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STIMULATING LONG-TERM SHAREHOLDING

Emeka Duruigbo

ABSTRACT

This Article answers, in the affirmative, two core research questions:do we need long-term shareholders and can we find them? The economyneeds long-term shareholders to provide prudent and profitable patientcapital, generate an antidote to corporate short-termism, and spearheadmanagerial accountability. Finding these shareholders requires a struc-

ture that provides the right environment and incentives for such invest-ment. This Article presents a novel application of the trust fund theorythe dominant philosophical paradigm of American corporate finance inthe nineteenth centuryas a vehicle for stimulating long-term sharehold-ing. The central features of the reformulated trust fund theory include thecreation of relatively illiquid trust securities, a permanent fund financedby the sale of the securities, and long-term shareholders who, in exchangefor less liquidity, receive an enhanced voice in corporate governance.Apart from addressing the need for long-term shareholding, the revisedtrust fund theory will also serve the additional functions of providingcreditor protection and assuring regulatory compliance.

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................. 1734

I. HISTORY OF THE CORPORATE TRUST FUND THEORY......................................... 1740

II. REVIVED TRUST FUND THEORY:NATURE AND STRUCTURE.............................. 1746

A. Express Creation......................................................................................... 1747

B. Permanent Fund........................................................................................ 1748

C. Class T Common Shares............................................................................ 1749

Associate Professor of Law, Thurgood Marshall School of Law, Texas Southern Universi-

ty. I presented aspects of this Article at the John Mercer Langston Workshop at SouthernMethodist University in June 2010 and the Law & Society Association Annual Meeting in SanFrancisco in June 2011 and received many helpful comments for which I am grateful. Specialthanks to Mitch Crusto, Lynne Dallas, Erik Gerding, and Jeff Schwartz for reading and com-menting on earlier versions. I deeply appreciate the invaluable research and editorial assistanceof Susan Akinyemi, Shamia Cottrell, Janelle Marshall, and Samuel Sarfo.


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D. Illiquidity and Control............................................................................... 1749

III. ARGUMENTS IN FAVOR OF THE REVIVED TRUST FUND PROPOSAL.................... 1752

A. Patient Capital........................................................................................... 1752

B. Exit, Voice, and Permanent Ownership............................................... 1758

C. Increased Managerial and Board Accountability................................... 1765

D. Long-Term Equity Security....................................................................... 1771

E. Antidote to Short-Termism....................................................................... 1773

F. Long-Term Shareholder Primacy............................................................. 1777

G. Cost Internalization and Creditor Protection......................................... 1779

IV. ARGUMENTS AGAINST THE REVIVED TRUST FUND PROPOSAL.......................... 1780

A. Impairment of Interests and Disparate Treatment of Existing

Shareholders................................................................................................ 1780

B. Heightened Vulnerability of Class T Shareholders................................. 1782

C. Difficulty Raising Funds............................................................................ 1783

D. Managements Opposition........................................................................ 1784

E. Superfluity................................................................................................... 1787

F. Unreasonable Restraint on Alienation.................................................... 1791

G. Shareholder Empowerment and Agency Costs....................................... 1791

H. Trigger Fiduciary Duties........................................................................... 1797

I. Board Cohesion and Effectiveness............................................................ 1798

J. Class T Short-Termism.............................................................................. 1800

CONCLUSION................................................................................................................... 1801

INTRODUCTION

Long-term shareholding is an essential, but increasingly scarce,commodity in a society currently consumed with a short-term orienta-tion and an attention span that is mainly amenable to quick fixes.1Theeconomy needs long-term shareholders to provide prudent and profita-ble patient capital, generate an antidote to corporate short-termism, andspearhead managerial accountability.2 Finding shareholders who arewilling to commit to a company for considerable periods of time and

1 MICHAEL T.JACOBS,SHORT TERM AMERICA:THE CAUSES AND CURES OF OUR BUSINESSMYOPIA (1991); Roberta S. Karmel, Should a Duty to the Corporation Be Imposed on Institu-tional Shareholders?, 60 BUS.LAW. 1, 20 (2004) (urging policy-makers to consider adoption ofmechanisms to encourage long-term holding of securities by institutional investors, particularlypension funds and endowment funds that theoretically should be focused on the long term);Usha Rodrigues, Corporate Governance in an Age of Separation of Ownership from Ownership ,95 MINN.L.REV. 1822, 1826 (2011) (In addition, one may question whether long-term inves-tors exist at all todayif they ever did.).

2 SeeJonathan Macey, Uncle Sam and the Hostile Takeover, WALL ST.J., Mar. 21, 2011, atA17 ([T]he overall economy performs better when companies perform better.).


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2012] S T I M U L A T I N G L O N G- T E R M S H A R E H O L D I N G 1735

employ a long horizon approach to their investment, however, is a diffi-cult undertaking. It requires a structure that provides the right envi-ronment and incentives for such investment. A revised version of the

trust fund theory would provide such a structure.3 Accordingly, thisArticle presents a novel application of the trust fund theory and hypoth-esizes that its revival will stimulate long-term shareholding, facilitateeffective governance, and ensure business success based on a number ofreasons developed below.4

The trust fund theory was the dominant philosophical paradigm inAmerican corporate finance in the nineteenth century.5 Through thetrust fund theory, the courts beginning in the 1820s postulated thatcapital contributions by shareholders to a corporation constituted atrust fund for the benefit of the corporations creditors. 6Further exten-sion of the doctrine established that shareholders were also personallyliable for the shortfall of portions of the stock price that remained un-paid,7or the difference between the stocks par value and considerationprovided for watered stock.8 Due to a number of problems, rangingfrom the conceptual to the practical, the theory received the severe dis-

3See infraParts III.4See infraPart III.5 SeeJames R. Ellis & Charles L. Sayre, Trust-Fund Doctrine Revisited: Part I, 24WASH.L.

REV.&ST.B.J.44,44(1949) (stating that the trust fund theory was once termed the most im-portant doctrine in the law of corporations); Daniel R. Kahan,Shareholder Liability for Corpo-rate Torts: A Historical Perspective, 97 GEO. L.J. 1085, 109697 (2009) (stating that the trustfund theory was the dominant philosophical thinking in American law in the nineteenth centu-ry).

6John C. Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on theJudicial Role, 89 COLUM.L.REV. 1618, 1638 (1989) ([T]he trust fund theory essentially heldthat the capital contributed by shareholders to a corporation in return for their shares consti-tuted a trust fund for the benefit of creditors.).

7Sawyer v. Hoag, 84 U.S. (17 Wall.) 610 (1873) (establishing that the trust fund doctrineapplied to unpaid stock subscriptions); Norwood P. Beveridge, Jr., Does A Corporations Boardof Directors Owe a Fiduciary Duty to Its Creditors?, 25 ST.MARYS L.J.589, 608 (1994) (If paid-in capital stock is a trust fund, it takes but a short step to hold that an unpaid stock subscriptionagreement is property of a corporation which is held in trust for creditors . . . . and severalcourts in the 1800s took that step.); Sam Denny & Edward S. Howell, Some Problems Raised byIssuing Stock for Overvalued Property and Services in Texas, 40 TEX. L. REV. 376, 379 (1962);James R. Ellis & Charles L. Sayre, Trust-Fund Doctrine Revisited: Part II, 24WASH.L.REV.&ST.B.J.134,134(1949).

8 FRANKLIN A.GEVURTZ,CORPORATION LAW130 (2d ed. 2010) (stating that the trust fundtheory was developed early in the history of American corporate law as a basis for assigningliability to shareholders who received bonus, discount, or watered stock). While the term wa-tered stock is used generically to refer to watered stock, bonus shares, and discount shares,they are three different concepts. SeeMELVIN ARON EISENBERG, CORPORATIONS AND OTHERBUSINESS ORGANIZATIONS: CASES AND MATERIALS 1260 (9th ed. 2005) (showing that bonusshares refers to shares issued free of charge, possibly as a bonus for purchasing some other classof security; discount shares are shares issued for an amount below the par value; watered sharesare issued for property less than the par value); ROBERT W. HAMILTON ET AL., CASES ANDMATERIALS ON CORPORATIONS INCLUDING PARTNERSHIPS AND LIMITED LIABILITY COMPANIES282 (11th ed. 2010).


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approbation of critics and fell into desuetude. The reformulated trustfund theory adopts and adapts the original theory by accepting its trust-premise and underlying creditor-protection justification while taking

into account valid criticisms of the theory.9Under this revived theory, the paid-in capital of some shareholders

would constitute an expressly created trust fund for the benefit of credi-tors. Companies can create a separate class of common shares (Class T)to fund the trust.10Holders of these securities will purchase the shareson the understanding that they will hold them for extended time peri-ods, with ten-year restrictions on sale or transfer. Because of the limitedliquidity of their holdings, the firm can readily count on the loyalty ofthese long-term shareholders.11This sense of loyalty and the attendantinvestment risk arising from the long, relatively illiquid holding, providejustification for affording these shareholders enhanced participation inthe governance of the corporation, including allocating to them a num-ber of seats on the board of directors, facilitating their nomination ofcandidates to fill those board positions, and allowing them to vote onthe corporations long-term strategy.12

In this reconstructed form, the trust fund theory can play a role inaddressing several contemporary corporate-law problems and assuringbusiness success in several respects. For instance, the theory may beuseful in serving its original creditor-protection function. Creditors who

9 SeeJohn W. Cioffi, Fiduciaries, Federalization, and Finance Capitalism: Berles Ambigu-ous Legacy and the Collapse of Countervailing Power, 34 SEATTLE U.L.REV. 1081, 1083 (2011)(Future generations are free to refashion and use theories and analytical frameworks in new

ways to address new problems, at least when their content and implications are not misstat-ed.).10 Companies may also enter into similar arrangements with existing shareholders who

purchased their stock from the external capital market and who accept the same conditions asClass T holders. Similarly, companies may allow current shareholders to convert their regularcommon stock into Class T shares. In these cases, there is no trust fund and the creditor-protection angle will be missing, although other incidents and benefits of the proposed ar-rangement will be preserved. SeeRebecca Wayland, The Case of Cummins Engine: IncreasingPrivate Ownership in a Publicly Traded Company, HARV.BUS.REV., Sept.-Oct. 1992, at 74, 75(illustrating with the case of a company some of whose major shareholders agreed not to selltheir shares for six years in order to assist management in building long-term value).

11 Patrick Rey & Jean Tirole, Loyalty and Investment in Cooperatives 4 (IDEI, WorkingPaper No. 123, 2000), available athttp://idei.fr/doc/by/rey/loyalty.pdf ([E]rect[ing] limitedbarriers to exit [can] create an appropriate amount of loyalty . . . .). The shareholders lack ofloyalty or commitment to the corporation in which she holds shares is legendary. See, e.g., KentGreenfield, Reclaiming Corporate Law in a New Gilded Age, 2 HARV. L. & POLY REV. 1, 9(2008); Homer Kripke, The SEC, Corporate Governance, and the Real Issues, 36 BUS.LAW. 173,177 (1981) (stating that the average shareholder sees himself as an investor who is at liberty tomove into and out of the corporation without loyalty).

12 SeeMichael E. Porter, Capital Disadvantage: Americas Failing Capital Investment Sys-tem,HARV.BUS.REV., Sept.-Oct. 1992, at 65, 81 (recommending that managers seek a smallernumber of long-term or nearly permanent owners and give them a voice in corporate govern-ance as a remedy to transient ownership which constitutes a major weakness in the Americancorporate system).
http://idei.fr/doc/by/rey/loyalty.pdfhttp://idei.fr/doc/by/rey/loyalty.pdf


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feel more comfortable dealing with firms with a segregated pool of cashor who would otherwise require personal guarantees before transactingwith firms may find the option palatable. This protection is even more

critical for involuntary creditors whose claims result from theultrahazardous activities of the corporation. A trust fund approach mayalso be utilized by companies in certain industrial or commercial activi-ties to meet regulatory requirements.13

A revised trust fund theory could offer a framework for effectiveshareholder monitoring of management through emphasis on voiceinstead of unlimited exit, proceeding on the understanding that voice isnot likely to be amplified where exit is not substantially constrained.14Inaddition, it provides a pathway for creating the elusive class of perma-nent or quasipermanent shareholders that has been viewed as key toensuring corporate accountability, paralleling the practice that prevailedfor a long time in Germany and Japan. Class T shareholders will im-prove board accountability by injecting into the boards nominees whoshare their view that the primary responsibility of the board is to buildlong-term shareholder value.15 The refocused board will accordinglyprioritize managerial devotion to this goal. Class T shareholders willalso improve management accountability by directly monitoring man-agers.16 Further, the permanent owner notion can contribute to en-trenching a long-term-shareholderprimacy norm. This norm canpromote a long-horizon approach to investment and management,thereby presenting at least a partial panacea to shareholder short-termism and managerial myopia that has caused consternation in cor-porations and the investment community.17 The trust securities also

13An example is the recently debated imposition of a $10 billion cap for economic lossesresulting from offshore drilling in the aftermath of BPs Deepwater Horizontragedy. Seeinfranote299 and accompanying text.

14 Unless otherwise noted, this Article uses the terms management or managers asshorthand ways of referring collectively to the corporations board of directors and seniorofficers. SeeDavid Millon, Theories of the Corporation, 1990 DUKEL.J. 201, 201 n.1.

15 SeeNYSE, REPORT OF THE NEW YORK STOCK EXCHANGE COMMISSION ON CORPORATEGOVERNANCE 2 (2010) [hereinafter NYSE REPORT], available at http://www.nyse.com/pdfs/CCGReport.pdf (The boards fundamental objective should be to build long-term sustainablegrowth in shareholder value for the corporation, and the board is accountable to shareholdersfor its performance in achieving this objective.).

16 Id.([T]he Commission believes that shareholders have the right and responsibility tohold a board accountable for its performance in achieving long-term sustainable growth inshareholder value.).

17 This objective could be strengthened by a complementary arrangement on the manageri-al side in the form of an executive compensation structure that involves further restricted stocksand stock options with holding periods of about ten years. SeeSanjai Bhagat & Roberta Roma-no, Reforming Executive Compensation: Focusing and Committing to the Long-Term, 26 YALE J.ON REG. 359 (2009) (proposing the adoption of restricted stock and stock option plans forcertain companies to discourage a short-term focus and encourage a long-term perspective bymanagers); Janice Kay McClendon, Bringing the Bulls to Bear: Regulating Executive Compensa-tion to Realign Management and Shareholders Interests and Promote Corporate Long-Term


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represent a market-based, as opposed to a government-mandated, ap-proach to creating equity securities that are targeted at long-term inves-tors who are not interested in playing the stock market roulette, but

want to hold stock as a means for providing income for their childrenscollege education and funding their own retirement.18

This proposal advances important corporate governance19 objec-tives, including enhanced shareholder voice, better board composition,and improved corporate performance.20While sharing the shareholder-empowering paradigm and premise of the recently promulgated andnow invalidated21 proxy access regulations by the Securities and Ex-change Commission (SEC), it differs in the sense that it favors privateordering and approaches the holding requirements differently.22At the

Productivity, 39 WAKE FOREST L.REV.971, 99495 (2004) (advocating longer holding periods

for stocks held by corporate executives).18 SeeGerald F. Davis, The Twilight of the Berle and Means Corporation, 34 SEATTLE U.L.

REV. 1121, 1138 (2011) (Not only is an economy organized around public corporations anincreasingly risky place for workers, it is not a safe bet even for shareholders.); Leo E. Strine,Jr., Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts ona Responsible Path Forward, 63 BUS. LAW. 1079, 1082 (2008) (Most individual investors areinvested for the long term to accomplish two key objectives, having the funds necessary to payfor their childrens college education and to provide for themselves in retirement. These inves-tors have little interest in short-term gimmicks . . . .).

19Amir N. Licht, Corporate Governance, in ENCYCLOPEDIA OF FINANCIAL GLOBALIZATION1, 1 (Gerard Caprio ed., 2011) (Corporate governance is the institutional framework thatregulates the division and exercise of power in the corporation.).

20 Amar Bhide, The Hidden Costs of Stock Market Liquidity, 34 J. FIN. ECON. 31 (1993)(stating that reduced liquidity improves corporate governance because it would engendershareholder monitoring); Jill E. Fisch, The Destructive Ambiguity of Federal Proxy Access 17

(Univ. of Penn. Inst. for Law & Econ., Research Paper No. 11-05, 2011) (identifying corporategovernance objectives to include increased shareholder voice, better board composition andimproved corporate performance), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1769061. It may be that stock market illiquidity reduces monitoring, but that isinapplicable here because the liquidity only pertains to a portion of the shares, not all of them.See Ernst Maug, Large Shareholders as Monitors: Is There a Tradeoff Between Liquidity andControl?, 53 J. FINANCE 65 (1998) (arguing that illiquidity would restrict access of potentialmonitor to a companys stock).

21 Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011).22The SEC regulations require a larger investment threshold (at least three percent of the

total voting power of the companys securities) than the present proposal envisions. They alsoimpose a requirement that the right is available only to shareholders who have held a compa-nys stock for at least three years. My proposal has no minimum holding period for eligibility toexercise any of the privileges accompanying the holding of these securities, but requires a firmand enforceable commitment to hold the stock for ten years. Unlike the SEC proposal, which ismandatory, this proposal relies on private ordering, leaving it up to corporations to adopt oramend as they see fit. See generallyFacilitating Shareholder Director Nominations, 75 Fed. Reg.56,668 (Aug. 25, 2010); Fisch, supra note20,at 5459; Bernard S. Sharfman, Why Proxy Access(SEC Rule 14a-11) is Harmful to Corporate Governance, 37 J. CORP. L. (forthcoming 2012),available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1873469 (assailing the SECsproxy access rule as wealth-reducing because it has no opt-in or opt-out provisions). For addi-tional discussions of the importance of private ordering in corporate law and generally, seeROBERTA ROMANO, THE GENUS OF AMERICAN CORPORATE LAW 8696 (1993); Lucian A.Bebchuk & Scott Hirst, Private Ordering and the Proxy Access Debate, 65 BUS.LAW. 329 (2010);


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Article concludes that the demands of modern investing and entrepre-neurship present favorable opportunities for rediscovering the trustfund theory as a tool for addressing corporate problems. Therefore, it

invites public corporations to adopt the revised version and urges publicofficials to further incentivize the adoption.

I. HISTORY OF THE CORPORATE TRUST FUND THEORY

The trust fund doctrines origins trace back to the early nineteenthcentury case of Wood v. Dummer,27in which Justice Story, while ridingcircuit, relied on public policy and presumed legislative intent to ad-vance the notion that the capital stock of a corporation constituted apledge or trust fund for creditors.28In the words of the celebrated ju-

rist:It appears to me very clear upon general principles, as well as the

legislative intention, that the capital stock of banks is to be deemed apledge or trust fund for the payment of the debts contracted by thebank. The public, as well as the legislature, have always supposed thisto be a fund appropriated for such purpose. The individual stock-holders are not liable for the debts of the bank in their private capaci-ties. The charter relieves them from personal responsibility, and sub-stitutes the capital stock in its stead . . . . To me this point appears soplain upon principles of law, as well as common sense, that I cannotbe brought into any doubt, that the charters of our banks make thecapital stock a trust fund for the payment of all debts of the corpora-tion.29

While the trust fund doctrine was enunciated in a case involving abank, its application was not limited to financial institutions but extend-ed to corporations engaged in other types of business. 30 In Sawyer v.

27 30 F. Cas. 435 (1824).28 SeeJoseph Jude Norton, Relationship of Shareholders to Corporate Creditors upon Disso-

lution: Nature and Implications of the Trust Fund Doctrine of Corporate Assets , 30 BUS.LAW.1061,1063 (1975). Capital stock refers to the assets that shareholders brought into the compa-ny, such as money paid in return for issuance of shares. SeeHenry T.C. Hu & Jay LawrenceWestbrook, The Abolition of the Corporate Duty to Creditors, 107 COLUM.L.REV. 1321, 1332(2007).

29 Wood, 30 F. Cas. at 436.30 Katharina Pistor et al., The Evolution of Corporate Law: A Cross-Country Comparison, 23

U.PA.J.INTL ECON.L. 791, 821 n.133 (2002) (stating that although the case involved a bank,the doctrine applied to corporations more generally); see also Adams & Westlake v. Deyette,31 L.R.A. 497, 65 N.W. Rep. 471, 473 (S.D. 1895) (holding in a case involving a hardware com-pany that a corporations assets are a trust fund for its creditors).


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Hoag,31 the U.S. Supreme Court gave its imprimatur to the doctrine.32The trust fund doctrine has been viewed as a peculiar creature of equi-ty, having no foundation in common law or general corporate law prin-

ciples; an extraordinary device used to achieve fair and just results.33Thus, its nature called for circumspection in its application.34

One striking feature of the trust fund idea is that it was pivotal inensuring the lock-in of capital investments, which in turn helped assurea long-term focus.35According to Professor Margaret Blair, through thedoctrine, the corporate form made it possible for investors in shares, aswell as creditors, employees, and suppliers, to enter into long-term rela-tionships with a firm with greater assurance that the pool of assetswould remain in the business to keep the business going forward. 36Formany years, the doctrine was broadly applied to both solvent corpora-tions and those facing insolvency.37Eventually, a preponderance of sup-port, in terms of opinion and practice, gravitated toward applying thetrust fund concept only to corporations grappling with insolvency ordissolution.38

The notions of par value and legal capital were central to the appli-cation of the original trust fund theory.39Companies issued stocks for apar value, the arbitrary amount below which the company could not sellthose shares to subscribing shareholders.40The sum received from thesale of the stock at that amount constituted the corporations legal capi-tal.41Although the rules were incredibly complex, the underlying prin-

31 84 U.S. 610, 620 (1873) (Though it be a doctrine of modern date, we think it now wellestablished that the capital stock of a corporation, especially its unpaid subscriptions, is a trust

fund for the benefit of the general creditors of the corporation.).32Morton J. Horwitz, Santa Clara Revisited: The Development of Corporate Theory, 88 W.VA.L.REV. 173, 207 n.163 (1985).

33 Norton, supra note28,at 1066.34 Id.35 Margaret M. Blair, Reforming Corporate Governance: What History Can Teach Us, 1

BERKELEY BUS.L.J. 1, 15 (2004).36 Id.37 Union Nat. Bank v. Douglass, 1 McCrary 86, 96 (D. Iowa 1877) (The truth is that it

makes no difference whatever whether a corporation is solvent or insolvent, so far as the doc-trine is concerned that the property is a trust fund which cannot be withdrawn or appropriatedby the stockholders until the debts are paid.); seealsoBeveridge, supra note7,at 616; Norton,supra note28,at 1064.

38 SeeNorton, supra note28,at 106566.39 See WILLIAM A.KLEIN & JOHN C.COFFEE,JR.,BUSINESS ORGANIZATION AND FINANCE,

228 (11th ed. 2010); Coffee, supranote6,at 1638 (The entire concept of par value was simply ameans of implementing this theory through a mechanical rule for measuring the size of thetrust fund.); see also Reuven S. Avi-Yonah, The Cyclical Transformations of the CorporateForm: A Historical Perspective on Corporate Social Responsibility, 30 DEL.J.CORP.L. 767, 799n.112 (2005) (stating that the advent of the no-par stock in the early twentieth century rein-forced the fall of the trust fund doctrine into desuetude).

40 HAMILTON ET AL.,supra note8,at 279.41 Harwell Wells, The Modernization of Corporation Law, 1920-1940, 11 U. PA. J. BUS. L.

573, 605 (2009). It should be noted that legal capital is the term used in the case of par value


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ciples were clear: a corporation could not sell shares for less than parand always had to retain a sum at least equal to its legal capital for thebenefit of creditors.42The firm was free to distribute the surplus, i.e.,

the amount above the legal capital, as dividends to shareholders. 43Shrewd corporate managers and resourceful lawyers were able to skirtthe par value and legal capital requirements, leading creditors to realizethat legal capital did not offer any real protection, as the funds were notsecured.44 Moreover, creditors tended to rely more on other indices,such as earnings, to measure the firms ability to repay money advancedto it.45Modern corporation statutes made par value an anachronism andshares are routinely issued for nominal or no par value. 46

The trust fund doctrine acquired an important place in Americanjurisprudence, dominating corporate finance thinking in the nineteenthcentury.47Courts and commentators eagerly embraced the concept, but

shares while stated capital is used in the case of no-par stock. SeeHamilton E. McRae III, Wa-tered StockShareholders Liability to Creditors in Arizona, 8 ARIZ.L.REV. 327, 328 (1967).

42 Wells, supra note41, at 60506.43 A corporation may assign a par value of one dollar to its shares. If it sells each share for

ten dollars, one dollar of the realized amount will be deemed capital, while nine dollars may beconsidered surplus. Shareholders may receive dividends to the extent of the surplus, even if thecorporation is not currently profitable. SeeGREGORY V.VARALLO ET AL.,FUNDAMENTALS OFCORPORATE GOVERNANCE: A GUIDE FOR DIRECTORS AND CORPORATE COUNSEL 92 (2d ed.2009).

44 Id. at 606; Hu & Westbrook, supra note 28, at 1333; see also THOMAS R. HURST &WILLIAM A. GREGORY, CASES AND MATERIALS ON CORPORATIONS 281 (2d ed. 2005) (statingthat legal capital offered mainly illusory protection as a corporation could exhaust the funds

paid in for shares in running its operations).45 KLEIN &COFFEE,supranote39,at226;BAYLESS MANNING &JAMES J.HANKS JR.,LEGALCAPITAL5057 (3d ed. 1990); James J. Hanks, Jr., Legal Capital and the Model Business Corpo-ration Act: An Essay for Bayless Manning, 74 LAW & CONTEMP. PROBS. 211, 213 (2011)(Bayless Manning first identified and revealed the vacuity of traditional legal capital stat-utes . . . .).

46 See Hu & Westbrook, supra note 28, at 1334; see also Luca Enriques & Jonathan R.Macey, Creditors Versus Capital Formation: The Case Against the European Legal Capital Rules ,86 CORNELL L. REV. 1165, 1174 n.37 (2001) (Notably, the Model Business Corporation Actdropped the legal capital concept in 1980.); Craig A. Peterson & Norman W. Hawker, DoesCorporate Law Matter? Legal Capital Restrictions on Stock Distributions, 31 AKRON L.REV. 175,183 (1997) ([T]he Revised Model Business Corporation Act (RMBCA) jettisoned the out-moded concepts of par value and stated capital set out in the MBCA in the apparent belief thatthe traditional legal capital doctrines were unduly complex, confusing and misleading. (cita-tion omitted)); Elliot Goldstein & Robert W. Hamilton, The Revised Model Business Corpora-tion Act, 38 BUS. LAW. 1019, 1021 (1983); Changes in the Model Business Corporation ActAmendments to Financial Provisions, 34 BUS.LAW. 1867, 186768 (1979) (explaining that theconcepts of stated capital and par value were deleted from the revised Model Act by the Com-mittee on Corporate Law because the concepts no longer served the original purpose of provid-ing protection to creditors and senior security holders); Current Issues on the Legality of Divi-dends from a Law and Accounting Perspective: A Task Force Report, 39 BUS. LAW. 289, 304(1984) (stating that California abandoned the concept of stated capital and par value evenbefore the Model Business Corporation Act).

47 Beveridge, supra note7,at 595; Kahan, supra note5,at 109697.


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criticisms were equally forthcoming with considerable speed.48 Only afew years after its enunciation, one commentator observed that the the-ory has been alternately applied and rejected by courts and eulogized

and condemned by text writers.49 Some major complaints about thedoctrine focused on the conceptual challenges it raised.50 In the firstinstance, critics considered the idea of a trust a misleading misno-mer,51as there was no express or constructive trust involved. 52 It wasnot only a trust that was nonexistent, there also was no fund.53One au-thor sums up these particular doctrinal impediments by noting that it isinapposite to use the term trust fund because capital claims of share-holders are not a fund (there are no assets in the capital stock account;it is a claim notation only) and it is not a trust. There is not really atrustee holding assets of the firm for the benefit of creditor beneficiar-ies.54

Commenting on Justice Storys statement that a corporations capi-tal stock constitutes a trust fund for creditors, Professor Edward Warrencalls it a venerable utterance, sonorous, and of benevolent connota-

48 15A WILLIAM MEADE FLETCHER,CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 7369 (perm. ed., rev. vol. 2000) (stating that perhaps no concept has created as much confu-sion in the corporate law as has the trust fund doctrine); Comment, The Appointment ofReceivers at the Instance of Creditors Upon the Mere Insolvency of a Corporation, 14 YALE L.J.232, 233 (1905) (The trust fund theory was established by Justice Story [and] has been greatlycriticised and quite generally repudiated.).

49 Note, The Trust Fund Theory, 9 HARV.L.REV. 481, 481 (1896); see alsoRecent Cases,CorporationsDirectors and Other OfficersTrust Fund Theory, 23 HARV. L. REV. 309, 309(1910) (This doctrine, formerly widely accepted in this country, has been rejected in many

jurisdictions and is generally adversely criticized by legal writers.); James C. Bonbright, No-ParStock: Its Economic and Legal Aspects, 38 Q.J.ECON. 440, 443 (1924) (Within recent years thetrust fund doctrine has been rejected by the best legal authority. (citation omitted)).

50 See,e.g., Note, The Trust Fund Doctrine as to the Capital Stock of Corporations , 4 VA.L.REV. 131, 13133 (1916) (explaining some of the doctrinal difficulties with compelling clarity).

51 Note,supra note49,at 482.52 SeeHospes v. Northwestern Mfg. & Car Co., 50 N.W. 1117, 1119 (Minn. 1892); Gottlieb

v. Miller, 39 N.E. 992, 994 (Ill. 1894) (The supposed trust does not fall within the definition ofeither an express trust, an implied trust, a resulting trust or a constructive trust.); G.W.Pep-per, The Trust Fund Theory of the Capital Stock of a Corporation, 41 AM.L.REG. 175, 180(1893) ([T]he distinctive attributes of a trust fund were wanting in the case of the capital stockof a corporation, whether paid or unpaid and that the use of the term was an abuse of it.); seealsoJames T. Johnson, Is the Trust Fund Theory of Capital Stock Dead?,34 ACCT.REV. 609, 609(1959) (The corporation is not a formal trustee of the contributions made by shareholders, andthe creditors are not beneficiaries.); McRae, supra note 41, at 330 (Since corporate assets arenot held in trust by the corporation, the trust fund theory, as an explanation of the basis ofliability, has been completely discredited . . . .); Norton, supranote28,at 106771.

53 GEVURTZ, supranote8,at 130 ([A] problem with the theory from a doctrinal standpointis that it is difficult to speak of a trust fund when there is no fund.); see also JAMES D.COX &THOMAS LEE HAZEN,CORPORATIONS503 (2d ed. 2003) (There is in fact no true trust fund atall, but only a legal prohibition against withdrawal of corporate assets that reduce the margin ofsafety for creditors.).

54 J.S. COVINGTON, JR., BASIC LAW OF CORPORATIONS: CASES, TEXT AND ANALYSES 284(1989).


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tion, but also untrue.55 Professor Warren argued that the proper ap-proach would be to view the issues of watered stock and voluntary dim-inution of capital as a negation of the legislatures intent and therefore

illegal, instead of inventing a new doctrine of trust funds.56Other writ-ers expressed similar sentiments, complaining that the theorys ques-tionable legal foundation led to inconsistencies in application.57 Onecourt noted that the doctrine has often been repudiated as a fictionunsound in principle and vexing in business practice.58

The mode of enforcement of the doctrine and the attendant uncer-tainty placed many shareholders in personal jeopardy while imperilingmillions of dollars in investments.59In one particular case, the U.S. Su-preme Court held investors liable for the difference between the parvalue and the price for which they purchased their shares twenty-fiveyears after the companys failure.60 In addition, the Supreme Court,while reaffirming the trust fund doctrine in Handley v. Stutz,61created adistinction between original subscription to shares and subsequent issueof shares by a corporation as it continued to operate in business.62Thetrust fund doctrine, according to the Court, applied to the former butnot the latter.63This leeway enabled corporations to finance their opera-tions by selling stock at a price the market was willing to pay, even iflower than the par value, without the fear of liability that would have

55 Edward H. Warren, Safeguarding the Creditors of Corporations, 36 HARV. L. REV. 509,546 (1923).

56 Id.; see alsoChas E. Carpenter, The Doctrine That the Assets of a Corporation Are a TrustFund for the Benefit of Creditors, 2 OR.L.REV. 122, 12223 (1922) (stating that the trust fundtheorys purpose of preserving corporate capital as a fund for the payment of creditors could beadequately explained and accomplished without invoking any misleading phraseology bysaying the law imposes an obligation upon the stockholders not to withdraw the fund which thestatutes have required to be set up and maintained for the protection of creditors).

57 SeeEdwin S. Hunt, The Trust Fund Theory and Some Substitutes for It, 12 YALEL.J. 63,74 (1902); Note, supranote49,at 482 (Just what the doctrine is, even those who uphold it donot seem to know. It seems to be an accommodating judicial ignis fatuus, which is present orabsent as courts seem to require. No court has been able to describe it exactly, or to define itslimits.).

58 Reif v. Equitable Life Assurance Socy of the U.S., 197 N.E. 278, 280 (N.Y. 1935).59 SeeHorwitz, supranote32,at 207.60 Id. at 208. Legislative changes restricted the application of the doctrine in cases such as

these. SeeDrew R. Fuller, Jr., Stockholder LiabilityArticle 7.12 of the Texas Business Corpora-tion Act Is the Exclusive Expression of the Trust Fund Theory in Texas, 13 ST. MARYS L.J. 660(1981) (discussing statutory modification of the trust fund doctrine to limit the time frame inwhich a shareholder could be held liable for obligations subsequent to the dissolution of thecorporation).

61 139 U.S. 417 (1891).62 Id. ([A]n active corporation may, for the purpose of paying its debts, and obtaining

money for the successful prosecution of its business, issue its stock and dispose of it for the bestprice that can be obtained.).

63 See Horwitz, supranote32,at 211.


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dissuaded potential investors from purchasing the stock.64 Yet the ap-parent incoherence of the Courts distinction between the liability ofdifferent classes of shareholders only provided additional fodder for

those intent on abandoning the trust fund doctrine.65One of the strongest attacks on the doctrine came from Justice

Mitchell of the Minnesota Supreme Court in Hospes v. NorthwesternManufacturing & Car Co.66 Justice Mitchell opted to replace the trustfund theory with a fraud, holding out, or misrepresentation theory,67reasoning that shareholders were liable for the balance of the par valueof their shares that remained unpaid because the business communityrelied on the corporate capital. 68Accordingly, only creditors who reliedon the availability of capital stock in dealing with the corporation wereentitled to a remedy.69Those who dealt with the corporation before theissuance of watered stock or knew of the bonus shares but proceeded toenter into dealings with the corporation had no recourse.70 This ap-proach presented a sharp contrast to the trust fund doctrine, whichsought to protect all creditors, regardless of their knowledge or situa-tion.71Professor John Coffee elaborates on this point and the conceptualdifficulties of viewing the corporate assets as a trust fund, noting that itwas difficult to see how creditors who advanced their funds to the cor-poration before the issuance of watered stock were in any way injuredby the later issuance, since they had not relied on the additional capitalso contributed.72

64 Id. One writer explains the rationale in a case where a company wanted to raise money

through new issuance of stock but its existing stock was trading at below par value and no newshareholder would be willing to pay par value for such devalued stock. In such a situation, anexisting creditor can hardly complain because the money raised from the watered stock addedto, instead of reducing, the capital of the corporation and improved, rather than diminished,the creditors chance of recovery. But there is still a problem as to the burden imposed onsubsequent creditors. See Pepper, supra note52,at 17677.

65 Horwitz, supranote32,at 211.66 50 N.W. 1117 (Minn. 1892).67 See Kenneth B. Davis, Jr., The Status of Defrauded Securityholders in Corporate Bank-

ruptcy, 1983 DUKEL.J. 1, 5 (stating that by the turn of the twentieth century, courts had startedsubstituting the trust fund theory with a reliance-based theory); see also EISENBERG, supranote8,at 1261 (Hospes substituted a new theory, known as the constructive-fraud, misrepresenta-tion, or holding out theory.).

68 Hospes,50 N.W. at 1121.69 Id. ([I]t is only those creditors who have relied, or who can fairly be presumed to have

relied, upon the professed amount of capital, in whose favor the law will recognize and enforcean equity against the holders of bonus stock.).

70 Id. at 112021.71 It should be noted that the fraud theory has had its fair share of criticisms. See, e.g.,

GEVURTZ, supra note8,at 131 ([W]hile the legal premise behind the misrepresentation theoryis unassailable, its factual premise is shaky.); C. Robert Morris, Some Notes on Reliance,75MINN. L. REV. 815, 81620 (1991); see also Comment, Shareholder Liability for WateredStockA Windfall to Creditors, 9 STAN.L.REV. 191, 20102 (1956).

72 Coffee, supranote6,at 1638 n.57.


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The criticisms mounted, and after 150 years of its articulation andapplication, one circuit court opinion agreed with the observation thatthe doctrine had generated confusion in corporate law. 73While the trust

fund doctrine is not completely defeated, it ultimately succumbed to theweight of criticisms, the adoption of alternative means of accomplishingits objectives, and the absence of its respected progenitor to continuallyanimate it.74 The reality is that today the once proud trust fund doc-trine is but a tattered shadow of its former self.75

II. REVIVED TRUST FUND THEORY:NATURE AND STRUCTURE

Discussing the ostensible basis of Justice Storys dicta in Wood,Professor Joseph Norton makes an observation that is analogous and

germane to the status of many public corporations today. First, the pub-lic nature of the corporation involved in that case may have played asignificant role and it appeared quite appropriate to use the term trustin reference to that type of institution.76 Also, there was widespreadsuspicion of corporations in 1824.77This is not remarkably dissimilar tothe level of mistrust defining public views of many large corporationstoday.78 The absence of trust has been linked to corporate short-termism: Public suspicion and mistrust of large companies in particu-

73 SeeAm. Natl Bank of Austin v. MortgageAmerica Corp., 714 F.2d 1266, 126869 (5thCir. 1983).

74 Bruce A. Markell, The Folly of Representing Insolvent Corporations: Examining Lawyer

Liability and Ethical Issues Involved in Extending Fiduciary Duties to Creditors, 6 J. BANKR.L.&PRAC. 403, 406 (1997) (The trust fund theory rose to prominence primarily on the strength ofJustice Storys reputation. It then fell into disuse after his tenure on the Supreme Court, re-placed by more detailed corporate statutes and by fraudulent transfer law.); John C. McCoid,II, Corporate Preferences to Insiders, 43 S.C.L.REV. 805, 82324 (1992) (Even in its originalcontext, the trust-fund theory generally has been rejected . . . . It was used over and over and isa good example of how a catchy phrase or the reputation of a jurist sometimes can stand in theway of thoughtful inquiry. Even today, the theory is not entirely dead, although its defects arewidely recognized.); see also Beveridge, supra note 7, at 600 (Through the sheer force ofJustice Storys efforts, the trust fund doctrine entered legal history and became the basis forcountless decisions until the closing years of the nineteenth century, by which time, althoughstill somewhat influential, it had generally fallen into intellectual disrepute.).

75 STEPHEN M. BAINBRIDGE, CORPORATE LAW420 (2d ed. 2009); see also Johnson, supranote52, at 60910 (adducing additional reasons for the decline of the trust fund theory).

76 Norton, supranote28,at 1064.77 Id.; see also Coffee, supranote6,at 1633 n.36 (stating that the rule formulated by Justice

Story lacked precedent in the prior English case law, but reflected the skepticism then preva-lent in the United States about use of the corporate form).

78 SeeMichelle M. Harner, Corporate Control and the Need for Meaningful Board Account-ability, 94MINN.L.REV. 541, 54142 (2010) (stating that large corporations have the trust ofonly thirteen percent of the American population and that this level of mistrust portendsenormous economic consequences for firms and their stakeholders); Rakhi I. Patel, FacilitatingStakeholder-Interest Maximization: Accommodating Beneficial Corporations in the Model Busi-ness Corporation Act, 23 ST.THOMAS L.REV. 135, 155 (2010).


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lar is due to their lack of long-term responsibility or social con-science.79

The journey toward regaining respect, ipso facto, will incorporate a

long-term focus and a mutually beneficial approach that encompassesinterests within and outside the corporation, including employees, cred-itors, and host communities.80 It is apposite to undertake an examina-tion of todays problems in light of the reaction of a previous era sharingsimilar characteristics. This Part takes up that task in adapting the fea-tures and strong points of the trust fund to the resolution of some of thecurrent problems plaguing corporations and the society. The nature andstructure of the revived trust fund will encompass the following ele-ments.

A. Express Creation

Unlike the original incarnation of the trust fund theory, which wasa result of judicial promulgation,81 not involving a real trust, 82 the re-vived trust fund will be expressly and voluntarily created as a trust bythe corporation. The corporation will be the trustee while the beneficiar-ies will be the involuntary victims of the corporations acts and thosethat voluntarily transact business with the corporation, relying on asegregated amount kept secure for the purpose of meeting the legitimateexpectations on the other side of the bargain.83

79 Frederick Beale & Mario Fernando, Short-Termism and Genuineness in EnvironmentalInitiatives: A Comparative Case Study of Two Oil Companies, 27 EUR.MGMT.J. 26, 27 (2009).

80 SeeLeo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on theShared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33J.CORP.L. 1, 20 (2007).

81 SeeHorwitz, supranote32,at 208 (noting that the trust fund doctrine was promulgatedby the courts); Note, supranote49,at 482 (conceding that the theory was an exercise in judiciallegislation but noting that legislation by courts is often demanded by justice in addressingproblems raised by insolvent corporations).

82 See Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371, 381 (1893) (While it is truelanguage has been frequently used to the effect that the assets of a corporation are a trust fundheld by a corporation for the benefit of creditors, this has not been to convey the idea that thereis a direct and express trust attached to the property.); Graham v. R.R. Co., 102 U.S. 148, 16061 (1880).

83 See Anna Fifield & Sylvia Pfeifer, Revenues to Secure Fund for Damages, FIN.TIMES, Aug.12, 2010, at 8 (providing an example of a corporation serving as trustee of victims fund albeitfor another corporation). Legitimate questions may be raised about the value of issuing Class Tstock if it cannot use the proceeds for capital investments and the possibility of truly segregat-ing the funds, even if a company wanted to do so. A quick response is that the funds raised maybe used for other pertinent purposes discussed in Part II.C and Part III.G below, notably in-vestment in conservative instruments and bonding.


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B. Permanent Fund

Because business corporations were not obliged to maintain a rig-id and carefully guarded fund,84the idea of a trust fund for the benefitof creditors ran into conceptual and practical difficulties. Addressingthis deficiency invites the existence and maintenance of a rigid and care-fully guarded pool of money available to satisfy appropriate creditorclaims, such as cases in which credit was advanced on the faith of thefund. The revived trust fund will adopt the original conception of legalcapital in the sense that there will be a pool of assets that is identifiableand reachable by creditors in the event of a stated calamity arising fromcorporate operations.85 To provide a real, instead of rhetorical safe-guard, this fund would be kept nearly under lock and key until needed

to satisfy claims or to be returned to the investors by the corporationredeeming or repurchasing the shares.86 The fund may be invested inconservative instruments so that the principal is always secure andavailable.87Accordingly, while the yield is expected to be low, it will notbe a completely inefficient deployment of capital yet at the same timeavoiding the predicament of the legal capital of yore that was not therewhen creditors needed it.88 The companies would raise and retain thefunds as separate from their operating funds.

84Frederick Dwight, Capital and Capital Stock, 16 YALE L.J. 161, 162 (1907).85 While this Article favors a segregated fund, it is not unmindful of other creditor-protection options. For instance, bond instruments often describe the assets that secure them,while unsecured obligations of the company are entitled to be paid from whatever pool of assetsremains in the corporation. So, in bankruptcy everybody receives in accordance with the levelof protection contracted for, not dissimilar from my proposal. Another method to preserveassets, of course, is to have appropriate risk-management policies that support long-term in-vestments, which Class T shareholders will most likely support. Another reason for Class Tshares is to oppose the use of the corporation as a short-term arbitrage opportunity throughtakeovers and other instant money shareholder activism proposals. I am immensely gratefulto Professor Lynne Dallas for the preceding observations.

86The money may be returned, with interest, less the cost of settling eligible creditors, inexchange for the shares. Shareholders may opt to keep their stock and forfeit the money. Ulti-mately, they may sell at a price, to a person, and at a time of their choosing. This feature makesthe Class T stock a bit similar to preferred stock. SeeJOSEPH SHADE,BUSINESS ASSOCIATIONS INA NUTSHELL 326 (3d ed. 2010) (stating that preferred stock may usually be redeemed at a fixedprice); see alsoHAMILTON ET AL.,supranote8,at 27576 (discussing preferred stocks that areredeemable at the option of the holder, objections to common shares that are redeemable at theoption of the holder, common shares that are callable at the option of the corporation, and theMBCA approach that permits the creation of these types of shares without restrictions).

87 SeeRobert J. Rhee, Bonding Limited Liability, 51 WM.&MARY L.REV. 1417, 1466 (2010)(making a similar point with regard to a compensation fund to be established under a proposedbonded limited liability scheme).

88 Id. at 146667.


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C. Class T Common Shares

The trust fund will be financed by creating a separate class ofcommon shares, referred to as Class T shares. Thus, the contributingshareholders purchase a special class of shares designed for this particu-lar purpose and on the understanding that the shares cannot be sold orotherwise transferred until the end of a designated period. Prohibitionof transfer includes stock lending.89In addition, holders of the stock willbe prevented from hedging away their risks through derivatives andother instruments since, as illustrated by the case of equity-based execu-tive compensation, such hedging has been an impediment to the effec-tiveness of restrictions on stock transfer within a specified period. 90Built into the Class T arrangement is an explicit contractual provision

against hedging of Class T stock within the applicable period, enforcea-ble by revocation of all the privileges appurtenant to the Class T status. 91A hedging ban under statute or securities regulations is also an optionworth considering.92This Article arbitrarily suggests a designated hold-ing period of ten years. This is consistent with the original conception ofthe trust fund doctrine, but with a stronger framework to ensure credi-tor protection.93

D. Illiquidity and Control

In exchange for the loss of liquidity during the specified period,

holders of the Class T shares will receive a measure of control in thecorporation. Professor Coffee has persuasively argued that liquidity and

89See infranotes25965 and accompanying text.90 See, e.g., Lucian A. Bebchuk et al., The Wages of Failure: Executive Compensation at Bear

Stearns and Lehman 2000-2008, 27 YALE J.ON REG. 257 (2010); Lucian A. Bebchuk & Jesse M.Fried, Paying for Long-Term Performance, 158 U.PA.L.REV. 1915, 195156 (2010); David I.Walker, The Challenge of Improving the Long-Term Focus of Executive Pay, 51 B.C.L.REV. 435(2010).

91 See David M. Schizer, Executives and Hedging: The Fragile Legal Foundation of IncentiveCompatibility, 100 COLUM. L. REV. 440 (2000) (discussing various approaches for preventinghedging of stocks and stock options under contract as well as tax and securities laws); MichaelC. Jensen & Kevin J. Murphy, Remuneration: Where Weve Been, How We Got to Here, Whatare the Problems, and How to Fix Them 6667 (Harvard Bus. Sch. NOM Unit, Working PaperNo. 04-28, 2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305(advocating a prohibition of stock option hedging in the capital markets).

92 SeeSchizer, supra note91,at 502 (discussing mandatory bans of stock and stock optionhedging through securities regulations).

93 SeeCraig A. Peterson & Norman W. Hawker, Does Corporate Law Matter? Legal CapitalRestrictions on Stock Distributions, 31 AKRON L.REV. 175, 180 (1997) (As originally conceived,the trust fund theory of legal capital simply prevented shareholders from withdrawing theassets they had contributed to the corporation until its creditors had been paid.).


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control are tradeoffs.94He observes that American law has said clearlyand consistently since at least the 1930s that those who exercise controlshould not enjoy liquidity and vice versa. 95An investor generally has to

surrender one in order to acquire or effectively utilize the other.96Some scholars see an interconnection between the demise of the

trust fund theory and the erosion of shareholder power.97To avoid theinjustice of making dispersed innocent shareholders pay for the fraudsof others, flowing from the growth of national stock markets, sharehold-ers traded the power that comes from proprietorship for limited liabil-ity.98Investing in a Class T stock exposes holders to greater personal lossthan other shareholders, as they cannot bail out when their investmentsare endangered but would be compelled to sink or swim with the corpo-ration.99 It stands to reason therefore that the greater exposure to per-sonal liability invites a proportionate increase in shareholder power orcontrol.100 Indeed, this notion is consistent with the evolution of thepower-allocation process in the corporation that indicates that share-holders enjoyment of limited liability is a function of their surrender ofcontrol, in return, to the board of directors.101

Exact details of what this control entails will require additionalwork. In the interim, a few suggestions may be offered. One suggestionis that Class T shareholders be offered an opportunity to be part of thedecision-making process regarding the corporations long-term strategy.A couple of seats on the board of directors may also be reserved forholders of the Class T stock.102Thus, they are guaranteed board repre-sentation because only the holders of the stock are eligible for election to

94 John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as CorporateMonitor, 91 COLUM.L.REV. 1277 (1991) see also William W. Bratton & Joseph A. McCahery,Incomplete Theories of the Firm and Comparative Corporate Governance , 2 THEORETICAL IN-QUIRIESL. 745,76065 (2001).

95 Coffee,supra note94, at 1287.96 Id.97Bruce P. Frohnen, The One and Many: Individual Rights, Corporate Rights and the Diver-

sity of Groups, 107 W. VA.L.REV. 789, 84243 (2005).98 Id. at 843; Horwitz, supranote32,at 20809.99 SeeStephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLAL.

REV. 601, 619 (2006) ([R]educed liquidity equates to enhanced risk. . . .).100 SeeMarshall M. Magaro, Two Birds, One Stone: Achieving Corporate Social Responsibility

Through the Shareholder-Primacy Norm, 85 IND.L.J. 1149, 1154 (2010) (stating that sharehold-ers surrendered control in exchange for limited liability).

101 See ROBERT A.G.MONKS &NELL MINOW,CORPORATE GOVERNANCE 109(4th ed.2008).102Lewis H. Lazarus, Directors Designated by Investors Owe Fiduciary Duties to the Compa-

ny as a Whole and Not to the Designating Investor, DEL.BUS.CT.INSIDER, Mar. 23, 2011, avail-able at http://www.morrisjames.com/en-US/publications/xprPubDetail.aspx?xpST=PubDetail&pub=99 (Investors who make substantial investments often demand a seat on their companysboard of directors. That is a reasonable request as it permits the investor to have a representa-tive on the board of directors with a voice in the management of the company.).


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the reserved positions.103 The adopting company may also create anadvisory director position to be filled by one of the long-term share-holder nominees.104The advisory role is one of the principal functions

of the board, in addition to monitoring, but greater focus has been onthe latter, sometimes to the detriment of the corporation.105The adviso-ry director will assume limited or no monitoring role, making it easierfor CEOs to be less antagonistic and share relevant strategic informationwith her.106

Class T holders should also be able to nominate candidates for theallocated director positions.107 Nominations may be facilitated by theinclusion of Class T shareholders in the issuers nominating commit-tee.108 Another option could consist of an adaptation of some recom-mendations on proxy access made in a slightly different context. 109Cor-porate managements have long mounted a strident resistance to proxyaccess reform.110 They have continued to oppose the SECs promulga-tion of proxy access regulations.111 Instead of the objections, a further

103 See Lehrman v. Cohen, 222 A.2d 800 (Del. 1966) (validating a corporations creation of aseparate class of voting stock with the right to vote for and elect one of five directors in order toprevent deadlock by the four directors elected by the other shareholders).

104 Olubunmi Faleye et al., Advisory Directors 1 (Midwest Fin. Assoc., Annual MeetingsPaper, 2011), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1866166.

105 Id.106 Id. at 12.107For a discussion of how the status quo makes it difficult for shareholders to effectively

nominate and elect directors,see Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93VA. L. REV. 675 (2007);George W. Dent Jr., Toward Unifying Ownership and Control in thePublic Corporation, 1989 WIS.L.REV. 881,90307; and Margaret M. Blair & Lynn A. Stout,A

Team Production Theory of Corporate Law, 85 VA.L.REV. 247, 310 (1999) ([L]egal and practi-cal obstacles to shareholder action render voting rights almost meaningless.).108 SeeFisch, supra note20,at 62; see also George Dent, The Case for Real Shareholder De-

mocracy, 55 CASE W.RES. L.REV. 581, 582 (2005) (proposing a nominating committee com-prised entirely of ten to twenty largest shareholders in a corporation).

109 Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditionalist Response toBebchuks Solution for Improving Corporate America, 119 HARV.L.REV. 1759, 177879 (2006);see alsoKenneth B. Orenbach, The Religiously Distinct Director: Infusing Judeo-Christian Busi-ness Ethics into Corporate Governance, 2 CHARLOTTE L.REV. 369, 424 (2010) (proposing share-holder proxy access to elect supervisory director).

110 Lucian A. Bebchuk, Another View: Dont Gut Proxy Access, N.Y. TIMES DEALBOOKBLOG (June 21, 2010, 9:00 AM), http://dealbook.blogs.nytimes.com/2010/06/21/another-view-dont-gut-proxy-access (Managements have long opposed proxy-access reform and has thusfar succeeded in blocking it.).

111 See, e.g., Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011). For reports ofconflicting empirical findings on the effect of proxy access on corporate value, seeAli C. Akyolet al., Shareholders in the Boardroom: Wealth Effects of the SECs Rule to Facilitate DirectorNominations, 47 J. FIN. QUANTITATIVE ANALYSIS (forthcoming 2012) (finding statisticallysignificant negative market reactions to the SECs attempts to empower shareholders), availa-ble at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1526081; Bo Becker et al., DoesShareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Chal-lenge 34, (Harvard Bus. Sch. Finance Unit, Working Paper No. 11-052, 2010), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695666 (finding that on the date that theSEC announced that it would delay implementation of proxy access, [the] share prices of


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concession in this area may be inevitable in order to attract the kind ofcommitment expected of the Class T investors. Insisting on the statusquo, even after shareholders have made a long-term capital commit-

ment, will only bolster the case of those who believe that the argument,basing support for the marginalization of some shareholders in corpo-rate governance on the ground that they are transient investors who donot genuinely care about the firms future, has no honest foundation.112

The revised trust fund proposal has a number of points in its favor.But it also raises legitimate concerns and faces significant constraints inits implementation. Parts III and IV provide an in-depth evaluation ofthe proposal, examining its merits and addressing potential objections.

III. ARGUMENTS IN FAVOR OF THE REVIVED TRUST FUND PROPOSAL

A. Patient Capital

The notion of patient capital attracted serious scholarly attention acouple of decades ago, particularly as corporate governance expertscompared the experiences of Germany and Japan with that of the Unit-ed States.113 After a while, the precepts of patient capital surrendered

companies that would have been most exposed to shareholder access declined significantlycompared to share prices of companies that would have been most insulated from the rule);Steven M. Davidoff, The Heated Debate over Proxy Access,N.YTIMES DEALBOOK BLOG(Nov.2, 2010, 4:04 PM), http://dealbook.nytimes.com/2010/11/02/the-heated-debate-over-proxy-access/; David F. Larcker et al., The Market Reaction to Corporate Governance Regulation, 101 J.

FIN. ECON. 431 (2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1650333 (finding a weak negative reaction to proxy access regulation); Jonathan B. Cohn etal., On the Optimality of Shareholder Control: Evidence from the Dodd-Frank Financial ReformAct (Feb. 22, 2011), http://www.sfs.org/Paper%20for%20Cavalcade%20website/On%20the%20Optimality%20of%20Shareholder%20Control.pdf (finding evidence broadly consistent withgreater allocation of control to shareholders increasing firm value).

112 SeeRonald J. Gilson & Reinier Kraakman, Reinventing the Outside Director: An Agendafor Institutional Investors, 43 STAN.L.REV. 863, 863 (1991).

113William T. Allen et al., Function over Form: A Reassessment of Standards of Review inDelaware Corporation Law, 56 BUS.LAW. 1287, 1288 n.3 (2001) (Only a few years ago a sub-stantial minority of corporate law academics posited that the patient capital supplied byGerman banks, the Japanese keiretsu and Korean chaebol might offer efficiency advantagesover the U.S. system of corporate governance.); Thomas J. Andr, Jr., Cultural Hegemony: TheExportation of Anglo-Saxon Corporate Governance Ideologies to Germany, 73 TUL.L.REV. 69,10506 (1998) (The stereotypical German model of governance therefore emphasizes patientcapital, consensus management, and the long term welfare of the company and its constitu-ents . . . . The virtual antithesis of the German stakeholder model of governance is usually saidto be that found in the United States . . . [which] is said to stress short-term market perfor-mance in which the only legitimate measures of an enterprises success are found in daily stockprices and quarterly sales figures.); John W. Cioffi, State of the Art: A Review Essay on Com-parative Corporate Governance: The State of the Art and Emerging Research, 48 AM.J.COMP.L.501, 529 (2000) (extolling the virtues of patient capital in the German and Japanese contexts);John Pound, The Rise of the Political Model of Corporate Governance and Corporate Control, 68N.Y.U.L.REV. 1003, 106768 (1993).


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some of this prominence.114 With the financial crisis of the past fewyears, however, patient capital has resurfaced in important discussionsof corporate governance and broader economic policy.115 Jurists and

commentators are beginning to lament the fact that patient capital isnow a scarce staple of public equity markets.116

Patient capital refers to capital provided by investors with longerexit horizons.117It is defined as capital that is willing to commit for along period of time.118Patient capital is characterized by such featuresas length of holding, which may be five to ten years or beyond, and rateof return, which could be relatively low, even bond-like.119 There arevarious sources of patient capital, including angel investors,120 venturecapitalists,121 employee stock ownership plans,122 sovereign wealth

114Scott H. Mollett, Sarbanes-Oxley Section 307 Domestically and Abroad: Will Section 307Lead to International Change?, 11 DUQ.BUS.L.J. 1, 11 (2008) (The main bank model, formerlychampioned by Japan and Germany, has been in decline and the tenets of patient capital havelost their salience.); Bliss Burdett Pak, National Markets and New Defenses: The Case for anEast Asian Opt-in Takeover Law, 20 COLUM.J.ASIAN L. 385, 391 (2007) (In Asia more broad-ly, the strong preference for stability and non-confrontational, patient capital characteristic ofmain bank and state-directed systems of corporate finance are giving way to an active marketfor mergers and acquisitions . . . .).

115Lawrence E. Mitchell, Financialism: A Lecture Delivered at Creighton University School ofLaw, 43 CREIGHTON L. REV. 323, 334 (2010); see also ASPEN INST., OVERCOMING SHORT-TERMISM:ACALL FOR A MORE RESPONSIBLE APPROACH TO INVESTMENT AND BUSINESS MAN-AGEMENT (2009), available at http://www.aspeninstitute.org/sites/default/files/content/docs/pubs/overcome_short_state0909_0.pdf.

116See, e.g., Strine, supra note80, at 10 (Ironic though it is, private equity investors are nowviewed as the nurturing providers of patient capital compared to the public equity markets.).117Darian M. Ibrahim, The (Not So) Puzzling Behavior of Angel Investors, 61 VAND.L.REV.

1405, 1438 n.169 (2008) (referring to angel investors as providers of patient capital becausetheir exit horizons are usually longer than those of the typical investor).

118 Lucian A. Bebchuk, Buying Troubled Assets, 26 YALE J.ON REG. 343, 347 (2009).119 Stephen Lloyd, Transcript: Creating the CIC, 35 VT.L.REV. 31, 42 (2010); Sverre David

Roang, Successful Family Business Transitions Depend on Three Things: Process, Process, andProcess, in FAMILY AND BUSINESS SUCCESSION PLANNING (2010), 2010 WL 2828082, at *4;Thomas L. Friedman, Patient Capital for an Africa that Cant Wait, N.Y.TIMES, Apr. 20, 2007,at A23 (Patient capital has all the discipline of venture capitaldemanding a return, andtherefore rigor in how it is deployedbut expecting a return that is more in the 5 to 10 percentrange, rather than the 35 percent that venture capitalists look for, and with a longer paybackperiod.).

120 William K. Sjostrom, Jr., Relaxing the Ban: Its Time to Allow General Solicitation andAdvertising in Exempt Offerings, 32 FLA.ST.U.L.REV. 1, 6 (2004) (stating that angel investorssupply patient capital, with investments that stay in place for five to ten years or even longerperiods); see also Ibrahim, supra note117,at 1438 n.169 (referring to angel investors as provid-ers of patient capital because their exit horizons are usually longer than those of the typicalinvestor).

121 See Abraham J.B. Cable, Fending for Themselves: Why Securities Regulations ShouldEncourage Angel Groups,13 U.PA.J.BUS.L. 107, 122 (2010).

122 See Aditi Bagchi, Varieties of Employee Ownership: Some Unintended Consequences ofCorporate Law and Labor Law, 10 U.PA.J.BUS.&EMP.L. 305,316 (2008).


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funds,123 pension funds,124 and other institutional investors, althougheach investors level of patience varies.125

Corporate managers are constantly in search of patient capital.126

Patient capital is favored because the investors longer exit horizon pro-vides the manager with the needed time to build value into the busi-ness.127When stocks have high turnover rates, they create greater vola-tility and uncertainty in equity prices than exist under a system of morepatient capital and this uncertainty militates against managerial in-volvement in long-term projects.128 By affording managers an oppor-tunity to engage in long-term planning and investment, including ac-quisition of durable equipment, patient capital offers efficiency gains.129

123 See Mark E. Plotkin, Foreign Direct Investment by Sovereign Wealth Funds: Using theMarket and the Committee on Foreign Investment in the United States Together to Make the

United States More Secure, 118 YALE L.J.POCKET PART88, 91 (2008) (discussing the benefitsand challenges presented by sovereign wealth funds investment in the U.S. economy).

124 SeeRich Ferlauto, Commentary on Leo Strines Toward Common Sense and CommonGround? Reflections on the Shared Interests of Managers and Labor in a More Rational System ofCorporate Governance, 33 J.CORP.L. 41, 41 (2007) (stating that public pension systems pro-vide patient capital). But seePoonam Puri & P.M. Vasudev, Canadian Pension Funds: Invest-ments and Role in the Capital Markets and Corporate Governance, 25 BANKING &FIN.L.REV.247, 267 (2010) (noting that the level of portfolio turnovers of pension funds, discernable fromrevenue gained from securities trading, raises doubts about the popular notion that pensionfunds invest for the long term and provide patient capital).

125 Karmel,supra note1,at 2 (stating that while some institutional investors provide patientcapital and hold stocks for the long term, a lot of institutions invest only for a very brief peri-od).

126 See Colleen D. Ball, Regulations 14A and 13D: Impediments to Pension Fund Participa-tion in Corporate Governance, 1991 WIS. L. REV. 175, 201 (Meanwhile, boards of directors

lament the lack of patient capital essential for the long-term business strategies that wouldrestore the health of corporate America.); Mark J. Roe, Foundations of Corporate Finance: The1906 Pacification of the Insurance Industry, 93 COLUM. L. REV. 639, 650 (1993) (stating thatmanagers claim they want patient capital).

127 Bebchuk, supra note 118, at 347; Gunter Festel et al., Importance and Best Practice ofEarly Stage Nanotechnology Investments,7 NANOTECHNOLOGY L.&BUS. 50, 58 (2010); AndreiShleifer & Robert W. Vishny, Equilibrium Short Horizons of Investors and Firms, 80 AM.ECON.REV.148 (1990).

128Sanford M. Jacoby, Employee Representation and Corporate Governance: A Missing Link,3 U.PA.J.LAB.&EMP.L. 449, 456 n.48 (2001).

129 See Thomas J. Andre, Jr., Some Reflections on German Corporate Governance: A Glimpseat German Supervisory Boards, 70 TUL.L.REV. 1819, 1820 (1996) (noting the contribution ofpatient capital to Germanys postwar economic success); Dwight B. Crane & Ulrike Schaede,Functional Change and Bank Strategy in German Corporate Governance, 25 INTL REV. L. &ECON. 513, 524 (2005) (stating that after World War II, companies in Germany needed stablefunding that would provide patient capital for highly leveraged plant and equipment invest-ment); Helen Garten, Institutional Investors and the New Financial Order, 44 RUTGERS L.REV.585, 671 (1992) (stating that patient capital gives rise to stable relationships that facilitate thelong-term corporate planning and capital allocation associated with the Japanese keiretsu);Nadine Hoser, Nanotechnology and Its Institutionalization as an Innovative Technology: Profes-sional Associations and the Market as Two Mechanisms of Intervention in the Field of Nano-technology, 7 NANOTECHNOLOGY L.&BUS. 180, 187 (2010); Johathan D. Richards, Comment,Japan Fair Trade Commission Guidelines Concerning Distribution Systems and Business Practic-es: An Illustration of Why Antitrust Law is a Weak Solution to U.S.Trade Problems with Japan,


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Managers assailed an active market for corporate control on thatground, deriding it as breeding inefficiency by fostering managerialmyopia in response to investor short-term orientation.130 Ultimately,

both the corporation, deprived of a long-term focus, and the societycould suffer significant losses.131 On the other hand, investment andmanagement strategies that emphasize the long-term are socially benefi-cial.132

Patient capital also benefits businesses because patient capital andvoice are natural companions. A provider of long-term capital is likelyto insist on having a voice in how the investment is managed.133 Theconverse is also true: one who is afforded a voice is likely to linger muchlonger than one who is not.134When shareholders exit the corporation

1993 WIS.L.REV. 921, 92324 (discussing the Japanese experience with patient capital and how

it spurs risk-taking and investing for the long term by companies).130 Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of

Shareholder Value and Stock Market Prices, 59 STAN. L. REV. 1465, 1522 (2007) (discussingmanagerial contention that an active market in corporate control was itself a cause of ineffi-ciency, because of the short-termism induced in managerial time horizons and that patientcapital, by contrast, presented the foundation for success in Europe and Japan).

131Aleta G. Estreicher, Beyond Agency Costs: Managing the Corporation for the Long Term,45 RUTGERS L.REV. 513, 54647 (1993) (stating that it is imprudent for managers to jettisonlong-term investments in favor of those that would yield short-term gains for shareholders andthat such form of decision-making harms both the corporation and the national economy thatis dependent on long-term production by private firms); Martin Lipton & Steven A.Rosenblum,A New System of Corporate Governance: The Quinquennial Election of Directors,58U.CHI.L.REV. 187,203 (1991) (The ascendancy of the institutional stockholder and the hos-tile takeover, however, creates an emphasis on short-term results that makes it increasinglydifficult for the corporation to maintain the long-term focus necessary to its own and societys

well-being.); Stephen B. Young, Moral Capitalism and the Great Financial Meltdown of 2008,33 FLETCHER F.WORLD AFF. 129, 130 (2009) (arguing that financial markets have a bias to-ward shortsighted profit-taking, when what successful capitalism actually needs is farsightedpatient capital.); Patrick S. Cross, Note, Economically Targeted InvestmentsCan PublicPension Plans Do Good and Do Well?,68 IND.L.J. 931, 961 (1993) (discussing the critical rolethat provision of patient capital can play in general economic growth).

132 See, e.g., HM Treasury: Remarks of Lord Myner at the UBS Corporate Governance Forum,October 6, 2009, in NINTH ANNUAL INSTITUTE ON SECURITIES REGULATION IN EUROPE: ACONTRAST IN EU&U.S.PROVISIONS241, 244 (PLI Corporate Law & Practice, Course Hand-book Ser. No. 1783, 2010) [hereinafter Lord Myners Remarks] (noting that fund managersgenerally do not supply patient capital and extolling the virtues of the investment approach ofWarren Buffet, whose record has shown the value of taking a longer view, accepting extendedperiods of relative under-performance as a fair price for avoiding extremes of market valuationor under-valuations; holding a concentrated, high conviction portfolio and taking a real interestin his companies, including in some cases taking Board seats). For similar observations madetwo decades earlier,seeLipton & Rosenblum, supranote131, at 22324.

133 Robert G. Vanecko, Comment, Regulations 14A and 13D and the Role of InstitutionalInvestors in Corporate Governance, 87 NW. U. L.REV. 376, 382 (1992) (Advocates of an in-creased voice for institutional investors argue that institutional investors could potentiallyprovide the patient capital that American corporations need to enhance their long-term com-petitiveness. (citation omitted)); Lord Myners Remarks, supra note132,at 244.

134 See Ball, supra note126,at 19697 (explaining that opportunity to exercise voice couldlead to long-term investing with the resulting opportunity for management to utilize the patientcapital to embark on long-term projects); Robert J. Klein, Note, The Case of Heightened Scruti-


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instead of working within it to address what is wrong, the corporationmay be the worse for it.135When shareholders have a voice in the corpo-ration, the corporation may be enriched. 136One commentator captures

the sentiment succinctly: [W]ealth creating organizations are built upover decades. Patient capital that can readily choose to rely on voice, notjust exit, is an indispensable foundation for long-term wealth creation. Ifinvestors make this discovery, directors will not be far behind.137

Furthermore, with the spate of financial crises in the past decadeand the resulting mistrust of corporations and undermining of publicconfidence in the markets,138 the importance of a long-term focusbacked by patient capital can hardly be overemphasized.139Along thoselines, The Conference Board recommended that the restoration of trustin public corporations would require the emergence of a base of share-holders with a long-term orientation to support a management focusedon creating long-term economic growth.140

The revised trust fund proposal will follow in the footsteps of theoriginal trust fund theory which, at least tangentially, facilitated thelock-in of capital.141It also seeks to create the desired base of sharehold-ers, a permanent class of long-term investors, who have an ownersmentality and disposition.142Owners commit resources to their venture

ny in Defense of the Shareholders Franchise Right, 44 STAN.L.REV. 129, 175 (1991) (Institu-tional investors assured of access to the proxy system can develop the patient capital philosophyfavored by managers.); Vanecko, supranote133,at 382 n.42 (restating the arguments made bysome commentators that if institutional investors had more freedom to combine forces, seekrepresentation on boards, and press for management changes, they would respond by votingtheir stock rather than selling it [and] that if pension funds could challenge management effec-

tively, they might become permanent shareholders).135See infraPart III.B.136 Id.137Elmer W. Johnson, Making the Board of Directors Function in the Age of Pension Fund

Capitalism, in21ST ANNUAL INSTITUTE ON SECURITIES REGULATION601, 619 (PLI CorporateLaw & Practice, Course Handbook Ser. No. 663, 1989).

138 Arthur Levitt, Jr., Op-Ed., How to Boost Shareholder Democracy, WALL ST. J., July 1,2008, at A17 (The meltdown of the subprime mortgage market, the implosion of Bear Stearns,and the revelations of poor risk management on the part of several large companies has injecteda dangerously large degree of mistrust into the markets.); Maxwell Strachan, American Dis-trust of Banks Reaches Highest-Recorded Level: Gallup, HUFFINGTON POST(June 24, 2011, 6:29PM), http://www.huffingtonpost.com/2011/06/24/banks-americans-poll-distrust-confidence_n_884303.html.

139 THE CONFERENCE BD. COMMN ON PUBLIC TRUST & PRIVATE ENTER., FINDINGS ANDRECOMMENDATIONS17 (2003) (emphasizing the importance of long-term strategies and devel-opment of a base of long-term investors in creating corporate long-term growth and viabilitythat would restore trust in public corporations).

140 Id.141 SeeBlair, supranote35,at 15. But seeLarry E. Ribstein, Should History Lock In Lock-In?,

41 TULSA L.REV. 523, 533 (2006) (arguing that the purpose of the trust fund theory was credi-tor protection not capital lock-in).

142A proposal based on similar premises, but a different prescription, is the quinquennialelection of directors made by Martin Lipton and Steven Rosenblum. SeeLipton & Rosenblum,supra note 130, at 224 (stating that their proposal seeks to make stockholders and managers


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or property, taking enormous risks over a considerably long period oftime, and adding their entrepreneurial skills to grow the enterprisewhen needed, while exercising utmost care to avoid activities that nega-

tively affect its value. 143 Renters, on the other hand, do not have thatlevel of commitment or involvement, and are not as concerned aboutthe effects of their activity on the ultimate value of the property. 144Tothem, the property presents an opportunity that they milk to their satis-faction and move on to another available one. Stephen Young has ar-gued that in the true sense, ownership of shares in a company, based onits history, is a term that properly refers to when stock-holding was nota mass phenomenon and when individuals were long-term owners inthe style of Warren Buffet or the owner of a family company whilemuch of what goes on in Wall Street is better characterized as renting. 145Contrasting a renters mentality with that of an owner in a broaderproperty context but also applicable to company shares, Young notesthat, [t]he incentives around renting for both lessor and lessee tend tocut off rights from corresponding responsibilities, encouraging cavaliertreatment of money and property, whereas ownership tends to bindproperty rights to responsibilities, with its incentive of profit over timeand the inherent burden of care.146

Similar in some respects to relational investing, the revised trustfund proposal creates a class of enlightened investors who give compa-nies patient capital [thereby freeing] management to focus on the longterm. Over time, that should lift profits, productivity and prospects.And that would boost U.S. competitiveness.147 More important, theClass Tshares approach is better positioned to accomplish this objec-

think and act like long-term owners by combining the patient capital approach of WarrenBuffett, the long-term monitoring approach of the Japanese and German ownership structures,and the financial incentives for managers of the [leveraged buyout]); see alsoRonald J. Gilson,The Political Ecology of Takeovers: Thoughts on Harmonizing the European Corporate Govern-ance Environment,61 FORDHAM L.REV. 161, 178 (1992) (discussing the virtue of replicating orcombining features of exist

stimulating long term shareholding

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