University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository SJD Dissertations Student Papers 2021 New Perspectives in Corporate Law Asaf Raz Follow this and additional works at: https://scholarship.law.upenn.edu/sjd_dissertations Part of the Business Organizations Law Commons, and the Jurisprudence Commons NEW PERSPECTIVES IN CORPORATE LAW ASAF RAZ S.J.D. DISSERTATION UNIVERSITY OF PENNSYLVANIA CAREY LAW SCHOOL DISSERTATION COMMITTEE David A. Skeel, S. Samuel Arsht Professor of Corporate Law Gideon Parchomovsky, Robert G. Fuller, Jr. Professor of Law Elizabeth Pollman, Professor of Law Dissertation Defense: April 13, 2021 2 Asaf Raz [Dissertation DISSERTATION CONTENTS New Perspectives in Corporate Law (2021) (S.J.D. Dissertation Introduction). Share Law: Toward a New Understanding of Corporate Law, 40 U. PA. J. INT’L L. 255 (2018). A Purpose-Based Theory of Corporate Law, 65 VILL. L. REV. 523 (2020). Mandatory Arbitration and the Boundaries of Corporate Law, 29 GEO. MASON L. REV. (forthcoming 2021). 2021] New Perspectives in Corporate Law 3 NEW PERSPECTIVES IN CORPORATE LAW ASAF RAZ* INTRODUCTION “The life of the law has not been logic: it has been experience,”1 wrote Oliver Wendell Holmes in 1881, laying the foundation for what would become the legal realist movement, and subsequently much of the way we think about, practice, adjudicate, and study the law today. Yet what if the life of the law has been both logic and experience? What if the law has its own structure, taxonomy, and unwaivable principles, which in turn operate to make the world a better place, even in extra-legal terms (economic, social, or otherwise)? This debate, regarding the proper balance between internal and external perspectives on the law, continues to unfold today. In my dissertation—consisting of this Introduction and my first,2 second,3 and third4 scholarly articles—I have set out to bridge the internal and external viewpoints on an area of jurisprudence that, so far, has largely remained on the realist side of the spectrum: corporate law. This Introduction describes the path I took while writing my dissertation, explaining the motivation for each article, how it relates to the others, and what lessons I hope can be derived from the dissertation as a whole. A. Why Do Legal Categories Have Value? The idea of share law, which lies at the center of my first article,5 occurred to me some years before I came to the University of Pennsylvania. As * [email protected]. © 2021 Asaf Raz. 1 OLIVER WENDELL HOLMES, JR., THE COMMON LAW 3 (Harvard Univ. Press 2009) (1881). 2 Asaf Raz, Share Law: Toward a New Understanding of Corporate Law, 40 U. PA. J. INT’L L. 255 (2018). 3 Asaf Raz, A Purpose-Based Theory of Corporate Law, 65 VILL. L. REV. 523 (2020). 4 Asaf Raz, Mandatory Arbitration and the Boundaries of Corporate Law, 29 GEO. MASON L. REV. (forthcoming 2021). 5 Raz, supra note 2. 4 Asaf Raz [Dissertation an aspiring academic, and an avid reader of legal cases and scholarship, I often thought about questions such as: who should be the parties to this lawsuit? Who holds what kind of cause of action? More broadly, where do we find the legal norm that tells us what rights and duties people have in a given situation— and which people have them? In most cases, that inquiry is not overly difficult; although it is sometimes hard to distill the norm itself, we generally know where to look for it. Contract law governs the rights and duties of contract parties (and, because this legal framework exists, contracts have economic value). Constitutional law constrains the legislature, and other state branches, vis-à-vis the people. We would normally not think to conflate the two, just as we would not confuse contract with, say, property or tort law, or these two among themselves. Indeed, even the most ardent legal realists6 saw the significance in Professor Wesley Hohfeld’s classic taxonomy of rights and duties.7 Yet, in regard to one kind of situation—that of shareholders—I found it much harder to discern both the substance and the parties. As I soon realized, that difficulty was shared by the broader legal community. Despite the fact that the value of publicly-traded shares worldwide is in the tens of trillions of U.S. dollars,8 shareholders fit like a square peg into the round hole of conventional legal categories: as my first article demonstrates, shareholders are not contract parties, given the near-total lack of ex ante information about any promise owed to them;9 they are not covered by property law, for it is not clear what “owning” a corporation practically means, nor do shareholders own the corporation’s buildings, trademarks, or bank accounts (the corporation does);10 they cannot be regarded as trust beneficiaries;11 and, despite seemingly pervasive judicial language in some U.S. jurisdictions, shareholders (outside of “a limited set of circumstances”12) are not direct beneficiaries of the corporation’s 6 See, e.g., Felix S. Cohen, Transcendental Nonsense and the Functional Approach, 35 COLUM. L. REV. 809, 828 (1935) (favorably referring to Hohfeld’s ideas). 7 Wesley Newcomb Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning, 23 YALE L.J. 16 (1913). 8 See Stocks Traded, Total Value (Current US$), WORLD BANK, https://data.worldbank.org/indicator/CM.MKT.TRAD.CD [https://perma.cc/QVF6-U8HN] (last visited Apr. 2, 2021) (indicating that the total value of shares publicly traded worldwide, in 2019, was US$60.359 trillion). 9 See Raz, supra note 2, at 282-85. 10 See id. at 285-87. 11 See id. at 287-90. 12 Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140, 1150 (Del. 1989). 2021] New Perspectives in Corporate Law 5 fiduciaries (such as directors and officers).13 As a result, shareholders cannot even be described as creatures of corporate law generally; their rights derive from a certain segment of corporate law, different than that which regulates the relationship between the corporation and its fiduciaries. What legal norms govern shares, then? In other words, why do shares have value? It was with this question that I set out to write my first article. The solution I fashioned was straightforward: shares reside in their own legal category. Within corporate law, we can identify a set of rules and principles that apply where a person is a residual claimant—having an entitlement defined only as “what is left after the corporation meets all of its other obligations.”14 I call that set of rules and principles “share law.” Because shareholders, as residual claimants, encounter a unique array of problems (mainly resulting from the open-ended, practically unlimited range of situations they might find themselves in),15 the law responds with a set of devices—among them the appraisal remedy, the law of share dilution, dividends and buybacks, shareholder voting, books and records inspection, and shareholder litigation16—tailored to ensure shareholders have a fair opportunity to receive the fruits of their bargain (even if the economic substance of those fruits changes on a constant basis). Just as the rest of corporate law does not float in mid-air, but borrows from other legal traditions (although it often re-assembles them in a unique manner), share law primarily rests on concepts of equity. It is the sensitivity of shareholders’ legal position, which can easily (and sometimes invisibly) be frustrated by their main counterparty (the corporation) or by others (such as directors, officers, and fellow shareholders), that justifies reliance on the anti- 13 See Raz, supra note 2, at 290-301. 14 This is the defining property of residual claims. If a person has some claim that arises under any other legal mechanism, it is not residual by nature. See Leo E. Strine, Jr., Poor Pitiful or Potently Powerful Preferred?, 161 U. PA. L. REV. 2025, 2040 (2013) (“To the extent the preferred get a contract right, they are preferred. To the extent they do not, they are subject to the same risks as other stockholders and entitled to no extra value or rights.”). The definition of residual claims, as subordinated to all of the corporation’s other legal obligations, also has strong bearing on broader debates in corporate law, and helps chart a more accurate way between the two prevailing conceptions (shareholderism and stakeholderism). See infra pp. 10-13. 15 See, e.g., id. at 263-69 (discussing a case where some of the corporation’s shareholders could not be located, so the court was asked to decide whether to distribute their dividend— about US$5,700 per claimant—among the other shareholders); Raz, supra note 4, at 54 n.309 (describing other highly unusual situations involving shareholders, litigated in the Delaware Court of Chancery). 16 See Raz, supra note 2, at 311-19. 6 Asaf Raz [Dissertation opportunistic power of equity.17 Although the terms are sometimes used interchangeably by U.S. corporate lawyers, equity is not the same as fiduciary law; the latter is but one branch of equity.18 About a year after my first article was published, I was happy to see this distinction further developed, in extensive detail, by Professor Paul Miller.19 The oppression remedy, discussed in Miller’s article, and grounded in equitable (rather than fiduciary) principles, sits at the heart of share law in Commonwealth and other jurisdictions. In several places throughout my first article, I discuss the prominent role played by the concept of corporate purpose.20 It is there that the foundations have been laid for my next article. B. Taking the Corporation Seriously My second article21 came as a result of several insights I gained during 2018-2020, while participating in the dynamic environment of corporate and business law, which I was fortunate to experience at Penn Law.