Can we please popularize the "Bainbridge Hypothetical"? Anyway, here is an excellent analysis of the problem under Australian law:
At the heart of the Bainbridge Hypothetical is a simple question - by what standard should company directors make their decisions?
Devised by Stephen Bainbridge, a law professor from UCLA*, his thought experiment asks what the ends of corporate governance should be. This post revisits the question from the perspective of an Australian director (changes to the original are in bold and are mine):
Acme's Limited board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders through a planned share buy back, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant.
Assume that:
Acme Limited is an Australian Public Company
The long- time workers are research scientists from leading universities;
obsolete means sustainably profitable but less profitable than the new plant; and
the latter groups cannot gain except at the former groups expense.
By what standard should the board make the decision in Australia.
In response to his original hypothetical, the Professor says:
“Shareholder wealth maximization provides a clear answer -- close the plant.
And, from what I can gather from recent comments from the Chief Justice of the Delaware Supreme Court, there's little doubt the Professor is right - in Delaware.
But, corporations being creatures of statute, what passes for the ends of governance in one place are out of place in another. Put simply, corporations aren't corporations. Outside of Delaware their nature and purpose reflect the varieties of the world's legislatures.
In Australia, we have an entity statute which makes the shareholder versus stakeholder debate, implicit in the Professor's answer, a false dilemma.
