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Brooklyn Journal of Corporate, Financial & Commercial Law THE CORPORATE LAW DILEMMA AND THE ENLIGHTENED SOVEREIGN CONTROL PARADIGM: IN SEARCH OF A NEW LEGAL FRAMEWORK

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Brooklyn Journal of Corporate, Financial & Commercial Law THE CORPORATE LAW DILEMMA AND THE ENLIGHTENED SOVEREIGN CONTROL PARADIGM: IN SEARCH OF A NEW LEGAL FRAMEWORK
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  Brooklyn Journal of Corporate, Financial & Commercial Law   V+! 125I! 2 A%c! 16-1-2018 THE CORPOTE LAW DILEMMA ANDTHE ENLIGHTENED SOVEREIGNCONTROL PADIGM: IN SEARCH OF A NEW LEGAL FMEWORK   Vincenzo Bavoso F++ $% a* a%%+*a +' a:$://b++'3*+'.b++'a.!/bc"cPa +" $!B%*! O#a*%4a%+* La C++* ,C+!c%a La C++*    , a* $!La a* Ec+*+%c C++* % A%c! % b+#$ + 3+ "+ "!! a* +!* acc! b3 $! La J+*a a B++'3*W+'. I $a b!!* acc!! "+ %*c%+* %* B++'3* J+*a +" C++a!, F%*a*c%a & C+!c%a La b3 a* a$+%4! !%+ +" B++'3*W+'. R!c+!*! C%a%+*  V%*c!*4+ Ba++, THE CORPOTE LAW DILEMMA AND THE ENLIGHTENED SOVEREIGN CONTROL PADIGM: IN SEARCH OF A NEW LEGAL FMEWORK   , 12 B++'.J.C+.F%*.&C+.L.(2017). Aa%ab! a:$://b++'3*+'.b++'a.!/bc"c/+12/%2/1  THECORPORATELAWDILEMMAANDTHEENLIGHTENEDSOVEREIGNCONTROLPARADIGM:INSEARCHOFANEWLEGALFRAMEWORK  Vincenzo Bavoso * ABSTRACT This Article is centered on the proposal of a new model of corporatedecision-making: the enlightened sovereign control paradigm. In revisiting the long-standing academic debate on the corporate objective, typicallyenshrined in the dichotomy between shareholder value and stakeholder theory, a critique of these existing models is put forward. In particular, it questions the ability of the existing theories to take account of the complexand multidimensional risks that are created by the company which affect different constituencies both inside and outside the company. While the global financial crisis of 2008 reignited the urgency to further define anappropriate legal framework for decision-making in large public firms, therehave not been many substantial changes within the legal and business circlesregarding the way this problem is treated.The Article is grounded in the recognition of the historical quest to find a legitimization of corporate power,and attempts tocreate asystem of publicaccountability that could justify managerial decision-making. These taskshave become ever more central in the wake of the many scandals that exploded from the early 2000s to the present day, showing that manyconstituencies can suffer from the externalities of corporate activities.While much has been written on this topic, more recent events illustratethe need to find an alternative approach to the question of the corporateobjective. This is because of its centrality in defining legal strategies tocontrol managerial behavior, but also because of the shortcomings of  existing paradigms. The asserted urgency to find a new theoretical model to governmanagerial actionsandcoordinatethemwiththeinterestsof different constituencies leads to the proposition of a new theory. The enlightened  sovereign control paradigm flows from a pluralistic theoretical foundationand provides a novel, legal, and institutional framework for the balancing of  different interests that are affected by the behavior of large publiccorporations. * Lecturer in Commercial Law, School of Law, University of Manchester. I thank Dr.Michael Galanis and Professor Hazel Carty for very insightful comments on a previous draftof this article. Errors remain my own.  242 B ROOK  . J. C ORP .F IN . & C OM . L. [Vol. 12 INTRODUCTION “. . . the liberty of a democracy is not safe if the peopletolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, inits essence, is Fascism – ownership of Government by anindividual, by a group, or by any other controlling private power. . . . Among us today a concentration of private power without equal in history is growing.” F.D. Roosevelt 1 “The rise of the modern corporation has brought aconcentration of economic power which can compete onequal terms with the modern state.” A.A. Berle 2 This Article revisits the long-standing academic debate on the corporateobjective,typicallyenshrinedinthequestionofinwhoseinterestshouldlarge publiccorporationsberun.Thishasbeentraditionallyaddressedbytwomaintheoretical paradigms: shareholder value and stakeholder theory. The globalfinancial crisis of 2008 (GFC) and the events thereafter have reignited theurgency to firstly, further define this theoretical debate, or expand it beyondthe above dichotomy, and secondly, find an appropriate legal framework toaddress the fundamental question of corporate decision-making. Notwithstanding the necessity to recalibrate problems related to corporatedecision-making, neither of the above questions has resulted in substantialchanges in the way the problem of the corporate objective is theorized andtreated in business and legal circles. 3 Post-crisis regulation has failed to address the fundamental issue of thecorporate goal and it has also failed to reassess—at the higher level—the purpose (and scope) of regulatory intervention. Both questions are verycentral to this debate because they involve,  inter alia , defining the rationalefor public intervention in corporate affairs and more generally, the degree towhich private corporate interests should be subservient to social priorities. 4 1 . Franklin D. Roosevelt, 32 nd President of the United States, Message to Congress on CurbingMonopolies (Apr. 29, 1938) (transcript available at   http://www.presidency.ucsb.edu/ws/index.php? pid=15637#axzz1Ze7GRv3W) [hereinafter Roosevelt’s Message to Congress]. 2 . A DOLF  A. B ERLE  & G ARDINER   C. M EANS , T HE  M ODERN  C ORPORATION AND  P RIVATE P ROPERTY  313 (rev. ed. 1967). 3 . Despite interesting and thought-provoking proposals:  see generally  Andrew Keay,  Ascertaining the Corporate Objective: An Entity Maximisation and Sustainability Model  , 71 M OD .L. R  EV . 663 (2008) [hereinafter Keay,  Ascertaining the Corporate Objective ];  see also  Dr. DanielAttenborough,  Giving Purpose to the Corporate Purpose Debate: An Equitable Maximisation and Viability Principle , 32 L EGAL  S TUD . 4 (2012). 4 . See  Justin O’Brien,  Back to the Future: James M. Landis, Regulatory Purposes and the Rationale for Intervention in Capital Markets ,  in  I  NTEGRITY  R  ISK AND  A CCOUNTABILITY IN  2018]  The Corporate Law Dilemma  243The question of public interest came to the fore in 2014 in the context of the attempted hostile takeover of UK pharmaceutical giant AstraZeneca byits U.S. counterpart Pfizer. Pfizer’s bid sparked heated political debates because of the consequences that the takeover would have had on researchand development in the UK pharmaceutical sector. 5 The widespread perception was that Pfizer’s strategy was aimed at breaking up AstraZenecaand eventually selling off its assets. 6 While a high bid could have met targetshareholders’ favor, other more pressing socio-political concerns reflectedthe long-term impact that the transaction could have had on the UnitedKingdom’s science and research environment, with losses of jobs andinfrastructures following the acquisition of the largest British drug-maker. 7 This in particular led labor representatives to invoke a public interest test onsensitive takeovers in order to block transactions that have a negative impacton the national economy. 8 Eventually, Pfizer’s offer was rejected by AstraZeneca’s board, despite pressure from some of its shareholders to reconsider the bid. 9 This situationexemplifies the aforementioned friction between the private interest of shareholders, concerned with reaping the benefit of their investment (mostlyin the short-term), and the broader public interest, reflected in this case byissuesofscienceandresearchdevelopment.It isinthecontextofthesehighlytopical junctures that this Article contributes a new approach to the problem C APITAL  M ARKETS  – R  EGULATING  C ULTURE  41, 59–60 (Justin O’Brien & George Gilligan, eds.,2013). 5 . AstraZeneca was at that time considered the largest pharmaceutical company in the UnitedKingdom. It was argued at the time of the hostile bid that research and development in new pharmacological treatments and products in the United Kingdom was effectively, to a substantialdegree, reliant on AstraZeneca and its strategic priorities to direct funding toward research.Concerns about the taking over of this particular company were thus not so much driven by the factthat the bidder was an overseas firm, but rather by the reputation that Pfizer had built as a “short-term raider” of competing businesses. The proposed takeover, it was felt, would have thereforecompromised pharmaceutical research in the United Kingdom as a whole.  See  Andrew Ward &David Crow,  Pfizer and AstraZeneca: One Year After Deal that Never Was , F IN . T IMES  (May 26,2015), https://www.ft.com/content/e8320ccc-0327-11e5-8333-00144feabdc0. 6 . See  Martin Wolf,  AstraZeneca Is More Than Investors’ Call  , F IN . T IMES  (May 8, 2014),http://www.ft.com/cms/s/0/6fe31054-d691-11e3-b251-00144feabdc0.html#axzz33PqNE3d6. 7 . See  Julia Kollewe,  Labour Threatens to Block AstaZeneca Takeover Bid If It Wins 2015 Election , T HE  G UARDIAN  (May 16, 2014), http://www.theguardian.com/politics/2014/may/16/la bour-threatens-to-block-astrazeneca-deal-if-it-wins-election. 8 . Id. 9 . See  Rupert Neate,  AstraZeneca Tells Shareholders to Stop Pressuring It to Reconsider  Pfizer  , T HE  G UARDIAN  (May 20, 2014), http://www.theguardian.com/business/2014/may/20/astrazeneca-chairman-leif-johansson-shareholders-pressure-pfizer. It needs to be noted though, thatPfizer never reached the stage of making a firmhostile bid for AstraZeneca, mainlyfor two reasons:namely the public bashing that this was already causing, and secondly, the rules introduced by theTakeover Code following the Cadburyacquisition byKraft in 2010, which limited the time betweenthe bidder’s initialannouncement and its firmoffer to28 days.  See  AdamBogdanor,  The RegulatorsWere Right to Force Pfizer’s Hand  , F IN . T IMES  (May 28, 2014), https://www.ft.com/content/a476f df0-e5bc-11e3-a7f5-00144feabdc0.  244 B ROOK  . J. C ORP .F IN . & C OM . L. [Vol. 12of balancing diverging interests in the decision-making process of large public corporations.InPartI,thisArticledefinestheimportanceandthedifficultyofdirectingdecision-making processes in large public corporations. This is followed, inPart II, by a critique of the two existing models of corporate management(shareholder value and stakeholder theory), which highlights each theory’sassumptionsandtheimpactthat eachhasontherunningoflargepublicfirms.While much has been written on the topic, the unfolding of events within theGFC shows that the need to find an alternative approach to the issue of thecorporate objective remains, mainly because of its centrality in defining legalstrategies to control and direct managerial behavior, but also because of theshortcomings of the above models.The asserted urgency to find a new theoretical model to governmanagerialactionsandalignsuchactionswiththeinterestsofabroaderrangeof constituencies leads to the proposition of a new framework. In Part III, theenlightened sovereign control (ESC) paradigm is put forward as analternative model to shareholder value and stakeholder theory. In proposinga pluralistic theoretical foundation, the ESC provides the background for more specific measures to regulate managerial behavior and channeldecision-making in boards of directors. I. DEFININGTHEPROBLEM:THEIMPORTANCEOFDECISION-MAKINGINLARGEPUBLICCORPORATIONS The ongoing economic crisis, sparked in 2008, has re-evoked memoriesof the Great Depression and, more surprisingly, of the regulatory and policyconcernsthat emerged at thattime.Thequotesat the beginningofthis Articlereflect striking similarities with some of the current issues faced within bothacademic and political circles. While President Roosevelt pointed in moregeneraltermstotheconcentrationofprivatepowerasathreattothefunctionsof a democratic state, Adolf Berle had framed the problem by identifying public corporations as the vehicle that elicits the concentration of private power, which could supersede the democratic state and escape regulation. 10 This section provides a background to this Article’s main theme as itexplains why it is important to establish sound mechanisms of decision-making in large public corporations.Large public corporations 11 have reached a new zenith. In the age of globalization, their position within society has become increasingly central 10 . See  Roosevelt’s Message to Congress,  supra  note 1. 11 . Large public firms are referred to in this Article as listed corporate entities that, because of their size and activities, create externalities on a varied range of constituencies. Examples of thiscategory are represented by financial institutions, multinational corporations, or companiesinvolved in the extraction of natural resources. This categorization will be discussed in more detailin the second part of this Article. For an explanation of what is meant by “large companies,”  see J.E.P ARKINSON , C ORPORATE  P OWER AND  R  ESPONSIBILITY  4 (2002).
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