Shareholder Democracy: A Reality or Chimera?

The American Law Institute in 1979 authorized the undertaking of a project dealing with a restatement of officers' and directors' responsibilities. This project has been funded and is proceeding under the direction of Stanley A. Kaplan, of Chicago.

See Schwartz Donald E. , “The Paradigm of Federal Chartering,” in idem (ed.), Commentaries on Corporate Structure and Governance, The ALI-ABA Symposiums (1979), p. 325; see idem, “A Case for Federal Chartering of Corporations,” Business Lawyer, vol. 31, (1976), p. 1125, for earlier explorations of this subject.

Berle A. Means G. , The Modern Corporation and Private Properly, revised edition, chapters IV and V (1968).

See the evaluations of the Berle and Means thesis, ibid., in Alchian Armen Demsetz Harold , “Production, Information Costs, and Economic Organization”; Williamson Oliver , “Managerial Discretion and Business Behavior”; de Alessi Louis , “Private Property and Dispersion of Ownership in Large Corporations”; Stano Miron , “Executive Ownership Interests and Corporate Performance”; Jensen Michael Meckling William , “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”; Fama Eugene , “Agency Problems and the Theory of the Firm,” all in Posner Richard Scott Kenneth (eds.), Economics of Corporation Law and Securities Regulation (1980), p. 10 et. seq.

See First National Bank v. Bellotti, 435 U.S. 765 (1978) (affording First Amendment political speech protection to a Massachusetts corporation); Consolidated Edison Co. of New York, Inc. v. Public Service Commission, ___ U.S. ___, 100 S. Ct. 2326 (1980) (commission's suppression of bill inserts discussing controversial issues of public policy directly infringed the First and Fourteenth Amendments' freedom of speech); Division of Corporate Finance, SEC, Staff Report on Corporate Accountability (1980); see also Lindbloom C. , Politics and Markets (1977).

See Eisenberg Melvin , The Structure of the Corporation (Boston: Little, Brown, 1976), p. 148, suggesting that belief in the functioning of shareholder democracy lulls shareholders, legislators, and the public into a false sense of security, believing that a disinterested board is supervising the corporation's affairs. Eisenberg identifies this skew between belief and reality as the “quack-cure problem.”

Conard A. , Corporations in Perspective (New York: Mineola, 1976), p. 114–121. Consider also the growth of institutional shareholders' holdings in the market and the impact of this, both in making participation more feasible (especially where the investor is a union pension fund) and in making the participants more knowledgeable.

For discussions of the agency relationship existing between management and shareholder in the modern corporation, see Jensen Meckling ; op. cit.; Fama , op. cit. See also Williamson , op. cit. (analyzing corporate behavior and decision making through consideration of “expense preference” motivation); and Anderson Alison , “Conflicts of Interest, Efficiency, Fairness, and Corporate Structure,” UCLA Law Review, vol. 25 (1978), p. 738 (suggesting that conflicts of interest are the inevitable result of specialized exchange).

For example, Kennecott Copper Corporation's management decision to invest the proceeds resulting from a sale of its subsidiary, Peabody Coal Company, in a purchase of the Carborundum Company instead of distributing the income to shareholders was a decision based partly in considerations involving long- or short-term risk. See Kennecott Copper Corp. v. Curtiss-Wright Corp. 584 F.2d 1195(2d Cir. 1978). A similar situation may arise when management is resistant to a takeover.

See Shlensky v. Wrigley, 95 Ill. App. 2d 173, 237 N.E. 2d 776 (1968) (issue of the installation of lights at Chicago Cubs' stadium was a matter of board business judgment); so long as the board is independent, little inquiry into its reasons is made. See, for example, Gall v. Exxon, 418 F. Supp. 508 (S.D. N.Y. 1976); Auerbach v. Bennett, 47 N.Y. 2d 619, 393 N.E. 2d 994 (1979).

See Coffee John C. , “Beyond the Short-Eyed Sentry: Toward a Theoretical View of Corporate Misconduct and an Effective Legal Response,” Virginia Law Review, vol. 63 (1977), p. 1100.

Rule 14a-4 under the Securities Exchange Act of 1934.

See, for example, Rosenfeld v. Fairchild Engine and Airplane Corp., 309 N.Y. 168, 128 N.E. 2d 291 (Ct. App. 1955); Levin v. Metro-Goldwyn-Mayer, Inc., 264 F. Supp. 797 (S.D. N.Y. 1967).

The growth in the use of the nominating committee may partially counter this. Nominating committees, however, are not required by any state. Furthermore, one might investigate who actually sits on these nominating committees in considering the real impact of this device.

Del. Corp. Law § 211 (d) (special meetings may be called by the board of directors or persons authorized by the certificate of incorporation or the by-laws); M.B.C.A. § 28 (special meetings may be called by the board, the holders of at least 10 percent of all shares entitled to vote or other authorized persons).

Del. Corp. Law § 141 (d); M.B.C.A. § 37.

Compare Del. § 214, providing that the certificate of incorporation may provide for cumulative voting, with Cal. Gen. Corp. L. § 708 (a), providing for mandatory cumulative voting in California corporations.

Del. Corp. Law § 242 (c) (1) (amendment of certificate of incorporation requires shareholder approval); M.B.C.A. § 79 (sale of assets other than in ordinary course of business requires shareholder authorization).

See Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) (finding of materiality of misstatement or omission in proxy statement was sufficient to establish shareholder-plaintiffs' cause of action because imposing on small shareholders the burden of rebutting the corporation's evidence of fairness of merger would discourage them from attempting private enforcement of the proxy rules).

Michelson v. Duncan, 407 A. 2d 211 (Del. Sup. 1979) (shareholder ratification of directors' stock option plan modification shifted burden of proof from defendants to stockholder); Schreiber v. Pennzoil Co., 419 A. 2d 952 (Del. Ch. 1980) (minority shareholders' overwhelming approval of subsidiary-parent management contract, shareholders being fully informed about the fee, operated to shift the burden of payment to the stockholder to show that payment of the fee was improper); Weinberger v. UOP, 409 A.2d 1262 (Del. Ch. 1979) (complaint did not state action against majority shareholders where it revealed on its face that merger could not have been approved without affirmative vote of majority of minority shareholders); Saxe v. Brady, 40 Del. Ch. 474, 184 A.2d 602 (1962) (unanimous shareholder ratification of transaction relieves interested parties of burden of proving fairness of the transaction and shifts burden to objecting stockholders).

See Del. Corp. Law §241 (b), (c); M.B.C.A. §59; but see N.Y. Bus. Corp. Law §803.

Rule 14a-8 under the Securities Exchange Act of 1934. But see Carter v. Portland General Electric Co., 227 Ore. 401, 362 P. 2d 766 (1961) (state court held that it did not have the power to judicially apply the SEC's stockholder proposal and that the shareholder resolution was in regard to an area not a proper subject for stockholder consideration).

Rule 14a-8 (c) (7) under the Securities Exchange Act of 1934.

See Schwartz Donald E. Weiss Elliott , “An Assessment of the SEC Shareholder Proposal Rule,” Georgetown Law Review, vol. 65 (1977), p. 635.

See, for example, Del. Corp. Law §141; M.B.C.A. §42; Eisenberg, op. cit., Part I, “The Legal Role of the Body of Shareholder,” p. 7.

Marsh Harold , “Are Directors Trustees? Conflict of Interested Corporate Morality,” Business Lawyer, vol. 22 (1966), p. 35.

M.B.C.A. § 41; Scottv. Multi-Amp. Corp. , 386 F. Supp. 44 (D.N.J. 1974); Remillard-Brick Co. v. Remillard-Dandini Co., 109 Cal. App. 2d 405, 241 P. 2d 66 (1952).

See, for example, Maldonado v. Flynn, 597 F. 2d 789 (2d Cir. 1979).

Mace M. , Directors: Myth and Reality (Cambridge: Harvard University Press, 1971).

Lipton , “Takeover Bids in the Target's Boardroom,” Business Lawyer, vol. 35 (1979), p. 101; Panter v. Marshall Field & Co., 486 F. Supp. 1168 (N.D. Ill. 1980) (court found that business judgment rule protected the board's conduct in resisting the offer through the use of defensive measures); Berman v. Gerber Products, 454 F. Supp. 1310 (W.D. Mich. 1978) (business judgment rule gave management wide discretion to determine the corporation's best interests in the face of a tender offer).

Ruckelshaus William , “Federal Chartering Threatens to Discard the Baby with the Bath Water,” in Schwartz (ed.), Commentaries, op. cit., p. 349.

86 Misc. 2d 809, 383 N.Y. S.2d 807, affirmed on opinion below 54 A.D. 2d 654, 387 N.Y. S. 2d 993 (1st Dept. 1976).

Hirschman A. , Exit, Voice, and Loyalty (Cambridge: Harvard University Press, 1970).

See Langvoort Donald , “State Tender-Offer Legislation: Interests, Effects, and Political Competency,” Cornell Law Review, vol. 62 (1977), p. 213.

An example of this is the auto industry's recent attempts to exclude the products of its Japanese competitors.

Weiss Elliott Schwartz Donald E. , “Using Disclosure to Activate the Board of Directors,” Law and Contemporary Problems, vol. 41 (1977), p. 63.

Note “Security for Expenses in Shareholders' Derivative Suits: 23 Years Experience,” Columbia Journal of Law and Social Problems, vol. 4 (1967), p. S-2.

Burks v. Lasker, 441 U.S. 471 (1979); Lewis v. Anderson, 615 F.2d 778 (9th Cir. 1980); Abbey v. Control Data Corp., 603 F.2d 724 (8th cir. 1979); Auerbach v. Bennett, 47 N.Y. 2d 619, 393 N.E. 2d 994 (1979); contra Galef v. Alexander, 615 F. 2d 51 (2d Cir. 1980); Maldonado v. Flynn, 413 A.2d 1251 Del. Ch. 1980). See Dent George , “Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit?” Northwestern University Law Review, vol. 75 (1980), p. 96.

Coffee John Schwartz Donald , “The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform,” Columbia Law Reviw, vol. 81(1981), p. 261.

Hinsey Joseph , “Maldonado (NY) v. Maldonado (DE); Which Prevails?” Legal Times of Washington (4 August 1980), p. 18.