Corporate, Entrepreneurship, Governance, and Transactional Law

Governance ≠ Leadership: What Blockchain and AI Won’t Do for Corporate Lawyers, forthcoming, J. Corp. Law (2020-21)

This is a contribution to the Journal of Corporation Law’s 2020 symposium on blockchain technology and corporate governance. The thesis is that blockchain technology is well suited to the monitoring function in corporate governance; that monitoring as the primary function of corporate governance is a particularly legal conception; and that the business conception of governance has far more to do with leadership, strategy, and operations. If the legal and business conceptions of governance tend to be ships passing in the night (at least in this somewhat exaggerated rendering), it is because prevailing economic and legal theoretical models have a difficult time incorporating human qualities that underlie leadership, intuition, insight, and creativity. Law schools have long taught litigation skills and transactional skills have come into vogue as well. Teaching leadership to aspiring business lawyers is the next challenge.

The False Dichotomy of Corporate Governance Platitudes, forthcoming, J. Corp. Law (2020-21)

In 2019, the Business Roundtable amended its principles of corporate governance, deleting references to the primary purpose of the corporation being to serve the shareholders. In doing so, it renewed the “shareholder vs. stakeholder” debate among academic theorists and politicians. The thesis here is that the zero-sum positions of the contending positions are a false dichotomy, failing to capture the complexity of the corporate management game as it is actually played. Sweeping and absolutist statements of the primary purpose of the corporation are based on arid thought experiments and idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised. In the real world, management regularly commits itself to multiple competing constituencies, including the shareholders. 

There are three arguments. The first is from reality, borne out by a survey of pre-amendment CEO annual report letters to shareholders (2017) and post-amendment responses (2020) to the COVID-19 pandemic. The second is from economics. Neo-classical economic theory supporting the doctrine is misplaced; transaction cost analysis under the New Institution Economics does a far better job of explaining the primacy of wide corporate discretion in allocating surplus among the corporate constituencies. The third is from jurisprudence. Doctrinal dicta like “corporations exist primarily to maximize shareholder wealth” are not so much right or wrong as meaningless. Rather, the business judgment rule, which justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise, subsumes all other platitudes posing as rules of law.

Trust V. "Law in a Box": Do Organizational Forms Make a Difference?, 2014 U. Ill. L. Rev. 1795.

In this contribution to the University of Illinois College of Law’s 2013 Larry Ribstein Memorial Symposium, I assess Professor Ribstein’s approach to both to trust and the “uncorporation.” My thesis is that his disciplinary commitment to a transaction cost economics model resulted in an overstatement of the extent to which business association forms matter in the real world. In contrast to Professor Ribstein’s view that mandatory law (which includes corporate law) “crowds out” trust (implicitly making uncorporations more amenable to trust), I see the orderliness of modern and abstract business structures (of any kind) as distinct from, yet operating at the same time and in the same space as, the usual gamut, for better or worse, of human emotions. Even if, as a matter of economic theory, uncorporations do a better job of corporations in permitting owners to control manager agency costs, the theory leaves out (for otherwise good reasons inherent in doing any kind of rigorous science) virtues like trust and vices like greed, fear, panic, all of which seem just as likely to operate in the uncorporate as the corporate setting.

What Is It Like to Be a Beetle? The Timelessness Problem in Gilson's Value Creation Thesis, forthcoming, U.C. Davis Bus. L. J. (2014)

This is a contribution to the 2014 mini-symposium honoring the thirtieth anniversary of the publication of Ronald Gilson’s seminal article Value Creation by Business Lawyers. In it, he coined two powerful metaphors: that of lawyers as "transaction cost engineers" and as beetles studied by their entomologist brethren in the legal academy. As a former lawyer-beetle and a current academic-entomologist, I am quite sure that the transaction cost economics he used to explain why business lawyers stay in business missed something important about the subjective and real world experience of being a lawyer-beetle. In this essay, I (a) summarize two different but significantly related critiques of theory, (i) the physicist Lee Smolin’s powerful argument for the unreality and therefore timelessness of algorithmic models of the universe – i.e., why physics as generally practiced is "physics in a box," and (ii) the philosopher Alasdair MacIntyre’s controversial argument for the unreality of modern conceptions of utility, rights, and efficiency, (b) borrow from both critiques in order to understand the difficulties in transposing timeless economic and legal conceptions ("utility" and "rights," respectively) to real transactions that occur in real time, (c) criticize the tendency of the legal profession, in both the academic and practicing arms, to teach and practice a scientific "law in a box," and (d) suggest a vision of what it means for a wise business lawyer not to be so constrained.

Beetles, Frogs, and Lawyers: The Scientific Demarcation Problem in the Gilson Theory of Value Creation, 46 Willamette L. Rev. 139 (2009)

Recently, Ronald Gilson described a transactional lawyer turned law professor as someone who was a beetle, but became an entomologist. This is not the first non-mammalian metaphor used by an economically inclined legal academic to demarcate those who study and those who are studied. As Richard Posner so colorfully explained rational actors as they appear to economists studying them objectively: "it would not be a solecism to speak of a rational frog." In this short essay, I suggest that both say something about the prevailing view of theorizing that is entitled to privileged epistemic status in the legal academy. Some economic explanations of the activities of beetles, frogs, and lawyers are entitled to this status, and some are not. I assess Professor Gilson's classic 1984 article on value creation by lawyers in terms of its implicit claims to (social) scientific knowledge, and conclude that it is not.

Why the Law of Entrepreneurship Barely Matters, 31 W. New Eng. L. Rev. 701 (2009)

Despite valiant (if nascent) efforts to show that law, or at least courts and doctrine, matters in the broader study of entrepreneurship, I am skeptical that it really does. The reason goes to the fundamental orientation to rules and their application of law and lawyers, on one hand, and entrepreneurs, on the other. As much as law students like rules, and social scientists like theories capable of prediction and algorithms and models, there are inherent philosophical (and perhaps psychological) problems with the interaction of the lawyer and the entrepreneur. In the same way that the relationship of law to moral intuition is perennially debated and no less frequently unresolved as between empiricists and rationalists, foundationalists and anti-foundationalists, the social context of rule-following for legal ordering is at odds with the entrepreneur's orientation to rules. 

In this Essay (which serves as an introduction to a longer work), I want to explore several themes. First, as the philosophers have shown, there is no rule for the application of a rule, and what we perceive as a given result is a matter of social congruence rather than a result inherent in the rule itself. The social and psychological orientation of those who create law, and those who create innovation, are at odds. Second, the predominant approaches to the science of law fail to account for the inherent paradox (or antinomy) of judgment. Third, the very nature of a legal or regulatory solution, by and large, is cognitive, and fails to address the non-cognitive aspects of entrepreneurship. Finally, there is a fundamental distinction between the definition of one's presently ascertainable rights in property, and private ordering to deal with future contingency. In the former, the law comes as close as it ever does to being constitutive; in the latter, what we say now is merely ammunition for instrumental use later.

Of Fine Lines, Blunt Instruments, and Half-Truths: Business Acquisition Agreements and the Right to Lie, 32 Del. J. Corp. L. 431 (2007)

In this article, I expand upon a happy coincidence (for scholars) in reconciling the overlap between contract and fraud. Both the recent book by Ian Ayres and Gregory Klass and the opinion by the Delaware Court of Chancery in Abry Partners Acquisition V, L.P. v. F & W Acquisition, LLC addressed the matter of lies within contractual promises, whether as to the promisor's intention to perform or as to the state of the business being sold. Each treatment, however, in focusing on fraudulent affirmative representations, falls short of (1) recognizing the fundamental aspect of deceptive promising in a complex deal, namely the half-truth, (2) articulating an appropriate doctrinal principle to address it, or (3) capturing the social and linguistic context that makes the deceptive half-truth so insidious. 

The archetypal facts in Abry frame the issue. When the parties to a business acquisition agreement purport to limit the buyer's reliance to those representations and warranties set forth in the agreement, just what obligations of truth-telling have the parties contractually released? We need to grapple with the interrelationship of law, language, mutual understanding, and trust. The language of the law (and the contract) is a blunt instrument by which to map the subtle fine lines of a complex agreement. I contend that there is a kind of special arrogance in the illusion onto which lawyers hold - that the uncertainties and contingencies of the world are in their power to be controlled, and to the winner of the battle of words go the spoils. The correct doctrinal result is to presume in the transactional speech acts (including the contract), as we do in everyday life, a default of truth-telling. This permits the parties to contract freely around the rule, but it requires narrow construction of the exceptions and disclaimers.

Contingency and Contracts:  A Philosophy of Complex Business Transactions, 54 DePaul L. Rev. 1077 (2005).

In this article, I argue that the prevailing literature on contract theory does not adequately address the way real-world lawyers address uncertainty in complex business transactions. I attribute this to the constraints imposed by thinking in legal models, the dominant tendency to turn to economics for analysis and normative prescription, and the focus on adjudicative issues of hindsight interpretation. Commercial uncertainty, and the law's response to it, is only a subset of the broader philosophical issue of contingency. As an alternative to prevailing thought, I trace philosophical approaches to contingency, utility and morality that have come down to us since the Enlightenment, and how those approaches reveal themselves in modern legal and management theory and practice. In particular, I criticize certain characterizations and applications of legal and philosophic pragmatism. While the leading proponents adopt the name legal pragmatism, I suggest that they have nevertheless opted for a dogmatic economic idealism. Successful business leaders (and lawyers) have a more subtle approach: they envision a world as they want it to be (as it ought to be) but are not consumed by the fact that things do not always work out as they should. I argue that lawyers who are legal or economic dogmatists, seeing the world only as they want it to be, or who are only pragmatic or empirical, and will only acknowledge the world as it is, will be far less effective in the highly contingent environment where contracts create more moral than legal markers. The most effective real-world deal lawyers will be prepared to deal with contingency and counsel their clients pragmatically, but with far more idealism than current proponents of the jurisprudence of legal pragmatism have acknowledged. 

Sarbanes-Oxley, Jurisprudence, Game Theory, Insurance and Kant: Toward a Moral Theory of Good Governance, 50 Wayne L. Rev. 1083 (2004)

The governance rules mandated by Sarbanes-Oxley, and the SEC regulations thereunder, were in direct response to many of the specific misdeeds of the Enron, WorldCom and other scandals, leaving corporate lawyers scrambling to keep their clients in technical compliance, but wondering whether it would create better governance. In this paper, I contend first that the frustrations with Sarbanes-Oxley have their basis in the jurisprudence underlying Sarbanes - the presence or absence of articulated policies and principles underlying the specific rules. I assess the law under modern positivist and naturalist theories, and point out ironies in its ultimate application. Second, I contend there is a more fundamental issue. Neither the law, nor one of the most cogent theories of non-legal norms - Eric Posner's application of game theory and signaling to principles - accounts fully for the moral aspect of corporate board service and ethical decision-making. I critique the economic model with a real world example of a wealthy director's assessment of his potential gain versus potential exposure. I suggest there is a moral theory that explains compliance outside of law or economics, and that the directors operate simultaneously under moral, legal and economic dictates. Finally, I contend social policy and legal training that in turn fail to recognize the importance of moral bearing on corporate governance will very likely miss the intended objective of good governance: more thoughtful, independent focus by boards on their fiduciary obligations to corporate stakeholders.

© Jeffrey Lipshaw 2013