Board of Directors
Corporate Governance and Countervailing Power
Brian R. Cheffins, 74(1) 1-52 (Winter 2018/2019)
The analysis of corporate governance has been a one-sided affair. The focus has been on “internal” accountability mechanisms, namely boards and shareholders. Each has become more effective since debates about corporate governance began in earnest in the 1970s but it is doubtful whether this process can continue. Correspondingly, it is an opportune time to expand the analysis of corporate governance. This article does so by focusing on three “external” accountability mechanisms that can operate as significant constraints on managerial discretion, namely governmental regulation of corporate activity, competitive pressure from rival firms, and organized labor. A unifying feature is that each was an element of a theory of “countervailing power” economist John Kenneth Galbraith developed in the 1950s with respect to corporations, an era when external accountability mechanisms did more than their internal counterparts to keep management in check.
Rethinking the Board of Directors: Getting Outside the Box
Stephen M. Bainbridge, 74(2) 285-296 (Spring 2019)
Externalizing Board Governance Means Changing the Board’s Function
Kelli Alces Williams, 74(2) 297-306 (Spring 2019)
Do Conflicts of Interest Require Outside Boards? Yes. BSPs? Maybe
Usha R. Rodrigues, 74(2) 307-312 (Spring 2019)
Upstream Liability, Entities as Boards, and the Theory of the Firm
Andrew Verstein, 74(2) 313-328 (Spring 2019)
Board Governance for the Twenty-First Century
Faith Stevelman and Sarah C. Haan, 74(2) 329-350 (Spring 2019)
Board 3.0: An Introduction
Ronald J. Gilson and Jeffrey N. Gordon, 74(2) 351-366 (Spring 2019)
Capitalism and Pragmatism Govern New Paradigms for Corporate Governance
Philip C. Thompson, 74(2) 367-372 (Spring 2019)
Outsourcing the Board: A Rebuttal
M. Todd Henderson, 74(2) 373-386 (Spring 2019)
Reconsidering Stockholder Primacy in an Era of Corporate Purpose
David J. Berger, 74(3) 659-676 (Summer 2019)
Ideology matters. Since the 1980s stockholder primacy has been the dominant ideology shaping corporate law. As a result, case law, director conduct, and our understanding of “best governance practices” have all been viewed under a single prism: how do these rules impact stockholder value? Even the recent debate over corporate purpose has largely been limited to stockholders, directors, and (of course) academics. Excluded from the debate are the vast majority of the population that owns little or no stock, as well as other corporate stakeholders such as employees and communities. This article considers how the discussion of corporate purpose is limited by stockholder primacy, and how a true debate over corporate purpose may require a reconsideration of the dominant ideology over stockholder purpose.
Simple Insolvency Detection for Publicly Traded Firms
J.B. Heaton, 74(3) 723-734 (Summer 2019)
This article addresses current limitations of financial-market-based solvency tests by proposing a simple balance-sheet solvency test for publicly traded firms. This test is derived from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation. The solvency test requires only the assumption that the market value of assets equals the sum of the market value of the firm’s debt plus the market value of the firm’s equity. The solvency test is a generated upper bound on the total amount of debt the firm can have and still be solvent or, alternatively, the minimum amount of stock-market capitalization the firm must have if it is solvent at current debt prices. The virtue of the method—apart from its ease of implementation—is that it makes possible the detection of balance-sheet insolvent firms notwithstanding the possibility that not all of the firm’s liabilities—including hard-to-quantify contingent liabilities—can be identified. As a result, the method allows for the detection of balance-sheet insolvent firms that otherwise might escape detection. The method proposed here can identify insolvent firms that should be retaining assets and not paying them out to shareholders as dividends or repurchases, identify stocks that brokers and investment advisers should treat as out-of-the-money call options that may be unsuitable investments, and can help auditors identify publicly traded firms that are candidates for going-concern qualifications and other disclosures.
Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets
Jonathan Macey and Joshua Mitts, 74(4): 1015-1064
In this article, we make several contributions to the literature on appraisal rights and similar cases in which courts assign values to a company’s shares in the litigation context. First, we applaud the recent trend in Delaware cases to consider the market prices of the stock of the company being valued if that stock trades in an efficient market, and we defend this market-oriented methodology against claims that recent discoveries in behavioral finance indicate that share prices are unreliable due to various cognitive biases. Next, we propose that the framework and methodology for utilizing market prices be clarified. We maintain that courts should look at the market price of the securities of a target company whose shares are being valued, unadjusted for the news of the merger, rather than at the deal price that was reached by the parties in the transaction.
Confronting the Problem of Fraud on the Board
Joel Edan Friedlander; 75(1): 1441-1494 (Winter 2019-2020)
Recent precedents make it difficult to challenge transactions approved by a board of directors and a stockholder majority. When should such cases be filed, proceed beyond the pleading stage, and prevail? My answer is that judicial intervention should remedy and detertortious misconduct that corrupts board decision-making (i.e., misconduct that the Delaware Supreme Court has called “illicit manipulation of a board’s deliberative processes” or “fraud upon the board”). Commission of fraud on the board is an omnipresent temptation for self-interested controllers, activist stockholders, officers, financial advisors, and their legal counsel. Fraud can be used to put a company in play, steer a sale process toward a favored bidder, suppress the sale price to a controller, or make a favored bid look more attractive.
Interview with Marty Lipton
Jessica C. Pearlman; 75(2): 1709-1724 (Spring 2020)
In September of 2019, after wrapping up meetings of the Mergers and Acquisitions (“M&A”) Committee of the Business Law Section of the American Bar Association (“ABA”), I took the train from Washington, D.C. to New York City to meet with Marty Lipton—the well-known founder of Wachtell, Lipton, Rosen & Katz—in a conference room at his firm. It was perfect timing to have this conversation with Mr. Lipton, given recent developments relating to corporate views on the constituencies corporations may take into account in their decision-making.
Dodge v. Ford Motor Co. at 100: The Enduring Legacy of Corporate Law’s Most Controversial Case
Michael J. Vargas, 75(3): 2103-2122 (Summer 2020)
This article examines Dodge v. Ford on its 100th anniversary. In Dodge v. Ford, the Michigan Supreme Court held that a business corporation is organized for the profit of its shareholders, and the directors must operate it in service to that end. Despite the fact that Dodge v. Ford is rarely cited in judicial opinions, the case continues to spark controversy in legal scholarship. There is little justification for this scholarly attention because the factual basis is little more than a caricature of Henry Ford, and subsequent developments in corporate law have all but eviscerated the precedential value of the case. Rather, the legacy of Dodge v. Ford may simply be that it serves as a convenient talisman, standing for the one sentence anyone actually cares about and rolled out with each new battle in the war between shareholder profit maximization and corporate social responsibility.