Edward B. Rock

The Corporate Form as a Solution to a Discursive Dilemma

I examine the connection between the discursive dilemma and corporate law. The discursive dilemma (or doctrinal paradox) is a distinctive social choice problem that was first identified by Kornhauser and Sager and later used as the basis for a theory of organizational personality by Pettit. I examine the ways in which the corporate form prevents the emergence of the discursive dilemma in the firm context and the extent to which the presence of the discursive dilemma can provide the foundation for a theory of corporate personality.

Symbiotic Federalism and the Structure of Corporate Law

In the public debate sparked by the corporate scandals of the last years, Delaware has been strikingly absent. In contrast to the high profile activity of Congress, the Securities and Exchange Commission, the stock exchanges, federal prosecutors, and even state law enforcement officials, Delaware has been largely mute: no legislation; no rule-making; no criminal investigations; few headlines. In this Article, we use Delaware’s relative passivity during this latest episode of corporate law-making as a starting point in the analysis of the shape of American corporate federalism and Delaware’s place within it. We argue that Delaware long ago opted for what we will call a “classical” or “19 century” common law model of corporate law-making. In Delaware, corporate law is largely judge-made; judicial opinions are filled with quasi-deterministic reasoning; statutory law is comparatively narrow and rarely subject of partisan disputes; the judiciary as well is relatively non-partisan and has claim to technical expertise; and the law is enforced through litigation brought by private parties. We view these traits through the lens of the institutional and political landscape in which Delaware must operate. This landscape is characterized by a federalist system in which Delaware’s regulatory powers co-exist with, and can be constrained by, the powers of the federal government. In this system, Delaware is faced with the threat that populist pressures will lead to a federal preemption of Delaware corporate law and thus eradicate the huge profits Delaware derives from being the domicile of choice for public-traded U.S. corporations. By creating and enhancing an apolitical gloss over Delaware’s corporate law, the various traits we identify help shield Delaware against this threat. At the same time, the scope of Delaware’s corporate law is designed to minimize conflicts by assuring that Delaware has the requisite personal jurisdiction over defendants to enforce its law effectively and that the prevailing conflict rules point to substantive Delaware law as applicable to a corporate law dispute. But this classical model of law making carries with it intrinsic limitations. Specifically, legal change is slow, standard-based and incremental. Faced with the recent corporate scandals, calls for action, and Sturm und Drang, Delaware reacted accordingly: Basically, it does nothing until cases are brought. Any more pro-active response by Delaware actors would have threatened to undermine the political legitimacy achieved by Delaware’s commitment to the classical common law model. But because the classical common law style, together with jurisdictional and conflict rules, constrain Delaware, federal law is needed to complement Delaware’s. In that respect, the relation between federal law and Delaware law is symbiotic, rather than antagonistic: Delaware is happy to have federal law pick up the slack and thereby reduce the likelihood that ineffective regulation produces a populist backlash.

Shareholder Eugenics in the Public Corporation

In a world of active, empowered shareholders, the match between shareholders and public corporations can potentially affect firm value. This article examines the extent to which publicly held corporations can shape their shareholder base. Two sorts of approaches are available: direct/recruitment strategies; and shaping or socialization strategies. Direct/recruitment strategies through which “good” shareholders are attracted to the firm include: going public; targeted placement of shares; traditional investor relations; the exploitation of clientele effects; and de-recruitment. “Shaping” or “socialization” strategies in which shareholders of a “bad” or unknown type are transformed into shareholders of the “good” type include: choice of domicile; choice of stock exchange; the new “strategic” investor relations; and capital structure. For each type of strategy, I consider the extent to which corporate and securities law facilitates or interferes with the strategy, as well as the ways in which it controls abuse. In paying close attention to the relationship between shareholder base and firms, this article attempts to merge investor relations, very broadly construed, with corporate governance.

Antitrust and the Market for Corporate Control

Introduction ................................................... 1367 I. The Importance of Competition in the Market for Corporate Control ........................................ 1370 A. The Antitrust Perspective ............................ 1371 1. Distributional Effects ............................. 1372 2. Allocational Effects ............................... 1376 a. Allocating Control to the Highest Valuing User .................................. 1376 i. Effects of Bidding Agreements on Potential Bidders .......................... 1377 ii. Efficient Allocation Among Bidders ........ 1377 b. Potential Allocational Inefficiencies from the Distributional Effects .......................... 1381 B. The Importance of Protecting Competition for Control, Regardless of Ones Views Concerning Takeovers ................................ 1382 II. The Arguments Against Protecting Competition for Corporate Control ........................................ 1386 A. The Principal Case: Kalmanovitz v. Heileman ......... 1387 1. A Critique ........................................ 1388 B. Preemption/Implied Immunity Under the W illiam s Act ......................................... 1391 1. The Williams Act and the Sherman Act Do Not Impose Inconsistent Requirements on Bidders ..... 1391 2. Legislative History of the Williams Act ............ 1393 3. Judicial Interpretation of the Scope of the W illiams Act ..................................... 1394 C. The SEC and Bidding Agreements .................... 1396 D. The Fit with Delaware Law .......................... 1399 E. The First Conclusion: Antitrust Should Apply ........ 1401 III. Towards an Antitrust Jurisprudence of the Market for Corporate Control ......................................... 1402 A. The Problem: The Variety of Agreements ............. 1402

Does Majority Voting Improve Board Accountability

Directors have traditionally been elected by a plurality of the votes cast. This means that in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a majority voting rule in which a candidate must receive a majority of the votes cast to be elected. Over the past decade, they have been successful, and the shift to majority voting has been one of the most popular and successful governance reforms.Yet critics are sceptical as to whether majority voting improves board accountability. Tellingly, directors of companies with majority voting rarely fail to receive majority approval – even more rarely than directors of companies with plurality voting. Even when such directors fail to receive majority approval, they are unlikely to be forced to leave the board. This poses a puzzle: why do firms switch to majority voting and what effect does the switch have, if any, on director behavior?We empirically examine the adoption and impact of a majority voting rule using a sample of uncontested director elections from 2007 to 2013. We test and find partial support for four hypotheses that could explain why directors of majority voting firms so rarely fail to receive majority support: selection; deterrence/accountability; electioneering by firms; and restraint by shareholders.Our most dramatic finding is a substantial difference between early and later adopters of majority voting. The early adopters of majority voting appear to be more shareholder-responsive than other firms. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in shareholder-responsiveness going forward. By contrast, later adopters, as a group, seem to have adopted majority voting only semi-voluntarily. Among this group, majority voting seems to have led to more shareholder-responsive behavior.These differences between early and late adopters have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Reform advocates, rather than targeting the firms that, by their measures, are most in need of reform, instead seem to have targeted the firms that are already most responsive. They then seem to use the widespread adoption of majority voting to create pressure on the non-adopting firms. Empirical studies of the effects of governance changes thus need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms.

Corporate Law through an Antitrust Lens

Antitrust law provides a better framework than corporate law for analyzing issues at the boundary between firms and markets. Such issues arise when shareholders are also competitors. For example, antitrust analysis calls into question the practice of joint bargaining by shareholders targeted by tender offers. Other issues illuminated by antitrust analysis include stakeholder coalitions and state antitakeover statutes.

Antitrust for Institutional Investors

With the increasing concentration of shares in the hands of large institutional investors, combined with greater involvement in corporate governance, the antitrust risk of common ownership has moved to center stage. Through an excess of enthusiasm, portfolio managers could end up exposing their firms and the portfolio companies to huge antitrust liability. In this Article, we start from basic antitrust principles to sketch out an antitrust compliance program for institutional investors and for the investor relations groups in portfolio companies. In doing so, we address the fundamental antitrust issues (explicit and tacit coordination) raised by the presence of common ownership by large, diversified investors. We then turn to more speculative concerns that have garnered a great deal of attention and that, to our eyes, threaten to divert attention from the core antitrust issues. We critically examine the claims of this newer literature, as illustrated by Azar, Schmaltz and Tecu (2017), that existing ownership patterns in the airline industry results in substantially higher prices. We then turn to the argument in Elhauge (2016) that existing ownership patterns violate Section 7 of the Clayton Act. Finally, we find the policy recommendations of Posner, Scott Morton, and Weyl (2017) to limit the ownership shares of multiple firms in oligopolistic industries to be overly stringent. To limit the chilling effect of antitrust on the valuable role of institutional investors in corporate governance, we propose a quasi “safe harbor” that protects investors from antitrust liability when their ownership share is less than 15 percent, the investors have no board representation, and they only engage in “normal” corporate governance activities.

Anti-Activist Poison Pills

Hedge funds have become active in corporate governance. They push for changes in strategy and the adoption of specific business plans. Their tactics include buying shares, conducting public campaigns, lobbying managers and other shareholders, seeking representation on the board of directors, and sometimes running a proxy contest. In response, boards have adopted a variety of “defensive measures” including deploying “poison pill” shareholder rights plans against activists. This article provides a comprehensive policy and doctrinal analysis of the use of poison pills again activists in corporate governance contests (as distinguished from corporate control contests). We argue that, because of the significance of the specific design features – features that have so far received little judicial attention – it is increasingly important to scrutinize pills to assure that they are targeted to address legitimate objectives. Various design features of a pill interact and features that may be harmless in pills designed to fend off a hostile takeover are unjustifiable in pills employed against an activist hedge fund. While a board, acting in good faith, should be permitted to use a pill to preserve and perfect the shareholder decision-making process, it should, in doing so, act as a “neutral election board.”