Posts Tagged ‘Incorporations’

The Role of Social Enterprise and Hybrid Organizations

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday February 3, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Ofer Eldar of Yale Law School.

In my paper, The Role of Social Enterprise and Hybrid Organizations, which was recently made available on SSRN, I advance a theory of hybrid organizations that combine profit-seeking and social missions.

Recent years have brought remarkable growth in hybrid organizations, including firms that pursue corporate social responsibility (“CSR”) policies, socially responsible investment firms, and environmentally-friendly firms. In addition, much attention has focused on a broad but vaguely defined group of hybrid organizations which are commonly referred to as “social enterprises”; these include microfinance institutions, businesses that sell fair trade products, work integration firms, and companies that sell affordable products in developing countries (e.g., eyeglasses and bed-nets). Despite popular enthusiasm for hybrid organizations, legal reforms to facilitate their formation and growth—including, in particular, special enabling statutes for hybrid firms (e.g., the Low-Profit LLC and the Benefit Corporation)—have largely been ineffective. This failure stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. Rather, legal and economic scholars tend to treat different forms of hybrids, especially social enterprises and firms implementing CSR policies, as essentially the same form of enterprise, i.e., firms with a mixed profit and social mission.

…continue reading: The Role of Social Enterprise and Hybrid Organizations

DGCL Amended to Authorize Public Benefit Corporations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 15, 2013 at 9:13 am
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Editor’s Note: The following post comes to us from Frederick H. Alexander, partner in the Delaware Corporate Law Counseling Group at Morris, Nichols, Arsht & Tunnell LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Beginning on August 1, 2013, the Delaware General Corporation Law will authorize the formation of public benefit corporations. The new provisions will allow entrepreneurs and investors to create for-profit Delaware corporations that are charged with promoting public benefits. These provisions modify the fiduciary duties of directors of PBCs by requiring them to balance such benefits with the economic interests of stockholders. In addition, the new provisions will require public benefit corporations to report to their stockholders with respect to the advancement of such non-stockholder interests.

Below are a few of the more salient elements of Delaware’s public benefit corporation legislation:

…continue reading: DGCL Amended to Authorize Public Benefit Corporations

Corporate Mobility and Regulatory Competition in Europe

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday May 7, 2013 at 9:34 am
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Editor’s Note: The following post comes to us from Wolf-Georg Ringe, Professor of International Commercial Law at Copenhagen Business School.

Is there a competition for corporate charters in Europe? Corporate and comparative scholars have been discussing the similarities between the Delaware-led competition in the United States with the slowly emerging market for corporate legal forms in the European Union.

In my recent paper, Corporate Mobility in the European Union – a Flash in the Pan? An empirical study on the success of lawmaking and regulatory competition, recently made available on SSRN, I provide new empirical evidence on the development of the market for incorporations in Europe, and on the impact of national law reforms.

Since the seminal Centros case in 1999, European entrepreneurs have been allowed to select foreign legal forms to govern their affairs. While much academic effort has been spent to evaluate the early market reactions to this case-law, effectively opening up the European market, relatively little attention has been devoted to subsequent developments. This is surprising, since the various national lawmakers’ responses to the wave of entrepreneurial migration offer a rare glimpse on the effects of regulatory competition and subsequent business’ reaction, as well as on the relevance and effects of lawmaking and regulatory responses to market pressure.

…continue reading: Corporate Mobility and Regulatory Competition in Europe

Putting Stockholders First, Not the First-Filed Complaint

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday January 22, 2013 at 9:11 am
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Editor’s Note: The following post comes to us from Leo E. Strine, Jr., Senior Fellow for the Harvard Program on Corporate Governance and Austin Wakeman Scott Lecturer at Harvard Law School, Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, and Matthew Jennejohn, an associate at Shearman & Sterling, LLP.

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this paper suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Putting Stockholders First responds to the observation that in 2011, only 5% of settlements of shareholder litigation challenging mergers and acquisitions involved an additional payout to stockholders, 84% of such settlements were based on additional disclosure only, but all of such settlements involved payment of fees for plaintiffs’ attorneys. These figures reflect a significant change from 1999 to 2000, when 52% of suits filed on behalf of shareholders produced a financial benefit for the class, and only 10% of settlements were “disclosure-only.”

…continue reading: Putting Stockholders First, Not the First-Filed Complaint

Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

Posted by Jesse Fried, Harvard Law School, on Tuesday January 8, 2013 at 8:57 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware dominates the corporate chartering market in the U.S—it is the only state that attracts a significant number of out-of-state incorporations. As a result, incorporation decisions are “bimodal,” with public and private firms typically choosing between home-state and Delaware incorporation.

Much ink has been spilled in the debate over whether Delaware’s dominance arose because it offers high-quality or low-quality corporate law. Under the “race-to-the-top” view, Delaware has prevailed because its law maximizes firm value. Under the “race-to-the-bottom” view, Delaware has won by offering corporate law that favors insiders at other parties’ expense.

But a firm today may choose Delaware law not solely because of its inherent features but rather because, after decades of Delaware’s dominance, business parties—including investors and their lawyers—are now simply more familiar with Delaware law than the laws of other states. Indeed, the bimodal pattern of domiciling is itself strong evidence that business parties are familiar only with their home states’ corporate law and Delaware’s.

In our paper, Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, recently made public on SSRN, Brian Broughman, Darian Ibrahim, and I show, for the first time, that familiarity does in fact affect firms’ decisions to domicile in Delaware rather in their home states.

…continue reading: Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

California Court Acknowledges “Quasi-California Corporation” Decision

Posted by Larry Sonsini, Wilson Sonsini Goodrich & Rosati, on Wednesday September 19, 2012 at 8:53 am
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Editor’s Note: Larry Sonsini is chairman of Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR alert.

Companies incorporated outside of California but with significant California contacts (so-called “quasi-California corporations”) have struggled with exactly how to comply with the long-arm statute found in Section 2115 of the California Corporations Code. The statute purports to impose a number of provisions of the California Corporations Code on quasi-California corporations, including the state’s requirement to obtain separate approval from holders of each class of capital stock on a merger “to the exclusion of the law of the jurisdiction in which [the quasi-California corporation] is incorporated.” Section 2115 has been thought to be legally infirm for some time, particularly after a decision by the Delaware Supreme Court in 2005. However, there never has been an acknowledgement by a California court that Section 2115 reaches too far. That changed earlier this year, when a California Court of Appeal stated in dicta that certain matters of internal corporate governance fall within a corporation’s internal affairs and should be governed by the laws of the corporation’s state of incorporation.

…continue reading: California Court Acknowledges “Quasi-California Corporation” Decision

Benefit Corporations vs. “Regular” Corporations: A Harmful Dichotomy

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday May 13, 2012 at 8:31 am
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Editor’s Note: The following post comes to us from Mark A. Underberg, retired partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP.

In less than two years, seven states, including New York, New Jersey and California, have enacted laws creating a new hybrid type of corporation designed for businesses that want to simultaneously pursue profit and benefit society. Advocates for this new type of entity—typically called a benefit corporation, or B Corp– say that it fills a gap between traditional corporations and non-profits by giving social entrepreneurs flexibility to achieve the dual objectives of doing well and doing good. [1]

At first glance, the B Corp seems a welcome addition to the corporate governance landscape, that promises to advance the cause of socially responsible business. Indeed, B Corp proponents have been remarkably successful in making their case to lawmakers; the statutes were passed without a single dissenting vote in both houses of the New York and New Jersey legislatures last year, and similar proposals are pending in four additional states. Meanwhile, hundreds of businesses, most notably the outdoor clothing company Patagonia, have chosen to organize under the B Corp banner.

But viewed from a broader corporate governance perspective, the B Corp initiative—however well-intentioned–has troubling implications. The problem is that its primary rationale rests on the mistaken, though widely-held, premise that existing law prevents boards of directors from considering the impact of corporate decisions on other stakeholders, the environment or society at large. This crabbed view of directorial fiduciary duties perpetuates the unfortunate misconception that existing law compels companies to single-mindedly maximize profits and share price, and in so doing undermines the very values that corporate governance advocates should seek to promote: responsible, sustainable corporate decision-making by companies of any stripe.

…continue reading: Benefit Corporations vs. “Regular” Corporations: A Harmful Dichotomy

Delaware’s Balancing Act

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 11, 2010 at 10:25 am
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Editor’s Note: The following post comes to us from John Armour, Professor of Law and Finance at the University of Oxford; Bernard Black, Professor of Finance and Law at Northwestern University and Professor of Finance and Law at the University of Texas at Austin; and Brian Cheffins, Professor of Corporate Law at the University of Cambridge. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In the paper Delaware’s Balancing Act, which was recently made publicly available on SSRN, we examine the decline in Delaware’s popularity as a venue for corporate litigation. The Delaware court system has functioned to a significant degree as a de facto “national” court for U.S. corporate law. Corporate disputes arising in Delaware courts frequently generate extensive press coverage. Delaware law is a central part of the business law curriculum in U.S. law schools and law students learning corporate law are exposed to a steady diet of Delaware case law. Official comments accompanying the Model Business Corporations Act (M.B.C.A.), a model set of laws prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association followed by 24 states, frequently refer to Delaware cases to provide examples or as a source of further explanation. Courts in M.B.C.A. states often rely on Delaware case law to clarify gaps in the M.B.C.A. and sometimes even cite Delaware jurisprudence in preference to M.B.C.A. court decisions.

…continue reading: Delaware’s Balancing Act

Revisiting Corporate Governance Regulation

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday May 8, 2009 at 4:44 pm
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Editor’s Note: This post comes from Moshe Cohen of MIT.

In my working paper Revisiting Corporate Governance Regulation: Firm Heterogeneity and the Market for Corporate Domicile, which I recently presented at the Law, Economics and Organizations Workshop here at Harvard Law School, I use a discrete choice framework to analyze state design and firm choice of the implications of incorporation: corporate governance laws, corporate taxes and court structure.

In order to exploit the information revealed in the preferences displayed by the different firms, a novel dataset with firm and incorporation characteristics is assembled and then a random coefficient discrete choice model is specified. In the model, incorporation is treated as a “product” that the states design, differentiated along all of the dimensions of the implications of incorporation, including the discrete “price”—the tax implications incorporation imposes on each firm. In every one year period, each heterogeneous firm chooses its preferred “product” by choosing to incorporate, to remain incorporated, or to reincorporate in one of the 51 US jurisdictions. Firms are decomposed into their ownership patterns, director characteristics, industry concentration, financial profiles, the geographical location of their headquarter states, and the residual unobservable dimensions of heterogeneity within them. The choice of incorporation state is seen to be made based on the preferences—resulting from these dimensions of firm heterogeneity—for the laws, court characteristics and taxes that makeup the incorporation implications.

I find that all incorporation implications, the laws, the court characteristics and the incorporation taxes matter. I find that firms are very responsive to incorporation and franchise taxes. In addition, on average, firms like antitakeover statues, but, consistent with an agency story, firms with an institutional shareholder block and venture capital backed firms dislike them. On average, firms dislike mandatory governance statutes restricting managerial power and facilitating the representation of minority shareholders, but these laws are not as restrictive for the choice of firms in concentrated industries. All firms dislike well functioning courts, consistent with a litigation deterrence motive. The recovered firm preferences are then taken to the simulation of recently proposed federal reforms aimed at centralizing the domicile implications and restricting firm choice. They are also related to the documented differential returns earned by firms with better internal governance in the 1990s, as well as to other trading strategies that would have yielded abnormal returns in the 2000s.

The full paper is available for download here.

The Shifting Balance of Power Between Shareholders and the Board

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 26, 2008 at 12:07 pm
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Editor’s Note: The post below comes to us from Jennifer G. Hill of the University of Sydney, Australia, who is Visiting Professor at Vanderbilt Law School during Spring 2008 and 2009. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

I have recently completed a paper, entitled “The Shifting Balance of Power Between Shareholders and the Board: News Corp’s Exodus to Delaware and Other Antipodean Tales”. The paper is posted on SSRN here.

The abstract to the paper is as follows:

The balance of power between shareholders and the board of directors is a contentious issue in current corporate law debate. It also lay at the heart of a controversy concerning the re-incorporation of News Corporation (News Corp) in Delaware. News Corp has recently been the subject of intense media attention due its successful bid to acquire Dow Jones & Company. Nonetheless, News Corp’s move to the US, which paved the way for this victory, was neither smooth nor a fait accompli. Rather, the original 2004 re-incorporation proposal prompted a revolt by a number of institutional investors, on the basis that a move to Delaware would strengthen managerial power vis-à-vis shareholder power. The institutional investors were particularly concerned about the effect of the re-incorporation on shareholder participatory rights, and the ability of the board of directors to adopt anti-takeover mechanisms, such as poison pills, which are not permissible under Australian law. It was this latter concern, which ultimately led a group of institutional investors to commence legal proceedings in the Delaware Chancery Court in UniSuper Ltd v News Corporation (2005 WL 3529317 (Del Ch)).

The News Corp re-incorporation saga highlights a number of important differences between US, UK and Australian corporate law rules relating to shareholder rights, and provides a valuable comparative law counterpoint to the recent US shareholder empowerment debate. Other recent Australian commercial developments discussed in the article show a tension between legal rules designed to enhance shareholder power, and commercial practices designed to readjust power in favor of the board of directors. These developments are interesting because they demonstrate how some Australian companies have tried to create a de facto corporate governance regime, which mimics certain aspects of Delaware law.

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