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• W2206200935 abstract "Ihave a secret: I love corporations. I study them and I love them, just as Jane Goodall studies and loves chimpanzees. It makes me terribly sad that corporations are so misunderstood.I'd like to help people understand my beloved corporations a little bit better. I think corporations are misunderstood because-please pardon this observation-we have too many economists talking about corporations, and not enough corporate lawyers. Corporations are legal creatures. With due apologies to all the nice economists out there, the fact is that most of you didn't go to law school. Therefore you don't really understand corporations the way that corporate lawyers can. I'm here to help.What I want to do in particular is debunk some very common but dangerous myths about corporations that have become endemic in the business world. There are two myths that I especially want to address.The First Myth: Corporate Law Requires Directors to Maximize Shareholder ValueThe first myth is the widely held belief that the directors of a corporation have some sort of legal duty to shareholder (often treated as synonymous with share price) and that directors can be sued for damages if they fail to do this. This is utter myth. Nevertheless, you'll see it widely repeated, including by business journalists. It seems to be traceable to an old case that comes out of Michigan almost 100 years ago called Dodge v. Ford. Whenever you ask someone to give you some legal authority for the proposition that directors have a fiduciary duty to maximize shareholder value, they seem to drag out poor, old, dusty Dodge v. Ford and put it on the table as Exhibit A.As a corporate lawyer, I want to advise you that you are in trouble if the best precedent you can find for a proposition is a case that is almost 100 years old and comes from a state that's a bit of a backwater for corporate law. (The big state for corporate law is Delaware; that's where the majority of large firms are incorporated.) Moreover, it turns out that Dodge v. Ford is not really a case about directors' duties to shareholders at all. It's actually a case about a conflict between shareholders. Henry Ford was the majority shareholder in Ford Motor Company. The Dodge brothers were minority shareholders in Ford who were trying to start up their own auto business, eventually known as Dodge Motors. Henry Ford wanted to prevent Ford Motors from paying big dividends because he wanted to starve the Dodge brothers of any economic return from their Ford Motors stock in hopes of crushing a potential competitor.This makes Dodge v. Ford not only a very old case from the wrong state, but also a very odd case that does not shed much light on the duties of directors. Please-let's take Dodge v. Ford behind the barn and put it out of its misery.If you look at modern corporate law, and especially Delaware corporate law, you will find there is no enforceable duty to maximize shareholder value because of a fundamental doctrine called the business judgment rule. What the business judgment rule says, in essence, is that as long as the directors of the company are not taking the company's assets for themselves-not stealing, in effect-and as long as they spend a decent amount of time poring over the papers that are presented to them, they can pretty much do what they darn please as long as they say that what they're doing is in the long-run interests of the corporation.Despite my somewhat cynical description, I believe the business judgment rule is a very wise rule for a variety of reasons, including the fact that if people could sue directors willy-nilly, corporations couldn't accomplish anything very useful. This is why you can find some version of the business judgment rule in almost every developed legal system in the world.But whether you like the business judgment rule or not, the rule makes pretty clear that corporate directors have the legal discretion to decline to maximize profits or share price, and instead run corporations with other objectives, such as producing great products, making great scientific innovations, taking care of employees, contributing to the community, or strengthening the nation. …" @default.
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• W2206200935 date "2014-12-01" @default.
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• W2206200935 title "The Corporation and the Law 1" @default.
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