Michael Klausner

Outside Director Liability: A Policy Analysis

Outside directors of public companies play a central role in overseeing management. Nonetheless, they have rarely incurred personal, out-of-pocket liability for failing to carry out their assigned tasks, either in the litigation-prone United States or other countries. Historically, as threats to this near-zero personal liability regime have appeared, market and political forces have responded to restore the status quo. We suggest here reasons to believe that this arrangement is justifiable from a policy perspective, at least in countries where reputation and other extra-legal mechanisms provide reasonable incentives for outside directors to be vigilant.

Lockups and the Market for Corporate Control

This paper analyzes the effect of lockups on the market for corporate control. We demonstrate that lockups can affect the outcome of bidding contests and that judicial leniency toward lockups would have detrimental effects on the disciplinary influence of the takeover threat and on the number of value-enhancing acquisitions that occur. Scholarship to date on lockups has argued that lockups are generally ineffective in allowing target managers to influence who acquires a target firm. Accordingly, scholars who have taken this position have advocated leniency in judicial review of lockups. We explain that this prior analysis has failed to take full account of the impact that the legal treatment of lockups has on the ex ante willingness of potential bidders to enter an auction, and thus fails to take full account of the ultimate influence a lockup can have on who acquires a target. We then examine the proper legal treatment of lockups from the perspectives of shareholder wealth maximization and social wealth maximization, and we propose an alternative to the current legal standard.

When Time Isn't Money: Foundation Payouts and the Time Value of Money

Since their original enactment in 1969, the minimum payout rule applicable to charitable foundations has allowed foundations to distribute funds at a rate that is roughly consistent with a foundation remaining in existence in perpetuity. Most foundations make grants at the minimum rate or slightly higher. Commentators have argued that faster payout rates are socially superior to slower payout rates, and that higher payout rates should be legally mandated. One argument that has been made invokes the concepts of discounted cash flow and the time value of money in support of this argument. This article explains why those concepts are irrelevant to the foundation payout issue and begins to develop an appropriate framework for analyzing the intergenerational allocation of foundation funds.

Institutional Shareholders' Split Personality on Corporate Governance: Active in Proxies, Passive in IPOs

For well over a decade, institutional shareholders have fought proxy battles with corporate management over matters of corporate governance. They have opposed takeover defenses and advocated such structures as independent boards and board committees, confidential voting, and the separation of the CEO and chairman positions. At the same time, however, hundreds of companies whose shares those same institutions own, through venture capital and other private equity funds, have gone public with charters containing the same takeover defenses that institutions oppose when the institutions are in the proxy battle mode - and without the governance provisions that they advocate. This article reports data on the apparently inconsistent behavior of institutional investors and asks the question: Why do institutional investors actively advocate their view of good governance in the proxy context but passively accept what they consider bad governance among the companies in which they invest through private equity funds? The article concludes with some potential (but ultimately unsatisfying) explanations.