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Notes Literature - American Corporate LawHC 1 – Trends and challenges
Principles in law:
• Agency law
• Fiduciary obligations of agents to their principal
à Overtime the rules have changed/are changing, because of:
- A dramatic reconsideration during the hostile takeover era of the 1980s;
- Modern business developments – the globalization of the economy and the increasing importance
of digital currencies, artificial intelligence, venture capital, franchising, supply chains and cross-
border governance structures;
- There has been an explosion in situations involving agency law, as fundamental principles of the
common law are adapted to the modern regulatory state, to global supply chains, to franchising
arrangements, and to global enterprises using hundreds of independently established companies,
called subsidiaries, in each country in which the firm does business;
- Outside of the firm, companies are being buffeted by social trends and challenges that are raising
the expectations of society for “responsible” business conduct.
1.1 Shifting norms for the responsibilities of business
Within the last few years, high-level organizations of CEOs and business elites have issued statements
supporting “stakeholder capitalism.”
à This approach to company responsibilities suggests that companies should be run for the benefit of
all of their stakeholders, including customers, employees, suppliers, communities, and shareholders. The
U.S., the Business Roundtable explicitly rejected its decades-long support for the view that companies
should prioritize shareholder wealth maximization, called “shareholder primacy.” The British Academy
contribution was a more subtle shift in the U.K. away from its “enlightened shareholder primacy.”
1.2 Shareholder activism and sustainability
• Another trend that is increasingly in evidence is the trend putting pressure on managements and boards
to pay attention to environmental and social “sustainability.” The term sustainability, much bandied
about, generally means acting with some recognition of global environmental limits, the importance of
healthy social foundations for thriving economies, and some concern for future generations.
à This is because of the financial risks of social and environmental issues are becoming more evident;
also, investors have a change in voting behavior, the change in investors’ voting behavior pertains to
environmental and social issues.
• At the same time, for the last fifteen years, at least, “hedge fund shareholder activists” have been
engaged in pressuring companies to improve their financial returns to shareholders. These investors
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, buy 2 to 3 % of the shares of a public company, which can require billions of dollars of investment, and
then put pressure on those companies to prioritize short-term strategies or transactions such as cutting
research and development, borrowing money to distribute to shareholders in dividends or share buy-
backs, selling divisions of the company, or engaging in mergers and acquisitions, all to increase share
prices and distribute funds to shareholders. He sustainability trend asks corporate directors and
management to take a long-term strategic perspective and adopt a stakeholder orientation to
management of significant corporate challenges.
à It is short-term vs long-term.
1.3 Digital transformation and the shift to a “metaverse”
Another external trend changing internal firm dynamics is the digital transformation. The technologies that are
expected to have a significant impact on corporate governance are blockchains and distributed ledgers.
• Blockchain: breaking this definition down into its functional components, blockchain technology is a
(1) Network that is; blockchain technology relies on a chain of multiple parties (sometimes
referred to as “peers” or “nodes”) to jointly maintain and edit a database.
(2) Consensus-based and; second, this database is maintained according to a consensus
mechanism, such as a “proof-of-work” protocol.
(3) Immutable; third, blockchains are considered to be immutable or non-repudiable.
Compared to centralized systems, the decentralized (or distributed) nature of the blockchain
system makes it much more difficult to modify existing data which is scattered across a
multitude of nodes. This feature of blockchain technology ensures the provenance of assets,
meaning that for any given asset, one can know with high accuracy not only its current status
but also where it has been and what has happened throughout its lifetime. Furthermore, trust in
the provenance of assets stems from the blockchain’s consensus mechanism, and not from any
particular individual member, whose identities are often not known, which is why the integrity
of the blockchain is sometimes referred to as “trustless trust.”
• Smart contract: this is defined as “a computerized transaction protocol that executes the terms of a
contract.” To be clear, smart contracts are not legal documents, they are a computer code.
o The descriptor ‘smart’ refers to the ability of a smart contract to execute on its own when
pre-determined conditions are met. This self-executing feature of the smart contract
eliminates the need to involve and rely on parties to execute the contract and verify the
accuracy of the process.
o Smart contracts require a trustworthy platform which specifies the agreed upon terms and
has the ability to determine and to act when pre-specified conditions have been met.
Blockchain and other distributed ledger technologies are one of the technologies that are
available to provide such a platform.
o Together, smart contracts and decentralized ledgers can be used to create a self- executing
and immutable record, which can be used to improve accuracy and transparency in many
aspects of corporate governance.
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,• Corporate Governance Applications of Blockchain and Smart Contracts:
o One of the interests has been corporate voting; shareholders normally vote on an annual basis
through giving the power to vote their shares, their “proxy,” to others, typically management,
based on disclosure (requirements for this) from management about how that voting power
will be used.
§ Specifically, blockchain technology could be used to record and identify shareholders
who have voting rights, record the votes of these shareholders, and provide
aggregated voting data based on the information recorded on the blockchain;
§ Furthermore, the greater speed, transparency, and accuracy afforded by blockchain-
enabled corporate voting could motivate shareholders to participate more directly in
corporate governance, such as by providing them with a user-friendly mechanism to
demand votes on topics that are of interest to them.
à However, as we know from our current experience with online voting
technologies, technology is not always the answer. Retail investor participation in
voting continues to decline even as voting technology continues to improve.
Technology can make it easier for shareholders to vote, but that doesn’t mean that
shareholders will show up to vote unless they believe that their vote matters both for
themselves and for the company. What must change is shareholder awareness, culture,
and incentives, which can begin with but cannot end with technology.
o In addition, corporate books and records have been highlighted as another area that could be
improved by blockchain and distributed ledger technologies.
1) They significantly narrow the temporal decoupling of governance rights and
economic interest;
2) They reduce the need to rely on intermediaries such as brokers or proxy solicitation
firms;
3) They reduce errors; and
4) They deter undesirable consequences of shareholders voting in transactions where
they have no economic interest in the outcome of the transaction because of
countervailing derivatives positions, so-called “empty voting.”
o Something else that has been suggested is the use of blockchain to resolve inefficiencies
related to the complexity of the current shareholding architecture and lack of transparency
regarding ownership of shares; most of the time the shares are hold in brokerage accounts
which make it impossible for companies to know who their actual shareholders are, the
“beneficial” shareholders.
§ Companies would issue digital shares (or smart securities), which would be settled in
real-time, and corporations would be able to maintain a single comprehensive register
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, which would be secure, transparent, and immutably reflective of ownership. As such,
there would be no discrepancy between record and beneficial shareholders, and voting
rights could be exercised directly by owners.
§ New platforms are being developed for companies to place key governance
documents and procedures on the blockchain; this is stimulating transparency.
à But there are two problems: 1) the identity of the individual members who
maintain copies of records are not always known, 2) the energy-intensive nature of
blockchains.
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