A corporation’s duty to shareholders April 19, 2012 at 3:51 pm
My earlier post on the duty a company has to maximize profits to shareholders attracted quite a lot of comments (well, quite a lot for DEM anyway). Andy helpfully pointed me towards Dodge v. Ford Motor Company, and that in turn lead me to Lynn Stout’s paper on the case.
What we seem to have, in US law (and Delaware law in particular, given most large corporates in the US are incorporated in Delaware) is the following:
- There is no obligation for a US corporation to make money for shareholders provided that it says what it is going to do. Non-profits are often structured as corporations for instance.
- However, there is an obligation to treat all shareholders equitably. (This was one of the main issues in Dodge v. Ford.)
- Moreover absent a statement that a company isn’t there to make money for shareholders, there is a presumption that it is.
- However the business judgement presumption (that absent compelling evidence to the contrary, Directors are presumed to be acting in the interests of the corporation) is very strong in Delaware law, so shareholders often find it difficult to find a colorable claim on management for conduct that didn’t end up being in their best interests.
In other words, a Delaware corporation can act in the interests of a wider group than just shareholders, and it is unlikely that they can be sued for it. Exactly where the boundary of business judgement lies here, though, would have to be settled on a case-by-case basis.
In some sense the need for the legal requirements are mitigated by an active and well-funded private equity sector. In many cross sections management is much more disciplined by the threat of LBOs that target poorly run firms with valuable assets than it is by shareholder lawsuits.
A very interesting topic, maybe more so outside the US and specifically in Europe were it is a rather common believe, that companies (even listed one) exist for the benefit of the employees and not the shareholders.