Each stockholder of a corporation or joint-stock association shall be individually and personally liable for such proportion of all its debts and liabilities contracted or incurred, during the time he was a stockholder, as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock, or shares of the corporation or association.”

He went on to note that:

That constitutional provision was repealed on November 4, 1930. See Kaysser v. McNaughton, 6 Cal. 2d 248 (1936)….

Limited liability may be entrenched today, but suprisingly the opposite rule was once true in California.

Actually, limited liability has been entrenched in most of the United States for a very long time. As Bishop notes, however, California joined the party very late.

The discussion below the line draws on Todd Henderson’s and my book, Limited Liability: A Legal and Economic Analysis (AMAZON LINK), which Northwestern Law Professor Stephen Presser called “one of the most important books on one of the most important contemporary legal issues, the liability of individual and corporate shareholders for corporate debts.”

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I also introduced a forthcoming Washington University Law Review article by Roy Shapira, Asaf Eckstein, and Ariel Shillo,1 which tackles a related—but, I think, seriously underappreciated governance problem; namely, that boards of directors are being asked to do far more than their structural capacity allows. They call this “board overload.”

I think they’ve spotted a real problem and advanced some useful ideas for addressing it. But while I like the article a lot, I have some quibbles and what I hope will be some friendly amendments.

The prior post set the stage by relating first principles, focusing on the question of why the statutory default model of corporate governance has a committee—i.e., the board of directors—at the apex of the corporate hierarchy rather than an individual autocrat. In this post, I use that background to develop my critique of Shapira et al.’s analysis.

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Some rating agencies urge clearly defined standards against over-boarding. ISS, for example, insists that directors who are not CEOs should not serve on more than six public company boards. (Directors who are CEOs are limited to three boards, including their own.) The rationale is that heavily committed directors cannot do a good job. Proponents believe the principle is so important that it ought to be a clear bright-line rule, even if doing so results in some over-inclusion and under-inclusion. For example, it stifles the fully retired but smart and energetic CEO who has no regular job but wants to serve on eight boards of fairly simple and unproblematic public companies, but it excuses the full-time professional who has an especially demanding job and also imagines he can effectively serve on the boards of three large, complicated, and troubled public companies.2

Over boarding concerns drove the NYSE to impose a disclosure requirement regarding audit committee membership, which provides that:

If an audit committee member simultaneously serves on the audit committees of more than three public companies, the board must determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company's audit committee and must disclose such determination either on or through the listed company's website or in its annual proxy statement or, if the listed company does not file an annual proxy statement, in its annual report on Form 10-K filed with the SEC. If this disclosure is made on or through the listed company’s website, the listed company must disclose that fact in its annual proxy statement or annual report, as applicable, and provide the website address.3

In addition, the commentary to that provision counsels that:

Because of the audit committee's demanding role and responsibilities, and the time commitment attendant to committee membership, each prospective audit committee member should evaluate carefully the existing demands on his or her time before accepting this important assignment.

A forthcoming Washington University Law Review article by Asaf Eckstein, Roy Shapira, and Ariel Shillo tackles a related—but, I think, seriously underappreciated governance problem; namely, that boards of directors are being asked to do far more than their structural capacity allows. Their insight is the subject of this commentary. At the risk of spoiling the end, I end up highly recommending it, while offering some friendly amendments.

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The Center for Law and the Economy will have two key missions. The first is to serve as a hub for work that fills major gaps in scholarship and policy research on the laws and tools that shape, structure, and govern economic activity. The center will bring expertise to advance work spanning public economic law, including in antitrust, administrative law, banking law, consumer protection, corporate governance, financial regulation, and tech policy, among other areas. Drawing on top government experience, the center’s fellows will focus on developing timely research that can move from scholarship into practice. The center’s Project on Public Economic Law will support students and scholars as they prepare for careers in legal academia, and it will host the Public Economic Law Colloquium to convene scholars and teach students pursuing this work.

The second part of the center’s mission is to educate, train, and support current students through its Law and Economy Student Network. Students from around the United States will have the opportunity to participate in events with leading scholars and policymakers; contribute to timely, original scholarship and policy projects; and submit work for annual awards. Through the network, the center will help train the next generation of legal and economic scholars and policy leaders and position them to advance careers in public service.

Or, as a cynic might say, to generate stovepipe law review articles and train aniother generation of progressive anti-business antitrust crusaders.

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Mega Bank Holding Co., Inc., a large and diversified financial services corporation providing, among other things, investment banking services, recently announced that it had reached a settlement with the U.S. Department of Justice and several other federal agencies of criminal and civil claims.1 The Department of Justice claimed that Mega had committed securities fraud and violated certain banking regulations in connection with Mega’s “packaging, marketing, sale, and issuance of residential mortgage-backed securities (RMBS).” In the settlement, Mega admitted having committed the alleged violations and further admitted that “in certain instances, loans that did not comply with underwriting guidelines were included in the RMBS sold and marketed to investors, but Mega did not disclose this to those investors.” Mega paid the government $1.7 billion to settle those claims.

Mega is a Delaware corporation. Its common stock is listed for trading on the NYSE. Its common stock and several classes of debt securities are registered with the SEC under § 12 of the Exchange Act. Mega is therefore a reporting company and at all relevant times was current in its reporting obligations.

Shareholders brought a number of derivative and class actions suits against Mega and its directors, which were combined for trial before Judge Helen Watkins of the U.S. District Court for the Southern District of New York. Among the many claims in the lawsuit is an allegation that the directors of Mega should be liable for violating Securities Exchange Act § 14(a) and SEC Rule 14a–9 thereunder because Mega’s proxy statements for the last two years were “materially false and misleading because they falsely stated that the Company’s Board of Directors maintained adequate and effective risk oversight over management and failed to disclose to the Company’s shareholders material deficiencies in the Board’s oversight of management and internal controls.”

1. If it were true that Mega’s board of directors failed to maintain “adequate and effective risk oversight over management,” would Mega’s shareholders have a state law claim against the directors? What would plaintiffs need to prove in order to prevail on such a claim, if any?

2. Mega’s directors have moved to dismissed the § 14(a) cause of action for failure to state a claim, citing Gaines v. Haughton.2 How should Judge Watkins rule?

3. Would your answer to Question 2 change if the directors’ fees paid to Mega’s board members varied with Mega’s stock price, so that higher profits and a resulting higher stock price meant the directors received higher compensation?

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I got a nice shout out from Lauren Pringle of The Chancery Daily in her latest newsletter:

As anyone actively involved in corporate law and governance knows, Stephen Bainbridge is something of a “Stephen-on-the-spot” about spotting relevant interesting issues as they arise in our sphere. While TCD generally runs a weekly or bi-weekly feature on Supreme Court arguments, our omission of such a feature in our March-due cadence came back to bite us, metaphorically speaking, when Professor Bainbridge highlighted one recent interesting oral argument in one of his awesome two-part series. We play a little catch up below, to add to what the professor has already noted about the interesting aspects of this pending matter.

She’s referring to these posts:

Bainbridge on Corporations

Witmer v. Armistice Capital, LLC: Part 1

We normally think of insider trading law as a matter of federal securities law rather than state corporate law. And, today, that’s largely true…

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a month ago · Stephen Bainbridge

Bainbridge on Corporations

Witmer v. Armistice Capital, LLC: Part 2

In my prior post on Delaware Vice Chancellor’s opinion in Witmer v. Armistice Capital, LLC, I offered a comprehensive review of the facts and issues in the case, as well as a detailed discussion of Zurn’s analysis of the controlling shareholder issue…

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a month ago · Stephen Bainbridge

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Calcorporatelaw.com

Can A Federal Court Remove A Corporate Director?

California Corporations Code Section 304 empowers the Superior Court to remove directors as follows…

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22 days ago · Keith Paul Bishop

Keith cites Van Steenwyk v. Van Steenwyk,1 as support for an affirmative—albeit non-statutory—answer. The plaintiff argued that a federal court sitting in diversity can exercise the power to remove directors per § 304 and, moreover, “has the equitable power to remove directors and officers.” The defendants contended that a federal “court does not have this equitable power regardless of the remedies provided for under state law.”

The court opined that:

[A federal district court] has the equitable power to remove or enjoin Defendants from acting as directors and officers of the Companies. Equitable relief in federal courts is “subject to restrictions: the suit must be within the traditional scope of equity as historically evolved in the English Court of Chancery[;] a plain, adequate and complete remedy at law must be wanting[;] explicit Congressional curtailment of equity powers must be respected[; and] the constitutional right to trial by jury cannot be evaded[.]”

It has been a “fundamental principle for well over a century that state law cannot expand or limit a federal court’s equitable authority.” For this reason, a “state statute does not change the nature of the federal courts’ equitable powers.” “That a State may authorize its courts to give equitable relief unhampered by any or all such restrictions cannot remove these fetters from the federal courts.” “State law cannot define the remedies which a federal court must give simply because a federal court in diversity jurisdiction is available as an alternative tribunal to the State’s courts.” “Contrariwise, a federal court may afford an equitable remedy for a substantive right recognized by a State even though a State court cannot give it.” …

Accordingly, Plaintiff is incorrect—the court’s equitable powers cannot be expanded by California and Texas laws, even if those laws enable their respective state courts to remove corporate directors. Defendants, however, interpret too narrowly the court’s equitable powers. Injunction is one of the “categories of relief” that was “typically available in equity.”

What I don’t understand about this case is why the court ignored § 304. The opinion neither claims that a federal court could exercise the powers granted to a California superior court by § 304 nor claims that a federal court may not do so. Perhaps an experienced California practitioner can explain.

In any case, let’s talk about something important. I.e., what the answer would be under Delaware law.

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The Securities and Exchange Commission is preparing a proposal to eliminate the requirement to report earnings quarterly and instead give companies the option to share results twice a year, according to people familiar with the matter. …

The push for semiannual reporting gained steam late last year. The Long-Term Stock Exchange petitioned the SEC to eliminate the quarterly earnings report requirement, The Wall Street Journal reported in September. Within days, President Trump and SEC Chairman Paul Atkins both said they supported the idea.

Publicly traded companies in the U.S. have reported results every three months for the past 50-plus years.

Over on LinkedIn, Joel Fleming is displeased:

News today that the Trump administration is casually kicking out another leg of the stool that has made US capital markets great. …

For decades, when you bought equity in a U.S. public company, you knew what you were buying and you knew that insiders wouldn’t be able to steal it from you. Those protections weren’t holding the market back, they were supercharging it.

A comment from Jim Davidson points out that:

There are comparable securities regulation regimes across the pond that we can examine; generally I think the consensus among the corporate grunts like me is that private ordering (ie, covenants) will compel most public companies to continue to deliver quarterly results in some form in order to appease investors, regardless of what the administration does here.

I’m siding with Davidson on this one.

I offered my take on the debate over quarterly reporting in three posts last September.

My first post discussed whether quarterly earnings reporting contributes to managerial short term biases:

My second post situated the current debate over quarterly earnings reports in the longstanding debate over mandatory disclosure generally:

My last post argued that the sky is not falling, because market forces will work:

Bainbridge on Corporations

Witmer v. Armistice Capital, LLC: Part 1

We normally think of insider trading law as a matter of federal securities law rather than state corporate law. And, today, that’s largely true…

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a month ago · Stephen Bainbridge

In this post, I offer up an analysis of VC Zurn’s treatment of the plaintiff’s Brophy claim. I also discuss the news reports of the Delaware Supreme Court’s recent oral argument in the appeal, which focused heavily on the Brophy claim.

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But it was not always so. A century ago, insider trading law was treated as a question of state corporate law fiduciary duties. Even today, moreover, there is a vestigial body of state law that occasionally comes into play.

I trace the history of the early state common law of insider trading, the assumption of primary responsibility for regulating it by the SEC, and the remaining scope of state law in my book, Insider Trading Law and Policy: Concepts and Insights (Foundation Press, 2nd edition, 2023) (AMAZON LINK)

As you might expect, Delaware has the most developed body of state insider trading law. It looks like we’re about due for another chapter of Delaware law in this area to be written, as the Delaware Supreme Court recently heard oral argument in Witmer v. Armistice Capital, LLC.1

It’s a very interesting fact pattern, which raises a couple of issues that are worth considering as the Court ponders the decision. The first is the definition of a controlling shareholder, which is a topic of perennial interest (at least to me) that we have frequently discussed. The second is the Brophy claim.

In this post, I discuss the Chancery Court decision’s analysis of the controlling shareholder issue. To be sure, the plaintiff did not appeal that aspect of the Chancery Court’s decision. It’s nevertheless worth discussing because the question of who is a controlling shareholder is one that we’ve frequently discussed here.

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Bainbridge on Corporations

Divesting University Endowments for Social/Political Reasons: Part 1

Back in the day (2000-2010) there was a website called Tech Central Station a.k.a. TCS Daily, which “was an online magazine with commentary and analysis on current news from a free-market perspective…

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a month ago · Stephen Bainbridge

In this post, I take up the second, University Trustees Should Say No to Divestment, which—as the title foreshadows—“argues that universities should commit their endowments to a non-divestment policy, investing solely for risk and return.”

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I was a regular contributor between 2004 and 2007. With the website now dead, my posts disappeared and now can only be found on the Wayback Machine.

Several of my TCS Daily articles dealt with divestment, starting with Those Divesting Presbyterians in 2004. Despite that head start, however, I never got around to writing a law review article on the law and policy of divestment. And now I don’t have to.

Max Schanzenbach (Northwestern) and Robert Sitkoff (Harvard) have posted two new articles on divestment. Divesting University Endowments deals with the legal issues surrounding “endowment divestment for nonfinancial reasons.” University Trustees Should Say No to Divestment, as the title foreshadows, “argues that universities should commit their endowments to a non-divestment policy, investing solely for risk and return.”

In this article, I tackle the first paper. The next will address the policy arguments in the second paper.

Overall, as you’ll see, I feel quite vindicated.

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Strine was always a frequent contributor to law reviews, but since he retired from the Court he has been even more productive. Many of his articles have dealt with important questions of corporate social responsibility, legal ethics, and corporate governance.

Leo has a new paper, Practicing Law In A Lawless Time, which is well worth reading. It’s particularly worth reading as a follow-up and thus in conjunction with his earlier paper, The Call of Conscience and the Current Moment: A Reflection Honoring William T. Allen and John L. Weinberg. The latter addressed the social role and responsibilities of corporate management in the present moment. The latter addresses what corporate lawyers should be advising their client to do in the present moment.

Here’s Call of Conscience’s abstract:

The lecture surfaces common themes in the extensive writings of Chancellor and Professor Allen on corporate governance, and in the singular lengthy writing of John Weinberg, his senior thesis focusing on the critical role of boards of directors in governing public companies. Both considered it critical to educate corporate leaders about their duties, and the relationship those duties had to not just the best interests of the corporation and its stockholders, but to society itself.

Both also stressed the need for high integrity corporate leadership, characterized by a commitment to speak with candor and act with independence when that was necessary to do what was right. Both believed deeply in the nation’s commitment to the rule of law and freedom and believed that principled corporate leadership was vital to ensuring that our society as a whole benefited from a market economy.

The lecture addresses these themes and finishes by relating them to the current moment during which fundamental principles Weinberg and Allen accepted as essential to our society are under serious challenge, and the ethical and moral questions this moment poses to leaders of not just business corporations, but of all key institutions in our society.

Here’s Practicing Law’s abstract:

The role of corporate lawyers has long been a subject of public scrutiny in the wake of market failures and scandals that involved corporate conduct at odds with expected ethical and legal norms. But this moment is different in a disturbing and unprecedented way for Americans. In prior moments, it could generally be assumed that those charged with enforcing the law were attempting to do so in a good-faith, even-handed, and non-discriminatory manner. In this moment, however, that long-standing assumption cannot be rationally embraced. Sadly, in this moment, the main threat to the rule of law comes from the government itself. This article addresses the essential role of corporate lawyers in this moment and provides practical arguments, rooted in long-standing ethical principles, common sense and business law, why encouraging clients to eschew the temptation to do the wrong thing for momentary advantage is not just the right thing for our nation, but the right thing for the clients in the long-term. The article concludes optimistically by noting that corporate lawyers regularly use their expertise and ethical muscle to bring out the better angels of their clients' natures and calling on the corporate bar to play a positive role in securing our nation's most essential values at this time when the rule of law is under serious threat.

So what should we make of it?

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As I did so, I got to wondering whether the decision survives the changes to DGCL § 144 effected by SB 21.

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For the better part of a year, critics of Senate Bill 21 have warned that Delaware had crossed a constitutional Rubicon. By recalibrating the standard of review applicable to controlling-stockholder transactions, the General Assembly, they claimed, had invaded the sacred province of the Court of Chancery. Entire fairness review, we were told, is part of the “irreducible minimum” of equity jurisdiction protected by the Delaware Constitution. To tamper with it is to tamper with the constitutional order itself.

That argument is now dead.

The Delaware Supreme Court today issued its long-awaited Rutledge opinion and upheld the constitutionality of Senate Bill 21. In doing so, reaffirmed the corporate law is not a body of equitable principles but rather is statutory at its core and that the General Assembly retains broad authority to shape it.

The opinion, authored by Justice Traynor, is careful, well-reasoned, and—I am pleased to report—closely tracks (but fails to cite) the analysis I offered in my June 2025 post on this blog, where I predicted the court would reach exactly this result.

See also:

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As they acknowledge, the SEC has not yet moved to significantly restrict the use of the rule by shareholders, but they are so freaked by the mere possibility that they joined hands to argue against any changes. The problem is that their arguments are full of holes. They range from errors to being outright misleading.

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… fears that AI will upend the software industry sent stocks tumbling earlier this month. The selloff accelerated Monday after a viral blog post about the threat posed by AI.

Bankers and investors now expect the few mega-offerings to dominate the year. Most private tech companies—many that have spent years biding their time—will be forced to keep waiting it out.

The other was an article about that negative AI report that went viral, Viral Doomsday Report Lays Bare Wall Street’s Deep Anxiety About AI Future:

A viral report by Citrini Research tapped into a new strain of fears about AI, painting a dark portrait of a future in which technological change inspires a race to the bottom in white-collar knowledge work. Concerns of hyperscalers overspending are out. Worries of software-industry disruption don’t go far enough. The “global intelligence crisis” is about to hit.

The new, broader question: What if AI is so bullish for the economy that it is actually bearish? …

Many of Monday’s moves roughly aligned with the situation outlined by Citrini, in which fast-advancing AI tools allow spending cuts across industries, sparking mass white-collar unemployment and in turn leading to financial contagion. …

Fears of AI disruption have rolled across software, private credit, insurance and wealth-management firms in recent weeks.

All of which called to mind a very interesting paper I recently read, The Social Risks of Generative AI by Marco Ceccarelli and Rex Wang Renjie. Their paper reveals something most AI hype misses entirely; namely that investors are already pricing in the downside risks of artificial intelligence and, moreover, that they’re doing it in a surprisingly sophisticated way.

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The Dig

Can private litigation hold auditors to account?

“A farmer went out to sow his seed. 4 As he was scattering the seed, some fell along the path, and the birds came and ate it up. 5 Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. 6 But when the sun came up, the plants were scorched, and they withered because they had no root…

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2 months ago · 9 likes · Francine McKenna

Most of the post is concerned with concerns that SEC CHairman Paul Atkins will basically gut the PCAOB, which is worth reading by itself, but then she turns to discussing the growth of private litigation against auditors.

All of which called to mind an old case that I teach in Advanced Corporation Law, Cenco Inc. v. Seidman & Seidman.1 One of the main reasons I first started teaching this case back in the late 1980s was that it was authored by Judge Richard Posner. When I was in law school, most of my professors and many of my then-newly formed Federalist Society friends seemed to worship at the altar of the Posner law and economics cult. When I went into law teaching, as someone who thought of himself as a law and economics guy, most of my fellow L&E academics seemed to also be card carrying members of the Posner fan club.

I never got it. Posner struck me as a provocateur (selling babies, really?), a moral relativist and secularist, and, frankly, not a very good judge. Cenco is a classic example of the sort of nonsense Posner was capable of spouting.

Of course, my current students don’t know much about Posner and what little they do know comes from his late career opinions when he had defected to the left. But I still like teaching it and smacking Posner around a bit.

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These are news items about corporate law and governance that caught my eye this week:

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