Saturday, May 5, 2018
Zohar Goshen and Sharon Hannes have just posted to SSRN an interesting paper, The Death of Corporate Law, arguing that markets and private ordering have begun to supplant adjudication as a mechanism for resolving corporate disputes because the increasing sophistication of investors has made private resolutions less costly.
There are many excellent insights in the piece, which furthers the taxonomy developed by Goshen and Richard Squire in Principal Costs: A New Theory for Corporate Law and Governance to add the costs of adjudication into the mix. Yet there may be some ways that the theory is incomplete. For example, the authors focus on the effect of shareholders’ rising “competence” – because of the concentration of investment in the hands of institutions – rather than on shareholders’ rising power, which (according to some) may not be accompanied by greater competence at all. Managers have acted to counteract that rising power (dual class stock regimes, delays in going public), which might represent an efficient bargain to which investors are agreeing (the authors’ view), or simply a forthcoming source of dispute.
But the other piece that’s missing, of course, is the role of securities law. Investors’ rising power and/or competence is not merely a function of markets; it’s a regulatory choice, due to everything from new CD&A disclosures and say-on-pay provisions to the expansion of Rule 14a-8 to permit its use for proxy access bylaws (and, heck, the existence of 14a-8 in the first place), to the loosening of restrictions of on investment in private funds. And what regulators giveth, regulators can taketh away. Thus, there are new efforts to, among other things, limit say-on-pay and shareholder proposals, and to regulate proxy advisors. There is even new Labor Department guidance meant to limit funds’ involvement in corporate governance (which I may or may not make the subject of another post).
At the same time, it's hard not to notice that we likely would be revisiting the old corporate disputes, but with respect to relationships between retail investors in funds and fund managers themselves, were it not for the fact that federal law occupies most of that space.
Point is, reports of corporate law’s death may be slightly, if not greatly, exaggerated. Perhaps another way of putting it is simply to note (as others have done) that the locus of regulation has shifted from flexible, ex post review to mandatory ex ante rulemaking.