Corporate governance includes legal, contractual, and market mechanisms that structure decision-making within business corporations. Most attention has focused on corporate governance in large U.S. public corporations with dispersed shareholding. The separation of ownership from control in those corporations creates a unique problem, as shareholders typically have weak individual incentive to monitor managers. Mechanisms that have been developed to address this agency problem include independent directors, fiduciary duty, securities law disclosure, executive compensation, various professional gatekeepers, the market for corporate control, and shareholder activism. In most countries outside the United States, there are few companies with dispersed shareholding. Instead, most companies have a controlling shareholder or group. These companies face a different agency problem, the possibility that controlling shareholders may use their power to gain at the expense of minority shareholders. Enterprise governance refers to mechanisms aimed at related agency problems that occur in closely held companies without publicly traded equity interests. Here too the agency problem typically encountered is the potential conflict between controllers and minority investors, with the added twist that share illiquidity removes an important protection for the minority. Closely held companies have adopted a variety of contractual mechanisms to address these concerns. Other than the important but special cases of venture capital and private equity fund investments, there is less empirical evidence on governance in closely held companies because information is generally much harder to find.
Charles R. Korsmo
Law and economics has proved a particularly fruitful scholarly approach in the field of mergers and acquisitions. A huge law and economics literature has developed, providing critical insights into merger activity in general and the proper role of corporate and securities law in regulating this activity. Early economic research examined the motivations for merger activity and the antitrust implications of mergers. Later scholarship elucidated the important disciplining effects on management from merger activity and the market for corporate control. If management performs poorly, causing a firm to become undervalued relative to a well-managed firm, the firm becomes vulnerable to a takeover where management will be replaced. This prospect provides a powerful incentive for management to perform well. More recent work has revealed the limitations of market discipline on management actions in the merger context, and the corresponding role of corporate law in protecting stockholders. Because a merger is generally the final interaction between management and the other stakeholders in a firm, the typical constraints and mechanisms of accountability that otherwise constrain managerial opportunism may be rendered ineffective. This work has played a central role in informing modern jurisprudence. It has shaped the application of enhanced judicial scrutiny of management actions in the merger context, as embodied in the landmark Delaware cases Unocal and Revlon. The law and economics literature has also made important contribution to more recent developments in stockholder appraisal. The law and economics tradition has also provided a useful framework for evaluating the dynamics of merger litigation, including stockholder appraisal, and the extent to which such litigation can be made to serve a useful role in corporate governance.