Reinier H. Kraakman

Ezra Ripley Thayer Professor of Law

Biography

Reinier Kraakman is the Ezra Ripley Thayer Professor of Law at Harvard Law School. He was previously Professor of Law at Yale Law School (1981 -1986) and Visiting Professor of Law at both Georgetown University Law Center (1993) and New York University Law School (1996 -1997). He was also a law clerk for Judge Henry J. Friendly of the U.S. Court of Appeals for the Second Circuit. He currently teaches corporate law, corporate finance, and a seminar devoted to theoretical issues in organizational law. He has been an advisor on company law reform in Russia and Vietnam. He has written numerous articles on topics in corporate law, corporate governance, and liability strategies for controlling corporate behavior. He was elected an ECGI research associate in 2006. His more recent better-known articles include The End of History for Corporate Law (with Henry Hansmann), 89 GEORGETOWN LAW JOURNAL 439 (2000); The Essential Role of Organizational Law (with Henry Hansmann), 110 YALE LAW JOURNAL 387 (2000); and Russian Privatization and Corporate Governance: What Went Wrong? (with Bernard Black and Anna Tarassova), 52 STANFORD LAW REVIEW 1731 (2000). He is a lead author of a recent treatise on comparative corporate law that is now in its second edition, R. Kraakman, et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (2nd ed.) (Oxford University Press: 2009), and a co-author of a book of cases and discussion of the law of business organizations, W. Allen, R. Kraakman, and G. Subramanian, Cases and Commentaries on the Law of Business Organization, (4th Ed. Wolters Kluwer, Aspen Press 2012). His current areas of research include corporate include the corporate governance of widely-held corporations, ownership structure and corporate governance, the empirical and legal determinants of CEO turnover, comparative corporate law and finance, the bases for individual- and firm- level liability in corporate settings, the meaning and legal implications of price efficiency in capital markets.

Areas of Interest

Reinier Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford Univ. Press 3rd ed. Mar. 2017).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Fiduciaries
,
Mergers & Acquisitions
,
Securities Law & Regulation
,
Shareholders
,
Foreign Law
,
Comparative Law
Type: Book
Abstract
"This is the long-awaited third edition of this highly regarded comparative overview of corporate law. This edition has been comprehensively revised and updated to reflect the profound changes in corporate law and governance practices that have taken place since the previous edition. These include numerous regulatory changes following the financial crisis of 2007-09 and the changing landscape of governance, especially in the US, with the ever more central role of institutional investors as (active) owners of corporations. The geographic scope of the coverage has been broadened to include an important emerging economy, Brazil. In addition, the book now incorporates analysis of the burgeoning use of corporate law to protect the interests of "external constituencies" without any contractual relationship to a company, in an attempt to tackle broader social and economic problems." --Publisher
Reinier H. Kraakman, Bernard Black & Anna Tarassova, Russian Privatization and Corporate Governance: What Went Wrong? 52 Stan. L. Rev. 1731 (2000).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Banking
,
Finance
,
Fiduciary Law
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Fiduciaries
,
Shareholders
,
Comparative Law
,
Developing & Emerging Nations
,
Foreign Law
Type: Article
Abstract
In Russia and elsewhere, proponents of rapid, mass privatization of state-owned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn't happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the self-dealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren't privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful privatization of large firms.
Reinier H. Kraakman & Henry Hansmann, The Essential Role of Organizational Law, 110 Yale L.J. 387 (2000).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Contracts
,
Commercial Law
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Fiduciaries
,
Mergers & Acquisitions
,
Shareholders
Type: Article
Abstract
The answer we offer is that organizational law goes beyond contract law in one critical aspect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries--a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: It involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of signal importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law--which is essentially a property-law-type function--has largely escaped notice, much less analysis, in both the legal and the economics literature.
Karl Hofstetter, Eugene F. Soltes & Reinier H. Kraakman, Compliance, Compensation and Corporate Wrongdoing(Program for the Comp. Study of L. & Corp. Governance, May 1, 2018).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Securities Law & Regulation
,
Executive Compensation
Type: Other
Abstract
Numerous high profile cases across industries and jurisdictions, including Wells Fargo, Siemens, Volkswagen, BP or Google, indicate that legal compliance remains a significant corporate governance challenge around the world. Ever increasing fines have become the standard response to all types of misconduct by corporations and their agents. Are they the appropriate answer to the compliance challenge? Are there superiour ways to rein in corporations? What can academic research contribute to this debate? An international Roundtable among academics, regulators and practitioners, which was organized at Harvard Law School in May 2018, discussed these and several related questions. The conclusions from this debate suggest a three-pronged way forward: (i) Companies need to keep finetuning their compliance organizations and toolkits by, e.g., systematically measuring the effectiveness of compliance efforts and specifically linking compensation policies to compliance; (ii) regulators and prosecutors need to give more weight to incentivizing corporate compliance around the world by, e.g., adding a properly-designed compliance defense to their fining policies; and (iii) academics need to put compliance as a serious topic on their research agendas with a view to developing meaningful guidance to companies and governments, as they have been doing for some time in other corporate governance areas.
John C. Coates, IV, Lucian A. Bebchuk, John C. Coffee, Bernard S. Black, Lawrence A. Hamermesh, James D. Cox, Marcel Kahan, Reinier Kraakman, Jeffrey N. Gordon, Ronald J. Gilson, Vikramaditya S. Khanna, Michael Klausner, Henry Hansmann, Donald C. Langevoort, Brian JM Quinn, Michal Barzuza, Mira Ganor, Edward B. Rock, Mark J. Roe, Helen S. Scott, Holger Spamann & Randall S. Thomas, Brief of Corporate Law Professors as Amici Curiae in Support of Neither Party, Mark Janus v. American Federation of State, County, and Mun. Employees, Council 31, et al., No. 16-1466, 138 S.Ct. 2448 (2018).
Categories:
Corporate Law & Securities
,
Government & Politics
,
Constitutional Law
Sub-Categories:
First Amendment
,
Shareholders
,
Corporate Law
,
Supreme Court of the United States
,
Politics & Political Theory
Type: Other
Abstract
The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors.Most individual shareholders cannot obtain full information about a corporation’s speech or political activities, even after the fact, nor can most shareholders prevent their savings from being used for political activity with which they disagree. More generally, the Court's focus on whether union non-members are effectively forced to fund political speech or activity with which they disagree should reflect the fact that most Americans must routinely fund speech with which they disagree. While some of this compulsion is from practical reality rather than law there are numerous examples outside the union context of laws that require individuals to fund expressive activities. There is, simply put, very little way for most individuals in modern America to avoid subsidizing speech with which they disagree.
John Armour, Henry Hansmann, Reinier Kraakman & Mariana Pargendler, Foundations of Corporate Law, in Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda, Mariana Pargendler, Georg Ringe & Edward Rock, The Anatomy of Corporate Law: A Comparative and Functional Approach ch. 1 (Oxford Univ. Press 3d ed. 2017).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Comparative Law
Type: Book
Abstract
This paper is the first chapter of the third edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda Mariana Pargendler, Georg Ringe, and Edward Rock (Oxford University Press, 2017). This paper is the first chapter of the third edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda Mariana Pargendler, Georg Ringe, and Edward Rock (Oxford University Press, 2017). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its third edition, the book has been significantly revised and expanded. As the introductory chapter to the book, this paper introduces the book’s analytic framework, which focuses on the common structure of corporate law across different jurisdictions as a response to fundamentally similar legal and economic problems. It first details the economic importance of the corporate form’s hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. The major agency problems that attend the corporate form and that, therefore, must be addressed, are identified. The chapter next considers the role of law and contract in structuring corporate affairs, including the function of mandatory and default rules, standard forms, and choice of law, as well the debate about the proper role of corporate law in promoting overall social welfare. While almost all legal systems retain the core features of the corporate form, individual jurisdictions have made distinct choices regarding many other aspects of their corporate laws. The forces shaping the development of corporate law, including evolving patterns of share ownership, are examined.
John Armour, Luca Enriques, Henry Hansmann & Reinier Kraakman, The Basic Governance Structure: The Interests of Shareholders as a Class, in Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda, Mariana Pargendler, Georg Ringe, and Edward Rock, The Anatomy of Corporate Law: A Comparative and Functional Approach ch. 3 (Oxford Univ. Press 3rd ed. 2017).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Shareholders
,
Corporate Governance
,
Comparative Law
Type: Book
Abstract
This paper is the third chapter of the third edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda Mariana Pargendler, Georg Ringe, and Edward Rock (Oxford University Press, 2017). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its third edition, the book has been significantly revised and expanded. Chapter 3 examines legal strategies employed in representative “core jurisdictions” to mitigate manager-shareholder conflicts. Agency problems arise from two of the core features of the corporate form: investor ownership, which often results in ultimate control being held by shareholders far removed from the firm’s day-to-day operations; and delegated management, which opens up the possibility for opportunistic behavior. This chapter describes how legal strategies outlined in Chapter 2 of the book are utilized to solve the trade-offs resulting from the interaction of investor ownership with delegated management. It describes the use of appointment rights, by which shareholders retain the right to appoint and remove directors. Next, it focuses on core decision rights and how their effectiveness is related to the problem of shareholder coordination costs. It then considers reward strategies and independent directors as a popular trusteeship strategy, while also highlighting differences in and commonalities in the regulation of executive compensation. The chapter briefly reviews legal rules and standards and disclosure as additional tools, before reflecting upon why some divergence in the basic corporate governance structure persists across our sample jurisdictions.
John C. Coates, IV, Lucian A. Bebchuk, Reinier Kraakman & Mark J. Roe (with Bernard S. Black, John C. Coffee, James D. Cox, Ronald J. Gilson, Jeffrey N. Gordon, Lawrence A. Hamermesh, Henry Hansmann, Robert J. Jackson, Marcel Kahan, Vikramaditya S. Khanna, Michael Klausner, Donald C. Langevoort, Brian J.M. Quinn, Edward B. Rock & Helen S. Scott, Supreme Court Amicus Brief of 19 Corporate Law Professors, Friedrichs v. California Teachers Association, No. 14-915 (U.S. Nov. 6, 2015).
Categories:
Corporate Law & Securities
,
Constitutional Law
Sub-Categories:
First Amendment
,
Corporate Law
,
Shareholders
Type: Article
Abstract
The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors.
Henry Hansmann, Reiner Kraakman & Richard Squire, Incomplete Organizations: Legal Entities and Asset Partitioning in Roman Commerce (European Corp. Governance Inst. (ECGI) – Law Working Paper No. 271/2014, Yale Law & Econ. Research Paper No. 511, Oct. 3, 2014).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
International, Foreign & Comparative Law
,
Legal Profession
Sub-Categories:
Banking
,
Commercial Law
,
Fiduciary Law
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Foreign Law
,
Comparative Law
,
Legal History
Type: Other
Abstract
In this chapter we analyze ancient Rome’s law of business entities from the perspective of asset partitioning, by which we mean the delimiting of creditor collection rights based on the distinction between business assets and personal assets. Asset partitioning, which is an essential legal attribute of modern business forms such as the partnership and the business corporation, reduces borrowing costs by simplifying credit-risk assessment and expediting insolvency proceedings. We find that ancient Roman business arrangements, such as the societas (very loosely, “partnership”) and the slave-run business endowed by the slaveowner with a peculium (a sum of capital), did not give business creditors the first claim to business assets, making these forms of organization non-entities according to the criterion of asset partitioning. It appears that the only true legal entity used to form profit-seeking firms was the societas publicanorum, which roughly resembled the modern limited partnership. But use of that form was generally limited to firms providing services contracted out by the state. Moreover, the societas publicanorum was largely a creature of the Republic, and was largely abandoned during the Empire. Although Rome had a complex economy and sophisticated commercial law, and was familiar with most of the types of asset partitioning we see in modern legal systems, it ultimately failed to develop legal entities for general use in commerce. Apparent reasons include the Roman aristocracy’s disparagement of commerce, the emperors’ wariness of strong organizations outside the state, and the society’s continuing reliance on the family -- a durable and complex legal entity in its own right -- to handle many of the needs of commerce.
Ronald J. Gilson & Reinier Kraakman, Market Efficiency after the Financial Crisis: It's Still a Matter of Information Costs, 100 Va. L. Rev. 313 (2014).
Categories:
Banking & Finance
,
Government & Politics
,
Corporate Law & Securities
Sub-Categories:
Financial Markets & Institutions
,
Securities Law & Regulation
,
Administrative Law & Agencies
Type: Article
Abstract
Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007–2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble—as a result of politics, it expanded from a narrow but important academic theory about the informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses informational efficiency, which is a relative, not an absolute measure. This focus on informational efficiency leads to a more focused understanding of what went wrong in 2007–2008. Yet informational efficiency is related to fundamental efficiency—if all information relevant to determining a security’s fundamental value is publicly available and the mechanisms by which that information comes to be reflected in the security’s market price operate without friction, fundamental and informational efficiency coincide. But where all value-relevant information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the information efficiency of prices and their relation to fundamental value. Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the information costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized.
William T. Allen, Reinier Kraakman & Guhan Subramanian, Commentaries and Cases on the Law of Business Organization: 2012-2013 Statutory Supplement (2012).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
,
Securities Law & Regulation
,
Corporate Law
Type: Book
Abstract
From the authors of Commentaries and Cases on the Law of Business Organization, this comprehensive yet concise Statutory Supplement provides relevant excerpts from state and federal statutes, SEC rules and regulations, restatements and ...
Henry Hansmann & Reinier Kraakman, Reflections on the End of History for Corporate Law, in Convergence of Corporate Governance: Promise and Prospects 32 (Abdul Rasheed & Toru Yoshikawa eds., 2012).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Corporate Governance
Type: Book
Abstract
Our essay on The End of History for Corporate Law was originally written for a conference at Columbia University in 1997 that was organized to address a question that was then just beginning to attract substantial attention: “Are Corporate Governance Systems Converging?” There can of course be as many answers to that question as there are interpretations of the question itself. At a macro level, however, it seemed to us that there was an important sense in which the answer to this question was clearly "yes." In our essay -- with its hyperbolic title and somewhat more modulated text -- we sought to expound that view. We now ask whether, 15 years after the End of History essay was written, the claims it makes still hold up.
William T. Allen, Reinier Kraakman & Guhan Subramanian, Commentaries and Cases on the Law of Business Organization (Aspen 4th ed. 2012).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
,
Corporate Law
,
Mergers & Acquisitions
,
Securities Law & Regulation
,
Corporate Governance
Type: Book
Abstract
Acting through others : the law of agency -- The problem of joint ownership : the law of partnership and related entities -- The corporate form -- The protection of creditors -- Normal governance : the voting system -- Normal governance : the duty of care -- Conflict transactions : the duty of loyalty -- Executive compensation -- Shareholder lawsuits -- Transactions in control -- Fundamental transactions : mergers and acquisitions -- Public contests for corporate control -- Trading in the corporation's securities.
John C. Coates, IV & Reinier Kraakman, The Link Between the Acquisitions Market and the Market for CEOs (Jan. 12, 2011).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Governance
,
Mergers & Acquisitions
,
Empirical Legal Studies
Type: Other
Abstract
Two empirical literatures tie the displacement of CEOs of widely-held companies to the poor performance of their firms - the turnover and mergers and acquisitions (M&A) literatures. In this paper we demonstrate a strong link between CEO turnover and friendly acquisitions of target firms in the S&P 500 between 1992 and 2004. We find that acquisitions and internal CEO turnover are most likely to occur at the same point in a CEO’s tenure, roughly five years after her initial appointment. We conjecture that deals are potential alternatives to CEO dismissal by the board or imminent CEO retirement. We explore interactions among CEO dismissals, retirements and resignations, and acquisitions on the one hand, and firm performance and CEO tenure on the other. We also investigate more specific hypotheses relating tenure to a CEO’s age, status as an inside or outside appointee, and the level of deal activity in the M&A market. Among our key findings is that the probability of a deal remains constant over the upper half of the age distribution of our sample CEOs, even though their probability of retiring increases sharply. This suggests that - contrary to our conjecture - impending retirement is not among the stronger incentives driving the management of target firms to seek friendly buyers. Finally, this paper contributes on the methodological level by comparing multinomial logistic regression - the traditional methodology of turnover research - to competing risk regression, a methodology adapted from epidemiological and medical research and recently introduced into the empirical finance literature.
Reinier H. Kraakman, John Armour & Henry Hansmann, Agency Problems, Legal Strategies, and Enforcement, in The Anatomy of Corporate Law: A Comparative and Functional Approach (Reinier H. Kraakman et al. eds. Oxford Univ. Press 2d ed. 2009).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
International, Foreign & Comparative Law
Sub-Categories:
Commercial Law
,
Fiduciary Law
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Fiduciaries
,
Shareholders
,
Law & Behavioral Sciences
,
Foreign Law
,
Comparative Law
Type: Book
Abstract
This article is the second chapter of the second edition of "The Anatomy of Corporate Law: A Comparative and Functional Approach," by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded. "Agency Problems and Legal Strategies" establishes the analytical framework for the book as a whole. After further elaborating the agency problems that motivate corporate law, this chapter identifies five legal strategies that the law employs to address these problems. Describing these strategies allows us to more accurately map legal similarities and differences across jurisdictions. Some legal strategies are "regulatory" insofar as they directly constrain the actions of corporate actors: for example, a standard of behavior such as a director's duty of loyalty and care. Other legal strategies are "governance-based" insofar as they channel the distribution of power and payoffs within companies to reduce opportunism. For example, the law may accord direct decision rights to a vulnerable corporate constituency, as when it requires shareholder approval of mergers. Alternatively, the law may assign appointment rights over top managers to a vulnerable constituency, as when it accords shareholders - or in some jurisdictions, employees - the power to select corporate directors. We then consider the relationship between different enforcement mechanisms - public agencies, private actors, and gatekeeper control - and the basic legal strategies outlined. We conclude that regulatory strategies require more extensive enforcement mechanisms - in the form of courts and procedural rules - to secure compliance than do governance strategies. However, governance strategies, for efficacy, require shareholders to be relatively concentrated so as to be able to exercise their decisional rights effectively. In addition to Chapter 2, Chapter 1, "What is Corporate Law?," is available in full text on the SSRN at http://ssrn.com/abstract=1436551
William T. Allen, Reinier Kraakman & Guhan Subramanian, Commentaries and Cases on the Law of Business Organization (Aspen 3rd ed. 2009).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Mergers & Acquisitions
,
Shareholders
,
Securities Law & Regulation
Type: Book
Abstract
Introduction to the law of enterprise organization -- Acting through others : the law of agency -- The problem of joint ownership : the law of partnership -- The corporate form -- Debt, equity, and economic value -- The protection of creditors -- Normal governance : the voting system -- Normal governance : the duty of care -- Conflict transactions : the duty of loyalty -- Shareholder lawsuits -- Transactions in control -- Fundamental transactions : mergers and acquisitions -- Public contests for corporate control -- Trading in the corporation's securities.
Reinier H. Kraakman, John Armour & Henry Hansmann, The Essential Elements of Corporate Law, in The Anatomy of Corporate Law: A Comparative and Functional Approach (Reinier H. Kraakman et al. eds. Oxford Univ. Press 2d ed. 2009).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Corporate Law
,
Corporate Governance
,
Fiduciaries
,
Business Organizations
,
Shareholders
,
Foreign Law
,
Comparative Law
Type: Book
Abstract
This article is the first chapter of the second edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press, 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded. As the book's introductory chapter, this article describes the functions and boundaries of corporate law. We first detail the economic importance of the corporate form's hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. We then identify the major agency problems that attend the corporate form, and that, therefore, corporate law must address: conflicts between managers and shareholders, between controlling and minority shareholders, and between shareholders as a class and non-shareholder constituencies of the firm such as creditors and employees. In our view, corporate law serves in part to accommodate contract and property law to the corporate form and, in substantial part, to address the agency problems that are associated with this form. We next consider the role of law in structuring corporate affairs so as to achieve these goals: whether, and to what extent standard forms - as opposed, on the one hand, to private contract, and on the other, to mandatory rules - are needed, and the role of regulatory competition. Whilst the ‘core’ features of corporate law are present in all - or almost all - legal systems, different systems have made different choices regarding the form and content of many other aspects of their corporate laws. To assist in explaining these, we review a range of forces that shape the development of corporate law, including domestic share ownership patterns. These forces operate differently across countries, implying that in some cases, complementary differences in corporate laws are functional. However, other such differences may be better explained as a response to purely distributional concerns. In addition to Chapter 1, Chapter 2 of the Anatomy of Corporate Law (2nd ed.), Agency problems, Legal Strategies, and Enforcement is also available (full text) on SSRN at http://ssrn.com/abstract=1436555.
John C. Coates & Reinier Kraakman, CEO Tenure, Performance and Turnover in S&P 500 Companies (John M. Olin Ctr. for Law, Econ., & Bus. Discussion Paper No. 595, ECGI - Finance Working Paper No. 191/2007, Sept. 2007).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Law
Type: Article
Abstract
The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance. However, less is known about the institutional and personal correlates of CEO turnover. In this study, we find two CEO characteristics interact with turnover: tenure and ownership. We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns – “owners” (who have large personal shareholdings) and “managers” (who have smaller holdings). The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions. Turnover significantly depends on firm performance during a CEO’s first four years on the job. In particular, external turnover by sale of the firm peaks a year 4 during a CEO tenure. By contrast, external turnover peaks at years 5 – 6, and plateaus at relatively high levels until year 9 of tenure. These term effects are strongest for relatively young CEOs. We also find that forced exit, retirement, and deals covary rather than substitute for one another as modes of CEO turnover. However, forced exits and deals both relate to poor performance by the firm on different metrics. Our evidence suggests that most internal turnover, particularly after a CEO’s first five years, is unrelated to firm performance.
Assaf Hamdani & Reinier Kraakman, Rewarding Outside Directors, 105 Mich. L. Rev. 1677 (2007).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
Civil Practice & Procedure
,
Labor & Employment
Sub-Categories:
Corporate Law
,
Corporate Governance
,
Torts - Negligence
,
Law & Behavioral Sciences
,
Legal Theory & Philosophy
,
Executive Compensation
Type: Article
Abstract
While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards. In this Paper, we consider the use of rewards to motivate director vigilance. Measures to enhance director liability are commonly perceived to be too costly. We, however, demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs. We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors. We conclude by providing preliminary sketches of two alternative reward regimes. While this paper focuses on outside directors, the implications of our analysis extend to other gatekeepers as well.
William T. Allen, Reinier Kraakman & Guhan Subramanian, Commentaries and Cases on the Law of Business Organization (Aspen 2nd ed. 2007).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Mergers & Acquisitions
,
Securities Law & Regulation
,
Shareholders
Type: Book
Abstract
Introduction to the law of enterprise organization -- Acting through others: the law of agency -- The problem of joint ownership: the law of partnership -- The corporate form -- Debt, equity, and economic value -- The protection of creditors -- Normal governance: the voting system -- Normal governance: the duty of care -- Conflict transactions: the duty of loyalty -- Shareholder lawsuits -- Transactions in control -- Fundamental transactions: mergers and acquisitions -- Public contests for corporate control -- Trading in the corporation's securities.
Henry Hansmann, Reinier Kraakman & Richard Squire, The New Business Entities in Evolutionary Perspective, 8 Eur. Bus. Org. L. Rev. 59 (2007).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
,
Corporate Law
Type: Article
Abstract
The many legal forms for business organisations that first appeared in the United States during the last thirty years — the limited liability company (LLC), the limited liability partnership (LLP), the limited liability limited partnership (LLLP) and the statutory business trust — all combine the pattern of creditors’ rights, or asset partitioning, that is traditional to the business organisation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors’ rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors’ rights and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of the continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction. This article first develops this argument in terms of the trade-off between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention, that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.
Reinier Kraakman, Concluding Remarks on Creditor Protection, 7 Eur. Bus. Org. L. Rev. 465 (2006).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Finance
,
Risk Regulation
,
Business Organizations
,
Corporate Law
,
Shareholders
,
Corporate Bankruptcy & Reorganization
,
European Law
Type: Article
Abstract
Presents observations on the principal themes of the symposium on Efficient Creditor Protection in European Company Law, held at the Max Planck Institute in Munich from December 1 to December 3, 2005. Explores the development of creditor protection through corporate and insolvency law. Considers whether a single regime of regulation will successfully provide adequate protection for creditors.
Henry Hansmann, Reinier Kraakman & Richard Squire, Law and the Rise of the Firm, 119 Harv. L. Rev. 1333 (2006).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
,
Corporate Law
Type: Article
Abstract
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call "entity shielding," is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-à-vis both personal and business creditors. The changing balance of these benefits and costs illuminates the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the seventeenth to nineteenth centuries, and the United States from the nineteenth century to the present.
Lucian Bebchuk, Allen Ferrell, Reinier Kraakman, Mark J. Roe & Guhan Subramanian, Placing Election Bylaws on the Corporate Ballot (Harvard PON Working Paper No. 915403, Aug. 2005).
Categories:
Corporate Law & Securities
Sub-Categories:
Securities Law & Regulation
,
Shareholders
,
Corporate Governance
Type: Other
Ronald J. Gilson & Reinier Kraakman, Takeovers in the Boardroom: Burke Versus Schumpeter, 60 Bus. Law. 1419 (2005).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Business Organizations
,
Mergers & Acquisitions
Type: Article
Abstract
This article, written on the occasion of the 25th anniversary of Martin Upton's 1979 article, Takeover Bids in the Target's Boardroom expresses the view that Takeover Bids is a Burkean take on a messy Schumpeterian world that, during 1980s, reached its apex in Drexel Burnham's democratization of finance through the junk bond market. The authors of this article reflect on the irony that today, long after the Delaware Supreme Court has adopted many of Upton's views, there is a new market for corporate control that no longer poses the threats—or supports the opportunities— that the market of the 1980s created. Today's strategic bidders and their targets share the same boardroom views. And for precisely this reason, "just say no" is no longer the battle cry that it once was. It stirred the crowds in the past precisely because hostile takeovers could be credibly depicted as a sweeping threat to the status quo—a claim that no one would make about today's strategic bidders. The market for corporate control now is a process of peer review, rather than an instrument of systemic change. What is lost as a result is just what, in the conservative view, has been gained: the capacity of the market for corporate control to ignite the dynamism that in our view has served the U. S. economy so well. Although Lipton may still lose today's battle to allow targets to just say no to intra-establishment takeovers, he will still have won the larger war. The authors of this article conclude that for now, at least, boardrooms are insulated from much of the force of a truly Schumpeterian market in corporate control of the sort we briefly glimpsed during the 1980s.
Ronald J. Gilson & Reinier Kraakman, MOME in Hindsight, Regulation, Winter 2004, at 64.
Categories:
Banking & Finance
,
Disciplinary Perspectives & Law
,
Corporate Law & Securities
Sub-Categories:
Financial Markets & Institutions
,
Financial Reform
,
Securities Law & Regulation
,
Law & Economics
,
Law & Behavioral Sciences
Type: Article
Abstract
Two decades ago, the Virginia Law Review published our article "The Mechanisms of Market Efficiency" (MOME), in which we tried to discern the institutional underpinnings of financial market efficiency. We concluded that the level of market efficiency with respect to a particular fact depends on which of several market mechanisms - universally informed trading, professionally informed trading, derivatively informed trading, and uninformed trading operates to reflect that fact in market price. Revisiting our article is particularly appropriate today. A new framework for evaluating the efficiency of the stock market, called "behavioral finance," and a growing number of empirical studies pose a serious challenge to the Efficient Markets Hypothesis. Twenty years have made us appropriately more skeptical of the efficiency of those institutions.
Ronald J. Gilson & Reinier Kraakman, The Mechanisms of Market Efficiency Twenty Years Later: The Hindsight Bias, 28 J. Corp. L. 715 (2003).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
Banking & Finance
Sub-Categories:
Finance
,
Financial Markets & Institutions
,
Corporate Law
,
Securities Law & Regulation
,
Law & Behavioral Sciences
,
Law & Economics
,
Empirical Legal Studies
Type: Article
Abstract
This article offers a brief, tentative assessment of the fit of behavioral finance with the framework developed twenty years ago in Mechanisms of Market Efficiency (MOME), and an even briefer and more tentative evaluation of the policy implications arising from the behavioral finance framework. It first puts market efficiency in an intellectual context - as part of the shift of finance from description to applied microeconomics that also included the development of the Capital Asset Pricing Model and the Miller-Modigliani Irrelevancy Propositions. It briefly recounts the MOME thesis, and describes the challenge of behavioral finance. It then offers an assessment of the central principles that drive behavioral finance, and evaluates how the MOME thesis stands up to the challenge. It next offers some MOME-based predictions about where it is likely that behavioral finance will and will not have significant policy implications, followed by a conclusion.
Henry Hansmann & Reinier Kraakman, Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights, 31 J. Legal Stud. S373 (2002).
Categories:
Property Law
,
Banking & Finance
,
Disciplinary Perspectives & Law
Sub-Categories:
Contracts
,
Secured Transactions
,
Law & Economics
,
Property Rights
,
Real Estate
,
Personal Property
,
Intellectual Property - Copyright
,
Intellectual Property - Patent & Trademark
Type: Article
Abstract
The law of every jurisdiction defines a set of well-recognized forms that property rights can take, and burdens the creation of property rights that deviate from those conventional forms. In this respect, property law differs from contract law, which generally leaves parties free to craft contractual rights in any form they wish. The law's restrictions on the forms of property rights have recently been rationalized as establishing an "optimal standardization" of property rights into a limited number of discrete forms to facilitate communication of the content of those rights to third parties. We argue, in contrast, that the law's limitations on property rights take the form, not of standardization, but rather of regulation of the notice required to establish different types of property rights. These limitations serve, not to facilitate communication of the content of rights, but to facilitate verification of ownership of the rights offered for conveyance. Property law generally addresses this verification problem by presuming that all property rights in an asset are held by a single owner, subject to the exception that a division of rights is enforceable if there is adequate notice to subsequent owners. Because the benefits of divided property rights are often low and the costs of verifying those rights are often high, property law takes an unaccommodating approach to all but a few basic categories of partial property rights. In the course of developing our analysis, we offer a simple and clear characterization of the distinction between property rights and contract rights. We explore the varieties of verification rules by which the law establishes the forms of notice required to establish property rights, and illustrate the close relationship between verification rules and the forms of property rights that those rules support. We set out conditions for assessing the efficiency of alternative property rights regimes, and discuss the extent to which that efficiency calculus is actually reflected in property law. We survey some of the principal categories of partial property rights - including security interests, legal entities, coordinating rights in real and personal property, and intellectual property - showing how the structure of those rights reflects limits on the feasible verification rules. We also seek to clarify the relationship between property rights and contract rights, the connection between property rights and property rules, and the limits on specific performance as a remedy in contract.
Reinier H. Kraakman & Bernard Black, Delaware's Takeover Law: The Uncertain Search for Hidden Value, 96 Nw. U. L. Rev. 521 (2002).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Fiduciary Law
,
Corporate Law
,
Corporate Governance
,
Fiduciaries
,
Shareholders
,
Business Organizations
Type: Article
Abstract
It is easy sport to criticize the Delaware takeover cases as inconsistent with the empirical evidence, each other, and a sensible allocation of power between managers and shareholders. We in fact believe all of these things. Here, however, we offer a more sympathetic account of the core Delaware takeover cases. We argue that they reflect an often unstated "hidden value" model, in which a firm's true value is visible to corporate directors but not to shareholders or potential acquirers. We explore the assumptions needed to make the hidden value model internally consistent, and contrast those assumptions to those that underlie to a "visible value" model in which shareholders and potential acquirers are well informed about firm value or can be made so through disclosure by the target's board. (One outcome of carefully stating the hidden value model's assumptions is to expose the model's problems.) We also address and reject a "control premium" theory, sometimes invoked by the Delaware courts, in which control is a corporate asset that the law protects by imposing Revlon duties on the target's board. Assuming that the Delaware courts continue to embrace hidden value, we argue that takeover decisions should, at a minimum, be governed by a bilateral decision-making structure, in which a target board's initial decision to approve an acquisition, block a takeover bid, or choose one bidder over another must be approved or rejected by shareholders. Under this approach, target boards could adopt modest deal protections and say "no" to a takeover bid by adopting a poison pill, but could not say "never" by using a staggered board to block a bid after the bidder wins a proxy contest. The courts must also strictly limit efforts by target boards to stuff the ballot box or otherwise alter shareholder vote outcomes.
Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Corporate Governance
,
Corporate Law
,
Shareholders
,
Comparative Law
,
Foreign Law
Type: Article
Abstract
Despite the apparent divergence in institutions of governance, share ownership,capital markets, and business culture across developed economies, the basic law of the corporate form has already achieved a high degree of uniformity, and continued convergence is likely. A principal reason for convergence is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders, including non controlling shareholders. This consensus on a shareholder-oriented model of the corporation results in part from the failure of alternative models of the corporation, including the manager-oriented model that evolved in the U.S. in the 1950'sand 60's, the labor-oriented model that reached its apogee in German co-determination,and the state-oriented model that until recently was dominant in France and much of Asia. Other reasons for the new consensus include the competitive success of contemporary British and American firms, the growing influence worldwide of the academic disciplines of economics and finance, the diffusion of share ownership in developed countries, and the emergence of active shareholder representatives and interest groups in major jurisdictions. Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the “end of history” for corporate law. The ideology of shareholder primacy is likely to press all major jurisdictions toward similar rules of corporate law and practice. Although some differences may persist as a result of institutional or historical contingencies, the bulk of legal development worldwide will be toward a standard legal model of the corporation. For the most part, this development will enhance the efficiency of corporate laws and practices. In some cases,however, jurisdictions may converge on inefficient rules, as when the universal rule ofl imited shareholder liability permits shareholders to externalize the costs of corporate torts.
Lucian A. Bebchuk, Reinier H. Kraakman & George Triantis, Stock Pyramids, Cross-Ownership and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights, in Concentrated Corporate Ownership 295 (R. Morck ed., Univ, Chi. Press 2000).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Securities Law & Regulation
,
Corporate Governance
,
Shareholders
Type: Book
Abstract
This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. We describe the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, we analyze the consequences and agency costs of these arrangements. In particular, we show that they have the potential to create very large agency costs -- costs that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies. The agency costs of these structures, we suggest, are also likely to exceed the agency costs of attending highly leveraged capital structures. Finally, we put forward an agenda for research concerning structures separating control from cash flow rights.
Bernard S. Black, Reiner H. Kraakman, & Anna S. Tarassova, Guide to the Russian Law on Joint Stock Companies (Kluwer L. Int'l 1998).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
Sub-Categories:
Business Organizations
,
Foreign Law
Type: Book
Abstract
This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://ssrn.com/abstract=246670 or one or more of its parts. It contains three parts: (1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://ssrn.com/abstract=263141 (2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from the download button below. (3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://ssrn.com/abstract=263143 Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://ssrn.com/abstract=10037
Jennifer Arlen & Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. Rev. 687 (1997).
Categories:
Corporate Law & Securities
,
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Business Organizations
,
Corporate Law
,
Torts
,
Torts - Business
,
Law & Economics
Type: Article
Abstract
Corporations have historically been held to a standard of strict vicarious liability for the wrongdoing of their employees. However, several areas of federal and state law have shifted to new duty-based schemes that mitigate liability for companies that have implemented compliance programs or reported wrongdoing to the government. Some states even grant privilege to environmental audit reports. Professors Arlen and Kraakman compare the norm of vicarious liability with various types of duty-based liability regimes, analyzing the benefits and costs of each approach. They conclude that social welfare is maximized by a mixed regime that includes elements of both strict and duty-based liability. The authors find that the mixed liability regime with the widest application is a composite regime, which imposes high penalties subject to mitigation for firms that engage in compliance activities. Under this regime, firms that satisfy all enforcement duties would nonetheless face substantial residual liability equal to the harm caused by wrongdoing divided by its probability of detection. They then examine the existing composite liability regimes embodied in the United States Sentencing Guidelines for corporate defendants and the evidentiary privileges that many states have adopted for companies’ environmental audit reports. They conclude that both current approaches are flawed, as they do not adequately create proper incentives for companies to monitor, investigate, and report employee wrongdoing.
Reinier H. Kraakman & Bernard Black, A Self-Enforcing Model of Corporate Law, 109 Harv. L. Rev. 1911 (1996).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
International, Foreign & Comparative Law
,
Legal Profession
Sub-Categories:
Commercial Law
,
Fiduciary Law
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Shareholders
,
Fiduciaries
,
Comparative Law
,
Developing & Emerging Nations
,
Foreign Law
,
Legal Reform
Type: Article
Abstract
This paper develops a "self-enforcing" approach to drafting corporate law for emerging capitalist economies, based on a case study: a model statute that we helped to develop for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The paper describes the contextual features of emerging economies that make importing statutes from developed countries inappropriate, including the prevalence of controlled companies and the weakness of institutional, market, cultural, and legal constraints. Against this backdrop, we argue that the best legal strategy for protecting outside investors in emerging economies while simultaneously preserving the discretion of companies to invest is a self-enforcing model of corporate law. The self-enforcing model structures decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the examples of self-regulatory statutory provisions are a mandatory cumulative voting rule for the selection of directors, which assures that minority blockholders in controlled companies have board representation, and dual shareholder- and board-level approval procedures for self-interested transactions. The paper also examines how one can induce voluntary compliance and structure remedies in emerging economies, as well as the implications of the self-enforcing model for the ongoing debate over the efficiency of corporate law in developed economies.
Ronald J. Gilson & Reinier H. Kraakman, Reinventing the Outside Director: An Agenda for Institutional Investors, 43 Stan. L. Rev. 863 (1991).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Finance
,
Fiduciary Law
,
Commercial Law
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Fiduciaries
Type: Article
Henry Hansmann & Reinier H. Kraakman, The Uneasy Case for Limiting Shareholder Liability in Tort, 100 Yale L.J. 1879 (1991).
Categories:
Corporate Law & Securities
,
Civil Practice & Procedure
Sub-Categories:
Shareholders
,
Corporate Law
,
Corporate Governance
,
Business Organizations
,
Torts
,
Torts - Business
Type: Article
Reinier H. Kraakman, Corporate Liability Strategies and the Costs of Legal Controls, 93 Yale L.J. 857 (1984).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Shareholders
,
Fiduciaries
,
Law & Economics
Type: Article
Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 Va. L. Rev. 549 (1984).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
Banking & Finance
Sub-Categories:
Commercial Law
,
Finance
,
Business Organizations
,
Corporate Governance
,
Corporate Law
,
Mergers & Acquisitions
,
Fiduciaries
,
Shareholders
,
Law & Economics
Type: Article

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