Recent articles have considered the status of corporate law in the United States, and some have concluded that the relevance of corporate law is in decline (see Zohar Goshen and Sharon Hannes, The Death of Corporate Law, ECGI Working Paper 402/2018).
In their article, “The Death of Corporate Law”, the authors argue that the role of the Delaware Courts has declined with the increasing role of institutional investors in the market. Sophisticated shareholders are able to address governance matters with less reliance on statutory laws or courts and more on contractual arrangements. The authors refer to activist shareholders as an example of monitoring mechanisms in this regard. The ability of institutional investors to draw on private ordering has become prevalent in the corporate context and impacted the institutional set up.
The authors look to agency costs in their analysis of the dynamics related to these developments. Principals carry monitoring costs as they seek to control the behaviour of agents; here the courts as an adjudicatory mechanism are also seen to impose a related monitoring cost – allowing for comparisons with alternative control mechanisms with lower costs. Sophisticated principals have lower competence costs and can actively engage in monitoring with lower costs than unsophisticated retail shareholders, for example. At the same time agency costs related to potential conflicts of interest of these shareholders are limited by more efficient equity market mechanisms. As a result the overall costs are lower than extensive reliance on the courts – which is demonstrated, the authors argue, by a decline in the relevance of the impact of the Delaware courts.
The points made by Goshen & Hannes reflect the overview of legal strategies presented by Kraakman et. al (The Anatomy of Corporate Law, 2017, 3rd ed.), where governance strategies would be the avenue of choice for principals with better ability for coordination and enforcement. Sophisticated shareholders are making effective use of initiation and veto rights as well as the threat of selection and removal rights. Active equity markets also guide the use of these rights and also, to some extent, provide protection and exit possibilities for retail investors.
