In Search of Lost Time: What if Delaware Had Not Adopted Shareholder Primacy?

David J. Berger is Partner at Wilson Sonsini Goodrich & Rosati. This post is based on his recent paper, forthcoming as a chapter in The Corporate Contract in Changing Times. This post is part of the Delaware law series; links to other posts in the series are available here.

Delaware law today is based upon the core concept that corporate directors cannot subordinate the best interests of stockholders to that of other corporate constituencies unless stockholders themselves expressly support that subordination. In my recent paper In Search of Lost Time: What if Delaware Had Not Adopted Shareholder Primacy, which is publicly available on SSRN (and is forthcoming in The Corporate Contract in Changing Times, Steven Davidoff Solomon and Randall Thomas ed, University of Chicago Press), I make no attempt to challenge this black-letter law. Instead, my paper asks the question “what if”? That is, how might directors and other corporate constituencies manage the corporation if we did not live in a world of stockholder control?

The purpose of my paper is three-fold. First, to simply note that while the concept of stockholder primacy currently dominates Delaware law, this is a relatively recent phenomenon. Indeed, no less an authority than Chief Justice Strine has written that the “Delaware Supreme Court first grappled with the question” of stockholder primacy in the late 1980s, in its decisions in Unocal and Revlon. Stockholder capitalism arose out of a series of academic arguments and regulatory developments that became popular during the Reagan Administration, and can be seen as part of the broader response to the takeover wars and legal debates over these wars that was taking place during this period. Prior to that time the corporation was constrained by a variety of countervailing forces, and these forces had multiple tools to limit the board’s discretion to act solely on behalf of stockholder interests; many of these countervailing forces lost power at the same time stockholder capitalism grew into the bedrock principle of corporate governance. Yet despite its relative youth, the dominance of stockholder primacy in the minds of corporate directors, business leaders, institutional investors, and even the public cannot be overstated. Given the significance and dominance of the stockholder primacy concept, I believe it is important to recognize that corporate America existed before the world of stockholder primacy, and in fact was often able to thrive despite living in such a world.

Second, I note that while stockholder primacy is currently the lingua franca of corporate governance, given both its relative youth and historical development, the law on this issue can change. The reason for this is not particularly complicated; stockholder primacy today is based upon Delaware law, and Delaware law is always subject to change. These changes can come in the form of changes to statutory law such as amendments to the Delaware General Corporate Law (“DGCL”) or even changes to the common law as interpreted by Delaware’s judiciary. As part of this discussion I note that there have been several substantial changes to Delaware law in recent years, both by statute and by the courts, that have led to fundamental changes in corporate law and corporate behavior. Obviously this does not mean that the world of stockholder primacy is changing anytime soon, but it does make it worth considering a world where stockholders may not be the sole constituency owed duties by the corporation, or even the sole group able to enforce any such duties.

The third purpose of the paper is the most modest: to simply point out that even what appears to be the most fundamental notions of corporate law are subject to change in the future. Former Chancellor William Allen recognized this many years ago when he described corporate law as “schizophrenic,” precisely because our view of the corporation changes along with our relative views of efficiency concerns, ideology, and interest group politics. The result, as former Chancellor Allen wrote, is that our view of the corporation, including its purpose and the proper roles and responsibilities of directors when acting on behalf of the corporation, “will hold for here and now, only to be torn by some future stress, and to be reformulated once more. And so on and so on, evermore.” Thus the essay concludes that while we currently live in a world of stockholder primacy, this world is capable of changing again at some point in the future.

The full paper is available here.

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