Yosifon on “The Law of Corporate Purpose”
David Yosifon recently posted “The Law of Corporate Purpose” on SSRN (HT: Bainbridge). Here is the abstract:
Delaware corporate law requires directors to manage firms for the benefit of the firm’s shareholders, and not for any other constituency. Delaware jurists have been clear about this in their case law, and they are not coy about it in extra-judicial settings, such as in speeches directed at law students and practicing members of the corporate bar. Nevertheless, the reader of leading corporate law scholarship is continually exposed to the scholarly assertion that the law is ambiguous or ambivalent on this point, or even that case law affirmatively empowers directors to pursue non-shareholder interests. It is shocking, and troubling, for corporate law scholarship to evince such confusion about the most important black letter matter in the field. While I am a critic of the “shareholder primacy norm” in corporate governance, I am nevertheless convinced that shareholder primacy is the law. In fact, the critical vantage and reformative program that I have pursued in other writing presupposes that shareholder primacy is currently the law. This article is therefore dedicated both to providing doctrinal clarification on the law of corporate purpose, and to vindicating a key presumption in a broader normative agenda.
While I have not had a chance to read the paper, my initial reaction to the abstract is that there is an important distinction between nominal and actual requirements. It is certainly fair to say that, “Delaware corporate law [nominally] requires directors to manage firms for the benefit of the firm’s shareholders, and not for any other constituency.” It is quite another thing to assert that Delaware jurists actually enforce this requirement in a way that seriously impinges on the ability of directors to manage the firm for the benefit of other constituents. While the latter pronouncement may be subject to vigorous debate, I certainly don’t find it troubling or shocking that a number of esteemed scholars have concluded that Delaware jurists do not in fact require directors to manage firms for the benefit of the firm’s shareholders in any meaningful sense—and thus there is actually no such requirement in practice. Of course, this is merely my initial reaction to the abstract and Yosifon may well deal with this objection deftly in the body of his paper. To that point, I note that Stephen Bainbridge commented (here) that Yosifon delivers “a very effective critique of arguments made by scholars like Einer Elhauge and Lynn Stout that, as the latter put it, ‘The notion that corporate law requires directors . . . to maximize shareholder wealth simply isn’t true.’” Thus, I encourage you to go read the entire paper if you have the time.