General corporation laws: History and economics

Law and Contemporary Problems

Volumn 74, Issue 1, 2011, Pages 1-18

  McBride, David ^a  

^a Young Conaway Stargatt and Taylor LLP   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 79953204686     PISSN: 00239186     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (65)

1. BENJAMIN M. FRIEDMAN, THE MORAL CONSEQUENCES OF ECONOMIC GROWTH 325 (2006) (citing RABBI ELEAZAR BEN AZARIAH, CHAPTERS OF THE FATHERS).
2. JOHN STEELE GORDON, AN EMPIRE OF WEALTH: THE EPIC HISTORY OF AMERICAN ECONOMIC POWER 9 (2004).
3. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) [hereinafter Dodd-Frank Act] contains several provisions that treat corporate governance, including most prominently authorization for the SEC to adopt a "proxy access" system, Dodd-Frank Act § 971, and "say on pay" and other executive compensation provisions. Dodd-Frank Act §§ 951-957.
4. For differing views on proxy access, compare Lucian A. Bebchuk & Scott Hirst, Private Ordering and the Proxy Access Debate, 65 BUS. LAW. 329 (2010).
5. With Joseph A. Grundfest, The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law, 65 BUS. LAW. 361 (2010).
6. See generally Brian R. Cheffins, Did Corporate Governance "Fail" During the 2008 Stock Market Meltdown? The Case of the S&P 500, 65 BUS. LAW. 1 (2009).
7. Frank H. Easterbrook, The Race for the Bottom in Corporate Governance, 95 VA. L. REV. 685 (2009).
8. JOSEPH E. STIGLITZ, FREEFALL: AMERICA, FREE MARKETS, AND THE SINKING OF THE WORLD ECONOMY 151-55 (2010).
9. RICHARD A. POSNER, A FAILURE OF CAPITALISM: THE CRISIS OF '08 AND THE DESCENT INTO DEPRESSION 97-99 (2009).
10. See generally Leo E. Strine, Jr., Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward, 63 BUS. LAW. 1079 (2008).
11. Sean J. Griffith & Myron T. Steele, On Corporate Law Federalism: Threatening the Thaumatrope, 61 BUS. LAW. 1 (2005).
12. William B. Chandler III & Leo E. Strine, Jr., The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State, 152 U. PA. L. REV. 953 (2003).
13. Renee M. Jones, Rethinking Corporate Federalism in the Era of Corporate Reform, 29 J. CORP. L. 625 (2004).
14. Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588 (2003).
15. David A. Skeel, Jr., Icarus and American Corporate Regulation, 61 BUS. LAW. 155 (2005).
16. Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 COLUM. L. REV. 1749 (2006).
17. Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 VAND. L. REV. 1573 (2005).
18. ALAN TRACHTENBERG, THE INCORPORATION OF AMERICA: CULTURE AND SOCIETY IN THE GILDED AGE 5-6 (1982).
19. MODEL BUS. CORP. ACT § 3.01 (2008).
20. By the end of the nineteenth century, the laws treating the corporate form had "converged" in providing five basic features that characterized the corporate form: (1) full legal personality, including the ability to contract; (2) limited liability for owners and managers; (3) shared ownership by investors of capital; (4) delegated management; and (5) transferable shares.
21. Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J. 439, 439-40 (2001).
22. See MODEL BUS. CORP. ACT § 3.01 (2008).
23. During the past decade, the limited liability company (LLC) has become the favored form of business organization, except with respect to publicly-traded entities, where the corporation remains the favored legal entity.
24. See generally Rodney D. Chrisman, LLCs Are the New King of the Hill: An Empirical Study of the Number of New LLCs, Corporations, and LPs Formed in the United States Between 2004-2007 and How LLCs Were Taxed for Tax Years 2002-2006, 15 FORDHAM J. CORP. & FIN. L. 459 (2010).
25. ERIC BEINHOCKER, THE ORIGIN OF WEALTH: EVOLUTION, COMPLEXITY AND THE RADICAL REMAKING OF ECONOMICS 9-11 (2006). As described by economic historian, David Landes, "the Englishman of 1750 was closer in material things to Caeser's legionnaires than to his own great-grand-children.".
26. DAVID S. LANDES, THE UNBOUND PROMETHEUS: TECHNOLOGICAL CHANGE AND INDUSTRIAL DEVELOPMENT IN WESTERN EUROPE FROM 1750 TO THE PRESENT 5 (1969). This period of incredible growth obviously was driven by the industrial revolution and technological advances, but many of those developments were facilitated by and utilized by corporations.
27. Eric Beinhocker's bio reads as follows: Eric Beinhocker is a senior fellow at the McKinsey Global Institute (MGI), McKinsey & Company's economics research arm, where he leads research on economic, management, and public policy issues. He was previously a partner at McKinsey and a leader in its Strategy Practice. His career has bridged both the business and academic worlds. He has been a software CEO, a venture capitalist, and an executive director of the Corporate Executive Board; at McKinsey he has served clients in a broad range of industries, including telecoms, computing, pharmaceuticals, and aerospace. He has also held research appointments at the Harvard Business School and the MIT Sloan School and has been a visiting scholar at the Santa Fe Institute. He is a graduate of Dartmouth College and the MIT Sloan School where he was the Henry Ford II Scholar.
28. MCKINSEY GLOBAL INST., http://www.mckinsey.com/mgi/perspective/biography/eric.asp (last visited Nov. 8, 2010).
29. L.D. WHITLEY, FOUNDATIONS OF GENETIC ALGORITHMS (1993).
30. MELANIE MITCHELL, AN INTRODUCTION TO GENETIC ALGORITHMS (1996).
31. L.F. LANDWEBER & E. WINFREE, EVOLUTION AS COMPUTATION (2002).
32. J.P. CRUTCHFIELD & P. SCHUSTER, EVOLUTIONARY DYNAMICS: EXPLORING THE INTERPLAY OF SELECTION, ACCIDENT, NEUTRALITY, AND FUNCTION (2003).
33. RICHARD DAWKINS, THE BLIND WATCHMAKER (1986)). Beinhocker's description of evolution borrows heavily from the work of Daniel Dennett, an evolutionary theorist and director of the Center for Cognitive Studies at Tufts University, and from Richard Dawkins, the Oxford evolutionary theorist.
34. Beinhocker borrows these concepts from the evolutionary economist Richard Nelson of Columbia University. See RICHARD R. NELSON & SIDNEY G. WINTER, AN EVOLUTIONARY THEORY OF ECONOMIC CHANGE (1982).
35. RICHARD R. NELSON, THE SOURCES OF ECONOMIC GROWTH (1996).
36. Subsequent to the financial crisis that began in 2007, classical economic theory and "freemarket" theories have come under substantial attack. One of the criticisms is that classical economic theory is based upon unrealistic assumptions about human behavior. In particular, classical economics assumes human agents that use complex deductive calculations to assess self-interest, make no cognitive errors and have no cognitive bias, have complete information, and have no need to learn or adapt.
37. HERBERT GINTIS, GAME THEORY EVOLVING: A PROBLEM-CENTERED INTRODUCTION TO MODELING STRATEGIC INTERACTION (2000).
38. H. PEYTON YOUNG, INDIVIDUAL STRATEGY AND SOCIAL STRUCTURE: THE EVOLUTIONARY THEORY OF INSTITUTIONS (1998).
39. ROBERT ALEXROD, THE COMPLEXITY OF COOPERATION (1997).
40. BRIAN SKYRMS, EVOLUTION OF THE SOCIAL CONTRACT (1996).
41. ROBERT AXELROD, THE EVOLUTION OF COOPERATION (1984) for the centrality of "game theory" to an understanding of the evolution of social norms and institutions).
42. See also R. WRIGHT, NON-ZERO: THE LOGIC OF HUMAN DESTINY (2000).
43. Various theorists have argued that free contracting in a competitive system will promote the general welfare. See generally FRANK EASTERBROOK & DANIEL FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991). This proposition has been applied to competition among states for incorporations.
44. See generally ROBERT ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW (1993).
45. But see Lucian Bebchuk, Alma Cohen & Allen Ferrell, Does the Evidence Favor State Competition in Corporate Law?, 90 CAL. L. REV. 1775, 1778-81 (2002).
46. The financial crisis of the past three years has generated substantial criticism of "efficient market" theory as the method for achieving or measuring the common good. Evolutionary or complexity economics may lead to certain conclusions also supported by efficient market theory, but based upon a different economic analysis.
47. For example, there are different models for the structure of corporate boards. The same model may not be the best model at all times for all corporations. Easterbrook, supra note 4, at 694-95. The point of evolutionary theory is that no one can determine a priori what is the best model, even for most firms, most of the time. Rather, boards operate as part of a complex adaptive system in which the fitness of the model will be determined by an evolutionary process operating from the ground up.
48. There is a considerable debate over the roles of stockholders and directors. For example, there is a plethora of criticism of stockholder activism, contending that stockholders are conflicted in their goals, short-term oriented, and uninformed.
49. See, e.g., Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. REV. 601 (2006).
50. Lynn A. Stout, The Mythical Benefits of Shareholder Control, 93 VA. L. REV. 789 (2007).
51. Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. REV. 561 (2006).
52. Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. CORP. L. 637 (2006).
53. Others argue that stockholder activism is associated with better long-term performance of the corporation. See, e.g., George W. Dent, Jr., The Essential Unity of Shareholders and the Myth of Investor Short-Termism, 35 DEL. J. CORP. L. 97 (2010).
54. (citing Harold Demsetz & Kenneth Lehm, The Structure of Corporate Ownership: Causes and Consequences, 93 J. POL. ECON. 1155, 1161 (1985) (arguing that corporations in which individual investors or small groups of investors own large blocks of stock perform better because the owners are good monitors).
55. J.W. Verret, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, 27 YALE J. ON REG. 283, 315-26 (2010). One commentator has proposed that "shareholder primacy" - profit maximization for the enterprise and stockholders-be a default setting that would give way in the case of an emergency, such as the financial crisis of 2008.
56. See generally Robert J. Rhee, Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson's Choice During a National Crisis, 17 GEO. MASON L. REV. 661 (2010).
57. Title II of the Dodd-Frank Act creates a new insolvency process for large, interconnected companies whose failure creates a significant risk to the financial stability of the United States. However, there is serious question whether the process created by Title II is sufficient to avoid the adverse and systemic damage that supposedly was prevented by the Troubled Asset Relief Program (TARP).
58. MODEL BUS. CORP. ACT §§ 8.31, 8.42 (2008).
59. DEL. CODE ANN. tit. 8, § 102(b)(7) (2001).
60. MODEL BUS. CORP. ACT § 2.02(b)(4) (2008).
61. See generally Myron T. Steele, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 AM. BUS. L.J. 221 (2009).
62. The proposition that contractual agreements-either real or hypothetical-may be either the best utilitarian outcome or the fairest outcome is hotly debated. See, e.g., J. William Callison & Allan W. Vestal, Contractarianism and Its Discontents: Reflections on Unincorporated Business Organization Law Reform, 42 SUFFOLK U. L. REV. 493 (2009).
63. In order to preserve the long-term cooperation essential to creating non-zero-sum gains, the contract should produce a division of gains deemed by the participants in the exchange as minimally fair. As one commentator has noted, "actual contracts carry moral weight insofar as they realize two ideals-autonomy and reciprocity.".
64. MICHAEL J. SANDEL, JUSTICE: WHAT'S THE RIGHT THING TO DO? 144 (2009).
65. The autonomy of the contracting parties may be undermined by their unequal bargaining positions, and the reciprocity of the contract may be undermined by a host of factors including the relative knowledge and judgment of the parties. See id. at 144-51. The long-term "fitness" of a purely contractual model for legal entities may depend upon how close or far the contract is from the ideals of autonomy and reciprocity. Two factors in evaluating such matters are the size of the enterprise and the role of the parties in setting the terms of the contract.