Article

The Untenable Case for Perpetual Dual-Class Stock

The desirability of a dual-class structure, which enables founders of public companies to retain a lock on control while holding a minority of the company’s equity capital, has long been the subject of a heated debate. This debate has focused on whether dual-class stock is an efficient capital structure that should be permitted at the time of initial public offering (“IPO”). By contrast, we focus on how the passage of time since the IPO can be expected to affect the efficiency of such a structure.

Our analysis demonstrates that the potential advantages of dual-class structures (such as those resulting from founders’ superior leadership skills) tend to recede, and the potential costs tend to rise, as time passes from the IPO. Furthermore, we show that controllers have perverse incentives to retain dual-class structures even when those structures become inefficient over time. Accordingly, even those who believe that dual-class structures are in many cases efficient at the time of the IPO should recognize the substantial risk that their efficiency may decline and disappear over time. Going forward, the debate should focus on the permissibility of finite-term dual-class structures¾that is, structures that sunset after a fixed period of time (such as ten or fifteen years) unless their extension is approved by shareholders unaffiliated with the controller.

We provide a framework for designing dual-class sunsets and address potential objections to their use. We also discuss the significant implications of our analysis for public officials, institutional investors, and researchers.

Religion Is Special Enough

In ways almost beyond counting, our legal system treats religion differently, subjecting it both to certain protections and certain disabilities. Developing the specifics of those protections and disabilities, along with more general theories tying the specifics together and justifying them collectively, has long been the usual stuff of debate among courts and commentators.

Those debates still continue. But in recent years, increasingly people have asked a slightly different question—whether religion should be singled out for special treatment at all, in any context, for any purpose. Across the board, but especially in the context of religious exemptions from generally applicable laws, many have come to doubt religion’s distinctiveness. And traditional defenses of religion’s distinctiveness have been rejected as unpersuasive or religiously partisan.

This Article offers a defense of our legal tradition and its special treatment of religion. Religious freedom can be justified on religion-neutral grounds; it serves the same kinds of values as other rights (like freedom of speech). And while religion as a category may not perfectly correspond to the underlying values that religious freedom serves, that kind of mismatch happens commonly with other rights and is probably inevitable. Ultimately, religious liberty makes sense as one important liberty within the pantheon of human freedoms. Religion may not be uniquely special, but it is special enough.

Information Gaps and Shadow Banking

This Article argues that information gaps—pockets of information that are pertinent and knowable but not currently known—are a byproduct of shadow banking and a meaningful source of systemic risk. It lays the foundation for this claim by juxtaposing the regulatory regime governing the shadow banking system with the incentives of the market participants who populate that system. Like banks, shadow banks rely heavily on short-term debt claims designed to obviate the need for the holder to engage in any meaningful information gathering or analysis. The securities laws that prevail in the capital markets, however, both presume and depend on providers of capital to perform these functions. In synthesizing insights from diverse bodies of literature and situating those understandings against the regulatory architecture, this Article provides one of the first comprehensive accounts of how the information-related incentives of equity and money claimants explain many core features of securities and banking regulation.

The Article’s main theoretical contribution is to provide a new explanation for the inherent fragility of institutions that rely on money claims. The existing literature typically focuses on either coordination problems among depositors or information asymmetries between depositors and bank managers to explain bank runs. This Article provides a third explanation for why reliance on short-term debt leads to fragility, one which complements the established paradigms. First, information gaps increase the probability of panic by increasing the range of signals that can cast doubt on whether short-term debt that market participants had been treating like “money” remain sufficiently information insensitive to merit such treatment. Second, information gaps impede the market and regulatory responses that can dampen the effects of a shock once panic takes hold. Evidence from the 2007–2009 financial crisis is consistent with the Article’s claims regarding the ways shadow banking creates information gaps and how those gaps contribute to fragility.

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