Volume 17
Volume 17.1
Everything I Know About the Bond Market I Learned from Litwin v. Allen
Richard A. Booth
This essay focuses on the classic 1940 case Litwin v. Allen, 25 N.Y.S.2d 667 (N.Y. Sup. Ct. 1940), in which the court ruled that directors and officers of a bank were liable for losses suffered by the bank from a transaction in which the bank bought a bond at a discounted price subject to an option permitting the seller to buy it back at the same price (up to) six months later. The price of the bond fell dramatically during the option period, the seller declined to buy it back, and the bank was left with the loss. The court ruled that the defendant directors and officers were not protected by the business judgment rule—which precludes liability for losses from good faith business decisions—because the deal entailed assuming an extra risk of loss without the prospect of extra return. In effect, it was a no-win bet in which the bank would break even at best. Thus, Litwin articulates one way that corporate management (and indeed any fiduciary) can be held accountable for losses suffered by the corporation (or principal) other than because of a disabling conflict of interest.
Although the Litwin court states the rule correctly, it is wrong on the facts. What the court fails to see is that the bank did bargain for extra return because it bought the bond at a discount from market value. Moreover, the bank could have hedged against the risk of loss and may indeed have been hedged by virtue of diversification. But to understand why the result in Litwin is wrong, one must understand the fundamentals of time value of money, going concern value, option pricing, portfolio theory, and many other topics typically covered in a class on corporate finance. Conversely, Litwin can be seen as a short course on the legal aspects of corporate finance and as such is an excellent teaching case. Despite being wrong on the facts, Litwin remains good law and continues to be followed by the courts, most notably by the Second Circuit in Joy v. North, 692 F.2d 880 (2d Cir. 1982), another seminal decision authored in 1982 by the late Judge (and Professor) Ralph Winter. Like Litwin, Winter's opinion in Joy can serve as a clinic in corporation law as seen at a time when legal scholars were just beginning to recognize the relevance and power of financial concepts and when new transactions and governance issues challenged old ways of thinking. This essay focuses on Litwin itself and the flaws in the reasoning thereof. The sequel will focus on the implications of the Litwin rule in connection with the interpretation of the business judgment rule as articulated in Joy by Judge Winter.
Mutual Fund “Clean Shares”: The Future or Part of It?
Michael B. Weiner
A mutual fund generally offers separate share classes to tailor its distribution fees to meet the needs of different investors. In this way, share classes are like trim levels of a car, where the car’s core attributes stay the same, but the trim levels allow consumers to pick the features and cost that best suit them. The world of mutual fund share classes received a jolt of change with the creation of so-called “clean shares,” which turn upside down how investors pay for fund distribution. After discussing the regulatory and commercial framework for share classes, this article considers whether clean shares carry through on their promise to improve fee transparency and lower investor costs. Relying on quantitative analysis, the article concludes that while clean shares are a worthy addition to the share class milieu, they are not a death knell for the status quo.
Facebook’s Corporate Law Paradox
Abby Lemert
In response to the digital harms created by Facebook’s platforms, lawmakers, the media, and academics repeatedly demand that the company stop putting “profits before people.” But these commentators have consistently overlooked the ways in which Delaware corporate law disincentives and even prohibits Facebook’s directors from prioritizing the public interest.
Because Facebook experiences the majority of the harms it creates as negative externalities, Delaware’s unflinching commitment to shareholder primacy prevents Facebook’s directors from making unprofitable decisions to redress those harms. Even Facebook’s attempt to delegate decision-making authority to the independent Oversight Board verges on an unlawful abdication of corporate director fiduciary duties. Facebook’s experience casts doubt on the prospects for effective corporate self-regulation of content moderation, and more broadly, on the ability of existing corporate law to incentivize or even allow social media companies to meaningfully redress digital harms.
Volume 17.2
Progressive Corporate Governance Under Social Capitalism: Do the Right Thing or Share the Wealth?
Amy Deen Westbrook and David A. Westbrook
This Article expands the idea of progressive corporate governance beyond the limitations entailed in the traditional debate over corporate purpose: should firms be operated for Shareholder Wealth Maximization (SWM) or for broader goods, today called Environmental, Social, and Governance (ESG) goals? In one form or another, “shareholder capitalists,” have debated with “stakeholder capitalists,” for over a century. In general, stakeholder capitalists have presented their conception of the firm’s purpose as “progressive.” This Article complicates that claim by arguing that both SWM and ESG may be understood as progressive, albeit under different understandings of the word “progressive,” different assumptions about the practicalities of corporate governance, and different understandings of today’s economy.
The circumstances of the debate over corporate purpose have changed. The contemporary U.S. economy is extremely financialized: shocks such as the Global Financial Crisis and the COVID-19 pandemic have demonstrated that institutions and individuals depend on the smooth functioning of the capital markets. Neither classical economics, on which shareholder capitalism relies, nor the tradition of social criticism, on which stakeholder capitalism depends, adequately frame this economy. Our situation is better understood in terms of “social capitalism.” Reversing Henry Sumner Maine’s famous dictum that progress is the movement from status to contract, human welfare in the United States is determined largely by station, in short, property.
Under social capitalism, a firm might be progressive in the way urged by stakeholder capitalists, by “doing the right thing.” Governance of such a firm should heed its active, influential shareholders, focusing on how the business operates. Alternatively, a firm might be progressive by “spreading the wealth” and democratizing participation in capital markets, both by individuals and institutions. Governance of such a firm practically requires delegation of control over assets to its board of directors and other fiduciaries, focusing on meeting society’s claims to economic output.
The question of what constitutes progressive corporate governance thus hinges on whether “progressive” is understood primarily in terms of operations and relatively few active shareholders, or in terms of wealth distribution and perforce delegated governance. In the age of social capitalism, the answer is likely both.
America’s First Corporate Person: The Bank of the United States, 1789-1812
Jared S. Berkowitz
This Article analyzes the centrality of legal personhood within the early American conception of the corporation. At the turn of the 19th century, Congress fiercely debated whether the General Government had the power to charter a national banking corporation, the Bank of the United States (BUS). Legal personhood, the judicial fiction that enables companies to buy, sell, and sue like ordinary individuals, was at the core of this ideological debate. Speeches supporting and opposing the BUS revealed how the corporation was conceptualized within emerging American law. Virginia’s James Madison, for example, spoke of the “civil character” and “civil rights” of the corporation. Similarly, New York’s John Lawrence warned of the corporation’s “individuality” and “irresponsibility.” Outside of Congress, legal controversies between individual states and the BUS tested the boundaries of federalism and provided judges with an opportunity to craft an American law of corporations—one that personified the institution while supporting an emerging capitalist economy. This Article reveals how legal personhood was leveraged in the early 19th century and how that history can help us navigate the challenges corporate personhood poses in our contemporary political and economic environment.
ESG’s Democratic Deficit: Why Corporate Governance Cannot Protect Stakeholders
John C. Friess
The environmental, social, and governance (ESG) movement has garnered significant attention over the past several years. This movement generally purports to focus on addressing the interests of all corporate stakeholders, such as employees, customers, the environment and the public at-large, rather than focusing solely on shareholder value. To accomplish this goal, proponents of ESG contend that corporate governance provides the best mechanism. However, this Note argues that such an approach would be detrimental. Corporate governance is a body of law and standards were created first and foremost to provide protections for shareholders vis-à-vis corporate managers; whereas, the government created distinct bodies of law to provide protection for other stakeholder groups vis-à-vis the corporation. In attempting to channel safeguards for every stakeholder group through a body of law intended to address only one such relationship, proponents of ESG are enabling a system of “self-regulation” for corporations that is both unproductive and undemocratic. Instead of outsourcing such a fundamental responsibility to shareholders and corporate boards, the government should step in to directly address the growing set of ESG issues that demand immediate attention.
Volume 17.3
The Evolving Geography of the American Antitrust Mind
Sungjoon Cho
The American antitrust regime has long been accused of countenancing the unprecedented monopolization of high-tech industries, including Facebook, Amazon, Apple, Netflix and Google. Such regulatory omission was thrown into sharp relief against the original antitrust history in which industrial behemoths, such as Standard Oil, were broken up. Yet, with a series of federal recruits of neo-Brandeisians, the Biden administration attempted to revamp the American antitrust regime. Why was the American antitrust regime passionately pro-industry in past administrations, to the extent that the very rationale of antitrust was in doubt? Also, what caused the sudden paradigm shift in the new administration? In an effort to answer these vexed questions, this Article employs a new concept of “regulatory mind,” which can be broadly defined as a basic set of assumptions, beliefs, and values that constitute a particular regulatory ideology. This Article advances a dynamic investigation of the American antitrust mind, which can elucidate the nature and identity of the American antitrust regime. First, this Article maintains that Chicago School’s market fundamentalism heavily influenced the American antitrust mind. Second, this Article seeks to corroborate such observation by tracing the dynamic shift of antitrust jurisprudence surrounding vertical price restraint (VPR). The main contribution of this Article is to reveal granular details that punctuate the analytical veil of clichéd images of American antitrust law and offer fresh insights informed by a sociological methodology of process-tracing.
SEC “Authority” and the “Major Questions” Doctrine
Robert A. Robertson and Kimberley Church
When West Virginia v. EPA appeared on the Supreme Court’s docket, the Court was set to determine the authority of the U.S. Environmental Protection Agency (“EPA”) to reduce the impact of climate change. However, the Court took the opportunity to impose a significant judicial restraint on all federal agency rulemakings. No doubt, the U.S. Securities and Exchange Commission (“SEC”) and other agencies are reviewing their recently adopted rules and proposed regulatory agendas to conform to the Court’s first comprehensive application of the “major questions” doctrine. The EPA decision will affect a host of SEC regulatory hot-button areas, such as ESG matters, corporate board diversity and cryptocurrency regulations.
Justice Roberts, writing for the Court’s majority, explained the major questions doctrine as one that should apply to “extraordinary cases” of administrative acts, where the history and the breadth of the authority asserted by the agency, and the economic and political significance of that assertion, provide “a reason to hesitate” before concluding that Congress meant to confer such authority. In such extraordinary cases, the agency instead must point to “clear congressional authorization” for the power it claims.
This Article examines the major questions doctrine’s impact on the SEC’s future regulatory rulemaking under the federal securities laws. In doing so, the Article will engage in a case study using the SEC’s recently proposed rules that would require climate-related risk disclosures to consider how the Court likely would evaluate these and other SEC regulations. The insights learned should portend a refined approach to the Commission’s regulatory actions.
U.S. Corporate Accountability in the ESG Era
Gilda Sophie Prestipino
The focus of corporate governance on Environmental, Social and Governance (“ESG”) issues has grown exponentially in recent years. The phenomenon has a global nature, and the COVID-19 pandemic has accelerated the demand for corporate leaders to take ESG seriously. In the United States, ESG-related proxy proposals and new rules on board diversity adopted by Nasdaq illustrate this change in the focus of corporate governance away from narrow attention to shareholder wealth maximization.
While practitioners and scholars have already analyzed in great detail both the practical and theoretical aspects of this paradigm shift, it is unclear whether the U.S. legal system currently provides the optimal framework for the complete realization of ESG goals. This article explores the potential for effective integration of ESG objectives into U.S. corporate law, bankruptcy practices, and securities regulation. The article suggests that, ultimately, what underlies the focus on ESG objectives is rising demand for greater accountability of corporations and their leaders, and that reputational incentives and activist campaigns have higher potential than the existing legal infrastructure.