The efficient norm for corporate law: A neotraditional interpretation of fiduciary duty

Michigan Law Review

Volumn 98, Issue 1, 1999, Pages 214-267

  Smith, Thomas A ^a  

^a NONE

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EID: 0000778914     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: 10.2307/1290199     Document Type: Article

References (143)

1. "[A] distinction," Lawrence Mitchell notes, "that has been slighted in the law." Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 TEXAS L. REV. 579, 586 (1992); see also Donald E. Schwartz, Defining the Corporate Objective: Section 2.01 of the ALI's Principles, 52 GEO. WASH. L. REV. 511, 512 (1984).
2. "[A] distinction," Lawrence Mitchell notes, "that has been slighted in the law." Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 TEXAS L. REV. 579, 586 (1992); see also Donald E. Schwartz, Defining the Corporate Objective: Section 2.01 of the ALI's Principles, 52 GEO. WASH. L. REV. 511, 512 (1984).
3. The Oxford English Dictionary defines reification as "the mental conversion of a person or abstract concept into a thing." 13 THE COMPACT EDITION OF THE OXFORD ENGLISH DICTIONARY 532 (2d ed. 1989).
4. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
5. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
6. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
7. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
8. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
9. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
10. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
11. See, e.g., ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932); MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 97 (1995) (Corporate law scholars "generally agree[ ] that management's principal fiduciary duty is to maximize the return to the common shareholders . . . ."); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423 (1993); A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Kenneth B. Davis, Jr., Discretion of Corporate Management to Do Good at the Expense of Shareholder Gain - A Survey of, and Commentary on, the U.S. Corporate Law, 13 CAN.-U.S. L.J. 7, 8 (1988) ("[M]aximization of shareholder value is the polestar of managerial decisionmaking."); A.A. Sommer, Jr., Whom Should the Corporation Serve: The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991). For a good summary of the shareholder primacy norm in legal scholarship, see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 277-83 (1998).
12. See, e.g., PROGRESSIVE CORPORATE LAW (Lawrence G. Mitchell ed., 1995); Margaret M. Blair, Stakeholders as Shareholders, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, 109 HARV. L. REV. 1150 (1996); William W. Bratton, Jr., Public Values and Corporate Fiduciary Law, 44 RUTGERS L. REV. 675 (1992); Wai Shun Wilson Leung, The Inadequacy of Shareholder Primacy: A Proposed Corporate Regime that Recognizes Non-Shareholder Interests, 30 COLUM. J.L. & SOC. PROBS. 587 (1997); David Millon, Communitarians, Contractarians, and the Crisis in Corporate Law, 50 WASH. & LEE L. REV. 1373 (1993); David Millon, Redefining Corporate Law, 24 IND. L. REV. 223 (1991) [hereinafter Millon, Redefining Corporate Law]; Lawrence E. Mitchell, A Critical Look at Corporate Governance, 45 VAND. L. REV. 1263 (1992) [hereinafter Mitchell, A Critical Look]; Mitchell, supra note 1.
13. See. e.g., FLA. STAT. ch. 607.0830(3) (1997); GA. CODE ANN. § 14-2-202(b)(5) (1994); HAW. REV. STAY. § 415-35(b) (1993 Replacement); ILL. ANN. STAT. ch. 32, para. 8.85 (Smith-Hurd Supp. 1992); ME. REV. STAT. ANN. tit. 13A, § 716 (West 1981); MASS. GEN. LAWS ANN. ch. 156B, 65 (West 1992); MINN. STAT. ANN. 302A.251 (West 1985); MISS. CODE ANN. 79-4-8.30(d) (Supp. 1988); N.J. STAT. ANN. 14A:6-1(2) (West 1969); N.M. STAT. ANN. 53-11-35(D) (Michie Supp. 1993); OHIO REV. CODE ANN. 1701.59(E) (Baldwin 1995); WIS. STAT. ANN. 180.0827 (West 1995). Some apply only when an acquisition proposal is under review. See ARIZ. REV. STAT. ANN. § 10-2702(1996); IDAHO CODE § 30-1602, -1702 (1995); IOWA CODE ANN. 491.101B (West 1991); LA. REV. STAT. ANN. § 12:92 G (West 1994); Mo. REV. STAT. § 351.347 (1994). Some place other constituencies in putative equality with shareholders. See IND. CODE ANN. 23-1-35-1(f) (West Supp. 1998); IOWA CODE ANN. § 491.101B (West 1991); 15 PA. CONS. STAT. ANN. § 515 (1995). For scholarly reaction to constituency statutes, see Stephen M. Bainbridge, Interpreting Nonshareholder Constituency Statutes, 19 PEPP. L. REV. 971 (1992); William J. Carney, Does Defining Constituencies Matter?, 59 U. CIN. L. REV. 385 (1990); Eric W. Orts, Beyond Shareholders: Interpreting Corporate Constituency Statutes, 61 GEO. WASH. L. REV. 14 (1992); Patrick J. Ryan, Calculating the "Stakes" for Corporate Stakeholders as Part of Business Decision-Making, 44 RUTGERS L. REV. 555 (1992); Steven M.H. Wallman, The Proper Interpretation of Corporate Constituency Statutes and Formulation of Director Duties, 21 STETSON L. REV. 163 (1991).
14. See, e.g., Dodge v. Ford Motor Co., 170 N.W. 668, 684 (1919); Lyman Johnson, The Delaware Judiciary and the Meaning of Corporate Life and Corporate Law, 68 TEXAS L. REV. 865 (1990); John H. Matheson & Brent A. Olson, Corporate Law and the Longterm Shareholder Model of Corporate Governance, 76 MINN. L. REV. 1313 (1992); Smith, supra note 3, at 277. For other statements of duty to shareholders in case law, see Revlon, Inc. v. MacAndrews and Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1986); Polk v. Good, 507 A.2d 531, 536 (Del. 1986); Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985); Aronson v. Lewis, 473 A.2d 805. 811 (Del. 1984); Francis v. United Jersey Bank, 432 A.2d 814, 824 (N.J. 1981).
15. See EASTERBROOK & FISCHEL, supra note 3, at 68; Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 STETSON L. REV. 23, 26-29 (1991). For an unsympathetic account of the link between shareholder primacy and economic analysis, see Johnson, supra note 6, at 884-86. Both proponents and critics, however, believe that shareholder primacy is grounded in an economic view.
16. Lyman Johnson, for example, inveighs as follows: [W]hile the notions of accountability and efficiency serve as [the economic] model's apparent lifelines to more widely shared social norms, the dreary egoistic underpinnings make it clear that those notions are only enticing window dressing; they are not essential. The contractual model subscribes to the root norm that, in a pinch, people do - therefore they should - act to save their own skin. If that is one's sense of life, why should the ethos in work and business or corporate law be different? . . . [It] reminds one of B.F. Skinner's work with pigeons. Johnson, supra note 6, at 895-96 (citations omitted).
17. See, e.g., Lynne L. Dallas, Working Toward a New Paradigm, in PROGRESSIVE CORPORATE LAW 35, 39-49 (Lawrence G. Mitchell, ed., 1995); David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW 1, 4-10 (Lawrence G. Mitchell, ed., 1995); Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 CORNELL L. REV. 856 (1997); Paul N. Cox, The Public, the Private and the Corporation, 80 MARQ. L. REV. 391 (1997); Lyman Johnson, Individual and Collective Sovereignty in the Corporate Enterprise, 92 COLUM. L. REV. 2215 (1992); Johnson, supra note 6; David Millon, Default Rules, Wealth Distribution, and Corporate Law Reform: Employment at Will Versus Job Security, 146 U. PA. L. REV. 975 (1998); Millon, Redefining Corporate Law, supra note 4; David Millon, Theories of the Corporation, 1990 DUKE L.J. 201 (1990); Marleen A. O'Connor, Symposium, Corporate Malaise - Stakeholder Statutes: Cause or Cure?, 21 STETSON L. REV. 3 (1991); Marleen A. O'Connor, Restructuring the Corporation's Nexus of Contracts: Recognizing a Fiduciary Duty to Protect Displaced Workers, 69 N.C. L. REV. 1189 (1991) [hereinafter O'Connor, Restructuring]; Orts, supra note 5; Lewis D. Solomon, Humanistic Economics: A New Model for the Corporate Constituency Debate, 59 U. CIN. L. REV. 321 (1990).
18. EASTERBROOK & FISCHEL, supra note 3, at 90-93.
19. The contractual approach to the firm was developed by economists, see Armen A. Alchian & Harold Demsetz, Production, Information Costs, and Economic Organization, 62 AM. ECON. REV. 777, 794 (1972); Ronald Coase, The Nature of the Firm, 4 ECONOMICA 386, 390-92 (1937); Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305, 307-08 (1976); William A. Klein, The Modern Business Organization: Bargaining Under Constraints, 91 YALE L.J. 1521, 1521 (1982); Oliver Williamson, Corporate Governance, 93 YALE L.J. 1197, 1200 (1984); and applied by lawyers, see, e.g., Lucian Arye Bebchuk, Contractual Freedom in Corporate Law - Foreword: The Debate on Contractual Freedom in Corporate Law, 89 COLUM. L. REV. 1395 (1989) [hereinafter Bebchuk, Contractual Freedom]; Lucian Arye Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 HARV. L. REV. 1820, 1840-46 (1989) [hereinafter Bebchuk, Limiting Contractual Freedom]; Henry N. Butler & Larry E. Ribstein, State Anti-Takeover Statutes and the Contract Clause, 57 U. CIN. L. REV. 611, 615-17 (1988). For a critical view of contractualism, see William W. Bratton Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407 (1989).
20. See EASTERBROOK & FISCHEL, supra note 3, at 90-91; Daniel R. Fischel, The Corporate Governance Movement, 35 V AND. L. REV. 1259, 1264 (1982); Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 STETSON L. REV. 23, 25 (1991).
21. A financial claim is a legal claim against a financial asset - a claim that might arise, for example, from ownership. A financial asset is an asset such as a stock, bond, right, certificate, etc., as distinguished from a tangible, physical asset. For example, real property is a physical asset, but shares in a real estate investment trust (REIT) or stock or bonds of a company that held property as an investment would be financial assets. See JOHN DOWNES & JORDAN ELLIOT GOODMAN, FINANCE AND INVESTMENT HANDBOOK 311 (4th ed. 1995). Many assets, such as tort claims, are not normally considered financial assets but can be converted into financial assets through a process of "securitization." See, e.g., Thomas A. Smith, A Capital Markets Approach to Mass Tort Bankruptcy, 104 YALE L.J. 367, 419-32 (1994).
22. For authors suggesting a fiduciary duty to bondholders, see supra note 4.
23. See Henry T.C. Hu, New Financial Products, The Modern Process of Financial Innovation, and the Puzzle of Shareholder Welfare, 69 TEXAS L. REV. 1273 (1991).
24. See id. at 1277; see also Bernard J. Karol & Mary B. Lehman, Equity Derivatives, 27 REV. OF SEC. & COMM. REG. 121 (1994); Edward D. Kleinbard, Equity Derivative Products: Financial Innovation's Newest Challenge to the Tax System, 69 TEXAS L. REV. 1319 (1991); Thomas A. Russo, Regulation of Equity Derivatives, 815 PLI/CORP 335 (1993); Saul Hansell, Is the World Ready for Synthetic Equity?, INSTITUTIONAL INVESTOR, Aug. 1990, at 54; Claire Makin, Hedging Your Derivatives Doubts, INSTITUTIONAL INVESTOR, Dec. 1991, at 113.
25. See THE HANDBOOK OF EQUITY DERIVATIVES 3-32 (Jack Clark Francis et al. eds, 1995); Jeffrey Allen, Reinventing a Corporation: The "Satellite" Structure of Thermo Electron, 11 J. APP. CORP. FIN., Summer 1998, at 38; Jeffrey Allen & John McConnell, Equity Carve-outs and Managerial Discretion, 53 J. FIN. 163 (1998); Hu, supra note 15, at 1288-1300; Bernard J. Karol, An Overview of Derivatives as Risk Management Tools, 1 STAN. J.L. BUS. & FIN. 195, 203 (1995); Dennis E. Logue et al., Rearranging Residual Claims: A Case for Targeted Stock, 25 J. FIN. MGMT. 43 (1996); Roni Michaely & Wayne H. Shaw, The Choice of Going Public: Spin-offs vs. Carve-outs, 24 J. FIN. MGMT. 5 (1995); Vikram Nanda, On the Good News in Equity Carve-outs, 46 J. FIN. 1717 (1991).
26. See Allen, supra note 17.
27. See JOHN F. MARSHALL & VIPUL K. BANSAL, FINANCIAL ENGINEERING: A COMPLETE GUIDE TO FINANCIAL INNOVATION 475-492 (1992); Issuers Opt For Hybrid Securities, 2 INS. FIN. & INV. No. 26 (1997); Karol, supra note 17, at 203; Kerry Capell, High Yields, Low Cost, Funny Names, BUS. WK., Sept. 9, 1996, at 122; R.S. Salomon, Jr., Profitable Hybrid, FORBES, Apr. 24, 1995, at 404.
28. See JOHN F. MARSHALL & VIPUL K. BANSAL, FINANCIAL ENGINEERING: A COMPLETE GUIDE TO FINANCIAL INNOVATION 475-492 (1992); Issuers Opt For Hybrid Securities, 2 INS. FIN. & INV. No. 26 (1997); Karol, supra note 17, at 203; Kerry Capell, High Yields, Low Cost, Funny Names, BUS. WK., Sept. 9, 1996, at 122; R.S. Salomon, Jr., Profitable Hybrid, FORBES, Apr. 24, 1995, at 404.
29. See JOHN F. MARSHALL & VIPUL K. BANSAL, FINANCIAL ENGINEERING: A COMPLETE GUIDE TO FINANCIAL INNOVATION 475-492 (1992); Issuers Opt For Hybrid Securities, 2 INS. FIN. & INV. No. 26 (1997); Karol, supra note 17, at 203; Kerry Capell, High Yields, Low Cost, Funny Names, BUS. WK., Sept. 9, 1996, at 122; R.S. Salomon, Jr., Profitable Hybrid, FORBES, Apr. 24, 1995, at 404.
30. See JOHN F. MARSHALL & VIPUL K. BANSAL, FINANCIAL ENGINEERING: A COMPLETE GUIDE TO FINANCIAL INNOVATION 475-492 (1992); Issuers Opt For Hybrid Securities, 2 INS. FIN. & INV. No. 26 (1997); Karol, supra note 17, at 203; Kerry Capell, High Yields, Low Cost, Funny Names, BUS. WK., Sept. 9, 1996, at 122; R.S. Salomon, Jr., Profitable Hybrid, FORBES, Apr. 24, 1995, at 404.
31. Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., No. Civ.A.12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991).
32. See Laura Lin, Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors, 46 VAND. L. REV. 1485, 1511-12 & n.87 (1993).
33. For discussions of maximizing share value as socially efficient, see EASTERBROOK & FISCHEL, supra note 3, at 38; Martin Lipton & Steven A. Rosenblum, A New System of Corporate Governance: The Quinquennial Election of Directors, 58 U. CHI. L. REV. 187, 203-05 (1991); Matheson & Olson, supra note 6, at 1329; and Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. TIMES, Sept. 13,1970, § 6 (Magazine), at 32.
34. See, e.g., Lin, supra note 21.
35. I am assuming that bond covenants do not prevent the risky, inefficient bet. If bond covenants were complete, then no risky, inefficient bet would be unanticipated. They are not, however. See infra text accompanying note 53.
36. See Rima F. Hartman, Note, Situation-Specific Fiduciary Duties for Corporate Directors: Enforceable Obligations or Toothless Ideals?, 50 WASH. & LEE L. REV. 1761, 1766 (1993); Stephen R. McDonneil, Comment, Geyer v. Ingersoll Publications Co.: Insolvency Shifts Directors' Burden From, Shareholders to Creditors, 19 DEL. J. CORP. L. 177, 209-10 (1994).
37. Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., No. Civ.A.12150, 1991 WL 277613, at 1 (Del. Ch. Dec. 30, 1991).
38. Just ask the people at Long-Term Capital Management. See generally Carol J. Loomis, A House Built On Sand: John Meriwether's Once Mighty Long-Term, Capital Has All But Crumbled. So Why Did Warren Buffett Offer to Buy It?, FORTUNE Oct. 26, 1998, a 110; Anita Raghavan & Matt Murray, Financial Firms Lose $8 Billion So Far - Global Fallout from Russia Hits Big Banks, Others; Meriwether Fund Hurt WALL ST. J., Sept. 3, 1998, at A2; Lean Nathans Spiro, How Long-Term Rocked Stocks, Too, BUS. WK., Nov. 9, 1998, at 160.
39. See JOHN C. COX & MARK RUBENSTEIN, OPTIONS MARKETS 436-45 (1985); FRANK J. FABOZZI & FRANCO MODIGLIANI, CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS 645-50 (1992).
40. See Michael J. Brennan, Corporate Finance over the Past 25 Years, FIN. MGMT. Summer 1995, at 9.
41. See Nicholas Denton, The Barings Crisis: Disaster, Just When Most Things Were Going Right, FIN. TIMES, Feb. 27, 1995, at 3; Peter Martin & F.T. Writers, The Barings Collapse: Blunders that Bust the Bank, FIN. TIMES, Mar. 24. 1995, at 24; Richard W. Stevenson, Barings Fiasco: Unbridled Ambition, L.A. DAILY NEWS, Mar. 5, 1995, at B1.
42. See Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Susan Rose-Ackerman, Risk Taking and Ruin: Bankruptcy and Investment Choice, 20 J. LEGAL STUD. 277 (1991).
43. Interests of managers and investors are not usually perfectly aligned. See Jensen & Meckling, supra note 11.
44. For discussions of firm-specific human capital, see MASAHIKO AOKI, THE COOPERATIVE GAME THEORY OF THE FIRM (1984); Gary S. Becker, Investment in Human Capital: A Theoretical Analysis, 70 J. POL. ECON. 9 (Oct. Supp. 1962); Harry De Angelo & Linda DeAngelo, Managerial Ownership of Voting Rights, 14 J. FIN. ECON. 33, 34-38 (1985); Jeffrey N. Gordon, Ties That Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 CAL. L. REV. 1 (1988); Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297, 313-19 (1978).
45. See Daniel J.H. Greenwood, Fictional Shareholders: For Whom Are Corporate Managers Trustees, Revisited, 69 S. CAL. L. REV. 1021 (1996).
46. See BERLE & MEANS, supra note 3, at 327.
47. See, e.g., Lawrence A. Cunningham, The Essays Of Warren Buffet: Lessons For Corporate America, 19 CARDOZO L. REV. 5 (1997); Isaac C. Hunt, Jr., Plain English -Changing The Corporate Culture, 51 U. MIAMI L. REV. 713, 718 (1997).
48. See Thomas A. Smith, Institutions and Entrepreneurs in American Corporate Finance, 85 CAL. L. REV. 1 (1997).
49. See MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS 53-65 (1971); KAY L. SCHLOZMAN & JOHN T. TIERNEY, ORGANIZED INTERESTS AND AMERICAN DEMOCRACY 82-85 (1986); Gary S. Becker, A Theory of Competition Among Pressure Groups for Political Influence 98 Q.J. ECON. 371, 392 (1983); Robert D. Tollison, Public Choice and Legislation, 74 VA. L. REV. 339 (1988); Stephen M. Bainbridge, The Politics of Corporate Governance, 18 HARV. J.L. & PUB. POL'Y, 671 (1995) (reviewing MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE (1994)).
50. See MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE 21-25, 263-87 (1994); see also Bernard S. Black, The Value of Institutional Investor Monitoring: The Empirical Evidence 39 UCLA L. REV. 895 (1992); Alfred F. Conard, Beyond Managerialism: Investor Capitalism?, 22 U. MICH. J.L. REFORM. 117 (1988).
51. See Michael C. Jensen, Active Investors, LBOs, and the Privatization of Bankruptcy, in DISCUSSING THE REVOLLTION IN CORPORATE FINANCE 158, 158-167 (Donald H. Chew, Jr. ed. 1998).
52. A defense of shareholder value maximization might take yet another form, but one that is equally unpersuasive. One might claim shareholder value maximization is what one might call a supererogatory norm. This is a normative prescription that takes a hyperbolic form as if to take into account the probability of human weakness. Thus a general obligation to be generous to the poor might take the form of an ethical prescription (such as some might read into the New Testament, for example) to give all one's belongings to the poor. One might think there is little danger that people will take this prescription so much to heart that they will actually inefficiently impoverish themselves, but they may take it seriously enough to actually live up to the real underlying obligation, which is to be generous to the poor. Similarly, one might state an ethical obligation in an unqualified way, also so as to take account of this "discount," when one in fact would admit of exceptions. Similarly, the norm "maximize shareholder value" might be the formula that managers, inclined to serve their own interests rather than those of the firm anyway, would respond to best, not actually maximizing shareholder value, which would harm themselves and not even be efficient, but, urged on by the norm's various enforcement mechanisms, take actions to some degree consistent with efficiency. There are, however, at least two problems with this view. First, it is imprecise Neither managers nor their critics can derive from this supererogatory norm clear instructions about what they should and should not do. Second, this supererogatory norm is parasitic upon the norm of efficiency. We must still justify the overstatement of "maximize shareholder value" in terms of the norm we really adhere to, which presumably is maximizing firm value This position would seem difficult to hold, however, in instances in which the maximization of share value and that of firm value actually conflict, which is the case with which we are primarily concerned.
53. Quite an extensive literature has developed on this topic. See, e.g., Bainbridge, supra note 3; William W. Bratton, Jr., The Economics and Jurisprudence of Convertible Bonds, 1984 WIS. L. REV. 667, 735-39 (1984); John C. Carter, The Fiduciary Rights of Shareholder, 29 WM. & MARY L. REV. 823, 826 (1988); J.A.C. Hetherington, Defining the Scope of Controlling Shareholders' Fiduciary Responsibilities, 22 WAKE FOREST L. REV. 9, 16 (1987); Thomas R. Hurst & Larry J. McGuiness, The Corporation, the Bondholder and Fiduciary Duties, 10 J.L. & COM. 187, 209 (1991); Hideki Kanda, Debtholders and Equityholders, 21 J. LEGAL STUD. 431 (1992); Roberta S. Karmel, Implications of the Stakeholder-Model, 61 GEO. WASH. L. REV. 1156, 1173 (1993); Jeffrey G. MacIntosh, Designing an Efficient Fiduciary Law, 43 U. TORONTO L.J. 425 (1993); Millon, Redefining Corporate Law supra note 4; Ann E. Conaway Stilson, Reexamining The Fiduciary Paradigm at Corporate Insolvency and Dissolution: Defining Directors' Duties to Creditors, 20 DEL. J. CORP. L. 1 (1995); Dale B. Tauke, Should Bonds Have More Fun? A Reexamination of the Debate over Corporate Bondholder Rights, 1989 COLUM. BUS. L. REV. 1; Mark E. Van Der Weide, Against Fiduciary Duties to Corporate Stakeholders, 21 DEL. J. CORP. L. 27 (1996).
54. Courts have traditionally held that managers owe no fiduciary duty to bondholders. See Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504, 1524-25 (S.D.N.Y. 1989); Simons v. Cogan, 549 A.2d 300, 303 (Del. 1988); Speer v. Dighton Grain, Inc., 624 P.2d 952, 961 (Kan. 1981); Merriman v. Smith, 599 S.W.2d 548, 552-56 (Tenn. Ct. App. 1979); Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1986).
55. See DOUGLAS M. BRANSON, CORPORATE GOVERNANCE §10.05, at 556 (1993); C. HUGH FRIEDMAN, CALIFORNIA PRACTICE GUIDE: CORPORATIONS CH. 6-C, ¶6:247.24 (Westlaw 1984); WILLIAM E. KNEPPER & DAN A. BAILEY, LIABILITY OF CORPORATE OFFICERS AND DIRECTORS §6-2, at 220 (5th ed. 1993).
56. See Albert H. Barkey, The Financial Articulation of a Fiduciary Duty to Bondholders with Fiduciary Duties to Stockholders of the Corporation, 20 CREIGHTON L. REV. 47 (1986); Victor Brudney, Contract and Fiduciary Duty in Corporate Law, 38 B.C. L. REV. 595 (1997)i.r,D«*S.»S.«:«"*«»/ l'«™.i«»CREIOH™L.MV.;ll») [hereinafter Brudney, Contract and Fiduciary Duty]; Victor Brudney, Corporate Bondholders and Debtor Opportunism: In Bad Times and Good, 105 HARV. L. REV. 1821 (1992) [hereinafter Brudney, Corporate Bondholders]; Michael E. Debow & Dwight R. Lee, Shareholders, Nonshareholders and Corporate Law: Communitarianism and Resource Allocation, 18 DEL. J. CORP. L. 393 (1993); David M.W. Harvey, Bondholders' Rights and the Case for s Fiduciary Duty, 65 ST. JOHN'S L. REV. 1023 (1991); David Millon. Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW, supra note 4, at 1-33; Millon, Redefining Corporate Law, supra note 4; Mitchell, supra note 4; Mitchell, supra note 1; Lawrence E. Mitchell, The Fairness Rights of Corporate Bondholders, 65 N.Y.U. L. REV. 1165 (1990); O'Connor, Restructuring, supra note 9; Orts, supra note 5. But see Bainbridge, supra note 9, at 856, 904 n.22.
57. See EASTERBROOK & FISCHEL, supra note 3, at 37-39; Alchian & Demsetz, supra note 11, at 787-89 & n.14; Bebchuck, Contractual Freedom, supra note 11, at 1397; Henry N. Butler, The Contractual Theory of the Corporation, 11 GEO. MASON L. REV., Summer 1989, at 99; William J. Carney, The ALI's Corporate Governance Project: The Death of Property Rights?, 61 GEO. WASH. L. REV. 898, 900, 905-11 (1993); Robert C. Clark, Contracts, Elites, and Traditions in the Making of Corporate Law, 89 COLUM. L. REV. 1703, 1706 (1989); Jensen & Meckling, supra note 11, at 310-11.
58. See EASTERBROOK & FISCHEL, supra note 3, at 38; Bainbridge, supra note 3, at 1443; Macey, supra note 7, at 36-39; C. Robert Morris, Directors' Duties in Nearly Insolvent Corporations: A Comment on Credit Lyonnais, 19 J. CORP. L. 61 (1993); Tauke, supra note 42; Van Der Weide, supra note 42, at 31-32.
59. See, e.g., SOCIAL CONTRACT: ESSAYS BY LOCKE, HUME, AND ROUSSEAU (Ernest Barker ed., 1948); THE SOCIAL CONTRACT FROM HOBBES TO RAWLS (David Bouche & Paul Kelly eds., 1994); Michel Rosenfeld, Contract and Justice: The Relation Between Classical Contract Law and Social Contract Theory, 70 IOWA L. REV. 769, 849 n.363 (1985).
60. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps in Incomplete Contracts]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficient and the Optimal Choice of Legal Rules, 101 YALE L.J. 729 (1992) [hereinafter Strategic Contractual Inefficiency]; Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 VA. L. REV. 821, 873 (1992); Gillian K. Hadfield, Judicial Competence and the Interpretation of Incomplete Contracts, 23 J. LEGAL STUD. 159 (1994); Russell Hardin, Magic on the Frontier: The Norm of Efficiency, 144 U. PA. L. REV. 1987, 1999 (1996); Charles R. O'Kelley, Jr., Filling Gaps in the Close Corporation Contract: A Transaction Cost Analysis, 87 Nw. U. L. REV. 216 (1992); Ian Ayres, Making a Difference: The Contractual Contributions of Easterbrook and Fischel, 59 U. CHI. L. REV. 1391 (1992) (reviewing EASTERBROOK & FISCHEL, supra note 3) [hereinafter Ayres, Making a Difference]. 50. On bond covenants generally, see Clifford W. Smith, Jr. et al., Financial Engineering: Why Hedge?, in THE HANDBOOK OF FINANCIAL ENGINEERING 126, 132-34, and (Clifford W. Smith, Jr. & Charles W. Smithson eds., 1990); and Clifford W. Smith, Jr. & Jerold B. Warner, On Financial Contracting: An Analysis of Bond Covenants, 7 J. FIN. ECON. 117 (1979). For discussions of shareholder-bondholder conflict, see Avner Kalay, Stockholder-Bondholder Conflict and Dividend Constraints, 10 J. FIN. ECON. 211 (1982); Rose-Ackerman, supra note 31; and George G. Triantis, Secured Debt Under Conditions of Imperfect Information, 21 J. LEGAL STUD. 225 (1992). For discussion of poison put bond covenants, see Leland Crabbe, Event Risk: An Analysis of Losses to Bondholders and "Super Poison Put" Bond Covenants, 46 J. FIN. 689 (1991), and Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting (or "The Economics of Boilerplate"), 83 VA. L. REV. 713 (1997). Also of interest are the following: Elazar Berkovitch & E. Han Kim, Financial Contracting and Leverage Induced Over-and Under-Investment Incentives, 45 J. FIN. 765 (1990); William W. Bratton, Jr., Corporate Debt Relationships: Legal Theory in a Time of Restructuring, 1989 DUKE L.J. 92; John C. Coffee, Jr. & William A. Klein, Bondholder Coercion: The Problem of Constrained Choice in Debt Tender Offers and Recapitalizations, 58 U. CHI. L. REV. 1207, 1216 n.27 (1991); Paul Gompers & Josh Lerner, The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements, 39 J.L. & ECON. 463 (1996); Mai E. Iskandar-Datta & Douglas R. Emery, An Empirical Investigation of the Role of Indenture Provisions in Determining Bond Ratings, 18 J. BANKING & FIN. 93 (1994); Ileen Malitz, On Financial Contracting: The Determinants of Bond Covenants, FIN. MGMT, Summer 1986, at 15; Marcel Kahan & Michael Klausner, Antitakeover Provisions in Bonds: Bondholder Protection or Management Entrenchment?, 40 UCLA L. REV. 931 (1993) [hereinafter Kahan & Klausner, Antitakover Provisions in Bonds]; Marcel Kahan, The Qualified Case Against Mandatory Terms in Bonds, 89 NW. U. L. REV. 565 (1995) [hereinafter Kahan & Klausner, The Qualified Case Against Mandatory Terms in Bonds]; Gene Laber, Bond Covenants and Forgone Opportunities: The Case of Burlington Northern Railroad Company, FIN. MGMT., Summer 1992, at 71, 72 n.1; Kenneth Lehn & Annette Poulsen, Contractual Resolution of Bondholder-Stockholder Conflicts in Leveraged Buyouts, 34 J.L. & ECON. 645 (1991); ILEEN B. MALITZ, THE MODERN ROLE OF BOND COVENANTS 43-44 (1993); Morey W. McDaniel, Bondholders and Corporate Governance, 41 BUS. LAW 413 (1986).
61. See FREDERICK BANARD HAWLEY, ENTERPRISE AND THE PRODUCTIVE PROCESS (1907); ISRAEL KIRZNER, COMPETITION AND ENTREPRENEURSHIP (1973); FRANK H. KNIGHT, RISK, UNCERTAINTY AND PROFIT (1921); Patrick J. Gunning, The Meaning of Entrepreneurship in Economic Theory: Historical Perspective, in 1 ENTREPRENEURSHIP, INNOVATION, AND ECONOMIC CHANGE (1992).
62. See, e.g., Ayres & Gertner, Filling Gaps in Incomplete Contracts, supra note 49; Ayres & Gertner, Strategic Contractual Inefficiency, supra note 49, at 730; Barriett, supra note 49; Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J.L. & PUB. POLY. 639 (1989); Ayres, Making a Difference, supra note 49.
63. For bond contracts to be literally gapless, contracting costs would have to be zero (or vanishingly small) because there are an infinite number of contingencies that potentially may affect payment and other important features of the bonds. Only if contracting costs were vanishingly small would it be economical for the bond contract to spell out the parties' rights and duties under all circumstances that might conceivably arise. See, e.g., Ayres & Gertner, Strategic Contractual Inefficiency, supra note 49; Per-Olof Bjuggren, A Transaction Cost Perspective on Financial Distress and Capital Structure, 15 INTL. REV. L. & ECON. 395 (1995); Brudney, Corporate Bondholders, supra note 45; Frank H. Easterbrook, High-Yield Debt as an Incentive Device, 11 INTL. REV. L. & ECON. 183 (1991); Joseph McLaughlin, Challenges to Underwriters and Their Counsel in the Modern Capital Markets Environment, 792 PLI/CORP 401 (1992).
64. See EASTERBROOK & FISCHEL, supra note 3, at 91.
65. See Frank H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L. & ECON. 425, 437 (1993).
66. For the flavor of this, see the elegiac last chapter in A.A. BERLE & V.J. PEDERSON, LIQUID CLAIMS AND NATIONAL WEALTH 199 (1934). Berle and Pederson opine. Plainly, there is more than a material loss in this dissolution of the element of property. The loss is at least equally spiritual. Possession of a liquid asset gives him a momentary possibility to fulfill his desire; and projects that possibility into the future; but the thing it gives him is precisely that and no more. It does not give him necessarily the possibility to create; and it precludes (at least to the extent of these assets) any possibility of having a function in terms of property. There is no escape from the fact that the truly liquid asset is a dead asset; as it enters into production it becomes less liquid; what has happened has been the splitting of the atom of property so that he has the dead part, and someone else the living. Id. at 203. The influence of this kind of progressive romanticism in American legal thought deserves an essay in its own right.
67. See EASTERBROOK & FISCHEL, supra note 3.
68. Id. at 91.
69. I do not address the complicated issues involved in duties firm decisionmakers might owe to workers, communities, and "other constituencies" of the corporation. This is because conventionally, human capital is not included in the portfolios that modern portfolio theory describes. This is obviously a serious limitation of modern portfolio theory. Ravi Jagannathan and Zhenyu Wang argue that if the market index is redefined to include human capital and betas are allowed to vary with the cyclical fluctuations in the economy, beta becomes a much better predictor of returns on assets. See Ravi Jagannathan & Zhenyu Wang. The Conditional CAPM and the Cross-Section of Expected Returns, 51 J. FIN. 3 (1996). One could imagine a very ambitious theory that would defend a general version of fiduciary duty that would fill all gaps in the corporate contract depending on what would maximize the total value of all assets, including human capital, that were contractually committed to the corporation. Such a theory might, however, not give workers more protection than they currently have. Moreover, hypothetical contract analysis that uses highly diversified investors as its personnel is more appealing in settling gap-filling principles for contracts with financial claimants than it would be for firm contracts with human capital investors. Treating shareholders as if they were diversified across asset classes is not grossly unrealistic, and it is not normatively offensive, because it treats shareholders as doing what they should be doing anyway. Considerations such as the decreasing marginal utility of wealth become relevant, however, in considering default rules governing conflicts of financial and human capital providers.
70. Cf. Barkey, supra note 45. Barkey argues for a duty of "global wealth maximization" which is similar to the proposal I make in this Article. He argues, however, that this duty follows from Black-Scholes option-pricing theory, making a connection I am not sure I follow. He seems to mean that under option-pricing theory, a bondholder is in a sense a residual claimant and as such should benefit from a fiduciary duty. As I explain in Section IV.A.1, I think the idea that fiduciary duty should follow from the residual status of a claim is just a mistake. He also seems to reject the idea that investors would be indifferent to maximizing firm value via wealth transfers from bondholders to stockholders or vice versa. Instead, he suggests the firm should have to compensate bondholders for such "expropriations." I do not endorse that view. I also find Barkey's article opaque at several crucial points. See id. at 69.
71. The literature on hypothetical bargaining theory is huge. See, e.g., BRUCE ACKERMAN, RECONSTRUCTING AMERICAN LAW 46-72 (1984); RICHARD POSNER, ECONOMIC ANALYSIS OF LAW 79-85 (3d ed. 1986); Ayres & Gertner, Filling Gaps in Incomplete Contracts, supra note 49; Bainbridge, supra note 9; Barnett, supra note 49; Lisa Bernstein. Social Norms and Default Rules Analysis, 3 S. CAL. INTERDISC. L.J. 59 (1993); Bebchuk, Limiting Contractual Freedom, supra note 11, at 1824; Daniel P. Brudney, Hypothetical Consent and Moral Force, 10 LAW & PHIL. 235 (1991); David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 MICH. L. REV. 1815 (1991); Clark, supra note 46; John C. Coffee, The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 COLUM. L. REV. 1618 (1989); Coleman et al., supra note 52; Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 STAN. L. REV. 271, 271-79, 283-99 (1986); Frank H. Easterbrook & Daniel R. Fischel, Corporate Control Transactions, 91 YALE L.J. 698, 702 (1982); [hereinafter Easterbrook & Fischel, Corporate Control Transactions]; Theodore Eisenberg., Symposium on the Law and Economics of Bargaining Commentary on 'On The Nature of Bankruptcy': Bankruptcy and Bargaining, 75 VA. L. REV. 205 (1989); Thomas Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L.J. 615 (1990); Robert A. Long, Jr., A Theory of Hypothetical Contract, 94 YALE L.J. 415 (1984); Jonathan R. Macey, Courts and Corporations: A Comment on Coffee, 89 COLUM. L. REV. 1692 (1989); Larry E. Ribstein, Fiduciary Duty Contracts In Unincorporated Firms, 54 WASH. & LEE L. REV. 537 (1997); Michael B. Rappaport, The Ambiguity Rule and Insurance Law: Why Insurance Contracts Should Not Be Construed Against the Drafter, 30 GA. L. REV. 171 (1995); Robert E. Scott, Conflict and Cooperation In Long-Term Contracts, 75 CAL. L. REV. 2005 (1987); Ayres, Making a Difference, supra note 49.
72. See, e.g., RONALD J. GILSON & BERNARD S. BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISISITONS 101 (2d ed. 1995); Richard A. Booth, Stockholders, Stakeholders, and Bagholders (Or How Investor Diversification Affects Fiduciary Duty), 53 BUS. LAW. 429, 478 (1998); Jeffrey S. Glaser, The Capital Asset Pricing Model: Risk Valuation, Judicial Interpretation, and Market Bias, 50 Bus. LAW. 687, 716 (1995); D. Gordon Smith, Corporate Governance and Managerial Incompetence: Lessons From Kmart, 74 N.C. L. REV. 1037, 1066 (1996); Cheol S. Eun, The Benchmark Beta. CAPM, and Pricing Anomalies, 46 OXFORD ECON. PAPERS 330 (1994); Risk and Return: Capital-asset Pricing Model, ECONOMIST, Feb. 2, 1991, at 72; Three Pioneers of Finance, ECONOMIST, Oct. 20, 1990, at 99.
73. See Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target's Management to a Tender Offer, 94 HARV. L. REV. 1161 (1981).
74. See Smith, supra note 37.
75. For some discussions of CAPM in the last ten years, see THOMAS E. COPELAND & J. FRED WESTON, FINANCIAL THEORY AND CORPORATE POLICY 185-211 (2d ed. 1983); Edward A. Bernstein, Law & Economics and the Structure of Value Adding Contracts: A Contract Lawyer's View of the Law & Economics Literature, 74 OR. L. REV. 189 (1995); Lawrence A. Cunningham, Conversations from the Warren Buffett Symposium, 19 CARDOZO L. REV. 719 (1997); Lawrence A. Cunningham, Introduction to the Warren Buffett Symposium Papers, 19 CARDOZO L. REV. 221 (1997); Eugene F. Fama, Efficient Capital Markets: II, 46 J. FIN. 1575 (1991); Eugene F. Fama & Kenneth R. French, Common Risk Factors in the Returns on Stocks and Bonds, 33 J. FIN. ECON. 1 (1993); Eugene F. Fama & Kenneth R. French, The Cross-Section of Expected Stock Returns, 47 J. FIN. 427 (1992); Nicholas L. Georgakopoulos, Why Should Disclosure Rules Subsidize Informed Traders?, 16 INTL. REV. L. & ECON. 417 (1996); Glaser, supra note 62; Henry T.C. Hu, Misunderstood Derivatives: The Causes of Informational Failure and the Promise of Regulatory Incrementalism, 102 YALE L.J. 1457, 1498 & n.247 (1993); Richard H. Koppes & Maureen L. Reilly, An Ounce of Prevention: Meeting the Fiduciary Duty to Monitor an Index Fund Through Relationship Investing, 20 J. CORP. L. 413 (1995); Louis Lowenstein, Efficient Market Theory: Let the Punishment Fit the Crime, 51 WASH. & LEE L. REV. 925 (1994); Robert F. Reilly, The Use and Misuse of CAPM, 13 AM. BANKR. INST. J. 29 (1994); Smith, supra note 37; Lynn A. Stout, How Efficient Markets Undervalue Stocks: CAPM and ECMH Under Conditions of Uncertainty and Disagreement, 19 CARDOZO L. REV. 475 (1997); and Samuel C. Thompson, Jr., A Lawyer's Guide to Modern Valuation Techniques in Mergers and Acquisitions, 21 J. CORP. L. 457 (1996).
76. See Smith, supra note 37, at 22.
77. See LOUIS LOWENSTElN, SENSE AND NONSENSE IN CORPORATE FINANCE 195-208 (1991); Brennan, supra note 29; Eun, supra note 62; Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE L.J. 239, 253-56 (1984); Jagannathan & Wang, supra note 59, at 4; Burton G. Malkiel & Yexiao Xu, Risk and Return Revisited, 23 J. PORTFOLIO MGMT., No. 3, at 9 (1997); Stout, supra note 65; Richard Roll, What Every CFO Should Know About Scientific Progress in Financial Economics: What Is Known and What Remains to Be Resolved, FIN. MGMT., June 23, 1994, at 69; Robert Teitelman, The Revolt Against Free-Market Finance. (A Group of Thinkers and Practitioners Reject Current Free-Market Economic Beliefs), INSTITUTIONAL INVESTOR, June, 1992, at 37; Wayne H. Wagner, Ten Myths and Twenty Years of Betas, J. PORTFOLIO MGMT., Sept. 22, 1994, at 79; Beta Beaten, ECONOMIST, Mar. 7, 1992, at 87; Tales from the FAR Side -Financial Markets' Evaluation of Risk Determines the Way Firms Invest. What If the Markets Are Wrong? / Judging Risk, ECONOMIST, Nov. 16, 1996, at 86.
78. A nice assessment of the current status of CAPM debate can be found in the most recent edition of the classic popular investors' guide, BURTON G. MALKIEL, A RANDOM WALK DOWN WALL STREET 251-76 (1996).
79. Chancellor Allen, however, seems to be hinting at this idea in the language he uses in Credit Lyonnais: At least where a corporation is operating in the vicinity of insolvency, a board of directors is not merely the agent of the residual risk bearers, but owes its duty to the corporate enterprise . . . . [T]he board [of directors] . . . had an obligation to the community of interest that sustained the corporation, to exercise judgment in an informed, good faith effort to maximize the corporation's long-term wealth creating capacity. Credit Lyonnais Bank Nederland, N. V. v. Pathe Communications Corp., No. Civ.A. 12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991) (emphasis added) reprinted in 17 DEL. J. CORP. L. 1099, 1155, 1157 (1992).
80. See United States v. Byrum, 408 U.S. 125, 138 (1972) (holding that directors have a fiduciary duty to promote the interests of the corporation); Guth v. Loft, Inc., 2 A.2d 225 (Del. Ch. 1938), aff'd. 5 A.2d 503 (Del. 1939) (holding that directors are charged with an unyielding fiduciary duty to the corporation and its shareholders); HENRY WINTHROP BALLANTINE, BALLANTINE ON CORPORATIONS § 122a (1927) (stating that directors and other officers of a corporation have a fiduciary relation toward the corporation); 1 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS § 4.10. at 4-233 (2d ed. 1997) ("Directors owe a duty of loyalty to the corporation and its stockholders . . . ."); 3 BETH A. BUDAY & BAIL A. O'GRADNEY, FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 837.50, at 181 (rev. vol. 1994) (stating that directors must act for the benefit of the corporation and the shareholders); 11 SIMON M. LORNE, ACQUISITTIONS AND MERGERS: NEGOTIATED AND CONTESTED TRANSACTIONS § 1A.02[1][6] (1999) (stating that the beneficiary of the fiduciary duty is unclear, however three choices exist: the corporate entity itself, the shareholders generally, or the minority shareholders); 3 WILLIAM L. NORTON, JR., NORTON BANKRUPTCY LAW AND PRACTICE 2d § 47:27, at 47-71 (1997) ("[O]fficers of corporations, are fiduciaries as to corporate stockholders as well as to the corporation itself . . . ."); 18B AM JUR. 2D CORPORATIONS § 1689, at 541 (1985) (stating that "it is well established that [directors] occupy a fiduciary, or more exactly a quasi-fiduciary, relation to the corporation and its stockholders").
81. See W. Jethro Brown, The Personality of the Corporation and the State, 21 L.Q. REV. 365 (1905); George F. Canfield, The Scope and Limits of the Corporate Entity Theory, 17 COLUM. L. REV. 128 (1917); George F. Deiser, The Juristic Person (pts. 1-3), 57 U. PA. L. REV 131, 216, 300 (1908-1909); John Dewey, The Historic Background of Corporate Legal Personality, 35 YALE L.J. 655 (1926); W.M. Geldart, Legal Personality, 27 L.Q. REV. 90 (1911); Morton J. Horwitz, Santa Clara Revisited: The Development of Corporate Theory, 88 W. VA. L. REV. 173, 217 (1985); Harold J. Laski, The Personality of Associations, 29 HARV. L. REV. 404 (1916); Elvin R. Latty, The Corporate Entity as a Solvent of Legal Problems, 34 MICH. L. REV. 597, 599-600 (1936); Arthur W. Machen, Jr., Corporate Personality (pts. 1 & 2), 24 HARV. L. REV. 253, 347 (1910-1911); Gregory A. Mark, The Personification of the Business Corporation in American LaW, 54 U. CHI. L. REV. 1441 (1987); Max Radin, The Endless Problem of Corporate Personality, 32 COLUM. L. REV. 643 (1932); Bryant Smith, Legal Personality, 37 YALE L.J. 283 (1928); Paul Vinogradoff, Juridical Persons, 24 COLUM. L. REV. 594 (1924); Martin Wolff, On the Nature of Legal Persons, 54 L.Q. REV. 494 (1938).
82. See O. GIERKE POLITICAL THEORIES OF THE MIDDLE AGES (F. W. Maitland trans., 1st ed. 1922); FREDERICK HALLIS, CORPORATE PERSONALITY 49-72 (1930); H.J. LASKI, THE FOUNDATIONS OF SOVEREIGNTY 250-91 (1921); F.W. Maitland, Moral Personality and Legal Personality, in 3 THE COLLECTED PAPERS 304, 315 (H.A.L. Fisher ed., 1911). The very embodiment of reification, of course, is G.W.F. HEGEL, THE PHENOMENOLOGY OF SPIRIT (Arnold V. Miller trans., 5th ed. 1977).
83. See EASTERBROOK & FISCHEL, supra note 3, at 12; Bainbridge, supra note 9, at 863 n.22.
84. See POSNER, supra note 61, at 13; RICHARD A. POSNER, THE ECONOMICS OF JUSTICE 48-115 (1981).
85. See JULES L. COLEMAN, MARKETS, MORALS AND THE LAW 98 (1988); POSNER, supra note 61, at 3-26; Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 ECON. J. 549, 550-51 (1939).
86. Perhaps "rarely" is an exaggeration. For criticisms of reification in various contexts, see Eric W. Orts, The Complexity and Legitimacy of Corporate Law, 50 WASH. & LEE L. REV. 1565, 1578-79 (1993) (reification of "corporation"); Charles A. Reich, The Individual Sector, 100 YALE L.J. 1409, 1441 (1991) (of "society"); and Steven L. Winter, The Meaning of "Under Color of" Law, 91 MICH. L. REV. 323, 334 (1992) (of "state").
87. See KENNETH J. ARROW, SOCIAL CHOICE AND INDIVIDUAL VALUES 46-60 (1963).
88. For denunciations of reification, see EASTERBROOK & FISCHEL, supra note 3, at 11-12; Victor Brudney, Association, Advocacy, and the First Amendment, 4 WM. & MARY BILL RTS. J. 1, 67 (1995); Jensen & Meckling, supra note 11, at 311.
89. See supra notes 71-72.
90. Jeffrey Macintosh, for example, organizes possible efficient forms of corporate fiduciary duty into several categories, including Pareto-superior and Kaldor-Hicks efficient forms of the duty. See MacIntosh, supra note 42, at 429-30. My proposal would presumably fall into the Kaldor-Hicks category. But cf. supra note 59 (giving an example where Kaldor-Hicks efficiency may be an inappropriate norm).
91. See MacIntosh, supra note 42, at 435-40.
92. The efficient gap-filling rule mandates that the size of the corporate pie be maximized but does not mandate any particular division of the pie among various classes of investors in the corporation.
93. See John D. Ayers, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Carliss Y. Baldwin & Scott P. Mason, The Resolution of Claims in Financial Distress: The Case of Massey Ferguson, 38 J. FIN. 505 (1983); Allan C. Eberhart et al., Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings, 45 J. FIN. 1457, 1468 (1990); Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747 (1989); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009 (1987); Alan Schwartz, A Contract Theory, Approach to Business Bankruptcy, 107 YALE L.J. 1807, 1836 (1998); David A. Skeel, The Uncertain State of an Unstated Rule: Bankruptcy's Contribution Rule Doctrine After Ahlers, 63 AM. BANKR. L.J. 221 (1989); Jerold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239 (1977); Lawrence A. Weiss, The Bankruptcy Code and Violations of Absolute Priority, 4 J. APPLIED CORP. FIN. 71 (1991).
94. See Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504 (S.D.N.Y. 1989); BRYAN BURROWS & JOHN HELYAR, BARBARIANS AT THE GATE: THE FALL OF RJR NABISCO (1990); Bratton, supra note 50; Nancy W. Graml, Bondholder Rights in Leveraged Buyouts in the Aftermath of Metropolitan Life Insurance Co. v. RJR Nabisco, Inc., 29 AM. BUS. L.J. 1 (1991); Joseph A. Grundfest, Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates, 45 STAN. L. REV. 857 (1993); Kahan & Klausner, Antitakeover Provisions in Bonds, supra note 50, at 932 n.1; Kahan & Klausner, The Qualified Case Against Mandatory Terms in Bonds, supra note 50; Steven L. Schwarcz, Rethinking a Corporation's Obligations to Creditors, 17 CARDOZO L. REV. 647 (1996); F. John Stark III et al., "Marriott Risk": A New Model Covenant to Restrict Transfers of Wealth from Bondholders to Stockholders, 1994 COLUM. Bus. L. REV. 503; Kenneth N. Gilpin, Bid for RJR Nabisco Jolts Bonds, N.Y. TIMES, Oct. 21, 1988, at D11; Wayne E. Green & Sonja Steptoe, Metropolitan Life Joins Backlash Against Leveraged Buy-Outs, WALL ST. J., Nov. 18, 1988, at C1; Glenn Ruffenach & Randall Smith, RJR Nabisco Gets Major Jolt in Debt Ratings, WALL ST. J., Jan. 29, 1990, at A3; Ames Sterngold, Kohlberg Leads Latest Nabisco Bids, N.Y. TIMES, Nov. 30, 1988, at D1.
95. See Metropolitan Life, 716 F. Supp. at 1508.
96. See Millon, Redefining Corporate Law, supra note 4, at 267-68.
97. See Alison Grey Anderson, Conflicts of Interest: Efficiency, Fairness and Corporate Structure, 25 UCLA L. REV. 738, 761 (1978); Easterbrook & Fischel, Corporate Control Transactions, supra note 61, at 702; McDaniel, supra note 50, at 447; Morey W. McDaniel, Bondholders And Stockholders, 13 J. CORP. L. 205, 246 (1988).
98. See EASTERBROOK & FISCHEL, supra note 3, at 52; Bainbridge, supra note 3, at 1443; Macey, supra note 7, at 36-39; Kenneth Lehn, The Lessons of Marriott, WALL ST. J., Mar. 11, 1993, at A14.
99. See Christopher Farrell, Bondholders Are Mad as Hell - and They're Not Going to Take It Anymore, Bus. WK., Feb. 6, 1989, at 82; Christopher Farrell, Takeovers and Buyouts Clobber Blue-Chip Bondholders New Debt to Finance - or Fend Off - Corporate Raiding Sends Prices Tumbling, BUS. WK., Nov. 11, 1985, at 113; Wayne E. Green & Sonja Steptoe, Metropolitan Life Joins Backlash Against Leveraged Buy-Outs, WALL ST. J., Nov. 18, 1988, at C1; Gary Hector, The Bondholders' Cold New World. (Securities Devalued Because of Leveraged Buyouts and Other Debt-Riddled Deals), FORTUNE, Feb. 27, 1989, at 83; James E. Lebherz, Taking a Look Back at the Year in Fixed-Income Securities, WASH. POST, Jan. 1, 1989, at H6; Paul Richter, The Deal That Burst the Bubble for KKR Buyouts: The Bankruptcy Filing of Hillsborough Holdings, Formerly Jim Walter Corp., Was the End of an Era for an Investment Giant Of The '80s, L.A. TIMES, Jan. 9, 1990, at D1; Linda Sandler, Southland's Junk Bonds Face Trouble, WALL ST. J., Sept. 7, 1989, at C3; Linda Sandier, "Predators Ball" Belles Will Be Buy-Out Bonds, WALL ST. J., Apr. 4, 1989, at C3.
100. See Stark et al., supra note 84, at 566-81 (describing development of event risk covenants).
101. See Bratton, supra note 50, at 156; Graml, supra note 84, at 34-35; Stark et al., supra note 844, at 509; Peter D.W. Heiberling, Event Risk Provisions
102. See Hurst & McGuinness, supra note 42 at 211-12; Kahan & Klausner, Antitakeover Provisions in Bonds, supra note 50, at 937-38; Kahan & Klausner, The Qualified Case Against Mandatory Terms in Bonds, supra note 50; Macey, supra note 7, at 36; Andrew J. Nussbaum, Like Money in The Bank? An Economic Analysis of Fiduciary Duties to Protect the S&L Deposit Insurance Fund, 44 ADMIN. L. REV. 355, 365-66 (1992); Schwarcz, supra note 84, at 681; Stark et al., supra note 84, at 579.
103. See supra notes 3, 19, and 23.
104. See Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504, 1508 (S.D.N.Y. 1989); see also Harris Trust & Sav. Bank v. E-II Holdings, Inc., 926 F.2d 636, 643-44 (7th Cir. 1991); Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981) (en banc); Hartford Fire Ins. Co. v. Federated Dep't Stores, 723 F. Supp. 976 (S.D.N.Y. 1989); Simons v. Cogan, 549 A.2d 300, 303 (Del. 1988); Pittelman v. Pearce, 8 Cal. Rptr. 2d 359 (Ct. App. 1992); Katz v. Oak Indus. Inc., 508 A.2d 873 (Del. Ch. 1986); Hazzard v. Chase Nat'l Bank, 287 N.Y.S. 541, 566-67 Sup. Ct. (1936). aff'd mem., 14 N.Y.S.2d 147 (App. Div. 1939), aff'd mem., 26 N.E.2d 801 (N.Y. 1940).
105. See Paul Asquith & Thierry A. Wizman, Event Risk, Covenants, and Bondholder Returns in Leveraged Buyouts, 21 J. FIN. ECON. 195 (1990); Ronald J. Gilson, Evaluating Dual Class Common Stock: The Relevance of Substitutes, 73 VA. L. REV. 807, 818-19 (1987); Kenneth Lehn & Annette Poulsen, Free Cash Flow and Stockholder Gains in Going Private Transactions, 44 J. FIN. 771 (1989); Laurentius Marais et al., Wealth Effects of Going Private for Senior Securities, 23 J. FIN. ECON. 155 (1989); Dale Arthur Oesterle & Jon R. Norberg, Management Buyouts: Creating or Appropriating Shareholder Wealth?, 41 VAND. L. REV. 207 (1988); Krishna G. Palepu, Consequences of Leveraged Buyouts, 27 J. FIN. ECON. 247 (1990).
106. See Schwarcz, supra note 84, at 685-86.
107. See Michael Bradley & Michael Rosenzweig, Defensive Stock Repurchases, 99 HARV. L. REV. 1377 (1986); Michael Bradley & L. Macdonald Wakeman, The Wealth Effects of Targeted Share Repurchases, 11 J. FIN. ECON. 301, 306-07 (1983); Larry Y. Dann, Common Stock Repurchases: An Analysis of Returns to Bondholders and Stockholders, 9 J. FIN. ECON. 113 (1981); Larry Y. Dann & Harry DeAngelo, Standstill Agreements, Privately Negotiated Stock Repurchases, and the Market for Corporate Control, 11 J. FIN. ECON. 275, 285-88 (1983).
108. See Bradley & Wakeman, supra note 97, at 312-13; William J. Carney, Controlling Management Opportunism in the Market for Corporate Control: An Agency Cost Model, 1988 WIS. L. REV. 385, 398; Dann & DeAngelo, supra note 97, at 295; Clifford G. Holderness & Dennis P. Sheehan, Raiders or Saviors? The Evidence on Six Controversial Investors, 14 J. FIN. ECON. 555 (1985); Jonathan R. Macey, Corporate Law and Corporate Governance: A Contractual Perspective, 18 J. CORP. L. 185, 208-09 (1993); Jonathan R. Macey & Fred S. McChesney, A Theoretical Analysis of Corporate Greenmail, 95 YALE L.J. 13 (1985); Wayne H. Mikkelson & Richard S. Ruback, Targeted Share Repurchases and Common Stock Returns, 22 RAND J. ECON. 544 (1991); A. Schliefer & R.W. Vishny, Greenmail, White Knights, and Shareholders Interest, 17 RAND J. ECON. 293 (1986).
109. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
110. See Unocal, 493 A.2d at 955; Eric A. Chiappinelli, The Life and Adventures of Unocal - Part I: Moore the Marrier, 23 DEL. J. CORP. L. 85 (1998); Janet E. Kerr, Delaware Goes Shopping for a "New" Interpretation of the Revlon Standard: The Effect of the QVC Decision on Strategic Mergers, 58 ALB. L. REV. 609, 616-20 (1995).
111. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
112. See Revlon, 506 A.2d at 182.
113. See Revlon, 506 A.2d at 184.
114. See Revlon, 506 A.2d at 182 (chastising Revlon management for accepting buyout terms that benefited subordinated note holders at the expense of shareholders).
115. See Great W. Producers Co-op, v. Great W. United Corp., 613 P.2d 873, 875 (Colo. 1980); Kirschner Bros. Oil v. Natomas Co., 185 Cal. App. 3d 784, 788 (Cal. Ct. App. 1986); Security Nat'l Bank v. Peters, Writer & Christensen, Inc., 569 P.2d 875, 881 (Colo. Ct. App. 1977); Jedwab v. MGM Grand Hotels, 509 A.2d 584, 594 (Del. Ch. 1986); Susan A. Barrett, Fiduciary Duties and Stock Warrants: A Fine Distinction Between Shareholder Rights and Contract Rights, 21 STETSON L. REV. 253, 260 (1991); Brudney, Contract and Fiduciary Duty, supra note 45, at 651; Lawrence E. Mitchell, The Puzzling Paradox of Preferred Stock (and Why We Should Care About It), 51 BUS. LAW. 443, 454 (1996); Robert B. Robbins & Barton Clark, The Board's Fiduciary Duty to Preferred Stockholders, 7 INSIGHTS, No. 11, at 18, 21-22 (1993).
116. See Barrett v. Denver Tramway Corp., 53 F. Supp. 198 (D. Del. 1943), aff'd, 146 F.2d 701 (3d Cir. 1944); Bove v. Community Hotel Corp., 249 A.2d 89 (R.I. 1969); Western Foundry Co. v. Wicker, 85 N.E.2d 722 (Ill. 1949); Dratz v. Occidental Hotel Co., 39 N.W.2d 341 (Mich. 1949); Iowa ex rel. Weede v. Bechtel, 31 N.W.2d 853 (Iowa 1948); Johnson v. Fuller, 121 F.2d 618 (3d Cir. 1941); Wessel v. Guantanamo Sugar Co., 35 A.2d 215 (N.J. Ch. 1944), aff,d, 39 A.2d 431 (N.J. 1944); Buckley v. Cuban American Sugar Co., 19 A.2d 820 (N.J. Ch. 1940); HB Korenvaes Invs., L.P. v. Marriott Corp., 19 DEL. J. CORP. L. 748 (1993) Johnson v. Lamprecht, 15 N.E.2d 127 (Ohio 1938).
117. See RICHARD A. BREALEY & STEWART C. MEYERS, PRINCIPLES OF CORPORATE FINANCE 376 (4th ed. 1991).
118. See Bove, 249 A.2d at 97-98 (stating that "the stockholder's contractual rights have been altered, but in each instance the alterations are permitted by the stockholder's contract into which the law reads the reserved power to amend or repeal. That power is a part of the charter or articles of association of every Rhode Island corporation").
119. See Smith, supra note 3, at 322-23.
120. 170 N.W. 668 (Mich. 1919).
121. See Bainbridge, supra note 3, at 1423-24.
122. Smith, supra note 3, at 320.
123. 53 N.W. 218, 223 (Mich. 1892); see also Smith, supra note 3, at 314 (relating Miner to the nineteenth century shift to protection of minority shareholders).
124. See EASTERBROOK & FISCHEL, supra note 3, at 228-52.
125. See supra Section I.A.2.
126. See supra text accompanying notes 97-98.
127. See supra note 97 and accompanying text.
128. See sources cited supra notes 13-17 and accompanying text.
129. For general discussions of different derivatives, see Hu, supra note 15; Karol, supra note 17; Kleinbard, supra note 16; Joseph L. Motes III, A Primer on the Trade and Regulation of Derivative Instruments, 49 SMU L. REV. 579 (1996); Barbara Donnelly Granito, Common Terms in the Derivatives Market, WALL ST. J., Aug. 10, 1993, at A6; Cathy E. Minehan & Katerina Simons, Managing Risk in the '90s: What Should You Be Asking About Derivatives?, NEW ENG. ECON. REV., Sept. 19, 1995, at 3; Balvinder S. Sangha, Financial Derivatives: Applications and Policy Issues, BUS. ECON., Jan. 1, 1995, at 46.
130. Options are the building blocks of more complex derivatives. See Frank Partnoy, Financial Derivatives and the Costs of Regulators Arbitrage, 22 J. CORP. L. 211, 216 (1997); Kenneth A. Froot et al., A Framework for Risk Management, HARV. Bus. REV., Nov.-Dec. 1994, at 91, 99; Donald L. Horwitz, Derivatives, I: The Basics on Terms and Risks, 5 Bus. L. TODAY, Sept.-Oct. 1995, at 38; Sangha, supra note 119, at 46.
131. For the story of unbundled stock units, see, for example, Alan J. Berkeley & Jean E. Minarick, Disclosure and Developments in Financing Instruments and Techniques, 703 PLI/CORP 335, 349 (1990); John D. Finnerty & Victor M. Borun, An Analysis of Unbundled Stock Units, 1 GLOBAL FIN. J. 47-69 (1989); Hu, supra note 15, at 1299; Raymond W. Wagner, Unbundled Stock Units, 662 PLI/CORP 175 (1989); Report, Sixth Annual Review of Developments in Business Financing, 45 Bus. LAW. 441, 446-49 (1989) (describing unbundled stock units); George Anders & Steve Swartz, Some Big Firms to Break up Stock into New Securities, WALL ST. J., Dec. 5, 1988, at C1; Floyd Norris, Shearson's Financial Alchemy, N.Y. TIMES, Dec. 11, 1988, at F1; and William E. Sheeline, Unbundled Stocks: How They Work, FORTUNE, Jan. 2, 1989, at 11.
132. See Morey W. McDaniel, Bondholders and Corporate Governance, 41 Bus. LAW. 413, 420-21 (1986).
133. See, e.g., Interneuron Pharmaceuticals Announces Call Option Arrangements, BUS. WIRE, May 5, 1997; New Deals - IDEC Pharmaceutical Corp., BIOVENTURE VIEW, Oct. 1, 1997; A Twist for Issuers and Buyers, the Detachable Call Option Debuts in $67 Million Las Vegas Deal, BOND BUYER, Apr. 9, 1992, at 5 (call options used in municipal finance).
134. An option is "out-of-the-money" when its exercise price is greater than the current market value of the underlying security, such as stock. Thus an option to buy stock in Amazon.com at a price of $175 would be out-of-the-money if Amazon.com were currently trading at $150. Options that are out-of-the-money at their expiration or maturity date are worthless. No one would pay anything for the right to buy for $175 a stock selling on the market for only $150. The more the price of the underlying security is below the exercise price of the option, the more the option is out-of-the-money. Applying the options analysis to corporate capital structure, stock of a corporation is like a call option in the sense that stockholders can be imagined as having the option to buy the firm by paying off creditors and keeping any residual for themselves. If a company were so highly leveraged that if it were to liquidate, not all creditors could be paid off in full, and stockholders would get nothing, the "options" represented by common stock could be said to be out-of-the-money.
135. See BERLE & PEDERSON, supra note 56.
136. See supra note 15.
137. See supra text accompanying notes 100-101.
138. See Richard G. Clemens, Poison Debt: The New Takeover Defense, 42 BUS. LAW. 747, 750 (1987); Hurst & McGuinness, supra note 42, at 197-200; Kahan & Klausner, Anntakeover Provisions in Bonds, supra note 50; Stark et al., supra note 84, at 566-68; Creditpolicy: Event Risk Covenant Rankings, STANDARD & POOR'S CREDITWEEK, July 24, 1989, at 17; Daniel Hertzberg, "Poison-Put" Bonds Are Latest Weapon in Companies' AnnTakeover Strategy, WALL ST. J., Feb. 13, 1986, at A5.
139. See Revlon Inc. v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173, 180 (Del. 1986); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985); Carol Seidler, Comment, Assessing the Wisdom of the Business Judgment Rule in Corporate Control Contests: Is It Time to Make Shareholders' Interests Paramount?, 23 LOY. L.A. L. REV. 919 (1990).
140. See Hu, supra note 15; supra text accompanying notes 15-19.
141. See, e.g., RICHARD H. THALER, THE WINNER'S CURSE: PARADOXES AND ANOMALIES OF ECONOMIC LIFE, ch. 12 (1992).
142. See Hu, supra note 15, at 1300-05.
143. See Henry T.C. Hu, Risk, Time, and Fiduciary Principles in Corporate Investment, 38 UCLA L. REV. 277, 295-306 (1990).