Print Archive
The U.S. securities laws allow security-holders to bring a class action suit against a public company and its officers who make materially misleading statements to the market. The class action mechanism allows individual claimants to aggregate their claims. This procedure mitigates the collective action problem among claimants, and also creates potential economies of scale. Despite these efficiencies, the class action mechanism has been criticized for being driven by attorneys and also encouraging nuisance suits.
Approaches to calculating fraud on the market 10b-5 damages have evolved substantially from the 1970s to the present. In this Essay I discuss the various approaches used over this span of time, including the rise of the event study approach.
Repurposing the corporation is the hot issue in corporate governance. Commentators, investors, and increasingly issuers, maintain that corporations should shift their focus from maximizing profits for shareholders to generating value for a more expansive group of stakeholders. Corporations are also being called upon to address societal concerns—from climate change and voting rights to racial justice and wealth inequality.
Despite being a cumbersome principle of corporate governance, the “one share, one vote” principle à la Easterbrook and Fischel is constantly challenged by several attempts to circumvent the original structure of capitalism democracy, based on the provision (often a default provision) that no more and no less than one vote is attributed to each share.
In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. In some cases shareholders are pushing companies to take actions that may reduce market value. It is hard to understand this behavior using the dominant corporate governance paradigm based on shareholder value maximization. We explain how jurisprudence has sustained this criterion in spite of its economic weaknesses.
We present a simple model of common ownership in which an investor chooses its stake in competing firms in light of the effects on firm behavior and firm profits. Two firms compete in Cournot duopoly, and ownership affects a firm’s objective function in the manner posited by Bresnahan & Salop (1986) and Salop & O’Brien (2000).
If a company misbehaves, lawsuits are one way of providing a remedy and encouraging that company and others to behave in the future. If the misbehavior is securities fraud, there are two potential plaintiffs—traders allegedly injured by the fraud may bring a private suit, and the government (through the SEC or DOJ) may sue to enforce the public interest in truthful disclosures of corporate information. If the misbehavior is violations of corporate governance rules, however, only private suits are available.
This project explores side letters in private market funds. Side letters, separate agreements between a fund and an investor, act as an invisible amendment to the main contract. This article introduces a new use case for side letters: impact investments, where funds target social, as well as financial, returns. Using a hand-collected data set, we examine the scope and role of side letters in this growing space.
Easterbrook and Fischel’s work suggests that society as a whole would achieve the best results if corporate leaders focused only on raising stock prices, leaving other institutions to tend to all other interests. But the idea that making societally important corporations govern to the whims of the stock market would be a win-win for investors, other corporate stakeholders, and our society as a whole has proven incorrect.
A compelling point in The Economic Structure of Corporate Law is that the single goal of maximizing shareholder value is efficient and generally desirable because it gives the managers one aim—while leaving room for law and private contracts to impose constraints on the firm in order to control negative externalities and other social concerns. Easterbrook and Fischel say that: “A manager told to serve two masters (a little for the equity holder, a little for the community) has been freed of both and is answerable to neither.”
This Article examines the perspective on insider trading in Frank Easterbrook and Daniel Fischel’s classic work, The Economic Structure of Corporate Law, comparing it with the perspectives the authors have taken in other work on the topic in which the Book’s authors did not coauthor with each other. While Easterbrook and Fischel have similar conceptions about the meaning of “fairness” in securities regulation and corporate law, their differing assumptions about the efficacy of the contracting process within the corporation explain their disagreements about what insider trading law should look like.
Frank Easterbrook and Daniel Fischel’s comments on corporate purpose are as fresh today as they were when they were first published in the 1980s. Starting from the “contractarian” perspective, they asked a key question about questions such as “what is the goal of the corporation?”, namely, “Who cares?” In this contribution to the symposium volume in their honor, I examine the current corporate purpose debate through the lens of their rather brief comments that first appeared in their 1989 article, “The Corporate Contract.”