D. Gordon Smith

How Early Stage Entrepreneurs Evaluate Venture Capitalists

A modified truck piece for attachment to a board surface such as a skate board. The truck has two pair of extended ridges each pair having an upper and a lower ridge and each pair running the length of the truck. Skidding pads are attached to the ridges and offer a protective surface covering for the ridges and thus allow the skateboard to be tilted (rolled) to one side or the other with safety. A channel in the bottom of each truck half allows an in line set of wheels to be attached to the underside of the truck piece. The pads may be replaced or reversed as needed.

Contracts as Organizations

Empirical studies of contracts have become more common over the past decade, but the range of questions addressed by these studies is narrow, inspired primarily by economic theories that focus on the role of contracts in mitigating ex post opportunism. We contend that these economic theories do not adequately explain many commonly observed features of contracts, and we offer four organizational theories to supplement-and in some instances, perhaps, challenge-the dominant economic accounts. The purpose of this Article is threefold: first, to describe how theoretical perspectives on contracting have motivated empirical work on contracts; second, to highlight the dominant role of economic theories in framing empirical work on contracts; and third, to enrich the empirical study of contracts through application of four organizational theories: resource theory, learning theory, identity theory, and institutional theory. Outside economics literature, empirical studies of contracts are rare. Even management scholars and sociologists who generate organizational theories largely ignore contracts. Nevertheless, we assert that these organizational theories provide new lenses through which to view contracts and help us understand their multiple purposes.

The Modern Business Judgment Rule

For over 150 years, the business judgment rule performed a relatively straightforward task in the corporate governance system of the United States, namely, protecting corporate directors from liability for honest mistakes. Under the traditional version of the business judgment rule, when the board of directors is careful, loyal, and acting in good faith, courts refuse to second-guess the merits of the board’s decisions, even if the corporation and its shareholders are harmed by those decisions. While modern courts continue to insulate directors from liability for honest mistakes according to this traditional formula, in the 1980s Delaware courts began assigning the business judgment rule a more expansive role. The modern business judgment rule is applied not only in cases without procedural infirmities, but in cases where procedural infirmities at the board level have been mitigated by a special committee, stockholder approval, or partial substantive review by the court. In these new contexts, a court must satisfy itself that a board decision is worthy of respect, not because the decision was substantively correct, but because the effect of the procedural infirmities was sufficiently muted. After the court reaches that point, the business judgment rule “attaches” to protect the substantive merits of the decision from (further) review. The modern business judgment rule is not a one-size-fits-all doctrine, but rather a movable boundary, marking the shifting line between judicial scrutiny and judicial deference. In describing the transformation of the business judgment rule, this chapter focuses on Delaware judicial opinions, with special attention to cases involving mergers and acquisitions, where the most important changes in the business judgment rule have been forged. The scripting of the business judgment rule’s new role by the Delaware courts is a work in progress, and the current law is inconsistent and confusing. Nevertheless, I trace the development of the modern business judgment rule and attempt to rationalize that development around the simple idea that the rule guides courts through the review of director conduct and marks the point at which judicial evaluation of a decision ends.

The Role of Shareholders in the Modern American Corporation

This chapter from the forthcoming Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.) examines the role of shareholders in the modern American public corporation. The chapter starts with the Berle and Means (1932) problem of the separation of ownership and control, but notes that the rise of institutional investors has changed the situation. Shareholders have three main sets of rights through which they can protect themselves: the right to vote, to sell, and to sue. Each of these rights has evolved significantly in recent years. The chapter describes some of the changes and debates, and also briefly addresses the question of the proper beneficiaries of corporate decisions.

The Dystopian Potential of Corporate Law

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question. In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.