Adapting to the New Shareholder-Centric Reality

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Adapting to the New Shareholder-Centric Reality

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce

Adapting to the New Shareholder-Centric Realityentric RealityEdward B. RockUniversity of Pennsylvania Carey Law SchoolFollow this and additional works at: https://scholarship.law.upenn.edu/faculty_

scholarshipỞ1 Part of the Banking and Finance Law Commons, Business Law, Public Responsibility, and Ethics Commons, Business Organizations Law Commons Adapting to the New Shareholder-Centric Reality

, Corporate Finance Commons, and the Law and Economics CommonsRepository CitationRock, Edward B., 'Adapting to the New Shareholder-Centric Reality" (2

Adapting to the New Shareholder-Centric Reality

013). Faculty Scholarship at PennLaw. 457.https://scholarship.law.upenn.edu/faculty_scholarship/457This Article is brought to you for free and open ac

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce

Adapting to the New Shareholder-Centric Realityf Penn Law: Legal Scholarship Repository. For more information, please contact PennlawlR@law.upenn edu.https://khothuvien.cori!ARTICLEADAPTING TO THE

NEW SHAREHOLDER-CENTRIC REALITYEDWARD B. rock*After more than eighty years of sustained attention, the master problem of U.S. corporate law—the separa Adapting to the New Shareholder-Centric Reality

tion of ownership and control—has mostly been brought under control. This resolution has occurred more through changes in market and corporate practic

Adapting to the New Shareholder-Centric Reality

es than through changes in the law. This Article explores how corporate law and practice are adapting to the new shareholder-centric reality that has

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce

Adapting to the New Shareholder-Centric Realitys. After considering how debt contracts, compensation arrangements, and governance structures can work together to limit shareholder-creditor agency c

osts, I turn to available legal doctrines that can respond to opportunistic behavior that slips through the cracks: fraudulent conveyance law, restric Adapting to the New Shareholder-Centric Reality

tions on distributions to shareholders, and fiduciary duties. To sharpen the analysis, I analyze two controversies that pit shareholders against credi

Adapting to the New Shareholder-Centric Reality

tors: a hypothetical failed LBO, and the attempts by* Saul A. Fox Distinguished Professor of Business Law, University of Pennsylvania L« School. Thank

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce

Adapting to the New Shareholder-Centric Realityge Triantis, and to participants in workshops at the University of Chicago and the University of Pennsylvania, for helpful conversations and comments.

1 have served as a consultant in a number of bankruptcy coses involving directors’ creditor-regarding duties, including: In re Tribune Co.. No. 08-13 Adapting to the New Shareholder-Centric Reality

141 (KjC), (Bankr. D. Del.) {on behalf of junior creditor’s proposed plan of reorganization). Hivt.Viwr e. BlazatnU. et id. (In re I.yondcũ Chemical C

Adapting to the New Shareholder-Centric Reality

o.). Case No. 09-10023 (REG), Adv. No. 09-1375 (REG), (Bankr. S.D.N.Y.) (on behalf of the LB Litigation Trust): and In re Getty Petroleum Marketing fn

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce

Adapting to the New Shareholder-Centric Realityiew[Vol. 161:1907shareholders of Dynegy Inc. 10 divert value from creditors through the manipulation of a complex group structure. 1 then consider som

e legal implications of a shareholder centric system, including the importance of comparative corporate law, the challenges to the development of fidu Adapting to the New Shareholder-Centric Reality

ciary duties posed by the awkward divided architecture of U.S. corporate law. the challenges for Delaware in adjudicating shareholder creditor dispute

Adapting to the New Shareholder-Centric Reality

s, and the potential value of reinvigorating the tradi tional 'entity" conception of the corporation in orienting managers and directors.Introduction.

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce

Adapting to the New Shareholder-Centric Realityy cost Problem"....................................1911A.A Brief Historical Background.......................1912B.The Classic Agency Cast Analysis...

.................19131.The Core Incentive Story.........................19132.The “Free Cash Flow Problem".....................19)43.Managerial Empire Adapting to the New Shareholder-Centric Reality

-Building.......................19154.Dispersed Ownership, Passive Shareholders, andCaptured Directors...............................19165.Managerial

Adapting to the New Shareholder-Centric Reality

Entrenchment and the Resistance toHostile Tender Otters............................19166.Evidence on the Magnitude of Agency Costs.......1916

University of Pennsylvania Carey Law SchoolPenn Law: Legal Scholarship RepositoryFaculty Scholarship at Penn Law2013Adapting to the New Shareholder-Ce