19911 A POLITICAL THEORY OF THE CORPORATION 21 If the fund chose not to be"diversified"under the tax code or the 1940 Act,its income would be taxed at the ordinary corporate tax rate, destroying the fund by a triple taxation of its income.Income received by the noncomplying fund as dividends would be taxed twice,once at 34%when earned hy the portfolio company,and then again when re- ceived b the fund the noncomplying mutu al f d could clude 70% ceived,nett ng out to an effe ve tax rate of 10%on dividends.Capital gains would be taxed at 34% .And the income would be taxed a third time when realized by shareholders This triple taxation deters most ordinary corporations from actin as long-term undive rsi近e d deters most from losing their "diversified"status).A corporation might accept the unfavorable tax status in the short-run,as a prelude to a takeover and restructuring,but the corporation asserting control over the long-term would have to be confident it had unusually acute monitoring skills. After all,if the ed half of its inc ei th ould I pay approximately come in taxes.A great deal of effective monitoring would be needed to make up for that initial penalty;only unusually able monitors could overcome it.Nor could a public fund organize itself as a partnership to pass through without itself paying tax.Tog tatus,a also with subchapter M's portfolio restrictions. Thus,if a mutual fund wished to sell services as an intermediary/ monitor,dividing its portfolio into three or four stocks,it could not get sul And no subchapter M could any that th more than a quarter of its assets to obtain a majority of the portfolio company's stock and oust management.That threat,and the influence it would yield,is prohibitively expensive for a mutual fund.44 3.Other Restrictions on Control. For that quarter of the fund tha could be concentra other restrictions apply. If a mu tual fund owned 5%of a portfolio company's stock or sat on its board,the port folio firm would become a statutory affiliate of the mutual fund and of the mutual fund's principal underwriter.45 Many mutual funds are sponsored by investment banks.A sponsoring investment bank could Venture capital firms,which would provide monitoring for small firms,not the large a our subject,are partially exempt from the no-control provision.Id. 51988 riple taxation"rules and the partr ership rule are in id.$243,1201& 7704(G(1988) 44.Id.851(b)(4)(B)(1988).Nor can mutual funds readily issue senior securities to enhance abs ute size,and hence th size of its holding of any single company.1940 Act, 958407 1991] A POLITICAL THEORY OF THE CORPORATION 21 If the fund chose not to be "diversified" under the tax code or the 1940 Act, its income would be taxed at the ordinary corporate tax rate, destroying the fund by a triple taxation of its income. Income received by the noncomplying fund as dividends would be taxed twice, once at 34% when earned by the portfolio company, and then again when re￾ceived by the fund. True, the noncomplying mutual fund could ex￾clude 70% of the dividends received, netting out to an effective tax rate of 19% on dividends. Capital gains would be taxed at 34%. And the income would be taxed a third time when realized by shareholders. This triple taxation deters most ordinary corporations from acting as long-term, undiversified monitors (and deters most mutual funds from losing their "diversified" status). A corporation might accept the unfavorable tax status in the short-run, as a prelude to a takeover and restructuring, but the corporation asserting control over the long-term would have to be confident it had unusually acute monitoring skills. After all, if the corporation received half of its income in capital gains and half in dividends, then it would pay approximately 20% of its in￾come in taxes. A great deal of effective monitoring would be needed to make up for that initial penalty; only unusually able monitors could overcome it. Nor could a public fund organize itself as a partnership to pass through its income to owners without itself paying tax. To get pass-through tax status, a publicly-traded partnership must also comply with subchapter M's portfolio restrictions. 43 Thus, if a mutual fund wished to sell services as an intermediary/ monitor, dividing its portfolio into three or four stocks, it could not get the advantage of subchapter M. And no subchapter M mutual fund could ever threaten a portfolio company that the fund would devote more than a quarter of its assets to obtain a majority of the portfolio company's stock and oust management. That threat, and the influence it would yield, is prohibitively expensive for a mutual fund.4 4 3. Other Restrictions on Control. - For that quarter of the fund that could be concentrated, other restrictions apply. If a mutual fund owned 5% of a portfolio company's stock or sat on its board, the port￾folio firm would become a statutory affiliate of the mutual fund and of the mutual fund's principal underwriter.4 5 Many mutual funds are sponsored by investment banks. A sponsoring investment bank could company that intended to make most of its income from management, as opposed to pas￾sive investment, could obtain subchapter M pass-through at all. Venture capital firms, which would provide monitoring for small firms, not the large firms that are our subject, are partially exempt from the no-control provision. Id. § 851(e) (1988). 43. The "triple taxation" rules and the partnership rule are in id. §§ 243, 1201 & 7704(c) (1988). 44. Id. § 851(b)(4)(B) (1988). Nor can mutual funds readily issue senior securities to enhance absolute size, and hence the size of its holding of any single company. 1940 Act, § 18(a), 15 U.S.C. § 80a-18(a) (1988). 45. 1940 Act, § 2(a)(3), 15 U.S.C. § 80a-2(a)(3) (1988); 17 G.F.R. 270.17a-6 (1990)