Columbia Business Law Review

Independence Reconceived

2024-03-06T03:53:04+00:00

What makes a director independent? Scholars, regulators, and investors have grappled for decades with the fleeting notion of director independence. Originally conceived as guardians of shareholder interests that could safeguard a corporate board’s ability to check management’s power, independent directors have become a marquee feature of modern corporate governance. But do the corporate actions of directors that are considered “independent” under current standards comport with what we think independence requires? In many cases, the answer would seem to be “no.” From a lack of observable financial impact to the unabated flow of corporate scandals, independent directors seem to keep failing at the job they were championed to do.

This Article addresses this puzzling tension, offering a novel theoretical and practical reframing of the decades-old discourse around independent directors. The historical focus on the classical managerial agency costs paradigm emphasized that directors who lack ties to the management team can prevent managerial slack or value extraction. However, this approach overlooks the critical role directors also have in curbing managerial overzealousness. In today’s governance ecosystem, directors are not only tasked with preventing managerial slack. They are increasingly tasked with preventing managerial overreach and misconduct even when such overreach or misconduct is compatible with promoting shareholder value. This has important theoretical and practical implications.

This Article makes two key contributions to the literature. First, it reframes the question of what makes directors independent by supplementing the focus on agency costs as the driver for independence. By identifying a need to prevent boards from rubber-stamping managerial actions—even those taken in good faith—this Article suggests that a simple lack of ties to management fails as a litmus test for independence. Second, by reconceiving independence, this Article also provides tangible credence to the value of diversity on boards, the value and perils of hedge fund activism, and to the emerging discourse regarding ESG and stakeholderism.

The Law of Contingent Control in Venture Capital

2024-03-06T04:05:23+00:00

Contingent control (CC) is a key enabler of startup growth and venture capital. To preserve adequate incentives and mitigate risks, venture finance deals distribute startups’ governance rights among investors and founders based on performance measures at different points in time. For example, granting greater decision-making powers to outperforming founders or depriving them of such prerogatives when they underperform. Crucially, these rights are distributed ex ante, through carefully designed contracts and securities, avoiding the costs and potential failure of future negotiations. This paper shows how corporate law determines the structure of CC: higher costs of structuring CC through bespoke securities, such as restricted shares or convertible preferred stock, incentivize the use of shareholders’ agreements and shadow governance structures in VC-backed companies. These findings demonstrate that cross-country differences in security design and capital structures are not only explained by the characteristics of transacting parties and deals or by tax regulation, but also by the regulation of non-listed companies, which has been evolving in the blind spot of legal and financial scholarship. The paper argues that corporate laws in entrepreneurial economies should be recalibrated to facilitate security design and discourage the disproportionate use of shareholders’ agreements.

Taking Personhood Seriously

2024-03-06T04:08:20+00:00

This Article takes the recent Twitter merger litigation, along with other high-profile legal developments, as an opportunity to re-examine one of the most important, and misunderstood, concepts in the modern social landscape: legal personhood. The Article makes three main contributions to the literature: first, it originally connects several key stages in personhood’s historical development, from the common law, through the hurdles of legal realism and the early law and economics movement, to the recent revival of substantive personhood, both in scholarship and following the Supreme Court’s decisions on corporate constitutional rights. It then integrates this history with an analysis of the legal scene where personhood achieved its most profound impact, from the 1980s takeover era to the Twitter story: Delaware corporate law. Finally, this Article builds upon these insights to offer a new theoretical account of personhood as a legal degree of freedom, which holds the capacity to generate a practically unlimited range of situational outcomes. So far, scholars have tended to discuss personhood in a limited, context-specific manner. This Article brings personhood front and center in its own right, illustrating for the first time how personhood can be a no less, and often more, significant fact of legal life than contract, property, or public law, and why we should place it at the start of the analysis, prior to delving into the policy discussion of the day.

Corporate Technocracy: ESG Governance Beyond Shareholder Democracy or Managerialism

2024-03-06T04:15:18+00:00

This Article advances a novel paradigm for governing corporate ESG that accounts for the principal-agent challenges undermining prevailing proposals. ESG (Environmental Social Governance) advocates typically advance one of two corporate governance paradigms for delivering on their objectives—shareholder democracy or managerialism. Shareholder democracy seeks to expand shareholder involvement in defining and monitoring corporate ESG agendas. Managerialism claims broader discretion for executives to govern in the interest of a corporation’s stakeholders. Both paradigms fail to account for novel agency challenges generated by prosocial corporate purpose, leaving unresolved core concerns about ESG accountability and efficacy.

This Article offers an alternative to the two prevailing ESG governance paradigms and argues that “corporate technocracy” can account for the novel agency challenges generated by ESG, while addressing the structural and legal shortcomings of both shareholder democracy and managerialism. Technocracy refers to rule by technical experts. It emphasizes institutional accountability, promotes legibility and measurability of corporate purpose, and characterizes shareholders and stakeholders as an information source for defining ESG materiality, particularly for emerging or controversial issues. Technocracy depoliticizes both managers’ and shareholders’ role in defining ESG, relegating managers to the role of administrators rather than statesmen, and shareholders to the role of informational satellites rather than political subjects. Technocracy offers a framework for ESG governance that is consistent with controlling Delaware corporate law doctrine and federal securities law. This Article offers a way beyond the political dogma that plagues contemporary ESG debates and advances a normatively defensible and practically administrable paradigm for ESG governance.

The Propriety and Inevitability of Netting in Antitrust Class Actions

2024-03-06T04:19:48+00:00

How to define “antitrust injury” is an issue that has been the source of much debate among judges, lawyers, and academics alike. Specifically, a disagreement exists as to whether participation in a single transaction, which a defendant has allegedly tainted via anticompetitive behavior, is sufficient to constitute antitrust injury. Complicating this area of jurisprudential and doctrinal uncertainty are cases in which a plaintiff who has alleged injury as a result of anticompetitive conduct later reaped offsetting gains resulting from that very same conduct. The disagreements regarding the role of these net beneficiaries, and the netting process necessary to identify them, in antitrust suits implicate matters that extend far beyond legal theory. This Note outlines the multitude of ways in which the foregoing consequences manifest. It then highlights the propriety of a contextual approach in which courts are more willing to engage in nuanced and substantive class certification analyses that balance the interests of the litigants and the goals of the antitrust laws. The Note uses financial markets, and variations among the instruments therein, as a specific instantiation of these principles and a context in which a nuanced approach is especially compelling. It concludes by demonstrating that, regardless of whether a court incorporates netting into its definition of antitrust injury, it will have to contend with netting principles during the class–certification process.

My Unfair Lady: An Analysis of the CFPB's Authority to Prosecute Discriminatory Conduct under Dodd-Frank’s UDAAP Standard in the Age of the Major Questions Doctrine

2024-03-06T04:29:18+00:00

According to President Lyndon B. Johnson, the Civil Rights Act of 1964 “affirmed that men equal under God are also equal when they seek a job, when they go to get a meal in a restaurant, or when they seek lodging for the night in any State in the Union.” Neither Congress nor President Johnson, however, mentioned bank accounts, overdraft fees, or access to bank branches. On March 16, 2022—nearly six decades later—the Consumer Financial Protection Bureau attempted to fill this gap. It revised its examination manual to identify discrimination in consumer financial products as an “unfair, deceptive, or abusive act or practice.” When Congress established the CFPB in 2010, it expressly empowered it to eliminate such practices, adopting a standard which it has featured in federal law since 1938. Various agencies have previously considered using the standard to address discrimination, but until March 2022 none ever had.

So why now? The CFPB’s newly appointed director, Rohit Chopra, announced the change to the examination manual and said, “When a person is denied access to a bank account because of their religion or race, this is unambiguously unfair.”

Less than five months after the announcement, however, the Supreme Court threw the agency’s decision into doubt by offering a new framework for evaluating agency statutory interpretation in West Virginia v. EPA. The West Virginia case announces a new “major questions doctrine” in which agency action requires clear congressional authorization depending on the “history and breadth of the authority that [the agency] has asserted” and its “economic and political significance.” On September 28, 2022, industry groups led by the Chamber of Commerce filed suit against the CFPB, citing West Virginia v. EPA in claiming the CFPB overstepped its statutory authority. On September 8, 2023, a federal judge sitting in the Eastern District of Texas decided against the CFPB, enjoining the agency from implementing its anti-discrimination policy. The judge cited the major questions doctrine and West Virginia v. EPA in striking down the agency’s revision as beyond its statutory authority.

This Note considers the effects of West Virginia v. EPA and the ‘major questions doctrine’ on anti-discrimination efforts by the CFPB and other federal agencies, specifically analyzing discrimination as a “major question,” and determining the lengths to which the UDAAP standard “clearly authorizes” anti-discrimination action. Given the political significance of anti-discrimination laws, the potential ramifications of allowing the CFPB freedom to interpret the UDAAP standard, and the long history of a narrower interpretation of the law, this Note argues that whether the CFPB can prohibit banks from denying access to accounts on the basis of religion or race could be a major question. However, the UDAAP standard, which is an express delegation by Congress to the CFPB to liquidate the content and nature of fair practices over time, is best read as a clear statement authorizing the CPFB to eliminate discrimination in consumer financial products.

Keeping Corporations in the Courts: A Framework for Addressing Jurisdiction over Corporate Defendants in Class Action Litigation

2024-03-06T04:34:23+00:00

In a series of recent cases, the Supreme Court has made it significantly more difficult for plaintiffs to seek legal redress against corporations by limiting the power of courts to exercise personal jurisdiction over corporate defendants. Beginning in 2011, the Supreme Court limited the inquiry around where a corporation might be subject to general, all-purpose jurisdiction for claims against it. Then, in 2017, in Bristol-Myers Squibb v. Superior Court of California (“BMS”), the Court constrained the ability of plaintiffs to join together to sue a corporation when those plaintiffs were harmed by the corporation in different states. Importantly, these decisions left open whether these jurisdictional constraints apply to class actions.

This Note argues that because of the important role that class actions play in corporate accountability, it is essential that these limitations not be extended to the class action form. In summary, if the Rule 23 class action certification criteria are met and if the court has jurisdiction over the defendant with respect to class representatives’ claims under current personal jurisdiction doctrine, then the court should impute jurisdiction over that defendant with respect to the claims of class members. Part II of the Note details the scope of the aforementioned string of cases and discusses the scholarly, judicial, and popular responses to the potential applicability of BMS to class actions. Part III identifies the problems with applying BMS to class actions, focusing on the importance of private enforcement in maintaining corporate accountability and the essential role that the class action form plays in that process. Finally, Part IV considers the legal, policy, and normative considerations associated with limiting the scope of BMS and proposes solutions for how to limit BMS in the class action context.

Miller in a Cashless Society: Financial Surveillance and the Fourth Amendment

2024-03-06T13:03:17+00:00

In United States v. Miller, the Supreme Court declared that the Fourth Amendment does not protect Americans’ bank records because there is no reasonable expectation of privacy in the data. More recently, while limiting the third-party doctrine in Carpenter v. United States, the Court expressly left Miller standing by distinguishing the checks and deposit slips in Miller from the cell site location information in Carpenter. The Carpenter majority described the bank records in Miller as containing “limited types of personal information,” but the continued use of that distinction relies on an outdated picture of financial technology and consumer habits. Financial records have evolved significantly since Miller was decided in 1976, and ever-increasing reporting and retention requirements have created massive financial databases. In an increasingly cashless society, financial records can reveal intimate and comprehensive information about nearly every American. Still, this Note recognizes that courts are unlikely to find them worthy of constitutional protection, and it does not argue that all searches of them should be subject to a warrant requirement. This Note instead aims to highlight our vast financial surveillance infrastructure, consider its costs and benefits, and advocate for Congressional narrowing of the procedures for access to and use of financial records by government agents.

In Search of the Caremark Junction: Conceptualizing the Core of Caremark Liability

2024-03-06T13:07:35+00:00

In recent years, Caremark claims have taken center stage in corporate law discussions. With more Caremark claims proceeding past the motion to dismiss stage, some argue that Caremark liability has evolved into a conduit between corporate governance and public policy. Much ink has been spilled debating whether Caremark claims should play this conduit role. Rather than add to the ink-spillage on this normative question, however, this Note takes a different approach; it employs a descriptive analysis of Caremark liability to establish a new framework for portraying and analyzing Caremark claims. In particular, by conceptualizing Caremark liability through the lens of shareholder versus third-party interests, this Note will peel the layers behind a Caremark claim, scrutinizing it until it reaches its core. And at the core, what this Note finds is quite remarkable and what it neologizes as the “Caremark Junction”: a rare point of overlap between shareholder and third-party interests concerning the scope and intensity of a board of director’s oversight behavior. This Note explores how to reach the Junction, dissecting its necessary conditions and analyzing its broader implications—all with the aim of grasping the true nature of Caremark liability as a distinct, though overlapping, concept from general oversight liability.