Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 1
of 22
Kandinsky, Fragment 2 for Composition VII (1913)
Why BusOrgs?
Corporations:
A Contemporary Approach
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Chapter 1
Introduction to the Firm
Slide 2
of 25
1.
Fundamentals
–
–
2.
Corporations and policy
–
–
–
3.
Chapter 1
Introduction to the Firm
Sale of control
Antitakeover devices
Deal protection
Close corporations
–
–
Corporations:
A Contemporary Approach
Securities markets
Planning
Securities fraud class actions
Oppression
Insider trading
Corporate deals
–
–
–
10.
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Stock corporations
trading
Close
–
–
–
9.
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
–
–
–
–
–
–
8.
10.
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
–
–
–
7.
Numeracy for corporate lawyers
Capital structure
Corporate externalities
–
–
–
6.
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
–
–
5.
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
–
–
–
4.
Introduction to firm
Corporate basics
Planning
Oppression
Slide 3
of 25
Schedule
Fall 2014
Workshops:
No classes:
Exam period:
Corporations:
A Contemporary Approach
Sep 11 / Sep 25 / Oct 9 / Nov 13
Oct 26-30 / Nov 3-6
Dec 8-19
Chapter 1
Introduction to the Firm
Slide 4
of 25
Grading (see Syllabus)
Three components:
1.Shareholder proposal memo – due Nov 21 (20%)
2.Multiple-choice exam – during exam period (30%)
3.
Final essay exam – during exam period (50%)
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 5
of 25
Your input …
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 6
of 25
What you will learn …
1.
2.
3.
4.
Basic vocabulary / essential concepts
Business understanding
Corporation in law / society
Policy – learn to learn
Frank Partnoy
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 7
of 25
Class “panels” …
Mon:
Tue:
Wed:
Thu:
Abaldukarim  Darr
Dickens  Kennedy
Kipinen  Price
Rivers  Zimlich
Class groups …
Michael Klotz (3L)
Five (5) classmates seated
nearby
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
[Teaching Assistant]
Slide 8
of 25
Laptops …
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 9
of 25
Module I – Fundamentals
Chapter 1
Introduction to the Firm
• Risks and risk allocation
Bar
exam
Corporate
practice
Law
profession
– Controllable/noncontrollable risks
– Risk control devices: diversification, insurance,
incentives
– Allocation devices: owner/agent
• Fiduciary duties
– Source: judge-made law
– Party expectations vs. legal norms
– Understanding of human motivations
• Role of law
Citizen of
world
Corporations:
A Contemporary Approach
– Mandatory vs. default rules
– Types of defaults: majoritarian, tailored, penalty
– Nature of US corporate law
Chapter 1
Introduction to the Firm
Slide 10
of 25
The “business firm”
• Meinhard v. Salmon
– Allocating risks
– Fiduciary duties
• Business firm
– Essential questions
– This course
• Role of law
– Mandatory vs. default rules
– US corporate law
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 11
of 25
Meinhard v. Salmon
(NY 1928)
(1) The business story
(2) The parties’ motivations?
(3) Which business organization?
(4) Nature and extent of fiduciary duties?
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 12
of 25
Hotel Bristol
Corporations:
A Contemporary Approach
Salmon Tower
Chapter 1
Introduction to the Firm
Slide 13
of 25
• Risks
– uncontrollable
– controllable
• Expected returns
– weighted average
– risk tolerance
• Manage risk
–
–
–
–
insurance
diversification
internal allocation
externalization
• Firm organization
Meinhard
(capitalist)
Corporations:
A Contemporary Approach
– Risk to principal
– Risk to agent
– Shared risk
Chapter 1
Introduction to the Firm
Salmon
(manager)
Slide 14
of 25
Expected returns
(what are returns worth)
Scenarios
Upturn
(best-case)
Middling
(likely-case)
Downturn
(worst-case)
Return
Probability
Expected
$15,000
30%
$4,500
$10,000
50%
$5,000
($6,000)
20%
($1,200)
(M’s share)
TOTAL
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
(weighted)
$8,300
Slide 15
of 25
Business organization choices
in Meinhard v. Salmon …
•
•
•
Corporations:
A Contemporary Approach
Who bears risk?
What agency costs arise?
How is risk-taking compensated?
Chapter 1
Introduction to the Firm
Slide 16
of 25
Business organization choices…
Employeremployee
Lenderborrower
Meinhard
Meinhard
(owner)
Joint
ownership
Meinhard
(owner)
---Salmon
Salmon
Corporations:
A Contemporary Approach
Salmon
(owner)
(owner)
Chapter 1
Introduction to the Firm
Slide 17
of 25
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 18
of 22
Fiduciary duties
in Meinhard v. Salmon …
•
•
•
Corporations:
A Contemporary Approach
What did plaintiff argue?
What did court hold?
What was remedy?
Chapter 1
Introduction to the Firm
Slide 19
of 25
“Joint adventurers, like copartners, owe
to one another, while the enterprise
continues, the duty of the finest
loyalty.”
“A trustee is held to something stricter
than the morals of the market place.”
“Not honesty alone, but the punctilio of
an honor the most sensitive, is then
the standard of behavior.”
“Uncompromising rigidity has been the
attitude of courts of equity when
petitioned to undermine the rule of
undivided loyalty …”
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Bejamin Cardozo
(1870-1938)
Slide 20
of 25
“There was no general partnership,
merely a joint venture for a limited
object, to end at a fixed time.”
“The new lease, covering additional
property, containing many new
and unusual terms and conditions,
with a possible duration of 80
years, was more nearly the
purchase of the reversion than the
ordinary renewal with which the
authorities are concerned.”
William Andrews
(1858-1936)
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 21
of 25
Essential elements
of “business firm”
• Basic structure
– Terms of relationship
– Who is “owner” / “manager”?
• Financing
– Sharing of profits/losses
– Insiders’ liability to outsiders
Capitalist
(owner)
• Governance
– Powers of “manager”
– Oversight by “owner”
– Information rights of “owner”
• Fiduciary duties
Manager
(manager)
– Discretion/duties of “manager”
– Method of enforcement
• Liquidity rights
– Terminate relationship
– What if no “owner” market?
• Change relationship
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 22
of 25
1.
Fundamentals
–
–
2.
Corporations and policy
–
–
–
3.
Chapter 1
Introduction to the Firm
Sale of control
Antitakeover devices
Deal protection
Close corporations
–
–
Corporations:
A Contemporary Approach
Securities markets
Securities fraud class actions
Insider trading
Corporate deals
–
–
–
10.
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Stock trading
–
–
–
9.
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
–
–
–
–
–
–
8.
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
–
–
–
7.
Numeracy for corporate lawyers
Capital structure
Corporate externalities
–
–
–
6.
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
–
–
5.
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
–
–
–
4.
Introduction to firm
Corporate basics
Planning
Oppression
Slide 23
of 25
Group Hypo
Your BusOrg professor is co-author of a
Corporations casebook published by West. As part
of his deal with West, he receives complimentary
“author” copies.
A bookseller has come by the professor’s office
and offers to buy copies for $30. Should he sell?
The professor’s contract with West does not
address the resale of complimentary author copies.
The professor and his co-author (who share
royalties equally) have no agreement about
whether they can sell their complimentary copies.
Please advise your professor.
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 24
of 25
Group Answers
Consider co-author
•Duty to co-author – don’t sell (13)
• As co-venturer, fiduciary duty to co-author
• Conflict of interest: sales reduce royalties to co-author
• Must inform co-author; need consent of co-author
•No duty to co-author – free to sell (3)
• No conflict of interest identified; co-author can sell his copies
• No duties beyond writing/publishing agreement
Consider West
•Duty to West – don’t sell (7)
• Fiduciary duty to West; can’t compete, undercut profits
• Gave right to distribute to West; author must be loyal
• Protect your reputation; publishers may shun you
•No duty to West – free to sell (7)
• No fiduciary relationship; no limits in contract
• “Complimentary” copies means belong to author; no E(V)
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 25
of 25
Model Answer
Dear Professor,
You asked for my advice on whether you can sell your complimentary “author”
copies of your book to a bookseller.
My advice is that you not sell your “author” copies, until you consult with your coauthor. Given your relationship, you have a duty not to benefit yourself at his
expense – such as by selling your “author” copies so as to reduce his royalties.
Nonetheless, you and your co-author could agree on how to handle this.
Your contract with West, on the other hand, does not prevent you from selling your
“author” copies. They’re yours! Assuming that you have not misrepresented
anything to West and that such sales by authors are not uncommon, you have no
duty to West. Although your limited sales of “author” copies may reduce sales for
the publisher, that’s your prerogative.
I could cite law, but that would make this a legal memo. You asked for my advice.
Sincerely,
Your trusted adviser
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 26
of 25
Identify type of rule …
Rule 1 - Every employer shall pay to each
of his employees wages at not less
than $7.25 an hour.
Rule 2 - An employment, having no
specified term, may be terminated at
the will of either party on notice to the
other.
Rule 3 - An agent, as fiduciary, must use
reasonable efforts to give his principal
information relevant to affairs entrusted
to him and which, as the agent has
notice, the principal would desire to
have.
Mandatory rule - cannot
agree otherwise
Default rule - can agree
otherwise
1. Majoritarian (most
parties would choose)
2. Tailored (fits parties’
expectations)
3. Penalty (forces
parties to negotiate)
Rule 4 - An employee cannot compete
with his employer during the term of
employment. After employment
terminates, a non-compete covenant
will not be implied.
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 27
of 25
Role of law
(in business firms)
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 28
of 25
US v. Europe
(who is more mandatory?)
Company law rules
22
(131 E.U. directives)
14
Some U.S. states
All U.S. states
No U.S. jurisdiction
95
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 29
of 25
US v. Europe
(who is more mandatory?)
Mandatory company
law rules
9
(67 E.U. directives)
4
Some U.S. states
All U.S. states
No U.S. jurisdiction
54
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 30
of 25
Group Hypo
Your BusOrg professor is co-author of a
Corporations casebook published by West. As part
of his deal with West, he receives complimentary
“author” copies.
A bookseller has come by the professor’s office
and offers to buy copies for $30. Should he sell?
The professor’s contract with West does not
address the resale of complimentary author copies.
The professor and his co-author (who share
royalties equally) have no agreement about
whether they can sell their complimentary copies.
Please advise your professor.
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 31
of 25
Group Answers
Consider co-author
•Duty to co-author – don’t sell (13)
• As co-venturer, fiduciary duty to co-author
• Conflict of interest: sales reduce royalties to co-author
• Must inform co-author; need consent of co-author
•No duty to co-author – free to sell (3)
• No conflict of interest identified; co-author can sell his copies
• No duties beyond writing/publishing agreement
Consider West
•Duty to West – don’t sell (7)
• Fiduciary duty to West; can’t compete, undercut profits
• Gave right to distribute to West; author must be loyal
• Protect your reputation; publishers may shun you
•No duty to West – free to sell (7)
• No fiduciary relationship; no limits in contract
• “Complimentary” copies means belong to author; no E(V)
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 32
of 25
Model Answer
Dear Professor,
You asked for my advice on whether you can sell your complimentary “author”
copies of your book to a bookseller.
My advice is that you not sell your “author” copies, until you consult with your coauthor. Given your relationship, you have a duty not to benefit yourself at his
expense – such as by selling your “author” copies so as to reduce his royalties.
Nonetheless, you and your co-author could agree on how to handle this.
Your contract with West, on the other hand, does not prevent you from selling your
“author” copies. They’re yours! Assuming that you have not misrepresented
anything to West and that such sales by authors are not uncommon, you have no
duty to West. Although your limited sales of “author” copies may reduce sales for
the publisher, that’s your prerogative.
I could cite law, but that would make this a legal memo. You asked for my advice.
Sincerely,
Your trusted adviser
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 33
of 25
The end
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Slide 34
of 25
Why BusOrgs?
Corporations:
A Contemporary Approach
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Chapter 1
Introduction to the Firm
Slide 35
of 25
How de-stress?
Being
physically
active
Enjoying
solitude
Being
creative
Being
social /
kind
Corporations:
A Contemporary Approach
Chapter 1
Introduction to the Firm
Watching
TV
Slide 36
of 25