In a blog post over at Conglomerate, Haskell Murray observed that:
Some would argue that as a matter of positive Delaware corporate law (and the law of states that follow Delaware’s lead), that the primary purpose of the traditional corporation is to maximize shareholder wealth.
This prompted a number of prominent corporate law academics to take issue with that claim. Lyman Johnson, for example, opined that:
I must dissent from the view that it is clear as a matter of positive law that corporations in general must maximize shareholder wealth. What is clear is that such a seemingly foundational issue lacks the sort of clear resolution--outside narrow settings-- in positive law one would expect in the year 2012. ... The law remains ambivalent and for good reasons, leaving the "corporation" itself as the appropriate focus. .... And of course, constituency statutes in almost 30 states further complicate assertions about positive law.
And Joan Heminway chimed in with:
You make a nice point about the difference in judicial review between the business judgment rule setting and the Unocal takeover defense setting. But that’s a fiduciary duty issue, really. Understanding that purpose and fiduciary duty are linked, can we talk more about the corporate purpose piece?
Since Haskell cited yours truly as the "some" who would so argue, I'm going to take this as an opportunity to stake out my take on the issue.
In this post, I want to focus on Joan's observation. Although I may have sometimes used loose language that suggests to the contrary, my own view is that any effort to talk about the law of corporate purpose is ultimately bootless.
As a matter of theory, the corporation is not a unitary person or even a thing capable of having a defined purpose. Hence, I must take issue with Lyman Johnson's assertion that "Perhaps the the corporation, long recognized as a distinctive legal person, should play a meaningful role on this foundational issue of purpose as well, not ignored as a mere semantic stand-in for the shareholders." Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?" The corporation is simply a nexus of contracts between factors of production. (More precisely, it is a legal fiction that has a nexus of contracts. See my article The Board of Directors as Nexus of Contracts.)
Just as the corporation has no conscience, it has no purpose. At most, the people whose contractual relations are brought within the legal construct known as the corporation may have a common purpose. Yet, as we see so often, even when we focus on a single constituency group--say, shareholders--the members of that group may have differing purposes.
As a practical matter, now that we've put the old ultra vires doctrine to bed, when does corporate purpose ever arise as a matter of law?
The question corporate law asks is not "what is the purpose of the corporation," but rather "whose interests prevail?" When the relevant decisionmaker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, which constituency wins?
That inquiry is operationalized mainly (if not entirely) via the law governing the fiduciary obligations of corporate directors and officers.
The relevant legal question thus is not "what is the corporate purpose" but rather "have the directors or officers violated their fiduciary duties by preferring the interests of one set of stakeholders over those of other sets?"
I'm going to elaborate on the debate in a series of posts:
Update: I continue the discussion started in this post, with a further explanation of why I think speaking of a corporate purpose leads one into the reification fallacy, in Is it useful to think about corporations as having a "purpose"?