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This essay is a contribution to the forthcoming Oxford University Press Handbook of Corporate Law and Governance edited by Jeffery Gordon and Georg Ringe. In the 1960s and 1970s, corporate law and finance scholars recognized that neither discipline was doing a very good job of explaining how corporations were really structured and performed. For legal scholars, Yale Law School professor and then Stanford Law School dean Bayless Manning confessed that corporate law has "nothing left but our great empty corporation statutes – towering skyscrapers of rusted girders, internally welded together and containing nothing but wind." Michael Jensen and William Meckling made a similar comment with respect to finance. The theory of the firm was an "empty box" or a "black box" that provided no theory about "how the conflicting objectives of the individual participants are brought into equilibrium." The result of Jensen and Meckling's seminal reframing of corporate law in agency cost terms, and so into something far broader than disputes over statutory language, was that both Manning's empty skyscrapers and Jensen and Meckling's empty box began to be filled. The essay proceeds by tracking how corporate law became corporate governance – from legal rules standing alone to legal rules interacting with non-legal processes and institutions – through three somewhat idiosyncratically chosen but nonetheless related examples of how we have come to usefully complicate the inquiry into the structures that bear on corporate decision-making and performance. Part I frames the first level of complication in moving from law to governance by defining governance broadly as the company's operating system, a braided framework encompassing legal and non-legal elements. Part II then adds a second level of complication by treating corporate governance dynamically: corporate governance becomes a path dependent outcome of the tools available when a national governance system begins taking shape, and the process by which elements are added to the governance system going forward – driven by what Paul Milgrom and John Roberts call "supermodularity." That characteristic reads importantly on both the difficulty of corporate governance, as opposed to corporate law, reform and the non-intuitive pattern of the results of reform: significant reform leads to things getting worse before they get better. Part II then further complicates corporate governance by expanding it beyond the boundaries of the corporation, treating particular governance regimes as complementary to other social structures – for example, the labor market, the capital market and the political structure – that together define different varieties of capitalism. Next, Part III considers commonplace, but I will suggest misguided, efforts to take a different tack from Parts I and II: to simplify rather than complicate corporate governance analysis by recourse to now familiar single factor analytic models: stakeholder theory, team production, director primacy, and shareholder primacy. Part III suggests that these reductions are neither models nor particularly helpful; they neither bridge the contextual specificity of most corporate governance analysis nor address the necessary interaction in allocating responsibilities among shareholders, teams and directors. As well, these "models" are static rather than dynamic, a serious failing in an era in which the second derivative of change is positive in many business environments and Schumpeter seems to be getting the better of Burke. Part IV concludes by examining the importance of a corporate governance system's capacity to respond to changes in the business environment: the greater the rate of change, the more important is a governance system's capacity to adapt and the less important its ability to support long-term firm-specific investment.

This paper is a contribution to a symposium on the European Model Company Act ("EMCA ") in which I argue that a model company court powerfully complements the EMCA. A particular characteristic of company law complicates the intermediating role of a model act in a federal system. Because complex corporate transactions inevitably are associated with significant uncertainty, especially when they present conflicts of interest, transaction designers and legislative drafters tend to frame applicable contractual and legal rules as standards, such as fairness and equal treatment, rather than as rules. In turn, the effectiveness of a standard in the face of complexity and uncertainty depends on the experience and expertise of the reviewing court. The outcome is that a model company court complements a model company code. The analysis proceeds as follows. Part I considers alternative approaches to addressing related party transactions between a controlling shareholder and a corporation with minority shareholders. Self-dealing may be addressed ex ante through structural prohibitions on the characteristics associated with private benefits. Alternatively, it can be addressed ex post by substantive review of the terms of related transactions. Part II then shifts attention to the role of courts: The effectiveness of a statutory strategy will depend on the quality and experience of the associated courts. Part III then reprises the argument that harmonization of the quality of judicial enforcement of corporate statutes may be more important than harmonization of the substantive law. In this respect, an E U level company court whose jurisdiction a corporation may opt into powerfully complements a model company act. Recognizing that an optional E. U. level company law court may not be established despite the supporting logic, Part III then endorses Michael Klausner's soft law approach (in this volume) to providing some of the benefits of a sophisticated company law court available to all member state companies through on ongoing role for the EMCA drafters.

Ten years ago, Tony Blair's "New Labour" government sought an agenda that replaced ideology with a pragmatic focus on both the creation of wealth and its distribution. Not surprisingly, part of this effort involved proposals to bridge the gap between capital and labor through refraining corporate governance. A "third way" as it was then styled, would walk a fine line between privileging markets and allocational efficiency at the cost of social justice on the one hand, and accepting less for everyone as long as the distribution was fair on the other. Motivated by changes in how we save for retirement that have made workers "forced capitalists," Vice Chancellor Leo Strine in Common Sense and Common Ground offers his own third way: an approach to corporate governance that reflects the dual status of worker-shareholders. But more is needed than the shift in the position of workers from creditors under a defined benefit plan to shareholders under a defined contribution plan, to prompt a strategy for making corporate governance more worker friendly. After all, the U.S. corporate governance system generally privileges shareholders. Whichever side may have won the legal fight in the 1980s over the objective function of the corporation, as a practical matter even the Business Roundtable has come to acknowledge that the corporation's purpose is to maximize shareholder value. If workers are shareholders, their interests will be protected just like those of other shareholders. So, to set up the need for changes in corporate governance to address the needs of forced capitalists, the Vice Chancellor needs to find a set of problems with the current system that peculiarly disadvantages worker-shareholders. He identifies three.

The focus of comparative corporate governance scholarship is shifting from takeovers to controlling shareholders in recognition of the fact that public corporations everywhere but in the U.S. and U.K. are characterized by a shareholder with effective voting control. Debate is now turning to the merits of controlling shareholder systems, both on their own terms and in comparison to the U.S. and U.K. widely held shareholding pattern. To date, the debate has treated the controlling versus widely held distinction as central, disagreeing over whether a particular country owed its characteristic shareholder distribution to the quality of minority shareholder legal protection or to politics. This simple dichotomy is far too coarse to provide an understanding of the diversity of ownership structures and their policy implications. This article complicates the analysis of controlling shareholders and corporate governance by providing a more nuanced taxonomy of controlling shareholder systems. In particular, it distinguishes between efficient and inefficient controlling shareholders, and between pecuniary and non-pecuniary private benefits of control. The analysis establishes that the appropriate dichotomy is between countries with functionally good law, which support companies with both widely held and controlling shareholder distributions, and countries with functionally bad law, which support only controlling shareholder distributions. In this account, the United States and Sweden are the same side, rather than on opposite sides of the dividing line. The articles examines the different understanding of the role of controlling shareholders in corporate governance and the policy implications that flow from a taxonomy that focuses on support of diverse shareholder distributions.

This paper seeks to identify the core of the U.S. venture capital contracting model, and then assess the extent to which the model provides guidance in engineering venture capital markets in other countries and, in particular, in identifying a viable role for government in assisting that project. All financial contracts respond to three central contracting problems: uncertainty, information asymmetry and opportunism in the form of agency costs. The special character of venture capital contracting is shaped by the fact that investing in early stage, high technology companies presents these problems in extreme form. The genius of U.S. venture capital contracting lies in the use of powerful incentives coupled with powerful monitoring for all participants in the process, the braiding of the investor/venture capital fund and venture capital fund/portfolio company contracts, especially with respect to the role of exit and reputation, and the critical role of implicit contracts, especially through the reputation market, to support the dense set of explicit contracts comprising the structure of venture capital contracting. The paper then illustrates the implications of this analysis through consideration of three different government programs – a remarkably unsuccessful early effort in Germany; a more recent, more successful program in Israel; and a newly launched program in Chile.

For the last ten years, Japanese corporate governance has served as a distant mirror in whose reflection American academics could better see the attributes of their own system. As scholars came to recognize that the institutional characteristics of the American and Japanese systems were politically and historically contingent, other countries' approaches became serious objects of study, rather than just way stations on the road to convergence. One learned about one's own system from the choices made by others. As it came to be conceived, the Japanese corporation of the 1980s represented quite a different method of organizing production. Styled the "J-form" by Masahiko Aoki, the Japanese corporation combined an interlocking set of governance arrangements that supported a different kind of industrial organization. The main bank relationship, coupled with cross shareholdings, supported a management commitment to lifetime employment for an important subset of employees who, in turn, had the proper incentives to invest in the firm specific human capital necessary for a production system geared to horizontal coordination and information sharing. Central to the J-form was a commitment to organizational stability, consistent with what was said to be a Japanese focus on process technologies.

For the last ten years, Japanese corporate governance has served as a distant mirror in whose reflection American academics could better see the attributes of their own system. As scholars came to recognize that the institutional characteristics of the American and Japanese systems were politically and historically contingent, other countries' approaches became serious objects of study, rather than just way stations on the road to convergence. One learned about one's own system from the choices made by others. The goal of this paper is to return the favor done for the United States by the Japanese governance system, by holding up an American mirror in whose reflection Japanese scholars may find insights into their own system. Part I provides a brief description of Japanese corporate governance as presented in the academic literature, highlighting how each attribute of its structure is said to interact in support of commitment and stability. Part II then depicts the American system, highlighting, in contrast, its distinctive elements of adaptive efficiency. Part III catalogues the challenges changing economic conditions pose for the Japanese system, and frames the questions an American mirror reveals about the Japanese system's adaptive mechanisms. Part IV concludes with brief comments on the role of external monitoring as a mechanism of adaptive efficiency in a system of complementary attributes.

Economic policy debate in the United States during the 1980s focused on the dynamics of bidder and target tactics in hostile takeovers. Confronted with the largest transactions in business history, financial economists took advantage of developments in econometric techniques to conduct virtually real time studies of the impact on firm value of each new bidder tactic and target defense. For courts and lawyers, hostile takeovers subjected standard features of corporate law to the equivalent of a stress x-ray, revealing previously undetected doctrinal cracks. Congress held seemingly endless hearings on the subject, although managing to enact only relatively innocuous tax penalties on particular defensive tactics the public found especially offensive. State legislatures, closer to the political action, acted more substantively, if less wisely. Whether or not takeovers created new wealth they did result in its transfer, and at least one of the parties from whom wealth was transferred – target management – had remarkable influence in state legislatures. When labor also came actively to oppose hostile takeovers, the coalition was virtually unstoppable. The decade saw some thirty-four states pass more than sixty-five major laws restricting corporate takeovers, including states discouraging partial offers and front-end loaded offers. The 1980s have now closed transactionally as well as chronologically. The first quarter of 1991 marked the lowest level of merger and acquisition activity since the first quarter of 1980. The passing of this remarkable decade invites a broader perspective, which can be helpfully thought of as the political ecology of takeovers. An ecological perspective builds on the proposition that phenomena are embedded in interactive systems – a rich web of mutually dependent relationships. Thus, a seemingly independent event cannot be fully evaluated without understanding how it relates to the environmental forces to which it was a response and which, in turn, respond to it. What the narrow focus of the 1980s debate missed was an appreciation of the complex economic corporate governance and political environments in which hostile takeovers are embedded. Corporate acquisitions are a response to real conditions in the economic environment. The choice among acquisition techniques, most importantly between friendly and hostile transactions, depends both upon the economic motivation for the transaction and upon conditions in the corporate governance environment. Finally, conditions in the corporate governance environment are directly influenced by politics; both what is allowed and prohibited is defined, in the first instance, by legislation. My goal in this article is two-fold. I begin by sketching the political ecology of takeovers in the United States – the interaction of economics, corporate governance and politics that shaped the experience of the 1980s. I then make a tentative effort at applying the insights gained from an ecological perspective to the current endeavor to change dramatically the European corporate governance environment through the harmonization of takeover and company law in the European Community. Sheltered by the cloak of political naivete commonly allowed those attempting comparative analysis from a distance, I will argue that an ecological understanding of takeovers suggests a different approach than that reflected so far in the debate over the terms of harmonization. This approach is based on what I term the "mutability principle."

In a recent issue of this Journal, Carr and Mathewson (1988) test a model of the impact of limited and unlimited liability regimes on the nature of firms by comparing the performance of law firms operated as partnerships and sole proprietorships (and therefore subject to unlimited liability) with that of law firms operated as corporations (and therefore subject to limited liability).

Hostile tender offers have become a recurrent political issue. In recent years Congress has held seemingly endless hearings on the subject, and by now the testimony has settled into a familiar dialogue. Potential acquirers cast themselves as the embodiment of Adam Smith's invisible hand – their activities energize the market for corporate control with the desirable result of improving the efficiency of corporate management. Management of potential targets, in turn, claim the role of Albert Chandler's visible hand – efficient managers who internalize a function previously carried out by an inefficient market. Their argument is that because the market for corporate control systematically understates companies' intrinsic values, managers must displace the market to prevent underpriced acquisitions. Although the terms of the debate are cast in the language of efficiency, as with most serious political issues, much of the real substance is distributional. Even those who genuinely believe that hostile takeovers improve allocative efficiency will concede that some groups still suffer in the process. Their point goes no further than the claim that, after netting out the gains (to, for example, target shareholders) and the losses (to, for example, laid-off middle management and local communities), hostile takeovers still yield a positive result. A substantial amount of the conflict in Congress, as well as within and between states, is over who reaps the gains and who bears the costs of takeovers, whatever their net social impact.

From the perspective of the antitakeover forces, greenmailers are the worst example of exploitive, opportunistic players in the market for corporate control, threatening an acquisition that has no efficiency justification (and may impose significant costs) simply to garner short-term gains. Prohibiting the payment eliminates the incentive to engage in such exploitive activity in the first place. The unique overlap of interests means that both sides can agree on one aspect of takeover reform: greenmail should be prohibited. My purpose here is not to debate that conclusion but to comment on the more prosaic yet nonetheless pressing problem of how to implement a prohibition on greenmail. Some states already have adopted legislative prohibitions, and the takeover legislation now pending in Congress also would prohibit the practice. Additionally, a significant number of corporations have not waited for legislative action, instead adopting charter amendments that prohibit the individual corporation from paying greenmail. The problem is that the efforts to date to prohibit greenmail are seriously underinclusive because they misunderstand the problem. Indeed, I will make the stronger claim that, rather than prohibiting greenmail, existing and proposed prohibitions in fact serve to legalize greenmail by creating a safe harbor within which it safely can be paid.

The tactical history of the tender offer movement resembles an unrestrained arms race. Faced with offeror assaults in the form of Saturday night specials, various types of bear-hugs, godfather offers, and block purchases, target management responded with equally intriguing defensive tactics: the black book, reverse bear-hug, sandbag, show stopper, white knight, and, drawing directly on military jargon, the scorched earth. But however varied the labels given particular defensive strategies, they share the common characteristic of being responsive: They are available only after an offer is made and the battle for the target's independence joined. From the target's perspective, what was missing from the defensive arsenal was a deterrent – a tactic that would convince a potential offeror not even to attempt the attack, thereby not only saving the target the substantial costs associated with tender offer conflicts but, more importantly, eliminating the not insubstantial risk that all defenses would fail and the offer prove successful. Shark repellent amendments are intended to fill this gap in a prospective target's defenses. The idea is to amend the target's articles of incorporation to make it a less desirable or more difficult acquisition, and thereby to encourage the "shark" to seek a more appetizing or more easily digested alternative. If successful, however, the tactic is not without cost. To the extent that shark repellent amendments deter potential offerors, they also have the unavoidable effect of preventing shareholder access to offers made at substantial premiums over market price, and at the same time insulating incumbent management from the principal mechanism by which they might be dislodged unwillingly from their positions.