Corporations-Scott-Sp07 - Corporations Outline Scott 2007...

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I. Introduction A. Key features/benefits of the corporate form (as compared with the default form – general partnership): 1) Limited liability 2) Centralized management 3) Perpetual Life 4) Transferable interests 5) No pass-through taxation B. Basic ideas 1) Competing theoretical models for the corporation (a) Contract model : The corporation as a web of contracts between its constituents. (i) On this model, we have to assume arms-length bargaining, and a reluctance to fill in gaps. (ii) Under this model, agency relationships are implied only to the extent necessary to fulfill the corporations express goals. (b) Fiduciary model : Older view, based on the idea that the corporation is like a trust, with strong obligations toward its shareholders. (i) This model places strong obligations on corporate management toward its shareholders. (ii) In this model, the default rules put the burden on management to justify its actions. (c) Government model : Looks at the corporation as something like a government, with an elected leadership. (i) Leadership decisions are treated like legislative or executive actions, with residuary power remaining in the shareholders. 2) Boards of directors (i) Typically composes of both inside (employee) and outside (non-employee) directors. But not all outside directors are disinterested directors, so we also have the concept of independent directors, who have some special roles. The CEO usually chairs the board, but is generally the only, or one of two, inside directors left on boards. (ii) Three standing board committees are required by statute Audit Compensation Governance (iii) The board has two roles vis a vis management Advisory Monitoring, as independent agents of the shareholders (iv) Boards are crucial to corporate governance because they are the only ones in a position to monitor management. For the most part, individual shareholdings are to dispersed to do it, and institutional investors often won’t do it because of the liquidity-trust problem (they can’t get too deeply involved in corporate management because their fiduciary duties require them to be able to get out of underperforming stocks). 3) Many of the corporate governance issues are about trying to prevent agency costs . (a) In a large corporation, the owner and the manager are not the same person, so their interests are not always the same. In particular, managers might have an incentive to take excessively risky actions. The problem is that there are costs inherent in the owners monitoring the managers. (i) Given diversification, most shareholders don’t have enough stock in any one corporation in their portfolio to make it worth incurring these costs. (b) Given this problem, mechanisms that might be employed to prevent managers from
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This note was uploaded on 04/04/2008 for the course LAW ALL taught by Professor Multiple during the Fall '06 term at NYU.

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Corporations-Scott-Sp07 - Corporations Outline Scott 2007...

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