Marcel Kahan & Edward B. Rock

89 Texas L. Rev. 1293

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After the recent bailouts, the U.S. government has become the controlling shareholder of some major U.S. corporations.  Corporate law provides rules to protect non-controlling shareholders from controlling shareholders who have goals other than maximizing firm value.  In this Article, the authors address how corporate law applies when the government is the controlling shareholder, including the extent to which federal “public law” structures substitute displaced state “private law” norms.

The authors first review recent events during which the U.S. Treasury invested in private firms.  Next, the authors examine the challenges posed to the existing structure of legal regulation of controlling shareholders when the U.S. Treasury is the controlling shareholder.  This requires an examination of sovereign immunity and its exceptions, as developed in the FTCA, the Tucker Act, and the APA.  Then, the authors address ex ante governance structures that have been used to control challenges.

The authors argue that Delaware restrictions on controlling shareholders are displaced by federal law, but not sufficiently replaced, and that the existing accountability structures do not provide sufficient protection to minority shareholders.  So, the authors look at ways in which government ownership has been structured in order to minimize political interference at the expense of non-controlling shareholders.  Examples include nonvoting stock, independent directors, dedicated trusts, and separate managements companies.  The authors find that ex ante legal structures and ex post judicial review do not hold much promise for controlling political interference.  Instead, the authors write that what remains is a choice between developing new structures of accountability and bringing this anomalous era of government control to a swift conclusion.  The authors notes that as the U.S. Treasury gets closer to taking some of these companies public again, understanding the law related to the government as controlling shareholder is important in deciding whether to buy shares in an IPO.  They conclude that it is clear we do not currently have adequate legal tools to address the problems posed when the government is the controlling shareholder.