Trust Law, Corporate Law, and Capital Market Efficiency

Abstract In both the publicly-traded corporation and the private donative trust a crucial task is to minimize the agency costs that arise from the separation of risk-bearing and management. But where the law of corporate governance evolved in the shadow of capitalmarket checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfactual-a control, as it were-for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this essay is that many of the differences on the agency costs frontier between the public corporation and the private donative trust can be roughly attributed to their relative positions in modern capital markets and the related disparity in their residual claimants' ease of exit. Among other things, this approach reveals a correlation between the trust law model and the views of corporate law scholars who doubt the ECMH and its implications for corporate governance. The essay also discusses the use of market data for assessing breach and damages in corporate and trust litigation and for empirical evaluation of theoretical scholarly analysis in both fields. More generally, comparison of the governance of the public corporation and the private donative trust brings into view the importance of relative price efficiency for the modern approach to corporate governance. I. INTRODUCTION The publicly-traded corporation separates risk-bearing and management.1 Risk-bearing falls on the residual-claimant shareholders, managerial authority ultimately lies with the board of directors. In this regard there is a strong similarity between the publicly-traded corporation and the private donative trust. Donative trusts give managerial responsibility for specified property to the trustee(s), but the risk or reward of the trust portfolio's good or bad performance falls on the residual-claimant beneficiaries.2 Thus, putting the interests of the trust donor to one side,3 in both the public corporation and the donative trust a crucial task is to minimize agency costs by aligning the interests of the managers with the interests of the residual claimants. At the same time, however, the paradigmatic private donative trust and publicly-traded corporation operate on opposite sides of the capital markets. In rough terms, the corporation is organized to raise (or buy) capital; the modern donative trust sells capital.4 Thus, where the public corporation is a buyer in capital markets, the modern donative trust is a seller. So both the donative trust and the public corporation separate risk-bearing and management, but they do so towards opposite ends in the capital markets. An important consequence of these differing orientations towards capital markets is the lack of a thick secondary market for trust residual claims, the sale of which are also stymied (if not altogether blocked) by several doctrinal impediments designed to give effect to the settlor's dead-hand interests.5 The animating idea for this essay is that many of the differences on the agency costs frontier between the publicly-traded corporation and the private donative trust can be attributed to their opposing, mirror-image positions in modern capital markets and the related disparity in their residual claimants' ease of exit. Of course, this involves some approximation and causation is unlikely to be exclusive. Nevertheless, a number of intriguing points about both corporate law and trust law are brought into view by this approach.6 (Readers familiar with corporate law might wonder why the trust and not the close corporation. This question is taken up in Section II.) The design for this essay is that of comparison. The essay contrasts the donative trust and the publicly-traded corporation with the hope of illuminating the impact of capital market efficiency, if any, on the evolution of the hypothetical bargain that is in effect codified in each. …