Table Of Content

The Corporate Contract in Changing Times The Corporate Contract in Changing Times Is the Law Keeping Up? edited by steven dav idoff solomon and r andall stuart thomas the university of chicago press chicago and london The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2019 by The University of Chicago All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission, except in the case of brief quotations in critical articles and reviews. For more information, contact the University of Chicago Press, 1427 E. 60th St., Chicago, IL 60637. Published 2019 Printed in the United States of America 28 27 26 25 24 23 22 21 20 19 1 2 3 4 5 isbn- 13: 978- 0- 226- 59940- 3 (cloth) isbn- 13: 978- 0- 226- 59954- 0 (e- book) doi: https:// doi .org/ 10 .7208/ chicago/ 9780226599540 .001 .0001 Library of Congress Cataloging-in-Publication Data Names: Davidoff Solomon, Steven, 1970– editor. | Thomas, Randall S., 1955– editor. Title: The corporate contract in changing times : is the law keeping up? / edited by Steven Davidoff Solomon and Randall Stuart Thomas. Description: Chicago ; London : The University of Chicago Press, 2019. | Includes bibliographical references and index. Identifi ers: lccn 2018035074 | isbn 9780226599403 (cloth : alk. paper) | isbn 9780226599540 (ebook) Subjects: lcsh: Contracts—United States. | Contracts—Delaware. | Corporations— Investor relations—United States. | Corporations—Finance—Law and legislation— United States. Classifi cation: lcc kf801.c677 2019 | ddc 346/.066—dc23 lc record available at https://lccn.loc.gov/2018035074 This paper meets the requirements of ansi/niso z39.48– 1992 (Permanence of Paper). Contents Foreword vii Leo E. Strine Jr. Introduction 1 chapter 1. Why New Corporate Law Arises: Implications for the Twenty- First Century 3 Robert B. Thompson chapter 2. The Rise and Fall of Delaware’s Takeover Standards Steven Davidoff Solomon and Randall S. Thomas 29 chapter 3. In Search of Lost Time: What If Delaware Had Not Adopted Shareholder Primacy? 48 David J. Berger chapter 4. The Odd Couple: Delaware and Public Benefi t Corporations 88 Michael B. Dorff chapter 5. Delaware’s Diminishment? 110 Hillary A. Sale chapter 6. Delaware and Financial Risk 130 Frank Partnoy chapter 7. Hedge Fund Activism, Poison Pills, and the Jurisprudence of Threat 156 William W. Bratton vi Contents chapter 8. Corporate Governance beyond Economics 183 Elizabeth Pollman chapter 9. The Many Modern Sources of Business Law 206 Colleen Honigsberg and Robert J. Jackson Jr. chapter 10. Appraisal after Dell 222 Guhan Subramanian chapter 11. Boilermakers and the Contractual Approach to Litigation Bylaws 244 Jill E. Fisch chapter 12. Litigation Rights and the Corporate Contract 273 Verity Winship chapter 13. Private Ordering Post- Trulia: Why No- Pay Provisions Can Fix the Deal Tax and Forum Selection Provisions Can’t 292 Sean J. Griffi th chapter 14. International Compliance Regimes 319 Stavros Gadinis List of Contributors 337 Index 339 Foreword Leo E. Strine Jr. As you read this provocative collection of incisive refl ections on whether the corporate contract is keeping up with changing times, you might usefully refl ect on this question: Is corporate law scholarship keeping up with a rapidly changing world? This excellent gathering of thoughts from many of America’s leading corporate law scholars brought this question to my mind as I considered how some of our best minds have approached new dynamics from what largely seem to be the same perspectives that have long shaped academic corporate law thinking. Writing a foreword that does justice to such a di- verse collection of provocative essays is a task, as an evidence treatise would say, beyond my ken. What you take from the essays will inevita- bly depend on your perspective, the mood you are in when you dig into them, and your openness to new ideas. Perhaps the only real service I can be to you, the reader, is to share a few reactions I had to the collection, with the idea that they may inspire you to consider how the various pieces, taken as a whole, might reveal some promising paths forward for new thinking and policy ideas. As in most cases when various minds come together, the most inter- esting way to read this collection is to consider the dissonance of the various perspectives, and what that suggests about the state of thinking and of actual corporate governance dynamics. For example, several eminent scholars1 suggest that Delaware has adopted a form of corporate law, of both the statutory and common law variety, that limits stockholder infl u- ence markedly.2 They also seem to lament the relative scarcity of judicial injunctions, yearning nostalgically for another period such as 1985–1 988, when they were all the rage.3 By contrast, another learned commentator viii Leo E. Strine Jr. bemoans the extent to which Delaware corporate law has required directors, within the limits of their legal and ethical discretion, to make stockholder welfare the end of for- profi t corporate governance, with other constituencies entitled to consideration only to the extent that doing so is consistent with advancing stockholder welfare.4 Because of Delaware’s prominence, he speculates that judicial rhetoric elevating other constituencies to the same level as the only constituency given rights in the Del- aware General Corporate Law would have stimulated much different, other- regarding behavior by corporations. Still others suggest that recent Delaware efforts to adopt a form of for-p rofi t corporation that explicitly requires that all corporate constituencies be treated as an end of governance and be treated with due regard are arguably unnecessary because all Delaware corporations can already do that.5 What I found curious in this clash, honestly, was the lack of a consistent focus on the power structure established by Delaware law (and utilized in concert with federally mandated disclosures and Rule 14a- 8) that has affected the real world within which for- profi t public entities that make products and deliver services must operate. Bemoaning the absence of injunctions under Unocal and Revlon in an era when struc- tural defenses have been largely torn down and it has never been eas- ier to take over a company without a fi ght seems to miss the most important reality. Suggesting that somehow Delaware judicial protection of the ballot box has been eroded in an era when proxy fi ghts are more common than ever, dissident directors are regularly seated on boards, and companies back down constantly at the threat of a fi ght also seems to be misdirected. But then again, so, too, does suggesting that the world would be a different place if the Delaware judiciary had simply stated that directors of for- profi t entities could regard constituencies such as workers and the community as equal ends of for-p rofi t governance with the only citizens recognized by American corporate law— stockholders. After all, in jurisdictions in the United States where antitakeover and constituency statutes were adopted, there is no discernible trend toward protecting other constituencies. Outsourcing, offshoring, and regula- tory shortcuts are just as, if not more, common, in corporations char- tered in such states. Perhaps all that is different is that management has had more potential to use those statutes as leverage for itself. No trend of their use for workers exists. Likewise, I yearned to see in the chapters a connection between the incentive systems within which key actors work and the policy points. Foreword ix For example, the excellent chapter on the importance of director over- sight in the context of fi nancially important fi rms cries out for a recogni- tion that market pressures on corporate governance may have led bank boards to be less equipped to manage externality risk and less willing to do so.6 Firms that engaged in the activities that led to the fi nancial crisis got a premium for that behavior before the bubble burst.7 And of course, these very fi nancial institutions had lobbied to relax the regula- tory framework within which they conducted huge- scale fi nancial activ- ity, posing risks for our entire economy. Not only that, but the push for heightened independence standards and boards with large supermajori- ties of independent directors may have led to the seating of supposedly independent directors with no industry or professional experts to over- see risk effectively and who were more responsive to immediate market pressures than to the interests of long- term stockholders and the sta- bility of the fi nancial system more generally. Is it really that Caremark8 with more teeth would do the trick? Or do we need to address the power dynamics that affect corporate boards, including the behavior of institu- tional investors and their priorities? Put simply, I sense that clear-e yed and big- hearted thinkers such as Adolf Berle, as a corporate law specialist, or George Orwell, as a keen observer of human affairs, would be struck by the extent to which these learned thinkers let their priors and focus on past policy debates distract them from the more important overall trends in the real world over the past decades. The comparative strength of stock market forces over corporations has grown, just as all for-p rofi t corporations have been forced to deal with intense international competition in product and services markets. In an environment where only one corporate constituency has power, when the legal moves have shifted power to the directors most sensitive to stock market pressures and the reputational threat of tan- gling with stockholder activists— professional independent directors with no strong ties to any company and with an ardent desire to stay in the independent director network—i t is not surprising that corporations have increasingly adopted the business and governance policies that the most vocal in the market demand. The most vocal does not mean the most rational, and none of the chapters focus on this fact. Rather, the most vocal are the most active traders, the ones who deviate from stable buy-a nd-h old policies the most and, of course, those for whom corporate governance sport has become a hobby. As a result, corporate governance policies have moved in the direction of a “corporate California”