Table of Contents
The New Realism in Business Law and Economics: Introduction
by Claire A. Hill
Law and economics gained a significant place in legal analysis, both in the academy (in scholarship and pedagogy) and in practice, several decades ago. It is still quite prominent today, but over the years, a new, more nuanced perspective has been gaining ground, a new realism.
The “new realism” is not new. Indeed, the term as I am using it includes a voluminous body of scholarship, some squarely within the law and economics tradition, and even more in the law and society/social norms tradition and in work that straddles all these fields. The new realism is a commitment to analyzing real world phenomena using explanations that are, in words (probably mistakenly) attributed to Albert Einstein, “as simple as possible, but no simpler.” The methods used are heterogeneous, but all aspire to combine the advantages of law and economics’ parsimonious worldview without losing sight of the ultimate goal—to understand what goes on in the real world. And perhaps, in the course of the endeavor, the toolbox—the theories, paradigms, and assumptions used for analyses—can be supplemented or otherwise made more useful.
Frequent Filer Shareholder Suits in the Wake of Trulia: An Empirical Study
by Sean J. Griffith
Shareholder suits challenging mergers and acquisitions (M&A) transactions remain common. Until 2016, they were filed in eighty-five to ninety-five percent of all deals over $100 million, and evidence suggests that any downturn since then may have been temporary. The pattern of these lawsuits is well documented: filings seek injunctive relief and settle (or, more recently, are mooted) by the defendants’ release of supplemental disclosures in the merger proxy, on account of which the plaintiffs’ lawyers are entitled to a fee based upon the corporate benefit doctrine. These cases became the bread and butter of the “disclosure bar,” a sub- class of plaintiffs’ lawyers that have built business models around regularly filing and swiftly resolving merger claims.
Bias, Identity and M&A
by Afra Afsharipour
Corporate executives, i.e. officers of a corporation, play a central role in a firm’s decision to undertake a merger or acquisition (M&A). M&A deals are often done at the behest of executives, who also largely run the deal-making process. For example, M&A deals can be initiated because management is under pressure to sell the company due to shareholder or other market demands, or because managers see an opportunity to run an even bigger company or build an empire.
Over the past two decades, a rich body of academic literature has explored the role of executives in M&A, seeking to understand the motivations and incentives of management undertaking M&A deals. One important strand of this literature explores the behavioral biases of management in M&A transactions. Studies support the claim that behavioral biases, such as overconfidence and ego gratification, are important drivers for M&A deals. Other studies show that social factors, such as extensive business or educational ties between managers of bidder and target firms, can undermine decision making in M&A deals. Managers may also be induced to engage in M&A in order to keep up with peers.
The Fallacy of Director Independence
by Yaron Nili
Director independence has become a key cornerstone of the contemporary corporate governance landscape. Over the past few decades, the composition of public firms’ boards of directors in the United States has changed dramatically, shifting towards an increased reliance on directors labeled as “independent.” Courts, regulators, and investors have come to increasingly rely on these independent directors and have made their presence on boards a priority.
However, despite the increased attention, the current system of selecting, anointing, and ensuring director independence is laden with gaps. This Essay highlights three key issues with the current independence framework. First, the current designation and disclosure framework for director independence is inadequate, providing companies with too much discretion and leaving shareholders with insufficient information. Second, the current structure of boards further complicates the ability of directors to act independently. Third, key board leaders such as the independent chair and the lead independent directors who have been lauded as the standard-bearer for independence, may in fact lack true independence or lack the effective powers to carry out their roles. As these gaps in the director independence framework continue to emerge, this Essay cautions against a deferential reliance on the director independence framework.
Repetition, Ritual, and Reputation: How Do Market Participants Deal with (Some Types of) Incomplete Information?
by Claire A. Hill
Incomplete information is an obstacle to deal-making. It may prevent the parties from agreeing on valuation, thus potentially preventing value-increasing deals from being made. Or perhaps a deal can be made, but negotiations are costlier than they could be. Information problems also exist as to ongoing matters in the parties’ relationship.
That this is so is well known. But attention has focused largely on a subset of information problems where there is agreement on what the information is and who has (or will have, or can reliably get) it. I will call this type of information “harder” information, contrasting it with “softer” information as to which there is far less agreement. Seemingly uncontroversially, the task of information acquisition involves doing so until the additional costs are not warranted by the additional benefits and relatedly, attempting to economize on those costs. But this characterization yields a far more straightforward way to proceed as to the acquisition of harder information than it does as to softer information. The tools to acquire harder information are the ones in the upper, most accessible part of the toolbox; how those tools work is intuitive and direct. By contrast, the tools available to acquire softer information work through a series of sometimes-circuitous inferences. Compare determining whether a business is being sued to appraising prospective ‘fit’ of two businesses or of a potential new employee.
Complete Contracts in Finance
by Elisabeth de Fontenay
When law students question the importance of studying contract law, it may help to point out that a recent contract dispute brought a major economy to its knees, created an international political incident, and prompted popular protests in the streets. The hedge fund Elliott Associates, L.P. single-handedly succeeded in holding up Argentina’s sovereign debt restructuring, by litigating for fifteen years over an arcane contract term that had been ubiquitous in sovereign bond indentures for over a century. Elliott’s maneuver is not a unique occurrence—such “contract arbitrage” has become an investment strategy in its own right. Hedge funds scour transactional agreements for provisions that they can sue to enforce or otherwise employ to their benefit. Often such provisions have consequences or interpretations that the parties did not intend when they first entered into the agreement.
Path Dependence, Information, and Contracting in Business Law and Economics
by Robert Anderson IV
The study of contracting is one of the most well established and active research areas in law and economics scholarship. The questions raised are of immense practical importance as parties order their economic relationships. It is also of theoretical importance for how society orders its social relationships through public policy. One of the important research problems in the law and economics of contract concerns the incomplete contract paradigm, which focuses on the role of transaction costs and information in contracting and their implications for business. It is now well established that all contracts are incomplete, and that contractual incompleteness has implications for decisions that affect economic efficiency.
Transformation Cost Engineering
by Matthew Jennejohn
Transactions in the market for corporate control are not fully standardized but rather exhibit a material amount of variation. This Essay explores a possible structural explanation: That the complexity of merger and acquisition (M&A) agreements makes them susceptible to multiple sources of path dependency, which introduce tensions that unsettle incentives toward uniform standardization. Using natural language processing techniques and standard regression analysis, the Essay presents preliminary evidence indicating that the level of standardization of various M&A agreement provisions correlates differently with multiple sources of path dependency, lending support to the hypothesis that endogenous structural factors limit the standardization of M&A transactions. Those findings underscore the importance of including scope economies in theories of contractual innovation and enforcement and emphasize the role of transaction designers’ organizational routines as a source of market resilience.
Boilerplate Semantics: Judging Natural Language in Standard Deal Contracts
by Jeremy McClane
Many corporate finance lawsuits involve the interpretation of commonly-used boilerplate contracts, the meaning of which is thought to be widely understood. In some cases, however, judges interpret these contracts in ways that upend market actors’ expectations about the meaning of terms and frustrate the presumed intent of the parties. Given this experience, and the legal profession’s long history with boilerplate, it is a source of frequent surprise that certain standard provisions continue to be used, sometimes almost verbatim, even after becoming notorious sources of conflict.
A number of persuasive explanations have been advanced for this phenomenon, but this Essay argues that they are incomplete, and an overlooked additional factor helps explain the persistence of trouble-making language. Many boilerplate clauses that become the subject of controversy share a type of ambiguous semantic structure that linguists know well, but that we as lawyers are rarely trained to identify. This type of structure lends itself well to boilerplate, but contributes to confusion and opportunistic reading of contract language. Semantically ambiguous constructions can seem straightforward enough to a drafting lawyer on first read, but they contain multiple layers of often-hidden meaning that provide fertile ground for later disputes.
Despite the confusion that these structures create, their ambiguities are difficult to spot and correct, especially using the interpretive processes that we lawyers are accustomed to using. Thus, even earnest attempts to correct problematic language can end up falling short. This Essay identifies these structures using three well-known boilerplate provisions whose interpretations have proved controversial. The Essay also discusses ways in which lawyers can learn to recognize these structures and suggests that algorithms designed to process natural language may be able to “see” them even when humans struggle to do so.
Revising Boilerplate: A Comparison of Private and Public Company Transactions
by Robert E. Scott, Stephen J. Choi, & Mitu Gulati
The textbook model of commercial contracts between sophisticated parties holds that terms are proposed, negotiated and ultimately priced by the parties. Parties reach agreement on contract provisions that best suit their transaction with the goal of maximizing the joint surplus from the contract. The reality, of course, is that the majority of the provisions in contemporary commercial contracts are boilerplate terms derived from prior transactions and even the most sophisticated contracting parties pay little attention to these standard terms, focusing instead on the price of the transaction. With standard-form or boilerplate contracts, this dynamic of replicating by rote the terms from prior transactions is exacerbated when the contract terms are reproduced largely because the same term was successful in closing prior deals and, even more importantly, because the terms are part of the market standard. The end result is that suboptimal terms can persist in boilerplate contracts unchanged for decades. Indeed, some standardized terms in boilerplate contracts may have lost any recoverable meaning—thus creating what we have called a contractual black hole. Here, courts may be practically incapable of recovering a plausible meaning that was attached to the standard terms by the contracting parties at the time the contract was drafted
Beyond Internal and External: A Taxonomy of Mechanisms for Regulating Corporate Conduct
by Ann M. Lipton
Corporate discourse often distinguishes between internal and external regulation of corporate behavior. The former refers to internal decisionmaking processes within corporations and the relationships between investors and corporate managers, and the latter refers to the substantive mandates and prohibitions that dictate how corporations must behave with respect to the rest of society. At the same time, most commenters would likely agree that these categories are too simplistic; relationships between investors and managers are often regulated with a view toward benefitting other stakeholders.
As a result, this Article will seek to develop a taxonomy of tactics available to, and used by, regulators to influence corporate conduct, without regard to their nominal categorization of “external” or “internal” (or “corporate” and “non-corporate”) in order to shed light on how those categories both obscure and misdescribe the existing regulatory framework. By reframing the shareholder/stakeholder debate, we can identify underutilized avenues for encouraging prosocial, and discouraging antisocial, corporate action, and recognize areas of contradiction and incoherence in current regulatory policy. Finally, this exercise will demonstrate how corporations, far from being “privately” ordered, are in fact the product of an overarching set of choices made by state actors in the first instance.