Daniel R. Fischel

Close Corporations and Agency Costs

The economic analysis of publicly held corporations has exploded in recent years. Yet there has been little attention to the more common corporate form of organization, the closely held corporation.2 This is not because one analysis will cover both. There is a fundamental difference between closely and publicly held corporations. Risk bearing and management are separated in publicly held but not in closely held corporations. The presence or absence of this separation of functions determines the governance mechanisms that have evolved in the two types of firms.3

The Economics of Lender Liability

In July 1986, the Hunt Brothers of Dallas, Texas, weakened by losses in the silver and oil markets, defaulted on a

From MITE to CTS: State Anti-Takeover Statutes, the Williams Act, the Commerce Clause and Insider Trading

1.5 billion loan. The Hunts then filed a

Labor Markets and Labor Law Compared with Capital Markets and Corporate Law

3.6 billion lawsuit against their lenders on theories, among others, of fraud, negligent misrepresentation, breach of fiduciary duty and duty of good faith, breach of contract, and violations of the antitrust laws and the Bank Holding Company Act.1 Ten years ago, the Hunts action would have been wholly unprecedented, with virtually no probability of success. However, developments in the law since that time, in particular the emergence of the booming area of lender liability, have dramatically changed the conventional understanding of the relationship between lenders and their borrowers. In recent years banks have been subjected to liability in a number of diverse situations. State National Bank of El Paso v. Farah Manufacturing Co.2 is illustrative. William Farah was chief executive officer of FMC, a clothing company. From 1972-76, the company incurred large losses, and William Farah was subsequently replaced as CEO. In 1977, FMC and its three banks amended their outstanding loan agreements to provide that any change in FMCs top management considered by any of the banks to be adverse to their interests would constitute an act of default. The purpose of the management change clause was to prevent Farah from returning as CEO. Shortly thereafter, however, Farah sought reinstatement as CEO. The board of directors refused after the lenders took the position that Farahs return would constitute a default under the management change clause. Approximately one year later, FMC and the banks restructured the loan and deleted the management change clause-Farah subsequently regained control of the company. Under Farahs leadership, FMCs fortunes changed dramatically for the better, and the company regained profitability.

Civil RICO after Reves: An Economic Commentary

On March 10, 1986, Dynamics Corporation of America, a New York Corporation with its principal place of business in Connecticut, was the beneficial owner of approximately 9.6 percent of the common stock of CTS Corporation, an Indiana corporation with its principal place of business and substantial assets in Indiana. On the same date, Dynamics initiated a cash tender offer for another one million shares of CTS stock for

Market Evidence in Corporate Law

43 per share. The common stock of CTS was selling for approximately

The Economic Structure of Corporate Law

36 prior to the offer. If successful, the offer, coupled with the shares already owned, would give Dynamics approximately 27.5 percent of the common stock of CTS.

The Regulation of Insider Trading

This essay sketches some differences between labor and capital markets and between labor and corporate law. This is a natural comparison because labor and capital are two different factors of production in all firms. Despite the obvious appeal of this comparison, it has largely been ignored in the existing literature. Two assumptions seem to me-a nonspecialist in the field-to underlie much of contemporary labor law: (1) employers, left to their own devices, will oppress workers; and (2) this problem of worker exploitation is best handled by a federal labor policy administered by an administrative agency. Corporate law, by contrast, makes the opposite assumptions. Firms are for the most part free to adopt whatever institutional arrangement they choose; and state, not federal, law controls. What accounts for these fundamental differences? While some differences between labor and capital markets do exist, I argue that they do not justify the differences between labor and corporate law. In particular, the tendency of firms to reach efficient contractual arrangements, and to economize on transaction costs by choosing to be governed by a particular set of standard-form contractual terms embodied in state law, is relevant to both labor and capital markets. In Part I, I discuss the incentives of firms and workers (or investors) to enter into contracts that work to the mutual benefit of both; Part II touches on the probable superiority of state over federal regulation of labor (or investor) relations. In Part III, I focus on several controversial aspects of labor-management relations-the role of unions, contracts terminable at will, the right to strike, and labor constituent directors-as examples of the principles developed in the first two sections. Finally, Part IV discusses some distributional arguments that might be used to justify differ-

Voting in Corporate Law

Those who were involved in the enactment of the Racketeer Influenced and Corrupt Organizations (RICO) chapter of the Organized Crime Control Act of 19701 would be hard-pressed to recognize the statute today. Originally promulgated as a weapon to deter and penalize the infiltration of legitimate businesses by organized crime, the statute is now rarely used for that purpose. Rather, the statute has been used against defendants in a wide array of garden variety commercial disputes.2 Because RICO awards successful plaintiffs their attorneys fees and contains a mandatory treble damage provision, plaintiffs have strong incentives to proceed under RICO whenever possible. Outside professionals such as law and accounting firms-perennial deep pocket defendants-have been sued routinely under the RICO statute. Because of the divergence between the statutes purpose and how it has been interpreted, lower courts have continually attempted

Limited Liability and the Corporation

Market prices are frequently given little or no weight in resolving valuation disputes in corporate law. Under Delaware corporate law, for example, market prices can never be the sole determinant of value in appraisal proceedings and, at most, are one factor to be considered.1 Similarly, corporate managers who negotiate corporate control transactions at significant premiums under Delaware law face significant potential liability for damages because courts dismiss the premium received as irrelevant. Other jurisdictions, with rare exceptions, have followed the same approach.3 I argue here that courts should rely more heavily on market prices when resolving valuation disputes than has occurred to date. Part I of this Article discusses why market prices are superior to other methods of valuation when market prices are available and addresses the various justifications that have been advanced for limiting reliance on market prices. Part I also briefly discusses other types of market evidence. Part II surveys some of the leading cases in corporate law to illustrate how adjudication of these cases would have been improved and simplified had courts interpreted the relevant market evidence properly. Part II also extends the analysis outside corporate law to the Winstar litigation-the damage claims filed by over one hundred sav-