Issue 8

Lawrence Lessig’s Dystopian Vision

In Free Culture, Stanford Law School Professor Lawrence Lessig has ratcheted up his already heated rhetoric to produce a book that warns that the health of the “ecosystem of creativity” is in “grave peril” due to the efforts of “big cultural monopolists” to reduce the size of the public domain while using new technologies “to control what we can and can’t do with the culture all around us.” Failure to reverse the degradation of this ecosystem, we are assured, could lead to the loss of “freedom to create, freedom to build” and even “freedom to imagine.”

But the curious thing about Free Culture is that, stripped of its impassioned tone, the book portrays not a world of suffocated creativity and cultural impoverishment, but rather one where an unprecedented number of individuals are engaged in creative projects, free to make use of and draw inspiration from a rich trove of cultural resources. To be sure, the picture that emerges is far from a Panglossian “best of all possible worlds.” Real problems exist, and Lessig provides a valuable public service in pointing them out. Absent from Lessig’s analysis, though, is a full acknowledgement that the problems he details are of a piece with ones that Anglo-American law has confronted many times. In particular, the concern that special interests will pressure legislatures to change the contours of property rights so as to restrict competition was well understood by the nation’s founders, and the drawbacks of granting property rights to individuals and institutions who place little or no value on such rights (as may have occurred with the abolition of formal registration requirements to obtain copyrights) have been extensively discussed in the contexts of adverse possession and future interests. 

Lessig’s stubborn insistence that the dangers that loom are of unprecedented magnitude leads him to suggest that sweeping overhauls of legal rules and institutions as well as of societal norms are warranted. But a careful reading of Lessig’s own litany points to a different, more complicated conclusion: existing regimes are for the most part healthy, albeit in need of continual monitoring and adjustment.

Toward a Controlling Shareholder Safe Harbor

This Note surveys the law governing transactions between public corporations and their controlling shareholders. It explains that Delaware courts review these “controlling shareholder transactions” under the “entire fairness” standard. Yet, Delaware and the Model Act provide safe harbors to review independently approved transactions between corporations and their directors under the business judgment rule. This Note questions the disparate treatment and suggests that the same constraints on interested directors—namely, disinterested approval and market checks—are at least as effective in supervising controlling shareholders.

Next, this Note proposes that a safe harbor doctrine extend to controlling shareholder transactions. The premise is that, so long as the interests of controlling and minority shareholders are aligned, independent approval and market checks together provide sufficient constraints that challenge the utility of the current entire fairness rule. Yet, because these constraints fail when shareholder interests diverge in the so-called “final period,” this Note suggests that controlling shareholder transactions be separated into (1) final period and (2) non-final period categories. Business judgment is appropriate when shareholder interests are aligned, but entire fairness is necessary in the final period to protect the minority from the controlling shareholder’s self interest.

This argument relies on two principal Delaware cases: Puma v. Marriott (1971) and Kahn v. Lynch Communications (1994). It suggests that Lynch implicitly recognized the final period problem, while Puma declined judicial review because the aggregate interests of shareholders were aligned. Thus, read together, they are seen as wholly consistent with the theory underlying a controlling shareholder safe harbor.

The Option Element in Contracting

The law of contracts has often treated options quite differently from other contractual transactions; for example, the characterization of a transaction as an option contract calls forth specially required formalities, but on the other hand often has the effect of releasing parties from doctrinal limitations on their contractual freedom, such as the duty to mitigate damages or the rule that holds excessively high liquidated damages void as penalties. Such differential treatment is challenging to explain from a functional viewpoint, in part because all contracts resemble options to the extent they are enforceable in terms of monetary damages, and in part because contracts that are nominally structured as explicit options can be close economic substitutes for contracts that are nominally structured as unconditional.

This Article sets out a theoretical account of the efficient design of option contracts—one that explains how contracting parties should strike the balance among option premium, option life, and exercise price, in order to maximize the expected surplus from their transaction. It shows that the tradeoffs between these various aspects of option contracts can affect the parties incentives to acquire and disclose information, to invest in relation specific investments, and to take efficient precautions against the event of breach. It then goes on to develop an organizing framework for private parties choosing whether and how to structure their contractual arrangements as options, and for policymakers choosing whether or how to regulate such private choices. In short, the appropriate balance between option premium, option life, and exercise price will depend on the relative importance that the one attaches to these various dimensions of incentives.

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