Corporate Law & Business PurposeJeff Van Duzer,Dodge v. Ford.docx

Corporate Law & Business Purpose
Jeff Van Duzer,
Dodge v. Ford (1919), and
eBay v. Newmark (2010)
BLAW 461.01, Sept. 17, 2018
Andy Little
Van Duzer’s Main Thesis
“I would conclude that at this time in history, there are two
legitimate, first-order, intrinsic purposes of business: as
stewards of God’s creation, business leaders should manage
their businesses (1) to provide the community with goods and
services that will enable it to flourish, and (2) to provide
opportunities for meaningful work that will allow employees to
express their God-given creativity. . . . When managers pursue
these particular goals for their companies, they participate
directly in God’s creation mandate. They engage in work of
intrinsic and not just instrumental value.”
Jeff Van Duzer, Why Business Matters to God (IVP Academic,
2010), p. 42.
“Note that nothing in this … model supports the conclusion that
business should be operated for the purpose of maximizing
profits. In fact, this model turns the dominant business model
on its head. . . . Profit is not important as an end in and of
itself. Rather, it becomes the means of attracting sufficient
capital to allow the business to do what, from God’s
perspective, it is in business to do—that is, to serve its
customers and employees.”
Ibid., pp. 45-46.

The challenge of articulating a different model of business in
light of the law on corporate purpose
It seems like from a Christian perspective, Van Duzer has a
point.
But, will the law even allow this prioritization of customers and
employees, perhaps at the expense of shareholders? Haven’t we
heard somewhere that profit maximization for shareholder
benefit is the only moral and legal requirement of officers and
directors?
Dodge v. Ford (Mich. Sup. Ct., 1919)
The Dodge brothers were seeking to extend their fortunes in the
young American automobile industry in 1903. They decided to
invest in a new company formed by an eccentric engineer and
race car driver, Henry Ford. The Dodges became 10% owners of
the new company, which was the third automobile company
started by Ford since 1899.
By 1916, the Dodges decided to start their own company in
competition with Ford, but Ford refused to declare a stock
dividend because he knew his investors (the Dodges) would just
use the cash to build cars that competed with his Model T.
Ford (59% owner) wanted to re-invest what would have been a
dividend into a new factory, the River Rouge plant.
What Was Ford Thinking?
--Is he really benevolent?
--Is he just trying to play the role of populist folk hero?
Henry Ford did not premise his refusal to declare a dividend
based on the long-term success of the River Rouge Plant and
thereby the success of the company and its stockholders.
Rather, he argued that cars were too expensive, and that he

intended to lower the price of the Model T so that the average
person could afford one, which, in his mind, would make
society better.
Ford’s comment to the media: “I do not believe that we should
make such an awful profit on our cars. A reasonable profit is
right, but not too much. So it has been my policy to force the
price of the car down as fast as production would permit, and
give the benefits to users and laborers….”
Ford’s testimony at trial, with questions posed by counsel:
Q: Do you still think those profits were awful profits?
A: Well, I guess I do, yes.
Q: And for that reason you were not satisfied to continue to
make such awful profits?
A: We don’t seem to be able to keep the profits down.
Q: …What is the Ford Motor Company organized for except
profits, will you tell me, Mr. Ford?
A: Organized to do as much good as we can, everywhere, for
everybody concerned. And incidentally to make money.
The holding of the Michigan Supreme Court
The Michigan Supreme Court decided in favor of the Dodge
Brothers, and against Henry Ford. The judges held that a
majority shareholder like Ford (59%) can’t oppress minority
shareholders (10% combined) and refuse to declare a dividend
under these circumstances.
Famous language from the court, which still gets quoted
occasionally:
"A business corporation is organized and carried on primarily
for the profit of the stockholders. The powers of the directors
are to be employed for that end. The discretion of directors is to
be exercised in the choice of means to attain that end, and does
not extend to a change in the end itself, to the reduction of
profits, or to the nondistribution of profits among stockholders
in order to devote them to other purposes."

Dodge v. Ford, a few notes
Some commentators say that Ford would have won the case had
he premised his decision to build the River Rouge Plant on the
long-term gains expected to be obtained by stockholders.
The case is, first and foremost, a minority oppression case. It
answers questions about how majority owners treat owners with
no control over the business. In this sense, it is about fiduciary
duties owed in the context of rival, competing owners.
The business judgment rule allows managers and directors wide
discretion in making decisions, so long as there is some
connection between the managerial decision and a benefit to the
corporation. It’s just that here, Ford failed to make the link
between his decision and business success.
eBay v. Newmark (Del. 2010).
A reassessment of Dodge v. Ford, ninety years later.
Craig Newmark is the 42.6% owner of craigslist. James
Buckmaster owns 29% of the company. The third shareholder is
eBay, which owns 28.4%. eBay decided to compete with
craigslist, which was allowed under the parties’ various
agreements, but which triggered certain actions.
In response, Newmark and Buckmaster attempted to deprive
eBay from controlling one of the seats on the board of directors
(which was previously allowed by agreement), and diluted
eBay’s investment. The majority owners did so because they
viewed craigslist as having a community information-sharing
orientation, not the accumulation of profits.
Okay, this is starting to sound like a Dodge v. Ford situation….
The Delaware Chancery Court holding

"[Newmark and Buckmaster] did prove that they personally
believe craigslist should not be about the business of
stockholder wealth maximization, now or in the future. As an
abstract matter, there is nothing inappropriate about an
organization seeking to aid local, national, and global
communities by providing a website for online classifieds that
is largely devoid of monetized elements. Indeed, I personally
appreciate and admire [Newmark's and Buckmaster's] desire to
be of service to communities. The corporate form in which
craigslist operates, however, is not an appropriate vehicle for
purely philanthropic ends, at least not when there are other
stockholders interested in realizing a return on their investment.
Jim and Craig opted to form craigslist, Inc. as a for-profit
Delaware corporation and voluntarily accepted millions of
dollars from eBay as part of a transaction whereby eBay became
a stockholder. Having chosen a for-profit corporate form, the
craigslist directors are bound by the fiduciary duties and
standards that accompany that form. Those standards include
acting to promote the value of the corporation for the benefit of
its stockholders."
eBay v. Newmark:
A few notes
This case, similarly to Dodge v. Ford, is a minority stockholder
oppression case arising in the context of competition from the
minority stockholder, up against majority shareholders who
have more public-oriented values.
Lessons to be learned:
The BJR allows for wide latitude for managers and directors,
but it has limits.
Investors like eBay want to have their cake and eat it too: eBay
knew of Newmark and Buckmaster’s values at the time of
investment, and wanted both: A) the community orientation of
craigslist, and B) the ability to compete with the company in
their own corporate vehicle that is not so community oriented.

And the Delaware court allowed this.
The Delaware Chancery Court seems to imply there are only
two corporate organizations for business owners: A) for profit,
which are carried on for the benefit of stockholders, and B)
non-profit, which are “purely philanthropic.” One result of this
[perhaps false] dichotomy in corporate forms is the rise of the
benefit corporation.
A continuum of opinion
Shareholder primacy is the law, and that’s a good thing.
Shareholder primacy is the law, and that’s a bad thing.
Shareholder primacy either isn’t the [only] law, or it’s largely
irrelevant to managerial conduct.
Cornell Law Library
[email protected] Law: A Digital Repository
Cornell Law Faculty Publications Faculty Scholarship

4-1-2008
W hy We Should Stop Teaching Dodge v. Ford
Lynn A. Stout
Cornell Law School, [email protected]
Follow this and additional works at:
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VIRGINIA LAW & BUSINESS REVIEW
VOLUME 3 SPRING 2008 NUMBER 1
WHY WE SHOULD STOP TEACHING
DODGE v. FORD
Lynn A. Stoutt
IN TROD UCTIO N
..................................................................................... 164
I. DODGE V. FORD ON CORPORATE PURPOSE
..................................... 164
II. DODGE V. FORD AS WEAK PRECEDENT ON
CORPORATE PURPOSE
.................................................................... 166
III.THE LACK OF AUTHORITY FOR DODGE V. FORD'S
POSITIVE
VISION OF CORPORATE PURPOSE
...................................................... 168
IV. THE LACK OF AUTHORITY FOR DODGE V. FORD'S
NORMATIVE
VISION OF CORPORATE PURPOSE
...................................................... 172

V. ON THE PUZZLING SURVIVAL OF DODGE V. FORD
........................ 174
C O N CLU SIO N
..........................................................................................
176
t Paul Hastings Professor of Corporate and Securities Law and
Principal Investigator for
the UCLA Sloan Research Program on Business Organizations,
UCLA School of Law.
The author would like to thank the UCLA Sloan Research
Program on Business Organi
zations for its financial support.
Copyright (0 2008 Virginia Law & Business Review
Association
HeinOnline -- 3 Va. L. & Bus. Rev. 163 2008
Virginia Law & Business Review
INTRODUCTION
W HAT is the purpose of a corporation? To many people, the
answer to
this question seems obvious: corporations exist to make money
for
their shareholders. Maximizing shareholder wealth is the
corporation's only
true concern, its raison d'etre. Devoted corporate officers and

directors should
direct all their efforts toward this goal.
Some find this picture of the corporation as an engine for
increasing
shareholder wealth to be quite attractive. Nobel Prize-winning
economist
Milton Friedman famously praised this view of corporate
purpose in his 1970
New York Times essay, "The Social Responsibility of Business
Is to Increase Its
Profits."' To others, the idea of the corporation as a relentless
profit-seeking
machine seems less appealing. In 2004, Joel Bakan published
The Coooration:
The Pathological Pursuit of Profit and Power, a book
accompanied by an award-
winning documentary film of the same name. 2 Bakan's thesis is
that corpora-
tions are indeed dedicated to maximizing shareholder wealth,
without regard
to law, ethics, or the interests of society. Thus, as Bakan argues,
corporations
are "dangerously psychopathic" entities.
3
Whether viewed as cause for celebration or for concern, the idea

that
corporations exist only to make money for shareholders is rarely
subject to
challenge. Although there is a tradition of scholarly debate
among legal
academics on this point, it has attracted little attention outside
the pages of
specialized journals. 4 Much of the credit, or perhaps more
accurately the blame,
for this state of affairs can be laid at the door of a single
judicial opinion: the
1919 Michigan Supreme Court decision in Dodge v. FordMotor
Compan;.]
I. D ODGE V. FORD ON CORPORATE PURPOSE
The facts underlying Dodge v. Ford are familiar to virtually
every student
who has taken a course in corporate law. Famed industrialist
Henry Ford was
1. Milton Friedman, The Social Reyonsibiil of Business If to
Incrase ts Profts, N.Y. TnMEs
MAG., Sept. 13, 1970, at 33.
2. JOL BAKAN, T-T CORPORATION: THE PATHOLOGICAL
PURSUIT OF PROFIT AND POWER
(2004).
3. Id. at2.

4. See Lynn A. Stout, Bad and ot-So-Bad A fgwuzfor
Shareholder Primag;, 75 S. CAT. L. REv.
1189, 1189-90 (2002) (noting the 1932 Berle-Dodd debate
regarding the proper purpose
of the corporation, as well as more modern scholarly
disagreement on the subject).
5. Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).
3:163 (2008)
Why We Should Stop Teaching Dodge v. Ford
the founder and majority shareholder of the Ford Motor
Comparn.6 Brothers
John and Horace Dodge were minorint investors in the firm.7
The Dodge
brothers brought a lawsuit against Ford claiming that he was
using his control
over the company to restrict dividend payouts, even though the
company was
enormously profitable and could afford to pay large dividends
to its
shareholders.8 Ford defended his decision to withhold dividends
through the
provocative strategy of arguing that he preferred to use the
corporation's
money to build cheaper, better cars and to pay better wages. 9
The Michigan
Supreme Court sided with the Dodge brothers and ordered the
Ford Motor

Company to pay its shareholders a special dividend. 10
In the process, the Michigan Supreme Court made an offhand
remark
that is regularly repeated in corporate law casebooks today:
There should be no confusion .... A business corporation is
organized and carried on primarily for the profit of the
stockholders. The powers of the directors are to be em-
ployed for that end. The discretion of the directors is to be
exercised in the choice of means to attain that end, and does
not extend to ... other purposes."
As will be discussed in greater detail below, this was merely
judicial dicta,
quite unnecessary to reach the court's desired result.
Nevertheless, this
quotation from Dodge v. Ford is cited almost invariably as
evidence that
corporate law requires corporations to have a "profit
maximizing purpose"
12
and that "managers and directors have a legal duty to put
shareholders' interests
above all others and no legal authority to serve an other
interests . ".'..
Indeed, Dodge v. Ford is routinely employed as the onj legal
authority for this
proposition.
14
6. Id. at 671.
7. Id. at 670.

8. Id. at 670 71.
9. Id. at 671.
10. Id. at 685.
11. Id. at 684.
12. ROBERT CHARLES CLYRK, CORPORAITE LAW 678
(1986).
13. BAIAN, supra note 2, at 36.
14. See, e.g., id.; CLAYRr, supra note 12, at 679; MARJORIE
KELLY, THE DINqNE RIGHT OF
CAPITAL: DETHRONING THE CORPORATE ARiSTOCRACY
52 53 (2001); Lawrence E.
3:163 (2008)
But what if the opinion in Dodge v. Ford is incorrect? What if
the Michigan
Supreme Court's statement of corporate purpose is a
misinterpretation of
American corporate doctrine? Put bluntly, what if Doge v. Ford
is bad law?
This Essay argues that Dodge v. Ford is indeed bad law, at least
when cited
for the proposition that the corporate purpose is, or should be,
maximizing
shareholder wealth. Dodge v. Ford is a mistake, a judicial
"sport," a doctrinal
oddity largely irrelevant to corporate law and corporate
practice. What is

more, courts and legislatures alike treat it as irrelevant. In the
past thirty years,
the Delaware courts have cited Dodge v. Ford as authorint in
only one
unpublished case, and then not on the subject of corporate
purpose, but on
another legal question entirely.15
Only laypersons and (more disturbingly) many law professors
continue to
rely on Dodge v. Ford. This Essay argues we should mend our
collective ways.
Legal instructors and scholars should stop teaching and citing
Dodge v. Ford. At
the least, they should stop teaching and citing Dodge v. Ford as
anything more
than an example of how courts can go seriously astray.
II. DODGE V. FORD AS WEAK PRECEDENT ON
CORPORATE PURPOSE
Let us begin with some of the more obvious reasons why legal
experts
should hesitate before placing much weight on Dodge v. Ford.
First, the case is
approaching its one hundredth anniversary. Henry Ford, John
Dodge, and
Horace Dodge have long since died and turned to dust, along
with the
members of the Michigan Supreme Court who heard their
dispute. In fact,
Dodge v. Ford is the oldest corporate law case selected as an
object for study in
most corporate law casebooks. This observation should provoke
concern, for
case law is a bit like wine: a certain amount of aging is

desirable, but after too
many years it goes bad-and it is a rare vintage that is still
drinkable after a
century. Why rely on a case that is nearly one hundred years old
if there is
more modern authority available?
A second odd feature of Dodge v. Ford is the court that decided
it. The
state of Delaware-not Michigan-is far and away the most
respected and
Mitchell, A Theoretical and Practical Iramework for Eqforing
Coiporate Costituenc S tatutes, 70
TEX. L. REV. 579, 601 (1992).
15. See Blackwell v. Nixon, Civ. A. No. 9041, 1991 WL
194725, at *4 (Del. Ch. Sept. 26,
1991).
3:163 (2008)
influential source of corporate case law, a fact that reflects both
Delaware's
status as the preferred state of incorporation for the nation's
largest public
companies and the widely recognized expertise of the judges on
the Delaware
Supreme Court and Delaware Court of Chancery. California and
New York

have produced their share of influential corporate law cases, as
has Massachu-
setts with regard to close corporations. Michigan, however, is a
distant also-
ran in the race among the states for influence in corporate law.
16
Finally, a third limiting aspect of Dodge v. Ford as a source of
legal author-
ity on the question of corporate purpose is the important fact,
noted earlier,
that the Michigan Supreme Court's statements on the topic were
dicta. The
actual holding in the case-that Henry Ford had breached his
fiduciary duty
to the Dodge brothers and that the company should pay a special
dividend-
was justified on entirely different and far narrower legal
grounds. Those
grounds were that Henry Ford, as a controlling shareholder, had
breached his
fiduciary duty of good faith to his minority investors.1 1
As the majority shareholder in the Ford Motor Company, Henry
Ford
stood to reap a much greater economic benefit from any
dividends the
company paid than John and Horace Dodge did. Ford had other
economic
interests, however, directly at odds with those of the Dodge
brothers. First,
because the Dodge brothers wished to set up their own car
company to
compete with Ford (as they eventually did), Ford wanted to

deprive them of
liquid funds for investment.'8 Second, Ford wanted to buy out
the Dodge
brothers' interest in the Ford Motor Company (as he eventually
did) at the
lowest price possible. Withholding dividends from the Dodge
brothers was an
excellent, if underhanded, strategy for accomplishing both
objectives. 9
16. See Guhan Subramanian, The Influence of Antitakeoer
Statutes on Incoiporation Choice: Eidence
on the 'ace" Debate andAntitakeoer O'erreacling, 150 U. PY. L.
RV. 1795 (2002).
17. See Dodge '. Ford, 170 N.W. at 685; see also Einer Elhauge,
Sarifieing Coiporate Prfits in the
Public Interest, 80 N.Y.U. L. REN. 733, 772 75 (2005)
(explaining why profit maximization
proponents' reliance on Doge z'. Ford is misplaced); Nathan
Oman, Coiporations andAuton
oT Theories of Contract: A Citique of the New Lex Mercatoria,
83 DEN. U. L. RENT. 101, 135
36 (2005) ("Ultimately, the Michigan Supreme Court ruled for
the Dodge brothers not
because of some generalized dut to maximize shareholder value,
but rather, because of
the right of dissenting minority shareholders to be free from
unreasonable oppression.");
D. Gordon Smith, The Shareholder Primacy, Norm, 23 J. CORP.
L. 277, 320 (1998) ("The
court did not think it was enunciating a meta principle of
corporate law. Rather, the court
thought it was merely deciding a dispute between majority and
minority shareholders in a
closely held corporation ... .

18. See Oman, supra note 17, at 135.
19. See Elhauge, supra note 17, at 774.
3:163 (2008)
Thus Dodge v. Ford is best viewed as a case that deals not with
directors'
duties to maximize shareholder wealth, but with controlling
shareholders'
duties not to oppress minority shareholders. The one Delaware
opinion that
has cited Dodge v. Ford in the last thirty years, Blackwell v.
Nixon, cites it for just
this proposition.
2'
Finally, not only is the Michigan Supreme Court's statement on
corporate
purpose in Dodge v. Ford dicta, but it is much more mealy-
mouthed dicta than
is generally appreciated. As Professor Einer Elhauge has
emphasized, the
Michigan Supreme Court described profit-seeking in Dodge v.
Ford as the
"primary," but not the exclusive, corporate goal. 21 Indeed,
elsewhere in the
opinion the court noted that corporate directors retain "implied
powers to

carry on with humanitarian motives such charitable works as are
incidental to
the main business of the corporation.
' 22
III. THE LACK OF AUTHORITY FOR DODGE V. FORD's
POSITIVE VISION OF CORPORATE PURPOSE
Dodge v. Ford suffers from several deficiencies as a source of
legal prece-
dent on the question of corporate purpose. The case is old, it
hails from a
state court that plays only a marginal role in the corporate law
arena, and it
involves a conflict between controlling and minorimt
shareholders that
independently justifies the holding in the case while rendering
the opinion's
discourse on corporate purpose judicial dicta. Nevertheless, one
might still
defend the continued teaching and citing of Doge v. Ford if the
discussion of
corporate purpose found in the case were an elegant, early
statement of a
modern legal principle.
Here we run into a second problem: shareholder wealth
maximization is
not a modern legal principle. To understand this point, it is
important not to
rely on the unsupported assertions of journalists, reformers, and
even the
occasional law professor as sources of legal authority, but
instead to look at
the actual provisions of corporate law. "Corporate law" can

itself be broken
down into three rough categories: (1) "internal" corporate law
(that is, the
requirements set out in individual corporations' charters and
bylaws); (2) state
corporate codes; and (3) corporate case law.
20. B/ackwell, 1991 WL 194725, at *4.
21. Elhauge, supra note 17, at 773 (quoting Doge '. Ford, 170
N.W. at 684).
22. Id.
3:163 (2008)
Let us first examine internal corporate law, especially the
statements of
corporate purpose typically found in corporate charters (also
called "articles
of incorporation"). Most state codes permit, or even require,
incorporators to
include a statement in the corporate charter that defines and
limits the
purpose for which the corporation is being formed. If the
corporation's
founders so desire, they can easily include in the corporate
charter a recitation
of the Dodge v. Ford view that the corporation in question "is
organized and
carried on primarily for the profit of the stockholders. ' 23 In
reality, corporate

charters virtually never contain this sort of language. Instead,
the typical
corporate charter defines the corporate purpose as anything
"lawful.
'2 4
What about state corporation codes? Do they perhaps limit the
corporate
purpose to shareholder wealth maximization? To employ the
common saying,
the answer is "not just 'no,' but 'hell no."' A large majorit of
state codes
contain so-called other-constituency provisions that explicitly
authorize
corporate boards to consider the interests of not just
shareholders, but also
employees, customers, creditors, and the community, in making
business
decisions. 25 The Delaware corporate code does not have an
explicit other-
constituency provision, but it also does not define the corporate
purpose as
shareholder wealth maximization. Rather, section 101 of the
General
Corporation Law of Delaware simply provides that corporations
can be
formed "to conduct or promote any lawful business or purposes.
'26
This leaves case law as the last remaining hope of a Dodge v.
Ford sup-
porter who wants to argue that, as a positive matter, modern
legal authority
requires corporate directors to maximize shareholder wealth. On

first
inspection, corporate case law does provide at least a little
hope. Contempo-
rarT judges do not cite Dodge v. Ford, but some modern cases
contain dicta that
echo its sentiments. Consider, for example, the Delaware
Chancery's
statement in the 1986 case of Katz v. Oak Industries that "[i]t is
the obligation
of directors to attempt, within the law, to maximize the long-run
interests of
the corporation's stockholders .... ",27
23. Dodge v. Ford, 170 N.W. at 684.
24. SeeJEFFREY D. BAUMAN, AT AN R. PALTTTER, AND
FRANK PARTNOY, CORPORATIONs LAW
AND POLICY: MATRIALS AND PROBLEMS 171 (6th ed.
2007).
25. See Mitchell, sulpra note 14, at 579-80 (describing the
statutes); id. at 579 n.1 (listing the
tventy-eight jurisdictions having a constituency statute at the
time of publication).
26. DEL. CODE ANN. tit. 8, § 101 (2008).
27. Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986).
3:163 (2008)
This statement is about as Dodge v. Ford-like a description of

corporate
purpose as one can hope to find in contemporary case law.
Many other
modern cases, however, contain contrary dicta indicating that
directors owe
duties beyond those owed to shareholders. For example, just a
year before the
Delaware Court of Chancery decided Kat, the Delaware
Supreme Court
handed down its famed decision in Unocal Coooration v. Mesa
Petroleum
Compa&y.28 In Unocal, the court opined that the corporate
board had a
"fundamental duty and obligation to protect the corporate
enterprise, which
includes stockholders," 29 a formulation that clearly implies the
two are not
identical. 30 The court went on to state that in evaluating the
interests of "the
corporate enterprise," directors could consider "the impact on
'constituencies'
other than shareholders (that is, creditors, customers,
employees, and perhaps
even the communit generally)."
31
Just as important, even shareholder-oriented dicta on corporate
purpose
of the Kath sort does not actually impose any legal obligation
on directors to
maximize shareholder wealth. The key to understanding this is
the qualifying
phrases "attempt" and "long-run." As a number of corporate
scholars have
pointed out, courts regularly allow corporate directors to make

business
decisions that harm shareholders in order to benefit other
corporate
constituencies. 32 In the rare event that such a decision is
challenged on the
grounds that the directors failed to look after shareholder
interests, courts
shield directors from liabilit under the business judgment rule
so long as any
plausible connection can be made between the directors'
decision and some
28. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.
1985).
29. Id. at 954.
30. See Margaret M. Blair & Lynn A. Stout, A Team Production
Theo oCoporate law, 85 V,. L.
REN. 247, 293-94, 301 (1999) (arguing that directors should be
viewed as owing fiduciary
duties to the corporation itself, in addition to any duties they
might owe to shareholders,
and that duties to the company can include non-shareholder
interests).
31. Unocal, 493 A.2d at 955.
32. See, e.g., CLARK, supra note 12, at 681-84 (noting the
difficulty of establishing any long-run
difference between public and private interests); Blair & Stout,
supra note 30, at 303
(giving examples of how modern corporate law departs from
"the norm of shareholder
primacy" and noting that "case law interpreting the business
judgment rule often explicitl
authorizes directors to sacrifice shareholders' interests to

protect other constituencies");
Elhauge, supra note 17, at 763-76 (describing corporate
discretion to refrain from legal
profit-maximizing activity); Lisa M. Fairfax, Doing Well While
Doing Good: Rea,,esi&g the
Scope Directon' Fiduciar Oblgatio~n in For-Profit Coporations
with Non-Shareholder Beneficiaies,
59 WASi. & LE L. REN. 409, 437-39 (2002) (identifying
doctrine that allows a corpora-
tion's directors to consider other interests at the expense of the
shareholder).
3:163 (2008)
possible future benefit, however intangible and unlikely, to
shareholders. If
the directors lack the imagination to offer such a "long-run"
rationalization
for their decision, courts will invent one.
A classic example of this judicial eagerness to protect directors
from
claims that they failed to maximize shareholder wealth can be
found in the
oft-cited case of Shlensky v. Wgl. 33 In Shlensy, minority
investors sued the
directors of the corporation that owned the Chicago Cubs for
refusing to
install lights that would allow night baseball games to be played
at Wrigley

Field.34 The minorint investors claimed that offering night
games would make
the Cubs more profitable. 35 The corporation's directors refused
to hold night
games, not because they disagreed with this economic
assessment, but
because they believed night games would harm the quality of
life of residents
in the neighborhoods surrounding Wrigley Field.36 The court
upheld the
directors' decision, reasoning, as the directors themselves had
not, that a
decline in the quality of life in the local neighborhoods might in
the long run
hurt property values around Wrigley Field, harming
shareholders' economic
interests.
3
Shlensky illustrates how judges routinely refuse to impose any
legal obliga-
tion on corporate directors to maximize shareholder wealth.
Although dicta in
some cases suggest directors ought to attempt this (in the "long
run," of
course), dicta in other cases take a broader view of corporate
purpose, and
courts never actually sanction directors for failing to maximize
shareholder
wealth.
There is only one exception to this rule in case law: the
Delaware Su-
preme Court's 1986 opinion in Revlon, Inc. v. MacAndrews &
Forbes Holdings,

Inc.3 8 Revlon is a puzzling decision, not least because the
Delaware Supreme
Court decided the case the same year it handed down its
apparently contradic-
tory decision in Unocal. In Rev/on, the board of a public
company had decided
to take the firm private by selling all of its shares to a
controlling share-
holder.39 In choosing between potential bidders, the board
considered, along
33. Shlensky v. Wrigley, 237 N.E.2d 776 (I1. App. 1968).
34. Id. at 777.
35. Id.
36. Id. at 778.
37. Id. at 780.
38. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986).
39. Id. at 177 79.
3:163 (2008)
Viginia Law & Business Review
with shareholders' interests, the interests of certain noteholders
in the firm.
40
This was a mistake, the Delaware Supreme Court announced;
where the
company was being "broken up" and shareholders were being
forced to sell

their interests in the firm to a private buyer, the board had a
duty to maximize
shareholder wealth by getting the highest possible price for the
shares.
41
Upon first inspection, Rev/on appears to affirm the notion that
maximizing
shareholder wealth is the corporation's proper purpose. In the
years following
the Revlon decision, however, the Delaware Supreme Court has
systematically
cut back on the situations in which Rev/on supposedly applies,
to the point
where any board that wants to avoid being subject to Rev/on
duties now can
easily do so. The case has become nearly a dead letter.
Accordingly, while the
Delaware Supreme Court has not explicitly repudiated Revlon
(at least not yet),
for practical purposes the case is largely irrelevant to modern
corporate law
and practice.
4 2
In sum, whether gauged by corporate charters, state corporation
codes, or
corporate case law, the notion that corporate law as a positive
matter
"requires" companies to maximize shareholder wealth turns out
to be
spurious. The offhand remarks on corporate purpose offered by
the Michigan
Supreme Court in Doge v. Ford lack any foundation in actual

corporate law.
IV. THE LACK OF AUTHORITY FOR DODGE V. FORD'S
NORMATIVE VISION OF CORPORATE PURPOSE
Doge v. Ford usually plays the role of Exhibit A for
commentators seeking
to argue that American law imposes on corporate directors the
legal
obligation to maximize profits for shareholders. 43 It is
important to recognize,
however, that many experts teach and cite Dodge v. Ford in a
more subtle, and
less obviously erroneous, fashion. To these experts, Dodge v.
Ford is not
evidence that corporate law actually requires directors to
maximize share-
holder wealth. Rather, many observers believe it is evidence
that corporate
directors ought to maximize shareholder wealth. In other words,
many legal
instructors teach Doge v. Ford not as a positive description of
what corporate
40. Id. at 178 79.
41. Id. at 182.
42. See Stout, supra note 4, at 1204.
43. See BAUMAN FT AT., spra note 24, at 87.
3:163 (2008)

law actually is, but as a normative discourse on what many
believe the proper
purpose of a well-functioning corporation should be.
This is a far more defensible position. Nevertheless, the switch
from
using Doge v. Ford as a source of positive legal authority to
using Doge v. Ford
as a source of normative guidance carries its own hazards. Most
obviously, it
begs the fundamental question of what the proper purpose of the
corporation
should be.
It is not enough to state that Dodge v. Ford represents an
important per-
spective on corporate purpose simply because many people
believe it
represents an important perspective on corporate purpose. This
argument
borders on tautology (that is, "Dodge v. Ford is influential
because people think
Doge v. Ford is influential"). Perhaps many people do share the
Michigan
Supreme Court's view that it is desirable for corporations to
pursue only
profits for shareholders. But why do they believe this is
desirable?
At least until fairly recently, many corporate experts found the
answer to
this question in economic theory. Not too long ago, it was
conventional
economic wisdom that the shareholders in a corporation are the

sole residual
claimants in the firm, meaning shareholders are entitled to all
the "residual"
profits left over after the firm has met its fixed contractual
obligations to
employees, customers, and creditors. This assumption suggests
that corpora-
tions are run best when they are run for shareholders' benefit
alone, because if
other corporate stakeholders' interests are fixed by their
contracts, maximizing
the shareholders' residual claim means maximizing the total
social value of the
firm.
44
Time has been unkind to this perspective. Advances in
economic theory
have made clear that shareholders generally are not, and
probably cannot be,
the sole residual claimants in firms. For example, modern
options theory
teaches that business risk that increases the expected value of
the equity
interest in a corporation must simultaneously reduce the
supposedly "fixed"
value of creditors' interests. 45 Another branch of the economic
literature
focuses on the contracting problems that surround specific
investment in
"team production," suggesting how a legal rule requiring
corporate directors
44. See Stout, supra note 4, at 1192 95 (critiquing the residual
claimants argument for

shareholder primacy).
45. See Margaret M. Blair & Lynn A. Stout, Director
Accountabl/j and the Mediating Role of the
Coiporate Board, 79 WASH. U. L.Q. 403, 411-14 (2001).
Sguneral Thomas A. Smith, ibe
Effl;ent Noiifor Coporate law: A Neotraditional [nteretation of
Fiduniag, Dulo, 98 MiCH. L.
REN. 214 (1999).
3:163 (2008)
to maximize shareholder wealth ex post might well have the
perverse effect of
reducing shareholder wealth over time by discouraging non-
shareholder
groups from making specific investments in corporations ex
ante.46 Yet a
third economic concept that undermines the wisdom of
shareholder wealth
maximization is the idea of externalities: when the pursuit of
shareholder
profits imposes greater costs on third parties (for instance,
customers,
employees, or the environment) that are not fully constrained by
law,
shareholder wealth maximization becomes undesirable, at least
from a social
perspective.

47
Finally, it is becoming increasingly well-understood that when a
firm has
more than one shareholder, the very idea of "shareholder
wealth" becomes
incoherent. 48 Different shareholders have different investment
time frames,
different tax concerns, different attitudes toward firm-level risk
due to
different levels of diversification, different interests in other
investments that
might be affected by corporate activities, and different views
about the extent
to which they are willing to sacrifice corporate profits to
promote broader
social interests, such as a clean environment or good wages for
workers.
These and other schisms ensure that there is no single, uniform
measure of
shareholder "wealth" to be "maximized."
Accordingly, most contemporary experts understand that
economic
theory alone does not permit us to safely assume that
corporations are run
best when they are run according to the principle of shareholder
wealth
maximization. Not only is Dodge v. Ford bad law from a
positive perspective,
but it is also bad law from a normative perspective. This gives
rise to the
question of how to explain Dodge v. Ford's enduring popularit.
V. ON THE PUZZLING SURVIVAL OF DODGE V. FORD

Simple inertia may provide an answer, to some extent.
Corporate law
casebooks have included excerpts from Dodge v. Ford for
generations, and it
would take a certain degree of boldness to depart from the
tradition. But there
is more going on here than inertia. Casebooks change, but
Dodge v. Ford
remains. This suggests Dodge v. Ford has achieved a privileged
position in the
46. See Blair & Stout, supra note 30; Margaret M. Blair & Lynn
A. Stout, Spe1.c In'estment and
Coiporate Law, 7 EUR. BuS. ORG. L. REiV. 473 (2006).
47. See Elhauge, supra note 17, at 738 56.
48. See Iman Anabtawi, Some Skepticism About Inc'easiug
Shareholder Powe; 53 UCLA. L. REV.
561 (2006).
3:163 (2008)
legal canon, not because it accurately captures the law (as we
have seen, it
does not) or because it provides good normative guidance
(again, we have
seen it does not), but because it serves law professors' needs.
In particular, Doge v. Ford serves professors' pressing need for

a simple
answer to the question of what corporations do. Law professors'
desire for a
simple answer to this question can be analogized to that of a
parent con-
fronted by a young son or daughter who innocently asks,
"Where do babies
come from?" The true answer is difficult and complex and can
lead to further
questions about details of the process that may lie beyond the
parent's
knowledge or comfort level. It is easy to understand why many
parents faced
with this situation squirm uncomfortably and default to
charming fables of
cabbages and storks. Similarly, professors are regularly
confronted by eager
law students who innocently ask, "What do corporations do?" It
is easy to
understand why professors are tempted to default to Dodge v.
For and its
charming and easily understood fable of shareholder wealth
maximization.
After all, explaining the true purpose of corporations is even
more chal-
lenging and uncertain than explaining reproduction. From a
positive
perspective, public corporations are extraordinarily intricate
institutions that
pursue complex, large-scale projects over periods of years or
even decades.
They have several directors, dozens of executives, hundreds or
thousands of
employees, thousands or hundreds of thousands of shareholders,

and possibly
millions of customers. Corporations resemble political nation-
states with
multiple constituencies that have different and conflicting
interests, responsi-
bilities, obligations, and powers. Indeed, the very largest
corporations (such as
Wal-Mart, ExxonMobil, or Microsoft) have greater economic
power than
many nation-states do. These are not institutions whose
behavior can be
accurately captured in a sound bite.
The problem of explaining proper corporate purpose is just as
off-putting
from a normative perspective. Even the seemingly simple
directive to
"maximize shareholder wealth" becomes far less simple and
perhaps
incoherent in a public firm with many shareholders with
different investment
time frames, tax concerns, outside investments, levels of
diversification, and
attitudes toward corporate social responsibility. The normative
question of
what corporations ought to do becomes even more daunting
when the answer
involves discussions of avoiding externalities, maximizing the
value of returns
to multiple residual claimants, and encouraging specific
investment in team
production.
Faced with this reality, it is entirely understandable why a legal
instructor
or legal scholar called upon to discuss the question of corporate

purpose
might be tempted to teach or cite Dodge v. Ford in reply.
Despite its infirmities,
3:163 (2008)
Dodge v. Ford at least offers an answer to the question of
corporate purpose
that is simple, easy to understand, and capable of being
communicated in less
than ten minutes or ten pages. It is this simplicity that has
allowed Doge v.
Ford to survive over the decades and to keep a place-however
undeserved-
in the canon of corporate law.
CONCLUSION
Simplicity is not always a virtue. In particular, simplicity is not
a virtue
when it leads to misunderstanding and mistake.
It might be perfectly fine for a Midwestern farmer to believe the
world is
flat. Although this simple model of the world is inaccurate, it is
easy to
understand and apply, and its inaccuracy is of no consequence
for someone
who travels only rarely and in short distances. A simple model
of a flat world,

however, might prove catastrophically inaccurate for a ship
captain attempting
to navigate from one continent to another. For the ship captain,
a more
complicated model that acknowledges the globe's spherical
shape is essential
to avoid disaster.
When it comes to corporations, lawyers are ship captains.
Corporations
are purely legal creatures, without flesh, blood, or bone. Their
existence and
behavior is determined by a web of legal rules found in
corporate charters and
bylaws, state corporate case law and statutes, private contracts,
and a host of
federal and state regulations. For lawyers, an accurate and
detailed under-
standing of the corporate entity and its purpose is just as
essential to success
as an accurate understanding of geography and navigation is to
a ship captain,
or an accurate and detailed understanding of brain anatomy and
function is to
a neurosurgeon.
This is why lawyers, and especially law professors, should
resist the siren
song of Dodge v. Ford. We are not in the business of imparting
fables, however
charming. We are in the business of instructing clients and
students in the
realities of the corporate form. Corporations seek profits for
shareholders, but
they seek others things, as well, including specific investment,
stakeholder

benefits, and their own continued existence. Teaching Dodge v.
Ford as
anything but an example of judicial mistake obstructs
understanding of this
reality.
3:163 (2008)
VIRGINIA LAW & BUSINESS REVIEW
VOLUME 3 SPRING 2008 NUMBER 1
A CLOSE READ OF AN EXCELLENT COMMENTARY
ON DODGE v. FORD
Jonathan R. Maceyt
IN TROD UCTION
..................................................................................... 177
I. WHY NOBODY DOES ANYTHING ABOUT DODGE V.
FORD ......... 180
II. AN ETHICAL PERSPECTIVE: HOw To ADVISE THE
CLIENT ......... 181
III. RESIDUAL CLAIMS AND PROFIT MAXIMIZATION
............................ 184
C O N C LU SIO N
...................................................................................... .........
189

INTRODUCTION
JN her delightful and provocative essay, Whj We Should Stop
Teaching Dodge
iv. Ford,' Professor Lynn Stout manages simultaneously to make
too much
and too little of the famous decision thwarting Henry Ford's
apparent effort
to steer the powerful automobile company he controlled away
from the
pursuit of profit maximization as the single-minded purpose of
the
corporation.
Professor Stout makes too much of the case when she asserts
that
"[m]uch of the credit, or perhaps more accurately the blame, for
this state of
affairs can be laid at the door of ... the 1919 Michigan Supreme
Court
decision in Dodge v. Ford Motor Companj."2 This is wrong,
since the Michigan
t Deputy Dean and Sam Harris Professor of Corporate Law,
Corporate Finance, and
Securities Law, Yale Law School.
1. Lynn A. Stout, Whb, We Should Stop Teaching Dodge v.
Ford, 3 V-. L. Bus. REV. 163 (2008).
2. Id. at 164 (citing Dodge v. Ford Motor Co., 170 N.W. 668
(Mich. 1919)).
Copyright © 2008 Virginia Law & Business Review Association

Supreme Court is merely the messenger here. As Professor Stout
rightly
points out, the Michigan Supreme Court has not innovated much
in the world
of corporate governance, 3 and this case is no exception. The
court certainly
cannot rightly be credited (or, if Professor Stout is to be
believed, blamed) for
inventing the idea that the purpose of the public corporation is
to maximize
value for shareholders.
Professor Stout makes too little of the case with her claim that
the
opinion is "a mistake, a judicial 'sport,' a doctrinal oddity
largely irrelevant to
corporate law and practice." 4 The case is not a doctrinal
oddity. Dodge v. Ford
still has legal effect, and is an accurate statement of the form, if
not the
substance, of the current law that describes the fundamental
purpose of the
corporation. By way of illustration, the American Law
Institute's ("ALI")
Princjples of Coioorate Governance ("Principles"),5 considered
a significant, if not
controlling, source of doctrinal authority, are consistent with
Dodge v. Ford's
core lesson that corporate officers and directors have a duty to
manage the
corporation for the purpose of maximizing profits for the

benefit of
shareholders. Specifically, section 2.01 of the Princjples makes
clear that "a
corporation should have as its objective the conduct of business
activities
with a view to enhancing corporate profit and shareholder gain."
' 6
Significantly, the Principles specify that the goal of the
corporation is
shareholder wealth maximization. According to Professor Mel
Eisenberg,
Reporter for the ALI's Principles of Corporate Governance
Project,
shareholder wealth maximization is used because "the market is
usually more
accurate" and is less susceptible to manipulation than other
measures of
corporate performance. 7 Moreover, the ALI expressly
emphasizes
shareholder wealth rather than corporate wealth, and
specifically excludes
labor interests as something that should be maximized, contrary
to Professor
Stout's apparent preferences on this matter.8
The Principles contain only three rather minor exceptions to the
shareholder wealth maximization norm. Corporations can ignore
shareholder
wealth maximization in order to: (1) comply with the law; (2)
make charitable
3. Id. at 167 (citing Guhan Subramanian, The Influence of
Antitakeo'er Statutes on Incolporation
Choice: Evidence on the 'Race" Debate and Antitakeozer

Operreaching, 150 U. PA. L. RnV. 1795
(2002)).
4. Id. at 166.
5. PRINCIPLES OF CORPORATE GOVERNANC (1994)
[hereinafter PRINCIPTEs].
6. Id. 2.01.
7. Symposium, Waseda Institute for Corporation Law and
Society, A Talk with Professor
Eisenbeig 21, http://www.21coe win
cls.org/english/actvit/Eisenberge.pdf (last visited
Apr. 7, 2008).
8. See id.
3:177 (2008)
3:177 (2008) A Close Read of an Excellent Commentay on
Dodge v. Ford 179
contributions; and (3) devote a "reasonable amount of resources
to public
welfare, humanitarian, educational, and philanthropic
purposes." 9 In other
words, the only exceptions permitted to the shareholder wealth
maximization
norm are those necessary to ensure that corporations be given
sufficient
latitude to act like responsible community members by
complying with the
law and supporting charities and other worthy causes.

Professor Stout makes the observation that "[a] large majority
of state
[corporation] codes contain so-called other-constituency
provisions that
explicitly authorize corporate boards to consider the interests of
not just
shareholders, but also employees, customers, creditors, and the
community, in
making business decisions."1 )° Professor Stout makes much too
much of this
corporate governance factoid. For the sake of completeness, she
should have
pointed out that these statutes cannot rationally be construed to
permit
managers to benefit non-shareholder constituencies at the
expense of
shareholders. Rather, these statutes are mere tie-breakers,
allowing managers
to take the interests of non-shareholder constituencies into
account when
doing so does not harm shareholders in any demonstrable way.
In this Essay, first I will examine in a bit more detail Professor
Stout's
claim that corporations have some purpose other than profit
maximization.
Next, I will argue that though she is wrong on the legal
doctrine, her
argument contains only a minor, essentially semantic error that
reflects a
modest bit of confusion about the legal landscape.
Nevertheless, Professor Stout's excellent essay captures two
very
important points about corporate law. First, because the

corporation is a
contract-based form of business organization, maximizing
shareholder gain is
only a default rule. Shareholders could opt out of this goal if
they so desired.
Shareholders, however, have indicated very little, if any,
propensity to alter
the application of the default rule that the public companies in
which they
invest should do strive to maximize profits on their behalf.
The second important point captured by Professor Stout's essay
is that
Doge v. Ford is interesting not because it establishes the
proposition that
directors should maximize shareholder wealth as a matter of
law, but rather as
a normative discourse on what many believe the proper purpose
of a well-
functioning corporation should be."" This observation is
meaningful and
important, but incomplete. Professor Stout's assertion that
Dodge v. Ford is a
mere normative description of what corporate law ought to be,
rather than a
9. PRINCIPLES, supra note 5, § 2.01.
10. Stout, supra note 1, at 169.
11. Id at 173.

positive account of what corporate law actually is, does not
account for the
inconvenient fact that the shareholder maximization ideal
actually drives the
holding and is not mere dicta.
Still, Professor Stout invokes an extremely important truth:
there are no
cases other than Dodge v. Ford that actually operationalize the
rule that
corporations must maximize profits. The goal of profit
maximization is to
corporate law what observations about the weather are in
ordinary
conversation. Everybody talks about it, including judges, but
with the lone
exception of Dodge v. Ford, nobody actually does anything
about it.
Next, I will expound on the implications of the fact that
shareholder
wealth maximization is widely accepted at the level of rhetoric
but largely
ignored as a matter of poicy implementation. In the following
section, I will
explain why Doge v. Ford is generally ignored. I will then
discuss what I
believe is the most interesting aspect of Doge v. Ford: the
implications of the
case from an ethical perspective. Here, I will make the radical
and irreverent
assertion that the reason we have never seen, and in all
probability will never
see, another case quite like Dodge v. Ford is because CEOs who
testify in

depositions and trials are better coached and more willing to
dissemble than
Henry Ford was. If other CEOs actually told the truth about how
they put
their own private interests ahead of those of the shareholders,
the case might
not stand in such splendid isolation.
In the final section, I will take issue with Professor Stout's
assertion that
advances in economic thinking have made it clear that
shareholders are not
the sole residual claimants in the firm, as well as its implication
that corporate
managers should be free to maximize the wealth of all of the
corporation's
constituencies and not just the wealth of the shareholders.
I. WHY NOBODY DOES ANYTHING ABOUT DODGE V.
FORD
Maximizing value for shareholders is difficult to do. There is no
simple
algorithm, formula, or rule that managers can employ to
determine what
corporate strategy will maximize returns for shareholders.
Competition is fierce.
The world changes quickly. Even extremely dedicated and able
managers
preside over business ventures that fail. A strategy that leads to
great success in
one venture may result in financial catastrophe in another
venture. The world
of business is more than uncertain: it is chaotic and
unpredictable.

Thus even though I believe, contrary to Professor Stout, that
corporate
law requires directors to maximize shareholder value, I also
recognize that it
simply is not possible or practical for courts to discern ex post
when a
3:177 (2008)
Dodge v. Ford 181
company is maximizing value for shareholders and when the
officers and
directors are only pretending to do so.
Shareholder wealth maximization, however, is still at least the
law on the
books, if not in practice. It is the law, just as it is the law that
cars should not
drive more than fifty-five miles per hour on Connecticut's
Merritt Parkway.
The speed limit is clearly posted and well understood. In
reality, however, it is
extremely rare to locate a car traveling at less than seventy
miles per hour, and
eighty miles per hour is closer to the norm. I presume that
Professor Stout
would agree with me about what the law says with respect to the
speed limit
on the Merritt Parkway.

The lack of any apparent means to enforce the de jure speed
limit on the
Merritt Parkway is largely due to the fact that the terrain makes
it extremely
difficult to set up speed traps. This, in turn, makes it difficult
for the police to
detect wrongdoing. The same is true for the rule of corporate
law that
corporate fiduciaries are obligated to maximize profits for
shareholders. The
law is clear. It is not merely a "normative discourse," as
Professor Stout
argues. 12 The problem is not the lack of clarity of the rule. The
problem is
lack of enforceability.
The enforceability problem is exacerbated by hindsight bias.
When a
company fails (or simply has deeply disappointed shareholders),
it will
inevitably appear that managers were not acting in the
shareholders' interests,
even if they were. In fact, because shareholders are residual
claimants who
may hold fully diversified portfolios of securities, maximizing
profit for
shareholders often requires significant risk-taking. Thus,
ironically, companies
that are engaged in shareholder wealth-maximizing, risk-taking
activities may
wind up in financial distress. On the other hand, companies that
are pursuing
strategies that primarily serve the interests of workers, such as
expanding only
to increase market share or acquiring other companies in
unrelated fields to

reduce risk, may never become insolvent. However, these
strategies often do
not maximize value for shareholders.
II. AN ETHICAL PERSPECTIVE: How To ADVISE THE
CLIENT
The prior discussion raises an interesting question about Dodge
v. Ford
itself. If I am correct that the profit maximization rule is so
difficult to
enforce as a practical matter, then how did the court in Dodge v.
Ford manage
to enforce it? After all, as Professor Stout accurately (though
perhaps a bit
bluntly) observes, unlike the Delaware courts, the Michigan
courts are not
12. See id.
exactly known for their expertise or sophistication in matters of
corporate
law. 13 Michigan is indeed "a distant also-ran in the race
between and among
the states for influence in corporate law."' 14 This is true not
only in
comparison with Delaware, but even in comparison with other
states, such as
California, New York, Massachusetts, Maryland, and Virginia.

The reason that the Michigan Supreme Court held against Mr.
Ford is
simple. Ford gave them no choice when he asserted that he was
pursuing
some strategy other than wealth maximization for shareholders.
As Professor
Stout observes, Henn, Ford did not acknowledge the validity of
the minority
shareholders' claim that the corporation had fiduciary
obligations to them.
Rather, Ford "argu[ed] that he preferred to use the corporation's
money to
build cheaper, better cars, and to pay better wages."' 15
Henry Ford's frank admission raises an important question.
Where was
Henry Ford's lawyer when Mr. Ford was losing the case for
himself by
claiming no hint of an obligation to maximize shareholder
value? Instead, Mr.
Ford testified that he did not plan to make any dividend
payments to the
shareholders, convincing the court that the CEO had "the
attitude towards
shareholders of one who has dispensed and distributed to them
large gains
and that they should be content to take what he chooses to
give."'
16
A fascinating thing about Dodge v. Ford, and a compelling
reason why it is
an excellent teaching vehicle, is how easy it would have been
for Mr. Ford to
have won this case. Suppose Mr. Ford simply had gotten on the

stand and
testified (contrary to the truth, apparently) that he was keenly
interested in
maximizing value for shareholders. Suppose further that Mr.
Ford took the
position (as many CEOs have done) that, in his view, the best
way to benefit
the shareholders was to increase the market share of the
business, and that
reducing the price of cars was critical to his strategy of
expanding the
company. Also suppose that Mr. Ford took the eminently
reasonable position
that the company required loyal, experienced, and skilled
workers to succeed,
and that his plan to raise wages was necessary to accomplish
this end.
In sum, suppose that Mr. Ford simply had testified that his plans
were
consistent with the goal of profit maximization for shareholders.
As the court
observed in Dodge v. Ford, while corporations are "organized
and carried on
primarily for the benefit of the stockholders[,] ... [t]he
discretion of the
directors is to be exercised in the choice of means to attain that
end . . . ."17 In
13. Seeid. at 166-67.
14. Id. at 167.
15. Id. at 165 (paraphrasing Dodge z'. Ford, 170 N.W. at 671).
16. Dodge v. Ford, 170 N.W. at 683.
17. Id. at 684.
3:177 (2008)

3:177 (2008) A Close Read of an Excellent Commentagy on
Dodge v. Ford 183
other words, Dodge v. Ford itself stands for the proposition that
as long as the
goal of the corporation is profit maximization, the directors
have virtually
unfettered discretion to choose the strategies to be employed to
that end,
which the court described aptly as "the infinite details of
business."18 The
court specifically noted that the issues in the case, including
(but presumably
not limited to) employee wages, working hours and conditions,
and product
pricing are at the discretion of the directors. 19 Consistent with
common
contemporary corporate practice, the court even suggests that
declining to
distribute dividends is fine, so long as the retained earnings are
used to benefit
the stockholders and not devoted to "other purposes.
'20
In other words, what mattered in this case was not what Mr.
Ford did,
but what he said he was doing. Mr. Ford said that he was
putting the interests
of other constituents ahead of the interests of the shareholders.
If he had lied

and said that his motivation was to maximize profits rather than
to benefit
workers and other non-shareholder constituencies, he would
have won the
case. The court acknowledges that the problem in this case was
Mr. Ford's
frank articulation of the motives for his behavior and that of his
directors, as
he had attempted to argue that directors' motives are irrelevant,
as long as
their actions "are within their lawful powers."
'21
The court did not dispute that the actions taken by the directors
were
within their lawful powers. The problem the court had was that
the directors
attempted to justify their actions by claiming that they were
motivated by a
desire to benefit some constituency other than the shareholders.
If Henry
Ford had decided to articulate a different, shareholder-centric
motivation for
his behavior, he would have prevailed in this litigation.
This raises the interesting question of how Mr. Ford's attorneys
might have
better counseled their star witness. The rules of professional
responsibility are
dear. Lawyers have a duty to do everything possible to prevent
a client from
lying, and they must not knowingly call any witness who plans
to lie while
testifying.22 Lawyers who believe that a client is going to give
untruthful

testimony are required to take remedial measures, including
disclosure to the
tribunal if necessary, rather than permit such conduct in the
proceeding.
23
Mr. Ford's lawyers had a responsibility not to allow him to lie
on the
stand. They certainly had an ethical responsibility not to coach
him to do so.
18. Id.
19. Id.
20. Id.
21. Id.
22. MODEvL RULFS OF PROF'1 CONDUCT R. 3.3(a)(3)
(2003).
23. Id. at R. 3.3(b).
Thus, this case tells us something important about the practical
ramifications
of the rules of professional conduct, as they may well have been
outcome-
determinative. Unless Mr. Ford lied about the motivations for
his actions, he
would lose the case.
Suppose, however, that Mr. Ford's lawyers had said something
like the

following: "We cannot advise you to lie. In fact, our
professional
responsibilities as lawyers require that we insist that you tell
the truth. Be
aware, however, that if you insist on testifying that your
motivations in
formulating your dividend policy and other corporate strategies
are to benefit
your employees and society rather than your company's
shareholders, you are
going to lose this case. On the other hand, if you can honestly
testify that you
think that what you are doing is in the overall best interest of
the Ford Motor
Company and its shareholders, then you should say so, and you
will be able to
do as you please regarding salaries, expansion of production
facilities, and
product pricing. The plaintiffs will have no chance of winning
this case if you
testify that you are doing what you are doing to maximize value
for your
company's shareholders."
Mr. Ford, not being a complete idiot, would undoubtedly get the
point if it
was presented to him in this fashion, and undoubtedly it would
have been. The
more vexing question is whether Mr. Ford's lawyers should have
advised Mr.
Ford that the outcome of the case would depend on the way he
characterized
his own motives. This is one of the things that make Dodge v.
Ford so intriguing.
Because there is no sure way to tell what Mr. Ford's real
motives were, it is

impossible to know whether he was lying when he testified, and
an unethical
lawyer could have advised Mr. Ford to lie without fear of
repercussion.
It would be wonderful to know what advice Mr. Ford's lawyers
gave him
before he testified so helpfully for the plaintiffs who were suing
him. Perhaps
this case represents the apogee of legal ethics in American law
practice.
Perhaps Mr. Ford was not told what the implications of his
testimony might
be. Or perhaps Mr. Ford was advised about the implications of
his testimony,
and, out of arrogance or pride, decided to tell the truth anyway,
in spite of his
lawyers. We will never know, but speculating certainly is fun.
III. RESIDUAL CLAIMS AND PROFIT MAXIMIZATION
Professor Stout challenges the proposition that shareholders are
the sole
residual claimants in the firm. 24 Professor Stout thinks that by
showing that
shareholders are not the sole residual claimants in a company,
she has
3:177 (2008)

Dodge v. Ford 185
somehow shown that profit maximization for shareholders is a
bad idea. In
my view, it is here that Professor Stout begins to err.
The basic problem is that Professor Stout's analysis reflects
more than
just a rejection of the goal of shareholder wealth maximization
contained in
Doge v. Ford (and elsewhere, including the ALI's Corporate
Governance
Project and Delaware's corporate law jurisprudence). It also
appears to reject,
at least implicitly, the observation that the modern corporation
is a nexus of
contracts. 25 Because the firm is a voluntary organization in
which
relationships are characterized by the contracts that define the
firm itself, it
would seem that rights, obligations, and power within the firm
should be
allocated according to contract. Seen from this perspective,
there is a simple
explanation for what the firm does-or, perhaps more accurately,
what the
firm should do. The corporation acts (or should act) so as to
perform its
obligations under the myriad contracts it has with its various
constituents.
At least to me, the default rule is clearly that the corporate
contract calls
for the firm to maximize value for shareholders consistent with

its other
obligations under the law, as well as to employees, suppliers,
customers, and
other firms and individuals with which the firm is in contractual
privint. The
goal of profit maximization for shareholders is the law, but it is
only a default
rule. If the shareholders and the other constituents of the
corporate enterprise
could agree on some other goal for the corporation, then the law
clearly
should not interfere. Thus, to the extent that Dodge v. Ford is
articulating a
default rule, I believe that the decision was and is correct. To
the extent that
Dodge v. Ford purports to reflect a mandatory rule, however, I
agree with
Professor Stout that the opinion is not a correct articulation of
the law.
Professor Stout claims that "[n]ot too long ago, it was
conventional
economic wisdom that the shareholders in a corporation are the
sole residual
claimants in the firm, meaning that shareholders are entitled to
all the
'residual' profits left over after the firm has met its fixed
contractual
obligations to employees, customers, and creditors." 26
Professor Stout is right
to observe that shareholders are not the only residual claimants
in the firm. It
would be impossible to prevent workers, customers, suppliers,
and other
constituencies (including local communities) from benefiting in
many

"residual" ways when the corporation flourishes, and to prevent
these
25. For the origins of this concept, see Ronald Coase, iJe Nature
of te Firm, 4 ECONOMICA
386 (1937); Michael C. Jensen & William H. Meckling, Theo f t
Firm: ManagraI
Behaior, Agenc; Costs, and Ownership St, cture, 3 J. FIN.
ECON. 305, 310-11 (1976) (noting
that most organizations are simply legal fictions which serve as
a nexus for a set of
contracting relationships among individuals).
constituencies from being harmed when the corporation is in
distress.
Contracting parties often benefit in various ways when their
counter-parties
flourish and suffer when their counter-parties fail.
Thus, shareholders are not distinguished by being the only
corporate
constituents with residual claims to the profits of the firm. What
distinguishes
shareholders is that they are the only claimants to the cash
flows of the firm
whose ony economic interests in the firm are residual. This, as
Professors

Easterbrook and Fischel pointed out long ago, explains a
peculiar feature of
corporate law that Professor Stout conveniently ignores:
shareholders, as
residual claimants, almost always have exclusive voting rights
in the firm.
2
Professor Stout also goes on to claim that "modern options
theory
teaches that business risk that increases the expected value of
the equity
interest in a corporation must simultaneously reduce the
supposedly 'fixed'
value of creditors' interests. ' 28 This claim is more or less
correct, subject to a
couple of important qualifications. First, it is worth noting that
under certain
conditions, shifting to new projects can increase the value of
shareholders'
interests without reducing the value of the creditors' interests
even where
business risk increases.
For example, suppose that a firm with $20 in debt is thinking of
shifting
from Project 1, which has an expected value of $54, to
investment 2, which also
has an expected value of $54. Project l's expected value of $54
is based on the
assumption that there is a 20% chance the firm will earn $20, a
60% chance that
the firm will earn $50, and a 20% chance that the firm will earn
$100 during the
relevant time frame. 29 Project 2 also has an expected value of

$54, based on the
assumption that there is a 40% chance the firm will earn $20, a
20% chance that
the firm will earn $50, and a 40% chance that the firm will earn
$90 during the
relevant time frame.30 Each of these projects provides an
expected value of $20
for the firm's fixed claimants and $34 for the firm's equity
investors.
31
The risk of these two projects can be assessed by comparing the
standard
deviation of the two projects. Because the standard deviation of
the second
project (66.15) is higher than that of the first project (65.05),
the shareholders
might prefer the first project to the second, depending on a host
of factors.
27. See Frank H. Easterbrook & Daniel R. Fischel, Voting in
Coiporate Law, 26 J.L. & ECON.
395 (1983).
29. (.2 x $20) + (.6 x $50) + (.2 x $100) = $54.
30. (.4 x $20) + (.2 x $50) + (.4 x $90) = $54.
31. With both projects creditors have a 100% chance of being
repaid the funds that are owed
to them. Project I's shareholders have an expected return of $34,
as (.2 × $0) + (.6 × $30)
+ (.2 X $80) = $34. Project 2's shareholders also have an
expected return of $34, as (.4 X
$0) + (.2 x $30) + (.4 x $70) = $34.

3:177 (2008)
Dodge v. Ford 187
Corporate law provides no guidance as to which of these two
projects should
be selected, even where shareholder wealth maximization is the
goal, because
the second project offers both greater upside potential and
greater risk to the
shareholders. It is dear, however, that the choice between
Project 1 and Project
2 is a matter of complete indifference to the firm's fixed
claimants, because the
creditors will be repaid in full regardless of which of the two
projects is chosen.
Thus, contrary to Professor Stout's assertions, finance theory
also teaches
that increasing business risk does not always result in a
diminution in the
value of a firm's fixed claims. There are many business
decisions that increase
the value of a firm's equity claims without decreasing the value
of the firm's
fixed claims. For example, suppose that the firm is offered a
third project.
Pursuing this project also entails the firm selling $20 in fixed
claims, but this
project has an expected value of $58. Project 3's expected value

of $58 is
based on the assumption that there is a 40% chance the firm will
earn $20, a
20% chance that the firm will earn $50, and a 40% chance that
the firm will
earn $100 during the relevant time frame. 32 This project
provides an expected
value of $20 for the firm's fixed claimants but a $38 expected
return for the
firm's equity investors.
33
Just as the fixed claimants were indifferent between Project 1
and Project
2, they are also indifferent among the firm's choices of Project 3
or Projects 1
or 2. Professor Stout offers no reason for why a rational fixed
claimant would
pay anything for the rights to participate in the decision about
which of these
three projects to pursue.
Of course, Professor Stout might respond to this criticism by
pointing
out that there are plenty of other projects that the firm might
pursue that
transfer wealth from the fixed claimants to the equity claimants
by increasing
the standard deviation of the expected returns in such a way as
to lower the
probability that the creditors' claims will be repaid in full. This
is true.
Creditors, however, can fully protect themselves from this risk
by contract.
Not only can creditors refuse to extend credit, or charge very

high rates of
interest to compensate themselves for the perceived risks of an
investment,
they can also bargain for protections such as the conversion
rights, which
allow them to convert their claims from fixed claims to equity
claims, or put
option rights, which permit them to sell their fixed claims back
to the firm
under contractually specified conditions.
32. (.4 x $20) + (.2 x $50) + (.4 x $100) = $58.
33. Project 3's creditors have a 00% chance of being repaid the
funds that are owed to them.
Project 3's shareholders have an expected return of $38, as (.2 ×
$0) + (.2 × $30) + (.4 ×
$80) = $38.
In other words, there are business decisions that simply do not
involve
the fixed claimants, because there are business decisions in
which the fixed
claimants do not have a stake. Because shareholders' only
claims are residual
claims, all decisions made by the firm that affect either risk or
return affect
the shareholders.
Most tellingly, while Professor Stout recognizes that business

risks that
increase the expected value of the equitv interests may reduce
the value of a
firm's fixed claims, she does not appear to recognize that the
reverse is true.
Business risks that increase the value of a firm's fixed claims
(that is, by
reducing risk) reduce the value of a firm's equity claims. For
example,
suppose that a firm embarked on Project 4, in which there was a
90% chance
that the firm would make $100 during the relevant time period,
but a 10%
chance that the firm would go bankrupt and be able to return
only half of the
$20 owed to creditors. This investment would have an expected
value of $91,
including $72 for the shareholders and $19 for the creditors.
34 Suppose
further that the firm was choosing between this project and an
alternative
Project 5 with a 100% chance of returning $50 at the end of the
relevant
investment period. This alternative project would have a value
of $20 for
creditors but only $30 for the shareholders.
35
It is true that if equity claimants gained control of a company
that was
pursuing the project with the $50 expected value (100% chance
of $50), they
would quickly shift the firm's resources to the alternative

project that reduced
the value of the fixed claims by nine percent, or from $100 to
$91. It is also
true, however, that if the fixed claimants somehow obtained
control of a
company that was pursuing the project with the $91 expected
value, they would
quickly steer the firm in the direction of the project with the
$50 expected
value, which would increase the expected value of their claims
from $19 to $20.
Thus, what we actually know by combining corporate finance
with the
Coase Theorem is the following. First, one cannot determine
whether fixed
claimants' interests are being sacrificed for the benefit of equint
claimants or
whether the reverse is happening unless one knows the baseline
understanding of the parties when they made their initial
investments. If the
parties invested thinking that the firm would pursue Project 4, a
shift to
Project 5 would benefit the firm's shareholders and harm the
firm's fixed
claimants. On the other hand, if the parties invested thinking
that the firm
34. (.1 X $10) + (.9 X $100) = $91. Project 4 will have an
expected return of $19 for creditors,
as (.1 X $10) + (.9 X $20) + (.4 $80) - $19. It will have an
expected return of $72 for
shareholders, as (.1 x $0) + (.9 x 80) - $72.
35. 1.0 x $50 = $50. This Project will have an expected return
of $20 for creditors, as 1.0 X

$20 = $20. It will have an expected return of $30 for
shareholders, as 1.0 X $30 = $30.
3:177 (2008)
Dodge v. Ford 189
would pursue Project 5, a shift to Project 4 would benefit the
firm's fixed
claimants and harm the firm's shareholders. Without knowing
the original
understanding of the parties, we simply do not know who is
ripping off whom.
Second, from a societal perspective, legal rules should be
organized to (a)
cause the firm to internalize fully the costs of its operations;
and, having done
that, (b) pursue the projects that maximize the overall value of
the firm. Thus,
as between Project 4 and Project 5, the firm clearly should
pursue Project 4,
which maximizes economic output and societal wealth. Fixed
claimants can
easily be compensated for moving from Project 5 to Project 4,
because
Project 5 is only worth $50 ($20 for the fixed claimants and $30
for the
shareholders), while Project 4 is worth $91 ($19 for the fixed
claimants and
$72 for the shareholders). Thus, both classes of claimants, fixed

and residual,
could be made better off by a move from Project 5 to Project 4,
accompanied
by a side-payment from the equity claimants to the fixed
claimants of some
amount greater than $1 but less than $42.36
Third, while fixed claimants may sometimes have an incentive
to
maximize the value of the firm, shareholders, as the residual
claimants, always
have the incentive to maximize the value of the firm. Thus,
shareholders, not
creditors, should be put in charge of making the marginal
decisions that affect
the overall value of the firm (subject, of course, to the abilit of
the fixed
claimants to protect themselves through the contracting
process).
These are the default rules in corporate law, subject to
modification by
the various participants in the corporate enterprise, of course.
The single,
uniform measure of wealth to be maximized is the overall value
of the firm,
and the shareholders are in the best position to do this, subject
to the
possibility of making side bargains with other constituencies.
CONCLUSION
As a narrow legal matter, Dodge v. Ford stands for the
proposition that if a
CEO testifies that he and his board were engaging in certain
actions for

reasons unrelated to maximizing shareholder value, they would
lose a lawsuit
challenging those actions, especially if they exhibited
indifference to the
interests of those shareholders. 3 On the other hand, if the CEO
engaged in
36. On the other hand, there is no way for the fixed claimants to
pay the shareholders to
move from Project 4 to Project 5, because the gains to the fixed
claimants ($1) are much
smaller than the losses to the equity claimants ($61).
37. For a modern version of Doge z'. Ford, see Lacos Land Co.
v. Arden Group, Inc., 517
A.2d 271 (Del. Ch. 1986), another case -whose outcome turns
on the CEO's motivation
for taking a particular corporate action and in -which the CEO
lost merely because he
precisely the same actions but claimed that doing so was for the
purpose of
maximizing shareholder value, they would win the same
lawsuit.
In other words, I agree with Professor Stout's essential claim
that the
corporate law principle of wealth maximization for shareholders
as articulated
and enforced in Dodge v. Ford is a rule that is hardly ever

enforced by courts.
Professor Stout and I disagree, however, about the reason why
this is the
case. Professor Stout attributes the lack of other cases like Doge
v. Ford to the
fact that the legal rule articulated in the case is not good law.38
Perhaps this is
true, but I do not think so.
In my view, the holding in Dodge v. Ford is attributable to the
fact that the
rule of wealth maximization for shareholders is virtually
impossible to enforce
as a practical matter. The rule is aspirational, except in odd
cases. As long as
corporate directors and CEOs claim to be maximizing profits for
shareholders, they will be taken at their word, because it is
impossible to
refute these corporate officials' self-serving assertions about
their motives.
Nonetheless, fully understanding the futility of the holding in
Dodge v. Ford
can provide an interesting and important lesson about the ability
of corporate
law to provide much of value to investors.
Doge v. Ford is a great metaphor for the complex and
gargantuan mass of
corporate law that has been piling up on the legal landscape at
both the state
and federal level since the beginning of the twentieth century.
While these
rules undoubtedly enrich the platoons of corporate lawyers who
plan for and
litigate with corporations, they do not do much for shareholders.

implied (indeed expressed) "threats" to oppose certain
transactions that "could be
determined by the board to be in the best interests of all the
stockholders." Id. at 278.
3:177 (2008)
Cornell Law Library[email protected] Law: A Digital
Repository4-1-2008Why We Should Stop Teaching Dodge v.
FordLynn A. StoutRecommended Citation
Brigham Young University Law School
BYU Law Digital Commons
Faculty Scholarship
12-31-1998
The Shareholder Primacy Norm
D. Gordon Smith
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D. Gordon Smith*
I. IN TRO D UCTION
...............................................................................................
.......... 277
11. THE SHAREHOLDER PRIMACY NORM IN PUBLICLY

TRADED
C ORPO RATION S
...............................................................................................
......... 280
A. The Shareholder Primacy Norm in Legal Scholarship
........................................ 280
B. The Irrelevance of the Shareholder Primacy Norm
in Publicly Traded Corporations
........................................................................ 283
1. The Shareholder Primacy Norm in Judicial Opinions
.................................. 284
2. The Shareholder Primacy Norm in Incorporation Statutes
........................... 288
3. The Shareholder Primacy Norm in Modern Business Practices
................... 290
III. SHAREHOLDER PRIMACY IN EARLY BUSINESS
CORPORATIONS ............................... 291
A. Early Business Corporations and the Public Interest
.......................................... 292
B. Evidence of Shareholder Primacy in Early Business
C orp orations
...............................................................................................
......... 296
IV. THE SHAREHOLDER PRIMACY NORM IN CLOSELY
HELD
C ORPORATION S
...............................................................................................
........ 305
A. The Birth of the Shareholder Primacy Norm
....................................................... 306

B. The Development of the Business Judgment Rule
................................................ 309
C. The Emergence of Minority Oppression
.............................................................. 310
D. Dodge v. Ford M otor Co. Revisited
..................................................................... 315
E. The Modern Doctrine of Minority Oppression
.................................................... 320
V . C ON CLU SION
...............................................................................................
............ 322
I. INTRODUCTION
The structure of corporate law ensures that corporations
generally operate in the in-
terests of shareholders. Shareholders exercise control over
corporations by electing direc-
tors, approving fundamental transactions, and bringing
derivative suits on behalf of the
" Associate Professor of Law, Northwestern School of Law of
Lewis & Clark College. I presented an out-
line of the ideas for this Article at the Lewis & Clark Faculty
Research Colloquium, and I benefitted im-
mensely from the comments of the participants. In addition,
Brian Blum, Bill Bratton, Ed Brunet, Vince
Chiappetta, Jill Fisch, Larry Hamermesh, Kim Krawiec, Curtis
Milhaupt, Larry Mitchell, and Randall Thomas
offered useful comments on drafts of this Article. Ken Piumarta,
Chad Plaster, and Glenn Perlow provided
research assistance. Special thanks go to Peter Nycum, Lynn
Williams, Tami Gierloff, Seneca Gray, and the
rest of the excellent staff of the Paul L. Boley Law Library at
the Northwestern School of Law of Lewis &

Clark College, who assisted in obtaining numerous historical
materials.
The Journal of Corporation Law
corporation. Employees, creditors, suppliers, customers, and
others may possess contrac-
tual claims against a corporation, but shareholders claim the
corporation's heart. This
shareholder-centric focus of corporate law is often referred to as
shareholder primacy.
Although shareholder primacy is manifest throughout the
structure of corporate law,
it is within the law relating to fiduciary duties that shareholder
primacy finds its most di-
rect expression. Corporate directors have a fiduciary duty to
make decisions that are in
the best interests of the shareholders. This aspect of fiduciary
duty is often called the
shareholder primacy norm.
1
Although the shareholder primacy norm has had myriad
formulations over time, the
one most often quoted by modem scholars comes from the well-
known case Dodge v.

Ford Motor Co.:
A business corporation is organized and carried on primarily for
the profit of
the stockholders. The powers of the directors are to be
employed for that end.
The discretion of directors is to be exercised in the choice of
means to attain
that end, and does not extend to a change in the end itself, to
the reduction of
profits, or to the nondistribution of profits among stockholders
in order to de-
vote them to other purposes.
2
Legal scholars generally assume that the shareholder primacy
norm is a major factor
considered by boards of directors of publicly traded
corporations in making ordinary
business decisions and that changing the shareholder primacy
norm would have an effect
on the substance of those decisions. Stephen Bainbridge
captured the prevailing senti-
ment exactly, asserting that "the shareholder wealth
maximization norm ... has been
fully internalized by American managers."

3
1. The term "shareholder primacy norm" has come into wide
use. See, e.g., William W. Bratton & Jo-
seph A. McCahery, Regulatory Competition, Regulatory
Capture, and Corporate Self-Regulation, 73 N.C.L.
REV. 1861, 1875 n.41 (1995); Lyman Johnson, The Delaware
Judiciary and the Meaning of Corporate Life
and Corporate Law, 68 TEX. L. REV. 865, 880 (1990).
Occasionally, the term "shareholder wealth maximiza-
tion norm" is employed instead. See, e.g., Stephen M.
Bainbridge, In Defense of the Shareholder Wealth
Maximization Norm: A Reply to Professor Green, 50 WASH. &
LEE L. REV. 1423, 1423 (1993). Identifying
this fiduciary duty as a "norm" has considerable jurisprudential
support. For example, Hans Kelsen described
legal norms as follows:
The concepts of "duty" and "right" (or entitlement) are
intimately connected with the functions
of norms. "A norm commands a certain behavior" is equivalent
to "A norm imposes a duty to
behave in this way." "A person is 'duty-bound' or has a 'duty' to
behave in a certain way" is
equivalent to "There is a valid norm commanding this
behavior." A duty is not something dis-

tinct from a norm: it is the norm in relation to the subject whose
behaviour is commanded.
HANS KELSEN, GENERAL THEORY OF NORMs 133
(Michael Hartney trans., 1991). Although rarely analyzed,
the distinction between the principle of shareholder primacy and
the shareholder primacy norm occasionally
emerges in corporate law scholarship. See, e.g., John H.
Matheson & Brent A. Olson, Corporate Cooperation,
Relationship Management, and the Trialogical Imperative for
Corporate Law, 78 MINN. L. REV. 1443, 1461
(1994) (referring to the "traditional shareholder primacy model"
as including the right of a corporation's
shareholders "to control its destiny, determine its fundamental
policies, and decide whether to make funda-
mental changes in corporate policy and practice" and quoting
Dodge v. Ford Motor Co., 170 N.W. 668, 684
(Mich. 1919), as an "encapsulation of the shareholder primacy
norm").
2. 170 N.W. at 684.
3. Stephen M. Bainbridge, Participatory Management Within a
Theory of the Firm, 21 J. CORP. L. 657,
717 (1996).
[Winter

This Article challenges the received wisdom and argues that the
shareholder pri-
macy norm is nearly irrelevant to the ordinary business
decisions of modem corpora-
tions. Furthermore, the shareholder primacy norm was not
created to mediate conflicts
between shareholders and nonshareholder constituencies of a
corporation. Indeed, the
origin and development of the shareholder primacy norm
suggest that it was introduced
into corporate law to perform a much different and somewhat
surprising function-the
shareholder primacy norm was first used by courts to resolve
disputes among majority
and minority shareholders in closely held corporations. Over
time this use of the share-
holder primacy norm has evolved into the modem doctrine of
minority oppression. This
application of the shareholder primacy norm seems incongruous
today because minority
oppression cases involve conflicts among shareholders, not
conflicts between sharehold-
ers and nonshareholders. Nevertheless, when early courts
employed rules requiring direc-
tors to act in the interests of all shareholders-not just the
majority shareholders-they
were creating the shareholder primacy norm.
Although first used to resolve minority oppression cases, the
shareholder primacy
norm was not confined to such cases. Because courts did not
routinely distinguish closely
held corporations from publicly traded corporations until the
middle of this century, the

shareholder primacy norm was employed without hesitation in
cases involving publicly
traded corporations. 4 Outside the takeover context, 5 however,
application of the share-
4. See JAMES WILLARD HURST, THE LEGITIMACY OF
THE BUSINESS CORPORATION IN THE LAW OF THE
UNITED STATES 1780-1970, at 76 (1970):
Both the set-pattern incorporation acts, which were standard as
of the 1880s, and the enabling-
act type of statute, which became standard by the 1930s, tacitly
assumed that the corporation
would be one with a substantial number of shareholders .... The
record shows no significant
attention given before the mid-twentieth century to the question
whether a different corporate
pattern might be more suited to the needs of a firm with
relatively few investors, most of whom
would usually be in continuing touch with its affairs, if not
actively involved in operating it.
The first legislature to adopt a statutory provision aimed at
addressing the special needs of closely held corpo-
rations was New York, which acted in the wake of Benintendi v.
Kenton Hotel Inc., 60 N.E.2d 829 (N.Y.
1945). North Carolina and South Carolina followed suit in 1955
and 1962 respectively. See F. Hodge O'Neal,
Close Corporations: Existing Legislation and Recommended
Reform, 33 BUS. LAW. 873, 873-75 (1978). One
of the first cases noting the importance of treating closely held
corporations differently than publicly traded
corporations was Galler v. Galler, 203 N.E.2d 577 (i11. 1964).
See also Donahue v. Rodd Electrotype Co., 328
N.E.2d 505 (Mass. 1975).

5. The shareholder primacy norm serves a different function in
the context of takeovers than it does in
the context of ordinary business decisions. Because takeovers
usually are a terminal event for shareholders of
the target corporation, the shareholder primacy norm protects
rights that otherwise might be lost forever. As
noted by the Delaware Supreme Court in Paramount v. QVC:
Because of the intended sale of control, the [acquisition of
Paramount by Viacom] has eco-
nomic consequences of considerable significance to the
Paramount stockholders. Once control
has shifted, the current Paramount stockholders will have no
leverage in the future to demand
another control premium. As a result, the Paramount
stockholders are entitled to receive, and
should receive, a control premium and/or protective devices of
significant value. There being
no such protective provisions in the Viacom-Paramount
transaction, the Paramount directors
had an obligation to take the maximum advantage of the current
opportunity to realize for the
stockholders the best value reasonably available.
Paramount Comm. Inc. v. QVC Network, Inc., 637 A.2d 34, 43
(Del. 1994). For more on the shareholder pri-
macy norm in the takeover context, see D. Gordon Smith,
Chancellor Allen and the Fundamental Question,
21 SEATTLE U. L. REv. (forthcoming 1998).
1998]

The Journal of Corporation Law
holder primacy norm to publicly traded corporations is muted
by the business judgment
rule. 6 As a result, even though the shareholder primacy norm is
closely associated with
debates about the social responsibility of publicly traded
corporations, 7 its impact on the
ordinary business decisions of such corporations is limited.
Part I of this Article describes the prevailing view of the
shareholder primacy norm
in legal scholarship. It then challenges that view by examining
the application of the
shareholder primacy norm to modem, publicly traded
corporations, arguing that the norm
is nearly irrelevant to the ordinary business decisions made by
boards of directors of such
corporations. Part II argues that shareholder primacy applied to
the earliest business cor-
porations and describes its role. Part III shows how courts first
enforced the shareholder
primacy norm in the context of closely held corporations in
actions that would be classi-
fied today as minority oppression cases. The Article concludes
with an explanation of
how the origin of the shareholder primacy norm reveals its
irrelevance to modem, pub-
licly traded corporations.
I1. THE SHAREHOLDER PRIMACY NORM IN PUBLICLY
TRADED CORPORATIONS
The shareholder primacy norm is considered fundamental to

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