Corporate law in the United States

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The New York Stock Exchange is the major center for listing and trading shares in United States. Most corporations are, however, incorporated under the influential Delaware General Corporation Law.

Corporate law in the United States is a collection of over 51 different systems of corporate law, or one law for each state plus the District of Columbia. Two sources of law are, however, particularly important: the Model Business Corporation Act (MBCA), drafted by the American Bar Association was influential and adopted by twenty four states;[1] and because companies are free to incorporate in any state under the United States Constitution, regardless of whether they are doing business or are headquartered there, many corporations (especially public ones) have found Delaware's laws and specialized courts attractive, while many private corporations have found Nevada's corporation law attractive as well. More than half of US corporations are incorporated under the Delaware General Corporation Law (DGCL), and Delaware corporate law is particularly influential. The corporate laws of large states such as New York and California are also important.

State laws govern corporations' mechanics, but many federal laws are also applicable. Publicly traded corporations must comply with federal securities laws, the most important of which are the Securities Act of 1933 and Securities Exchange Act of 1934. The Sarbanes-Oxley Act of 2002 (SOXA) imposed many new rules on public corporations. Corporations must also comply with the wide variety of federal laws governing employment, environmental protection, food and drug regulation, intellectual property and other areas.

History[edit]

AA Berle, with coauthor Gardiner Means, wrote The Modern Corporation and Private Property in 1932, as a response to the Wall Street Crash. They gathered evidence that in modern corporations directors had become too unaccountable, requiring New Deal law reforms.
The first states to have general incorporation laws were among the original founding states. See here for a more detailed animation.

Corporations and civil law[edit]

The state of Delaware is the place of incorporation for over 60 per cent of Fortune 500 corporations.[2] In 1999, from 6,530 publicly traded nonfinancial firms in the US, 3,771 (57.75%) were incorporated in Delaware, 283 (4.33%) in California, and 226 (3.46%) in New York.[3]

Corporations are invariably classified as "legal persons" by all modern systems of law, meaning that like natural persons, they may acquire rights and duties. All major public corporations are also characterized by holding limited liability and having a centralized management.[4] When a group of people go through the procedures to incorporate, they will acquire rights to make contracts, to possess property, to sue, and they will also be responsible for torts, or other wrongs, and be sued. The federal government does not charter corporations, although it does regulate them. Each of the 50 states plus DC has its own corporation law. Most large corporations have historically chosen to incorporate in Delaware, even though they operate nationally, and have little or no business in Delaware itself. The extent to which corporations should have the same rights as real people is controversial, particularly when it comes to the fundamental rights found in the United States Bill of Rights. As a matter of law, a corporation acts through real people that form its board of directors, and then through the officers and employees who are appointed on its behalf. Shareholders can in some cases make decisions on the corporation's behalf, though in larger companies they tend to be passive. Otherwise, most corporations adopt limited liability so that generally shareholders cannot be sued for a corporation's commercial debts. If a corporation goes bankrupt, and is unable to pay debts to commercial creditors as they fall due, then in some circumstances state courts allow the so-called "veil of incorporation" to be pierced, and so to hold the people behind the corporation liable. This is usually rare and in almost all cases involves non-payment of trust fund taxes or willful misconduct essentially amounting to fraud.

Incorporation and charter competition[edit]

Although every state will have slight differences in their requirements, the process of forming a new corporation is usually quick.[5] A corporation is not the only kind of business organization that can be chosen. People may wish to register a partnership or a Limited Liability Company, depending on the precise tax status and organizational form that is sought.[6] Most frequently, however, people will choose corporations which have limited liability for those who become the shareholders: if the corporation goes bankrupt the default rule is that shareholders will only lose the money they paid for their shares, even if debts to commercial creditors are still unpaid. A state office, perhaps called the "Division of Corporations" or simply the "Secretary of State",[7] will require the people who wish to incorporate to file "articles of incorporation" (sometimes called a "charter") and pay a fee. The articles of incorporation typically record the corporation's name, if there are any limits to its powers, purposes or duration, identify whether all shares will have the same rights. With this information filed with the state, a new corporation will come into existence, and be so be subject to legal rights and duties that the people involved create on its behalf. The incorporators will also have to adopt "bylaws" which identify many more details such as the number of directors, the arrangement of the board, requirements for corporate meetings, duties of officer holders and so on. The certificate of incorporation will have identified whether the directors or the shareholders, or both have the competence to adopt and change these rules. All of this is typically achieved through the corporation's first meeting.

Corporate income tax as a share of GDP, 1946–2009.

One of the most important things that the articles of incorporation determine is the state of incorporation. Different states can have different levels of corporate tax or franchise tax, different qualities of shareholder and stakeholder rights, more or less stringent directors' duties, and so on. However, it was held by the Supreme Court in Paul v Virginia that in principle states ought to allow corporations incorporated in a different state to do business freely.[8] This appeared to remain true even if another state (e.g. Delaware) required significantly worse internal protections for shareholders, employees, creditors than the state in which the corporation operated (e.g. New York). So far, federal regulation has affected more issues relating to the securities markets than the balance of power and duties among directors, shareholders, employees and other stakeholders. The Supreme Court has also acknowledged that one state's laws will govern the "internal affairs" of a corporation, to prevent conflicts among state laws.[9] So on the present law, regardless of where a corporation operates in the 50 states, the rules of the state of incorporation (subject to federal law) will govern its operation.[10] Early in the 20th century, it was recognized by some states, initially New Jersey, that the state could cut its tax rate in order to attract more incorporations, and thus bolster tax receipts.[11] Quickly, Delaware emerged as a preferred state of incorporation.[12] In the 1933 case of Louis K. Liggett Co v Lee,[13] Brandeis J. represented the view that the resulting "race was one not of diligence, but of laxity", particularly in terms of corporate tax rates, and rules that might protect less powerful corporate stakeholders. Over the 20th century, the problem of a "race to the bottom" was increasingly thought to justify Federal regulation of corporations. The contrasting view was that regulatory competition among states could be beneficial, on the assumption that shareholders would choose to invest their money with corporations that were well governed. Thus the state's corporation regulations would be "priced" by efficient markets. In this way it was argued to be a "race to the top".[14] An intermediate viewpoint in the academic literature,[15] suggested that regulatory competition could in fact be either positive or negative, and could be used to the advantage of different groups, depending on which stakeholders would exercise most influence in the decision about which state to incorporate in.[16] Under most state laws, directors hold the exclusive power to allow a vote on amending the articles of incorporation, and shareholders must approve directors' proposals by a majority, unless a higher threshold is in the articles.

Corporate personality[edit]

In principle a duly incorporated business acquires "legal personality" that is separate from the people who invest their capital, and their labor, into the corporation. Just as the common law had for municipal and church corporations for centuries,[17] it was held by the Supreme Court in Bank of the United States v Deveaux[18] that in principle corporations had legal capacity. At its center, corporations being "legal persons" mean they can make contracts and other obligations, hold property, sue to enforce their rights and be sued for breach of duty. Beyond the core of private law rights and duties the question has, however, continually arisen about the extent to which corporations and real people should be treated alike. The meaning of "person", when used in a statute or the US Bill of Rights is typically thought to turn on the construction of the statute, so that in different contexts the legislature or founding fathers could have intended different things by "person". For example, in an 1869 case named Paul v Virginia, the US Supreme Court held that the word "citizen" in the privileges and immunities clause of the US Constitution (article IV, section 2) did not include corporations.[19] This meant that the Commonwealth of Virginia was entitled to require that a New York fire insurance corporation, run by Mr Samuel Paul, acquired a license to sell policies within Virginia, even though there were different rules for corporations incorporated within the state.[20] By contrast, in Santa Clara County v Southern Pacific Railroad Co,[21] a majority of the Supreme Court hinted that a corporation might be regarded as a "person" under the equal protection clause of the Fourteenth Amendment. The Southern Pacific Railroad Company had claimed it should not be subject to differential tax treatment, compared to natural persons, set by the State Board of Equalization acting under the Constitution of California. However, in the event Harlan J held that the company could not be assessed for tax on a technical point: the state county had included too much property in its calculations. Differential treatment between natural persons and corporations was therefore not squarely addressed.

In Citizens United v FEC, the US Supreme Court in a 5 to 4 decision removed the power of state and federal legislatures to control unlimited spending by corporations on political campaigns, reasoning that corporations are "persons" under the First Amendment.[22]

In the late 20th century, however, the issue of whether a corporation counted as a "person" for all or some purposes acquired political significance. Initially, in Buckley v Valeo[23] a slight majority of the US Supreme Court had held that natural persons were entitled to spend unlimited amounts of their own money on their political campaigns. Over a strong dissent, the majority therefore held that parts of the Federal Election Campaign Act of 1974 were unconstitutional since spending money was, in the majority's view, a manifestation of the right to freedom of speech under the First Amendment. This did not affect corporations, though the issue arose in Austin v Michigan Chamber of Commerce.[24] A differently constituted US Supreme Court held, with three dissents, that the Michigan Campaign Finance Act could, compatibly with the First Amendment, prohibit political spending by corporations. However by 2010, the Supreme Court had a different majority. In a five to four decision, Citizens United v Federal Election Commission[22] held that corporations were persons that should be protected in the same was as natural people under the First Amendment, and so they were entitled to spend unlimited amounts of money in donations to political campaigns. This struck down the Bipartisan Campaign Reform Act of 2002, so that an anti-Hillary Clinton advertisement ("Hillary: The Movie") could be run by a pro-business lobby group. Subsequently, the same Supreme Court majority decided in 2014, in Burwell v Hobby Lobby Stores Inc[25] that corporations were also persons for the protection of religion under the Religious Freedom Restoration Act. Specifically, this meant that a corporation had to have a right to opt out of provisions of the Patient Protection and Affordable Care Act of 2010, which could require giving health care to employees that the board of directors of the corporation might have religious objections to. It did not specifically address an alternative claim under the First Amendment. The dissenting four judges emphasized their view that previous cases provided "no support for the notion that free exercise [of religious] rights pertain to for-profit corporations."[26] Accordingly, the issue of corporate personality has taken on an increasingly political character. Because corporations are typically capable of commanding greater economic power than individual people, and the actions of a corporation may be unduly influenced by directors and the largest shareholders, it raises the issue of the corruption of democratic politics.[27]

Delegated management and agents[edit]

Although a corporation may be considered a separate legal person, it physically cannot act by itself. There are, therefore, necessarily rules from the corporation statutes and the law of agency that attribute the acts of real people to the corporation, to make contracts, deal with property, commission torts, and so on. First, the board of directors will be typically appointed at the first corporate meeting by whoever the articles of incorporation identify as entitled to elect them. The board is usually given the collective power to direct, manage and represent the corporation. This power (and its limits) is usually delegated to directors by the state's law, or the articles of incorporation.[28] Second, corporation laws frequently set out roles for particular "officers" of the corporation, usually in senior management, on or outside of the board. US labor law views directors and officers as holding contracts of employment, although not for all purposes.[29] If the state law, or the corporation's bylaws are silent, the terms of these contracts will define in further detail the role of the directors and officers. Third, directors and officers of the corporation will usually have the authority to delegate tasks, and hire employees for the jobs that need performing. Again, the terms of the employment contracts will shape the express terms on which employees act on behalf of the corporation.

The actions of all employees, in the course of employment become those of the corporation, when it goes right or wrong because it is thought that if a corporation takes the benefits of an employee's work, it should also take the burdens.[30]

Toward the outside world, the acts of directors, officers and other employees will be binding on the corporation depending on the law of agency and principles of vicarious liability (or respondeat superior). It used to be that the common law recognized constraints on the total capacity of the corporation. If a director or employee acted beyond the purposes or powers of the corporation (ultra vires), any contract would be ex ante void and unenforceable. This rule was abandoned in the earlier 20th century,[31] and today corporations generally have unlimited capacity and purposes.[32] However, not all actions by corporate agents are binding. For instance, in South Sacramento Drayage Co v Campbell Soup Co[33] it was held that a traffic manager who worked for the Campbell Soup Company did not (unsurprisingly) have authority to enter a 15 year exclusive dealing contract for intrastate hauling of tomatoes. Standard principles of commercial agency apply ("apparent authority"). If a reasonable person would not think that an employee (given his or her position and role) has authority to enter a contract, then the corporation cannot be bound.[34] However, corporations can always expressly confer greater authority on officers and employees, and so will be bound if the contracts give express or implied actual authority. The treatment of liability for contracts and other consent based obligations, however, differs to torts and other wrongs. Here the objective of the law to ensure the internalization of "externalities" or "enterprise risks" is generally seen to cast a wider scope of liability.

Shareholder liability for debts[edit]

One of the basic principles of modern corporate law is that people who invest in a corporation have limited liability. For example, as a general rule shareholders can only lose the money they invested in their shares. Practically, limited liability operates only as a default rule for creditors that can adjust their risk.[35] Banks which lend money to corporations frequently contract with a corporation's directors or shareholders to get personal guarantees, or to take security interests their personal assets, or over a corporation's assets, to ensure their debts are paid in full. This means much of the time, shareholders are in fact liable beyond their initial investments. Similarly trade creditors, such as suppliers of raw materials, can use title retention clause or other device with the equivalent effect to security interests, to be paid before other creditors in bankruptcy.[36] However, if creditors are unsecured, or for some reason guarantees and security are not enough, creditors cannot (unless there are exceptions) sue shareholders for outstanding debts. Metaphorically speaking, their liability is limited behind the "corporate veil".

The International Court of Justice in Re Barcelona Traction, Light, and Power Co, Ltd[37] acknowledged that there is invariably a principle of piercing the veil to prevent abuse of the corporate form.

There are a number of exceptions, which differ according to the law of each state, to the principle of limited liability. First, at the very least, as is recognized in public international law,[38] courts will "pierce the corporate veil" if a corporation is being used evade obligations in a dishonest manner. Defective organization, such as a failure to duly file the articles of incorporation with a state official, is another universally acknowledged ground.[39] However, there is considerable diversity in state law, and controversy, over how much further the law ought to go. In Kinney Shoe Corp v Polan[40] the Fourth Circuit Federal Court of Appeals held that it would also pierce the veil if (1) the corporation had been inadequately capitalized to meet its future obligations (2) if no corporate formalities (e.g. meetings and minutes) had been observed, or (3) the corporation was deliberately used to benefit an associated corporation. However, a subsequent opinion of the same court emphasized that piercing could not take place merely to prevent an abstract notion of "unfairness" or "injustice".[41] A further, though technically different, equitable remedy is that according to the US Supreme Court in Taylor v Standard Gas Co[42] corporate insiders (e.g. directors or major shareholders) who are also creditors of a company are subordinated to other creditors when the company goes bankrupt.

The trend in US corporate tort cases, particularly in oil spill disasters, as with The Amoco Cadiz case and in the Deepwater Horizon litigation, is to either pierce the corporate veil or hold parent corporations directly liable for the harm their enterprise causes.

Tort victims differ from commercial creditors because they have no ability to contract around limited liability, and are therefore regarded differently under most state laws. The theory developed in the mid-20th century that beyond the corporation itself, it was more appropriate for the law to recognize the economic "enterprise", which usually composes groups of corporations, where the parent takes the benefit of a subsidiary's activities and is capable of exercising decisive influence.[43] A concept of "enterprise liability" was developed in fields such tax law, accounting practices, and antitrust law that were gradually received into the courts' jurisprudence. Older cases had suggested that there was no special right to pierce the veil in favor of tort victims, even where pedestrians had been hit by a tram owned by a bankrupt-subsidiary corporation,[44] or by taxi-cabs that were owned by undercapitalized subsidiary corporations.[45] More modern authority suggested a different approach. In a case concerning one of the worst oil spills in history, caused by the Amoco Cadiz which was owned through subsidiaries of the Amoco Corporation, the Illinois court that heard the case stated that the parent corporation was liable by the fact of its group structure.[46] The courts therefore "usually apply more stringent standards to piercing the corporate veil in a contract case than they do in tort cases" because tort claimants do not voluntarily accept limited liability.[47] Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the US Supreme Court in United States v Bestfoods[48] held if a parent corporation "actively participated in, and exercised control over, the operations of" a subsidiary's facilities it "may be held directly liable". This leaves the question of the nature of the common law, in absence of a specific statute, or where a state law forbids piercing the veil except on very limited grounds.[49] One possibility is that tort victims go uncompensated, even while a parent corporation is solvent and has insurance. A second possibility is that a compromise liability regime, such as pro rata rather than joint and several liability is imposed across all shareholders regardless of size.[50] A third possibility, and one that does not interfere with the basics of corporate law, is that a direct duty of care could be owed in tort to the injured person by parent corporations and major shareholders to the extent they could exercise control. This route means corporate enterprise would not gain a subsidy at the expense of other people's health and environment, and that there is no need to pierce the veil.

Corporate governance[edit]

The New York Stock Exchange, along with Federal and state laws, is a significant regulator of corporate governance for listed corporations, particularly on shareholder voting rights and board structures.

Corporate governance, though used in many senses, is primarily concerned with the balance of power among the main actors in a corporation: directors, shareholders, employees, and other stakeholders.[51] A combination of a state's corporation law, case law developed by the courts, and a corporation's own articles of incorporation and bylaws determine how power is shared. In general, the rules of a corporation's constitution can be written in whatever way its incorporators choose, or however it is subsequently amended, so long as they comply with the minimum compulsory standards of the law. Different laws seek to protect the corporate stakeholders to different degrees. Among the most important are the voting rights they exercise against the board of directors, either to elect or remove them from office. There is also the right to sue for breaches of duty, and rights of information, typically used to buy, sell and associate, or disassociate on the market.[52] The federal Securities and Exchange Act of 1934, requires minimum standards on the process of voting, particularly in a "proxy contest" where competing groups attempt to persuade shareholders to delegate them their "proxy" vote. Shareholders also often have rights to amend the corporate constitution, call meetings, make business proposals, and have a voice on major decisions, although these can be significantly constrained by the board. Employees of US corporations have often had a voice in corporate management, either indirectly, or sometimes directly, though unlike in many major economies, express "codetermination" laws that allow participation in management have so far been rare.

Corporate constitutions[edit]

In principle, a corporation's constitution can be designed in any way so long as it complies with the compulsory rules set down by the state or federal legislature. Most state laws, and the federal government, give a broad freedom to corporations to design the relative rights of directors, shareholders, employees and other stakeholders in the articles of incorporation and the by-laws. These are written down during incorporation, and can usually be amended afterwards according to the state law's procedures, which sometimes place obstacles to amendment by a simple majority of shareholders.[53] In the early 1819 case of Trustees of Dartmouth College v Woodward[54] the US Supreme Court held by a majority that there was a presumption that once a corporate charter was made, the corporation's constitution was subject to "no other control on the part of the Crown than what is expressly or implicitly reserved by the charter itself."[55] On the facts, this meant that because Dartmouth College's charter could not be amended by the New Hampshire legislature, though subsequent state corporation laws subsequently included provisions saying that this could be done. Today there is a general presumption that whatever balance of powers, rights and duties are set down in the constitution remain binding like a contract would.[56] Most corporation statutes start with a presumption (in contrast to old ultra vires rules) that corporations may pursue any purpose that is lawful,[57] whether that is running a profitable business, delivering services to the community, or any other objects that people involved in a corporation may choose. By default, the common law had historically suggested that all decisions are to be taken by a majority of the incorporators,[58] and that by default the board could be removed by a majority of shareholders for a reason they themselves determined.[59] However these default rules will take subject to the constitution that incorporators themselves define, which in turn take subject to state law and federal regulation.

The NASDAQ is the second biggest stock in the US, after the New York Stock Exchange. It specializes in IT sector, that saw its first major crash with the Dot-com bubble of 2000.

Although it is possible to structure corporations differently, the two basic organs in a corporate constitution will invariably be the general meeting of its members (usually shareholders) and the board of directors.[60] Boards of directors themselves have been subject in modern regulation to a growing number of requirements regarding their composition, particularly in federal law for public corporations. Particularly after the Enron scandal, companies listed on the major stock exchanges (the New York Stock Exchange, the NASDAQ, and AMEX) were required to adopt minimum standards on the number of independent directors, and their functions. These rules are enforced through the threat of delisting by the exchange, while the Securities and Exchange Commission works to ensure ultimate oversight. For example, the NYSE Listed Company Manual Rule 303A.01 requires that listed companies have a majority of "independent" directors.[61] "Independence" is in turn defined by Rule 303A.02 as an absence of material business relationship with the corporation, not having worked for the last three years for the corporation as an employee, not receiving over $120,000 in pay, or generally having family members who are.[62] The idea here is that "independent" directors will exercise superior oversight of the executive board members, and thus decrease the likelihood of abuse of power. Specifically, the nominations committee (which makes future board appointments), compensation committee (which sets director pay), and audit committee (which appoints the auditors, are required to be composed of independent directors, as defined by the Rules.[63] Similar requirements for boards have proliferated across many countries,[64] and so exchange rules allow foreign corporations that are listed on an American exchange to follow their home jurisdiction's rules, but to disclose and explain how their practices differ (if at all) to the market.[65] The difficulty, however, is that oversight of executive directors by independent directors still leaves the possibility of personal relationships that develop into a conflict of interest. This raises the importance of the rights that can be exercised against the board as a whole.

Shareholder rights[edit]

While the board of directors is generally conferred the power to manage the day-to-day affairs of a corporation, either by the statute, or by the articles of incorporation, this is always subject to limits, including the rights that shareholders have. For example, the Delaware General Corporation Law §141(a) says the "business and affairs of every corporation... shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation."[66] However, directors themselves are ultimately accountable to the general meeting through the vote. Invariably, shareholders hold the voting rights,[67] though the extent to which these are useful can be conditioned by the constitution. The DGCL §141(k) gives an option to corporations to have a unitary board that can be removed by a majority of members "without cause" (i.e. a reason determined by the general meeting and not by a court), which reflects the old default common law position.[68] However, Delaware corporations may also opt for a classified board of directors (e.g. where only a third of directors come up for election each year) where directors can only be removed "with cause" scrutinized by the courts.[69] More corporations have classified boards after initial public offerings than a few years after going public, because institutional investors typically seek to change the corporation's rules to make directors more accountable.[70] In principle, shareholders in Delaware corporations can make appointments to the board through a majority vote,[71] and can also act to expand the size of the board and elect new directors with a majority.[72] However, directors themselves will often control which candidates can be nominated to be appointed to the board. Under the Dodd-Frank Act of 2010, §971 empowered the Securities and Exchange Commission to write a new SEC Rule 14a-11 that would allow shareholders to propose nominations for board candidates. The Act required the SEC to evaluate the economic effects of any rules it wrote, however when it did, the Business Roundtable challenged this in court. In Business Roundtable v SEC,[73] Ginsburg J in the DC Circuit Court of Appeals went as far to say that the SEC had “acted arbitrarily and capriciously” in its rule making. After this, the Securities and Exchange Commission failed to challenge the decision, and abandoned drafting new rules. This means that in many corporations, directors continue to have a monopoly on nominating future directors.

The Securities and Exchange Commission has a statutory duty to regulate some aspects of director elections and shareholder voting rights, though its rule-making authority has continually been challenged by the Business Roundtable.[74]

Apart from elections of directors, shareholders' entitlements to vote have been significantly protected by federal regulation, either through stock exchanges or the Securities and Exchange Commission. Beginning in 1927, the New York Stock Exchange maintained a "one share, one vote" policy, which was backed by the Securities and Exchange Commission from 1940.[75] This was thought to be necessary to halt corporations issuing non-voting shares, except to banks and other influential corporate insiders.[76] However, in 1986, under competitive pressure from NASDAQ and AMEX, the NYSE sought to abandon the rule, and the SEC quickly drafted a new Rule 19c-4, requiring the one share, one vote principle. In Business Roundtable v SEC[77] the DC Circuit Court of Appeals struck the rule down, though the exchanges and the SEC subsequently made an agreement to regulate shareholder voting rights "proportionately". Today, many corporations have unequal shareholder voting rights, up to a limit of ten votes per share.[78] Stronger rights exist regarding shareholders ability to delegate their votes to nominees, or doing "proxy voting" under the Securities and Exchange Act of 1934. Its provisions were introduced to combat the accumulation of power by directors or management friendly voting trusts after the Wall Street Crash. Under SEC Rule 14a-1, proxy votes cannot be solicited except under the its rules. Generally, one person soliciting others' proxy votes requires disclosure, although SEC Rule 14a-2 was amended in 1992 to allow shareholders to be exempt from filing requirements when simply communicating with one another,[79] and therefore to take collective action against a board of directors more easily. SEC Rule 14a-9 prohibits any false or misleading statements being made in soliciting proxies. This all matters in a proxy contest, or whenever shareholders wish to change the board or another element of corporate policy. Generally speaking, and especially under Delaware law, this remains difficult. Shareholders often have no rights to call meetings unless the constitution allows,[80] and in any case the conduct of meetings is often controlled by directors under a corporation's by-laws. However, under SEC Rule 14a-8, shareholders have a right to put forward proposals, but on a limited number of topics (and not director elections).[81]

Ratio of average pay of CEOs and production workers within a corporation from 1965 to 2009, not taking into account outsourced workers, or supply chains.[82]

On a number of issues that are seen as very significant, or where directors have incurable conflicts of interest, many states and federal legislation give shareholders specific rights to veto or approve business decisions. Generally state laws give the right for shareholders to vote on decision by the corporation to sell off "all or substantially all assets" of the corporation.[83] However fewer states give rights to shareholder to veto political contributions made by the board, unless this is in the articles of incorporation.[84] One of the most contentious issues is the right for shareholders to have a "say on pay" of directors. As executive pay has grown beyond inflation, while average worker wages remained stagnant, this was seen important enough to regulate in the Dodd-Frank Act of 2010 §951. This provision, however, simply introduced a non-binding vote for shareholders, though better rights can always be introduced in the articles of incorporation. While some institutional shareholders, particularly pension funds, have been active in using shareholder rights, asset managers regulated by the Investment Advisers Act of 1940 have tended to be mute in opposing corporate boards, as they are often themselves disconnected from the people whose money they are voting upon.

Investor rights[edit]

Employee rights[edit]

  • RC Clark, Corporate Law (1986) 32, ‘even if your aim is not to understand all of law’s effects on corporate activities but only to grasp the basic legal ‘constitution’ or make-up of the modern corporation, you must, at the very least, also gain a working knowledge of labor law.’
  • US Congress, Report of the Committee of the Senate Upon the Relations between Labor and Capital (Washington DC 1885) vol II, 806
  • Commission on Industrial Relations, Final Report and Testimony (1915) vol 1, 92 ff, and LD Brandeis, The Fundamental Cause of Industrial Unrest (1916) vol 8, 7672
  • NICB, Works Councils in the United States (1919) Research Report Number 21
  • An Act to enable manufacturing corporations to provide for the representation of their employees on the board of directors (3 April 1919) Chap. 0070
  • Massachusetts Laws, General Laws, Part I Administration of the Government, Title XII Corporations, ch 156 Business Corporations, §23
  • New Jersey Revised Statute (1957) §14.9-1 to 3
  • E Appelbaum and LW Hunter, ‘Union Participation in Strategic Decisions of Corporations’ (2003) NBER Working Paper 9590
  • RB McKersie, ‘Union-Nominated Directors: A New Voice in Corporate Governance’ (1 April 1999) MIT Working Paper
  • JB Bonanno, ‘Employee Codetermination: Origins in Germany, present practice in Europe and applicability to the United States’ (1976-1977) 14 Harvard Journal on Legislation 947
  • B Hamer, ‘Serving Two Masters: Union Representation on Corporate Boards of Directors’ (1981) 81(3) Columbia Law Review 639
  • Dunlop Commission on the Future of Worker-Management Relations: Final Report (1994)

Directors' duties[edit]

While corporate constitutions typically set out the balance of power between directors, shareholders, employees and other stakeholders, additional duties are owed by members of the board to the corporation as a whole. First, rules can restrain or empower the directors in whose favor they exercise their discretion. While older corporate law judgments suggested directors had to promote "shareholder value", almost modern state laws empower directors to exercise their own "business judgment" in the way they balance the claims of shareholders, employees, and other stakeholders. Second, all state laws follow the historical pattern of fiduciary duties to require that directors avoid conflicts of interest between their own pursuit of profit, and the interests of the corporation. The exact standard, however, may be more or less strict. Third, many states require some kind of basic duty of care in performance of a director's tasks, just as minimum standards of care apply in any contract for services. However, Delaware has increasingly abandoned substantive objective duties, as it reinterpreted the content of the duty of care, allows liability waivers.

Stakeholder interests[edit]

Most states follow the approach in Shlensky v Wrigley,[85] that directors do not only need to maximize shareholder profits. They can balance the interests of all stakeholders, as in a decision to not put in floodlights to play nighttime baseball games, in the community's interest.

Most corporate laws empower directors, as part of their management functions, to determine which strategies will promote a corporation's success in the interests of all stakeholders. Directors will periodically decide whether and how much of a corporation's revenue should be shared among directors' own pay, the pay for employees (e.g. whether to increase or not next financial year), the dividends or other returns to shareholders, whether to lower or raise prices for consumers, whether to retain and reinvest earnings in the business, or whether to make charitable and other donations. Most states have enacted "constituency statutes",[86] which state expressly that directors are empowered to balance the interests of all stakeholders in the way that their conscience, or good faith decisions would dictate. This discretion typically applies when making a decision about the distribution of corporate resources among different groups, or in whether to defend against a takeover bid. For example, in Shlensky v Wrigley[85] the president of the Chicago Cubs baseball team was sued by stockholders for allegedly failing to pursue the objective of shareholder profit maximization. The president had decided the corporation would not install flood lights over the baseball ground that would have allowed games could take place at night, because he wished to ensure baseball games were accessible for families, before children's bed time. The Illinois court held that this decision was sound because even though it could have made more money, the director was entitled to regard the interests of the community as more important. Following a similar logic in AP Smith Manufacturing Co v Barlow a New Jersey court held that the directors were entitled to make a charitable donation to Princeton University on the basis because there was "no suggestion that it was made indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends."[87] So long as the directors could not be said to have conflicting interests, their actions would be sustained.

Dodge v Ford Motor Co notoriously held in 1919 that corporations had to be run "primarily for the profit of the stockholders" though most states, and the Supreme Court, have since followed the view that directors must balance all stakeholders' interests.[88]

Delaware's law has also followed the same general logic, even though it has no specific constituency or stakeholder statute.[89] The standard is, however, contested largely among business circles which favor a view that directors should act in the sole interests of shareholder value. Judicial support for this aim is typically found in a case from Michigan in 1919, called Dodge v Ford Motor Company.[90] Here, the Ford Motor Company president Henry Ford had publicly announced that he wished not merely to maximize shareholder returns but to raise employee wages, decrease the price of cars for consumers, because he wished, as he put it, "to spread the benefits of this industrial system to the greatest possible number". A group of shareholders sued, and the Michigan Supreme Court said in an obiter dictum that a "business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end." However, in the case itself a damages claim against Ford did not succeed, and since then Michigan law has been changed.[91] The US Supreme Court has also made it clear in Burwell v Hobby Lobby Stores Inc that shareholder value is not a default or overriding aim of corporate law,[92] unless a corporation's rules expressly opt to define such an objective. In practice, many corporations do operate for the benefit of shareholders, but this is less because of duties, and more because shareholders typically exercise a monopoly on the control rights over electing the board. This assumes, however, that directors do not merely use their office to further their own personal goals over the interests of shareholders, employees, and other stakeholders.

Conflicts of interest[edit]

Since the earliest corporations were formed, courts have imposed minimum standards to prevent directors using their office to pursue their own interests over the interests of the corporation. Directors can have no conflict of interest. In trusts law, this core fiduciary duty was formulated after the collapse of the South Sea Company in 1719 in the United Kingdom. Keech v Sandford held that people in fiduciary positions had to avoid any possibility of a conflict of interest, and this rule "should be strictly pursued".[93] It was later held that no inquiry should be made into transactions where the fiduciary was interested in both sides of the deal.[94] These principles of equity were received into the law of the United States, and in a modern formulation Cardozo J said in Meinhard v Salmon that the law required "the punctilio of an honor the most sensitive... at a level higher than that trodden by the crowd."[95]

In Guth v Loft Inc the Delaware Supreme Court reduced the standards a director had to avoid conflicts of interest.

The standards applicable to directors, however, began to depart significantly from traditional principles of equity that required "no possibility" of conflict regarding corporate opportunities, and "no inquiry" into the actual terms of transactions if tainted by self-dealing. In a Delaware decision from 1939, Guth v Loft Inc,[96] it was held that Charles Guth, the president of a drink manufacturer named Loft Inc., had breached his duty to avoid conflicts of interest by purchasing the Pepsi company and its syrup recipe in his own name, rather than offering it to Loft Inc. However, although the duty was breached, the Delaware Supreme Court held that the court will look at the particular circumstances, and will not regard a conflict as existing if the company it lacked finances to take the opportunity, if it is not in the same line of business, or did not have an "interest or reasonable expectancy". More recently, in Broz v Cellular Information Systems Inc,[97] it was held that a non-executive director of CIS Inc, a man named Mr Broz, had not breached his duty when he bought telecommunications licenses for the Michigan area for his own company, RFB Cellular Inc.. CIS Inc had been shedding licenses at the time, and so Broz alleged that he thought there was no need to inquire whether CIS Inc would be interested. CIS Inc was then taken over, and the new owners pushed for the claim to be brought. The Delaware Supreme Court held that because CIS Inc had not been financially capable at the time to buy licenses, and so there was no actual conflict of interest. In order to be sure, or at least avoid litigation, the Delaware General Corporation Law §144 provides that directors cannot be liable, and a transaction cannot be voidable if it was (1) approved by disinterested directors after full disclosure (2) approved by shareholders after disclosure, or (3) approved by a court as fair.[98]

Corporate officers and directors may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically "fair" to the corporation.

  • Lieberman v Becker, 38 Del Ch 540, 155 A 2d 596 (Super Ct 1959)
  • DGCL §144 contains the rule that the burden for proving unfairness remains on plaintiff after disclosure

Duty of care[edit]

Main article: Duty of care
In Ultramares Corporation v Touche,[99] a case concerning Touche, Niven & Company (now Deloitte) across from the NYSE,[100] Cardozo CJ held that the ordinary duty of care applicable to professionals performing services requires people to act "with the care and caution proper to their calling".

The duty of care that is owed by all people performing services for others is, in principle, also applicable to directors of corporations. Generally speaking, the duty of care requires an objective standard of diligence and skill when people perform services, which could be expected from a reasonable person in a similar position (e.g. auditors must act "with the care and caution proper to their calling",[101] and builders must perform their work in line with "industry standards"[102]). In a 1742 decision of the English Court of Chancery, The Charitable Corporation v Sutton,[103] the directors of the Charitable Corporation, which gave out small loans to the needy, were held liable for failing to keep procedures in place that would have prevented three officers defrauding the corporation of a vast sum of money. Lord Hardwicke, noting that a director's office was of a "mixed nature", partly "of the nature of a public office" and partly like "agents" employed in "trust", held that the directors were liable. Though they were not to be judged with hindsight, Lord Hardwicke said he could "never determine that frauds of this kind are out of the reach of courts of law or equity, for an intolerable grievance would follow from such a determination." Many states have similarly maintained an objective baseline duty of care for corporate directors, while acknowledging different levels of care can be expected from directors of small or large corporations, and from directors with executive or non-executive roles on the board.[104] However in Delaware, as in a number of other states,[105] the existence of a duty of care has became increasingly uncertain.

In re Citigroup Inc Shareholder Derivative Litigation[106] ensured that no director of any major banking corporation could be held liable for breach of the duty of care, even though its risky practices caused the global financial crisis of 2007-8.[107]

In 1985, the Delaware Supreme Court passed one of its most debated judgments, Smith v Van Gorkom.[108] The directors of TransUnion, including Jerome W. Van Gorkom, were sued by the shareholders for failing to adequately research the corporation's value, before approving a sale price of $55 per share to the Marmon Group. The Court held that to be a protected business judgment, "the directors of a corporation [must have] acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Failing to act on an informed basis, if it caused loss, would amount to gross negligence, and here the directors were liable. The decision triggered a panic among corporate boards which believed they would be exposed to massive liability, and insurance firms who feared rising costs of providing directors and officers liability insurance to corporate boards. In response to lobbying, the Delaware General Corporation Law was amended to insert a new §102(b)(7). This allowed corporations to give directors immunity from liability for breach of the duty of care in their charter. However, for those corporations which did not introduce liability waivers, the courts subsequently proceeded to reduce the duty of care outright.[109] In 1996, In re Caremark International Inc. Derivative Litigation[110] required "an utter failure to attempt to assure a reasonable information and reporting system exists", and in 2003 In re Walt Disney Derivative Litigation[111] went further. Chancellor Chandler held directors could only be liable for showing "reckless indifference to or a deliberate disregard of the whole body of stockholders" through actions that are "without the bounds of reason".[112] In one of the cases that came out of the Global Financial Crisis, the same line of reasoning was deployed in In re Citigroup Inc Shareholder Derivative Litigation.[106] Chancellor Chandler, confirming his previous opinions in Re Walt Disney and the dicta of Re Caremark, held that the directors of Citigroup could not be liable for failing to have a warning system in place to guard against potential losses from sub-prime mortgage debt. Although there had been several indications of the significant risks, and Citigroup's practices along with its competitors were argued to have contributed to crashing the international economy, Chancellor Chandler held that "plaintiffs would ultimately have to prove bad faith conduct by the director defendants". This suggested that Delaware law had effectively negated any substantive duty of care. This suggested that corporate directors were exempt from duties that any other professional performing services would owe. Itt remained unclear, with a change in the Chief Justice of the Delaware Supreme Court in 2014, whether this position would remain.

Derivative suits[edit]

Main article: Derivative suit

Because directors owe their duties to the corporation and not, as a general rule, to specific shareholders or stakeholders, the right to sue for breaches of directors duty rests by default with the corporation itself. The corporation is necessarily party to the suit.[113] This creates a difficulty because almost always, the right to litigate falls under the general powers of directors to manage the corporation day to day (e.g. Delaware General Corporation Law §141(a)). Often, cases arise (such as in Broz v Cellular Information Systems Inc[97]) where an action is brought against a director because the corporation has been taken over and a new, non-friendly board is in place, or because the board has been replaced after bankruptcy. Otherwise, there is a possibility of a conflict of interest because directors will be reluctant to sue their colleagues, particularly when they develop personal ties. The law has sought to define further cases where groups other than directors can sue for breaches of duty. First, many jurisdictions outside the US allow a specific percentage of shareholders to bring a claim as of right (e.g. 1 per cent).[114] This solution may still entail significant collective action problems where shareholders are dispersed, like the US. Second, some jurisdictions give standing to sue to non-shareholder groups, particularly creditors, whose collective action problems are less.[115] Otherwise, third, the main alternative is that any individual shareholder may "derive" a claim on the corporation's behalf to sue for breach of duty, but such a derivative suit will be subject to permission from the court.

Increasingly courts have denied that the board should restrict derivative suits, as in the 2003 case In re Oracle Corp Derivative Litigation[116] where it was held that an insider trading claim against Oracle Corp CEO Larry Ellison could proceed.[117]

The risk of allowing individual shareholders to bring derivative suits is usually thought to be that it could encourage costly, distracting litigation, or "strike suits" - or simply that litigation (even if the director is guilty of a breach of duty) could be seen as counterproductive by a majority of shareholders or stakeholders who have no conflicts of interest. Accordingly, it is generally thought that oversight by the court is justified to ensure derivative suits match the corporation's interests as a whole because courts may be more independent. However, especially from the 1970s some states, and especially Delaware, began also to require that the board have a role. Most common law jurisdictions have abandoned role for the board in derivative claims,[118] and in most US states before the 1980s, the board's role was no more than a formality.[119] But then, a formal role for the board was reintroduced. In the procedure to bring a derivative suit, the first step is often that the shareholder had to make a "demand" on the board to bring a claim.[120] Although it might appear strange to ask a group of directors who will be sued, or whose colleagues are being sued, for permission, Delaware courts took the view that the decision to litigate ought by default to lie within the legitimate scope of directors' business judgment. For example, in Aronson v Lewis[121] a shareholder of the Meyers Parking System Inc claimed that the board had improperly wasted corporate assets by giving its 75 year old director, Mr Fink, a large salary and bonus for consultancy work even though the contract did not require performance of any work. Mr Fink had also personally selected all of the directors. Nevertheless, Moore J. held for the Delaware Supreme Court that there was still a requirement to make a demand on the board before a derivative suit could be brought. There was "a presumption that in making a business decision, the directors of a corporation acted on an informed basis in good faith and in the honest belief that the action was taken in the best interests of the company", even if they owed their jobs to the person being sued. A requirement to make a demand on the board will, however, be excused if it is shown that it would be entirely "futile", primarily because a majority of the board is alleged to have breached its duty. Otherwise it must be shown that all board members are in some very strong sense conflicted, but merely working with the accused directors, and the personal ties this potentially creates, is insufficient for some courts.[122] This indicated a significant and controversial change in Delaware's judicial policy, that prevented claims against boards.

In 1981, in Zapata Corp v Maldonado[123] the Delaware Supreme Court held that the board of Zapata Corp., founded by George H.W. Bush, could not be sued for breach of fiduciary duty. An "independent investigation committee" was competent to reject the demand for a derivative suit, despite being appointed by the board.

In some cases corporate boards attempted to establish "independent litigation committees" to evaluate whether a shareholder's demand to bring a suit was justified. This strategy was used to pre-empt criticism that the board was conflicted. The directors would appoint the members of the "independent committee", which would then typically deliberate and come to the conclusion that there was no good cause for bringing litigation. In Zapata Corp v Maldonado[123] the Delaware Supreme Court held that if the committee acted in good faith and showed reasonable grounds for its conclusion, and the court could be "satisfied [about] other reasons relating to the process", the committee's decision to not allow a claim could not be overturned. Applying Connecticut law, the Second Circuit Federal Court of Appeals held in Joy v North[124] that the court could substitute its judgment for the decisions of a supposedly independent committee, and the board, on the ground that there was scope for conflicting interests. Then, the substantive merits for bringing the derivative claim would be assessed. Winter J held overall that shareholders would have the burden "to demonstrate that the action is more likely than not to be against the interests of the corporation". This would entail a cost benefit analysis. On the benefit side would be "the likely recoverable damages discounted by the probability of a finding of liability", and the costs side would include "attorney's fees and other out-of-pocket expenses", "time spent by corporate personnel", "the impact of distraction of key personnel", and potential lost profits which may result from the publicity of a trial." If it is thought that the costs exceed the benefits, then the shareholders acquire the right to sue on the corporation's behalf. A substantive hearing on the merits about the alleged breach of director's duty may be heard. The tendency in Delaware, however, has remained to allow the board to play a role in restricting litigation, and therefore minimize the chances that it could be held accountable for basic breaches of duty.[125]

Minority shareholder protections[edit]

  • Ivanhoe Partners v Newmont Mining Corp., 535 A.2d 1334 (Del. 1987) a shareholder owning over 50% of shares is a controlling shareholder; but actual control may also be present through other mechanisms
  • Citron v Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989) non controlling shareholders do not owe duties to minority shareholders and may vote their shares for personal gain without concern
  • In re Cysive, Inc. Shareholders Litigation 836 A.2d 531 (Del. 2003) Nelson Carbonell owned 35% of Cysive, Inc., a publicly traded company. His associates' holdings and options to buy more stock, however, actually meant he controlled around 40% of the votes. Chancellor held that "without having to attract much, if any, support from public stockholders" Carbonell could control the company. This was especially so since "100% turn-out is unlikely even in a contested election" and "40% block is very potent in view of that reality."
  • Kahn v Lynch Communications Systems, Inc. 638 A.2d 1110 (Del. 1994) Alcatel held 43% of shares in Lynch. One of its nominees on the board told the others, "you must listen to us. We are 43% owner. You have to do what we tell you." The Delaware Supreme Court held that Alcatel did in fact dominate Lynch.
  • Perlman v Feldmann, 219 F.2d 173 (2d Cir 1955), certiorari denied, 349 US 952 (1955) held it was foreseeable that a takeover bidder wished to divert a corporate advantage to itself, and so the selling shareholders were required to pay the premium they received to the corporation
  • Jones v H.F. Ahmanson & Co. 1 Cal.3d 93, 460 P.2d 464 (1969) holders of 85% of comm shares in a savings and loan association, exchanged shares for shares of a new corporation and began to sell those to the public, meaning that the minority holding 15% had no market for the sale of their shares. Held, breach of fiduciary duty to the minority: "majority shareholders... have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner."
  • New York Business Corporation Law section 1104-a, the holders of 20 per cent of voting shares of a non-public corporation may request that the corporation be would up on grounds of oppression.
  • NY Bus Corp Law §1118 and Alaska Plastics, Inc. v. Coppock, 621 P.2d 270 (1980) the minority can sue to be bought out at a fair value, determined by arbitration or a court.
  • Donahue v Rodd Elctrotype Co of New England 367 Mass 578 (1975) majority shareholders cannot authorise a share purchase from one shareholder when the same opportunity is not offered to the minority.
  • In re Judicial Dissolution of Kemp & Beatley, Inc 64 NY 2d 63 (1984) under a "just and equitable winding up" provision, (equivalent to IA 1986 s 212(1)(g), it was construed that less drastic remedies were available to the court before winding up, and "oppression" was said to mean ‘conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise. A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.’
  • Meiselman v Meiselman 309 NC 279 (1983) a shareholder’s ‘reasonable expectations’ are to be determined by looking at the whole history of the participants’ relationship. ‘That history will include the ‘reasonable expectations’ created at the inception of the participants’ relationship; those ‘reasonable expectations’ as altered over time; and the ‘reasonable expectations’ which develop as the participants engage in a course of dealing in conducting the affairs of the corporation.’

Mergers and acquisitions[edit]

Corporate finance[edit]

Securities markets[edit]

Investment businesses[edit]

Auditing[edit]

Bankruptcy[edit]

Taxation[edit]

Theory[edit]

See also[edit]

Notes[edit]

  1. ^ Lucian Bebchuk, The Case for Increasing Shareholder Power 118 Harvard Law Review 833, 844 (2004)
  2. ^ See corplaw.delaware.gov.
  3. ^ See L Bebchuk, A Cohen and A Ferrell, Does the Evidence Favor State Competition in Corporate Law? 90 California LR 1775, 1809-1810 (2002)
  4. ^ c.f. RC Clark, Corporate Law (Aspen 1986) 2, who defines the modern public corporation by four main features: separate legal personality, limited liability, centralized management, and freely transferable shares.
  5. ^ See generally, WA Klein and JC Coffee, Business Organization and Finance: Legal and Economic Principles (9th edn Foundation 2004) 137-140
  6. ^ See also Limited liability limited partnership
  7. ^ e.g. in Delaware see the Division of Corporations at corp.delaware.gov, in New York see the Division of Corporations at dos.ny.gov/corps, and in California see the "Business Entities" section of the Secretary of State website at sos.ca.gov/business
  8. ^ 75 US 168 (1869) and see Henry N. Butler, Nineteeth century jurisdictional competition in the granting of corporate privileges (1985) 14(1) Journal of Legal Studies 129
  9. ^ See Edgar v MITE Corp, 457 US 624 (1982) White J., citing Restatement (Second) of Conflict of Laws § 302, Comment b, pp. 307-308 (1971) Also VantagePoint Venture Partners 1996 v Examen Inc, 871 A2d 1108, 1113 (2005) 'The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholder.'
  10. ^ Contrast the European Union decisions, including Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd (2003) C-167/01 and see Simon Deakin, Two Types of Regulatory Competition: Competitive Federalism versus Reflexive Harmonisation. A Law and Economics Perspective on Centros (1999) 2 Cambridge Yearbook of European Legal Studies 231
  11. ^ See WL Cary, ‘Federalism and Corporate Law: Reflections on Delaware’ (1974) 83(4) Yale Law Journal 663, 664, noting how under Woodrow Wilson acting as governor tightened New Jersey law, provoking Delaware to change its regulation.
  12. ^ See William Ripley, Wall Street and Main Street (1927) 30, ‘The little state of Delaware has always been forward in this chartermongering business.’
  13. ^ 288 US 517 (1933)
  14. ^ See RK Winter, ‘State Law, Shareholder Protection, and the Theory of the Corporation’ (1977) 6 J Leg Studies 251
  15. ^ This is vast. See K Kocaoglu, 'A Comparative Bibliography: Regulatory Competition on Corporate Law' (2008) Georgetown University Law Center Working Paper, on SSRN
  16. ^ e.g. W Bratton, ‘Corporate Law’s Race to Nowhere in Particular’ (1994) 44 U Toronto LJ 401. See also
  17. ^ e.g. Case of Sutton's Hospital (1612) 77 Eng Rep 960
  18. ^ 9 US 61 (1809)
  19. ^ 75 US 168 (1869)
  20. ^ The larger consequence was that insurance regulation remained state based, as the Court also held that insurance did not generally affect interstate commerce. This latter ruling was, however, overturned by United States v South-Eastern Underwriters Association, 322 US 533 (1944)
  21. ^ 118 US 394 (1886)
  22. ^ a b 558 US 310 (2010)
  23. ^ 424 US 1 (1976)
  24. ^ 494 US 652 (1990)
  25. ^ 573 US ___ (2014)
  26. ^ per Ginsburg J (dissenting), at page 14 of the dissent 573 US ___ (2014)
  27. ^ cf Kennedy J (dissenting) Citizens United v Federal Election Commission, 558 US 310 (2010)
  28. ^ e.g. DGCL §141(a), "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation." California Corporations Code §300(a). NYBCL §701, "Subject to any provision in the certificate of incorporation authorized by... [the] certificate of incorporation as to control of directors... the business of a corporation shall be managed under the direction of its board of directors..." This is a change from an old dictum in Manson v Curtis, 119 NE 559, 562 (NY 1918) where it was said that a director's powers are "original and undelegated". For support for this position, see Johannes Zahn, Wirtschaftsführertum und Vertragsethik im Neuen Aktienrecht 95 (1934) reviewed by Friedrich Kessler (1935) 83 University of Pennsylvania Law Review 393 and Stephen Bainbridge, Director Primacy and Shareholder Disempowerment, 119(6) Harvard Law Review 1735, 1746, fn 59 (2006)
  29. ^ See NLRB v Bell Aerospace Co, 416 US 267 (1974) excluding "managerial employees" from the scope of the National Labor Relations Act of 1935 §2(3) and (11). See further A Cox, DC Bok, RA Gorman and MW Finkin, Labor Law Cases and Materials (14th edn 2006) 92-97
  30. ^ cf Turberville v Stampe (1697) 91 ER 1072, per Lord Holt CJ
  31. ^ See RS Stevens, 'A Proposal as to the Codification and Restatement of the Ultra Vires Doctrine' (1927) 36(3) Yale Law Journal 297 and MA Schaeftler, 'Ultra Vires - Ultra Useless: The Myth of State Interest in Ultra Vires Acts of Business Corporations' (1983-1984) Journal of Corporation Law 81
  32. ^ Revised MBCA §3.01(a) presumption that a corporation's purpose is to 'engage in any lawful business unless a more limited purpose is set forth in the articles of incorporation.' Also §3.04, precludes a corporation from asserting ultra vires as a defense from having contracts enforced against it.
  33. ^ 220 Cal App2d 851, (3d Dist 1963)
  34. ^ See further, Restatement of the Law of Agency (3rd edn 2006)
  35. ^ LA Bebchuk and JM Freid, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’ (1996) 105 Yale LJ 857, 881-890
  36. ^ All such interests need to be registered to take effect under the Uniform Commercial Code art 9
  37. ^ [1970] ICJ 1
  38. ^ See Re Barcelona Traction, Light, and Power Co, Ltd [1970] ICJ 1
  39. ^ e.g. MBCA §2.04
  40. ^ 939 F.2d 209 (4th Cir. 1991)
  41. ^ See Perpetual Real Estate Services Inc v Michaelson Properties Inc, 974 F2d 545 (4th Cir 1992)
  42. ^ 306 US 307 (1939) known as the "Deep Rock doctrine"
  43. ^ See generally AA Berle, 'The Theory of Enterprise Entity' (1947) 47(3) Columbia Law Review 343
  44. ^ Berkey v Third Avenue Railway, 244 NY 602 (1927)
  45. ^ eg Walkovszky v Carlton 223 NE2d 6 (NY 1966). Contrast the dissent of Keating J and the Californian decision Minton v Cavaney, 56 Cal2d 576 (1961). Traynor J held the veil would be pierced when shareholders "provide inadequate capitalization and actively participate in the conduct of corporate affairs." This meant the family of a girl who drowned in a swimming pool would be compensated.
  46. ^ In re Oil Spill by the Amoco Cadiz off the Coast of France on March 16, 1978, 1984 AMC 2123 (ND Ill 1984), McGarr J, at 2191, "As an integrated multinational corporation which is engaged through a system of subsidiaries in the exploration, production, refining, transportation and sale of petroleum products throughout the world, Standard is responsible for the tortious acts of its wholly owned subsidiaries and instrumentalities, AIOC and Transport."
  47. ^ Perpetual Real Estate Services Inc v Michaelson Properties Inc, 974 F2d 545 (4th Cir 1992) citing WM Fletcher, Fletcher Cyclopedia of the Law of Private Corporations (1990) § 41.85 at 71, "courts usually apply more stringent standards to piercing the corporate veil in a contract case than they do in tort cases. This is because the party seeking relief in a contract case is presumed to have voluntarily and knowingly entered into an agreement with a corporate entity, and is expected to suffer the consequences of the limited liability associated with the corporate business form, while this is not the situation in tort cases." c.f. Fletcher v Atex Inc 8 F.3d 1451 (2d Cir. 1995)
  48. ^ 524 US 51 (1998)
  49. ^ e.g. Texas Business Corporation Act of 1997, art 2.21(2)
  50. ^ Henry Hansmann and Reiner Kraakman, Towards Unlimited Liability for Corporate Torts 100(7) Yale Law Journal 1879, 1900-1901 (1991)
  51. ^ See Peter Gourevitch and James Shinn, Political Power and Corporate Control (Princeton 2005) 4
  52. ^ See Robert C. Clark, Corporate Law 86 (Aspen 1986)
  53. ^ eg DGCL §242(b)(1) requires a resolution by the directors, and then a majority vote of shareholders, and the affected classes of shareholder.
  54. ^ 17 US 518 (1819)
  55. ^ cf William A. Klein and John C. Coffee, Business Organization and Finance 113-114 (9th edn 2004) "The decision evoked much contemporary protest, because to many it seemed to imply that once a corporate charter was granted, the corporation was beyond legislative control. In fact, its significance was more limited than this because, as Justice Story pointed out... the state could insert a provision in any charter that it granted reserving its right to amend or further condition the charter."
  56. ^ cf, the English Court of Appeal case, Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34, cited in Jesse H. Choper, John C. Coffee and Ronald J. Gilson, Cases and Materials on Corporations (8th Edition 2012)
  57. ^ eg DGCL §102(b)
  58. ^ Attorney General v Davy (1741) 26 ER 531, per Lord Hardwicke LC
  59. ^ R v Richardson (1758) 97 ER 426, per Lord Mansfield
  60. ^ cf Manson v Curtis, 223 NY 313, 119 NE 559 (1918) holding that the board of directors could not be effectively abolished so as to allow large shareholders to dominate.
  61. ^ See also NASDAQ Rule 4350(c)(1)
  62. ^ See NYSE Listed Company Manual Rule 303A.02
  63. ^ NYSE Rule 303A.04-05. See also NASDAQ Rule 4350(c)(3)-(4) allows one of three directors to lack "independence" if he or she is not an officer or family member of an officer.
  64. ^ This is generally thought to have begun with the UK Cadbury Report.
  65. ^ eg NYSE Listed Company Manual Rule 303A.11
  66. ^ DGCL §141(a) Also see DGCL §350, shareholder agreements may only affect a board's discretion in close corporations, and Galler v Galler, 32 Ill2d 16 (1964)
  67. ^ This is not inevitable, as in corporations without shareholders, or those which may choose to give a voice to employees, eg Massachusetts Laws, General Laws, Part I Administration of the Government, Title XII Corporations, ch 156 Business Corporations, §23
  68. ^ Attorney General v Davy (1741) 2 Atk 212 and R v Richardson (1758) 97 ER 426
  69. ^ The case law on the meaning of "with cause" is conflicting. In New York, see Fox v Cody, 141 Misc 552, 252 NYS 395 (Sup Ct 1930) and Auer v Dressel, 306 NY 427, 118 NE 2d 590, 593 (1954) and in Delaware, see Campbell v Loew’s Inc, 36 Del Ch 563, 134 A 2d 852 (Ch 1957) referring back to Auer.
  70. ^ Marcel Kahan and Edward Rock, Embattled CEOs, 88(5) Texas Law Review 987, 1008 (2010)
  71. ^ DGCL §211(b)
  72. ^ DGCL §228
  73. ^ 647 F3d 1144 (DC Cir 2011)
  74. ^ See Business Roundtable v SEC, 647 F3d 1144 (DC Cir 2011) and Business Roundtable v SEC, 905 F2d 406 (DC Cir 1990)
  75. ^ See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 George Washington Law Review 687 (1986)
  76. ^ See William Z. Ripley, Two Changes in the Nature and Conduct of Corporations 11(4) Trade Associations and Business Combinations 143 (1926); or Proceeding of the Academy of Political Science in the City of New York 695
  77. ^ 905 F 2d 406 (DC Cir 1990)
  78. ^ eg NYSE Listed Company Manual §313.00
  79. ^ See, SEC Release No. 34-31326 (16 October 1992) changing rules so that (1) preparing and filing proxy statements are not needed if a person is not seeking to obtain voting authority from another person, but owners of over $5m are required. (2) no prior review of preliminary proxy solicitation materials (3) proxies are required to unbundle proposals so there are separate votes on each.
  80. ^ eg DGCL §211(d). See also, SEC 13d-5, dating from times when groups of investors were considered potential cartels, saying any 5% shareholder voting block must register with the Federal financial authority, the Securities and Exchange Commission.
  81. ^ SEC Rule 14a-8
  82. ^ Economic Policy Institute, 'More compensation heading to the very top: 1965–2009' (16 May 2011) Based on data from Wall Street Journal/Mercer, Hay Group 2010.
  83. ^ DGCL §271, and cf Katz v Bregman, 431 A2d 1274 (1981) includes assets under 50% of the company's value.
  84. ^ cf the United Kingdom Companies Act 2006 ss 366-368 and 378
  85. ^ a b 237 NE 2d 776 (Ill App 1968)
  86. ^ 28 states in 1991. See C Hansen, 'Other Constituency Statutes: A Search for Perspective' (1991) 46(4) The Business Lawyer 1355, Appendix A for a list of laws. The Connecticut General Statute Ann. §33-756 goes further than most in requiring directors take account of stakeholders.
  87. ^ 39 ALR 2d 1179 (1953)
  88. ^ See Lynn Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Virginia Law and Business Review 163 (2008)
  89. ^ See Davis v Louisville Gas and Electric Co, 16 Del Ch 157 (1928) ‘the directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final. The judgment the directors of the corporation enjoys the benefit of a presumption that it was formed in good faith, and was designed to promote the best interests of the corporation they serve.’ See also Unocal Corp v Mesa Petroleum Co, 493 A2d 946 (Del 1985)
  90. ^ 170 NW 668 (Mich 1919)
  91. ^ Michigan Business Corporation Act §§251 and 541a(1)(c), and see Churella v Pioneer State Mutual Insurance Co, 671 NW2d 125 (2003) distinguishing Dodge.
  92. ^ 573 U.S. ___ (2014) at page 23, "While it is certainly true that a central objective of for- profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives."
  93. ^ [1726] EWHC Ch J76
  94. ^ See Whelpdale v Cookson (1747) 27 ER 856
  95. ^ 164 N.E. 545 (N.Y. 1928)
  96. ^ 5 A2d 503 (Del 1939)
  97. ^ a b 637 A2d 148 (Del Supr 1996)
  98. ^ See also the Revised Model Business Corporation Act §8.61 and California Corporation Code §310
  99. ^ 174 NE 441 (1932)
  100. ^ At 30 Broad Street, New York City.
  101. ^ See Ultramares Corporation v Touche, 174 N.E. 441 (1932)
  102. ^ See Terlinde v Neely, 275 SC 395, 271 SE2d 768 (1980)
  103. ^ (1742) 26 ER 642
  104. ^ eg Barnes v Andrews, 298 F 614 (SDNY 1924) A director of the Liberty Starter Co, now insolvent, was accused of having contributed to the failure by being inattentive on the board. Acknowledging the duty of care, but distinguishing on these facts, Learned Hand J held, "It is easy to say he should have done something, but that will not serve to harness upon him the whole loss, nor is it the equivalent of saying that, had he acted, the company would now flourish. An inattentive director or directors cannot be held liable for a corporate loss if it is shown that proper attentiveness to corporate affairs by all the directors would still not have prevented the loss complained of. In order words, it must be demonstrated that the accused director's slothfulness was a cause of the company's loss. This notion of causation is thus a critical element in any action brought against a poorly performing board of directors and has had a tremendous impact on the course of modern corporate governance."
  105. ^ e.g. Indiana Code Ann §23-1-35(1)(e)(2) requires willful misconduct or recklessness before any liability. c.f. Model Business Corporation Act §8.30(a) which requires a director act in good faith and what he or she reasonably believes to be in the company's best interests.
  106. ^ a b 964 A 2d 106 (Del Ch 2009)
  107. ^ See further, JC Coffee, ‘What went wrong? An initial inquiry into the causes of the 2008 financial crisis’ (2009) 9(1) Journal of Corporate Law Studies 1
  108. ^ 488 A2d 858 (Sup Ct Del 1985) Before this, the leading case was Graham v Allis-Chalmers Manufacturing Co, 188 A2d 125 (Del Supr 1963)
  109. ^ See also Cinerama Inc v Technicolor, Inc, 663 A.2d 1156 (1995) directors proved the 'entire fairness' of a merger, selling to MacAndrews & Forbes Group, even though directors failed to conduct an adequate market check to determine if other bidders would have given a higher price. Van Gorkom was distinguished.
  110. ^ 698 A 2d 959 (Del. Ch. 1996)
  111. ^ 825 A 2d 275 (2003)
  112. ^ See also, Brehm v Eisner, 746 A.2d 244 (2000) Del Supreme Court, "Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule. Irrationality may be the functional equivalent of the waste test or it may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule."
  113. ^ See generally Davenport v Dows, 85 US 626 (1873) and Ross v Bernhard, 396 US 531 (1970)
  114. ^ e.g., the German Aktiengesetz 1965 §148
  115. ^ e.g. BCE Inc v 1976 Debentureholders [2008] 3 SCR 560
  116. ^ 824 A.2d 917 (2003)
  117. ^ The case was subsequently settled. See 'Oracle's Chief in Agreement to Settle Insider Trading Lawsuit' (12 September 2005) NY Times
  118. ^ See for example, the UK Companies Act 2006 ss 261-263
  119. ^ See RM Buxbaum, 'Conflict-of-Interest Statutes and the Need for a Demand on Directors in Derivative Actions' (1980) 68 Californian Law Review 1122
  120. ^ Delaware Chancery Court Rules, Rule 23.1, requires exhaustion of internal remedies.
  121. ^ 473 A 2d 805, 812 (Del 1984)
  122. ^ e.g. in New York, see Barr v Wackman 329 NE.2d 180 (1975) and In re Kaufmann Mutual Fund Actions, 479 F.2d 257 (1973) cert denied 414 US 857 (1973)
  123. ^ a b 430 A 2d 779 (Del Sup 1981)
  124. ^ 692 F.2d 880 (1982)
  125. ^ c.f. more recently, In re Oracle Corp Derivative Litigation, 824 A.2d 917 (2003) concerning insider trading, approving a derivative claim on the basis of the director's personal ties.

References[edit]

Books
Articles
  • Stephen Bainbridge, Director Primacy and Shareholder Disempowerment, 119(6) Harvard Law Review 1735 (2006)
  • LA Bebchuk, The Case for Increasing Shareholder Power 118 Harvard Law Review 833 (2004)
  • LA Bebchuk, A Cohen and A Ferrell, Does the Evidence Favor State Competition in Corporate Law? 90 California LR 1775 (2002)
  • AA Berle, Non-Voting Stock and Bankers Control (1925–1926) 39 Harvard Law Review 673
  • AA Berle, Corporate Powers as Powers in Trust (1931) 44 Harvard Law Review 1049
  • AA Berle, The Theory of Enterprise Entity (1947) 47(3) Columbia Law Review 343
  • AA Berle, The Developing Law of Corporate Concentration (1952) 19(4) University of Chicago Law Review 639
  • AA Berle, Control in Corporate Law (1958) 58 Columbia Law Review 1212
  • AA Berle, Modern Functions of the Corporate System (1962) 62 Columbia Law Review 433
  • AA Berle, Property, Production and Revolution (1965) 65 Columbia Law Review 1
  • AA Berle, Corporate Decision-Making and Social Control (1968–1969) 24 Business Lawyer 149
  • V Brudney, Contract and Fiduciary Duty in Corporate Law 38 BCL Review 595 (1977)
  • RM Buxbaum, Conflict-of-Interest Statutes and the Need for a Demand on Directors in Derivative Actions (1980) 68 Californian Law Review 1122
  • WL Cary, Federalism and Corporate Law: Reflections on Delaware (1974) 83(4) Yale Law Journal 663
  • JC Coffee, What went wrong? An initial inquiry into the causes of the 2008 financial crisis (2009) 9(1) Journal of Corporate Law Studies 1
  • C Hansen, Other Constituency Statutes: A Search for Perspective (1991) 46(4) The Business Lawyer 1355
  • Henry Hansmann and Reiner Kraakman, Towards Unlimited Liability for Corporate Torts, 100(7) Yale Law Journal 1879 (1991)
  • Marcel Kahan and Edward Rock, Embattled CEOs, 88(5) Texas Law Review 987 (2010)
  • Friedrich Kessler, Book Review (1935) 83 University of Pennsylvania Law Review 393
  • K Kocaoglu, A Comparative Bibliography: Regulatory Competition on Corporate Law (2008) Georgetown University Law Center Working Paper
  • MA Schaeftler, Ultra Vires - Ultra Useless: The Myth of State Interest in Ultra Vires Acts of Business Corporations (1983-1984) Journal of Corporation Law 81
  • Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 George Washington Law Review 687 (1986)
  • RS Stevens, A Proposal as to the Codification and Restatement of the Ultra Vires Doctrine (1927) 36(3) Yale Law Journal 297
  • Lynn Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Virginia Law and Business Review 163 (2008)
  • William Z. Ripley, Two Changes in the Nature and Conduct of Corporations, 11(4) Trade Associations and Business Combinations 143 (1926); or Proceeding of the Academy of Political Science in the City of New York 695
  • RK Winter, ‘State Law, Shareholder Protection, and the Theory of the Corporation’ (1977) 6 J Leg Studies 251

External links[edit]

Based on the MBCA
Other states with own laws