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Business Associations/Corporations
University of Toledo School of Law
Friedman, Howard M.

a.     unsystemic risks (unique to individuals)
b.     systemic risk: moral hazard
i.      remedies when corporation is improperly used
1.     Derivative actions
a.     Benefits
i.       could reduce systemic (market) risk by reducing agency costs — but this would assume that shareholders are fully diversified
2.     Piercing
a.     Managers seem to be able to exploit shareholder disunity to entrench — and maybe judicial is the only rational means to distribute corporation assets
b.     Parties who piercing has effect on
i.       Employees
1.     It wouldn’t be so bad, except if liability were joint and several
2.     Some would rather have pro-rated share
3.     Alternative viewpoint: Agency theory: benefits of agency exceed the costs
a.     Direct costs
b.     Costs of controlling managerial assets
c.     Shareholders may vote to do things that are irrational because of the control of the corporation
i.       If the firm was a true contract there would be true-opting out of things that enabling things allow
ii.     Fiduciaries get a fixed amount, and they don’t get any more
d.     Intra-firm incentives: may not be effective in controlling agency costs — legal doctrine seems to be closest to contract model, and furthest form the fiduciary model which would grant bonus’s
ii.     Shareholders:
1.     Optimizes investment decisions
2.     The relationships between shareholders and management seems to be vaguely strutted by the laws, and these laws have changed politically
a.     Evolution of corporations
i.       Chaos: hard to predict exactly where they go
ii.     Path dependence: corporations may adapt to threats that stop existing: could be reason for strong managers and week owners, but there other alternatives
iii.    Modern evolutionary theory: no assurances that a destroyed group will reappear
b.     Difficult to tell which is always efficient
i.       There are few inequalities between markets for corporate control
3.     Things might be better if firms had more choice of organization
iii.    Managers: can act efficiently because of liquidity
1.     Close corporations aren’t as efficient
2.     Mangers seem to be able to exploit shareholder disunity to entrench — and maybe judicial is the only rational means to distribute corporation assets
iv.   Voluntary creditors can bargain to protect themselves
1.     Courts pierce most often in contract cases
2.     Reasons for piercing – Federal courts will only have jurisdiction under tort if there is a piercing issue — burden of proof is on Plaintiff
3.     Some say that There can be statutory insurance or bond requirements
4.     Alternative Maybe the best time is when creditors are mislead
v.     Outside director is defined as not part of, or have strong ties to the management
1.     Reasons
a.     Can reduce agency costs, but differences as to how long their scope should be — ALI recommends mostly outsiders
2.     problems
a.     Outside directors may still be reluctant to displace an incumbent CEO

alings and investment is no structural bias
iii.    Contributions to a University may be enough (rare) for bias in Delaware
iv.   Mass: because of the danger of structure bias judicial oversight is necessary
v.     Independent must have no interest at all
vi.   Just because someone is elected by interested people doesn’t make them interest
vii. If there is an Independent majority, Plaintiff’s have burden of proof of showing that the majority of the board isn’t independent, else other way around
5.     perhaps board should include employees and other constituencies
a.     having ethnic diversity might limit talent pool
b.     still open as to whether special interests should be on board
c.     perhaps professional directors (maybe institutional investors)
i.       a market for it might be more efficient — but expertise is finite, and much of it may be inside
6.     Professionalism: independence, integrity, competence
a.     Might be a need to limit number of years
7.     Check this – go back to ch. 15
vi.   Board committees – usually to deal with technical work
1.     Audit
2.     Nominating
3.     Compensation
4.     For derivative suits
5.     NACD: suggests oversight “governance” committee