Edward Rock

Closely held corporations (or “close corporations”) form an important subset of corporations with concentrated ownership. ’ The category in-cludes an interesting variety of enterprises, including the traditional “mom-and-pop’ ’ businesses, high-tech start-ups, and mature publicly held corpo-rations post-leveraged buyout. More generally, close corporations are important because of their number and because even the largest publicly held corporations often started out as closely held corporations. As such, close corporations are incubators for tomorrow’s publicly held corpora-tions. Two sets of problems have arisen repeatedly in closely held corporations but only rarely in publicly held firms. The first, now resolved, revolved around the enforceability of attempts by participants to tailor the terms set by the general corporation law. Because states historically have pro-vided one corporation law for all corporations, participants in closely held corporations have often tried to modify...

In this contribution to a symposium on "Legal Realism and Legal Doctrine," I examine the role that jurisprudence plays in corporate law doctrine. Through an examination of paired cases from the United States and United Kingdom, I offer a case study of the contrasting influence on corporate law judging of American Legal Realism versus traditional U.K. Doctrinalism.Specialist judges in both systems, aided by specialist lawyers, clearly identify and understand the core policy issues involved in a dispute and arrive at sensible results. Adjusting for differences in background law and institutions, it seems likely that the disputes would ultimately be resolved in more or less the same way in each system. This is unsurprising in a field such as corporate law, where market and institutional pressures demand practical solutions to practical problems.On the other hand, the differences in style are inescapable. While Delaware corporate law judges openly identify gaps and resolve the...

The paper provides a detailed examination of the evolution of Delaware corporate law in the regulation of management buyouts as a case study for understanding, more generally, how Delaware corporate law uses fiduciary duties to influence managers to act in the interests of shareholders. The goal of the paper is to understand better how corporate law works, that is, the mechanism by which corporate law constrains managers. The paper argues that the Delaware cases can best be understood as attempts to create social norms for senior managers, directors and the lawyers who advise them. The paper then sketches out (preliminarily) how these norms are transmitted to the principal actors (managers, directors and lawyers), drawing on the "A Memorandum to our Clients" genre, extrajudicial judicial utterances, and popular and trade press accounts. I then consider the implications of this reconceptualization for a variety of issues in corporate law, including: the consistency of the r...

Corporate Charter competition has become an increasingly international phenomenon. The thesis of this article is that this development in the corporate law requires a greater focus on the corporate tax law. We first demonstrate how a tax system's capacity to distort the international charter market depends both upon its approach to determining corporate location and the extent to which it taxes foreign source corporate profits. We also show, however, that it is not possible to remove all distortions through modifications to the tax system alone. We present instead two alternative methods for preserving an international charter market. The first best solution involves severing the markets for corporate law and corporate tax law through coordination of locational rules under each regime, with a "place of incorporation" rule for corporate law and a "real seat" rule for corporate tax. The second best solution relies on a properly designed federal structure. The c...

What functions does the existing mandatory disclosure system serve? In this article, I argue that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed practical and formal asymmetry between the ease of entry into the SEC system and the difficulty of exit from it. I then consider the implications of this credible commitment view for the various proposals on securities disclosure in a global capital market, and the tradeoffs between the potential benefits of increasing competition among suppliers of disclosure regulation and the potential loss of the ability of any system to offer credible commitment.

In both the union and nonunion sectors, firms restructure their assets and production, deciding continuously whether to make or buy an input (the subcontracting decision), as well as whether to continue or to exit a product line. The principal difference in the legal requirements applicable to restructuring in the union sector lies in the National Labor Relations Act's (NLRA) obligation to bargain over the "terms and conditions of employment." This obligation raises the legal question of when, in an asset restructuring, there is a duty to bargain with the union. The question has significance for asset restructuring in both the union and nonunion sectors because the regime of explicit contracting encouraged by the NLRA provides our clearest window into the less easily identified patterns of implicit contracting that prevail in the substantially larger nonunion sector. In this Article, we use labor economics to elucidate the nature of the question, the competing concerns...

Never has voting been more important in corporate law. With greater activism among shareholders and the shift from plurality to majority voting for directors, the number of close votes is rising. But is the basic technology of corporate voting adequate to the task? In this Article, we first examine the incredibly complicated system of US corporate voting, a complexity that is driven by the underlying custodial ownership structure, by dispersed ownership and large trading volumes, and by the rise in short-selling and derivatives. We identify three ways in which things predictably go wrong: pathologies of complexity; pathologies of ownership; and pathologies of misalignment of interests. We then discuss the current legal treatment of these pathologies and consider a variety of directions for reform, ranging from incremental modifications to fundamental redesign. We show that, absent a fundamental reconstruction of the ownership structure, the existing system will continue to be noisy,...

There is evidence that purpose-driven businesses outperform competitors. A traditional business planner’s question that arises in response to this evidence – namely, which enterprise form is best suited to a purpose-driven business? – contains deep conceptual insights. In this chapter, I explore the business planner’s question in order to draw a sharp conceptual distinction between “business purpose” and “the objective of the corporation.” “Business purpose” should be understood to be a property of business enterprises, however they are organized. “Corporate objective,” by contrast, is best understood as a characteristic of a particular enterprise form (the general corporation) and not as a description of what actual businesses do on a day to day basis. Confusing these two concepts under the heading “corporate purpose” limits our ability to understand what sort of organizational form is best suited to a particular enterprise, and leads to confusion in the management debates over how to build successful businesses and the political debates over the social role and obligations of large scale business enterprises.

Although it is well understood that activist shareholders challenge management, they can also serve as a shield. This Article describes “validation capital,” which occurs when a bloc holder’s—and generally an activist hedge fund’s—presence protects management from shareholder interference and allows management’s pre-existing strategy to proceed uninterrupted. When a sophisticated bloc holder with a large investment and the ability to threaten management’s control chooses to vouch for management’s strategy after vetting it, this support can send a credible signal to the market that protects management from disruption. By protecting a value-creating management strategy that might otherwise be misjudged, providers of validation capital benefit all shareholders, including themselves. However, validation capital may also have a dark side: in theory, it could be used to entrench under-performing management from outside interference that would benefit the company and its shareholders. In this scenario, the bloc holder acts as a hired “bodyguard” who receives a side payment in exchange for the promise to ward off other investors. We theorize that legal and market forces do much to constrain the corrupt form of validation capital, and our empirical study of hedge fund activism events from 2015 offers evidence in support of our theory. We find that although side payments from corporate management to hedge funds are relatively common, they tend to be small, and not of the magnitude necessary to induce corruption of the sophisticated funds capable of generating a persuasive signal.

Majority of Minority (MOM) approval is a common mechanism used in many jurisdictions to control conflicts of interest in related party transactions. Recently, in M & F Worldwide, the Delaware Supreme Court held that MOM approval in a controlling shareholder freezeout shifted the standard of review from Entire Fairness to Business Judgement Rule. In this article, I investigate how MOM approval functions in the presence of active shareholders (both hedge funds and actively managed mutual funds). After reviewing the potential benefits and problems with MOM approval, I review the use of MOM provisions in controlling shareholder freezeouts in the U.S. between 2010 and 2017. I combine this with three case studies involving MOM approval: the Dell MBO; the Oracle/NetSuite merger; and the unsuccessful effort by the Dolan family to take Cablevision private in 2007. I then briefly consider a quite different sort of MOM approval: the EU Takeover Directive’s requirement that conditions mandatory freezeouts on achieving a very high level of ownership (90-95%), typically through a tender offer. The principal lessons of this investigation are ambiguous. First, I do not find significant evidence that the use of MOM conditions in Delaware has attracted the sort strategic behavior by hedge funds or actively managed mutual funds that transactional lawyers have worried about. Except for the 2007 Cablevision deal (an unhappy experience for both investors and the controlling shareholder), I have not found any cases in which shareholders have successfully used MOM provisions to block transactions. Second, as far as I can tell, the MOM condition also does not seem to do much good. I have not found any cases in which shareholders have successfully threatened to block a deal as a way of increasing the consideration paid by the controlling shareholder. Contrary to the hopes of optimists, the MOM condition does not seem to have empowered even large active shareholders to negotiate with controlling shareholders over price. Although it is possible that the MOM condition serves as a shareholder referendum on the performance of the special committee, there is little evidence that it has done so. Third, EU directive’s mandatory version of MOM (the 90-95% threshold for freezeouts) does seem to attract strategic investors who block transactions until they are bought out at a higher price. The lack of observable effects of MOM approval raise a question whether an independent special committee combined with MOM approval provides sufficiently robust protections of non-controlling shareholders to relieve Delaware courts of their traditional role in scrutinizing conflicted controlling shareholder transactions for Entire Fairness.

With the increasing concentration of shares in the hands of large institutional investors, combined with greater involvement in corporate governance, the antitrust risk of common ownership has moved to center stage. Through an excess of enthusiasm, portfolio managers could end up exposing their firms and the portfolio companies to huge antitrust liability. In this Article, we start from basic antitrust principles to sketch out an antitrust compliance program for institutional investors and for the investor relations groups in portfolio companies. In doing so, we address the fundamental antitrust issues (explicit and tacit coordination) raised by the presence of common ownership by large, diversified investors. We then turn to more speculative concerns that have garnered a great deal of attention and that, to our eyes, threaten to divert attention from the core antitrust issues. We critically examine the claims of this newer literature, as illustrated by Azar, Schmaltz and Tecu (2017), that existing ownership patterns in the airline industry results in substantially higher prices. We then turn to the argument in Elhauge (2016) that existing ownership patterns violate Section 7 of the Clayton Act. Finally, we find the policy recommendations of Posner, Scott Morton, and Weyl (2017) to limit the ownership shares of multiple firms in oligopolistic industries to be overly stringent. To limit the chilling effect of antitrust on the valuable role of institutional investors in corporate governance, we propose a quasi “safe harbor” that protects investors from antitrust liability when their ownership share is less than 15 percent, the investors have no board representation, and they only engage in “normal” corporate governance activities.

Thirty years of regulatory reform has focused on encouraging diversified institutional investor involvement in corporate governance. Recently, some intriguing recent economic research by Azar, Schmalz and Tecu (working paper 2015) and Azar, Raina and Schmalz (working paper 2016) purports to show that concentration among shareholdings has led to higher prices in the airline and banking industries, two concentrated industries. Based on this research, Einer Elhauge (2016) has argued that current ownership patterns by diversified institutional investors violate Section 7 of the Clayton Act. Following on Elhauge, Posner, Weyl and Scott Morton (working paper 2016) propose a “solution” in which diversified investors would be limited to acquiring one firm in any oligopoly. In this article, we critique the economic evidence, focusing on the airline industry. We then challenge Elhauge’s legal analysis and critically examine Posner et al’s proposals. Although we are unconvinced by the rather broad claims of the existing literature, we agree that an open discussion of the antitrust implications of common ownership by large institutional investors is appropriate. Thus, in the final section, we sketch out proposed “Antitrust Guidelines,” including a safe harbor, in an effort to prevent anticompetitive effects, while continuing to encourage institutional investors’ involvement in corporate governance.

Hydrogenated amorphous silicon is produced by thermally decomposing silane (SiHâ) or other gases comprising H and Si, at elevated temperatures of about 1700 to 2300°C, in a vacuum of about 10⁻⁸ to 10⁻⁴ torr. A gaseous mixture is formed of atomic hydrogen and atomic silicon. The gaseous mixture is deposited onto a substrate to form hydrogenated amorphous silicon.

II. THE COLLECTIVE ACTION PROBLEM: THE LOGIC OF SHAREHOLDER ACTION .............. ........................ ... B. THE DEGREE OF LATENCY: CONCENTRATION IS MORE SIGNIFICANT THAN NUMBER ............................. ... C. THE SHAPE OF THE NET BENEFIT FUNCTION ...

What functions does the existing mandatory disclosure system serve? In this article, I argue that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed asymmetry between the ease of entry into the SEC system and the difficulty of exit from it. I then consider the implications of this credible commitment view for the various proposals on securities disclosure in a global capital market, and the tradeoffs between the potential benefits of increasing competition among suppliers of disclosure regulation and the potential loss of the ability of any system to offer credible commitment.

This Essay on Eric Posner's "Law and Social Norms" examines the extent to which signaling theory can provide a model for understanding non-legally enforced cooperation within institutions. After reviewing the signaling model upon which Posner's book is based, we take the employment relationship in firms as a case study. We argue that while signaling theory may be useful in explaining the formation of that relationship, it does not provide a basis for understanding its observed regularities, or of the very limited role played by the legal rules in rendering the relationship "incentive compatible." We conclude that our analysis and Posner's focus on different aspects of similar phenomena and are complementary rather than competing theories.

We generalize the internal labor markets (ILM) analysis of the employment relationship to provide a comprehensive model of the relationships among employees, capital providers (particularly shareholders), and the firm. We start by showing that all are variable claimants and all participate in governance, but that the characteristic differences in the payment streams and governance rights of employees and shareholders can be explained by differences in the four principal industrial organization (IO) factors -- investments in match, asymmetry of information, risk aversion and transaction costs. In arriving at these results, we analyze the ways in which employees are typically variable but not residual claimants and why making employees residual claimants over the relevant set of assets, while providing strong incentives for maximizing the value of those assets, is typically not incentive compatible. Our principal conclusions are the following. First, the ownership rights of shareholde...

This chapter examines the role of institutional investors in corporate governance and whether regulation is likely to encourage them to become active stewards. It considers the lessons that can be learned from the US experience for the EU’s 2014 proposed amendments to the Shareholder Rights Directive. After reviewing how institutional investors fit within the historical evolution of finance, the chapter documents the growth in institutions equity holdings over time. It explains how institutional investors are governed and organize share voting before turning to two competing hypotheses to account for the relative passivity of institutional investors: the excessive regulation and the inadequate incentives hypotheses. In evaluating these hypotheses, it reviews the results of the SEC’s attempt to incentivize mutual funds to vote their shares. The chapter concludes by highlighting the role of hedge funds in catalyzing institutional shareholders, along with some of the risks associated w...

What functions does the existing mandatory disclosure system serve? In this Article, I argue that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed practical and formal asymmetry between the ease of entry into the SEC system and the difficulty of exit from it. I then consider the implications of this credible commitment view for the various proposals on securities disclosure in a global capital market, and the tradeoffs between the potential benefits of increasing competition among suppliers of disclosure regulation and the potential loss of the ability of any system to offer credible commitment.