Fall 2023 Workshops

Sept. 25, 2023 (Mon)
4:20 – 6:10 PM

Gabriel Rauterberg

Professor of Law
University of Michigan Law School

Presentation in person in Case Lounge (Jerome Greene Hall, room 701).

The Rise of Form Contract:
Contract Design and Enforcement in the First Corporations

England’s first business corporations, the joint stock trading companies, grew from small entrepreneurial ventures to define a century of world trade. This Article revisits the law’s role in their success. The central claim is that the companies succeeded not only because of their innovations in organizational form, which are widely appreciated, but also because of their innovations in contractual form. The joint stock companies faced a daunting challenge – to manage agents trading under uncertain conditions and at vast distances of time and space. This challenge was only sharpened because as novel business ventures opening trade with foreign polities, they could not rely on the mechanisms of kinship, reputation, and shared norms celebrated by many historians of premodern commerce.

I show how two of the largest joint stock companies, the East India Company and Hudson’s Bay Company, responded to this challenge by developing sophisticated standard form contracts that tailored employees’ duties and established complex remedies. The East India Company aggressively litigated its contracts in England’s high courts, generating a substantial body of novel case law. This heavy reliance on formal design and enforcement contrasts with much of the scholarship on premodern contracting, which often emphasizes private ordering without the state. Yet the joint stock companies show how formal contract design and enforcement could already offer powerful advantages in seventeenth century England. Form contracting enabled the firms to apply an intricate, well-defined set of incentives and sanctions to all employees, strengthened the clarity and enforcement of contract terms, and provided uniform, shared expectations as a substitute for pre-existing social and cultural ties. This descriptive and explanatory account has implications for how we understand the common law of contracts, the efficiencies of standard form contracting, and the role of contract law in economic development.

Oct. 9, 2023 (Mon)
4:20 – 6:10 PM

Alan Schwartz

Sterling Professor of Law
Yale Law School

Presentation in person in Case Lounge (Jerome Greene Hall, room 701).

Fairness and Freedom in Contract Law

Parties may choose their contract’s substantive terms but courts regulate party choices of remedy, interpretive, fiduciary and modification terms, which we characterize as “procedural.” We claim that parties should also be free to choose the procedural terms. We make three arguments. First, mandatory contract law rules bear unfairly and arbitrarily on contracting parties: the rules bind unsophisticated or occasional players while sophisticated parties can use clever contracting strategies to avoid the rules’ affect. Second, there is a divide in the contracts literature, and increasingly among courts, between economic and moral views of contract law. Economic theorists tend to support greater party control over procedural terms; moral theorists tend to support the current constraints. We attempt to dissolve this divide, arguing that nonconsequential moral theories actually support the same freer contract law that the economic theory supports. Third, we offer novel arguments in support of the economic view. Finally, we attempt to show what the commercial world would be like if parties could create their own contracting regimes in lieu of the current state regime.

Our claim that parties should be free to choose procedural terms has wide implications. Parties can contract away from contract law’s substantive default rules but the law’s mandatory rules bind parties everywhere. Reducing these rules to defaults thus would increase commercial agents’ freedom to contract about property, corporations, finance, bankruptcy, and so on. American business law would be fairer and more efficient.

Oct 23, 2023 (Mon)
4:20 – 6:10 PM

Frank Partnoy

Adrian A. Kragen Professor of Law
UC Berkeley Law School

Presentation in person in Case Lounge (Jerome Greene Hall, room 701).

Zombie Stocks

Coauthors:
Young Jae Choi, Joseph Engelberg, Adam V. Reed, Matthew C. Ringgenberg

We contribute to the academic literature on stock markets by examining a previously unstudied example of how legal rules lead investors to overpay for stocks. Numerous studies have shown that short sellers tend to be informed traders, so that disincentivizing them harms markets. We show how legal rules harm short sellers of “zombie stocks” by trapping them when stocks are delisted and deregistered.

We use the term “zombie stocks” to describe shares of companies that appear to be “dead,” but nevertheless create financial horror for short sellers. We examine how brokers impose significant risks and costs on short sellers, including retail investors, even when someone has speculated correctly against a company’s shares. The central problem occurs when short sellers are unable to purchase shares to satisfy their borrowing obligations and instead become stuck paying increased equity loan fees and posting collateral, potentially indefinitely.

We focus on short selling, an area where numerous studies have shown that regulatory risks and costs can be a significant limit to arbitrage that impedes the ability and willingness of informed traders to correct stock mispricing. We explain for the first time in the literature how the existing legal framework imposes costs because of how shares are held, loaned, and traded in public markets.

We collect and analyze a unique dataset of thousands of stocks that were delisted during 2002 to 2019, and we examine the risks and costs of stocks becoming zombies. We demonstrate that these risks and costs are substantial: for more than 250 firms in our sample, we show that short sellers could have been trapped in a position for at least a month, and possibly much longer. We quantify the increased lending fees brokers charge to short sellers after delisting, when their clients arguably should be released from their positions and not pay fees at all.

Finally, we propose and assess several policies to address the existence of zombie stocks. We contribute to the law and finance literature by providing the first evidence of zombie stocks as a barrier to short selling and by providing policy responses that could reduce the risks and costs associated with zombie stocks. We suggest that stock markets work best when short sellers have proper incentives to find overpriced stocks, bet against them, and profit.

Nov. 6, 2023 (Mon)
4:20 – 6:10 PM

Yoon-Ho Alex Lee

Professor of Law,

Director,
Center on Law, Business, & Economics

Northwestern University,
Pritzker School of Law

Presentation in person in Case Lounge (Jerome Greene Hall, room 701).

A Model of the Zone-of-Interests Test

This Article offers the first comprehensive economic analysis of the zone-of-interests test from administrative law. Applying concepts from polar coordinates and inner products, we construct a model of the zone-of-interests test that suggests answers to many of the difficult questions stemming from the doctrine. The results of the model suggest that the zone-of-interests test can be understood as Congress’s attempt to cabin judicial review to ensure that litigation based on administrative rule challenges would lead to efficient, effective, and timely outcomes that are consistent with Congress’s intent behind the subject statute. Our model also illustrates a relationship between the zone-of-interests doctrine and the standing doctrine. In an extension, we also consider how the doctrine can be rationalized as safeguarding against substantive court errors and how the zone-of-interests doctrine should be understood when the substantive statute does not direct an agency toward a particular rule outcome.

Nov, 20, 2023 (Mon)
4:20 – 6:10 PM

Mira Ganor

Judge Solomon Casseb, Jr. Research Professor in Law
University of Texas at Austin,
School of Law & LBJ School of Public Affairs

Presentation in person in The Feldberg Space
(William & June Warren Hall, next to first floor lobby).

The Curious Case of Reverse Morris Trusts

This Article analyzes the reverse Morris trust (RMT) transaction and shows that RMTs present a unique case of corporate governance.  In an RMT the shareholders are positioned on both sides of the transaction while management is not, thus creating a misalignment of interests, which can be detrimental to the shareholders and potentially lead to inefficient transactions.  This Article shows that the common use of a split-off as part of the RMT transaction can benefit informed shareholders at the expense of unsophisticated shareholders.  To address these concerns, this Article puts forward a proposed amendment to the tender offer rules – a default contingent tender rule.

Dec. 4, 2023 (Mon)
4:20 – 6:10 PM

Roberto Tallarita

Assistant Professor of Law
Harvard Law School

The workshop will be in person in The Feldberg Space at William & June Warren Hall.  The building entrance is at 1125 Amsterdam Avenue (near the NE corner of 115^th St.) in New York City.  The Feldberg Space is next to the first floor lobby.

Dual Class Contracting

Dual class companies—in which insiders have more votes per share than public shareholders—have become widespread in the tech sector. But while the choice between single class and dual class structures has long been studied and debated, customization and innovation within dual class structures remain poorly understood. Voting inequality is a spectrum, not a binary choice; yet we know little about how different dual class companies choose a level of voting inequality along this spectrum.

In this Article, I seek to shed some light on this phenomenon by presenting and discussing quantitative and qualitative data on dual-class IPOs, including the analysis of a comprehensive sample of dual class charters adopted at IPO by U.S. nonfinancial companies as well as a survey of capital markets lawyers with expertise on dual class IPOs. The corporate charters analyzed for this Article span 27 years, from 1996 to 2022, and the respondents to the survey include more than three dozen law firm partners, working at elite law firms that have assisted more than two thirds of the U.S. dual class companies that went public in the past decade.

The Article has three main goals. The first is to map the dual class landscape and to document standardization and customization of voting inequality and dual class charters across almost 300 companies and three decades. It finds that most dual companies choose similar or identical levels of voting inequality, but that dual class “norms” occasionally break and unravel. The second goal is to reconstruct the “contracting process” that shapes dual class charters, as experienced by expert IPO lawyers, and the role of key market actors in this process. The third goal is to try to reconcile this picture with the basic tenets of the “classic contractarian theory,” the richer and more nuanced insights of “modern contractarian theory,” and the work of sociologists and social economists on the evolution of social norms.