Randi Val Morrison makes a good argument for "tolerance of multiple views and alternative structures based on what the board believes to be optimal under the circumstances," citing yours truly.
Randi Val Morrison makes a good argument for "tolerance of multiple views and alternative structures based on what the board believes to be optimal under the circumstances," citing yours truly.
Roberta Romano has posted "The Market for Corporate Law Redux" (October 19, 2014). Forthcoming in Francesco Parisi, ed., Oxford Handbook of Law and Economics. Available at SSRN: http://ssrn.com/abstract=2514650:
Abstract: Corporations operate in numerous markets -- product markets, labor markets, capital markets. This chapter focuses on the market that is the prerequisite for firms’ successful operation in all other markets, as it is the market that frames their organizational structure and governance: the market for corporate law. In the United States, two features of the legal landscape have informed such a conceptualization of corporate law as a product: (1) corporate law is the domain of the states rather than the national government; and (2) under the internal affairs doctrine, the state whose corporate law governs a firm is the state of its statutory domicile. This arrangement provides firms with a choice, they can select their governing law from among the states regardless of their physical location, hence the notion that states offer a product that corporations purchase, by means of incorporation fees (referred to as franchise taxes). For the past century, remarkably, one small state, Delaware, has been the market leader, serving as the domicile for the overwhelming majority of U.S. corporations. The debate over the market for corporate law has focused, in large part, on whether the phenomenon of Delaware’s dominance is for the better.
The first part of the chapter analyzes the dynamics of the U.S. market for corporate law, which can best be characterized as states competing for corporate charters, along with data pertinent to the question of whom this market organization benefits -- managers or shareholders -- and explanations why Delaware has had a persistent and commanding position. The focus is on the market for public corporations, given their relative importance to the economy, the more extensive literature, and space limitations for this chapter. The second part of the chapter turns to explain Delaware’s persistence as the preeminent incorporation state. This is a distinctive feature of U.S. corporate law. There are other federal systems of corporate law, but a similar “Delaware” phenomenon does not exist. The chapter concludes with a summary and suggestions for future research.
I include the table of contents below the fold, as it does a great job of showing the breadth and reach of this very important review and critique of the literature.
Brett McDonnell has posted The Liberal Case for Hobby Lobby (October 22, 2014), available at SSRN: http://ssrn.com/abstract=2513380:
The recent Supreme Court decision in Burwell v. Hobby Lobby Stores, Inc. has stirred strong objections from political liberals. This article argues that those objections are unwarranted, and that the Court’s opinion reflects core liberal values. The decision has two main parts, and liberal objections to each part are misguided.
In the first part, the Court held that in some circumstances for-profit corporations committed to religious goals may invoke the religious liberty protection of the Religious Freedom Restoration Act (RFRA). Liberals have treated this as an appalling and/or humorous extension of rights which should apply only to humans. However, the Court’s decision rightly recognizes that corporations can and sometimes do pursue goals other than shareholder profits. This fits well with the stress on corporate social responsibility one finds in progressive corporate law scholarship such as the author’s. Where religious beliefs shape a corporation’s purposes, the protections of RFRA may rightly apply. The article suggests a detailed framework for determining when particular corporations are engaged in the exercise of religion, looking to both organizational and ownership dimensions of commitment to religion. This framework clarifies the somewhat sketchy analysis of the Court and more firmly roots that analysis in corporate law and theory.
In the second part of the opinion, the Court held that the contraceptive mandate of the Affordable Care Act substantially burdens the religious exercise of employers, and that the mandate is not the least restrictive means of achieving a compelling governmental objective. Liberals fear that this holding aggressively extends the protection of RFRA while undermining the compelling goal of the contraceptive mandate. The article argues that the holding is quite nuanced and limited, and that much liberal reaction reflects discomfort with RFRA itself. That is a shame, as creating a diverse society where persons and groups with differing beliefs are able to co-exist should be a core liberal commitment. The article suggests that liberals may have lost sight of this commitment as the groups invoking RFRA’s protection have shifted from social outcasts to more mainstream religious conservatives. That may explain, but does not justify, liberal opposition to Hobby Lobby.
As you can imagine, I disagree with the first for reasons well rehearsed in this space many time before.
The second point is one that I think makes a lot of sense. Sadly, however, I do not believe that today's modern liberals value a diverse society when the diversity is expressed along religious lines and, in articular, when diversity requires toleration of opinions that differ from the politically correct liberal catechism. Hence, where Brett says "liberals may have lost sight" of their commitments to religious diversity and freedom, I would say "liberals have definitely lost sight" thereof.
Lyman Johnson and David Millon have just posted a very interesting paper on Corporate Law after Hobby Lobby, THE BUSINESS LAWYER, Vol 70 - November 2014, available at SSRN: http://ssrn.com/abstract=2507406:
We evaluate the U.S. Supreme Court's controversial decision in the Hobby Lobby case from the perspective of state corporate law. We argue that the Court is correct in holding that corporate law does not mandate that business corporations limit themselves to pursuit of profit. Rather, state law allows incorporation 'for any lawful purpose.' We elaborate on this important point and also explain what it means for a corporation to 'exercise religion.' In addition, we address the larger implications of the Court's analysis for an accurate understanding both of state law's essentially agnostic stance on the question of corporate purpose and also of the broad scope of managerial discretion.
The point at which I would most strongly join issue with their argument is the claim (at 14) that:
State corporate law does not require corporations to prioritize profits over competing considerations. This fact has ramifications that extend far beyond the particular activities- religious observance — at issue in the Hobby Lobby cases. All business corporations (and non- profits too, for that matter) must generate profit in order to survive. That is simply a fact of life. But corporate law confers on them broad discretion to determine the extent to which they choose to temper the pursuit of profit by regard for other values.
Well, yes, but. As I noted in Does Hobby Lobby sound a death knell for Dodge v. Ford Motor Co.?:
I think it's critical to remember that Hobby Lobby is very explicitly a case about closely held corporations.
“As a leading commentator in the field has observed: ‘unlike the typical shareholder in the publicly held corporation, who may be simply an investor or a speculator and cares nothing for the responsibilities of management, the shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. …’” Simms v. Exeter Architectural Products, Inc., 868 F.Supp. 677, 682 n. 1 (M.D.Pa.1994) (citing (O'Neal, Close Corporations [2d Ed.], § 1.07, at pp. 21–22 [n. omitted]).
I also refer you to Baran v. Baran, 1947 WL 2915, which held of close corporations that "It is not in violation of any rule or principle of law for stockholders, who own a majority of the stock in a corporation, to cause its affairs to be managed in such way as they may think best calculated to further the ends of the corporation, and for this purpose to appoint one or more proxies, who shall vote in such a way as will carry out their plans." In that case, the court upheld an agreement among the shareholders to elect one another to corporate office. But why should the same rule not apply to a consensus among shareholders of a close corporation to define the ends of the corporation in religious terms?
Hobby Lobby's meaning will be contested on many levels for a long time to come, but I think it is best understood as recognizing the well-established principle that shareholders of a closely held corporation can alter the default rules of corporate law, including the issue of corporate purpose. I don't think Hobby Lobby should be understood as changing the default rule, especially by why of what is arguably dicta.
OTOH, see the discussion in Lyman and David's paper at 36-37, which argues that Hobby Lobby is not so limited.
Also pertinent to this debate is my recent paper Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-12. Available at SSRN:http://ssrn.com/abstract=2494003:
Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.
A friend recently emailed, raising a question about the new Delaware Chancery Court decision in In re KKR Financial Holdings LLC Shareholder Litigation, --- A.3d ----, 2014 WL 5151285 (Del.Ch.2014). He writes:
I am confused by the relationship of [KKR Financial Holdings to] Kahn v. M&F Worldwide. As I understand Kahn, in a merger with a controlling shareholder you need both approval of a disinterested independent committee and a vote of a majority of the minority. In the KKR case the court concludes that KKR is not a "controlling" shareholder, but that even if the majority of the board is not disinterested (that is, a majority is somehow beholden to the acquirer) the BJR applies if there is approval by a majority of the minority. That seems to me to be inconsistent with Kahn. I don't see the difference between a company that is controlled by the acquirer and one whose board is not independent of the acquirer. What am I missing?
I'm puzzled also. I first note that the court found that a majority of the BOD was disinterested and independent, so the part that is puzzling us is dicta:
For the foregoing reasons, I conclude that plaintiffs have failed to allege facts that support a reasonable inference that eight of the twelve KFN directors, constituting eight of the ten who voted on the transaction, were not independent from KKR. Thus, plaintiffs have failed to rebut the presumption that the business judgment rule applies to the KFN board’s decision to approve the merger.
But that's not the interesting question. Instead, it is the court's statement that, "even if plaintiffs had alleged sufficient facts to reasonably support such an inference, business judgment review still would apply because the merger was approved by a majority of disinterested stockholders in a fully-informed vote."
I note that, oddly, plaintiffs did not challenge the defense position on the effect of approval by the shareholders:
Relying on Chancellor Strine’s decision last year in Morton’s ... and his earlier decision in Harbor Finance Partners v. Huizenga, defendants argue that, because the merger did not involve a controlling stockholder and was approved by a fully informed vote of KFN’s stockholders, the business judgment rule applies and insulates the merger from all attacks other than on the grounds of waste. Put differently, defendants argue that, even if a majority of the KFN’s directors were not independent, the business judgment presumption still would apply because of the effect of untainted stockholder approval of the merger.
Plaintiffs do not take issue with defendants’ position concerning the legal effect of a fully informed vote where a controlling stockholder is not involved.
But that would not excuse the court from considering the issue sua sponte, would it? In any case, the court nowhere discusses the Delaware Supreme Court decision in Kahn.
Obviously, if a majority of the board were disinterested and independent, shareholder approval would invoke the business judgment rule. But if a majority of the board were interested by virtue of a link to major (albeit non-controlling) shareholder, shouldn't that trigger Kahn? After all, you have a conflict of interest on the part of the board that arises out a relationship with a shareholder?
UCLA Lowell Milken Institute Fellow George Georgiev has just posted his essay Shareholder vs. Investor Primacy in Federal Corporate Governance, 62 UCLA Law Review Discourse 71 (2014). Available at SSRN: http://ssrn.com/abstract=2503300
This short essay was written in connection with the Conference on Competing Theories of Corporate Governance held at UCLA School of Law in April 2014. The essay questions the notion that recent federal corporate governance regulation reflects the shareholder primacy model of corporate governance and argues that, instead, such regulation comports more closely with the investor protection norm embedded in the federal securities laws. A key to the argument is the distinction between "shareholders" and "investors," which are overlapping but distinct groups with different functions, powers, and governance rights. Using a series of examples, the essay shows that recent federal corporate governance provisions and initiatives are best viewed as a means of ensuring that investors are able to participate in the markets for debt and equity securities on the basis of adequate and accurate information, and that these same provisions and initiatives have not accorded any unique and meaningful governance rights to shareholders alone (with say-on-pay rules proving no exception). The essay does not dispute that shareholders as a class have expanded their power and influence in corporate affairs in recent years; it simply argues that this has not been the direct result of federal corporate governance regulation which, as a descriptive matter, has prized the interests of all investors over those of shareholders alone.
I think the investor/shareholder dichotomy is a very interesting one and worth further exploration.
The ISS is currently conducting its 2015 benchmark voting policy consultation:
To ensure its voting policies take into consideration the perspectives of the corporate governance community and the views of its institutional clients, ISS gathers broad input each year from institutional investors, issuers, and other market constituents through a variety of channels and mediums. Following the release earlier this month of its 2015 policy survey results, ISS is now making available for public comment draft 2015 voting policies.
Specifically, ISS is requesting feedback from interested market constituents on new or potential changes to nine discrete voting policies, including: independent chair shareholder proposals (U.S.); former CEO cooling-off period (Canada); board independence (Portugal); board independence (Japan); factoring capital efficiency into director elections (Japan); equity plan scorecard (U.S.); share issuance limit (Singapore); advance notice provisions (Canada); and impact of Florange Act (France). Download the draft policies here.
Today, I submitted the following comments to the ISS with respect to the proposed changes to their policy on Independent Chair Shareholder Proposals:
At least 34 separate studies of the differences in the performance of companies with split vs. unified chair/CEO positions have been conducted over the last 20 years, including two “meta-studies.” … The only clear lesson from these studies is that there has been no long-term trend or convergence on a split chair/CEO structure, and that variation in board leadership structure has persisted for decades, even in the UK, where a split chair/CEO structure is the norm.
I really like Bill Carney's new article, Larry Ribstein's Federalism Scholarship and the Unfinished Agenda, available at SSRN: http://ssrn.com/abstract=2497707:
Larry Ribstein and his co-authors broke new ground in examining jurisdictional competition and private choice of law. Going beyond corporate law bounds, they examined jurisdictional competition for other forms of entities, and found competition driving efficient uniformity. The more challenging area they addressed was private choice of law in contracts. While much of their work is enlightening, there is much left to be done in examining the mechanisms of efficiency in private agreements. Law are complex bundles of rights and obligations, often heterogeneous, in a market without explicit prices. While the mechanisms of adoption of business laws are well documented, difficult questions of bounded rationality remain in the area of private choice of law.
Updating my earlier post on Robert F Kennedy Jr.'s absurd proposal to impose the corporate death penalty on companies that disagree with his extreme climate views, Keith Paul Bishop examines the relevant California principles and concludes:
I agree with the professor, none of these authorizes the killing of a corporation merely because it has put its profit motive above the “general welfare”.
Meanwhile, Andrew Stuttaford argues that:
Kennedy also argues that “corporations which deliberately, purposefully, maliciously and systematically sponsor climate lies should be given the death penalty. This can be accomplished through an existing legal proceeding known as “charter revocation.” State Attorneys General can invoke this remedy whenever corporations put their profit-making before the “public welfare.”
As a precedent, Kennedy cites this:
In 1998, New York State’s Republican Attorney General, Dennis Vacco successfully invoked the “corporate death penalty” to revoke the charters of two non-profit tax-exempt tobacco industry front groups, The Tobacco Institute and the Council for Tobacco Research (CTR)… Attorney General Vacco seized their assets and distributed them to public institutions.
Hmmm, whatever you think about the rights and wrongs of that particular decision, it’s worth noting that it was directed against groups with charitable status, a status that rests on a presumption of some sort of public good. What Kennedy is contemplating is action against ‘regular’ corporations (such as ExxonMobil and Koch Industries) that support a political and scientific agenda with which he disagrees, corporations that, incidentally, he believes to be “enemies of mankind”. That hysterical and demagogic description tells you everything that you need to know. Kennedy’s is the language of a tyrant-in-the-making, prowling around America’s constitutional protections and looking for a way in.
We should, I suppose, thank Kennedy for highlighting the fact that State attorneys-general have this power, and we should take steps to ensure—by law—that it cannot be abused by those who cannot stomach the awkwardness of free speech.
Stuttaford concludes by bashing Bobby's hyperbolic attacks on vaccine scientists.
Steven Hayward at Powerline does a nice job of summarizing the teapot tempest:
Robert F. “Little Bobby” Kennedy Jr is trying to backtrack from his latest foam-flecked calls for jailing climate skeptics. He’s taken the pages of EcoWatch.com (what—was Salon.com out of pixels that day?) to affect a denialist pose (heh) of his own previous very clear words:
Hysterics at the right wing think tanks and their acolytes at The Washington Times, talk radio and the blogosphere, are foaming in apoplexy because I supposedly suggested that “all climate deniers should be jailed.” . . . Of course I never said that. I support the First Amendment which makes room for any citizen to, even knowingly, spew far more vile lies without legal consequence.
Nice try. But Little Bobby essentially doubles down on stupid right away:
I do, however, believe that corporations which deliberately, purposefully, maliciously and systematically sponsor climate lies should be given the death penalty. This can be accomplished through an existing legal proceeding known as “charter revocation.” State Attorneys General can invoke this remedy whenever corporations put their profit-making before the “public welfare.”
Not content with delivering lethal injections to corporations, he thinks the idea should extend to non-profit advocacy organizations, too:
An attorney general with particularly potent glands could revoke the charters not just oil industry surrogates like AEI and CEI. . .
What was that about the First Amendment again, Little Bobby? Also, I wonder how Little Bobby would react if a state attorney general turned the same doctrine on his anti-vaccine advocacy, which has immediate real world consequences for children whose stupid parents follow his advice.
Turns out Little Bobby is skilled at backtracking, because he has to do it so much. Just Google “RFK Jr backtracking,” and sit back and enjoy the results....
Let's focus on Bobby's proposal to kill corporations via "charter revocation." First, in almost all states, there is no procedure called "charter revocation."
In Model Business Corporation Act states, there are three ways in which a charter may be nullified. First, voluntary dissolution approved by the shareholders and the board of directors, which is obviously not relevant here.
Second, there is a process of administrative dissolution, which may be carried out by the secretary of state--not Bobby's attorney general--but only for a very limited set of reasons none of which remotely relate to climate denial:
§ 14.20 Grounds for Administrative Dissolution. The secretary of state may commence a proceeding under section 14.21 to administratively dissolve a corporation if:
(1) the corporation does not pay within 60 days after they are due any franchise taxes or penalties imposed by this Act or other law;
(2) the corporation does not deliver its annual report to the secretary of state within 60 days after it is due;
(3) the corporation is without a registered agent or registered office in this state for 60 days or more;
(4) the corporation does not notify the secretary of state within 60 days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or
(5) the corporation’s period of duration stated in its articles of incorporation expires.
Do you see anything in there about forced dissolution of corporations that "put their profit-making before the 'public welfare.'" Nope? Me neither.
Finally, there is a process by which the state attorney general can request judicial dissolution of a corporation, but only on very limited grounds:
§ 14.30 Grounds for Judicial Dissolution
(a) The [name or describe court or courts] may dissolve a corporation:
(1) in a proceeding by the attorney general if it is established that:
(i) the corporation obtained its articles of incorporation through fraud; or
(ii) the corporation has continued to exceed or abuse the authority conferred upon it by law ....
The first prong is obviously irrelevant. So for Bobby's proposal to execute corporations to have any legal validity, you have to believe that climate denial constitutes "exceed[ing] or abus[ing] the authority conferred upon it by law."
Bobby apparently believes that exercising free speech rights constitutes such an abuse, but despite his "support" for the First Amendment (for which I suppose we should all be grateful), presumably his education omitted much of the law of free speech under the First Amendment. If corporations have free speech rights (as they do), after all, speaking on issues of public policy must be covered and protected by the First Amendment.
Bobby also apparently believes that "profit-making before the 'public welfare,'" whatever the heck that welfare may be (apparently he gets to define what constitutes such welfare), constitutes "exceed[ing] or abus[ing] the authority conferred upon it by law." Wrong again.
What is the authority conferred upon a corporation by law? Very simply, to make money within the bounds of law:
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes. ...
As we have pointed out, [...] it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of shareholders, it would not be the duty of the courts to interfere.
In other words, Bobby has it exactly backwards. It would be an effort by "directors was to sacrifice the interests of shareholders" that truly would constitute "exceed[ing] or abus[ing] the authority conferred upon it by law ...."
Look, I'm not a climate denialist. Climate change is happening, albeit to debatable extents, and human activity is relevant. But stupid arguments against climate denialists don't help. And, once again, Bobby has been very, very stupid.
Update: Bobby opines in his article that:
New York, for example, prescribes corporate death whenever a company fails to “serve the common good” and “to cause no harm.”
I have searched the relevant New York statute and case databases on Westlaw for those phrases, as well as the secondary literature, and came up with nothing relevant. So I call BS. I think he made it up or got it from somebody who made it up.
If I were still a member of the ABA Committee on Corporate Laws I'd have to fly to meetings at least 4 times per year, which would mean four more TSA gropings and Ebola exposures. So I'm glad I'm not. But if I were, I'd be jumping up and down to get the Committee to follow Oklahoma (of all places) lead on fee-shifting bylaws. Kevin Lacroix has the details:
One of the most interesting recent developments has been the onset of innovative litigation reform efforts in the form of bylaw revisions. Among the most intriguing of these efforts involves fee shifting bylaws, whereby an unsuccessful claimant in intracorporate litigation must pay the other party’s costs. As discussed here, earlier this year, the Delaware Supreme Court upheld the validity of a fee shifting bylaw, a judicial decision that immediately triggered a legislative initiative to limit the effect of the decision to non-stock companies. As discussed here, the Delaware legislative initiative has now been tabled until early next year.
But while the Delaware legislative initiative is on hold, at least one legislature has gone forward to provide for the awarding of fees against unsuccessful derivative lawsuit claimants. ...
... the “loser pays’ model that the Oklahoma legislation adopts is extraordinary — It represents a significant departure from what is general known as the American Rule, under which each party typically bears its own cost. And unlike the fee-shifting bylaws being debated in Delaware –which would in any event require each company to decide whether it was going to adopt the bylaw (and might therefore be subject to shareholder scrutiny) — the Oklahoma legislation applies to any derivative action in the state, even if the company involved is not an Oklahoma corporation.
If more states follow Oklahoma's lead, Delaware's need to remain at the forefront of corporate law may be enough to overcome the self-interested lobbying by lawyers (both defense and plaintiff) who hate loser pays. One can only hope.
Steve Bradford nails it:
Weinberger says that the two elements of fairness [fair dealing and fair price] must be considered together, that “the test for fairness is not a bifurcated one between fair dealing and fair price.” Id. But, of course, damages will be measured against a fair price. If that’s the case, I ask my students, does fair dealing really make any difference as long as the price is fair?
A Delaware Court of Chancery opinion, In Re Nine Systems Corporation Shareholders Litigation, (Del. Ch. Sept. 4, 2014), recently dealt with that issue. Vice Chancellor Noble concluded that the procedure followed by the company was unfair, so the element of fair dealing was not met. He decided that the price was fair but, considering the two elements together, decided that the burden of proving fairness had not been met.
Because of his finding that the price was fair, the Vice Chancellor rejected the plaintiffs’ claim for damages. However, he concluded that the court could require the defendants to pay certain of the plaintiffs' attorneys' fees and costs.
I now have an answer for my students. Even if the price is fair, fair dealing can still make a difference. Of course, I’m not sure anyone other than the plaintiffs’ attorneys will be terribly happy with the result.
Here. Just remember: The Supreme Court knows just about as much about corporate law theory as I know about string theory. So take anything it says with a grain of salt.
I'm reading Leo Strine and Nicholas Walter's new article, Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United (August 1, 2014). Harvard Law School John M. Olin Center Discussion Paper No. 788. Available at SSRN: http://ssrn.com/abstract=2481061. Here's the abstract:
One important aspect of Citizens United has been overlooked: the tension between the conservative majority’s view of for-profit corporations, and the theory of for-profit corporations embraced by conservative thinkers. This article explores the tension between these conservative schools of thought and shows that Citizens United may unwittingly strengthen the arguments of conservative corporate theory’s principal rival.
Citizens United posits that stockholders of for-profit corporations can constrain corporate political spending and that corporations can legitimately engage in political spending. Conservative corporate theory is premised on the contrary assumptions that stockholders are poorly-positioned to monitor corporate managers for even their fidelity to a profit maximization principle, and that corporate managers have no legitimate ability to reconcile stockholders’ diverse political views. Because stockholders invest in for-profit corporations for financial gain, and not to express political or moral values, conservative corporate theory argues that corporate managers should focus solely on stockholder wealth maximization and non-stockholder constituencies and society should rely upon government regulation to protect against corporate overreaching. Conservative corporate theory’s recognition that corporations lack legitimacy in this area has been strengthened by market developments that Citizens United slighted: that most humans invest in the equity markets through mutual funds under section 401(k) plans, cannot exit these investments as a practical matter, and lack any rational ability to influence how corporations spend in the political process.
Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit-seeking. Citizens United thus undercuts conservative corporate theory’s reliance upon regulation as an answer to corporate externality risk, and strengthens the argument of its rival theory that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society — and not just stockholders — when making business decisions.
An initial reaction is that we need to draw a sharp distinction between what Strine calls "conservative corporate law theory" and the Roberts Court's decisions in cases like Citizens United and Hobby Lobby. As I observed of the Supreme Court's decision in Federal Communications Commission v. AT&T, Inc.:
Twelve pages of what purports to be legal and grammatical analysis follows. But Chief Justice Roberts could have summed up his opinion far more succinctly: "Because at least 5 of us say so."
The Citizens United decision last term attracted much criticism--not least from Con Law Professor-in Chief Obama--for holding that a corporation is a person and as such has certain constitutional rights. While I agreed with the holding, I was disturbed that the Chief Justice's majority opinion for the Supreme Court so obviously lacked a coherent theory of the nature of the corporation and, as such, also lacked a coherent theory of what legal rights the corporation possesses.
The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts has failed to articulate a plausible analytical framework for this important problem.
In short, nothing the SCOTUS says should be understood as affecting our understanding of corporate law or corporate law theory. They're just making this stuff up as they go along. On a preliminary read, I don't think Strine makes this mistake, but his article provides a useful opportunity for reminding us of this basic point.
Second, I don't agree with Strine that the political spending poses a threat to conservative corporate law theory. For one thing, the so-called flood of money really is a trickle. As a society, we spend much more money advertising toilet paper than we do deciding who should run the most powerful country in the world.
For another, and more pertinent to Strine's point, I don't see any evidence that corporate political spending is significantly chipping away at "regulation as an answer to corporate externality risk." To the contrary, the regulatory burden on US corporations continues to rise despite Citizens United. The Obama administration has used its executive powers to adopt a raft of pro-worker and anti-business regulations. The EPA is protecting the environment without much regard for cost-benefit analysis. We are dealing with massive regulation by prosecution:
The problem is not just that companies are ever more frequently treated as criminals. It is that the crimes they are accused of are often obscure and the reasoning behind their punishments opaque, and that it is far from obvious that justice is being done and the public interest is being served.
In sum, it seems entirely plausible that corporate political spending does not erode labor and environmental protections but simply slows the rate at which new regulations are piled onto the mountain of laws to which corporations are already subject. Indeed, maybe such expenditures provide a pro-social service by creating incentives for regulators to take the costs of their rules into account. By analogy, for example, the US Chamber of Commerce has been able to get a number of SEC regulations overturned because the agency had failed to conduct adequate cost-benefit analyses. If corporate lobbying encourages regulators to consider business' objections to a rule, then maybe agencies will be more likely to be more thorough in ensuring that the benefits of their rules outweigh their costs.
Finally, and most importantly, the case against corporate social responsibility rests on many legs of which the "regulation solves externalities" claim is but one. Speaking only for myself, I would still oppose CSR even if we lived in a night watchman state. (Hey, that's a good article title: Corporate Social Responsibility in the Night Watchman State! Fellow academics: I will track you down and wreak terrible vengeance if you swipe it.)
I'll have more detailed reactions later. But for now I urge you to go read the article and encourage comments.