Yesterday's faculty collquium speaker was Anupam Chander, of the UC Davis School of Law (visiting Cornell), who presented his paper "Minorities, Shareholder and Otherwise," which is forthcoming in the Yale Law Journal. You can download a copy of this very interesting paper here; the abstract follows:
Corporate law understands what constitutional law does not. Being a minority matters to law. While constitutional law moves towards colorblindness, shunning knowledge of minority status, corporate law places minorities at the heart of its endeavor. This Essay seeks to reconcile the "minorities" in corporate and constitutional law, developing a larger theory of minority status and its relevance to legal decision. I begin by rereading the corporate canon. I show that body's concern not just for wealth maximization, but also its distribution. I reveal corporate law's deep commitment to protecting minority shareholders, operationalized through an elaborate common law and statutory framework. Ironically, it is corporate law, not constitutional law, that is obsessed with issues such as fairness, oppression, and power. My Essay highlights this and then applies corporate law's theory of minority/majority relations to three hot button debates in the constitutional law realm: affirmative action (currently before the Supreme Court), California's Racial Privacy Initiative (on the ballot for 2004), and the demographic shift to a majority minority polity (already a reality in California).
Chander is very smart and interesting, and so is his paper. It's a very clever idea, which is quite well-executed. Most important, it's quite novel, which is what really counts in the academic reward system. Yet, as explained below, I think I must respectfully dissent.
Corporate law permits discrimination among shareholders. Probably the best known examples are the discriminatory self-tender offer Unocal used to fend off Boone Pickens and the poison pill. Instructively, however, those devices involve discrimination directed against someone who is trying to become a majority shareholder. As Chander correctly observes, corporate law has many doctrines intended to protect minority shareholders and to ensure fair treatment of such shareholders. Chander then claims that constitutional law is much less concerned with protecting racial minorities. Obviously, this will strike many as a controversial claim, especially after last term's Supreme Court decisions in Grutter and Lawrence. Indeed, Chander's analysis seems far more persuasive as a critique of Scalia's color blindess-based dissent in Grutter than of the majority opinion.
Turning to the corporate law analogy, an initial question is whether the appropriate analogy is to the close or public corporation. It’s an important question because fairness is much more of a concern in the law of close corporations than in that of public firms. Close corporations are like the body politic because exit is costly in both, while secondary capital markets make exit from public corporations quite easy. Yet, it is very doubtful one would want to export the law of close corporations to the constitutional context.1 Close corporations are often described as “incorporated partnerships,” which explains why fairness is such a big issue in the close corporation context. Query, however, whether partnership is a useful way of thinking about the body politic. Partnerships make decisions by consensus, which they can do because partners typically have comparable interests (profit maximization) and equal access to information. In a pluralistic body politic, those conditions do not hold, and decisionmaking must be effected through the exercise of authority. As such, the body politic most closely resembles the public corporation, where fairness concerns – while still present – are more attenuated.
Consider, for example, former Delaware Chancellor William Allen’s opinion in Mendel v. Carroll. The Carroll family collectively controlled Katy Industries, Inc., owning at various times 48 to 52% of the stock. Even when they did not have an outright majority, their status as the largest shareholder ensured that they had effective control. The Carroll family had proposed a freeze-out merger that would have involved cashing out the minority shareholders at about $26 per share. A competing offer was made by a group organized by a fellow named Sanford Pensler at about $28 per share. The Carroll Family withdrew their merger proposal, but also announced that they had no interest in selling their shares. Their opposition to the Pensler proposal effectively precluded it from going forward. Minority shareholders sued, alleging that the Carroll Family violated its fiduciary duties and that the board of directors violated its fiduciary duties. Specifically, the minority wanted the board to issue more stock to dilute the Carroll family’s holdings to the point at which they no longer have control. Chancellor Allen held: “The board's fiduciary obligation to the corporation and its shareholders, in this setting, requires it to be a protective guardian of the rightful interest of the public shareholders. But while that obligation may authorize the board to take extraordinary steps to protect the minority from plain overreaching, it does not authorize the board to deploy corporate power against the majority stockholders, in the absence of a threatened serious breach of fiduciary duty by the controlling stock.” [651 A.2d 297, 306 (Del. Ch. 1994).] Mendel thus illustrates the extent to which corporate law is far more tolerant of hegemony than constitutional law.2 As the Massachusetts court observed in Wilkes v. Springside Nursing Home, 353 N.E.2d 657 (Mass. 1976), there must be a balance between the fiduciary duty of the majority and its right to selfish ownership, which gives the controlling group “some room to maneuver” in setting policy. Hence, it is not clear to me that corporate law provides a useful lens through which to view constitutional law problems like affirmative action. Nothing I saw in Grutter suggests that racial majorities are entitled to “selfish ownership” of the body politic.
Another way of getting at my problem with the paper might be to examine the corporate law doctrine that permits a controlling shareholder to freeze-out the minority, so long as the controlling shareholder pays a fair price. If we export both corporate law's solicitude for minority shareholders and corporate law's tolerance of hegemony to the constitutional context, Plessey was correct and Brown was not. The racial majority would be permitted to freeze-out the minority from their schools, for example, so long as they gave the minorities fair treatment, which leads directly to separate but equal schools. For a while post-Plessey the Supreme Court actually tried to enforce separate but equal by monitoring whether the separate schools really were equal. The Court gave that project up in Brown, however; and rightly so, because it never worked. Separate but equal was inherently unequal and properly was struck down. Accordingly, I am left unpersuaded that exporting corporate law principles to the constitutional context does very much to advance the analysis in the latter, unless one is prepared to be very selective about which corporate law principles one is prepared to export and which one intends to leave behind. But that seems to defeat the purpose of the exercise.
In sum, it is a very interesting paper that is well-worth reading. The idea is clever and the execution is impressive. In my view, however, it would have been even more impressive if Chander had been willing to make the move of advocating that con law adopt corporate law’s more tolerant view of hegemony. That would have been a really radical and daring step. But go download the paper and decide for yourself.
1 Chander denies any agenda of exporting the fairness technologies, which tends to make the normative payoff kind of anticlimactic.
2 Chander forthrightly acknowledges this difference between corporate and constitutional law; indeed, the differing ways in which the two bodies of law view power is a motivation for the paper.
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