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Loopline_for_Business_Associations_Glynn_ - OUTLINE FOR...

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O UTLINE FOR B USINESS A SSOCIATIONS P ROFESSOR G LYNN – F ALL 1999 J EFF L OOP 1 1. THEORY & BACKGROUND A. A Little Bit of History : Modern corporate law is very new. The first modern incorporation statute was passed in NJ in 1896 (1896 N.J. Gen. Revision Act). This act, which made it much easier to incorporate and was much more favorable to management and the corporate entity, started the “race to the bottom” between the northern states to see which one could make their laws more favorable and thus attract more business. Delaware appears to have won. It is the number one state for incorporation of new companies and the first in reincorporation of existing companies. The reasons are the established and stable caselaw on the Delaware General Corporate Laws, the perceived pro-management climate in the courts, the specialization of the Del. Chancery Courts, and the fact that many lawyers know the DGCL. The modern trend continues to be a relaxation of strictures on corporations and more flexibility in forming and manipulating them, however, the social responsibility theorists advocate a radical change in the opposite direction. See infra . The federal corporate law is even newer. The two primary federal statutes governing corporations were enacted in 1933 and 1934: the 1933 Securities Act and the 1934 Securities Exchange Act. B. Sources of Corporate Law : 1. State Statutes, e.g., DGCL 2. Model and Uniform Laws 3. Federal Statutes & Regulations: 1933 Securities Act, 1934 S.E.A., and SEC Regulations. 4. State “Blue Sky” Laws 5. Caselaw (common law and interpretive). C. Theoretical Approaches to Corporate Law : 1. The Traditionalist Approach : This school of thought was first articulated by Adolfe Berle and Gardiner Means in 1933 in T HE M ODERN C ORPORATION AND P RIVATE P ROPERTY . a. Observations : The Traditionalists posit three arguments concerning the modern corporate structure: i. The concentration of economic power in a few large corporations has been accompanied by a dispersion of equity ownership in those corporations, 1 Special thanks to Karen Fasano for her help on the Federal Securities section of this outline. Outline for Business Associations - 1 - J. Loop
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ii. Control of the largest corporations is increasingly held by management groups with minority stock interests, iii. Because of the first two arguments, there is a separation of ownership and control in the largest corporations. Thus the manager’s interests conflict with the interests of the shareholders, and the managers will act in a self-serving manner to the detriment of the shareholders. The lack of real bargaining between management and the dispersed SH means that managers will use their control to exploit unknowing and unsophisticated SH. b. Recommendations : The Traditionalists advocate strong outside control of the corporate entity in order to prevent the abuses inherent in the control/ownership gap. They argue for three methods of keeping management in line: i. Strong corporate laws and rules – strict requirements for incorporating, ii.
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