a new safe harbor for preferences in chapter 11 while repealing certain existing preference defenses in chapter 7. The proper path of reform in this area would preserve preference recovery as a feature of chapter 11 reorganization law while raising the monetary limits on minimum recoveries, restricting financial contract safe harbors and bolstering ordinary trade creditor defenses across both chapter 11 and chapter 7.

Ethics for Examiners

Mon, 5 Dec 2016 00:00:00 +0000

“Litigate or settle” is the choice generally available to disputants in American courts, including federal bankruptcy courts. In authorizing examiners, however, the Bankruptcy Code provides one very specific procedural device peculiarly suited to introduce inquisitorial process into a chapter 11 case. Until recently, examiners were seldom employed, and even when employed were not a true inquisitorial alternative to “litigate or settle.” Rather, examiners would determine the legal sufficiency of a disputed claim but not opine on the merits or undertake to resolve factual disputes. In "A Third Way: Examiners As Inquisitors," 90 Am. Bankr. L. J. 59 (2016), I identify and assess an emerging new approach to the bankruptcy examiner’s role. While not quite fully embracing an inquisitorial alternative to traditional bankruptcy dispute resolution, In re Tribune Co. and a series of post-Tribune investigations show that inquisitorial methods may be productively employed in certain...

Bondholders and Securities Class Actions

Tue, 20 Jan 2015 00:00:00 +0000

Prior studies of corporate and securities law litigation have focused almost entirely on cases filed by shareholder plaintiffs. Bondholders are thought to play little role in holding corporations accountable for poor governance leading to fraud. This Article challenges this conventional view in light of new evidence that bond investors are increasingly recovering losses through securities class actions. From 1996 through 2000, about 3% of securities class action settlements involved a bondholder recovery. From 2001 through 2005, the percentage of bondholder recoveries increased to about 8% of all securities class action settlements. Bondholders were involved in 4 of the 5 and 19 of the 30 largest securities class action settlements, and tended to recover in frauds associated with a credit downgrade. By 2005, almost half of all securities class actions alleged claims on behalf of all public investors, not just shareholders. The rise in bondholder recoveries is evidence that securities...

Causation and Foreseeability

Tue, 19 Feb 2013 00:00:00 +0000

This paper critiques the theory of causation offered by Steven Shavell and proposes a new theory that more successfully predicts the results of proximate cause cases. Two doctrines of proximate cause exist: “direct consequences” and “reasonable foresight.” We can explain case law best if we assume that both doctrines must be satisfied in order for negligence liability to exist. Thus, the two doctrines do not represent alternative conceptions of proximate cause as some analysts have proposed. Proximate cause limitations are prominent when a party has inadvertently, as opposed to deliberately, omitted a reasonable precaution. Actors cannot efficiently reduce their inadvertent lapses to zero. In situations in which the defendant’s conduct has been “possibly efficient,” causation doctrines truncate liability. This truncation has the effect of preserving efficient activity levels and preventing actors from substituting inefficiently durable...

Retiree Out-of-Pocket Health Care Spending: A Study of Expert Views, Consumer

Fri, 14 Sep 2012 00:00:00 +0000

A mounting body of health care research reports that American retirees are likely to face large and increasing expenditures for out-of-pocket health care costs and that they often struggle to finance these expenditures. It is, however, unclear whether the general population understands what their likely out-of-pocket health care expenditures might be in retirement. It is even less clear whether the population appreciates how much these costs can vary from person to person and over time. It is critically important to know whether Americans understand these costs and to what degree misunderstanding might hamper their financial planning for retirement, especially in light of recent discussion of Medicare reform that could affect these costs.

This article explores this previously unexamined question of how much Americans expect to pay for their out-of-pocket health care spending in etirement. To answer this question,we surveyed 2000 near retirees and retirees to gauge...

Relative Value Health Insurance: A Behavioral Law and Economics Solution to the Medical Care Cost Crises

Fri, 17 Aug 2012 00:00:00 +0000

Now that the Supreme Court has upheld the constitutionality of the Patient Protection and Affordable Care Act (“PPACA”), access to medical care will sharply increase. But the new law will do little to reign in the rapidly increasing cost of medical care in the United States. Regulatory controls on prices or benefits, favored by some on the left, are political non-starters in today’s environment. Consumer directed health care (“CDHC”) proposals, which seek to provide patients with financial incentives to equate marginal costs and benefits at the point of treatment and is favored by many on the right, is infeasible because of the skewed distribution of health care expenses and patient bounded rationality. New approaches are desperately needed.

This article proposes a government-facilitated but market-based approach to improvingefficiency in the market for medical care that I call “relative value health insurance.” The approach would enable even boundedly-rational...

The Borat Problem In Contract Law: Fraud, Assent, And Standard Forms

Tue, 9 Aug 2011 00:00:00 +0000

Two parties reach an oral agreement. The first then presents a standard form contract, which the second signs without reading, or without reading carefully. When the second party later objects that the first did not perform according to the oral representations, the first party points out that the signed document includes different terms or disclaims prior representations and promises. I call this all-too-common occurrence the “Borat problem,” after litigation over the 2006 movie of that name based on this fact pattern.

The Borat problem exists on the blurry border between tort and contract law. This article describes the doctrinal indeterminacy and the underlying normative problem of bilateral opportunism that has caused courts to respond to the problem in a variety of inconsistent and unsatisfying ways. It then makes the case that the costs of contracting can be minimized if parties who draft standard form contracts are required to obtain “specific assent” from...

Managerial Judging Goes International But Its Promise Remains Unfulfilled: An Empirical Assessment of the Reforms to Expedite the Procedure of the International Criminal Tribunal for the Former Yugoslavia

Tue, 21 Sep 2010 00:00:00 +0000

This article analyzes whether managerial judging reforms introduced to expedite procedure at the International Criminal Tribunal for the former Yugoslavia (ICTY) achieved their goal. Using survival analysis, the paper tests the hypothesis that the higher the number of reforms a case was subjected to, the shorter the pretrial and trial phase of that case should be. Our six models for pretrial and trial reveal that in all pretrial and trial models the number of reforms is significantly correlated with longer pretrial and trial. The article explains that reforms made process longer rather than shorter because ICTY judges did not use their managerial powers or used them deficiently, and prosecution and defense managed to neutralize the implementation of the reforms. To explain judges’ behavior, the paper articulates an unnoticed challenge for managerial judging—the court is likely to have limited information about the case that may lead judges to restrict use of their managerial...

When American Small Business Hit the Jackpot: Taxes, Politics and the History of Organizational Choice in the 1950s

Wed, 11 Mar 2009 00:00:00 +0000

While many political developments affected American small businesses during the twentieth century, the enactment of Subchapter S of the Internal Revenue Code was of particular significance. For the first time Congress was inclined to, at least partially, eliminate the double tax burden. Following the S Corporation, state legislatures formed other hybrid entities and gradually reduced the barriers to limited liability and other non-tax characteristics of organizational choice. Today, we observe a steady increase in the number of hybrid entities, which indicates that people favor the pass-through approach for taxation. At the same time, it is apparent that the existence of different federal tax regimes still plays a significant role in investors' choice of action. This article begins with the question: How did the American small business community achieve political victory where large organizations had failed? Put differently, how was it that the "little fellow" accomplished...

Unavoidable Accident

Tue, 3 Feb 2009 00:00:00 +0000

In negligence law, "unavoidable accident" is the risk that remains when an actor has used due care. The counterpart of unavoidable accident is "negligent harm." Negligence law makes parties immune for unavoidable accident even when they have used less than due care. Courts have developed a number of methods by which they "sort" accidents to unavoidable accident or to negligent harm, holding parties liable only for the latter. These sorting techniques are interesting in their own right and also provide a way of conceptualizing the relationship between specific negligence and res ipsa loquitur, which are two variants of the negligence rule. One judicial sorting technique reveals a paradox of negligence law. New safety technology often reduces the amount of unavoidable accident and simultaneously increases the expected number of "compliance errors," or routine negligent lapses, that actors will make. Paradoxically, an actor's use of new safety technology can make it more likely...

The Negligence Dualism

Tue, 3 Feb 2009 00:00:00 +0000

When Oliver Wendell Holmes synthesized the writs of trespass and trespass on the case, he left out of his gloss of modern accident law an extremely important part, namely, the strict liability that everyone faces for routine errors, such as failing to check one’s blind spot before changing lanes.

One proof of how poorly the language of negligence fits the strict liability that actually exists for routine “compliance errors” is the debate among legal historians about whether the modern tort rule governing accidents is less strict than the classical English rule. As I develop in the article, the modern accident rule is, in reality, strikingly similar to the ancient accident rule. Holmes’s neglect of the strict liability component of the modern negligence rule has hindered our understanding of both it and the classical accident rule.

When we see clearly what the strict-liability component of the modern negligence rule is, it opens a new window on negligence theory.

Toward a Positive Economic Theory of Antitrust

Wed, 17 Dec 2008 00:00:00 +0000

Most economists associate antitrust policy with the Sherman and Clayton Acts. Nonetheless, there is in England and America a much older body of antitrust law, namely, the common law of restraint of trade. This regulation, like language and markets, evolved over a long period of time. This article examines whether the rules that the common law courts developed can be explained by a hypothetical wish to maximize social wealth and concludes that many of them can be. The last part of the article outlines a theory of legal evolution.

The Free Radicals of Tort

Fri, 5 Dec 2008 00:00:00 +0000

Rational and irrational people are typically held to an identical tort standard when it is a question of their own liability. On the other hand, when it is a question of whether someone else has encouraged some dangerous behavior, as under the doctrines of duty and proximate cause, the encouragers will be liable only when the persons were part of a group whose members typically lack rationality. The courts' apparent purpose is to prevent accidents in every way possible even if it means diluting the incentives of irrational people in order to increase the incentives of responsible people to refrain from creating tempting opportunities for them.

BMW v. Gore: Mitigating the Punitive Economics of Punitive Damages

Fri, 5 Dec 2008 00:00:00 +0000

In BMW v Gore, the Supreme Court held that a state court's award of punitive damages was so excessive that it violated the Due Process Clause. In three other recent cases, the Court had rejected due process challenges to large awards of punitive damages. Although the Court did not articulate an economic rationale, these four cases are consistent with a theory under which federal courts should intervene only when there is a high risk that punitive damages will systematically appropriate wealth from the citizens of other states. Rather than apply due process analysis directly to punitive damages awards, the Court might more usefully revise the constitutional rules regulating the exercise of long-arm jurisdiction. With clear and realistic rules allowing firms to avoid states in which juries are not adequately restrained, the mechanisms of federalism would adequately control excessive punitive damages. Gore may be an effort to approximate this result by other means.

Proximate Cause Decoded

Fri, 5 Dec 2008 00:00:00 +0000

Some have seen the doctrine of proximate cause as an especially incoherent feature of negligence law. This Article demonstrates that the doctrine is far more regular than many have supposed. Proximate cause is really two doctrines at the same time, one directed toward cases with multiple causes and another directed toward cases with multiple risks. Each doctrine includes distinct paradigms leading to either liability or nonliability. When we sort problem cases between these paradigms, we can reliably predict how the courts will decide them.

The Mechanisms of Market Inefficiency: An Introduction to the New Finance

Mon, 18 Apr 2005 00:00:00 +0000

During the 1970s and early 1980s, the Efficient Capital Market Hypothesis (ECMH) became one of the most widely-accepted and influential ideas in finance economics. More recently, however, the idea of market efficiency has fallen into disrepute as a result of market events and growing empirical evidence of inefficiencies. This essay argues that the weaknesses of the efficient market theory are, and were, apparent from a careful inspection of its initial premises, including the presumptions of homogeneous investor expectations, effective arbitrage, and investor rationality. By the same token, a wide range of market phenomena inconsistent with the ECHM can be explained using market models that modify these three assumptions. In illustration, this Article explores three important strands of today's finance literature: (1) the expanding body of work on asset pricing when investors have heterogeneous expectations; (2) recent theoretical and empirical scholarship on how and why arbitrage...

On the Export of U.S.-Style Corporate Fiduciary Duties to Other Cultures: Can A Transplant Take?

Mon, 18 Apr 2005 00:00:00 +0000

This essay explores the feasibility of exporting U.S.-style corporate fiduciary duty rules to other nations. It suggests that fiduciary duty rules are best understood as open-ended standards of behavior that exhort corporate officers, directors, and controlling shareholders to focus on the firm's interests rather than their own, in circumstances where a failure to do this often would be difficult to punish. Put differently, fiduciary rules ask corporate insiders to show altruistic concern for the firm and its shareholders. Extensive empirical evidence demonstrates that altruistic behavior is in fact common, predictable, and reliable among U.S. subjects. However, a recent study also reports significant cross-cultural differences in altruistic behavior. The essay explores some possible sources of such cross-cultural differences, and what each implies about the challenges to be faced in transplanting fiduciary duty rules to other societies. In the process, it offers insight into...

The Shareholder As Ulysses: Some Empirical Evidence on Why Investors in Public Corporations Tolerate Board Governance

Mon, 18 Apr 2005 00:00:00 +0000

Why do investors in public corporations cede control over corporate assets and outputs to a board of directors, rather than retaining control for themselves? This Article reviews two possible explanations for why shareholders tolerate board control: the monitoring hypothesis, which posits that shareholders rely on boards primarily to control the "agency costs" associated with turning day-to-day control over the firm to self-interested corporate executives; and the mediating hypothesis, which posits that shareholders also seek to "tie their own hands" by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of stakeholder groups such as creditors, executives, and employees. Part I of the Article reviews each hypothesis and concludes that each is theoretically plausible and internally consistent. As a result, the validity of each only can be established, or rejected, on the basis of empirical evidence.

Part II of the Article...

On the Proper Motives of Corporate Directors (Or, Why You Don't Want to Invite Homo Economicus to Join Your Board)

Mon, 4 Apr 2005 00:00:00 +0000

One of the most important questions in corporate governance is how directors of public corporations can be motivated to serve the interests of the firm. Directors frequently hold only small stakes in the companies they manage. Moreover, a variety of legal rules and contractual arrangements insulate them from liability for business failures. Why then should we expect them to do a good job?

Conventional corporate scholarship has great difficulty wrestling with this question, in large part because conventional scholarship usually adopts the economist's assumption that directors are rational actors motivated purely by self-interest. This homo economicus model of behavior may be fundamentally misleading when applied to corporate directors. The institution of the corporate board is premised on the expectation, and the experience, of director altruism, in the form of a sense of obligation to the firm and its shareholders. As a result, to properly understand the role and conduct...

On the Nature of Corporations

Mon, 4 Apr 2005 00:00:00 +0000

Legal experts traditionally distinguish corporations from unincorporated business forms by focusing on such corporate characteristics as limited shareholder liability, centralized management, perpetual life, and freely transferred shares. While this approach has value, this essay argues that the nature of the corporation can be better understood by focusing on a fifth, often-overlooked, characteristic of corporations: their capacity to lock in equity investors' initial capital contributions by making it far more difficult for those investors to subsequently withdraw assets from the firm. Like a tar pit, a corporation is much easier for equity investors to get into, than to get out of.

An emerging school of theorists has begun to explore the implications of this idea for corporate law and practice. The idea is still novel enough to lack a uniformly-accepted label - in addition to the phrase capital lock-in, scholars have described this aspect of incorporation as affirmative...

Share Price as a Poor Criterion for Good Corporate Law

Mon, 4 Apr 2005 00:00:00 +0000

Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price.

Contemporary economic and corporate theory (as well as recent business history) nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, including the problem of private information; obstacles to effective arbitrage; investors' cognitive defects and biases; options theory and the problem of multiple residual claimants; and the problem of corporate spillover effects that erode diversified shareholders' returns. These considerations argue against assuming there...