On September 26, I had the privilege of moderating a panel at the Delaware Corporate Law Anniversary Symposium in Wilmington, Delaware. The panel included Professor Lyman P. Q. Johnson, Norman M. Monhait, Professor Elizabeth Pollman and Chief Justice Leo E. Strine, Jr. The title of the panel was “The Purpose of the Delaware Corporation.” Below are my opening remarks.
Corporate Law in a Single Sentence
There is a story in the Talmud that involves a person asking Rabbi Hillel to teach him all of Jewish learning while standing on one foot. The Rabbi responded “do not do to your neighbor what is hateful to you: all the rest is commentary; now go and learn.”
Were I issued that same challenge about Delaware corporate law, I would say “corporations are managed by a board of directors that is elected by shareholders—all the rest is commentary—now go and learn.”
Think about it: the business judgment rule, Revlon, and the entire fairness doctrine—each of these is a judicially created standard that evolved through the courts trying to make sense of a very simple statutory command: directors manage the business and affairs of the corporation. How do we give them leeway to do that, but provide some assurance that the power will not be abused?
Of course, when the courts apply Unocal and its cousin, the inequitable manipulation doctrine, they are also addressing a second statutory command—that shareholders get to decide who those directors are. So in takeover and election situations, the courts must resolve a tension between the directors’ statutory right to govern the corporation, and the shareholders’ statutory right to elect those directors—the court rulings in Schnell and other cases are about how to resolve these competing tensions.
The Common Law Leap to Purpose
In interpreting these two simple statutory commands, judges have made the leap that because shareholders elect the directors, those directors must be managing the corporation for the benefit of the shareholders. Note that there is nothing in the Delaware General Corporation Law that says that—the DGCL gives shareholders plenty of governance rights, but does establish any fiduciary duties; even Section 144, the oddball interested transaction provision that no one quite understands, speaks only in terms of fairness to the corporation, not to shareholders.
But like the Talmudic commentary on the Bible, the fiduciary common law is binding, and there are clear fiduciary duties under Delaware law run to shareholders, and not to others. Delaware never joined the “other constituency club.”
So function follows form. Because shareholders decide who runs the show, the courts have found that the managers must protect those shareholders’ interests. But the courts have made a second leap: they also appear to have decided that shareholders are primarily interested their financial return. Thus, fiduciary duty to shareholders has become equated with maximizing that return, and the purpose of Delaware for-profit corporations has come to be associated primarily with creating wealth for shareholders.
I want to end my introduction with and statement and a question:
The DGCL does not define corporate purpose, but the common law has: the cases have concluded that the purpose of a corporation is to satisfy shareholders, and that maximizing financial return is the way to do that. Does such a narrow purpose serve the interests of shareholders and society?