Corporate law has undergone a gradual transformation. Founding chief executive officers ("founder-CEOs") and activist hedge funds increasingly dominate leading American corporations despite owning well short of a majority of shares. Founder-CEOs, through personal brands or dual-class voting structures, control firms despite having minority stakes; activist hedge funds, with single-digit holdings, press for major governance changes. We argue that these two types of shareholders, often treated as opposites, both dominate corporations through disproportionate influence rather than majority ownership. We describe these investors who dictate corporate policy through disproportionate influence as high-influence shareholders. Delaware's doctrinal response to high-influence shareholders has been inconsistent, generating market uncertainty. Courts have alternated between deferring to founder-CEOs under the business judgment rule and expanding the definition of control to impose "entire fairness" review. Likewise, courts have upheld poison pills against activist hedge funds to guard against creeping control, yet have struck down pills explicitly aimed at deterring activism. To rationalize this area of law, we propose a disproportionate influence test as a doctrinal reform: whenever a board makes decisions under the influence of high-influence shareholders, courts should apply enhanced scrutiny. Likewise, when boards face the risk of disproportionate activist influence, they should be permitted to adopt defensive measures such as poison pills. Delaware's expert judiciary is well positioned to articulate and refine the contours of disproportionate influence, while also designing cleansing procedures that boards can use to avoid heightened review. Recent Delaware legislative amendments, aimed at enhancing predictability by narrowing the definition of control, have the effect of shielding board decisions shaped by influential but noncontrolling shareholders from meaningful review. We argue that simplified and predictable cleansing procedures can restore legal certainty, but that Delaware courts should retain a central role in evaluating when excessive shareholder influence on board decision-making warrants greater judicial scrutiny.

Nonprofit control of operating businesses has long been a feature of European corporations such as Novo Nordisk, Ikea, Carlsberg, and Rolex, which are governed by enterprise foundations-nonprofits with charitable missions explicitly permitted to hold controlling stakes in businesses. In the United States, nonprofit control is becoming more prominent due to recent legal developments, with companies like Patagonia and OpenAI under nonprofit ownership. Despite this growing interest, the economic rationale behind nonprofit control remains poorly understood: why would nonprofits with social missions choose to control businesses that sell products and services? We identify two primary models of nonprofit control. The income-generating for-profit is controlled by a nonprofit to generate funding for the nonprofit's charitable mission, ensuring steady long-term cash flows and mitigating systematic risk. The socially oriented for-profit is controlled to ensure the operating business adheres to the nonprofit's mission. Unlike simplistic accounts that treat all nonprofit-controlled businesses as uniformly purpose-driven, our analysis clarifies the benefits and risks of these models and provides a framework for evaluating legal regimes governing them. Our comparative analysis of legal systems in Europe, the United Kingdom, and the United States highlights significant differences in how nonprofit control is regulated. European and U.K. laws support income-generating for-profits through enterprise foundations and trading companies while incorporating oversight to ensure socially oriented for-profits remain mission-driven. U.S. law, by contrast, imposes strict limits on private foundations while allowing other nonprofits to control businesses with few safeguards against outside-investor influence. We propose an optimal legal framework to facilitate income-generating for-profits where mission drift risks are relatively low while also imposing stronger safeguards on socially oriented for-profits to prevent outside investors from undermining those for-profits' social missions, as seen in the recent OpenAI controversy. Rather than focusing on independence from donors or founders, legal reforms should prioritize independence from investors with economic interests in the for-profit subsidiary. Our proposal ensures that nonprofit-owned businesses remain both financially sustainable and committed to their stated social purposes.

We develop a stylized model in which common owners of firms in the same industry appoint a common director to benefit from information-sharing between firms with similar products. Information sharing increases the likelihood of product success but also reduces profits from heightened competition. Empirically, we find that common ownership by investors with large stakes, long horizons, and concentrated portfolios—notably in pharmaceuticals—is associated with a higher likelihood of common directors. Consistent with the model, common directors are associated with greater product similarity and broader scope, but with lower markups and diminished exploratory innovation. Our findings point to an active governance channel linking common ownership to strategy.

We exploit the staggered introduction of liability waivers when investors hold stakes in conflicting business opportunities as a shock to venture capital (VC) investment and director networks. After the law changes, we find increases in within-industry VC investment and common directors serving on startup boards. Despite the potential for rent extraction, same-industry startups inside VC portfolios benefit by raising more capital, failing less, and exiting more successfully. VC directors serving on other startup boards are the primary mechanism associated with positive outcomes, consistent with common VC investment facilitating informational exchanges in VC portfolios.Authors have furnished an , which is available on the Oxford University Press Web site next to the link to the final published paper online.

Only rarely does the United States Supreme Court hear a case with fundamental implications for corporate law. In Carney v. Adams, however, the Supreme Court had the opportunity to address whether the State of Delaware’s requirement of partisan balance for its judiciary violates the First Amendment. Although the Court disposed of the case on other grounds, Justice Sotomayor acknowledged that the issue “will likely be raised again.” The stakes are high because most large businesses are incorporated in Delaware and thus are governed by its corporate law. Former Governors and Chief Justices of Delaware lined up to defend the state’s “nonpartisan” approach to its judiciary. The case raises the question of why nonpartisanship is taken to be an advantage for Delaware and whether the processes by which corporate law is made are generally politically partisan or not. Despite these developments, however, the place of political partisanship in corporate law has been largely overlooked. This Article offers a framework for analyzing the role of political partisanship in corporate law. It begins by showing that there is suggestive evidence of a relationship between political partisanship and the substance of corporate law at the state level. When corporate law materially differs across states, those differences are often predicted by which party controls the state’s government. Political party entrepreneurs also agitate for corporate law reforms at the state level. Yet, Delaware adopts a conspicuously nonpartisan approach to corporate law. As is widely observed, how Delaware makes corporate law, from its constitution, to its legislature, to its judiciary, is unusual. It is designed to insulate that law from political partisanship. More surprisingly, this began when Delaware first became a leading home to incorporations a century ago. In fact, the same thing was true of New Jersey during its brief period of prominence before Delaware. Why?We suggest that the answer relates to corporate law’s central debate regarding the “market for corporate law.” In the United States, the internal affairs doctrine allows corporations to choose the state whose corporate law governs them by incorporating in the jurisdiction of their choice. This doctrine produces a form of regulatory competition that is structurally biased to produce a winner that favors “demand-side” interests, i.e., the interests of corporate decision-makers themselves. Understanding this dynamic has been one of corporate law’s foundational concerns. We complement that literature by arguing that nonpartisanship provides a competitive advantage in Delaware’s quest to appeal to these interests. Delaware’s approach enables it to afford great weight to the interests of nationally diverse and heterogeneous shareholders and makes it less likely that the state will sacrifice shareholders’ interests to please local constituents. The internal affairs doctrine thus indirectly works to favor incorporations to a state with a nonpartisan approach. Our framework also offers new insights into the debate on the federalization of corporate law and the Supreme Court litigation. Specifically, we argue that within First Amendment jurisprudence, the Supreme Court can and should carefully consider its ruling’s effects on Delaware nonpartisanship.

Entrepreneurial firms have assumed increasing prominence with the decline in the number of public firms and the increase of venture capital (VC) invested in startups. This chapter evaluates key policy issues in the governance of entrepreneurial firms, such as fiduciary duties, the role of independent directors, and contractual bargaining for control rights, and how different governance regimes may affect exit choices and innovative activity. Each of the issues is evaluated in light of developments that have changed the relationship between VC investors and startup founders, including ‘spray and pray’ investing, the increase in the supply of private capital, and the growing power of founders of successful startups. The main theme is that the changing dynamics between VC investors and founders calls for a reassessment of the laws and standards that govern entrepreneurial firms, and further research is needed to understand optimal governance for promoting startup growth and innovation

The Opportunity Zone (OZ) program is one of the most comprehensive to promote development in distressed communities. A criticized feature is that state governors designate zones as OZs from many eligible tracts without scrutiny. We find that governors are more likely to select tracts with higher distress levels and tracts on an upward economic trajectory, which indicates that they select OZs in a systematic way on the basis of objective criteria. However, we also provide evidence that favoritism plays a role in governors' decisions. The OZ designation is more likely for tracts in counties that supported the governor in an election and when executives or firms with an economic interest in the tract donated to the governor's campaign. We further explore whether transparency and accountability measures affected states' decisions. Our analysis suggests that while most measures had no discernible impact, publishing draft selections may mitigate favoritism and promote systematic decision-making.

The conventional view of dual-class structures assumes that the alternative to a dual-class IPO is a single-class IPO, where shareholders' voting power aligns with their economic interests. However, more often than not, the alternative to a dual-class IPO is for firms to remain private or, at the very least, postpone their IPOs. Dual-class IPOs have become prevalent among startup unicorns in the technology sector, with many of these unicorns being controlled by founders who highly value maintaining control. With the expansion of private markets, these unicorns may opt to stay private if their founders would otherwise have to relinquish control upon going public.From a governance standpoint, the private option may be particularly worrisome. While founder-controlled firms, whether private or public, may grapple with agency problems, governance failures in private unicorns with dominant founders, such as Theranos, WeWork and FTX, have led to a complete collapse of the business model. In comparison, founder-controlled startups that went public with a dual-class structure have arguably performed reasonably well.The explanation I offer in this article is that dual-class structures facilitate the IPO decision by enabling startup founders to take their company public without losing control. The IPO process, with its requirements for detailed disclosures about the firm’s business model and financial accounts followed by market scrutiny, effectively screens entrepreneurial startups with a viable business model from those that do not. Thus, the availability of dual-class structures effectively mitigates the tail risk of the agency problem in founder-controlled firms that could result in dramatic losses for investors.

We complement the literature on common ownership by presenting two new observations from entrepreneurial startups. First, given the increase in common ownership of startups by VC investors, inclusion of high-value startups in standard common ownership measures may actually increase aggregate measures of common ownership. Second, we suggest that even if public-firm common ownership leads to collusive inefficiency and higher prices in the short-term, it may also create opportunities for entry of innovative high-growth startups. Consistent with this, we document that entrepreneurial activity and common ownership of startups tends to be higher in industries with higher common ownership among public firms.

We show that a large number of firms adopt poison pills during periods of market turmoil. Specifically, during the coronavirus pandemic, many firms adopted poison pills following declines in valuations, and stock prices increased upon the announcement of firms' poison pill adoption. Stock price increases are driven by (1) firms in which activist shareholders acquire ownership stakes and (2) firms in industries that had high exposure to the crisis. Likewise, we find a positive reaction to pills with provisions directed at stalling activists' interventions. Our results suggest that crisis pills that target potentially disruptive ownership changes may benefit current share-holders.

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The long-standing debate about the purpose and role of business firms has recently regained momentum. Business firms face growing pressure to pursue social goals and benefit corporation statutes proliferate across many U.S. states. This trend is largely based on the idea that firms increase long-term shareholder value when they contribute (or appear to contribute) to society. Contrary to this trend, this Article argues that the pressing issue is whether policies to create social impact actually generate value for third-party beneficiaries—rather than for shareholders. Because it is difficult to measure social impact with precision, the design of legal forms for firms that pursue social missions should incorporate organizational structures that generate both the incentives and competence to pursue such missions effectively. Specifically, firms that have a commitment to transacting with different types of disadvantaged groups demonstrate these attributes and should thus serve as the basis for designing legal forms. While firms with such a commitment may be created using a variety of control and contractual mechanisms, the related transaction costs tend to be very high. This Article develops a social enterprise legal form that draws on the legal regime for community development financial institutions (CDFIs) and European legal forms for work-integration social enterprises (WISEs). This form would certify to investors, consumers, and governments that designated firms have a commitment as social enterprises. By obviating the need for costly social impact measurement, this form would facilitate the provision of subsidy-donations to social enterprises from multiple groups, particularly investors (through below-market investment) and consumers (via premiums over market prices). Thus, this social enterprise form would be to altruistic investors and consumers what the nonprofit form is to donors. Moreover, the proposal could facilitate the flow of investments by foundations in social enterprises (known as program-related investments, “PRIs”) because it would help foundations verify the social impact of their investees. In addition, by giving subsidy-providers greater assurance that social enterprises pursue social missions effectively, the proposed legal form could facilitate public markets for social enterprises.

This article develops an empirical model of firms’ choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a database of firm incorporation decisions from 1995 to 2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada’s rise is due to the preferences of small firms. Consistent with the bonding hypothesis, our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. (JEL G34, G38, K21, K22, L25, L51)

What are business entities for? What are security interests for? The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors. But if both bodies of law partition assets, then what distinguishes them? In fact, these bodies of law appear to be converging as increasing flexibility irons out any differences. Indeed, many legal products, such as securitization vehicles, insurance products known as captive insurance, and mutual funds, employ entities to create distinct asset pools. Moreover, recent legal innovations, such as “protected cells,” which were created to facilitate such products, further blur the boundaries between security interests and entities, suggesting that convergence has already arrived. This Article identifies and defends a central distinction between business entities and security interest. We argue that while both bodies of law support asset partitioning, they do so with different priority schemes. Security interests construct asset pools subject to fixed priority, meaning that the debtor is unable to pledge the same collateral to new creditors in a way that changes the existing priority scheme. Conversely, entities are associated with floating priority, whereby the debtor retains the freedom to pledge the same assets to other creditors with the same or even higher priority than existing ones. The distinction is valuable in understanding financial products, such as securitization, captive insurance, and mutual funds. We show that such products are driven by an appetite for assets pools with a fixed priority scheme, and recent legal innovations are primarily designed to meet this need. This distinction is consistent with the intuitive view of entities as managed going concerns and security interests as mere interests in assets. The distinction is also enduring. Despite the apparent convergence of forms, we predict that the distinction we offer will survive legal and technological innovations.

Recent scholarship argues that Nevada’s corporate law, which exempts managers from fiduciary duties, may harm shareholder wealth. I present comprehensive evidence that Nevada law does not harm shareholder value for firms that self-select into Nevada, particularly small firms with low institutional shareholding and high insider ownership, and it may in fact enhance the value of these firms. A possible explanation is that Nevada’s pro-managerial laws reduce the likelihood of takeovers and litigation, thereby benefiting a segment of small firms for which the costs of corporate governance may outweigh the benefits.

Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth—particularly, legal forms for hybrid firms—have largely been ineffective. This shortcoming 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. In pursuit of such a theory, this Article focuses on a large class of hybrid organizations that has been effective in addressing development problems, such as increasing access to capital and improving employment opportunities. These organizations, which are commonly referred to as "social enterprises," include microfinance institutions, firms that sell fair trade products, work integration firms, and low-cost sellers of essential goods and services such as eyeglasses, bed-nets, and healthcare. The common characteristic of social enterprises is that they have a transactional relationship with their beneficiaries, who are either purchasers of the firms' goods or services or suppliers of inputs (including labor) to the firm. The essence of this Article's theory is that through these transactions, social enterprises perform a measurement role; that is, they measure or gather information on their patron-beneficiaries' abilities to transact with commercial firms (for example, workers' skills, borrowers' creditworthiness, and consumers' ability to pay). That information permits social enterprises to tailor the form and amount of subsidies to the specific needs of individual beneficiaries. This "measurement" function makes social enterprises relatively effective vehicles for allocating subsidies as compared to traditional donative organizations and other forms of hybrid organization, in particular firms that pursue corporate social responsibility policies. Thus, the measurement function can serve as the basis for designing a legal form for social enterprises.