Two types of theories of the firm have emerged in scholarship. Economic theories concern the allocation of control rights and residual claims: a firm is a group of assets under common ownership. Legal theories focus on the legal significance of firm boundaries: each firm is a legal person. Thus, assets may be economically integrated under common control and yet be partitioned between distinct legal entities. This paper presents a theory of legal boundaries that focuses on the choice of capital structure, and traces the interplay between economic integration and legal partitioning. The law treats many capital structure decisions, including both financial and governance choices, as in personam rather than in rem. Thus, these decisions must be made firm-wide; these include the issuance of debt or equity, the adoption of takeover defenses, and the composition of the board of directors. Yet, the determinants of optimal capital structure are often asset-contingent. For example, the amount of leverage, the desirability of takeover defenses and the number of independent directors may vary with the industry. The resulting tension is significant in the choice of firm boundaries. If two groups of assets have divergent capital structure demands—in that the optimal design of financial and governance rights related to each group is different—then either the assets are put in separate firms that tailor capital structure to their respective asset groups or they are combined in a single firm with a blended capital structure. We suggest that legal integration into a single firm sacrifices efficiency in some cases, but not in others. Where the efficiency losses are large enough to offset countervailing advantages from legal integration, legal partitioning might occur. We also demonstrate, however, that legal partitioning may undermine the benefits from economic integration, even if the discrete firms are kept under common control, as that concept is defined in law. Our theory thus suggests additional factors to be considered in explaining the structure of combinations (such as mergers or acquisitions) and divestitures (such as spin-offs, carve-outs or securitizations).
Issue 3
The Political Economy of Financial Rulemaking After Business Roundtable
In Business Roundtable v. S.E.C., the D.C. Circuit struck down the SEC’s proxy access rule. The court held that the SEC’s failure to perform an adequate cost-benefit analysis amounted to an arbitrary and capricious rulemaking that was not in accordance with law. The decision may be one of the most significant administrative law cases in a generation. If the D.C. Circuit adheres to its reasoning, federal agencies will no longer be able to satisfy their obligation to perform cost-benefit analyses by performing the sort of pro-forma analyses that they have been performing since the early 1980s when opponents of the regulatory state first started demanding cost-benefit analyses. Instead, they will have to perform serious cost-benefit analyses that can survive what appears to be a heightened form of hard-look scrutiny approaching de novo review.
This note will explore the implications of the Business Roundtable decision by considering its application to rulemaking under the most important financial reform legislation since the Great Depression—the Dodd-Frank Act. This note surveys the impact that Business Roundtable will have on the gamut of political and private actors. In order to shore up their rules against court challenges, agencies will have to increase the number and quality of the economists on their staffs. This will increase the cost of rulemaking and reduce the range of rules that will pass through the new cost-benefit filters. It will result in a wide range of strategic behaviors on the part of private litigants and political actors since it raises the stakes for cost-benefit analysis mandates in statutes and executive orders.
Plenary Power Preemption
This essay responds to the Supreme Court’s recent decision in Arizona v. United States, which struck down all but one of the disputed sections of Arizona’s S.B. 1070 immigration law. It advances the theory that although the Arizona Court purported to apply classic conflict and field preemption analyses, it was actually using a different form of preemption, one that gives particular weight to federal interests where questions of national sovereignty are at stake. The Court did so through doctrinal borrowing of the “plenary power doctrine,” which gives the political branches special deference when passing or executing immigration legislation, even where doing so would otherwise violate individual constitutional rights. This Essay labels the form of preemption used in Arizona and other alienage cases “plenary power preemption.” It shows how this doctrine developed over time, as the scope of the legitimate exercise of state police power and federal immigration changed, and federal and state regulation of noncitizens became more complex and enmeshed. It argues that plenary power preemption has two important effects: it allows courts to evade the thorny question of the scope of executive—as opposed to legislative—power over immigration, and it substitutes for the lack of an equal protection doctrine that adequately protects unauthorized aliens from discrimination.