By: Beate Sjåfjell*

Introduction: A Moral Imperative for Action

The company is one of the most ingenious inventions of our time.[1]  With limited liability for its investors, enabling capital to be (in theory) put to its most efficient use, the company has become the backbone of our economies.  But must this all-important component of our market economies be equated with environmental degradation to the extent that we risk dangerous loss of biodiversity and passing the tipping point of climate change?  In my opinion it must not.  We need to find out how to make the necessary changes.  We have a moral imperative for action.[2]

Climate change is a case in point for the necessity of working toward a sustainable development; toward the achievement of economic development and social justice within the nonnegotiable ecological limits of our planet.[3]  According to even the most conservative estimates of the Intergovernmental Panel on Climate Change (“IPCC”),[4] business as usual will most probably lead to climate change of a magnitude to which we cannot adapt, or to which we can adapt only at extremely high costs.[5]  Contrary to popular phraseology, dealing with climate change is not about saving the planet.  The planet will take care of itself.  The issue is whether we should preserve the very basis of our existence, of our societies as we know them today.[6]  Runaway climate change involves a high risk of severe environmental, social, and economic consequences,[7] and the challenge of climate change needs to be dealt with on all those levels, both in terms of mitigating as much as possible, and adapting to that which cannot be avoided.[8]

Climate change is not the only crisis we face.  There is a convergence of crises: the financial crises; the loss of biodiversity threatening the stability of our ecosystems;[9] the peaking of fossil energy sources;[10] and the harsh brutality of tens of thousands of people dying every day for poverty-related reasons.[11]  In the aftermath of one financial crisis and the furious effort to try to avoid a new full-blown crisis, the attention of world leaders is on stimulating growth and getting back to business as usual.[12]  Although there has been some talk of a “Global Green New Deal,” of turning the financial crisis into an opportunity for necessary transition to a green economy,[13] generally speaking, environmental concerns have a tendency to be placed on the backburner, along with concerns for the underprivileged of this world, when jobs are lost, revenues disappear, stock markets quiver, and the financial basis of developed countries appears to be in danger.[14]  Getting back on track with economic growth and business as usual is a postponement of the necessary focus on dealing with climate change and other overriding environmental concerns—a postponement that may turn out to be highly detrimental to our chances of achieving a sustainable global society: financially, socially, and environmentally.[15]

It is the poor people of this world who are already suffering the most, who are hit first by financial crises,[16] and who will continue to be affected the most, in the short term, as a consequence of climate change and the global energy situation.[17]  But ultimately these crises affect us all: there are many indications that business as usual is the right choice only if we desire a very uncertain future for our children and grandchildren.[18]  Unfortunately, by the time enough decision-makers realize that business as usual is not a viable alternative, it may very well be too late.[19]  That gives rise to the question: What do we do?

I.  The Role of Companies

What then is the role of companies in this bigger picture?  Surely it is not companies, but policymakers and lawmakers, our parliaments and governments, who should do what is necessary to lead us into sustainable development.  The responsibility of the state is incontestable.[20]  However, a part of that responsibility is considering the role of companies.[21]  The great significance of the function of companies within the global economy and the vast impact that the operations of companies today have, on an aggregated level, on society in general and on the biosphere and the atmosphere, means that a critical analysis of the purpose of companies and the regulatory framework within which they operate is crucial to a deeper understanding of the correlation between society and sustainable development.[22]  We cannot hope to achieve overarching societal goals without companies contributing to them.  Companies are all-important components of our economies, with an enormous unrealized potential for mitigating climate change.  As put forward by the IPCC, there is potential to reduce greenhouse gas emissions with existing technology, but a number of barriers prevent this potential from being realized.[23]

The conceived primacy of shareholders and of profit maximization for shareholders is arguably one such barrier, and indeed prime among them.[24]  Business acceptance of the nonprimacy of shareholder interests seems to be a necessary prerequisite for business to become sustainable, also in the environmental sense.  As long as profit (maximization) for shareholders is the overarching goal, any attempt at prioritizing environmental concerns and prioritizing climate change mitigation will quickly hit a ceiling.[25]  Certainly, profit in itself is good and necessary for the survival of our businesses providing workplaces, revenue, and in short, welfare.  The search for profit is legitimate and necessary.  The problem arises when profit becomes the overarching objective to the detriment of other legitimate interests and societal goals.  We need to find out how to change the framework within which profit is pursued, so that profit is pursued within the goal of sustainable development instead of the pursuit of profit being the main goal, with some good being done (or appearing to be done) in the name of corporate social responsibility.

II.  The Role of Law

A.     Beyond CSR and Mainstream Corporate Governance: Integration of Environmental Concerns

There are two dominant debates concerning companies: the Corporate Social Responsibility (“CSR”) debate and the Corporate Governance debate.[26]  CSR in a sustainable-development perspective could be seen as dealing with and bringing together two interrelated issues:[27] firstly, legal compliance and secondly, the company’s responsibility for going beyond such compliance, with the legal rules forming the floor and the voluntary part of CSR being a striving beyond that—a race to the top.[28]  In that sense, CSR would encompass and form a bridge between hard law, soft law, and ethical obligations.  But CSR does not do this.  Business lobbyists have captured the CSR concept and ensured that the definition legislators subscribe to is that of CSR as a voluntary activity.[29]  The business message may be said to be: “Do not legislate us, and we are willing to talk about how we behave.”[30]  This is not meant to ignore that good is done in the name of CSR.  And certainly the CSR movement has led to or been a part of a process where no self-respecting business leader will claim that her company disregards CSR.[31]  However, as I have argued elsewhere, defining CSR through delimitation against legal obligations is deceptive and detrimental to the development of a sustainably and socially responsible business and has contributed to giving CSR a bad name.[32]

Much of what companies claim as credit on their CSR accounts is involvement with issues unrelated to their businesses, for example the Norwegian Airport Express Train organizing computer classes for former drug addicts[33] or Norsk Hydro funding the Oslo Philharmonic Orchestra.[34]  Funding the Orchestra gives no indication at all of how Norsk Hydro is run as a business—how it contributes to or works against the mitigation of climate change, how its employees are treated, or whether it cares about the workers hired by its subcontractors.[35]  Organizing computer classes for the underprivileged or funding cultural activities is not CSR in the true sense—it is corporate charity work.[36]

The mainstream corporate governance debate concentrates on a small segment of the reality in which companies operate.[37]  This debate focuses on investors, first and foremost shareholders, and their relationship with the board of the company and, by extension, its management.  The corporate governance debate has spawned a number of corporate governance codes and legislative measures, such as the EU Directive on shareholder rights.[38]  Heavily influenced by the dominant legal-economic theory of agency,[39] the focus is on how to find the right incentives to make the board act as agents for the shareholders as principals with profit maximization as the overarching goal.[40]

Together with the capture of CSR as a voluntary affair for business, the narrow focus typical of the mainstream corporate governance debate promotes the shareholder primacy drive and the misconception that the company is and should be a vehicle for profit maximization for shareholders only—and that it is sufficient for companies to contribute to overarching societal goals.[41]  A true integration of environmental concerns is required.  The law, therefore, is necessary to ensure the contribution of companies, to level the playing field for companies that wish to actively contribute to the mitigation of climate change and of threats to biodiversity, and to ensure that their contributions are not limited by the competitive advantage that today’s system tends to give irresponsible and short-sighted companies.

B.     The Limited Effectiveness of Environmental Law

Having established that the law is necessary, this poses the question: What area of law?  Environmental law and other forms of external regulation[42] are important, but the limits of external regulation are well documented and consist of a number of interlinked issues, briefly sketched here.

First, the extraterritoriality issue or the issue of home state and host state.  For example, while European companies may be under relatively strict environmental regulation in their home state, the jurisdictional scope of home state regulation does not typically cover the companies’ business in other countries.[43]  The host state may have lax regulation or lacking enforcement.  Developing countries, needing jobs and revenue, may be fearful of making demands on companies from developed countries.[44]  Second, the regulatory lacuna at an international level—the stalled proposal for UN norms governing transnational companies is an example of this gap.[45]  Third, the legislatures cannot keep up with everything companies do or plan to do and the environmental consequences of their actions.[46]  Fourth, there is the danger of loopholes, boilerplate formulas or other measures through which companies comply or seem to comply with the law at as low a cost as possible.  This is the problem with reporting.[47]

Finally, and perhaps most importantly, sustainable development is about going further than the antipollution approach that often characterizes environmental law and other external regulation.  Sustainable development is a way of thinking.  To get decision makers in companies to think in a certain manner an internal company perspective is required.  In my opinion, this involves a company law perspective—not as an exclusive perspective, but as a necessary contribution.

C.     The Role of Core Company Law

This Article makes the argument that company law is a necessary tool for achieving sustainable companies, both to make the external regulation of companies more effective and to realize the potential within each company to make its own independent, creative, and active contribution to the mitigation of climate change.  Take the mainstream corporate governance debate as a starting point: If the focus of the board, and by extension, the management, is to be primarily on ensuring profit for shareholders and keeping the share price high, and the whole system encourages shareholders to focus on their profits, who then is to be responsible for the company’s action beyond its narrow obligation to comply with the law?  In my opinion, this should be the responsibility of the board.  But the board is under pressure from the shareholder primacy drive to focus on the short term rather than the long term and to disregard externalities that the company is not obligated by law to internalize (or which it can get away with ignoring).

In many jurisdictions, company law is seen as regulating the purpose of the company through its regulation of the relationship between the shareholders, the board, and management.  Company law is thereby seen as supporting the shareholder primacy drive, although that view arguably is more a social norm than a legal one.[48] Combating the negative effects of the shareholder primacy drive therefore, in my opinion, entails redefining the purpose of the company and the role and the purpose of the board.[49]  I believe redefining should be done in a principle-based manner, but it should be done in law, through the use of legal standards, instead of attempting to do this (only) through more or less voluntary codes and so on.  The law needs to create a floor beneath which no company can go, thereby promoting a race to the top through each company contributing in its own individual, creative way.

III.  The Research Project “Sustainable Companies”

A.     Internalizing Environmental Externalities

The international team of the Oslo-based research project “Sustainable Companies”[50] is dedicated to finding out how to move from the idea of internalizing externalities[51] to a research-based proposal.  Our vision is to contribute to the tools that make companies become a part of the solution.  The hypothesis underlying the project is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.[52]  To test this hypothesis and to prepare the ground for well-founded proposals for reform at the end of the project period, an important first stage in the “Sustainable Companies” project has been to map the barriers to and possibilities for the promotion of sustainable business in the hitherto often ignored area of company law.[53]  Team members in our project, from a wide range of jurisdictions including countries in Europe, the Americas, Africa, and Asia,[54] have written country reports concerning the same set of questions with the main focus on core company law issues but also covering accounting/reporting and auditing/assurance, as well as the in practice very important but in company law not adequately addressed area of groups.  These country reports have formed the basis for the ongoing work with three cross-jurisdictional papers identifying the barriers to and possibilities for sustainable companies in the same three important areas: first, core company law; second, accounting/auditing rules; and third, the regulation of company groups.[55]  In this Article, a first tentative suggestion of the results of this mapping and what it entails for possible reforms is given.[56]  For reasons that will be made clear below, the focus is on core company law.

B.     Tentative Results: Possibilities and Critique

On the face of it, we see tentative glimmers of hope and possibilities for the promotion of companies in the increasing focus on CSR and the ethical obligations of a company to consider the environmental and societal impacts of its business.[57]  An analysis of the results of the mapping indicates that the two debates of CSR and mainstream corporate governance are reflected.[58]  On the one hand, there is more shareholder focus, also in continental European and Nordic countries originally having a wider perspective.[59]  On the other hand, there is more focus on the wider corporate responsibility also in shareholder primacy strongholds such as the United Kingdom, with its enlightened shareholder value.[60]  Exceptionally, the consideration of the environment is directly included in legal requirements of the duties of the board, as in the U.K. Companies Act of 2006,[61] while in jurisdictions like Germany we even see an increased emphasis in company law on a pluralistic view of the interests of the company.[62]  In countries that have had to rebuild their societies after communism, or as in South Africa after apartheid, we see tendencies to new approaches based on a broader understanding of the societal significance of companies.[63]  Certainly company law in many jurisdictions allows the inclusion of environmental concerns and also the prioritization of environmental protection over short-term profit, and we find legal sources that substantiate that from a legislative perspective.  Companies are expected to contribute toward societal goals wider than that of shareholder profit maximization.[64]

These two partly conflicting trends seem to lead to reporting being seen as the solution, as a compromise satisfying both groups, especially in the form it takes in most countries, where the extent to which companies internalize environmental externalities[65], for example, is voluntary, while the reporting itself is not—an approach that may be seen as underpinned through theories of reflexive law.[66]  We see this in EU law and it is taken further in Norway[67] and Denmark.[68]  We see the same tendency in some corporate governance codes, notably in the Netherlands.[69]  There are some court cases that arguably indicate a new approach, inter alia, in cases concerning the piercing of the corporate veil.[70]

There are also some business initiatives, in Germany and in Ireland for example, that seem to be working to contribute toward sustainable development.[71]  There are some institutional investors, some pension funds, which are on their way toward what may become truly socially responsible investment.[72]  And we see a very slowly growing tendency in public opinion to require more from companies.[73]

However, the positive tendencies are not sufficient, neither in their current scope nor in their capacity to develop—it is too little and most likely going to be too late.  Even more seriously, there is a two-pronged danger of the CSR talk and of reporting as the preferred perceived solution.  First, concerning reporting: when the core duty is not in place, when the decision makers in companies are not required to integrate environmental concerns into the decisions of how the core business of the company is to be run, and when there is no hard law stating that companies must be run in a socially responsible manner, we risk that environmental reporting is neither relevant nor reliable.[74]  There are even studies that indicate “a negative relation, i.e., the more a firm discloses, the worse its environmental performance.”[75]  The uglier the company, the more makeup it uses.  Similar problems are reported concerning the disclosure of social issues.[76]  Second, concerning CSR: corporate charity work is often used instead of true CSR, leading to greenwashing and deflecting our attention from how the core business of the company is actually run.[77]  Further, all the CSR talk creates a danger of the wool being pulled over our eyes—making us believe that enough is being done.  This is the danger with the company law reforms that are perceived by some as positive, notably the codification of the so-called enlightened shareholder value of the U.K. Companies Act.[78]  If this is seen as a step forward, it may serve to take the pressure off of legislators to undertake proper reform, due to the misconception that progress is made in terms of internalising externalities in business decision making, when the truth seems to be that nothing has changed at all—at least not for the better.  In the United Kingdom, as in most of the rest of the world, we are still seeing business as usual—or, with the current financial unrest following the financial crisis of 2008, desperate attempts to keep business going as usual.[79]  But business as usual is not and cannot be an alternative for humanity desiring to ensure viable ecosystems for future generations.[80]

C.     Tentative Results: The Main Barrier

The role of the board is central to the way companies are run and thereby to the contribution of companies to the mitigation of climate change and the mitigation of the destruction of biodiversity.[81]  Inspired by the ideas of agency theory, directors of the board are increasingly seen as agents for the shareholders as principals, with profit maximization as the goal.[82]  The tentative results of our cross-jurisdictional analysis indicate that shareholder primacy and the perceived overarching goal of maximizing shareholder profit present the most important barriers to the contribution of companies to environmental sustainability.[83]  Indeed, all tentative possibilities, all glimmerings of hope, are negated through the dominance of shareholder primacy and the short-term shareholder profit maximization drive.

This does give rise to the question: How can shareholder primacy be perceived as a main barrier in an analysis of company law, when shareholder primacy arguably is more of a social norm than a legal one?[84]  However, there is a clear link between this social norm and company law, because the social norm has developed within the framework of the law, as a result of what the law does and does not regulate.[85]  In my opinion, understanding this relationship may be a significant step in understanding how we can achieve change, and it certainly is also indicative of the possibility that lies in company law as it is today.

In what way has company law allowed this myth of shareholder primacy and profit maximization as a mandatory requirement to develop?  To understand that, it may be useful to return to the starting point of this Article, namely that the company is one of the most ingenious inventions of our time.  We mostly take it for granted today, but the company with limited liability for its shareholders is a relatively recent innovation, and much younger than the enforceable contract, that perhaps was the most innovative contribution of Roman law.[86]  Contracts and private property rights are necessary prerequisites for business as we know it and have much deeper historical roots as such.[87]  The idea of the company with limited liability, where people can invest their money in a business venture and expect a cut of future profits if successful and not lose more than their investment if unsuccessful, is relatively speaking the newcomer in the world of business.[88]  From one perspective, this was arguably not new: banks lend money to business projects along the same principles.[89]  The major difference is, however, that banks are protected through contract, while shareholders are not.[90]  Nor are shareholders owners, in any full, traditional sense of the word ownership.[91]

History saw the rise of this innovative way of financing companies, putting capital to its purportedly most efficient use, but for that to work on a grand scale, investors needed some kind of protection.  Naturally, therefore, Companies Acts setting up rules for companies with limited liability for their shareholders emphasize regulating the relationship between the shareholders on the one hand and the company, through its board and management, on the other.  This is not to say that no other interests involved in or affected by companies are dealt with in Companies Acts—most Companies Acts have some rules concerning creditor protection.[92]  The rights of creditors are, however, mainly regulated through other areas of law, with historical roots far surpassing those of companies with limited liability.

The focus on shareholders in the Companies Acts has in many jurisdictions led to company law being perceived as regulating the purpose of the company through its regulation of the relationship between shareholders and the company.  Nordic Companies Acts, for example, typically state that companies that do not have profit for shareholders as a purpose should regulate in their articles of association how the profit of the company is to be distributed.[93]  This is misconstrued, in my opinion, as setting out the purpose of the company understood as the company’s only or main purpose.  Understood historically, the Companies Acts set out the typical purpose that shareholders have with their relationship with companies in which they have shares, and serves as a protection of that purpose in the sense that if companies do not intend to distribute dividends to shareholders at all, then potential investors should be given a forewarning in the articles of association.  What the Nordic Companies Acts do not say anything about—and neither do Companies Acts, generally speaking, expressly regulate this issue—is what the purpose of the company on an aggregated level is, and what the guidelines are according to which the company is to be run.  The interlinked concepts of the purpose of the company and the interests of the company are therefore topics for debate in academic contributions, while in more pragmatic, practitioner-oriented literature the inference is simply drawn that shareholder focus in the Companies Acts translates into a prioritization of shareholder interest by the legislators.  The historically explicable fact of the focus of the relationship between the shareholders and the company organs in the Companies Acts, and the lack of express regulation of the core company issues of the purpose of the company and the interests of the company, has therefore led to the development within this vacuum of an idea of shareholder primacy.[94]  This is not to say that shareholder primacy cannot be substantiated as having legal support in any jurisdiction.  However, the dominance of the Anglo-American law-and-economics[95]inspired shareholder primacy[96] does seem to go far beyond anything that can be substantiated in a comparative analysis of company law.[97]  Certainly the narrow, short-term perspective that the shareholder primacy drive has led to is contrary to company legislation anywhere, and detrimental to the societal goals to which the regulation of companies is meant to contribute.[98]

The vacuum in the Companies Acts of many jurisdictions and the resulting development of the shareholder primacy drive, with its detrimental effects, has led to the extraordinary state of affairs of the Reflection Group on the Future of EU Company Law[99] suggesting that companies should be allowed to include in their articles of association that boards are allowed to promote the interests of the company[100] and to employ a long-term perspective.[101]  The Reflection Group thereby proposes to codify an acceptance of what, from any proper, in-depth company law analysis seems to be the state of law today—namely that shareholder profit maximization and shareholder primacy are not the only, nor should they be, the dominant guidelines in the narrow, short-term sense that we see today and that may be seen as contributing to the convergence of crises that we face.[102]  The perverse effect of that well-intended proposal may unfortunately be that it is used as an argument to say that narrow, short-term shareholder primacy is the norm according to European company law—otherwise, why would the Reflection Group suggest that the opposite should be expressly allowed?

D.    The Way Forward: Tentative Reflections

We see that what is perhaps the main barrier to sustainable companies has been allowed to flourish because of what the law regulates and what it does not.  This also indicates a way forward.  If a key problem is the lack of regulation of what the purpose of companies and the interests of companies are, then a clarifying regulation of those issues will not be just an additional layer of detailed regulation that entails only more expenses and aggravation for companies, but will set a key issue straight in a principle-based manner that could be the start of a shift in a sustainable direction.[103]  However, as we are so far off track from sustainable development, with a dramatic shift needed to achieve the presumed safe harbour of no more than two degrees Celsius warming,[104] we probably need to go beyond stipulating long-term, inclusive concepts of the purpose of the company and the interests of the company.  In my opinion, what urgently needs to be done is to clarify that the company, on an aggregated level, may and should have profit as a core of its purpose[105]—business cannot survive in the long run without making profit—but this should be sought within the overarching societal purpose of sustainable development.  This would be turning inside out the purpose of the company that shareholder primacy drive today promotes, where profit is the overarching purpose and perhaps some good may be sought in the name of CSR.

Because shareholder primacy in the narrow, short-term sense has been allowed to develop for so long, we will also need to consider incentives to support a shift towards sustainable development, and removing disincentives for sustainability that encourage the myth of shareholders as owners and shareholder profit maximization as the dominant guideline.  The concept of the interests of the company as a guideline should be developed accordingly, and as I have suggested elsewhere, be teamed together with a concept of sustainable development as an overarching guideline.[106]

A tentative conclusion from my point of view is that legal reform seems to be necessary to not only support the possibilities that company law today actually gives sustainable business, but to codify these possibilities expressly, preferably as mandatory guidelines, so that the competitive advantage is given to companies that wish to contribute to sustainable development and taken away from those that do not.  Legal reform seems to be necessary to start the difficult process of removing the barriers created mainly through social norms that have been allowed to develop in the vacuum caused by the lack of definition of the purpose of companies and of the interests of the company in company law.

Only once these issues are clarified as a matter of company law do we have a good basis for discussing incentives and sanctions, such as liability, and necessary supportive measures such as accounting and reporting—taken seriously—and not as marketing and greenwashing and wool-over-the-eyes pulling as we have today.

Reforming core company law seems in short to present itself as a necessary prerequisite to achieving sustainable companies, both to make the external regulation of companies more effective and to realize the potential within each company to make its own independent, creative, and active contribution to the mitigation of climate change.

IV.  The Proposals of the “Sustainable Companies” Project

The “Sustainable Companies” project seeks in the last phase of the project[107] to identify necessary measures to dismantle the barriers preventing business from becoming sustainable and legal mechanisms and incentives to propose to promote truly responsible business.[108]  For the European part of the project,[109] EU law, the common framework for thirty European countries, contains the legal basis for making necessary changes to achieve sustainable business (and sustainable development in general).[110]  However, the necessary steps have not been taken.[111]  This lack of movement may be seen as indicative of a general problem: we may presume that the legislators have sufficient knowledge and on the EU level they have not only knowledge and sufficient legal basis to move forward,[112] but even legal obligations to take action to achieve the goal of sustainable development.[113]  Legislators nevertheless often seem to be powerless to move beyond path-dependent ways of dealing with the pervasive issues of our time.  Legislative work tends to be reactive rather than proactive, based on postulates and superficial discussions, with a striking lack of time and energy devoted to in-depth analysis of the underlying issues and the consequences of existing and proposed new legislation.[114]  The “Sustainable Companies” project therefore aims to conclude its work with research-based concrete proposals for any necessary change on the EU level, as well as jurisdiction-specific proposals for a number of the countries represented in the project team.[115]  These may take the form of proposals for legal reform within and beyond company law as well as proposals for guidelines for companies wishing to become true contributors to sustainable development.

Conclusion: Global Challenges Call for Global Debate

The challenges we face are global by nature.  Global challenges ideally require a global approach and an unprecedented holistic and forward-looking approach.[116] The international climate negotiations in Copenhagen and in Cancun have shown, as presumably will the coming negotiations in Durban, that we cannot depend on the governments agreeing to the necessary measures to mitigate climate change as far as still possible.  And even if the international community against all odds was to reach an agreement on a sufficient reduction in greenhouse gas emissions,[117] regulators around the world would be in dire need for effective proposals regarding how to achieve those goals.  And to reiterate: climate change is but one case in point for the necessity of a shift toward sustainable development.[118]

The “Sustainable Corporation” Symposium organized by the Wake Forest Law Review is one piece of an important jigsaw puzzle of international debate and collaboration necessary to move forward;[119] the “Sustainable Companies” research project, with its international team of scholars, is another.  Let us hope that there will be enough jigsaw puzzle pieces in time to make the picture complete.


*   Professor at the University of Oslo, Faculty of Law, Department of Private Law.  Head of the research project “Sustainable Companies” and the research group “Companies, Markets, Society and the Environment.”  Dr. Juris 2008, University of Oslo; Cand. Jur. 1999, University of Oslo.  My warmest thanks to Alan Palmiter for inviting me to present this Article at the Wake Forest Law Review Symposium “The Sustainable Corporation,” and to the participants for invigorating and challenging discussions.  I would also like to express my gratitude to my colleagues in the research project “Sustainable Companies” for their insightful contributions to our ongoing research.  The views expressed in this Article are my own and do not necessarily represent those of the project team.  All comments are welcome at[email protected].

        [1].   The enforceable contract may be the most innovative contribution of Roman law.  See Alan Watson, The Evolution of Law: The Roman System of Contracts, 2 Law & Hist. Rev. 1, 1 (1984).  In a similar manner, company law has contributed to the contemporary economy.  See Raghuram G. Rajan & Luigi Zingales, Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity 59, 160 (2003).

        [2].   Others have also eloquently argued this proposition.  See generally Jonathon Porritt, Capitalism as if the World Matters (Earthscan rev. ed. 2007).  The title of this Article is inspired by and intended as a tribute to Jonathon Porritt’s book.

        [3].   Sustainable development—the balancing of economic development, environmental protection, and social justice—has famously been defined as a development that “meets the needs of the present without compromising the ability of the future generations to meet their own needs.”  Rep. of the World Comm’n on Env’t and Dev.: Our Common Future, ¶ 27, U.N. Doc. A/42/427, Annex (Aug. 4, 1987) [hereinafter Our Common Future].  For a discussion of the concept and criticism against it, see Beate Sjåfjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case § 10.7 (2009).  See also Christina Voigt, Sustainable Development as a Principle of International Law: Resolving Conflicts Between Climate Measures and WTO Law (2009).

        [4].   See generally Intergovernmental Panel on Climate Change, Fourth Assessment Report: Climate Change 2007 (2007), available at

        [5].   “Unmitigated climate change would, in the long term, be likely to exceed the capacity of natural, managed and human systems to adapt.  Reliance on adaptation alone could eventually lead to a magnitude of climate change to which effective adaptation is not possible, or will only be available at very high social, environmental and economic costs.”  Lenny Bernstein et al., Synthesis Report, in Intergovernmental Panel on Climate Change, Climate Change 2007: Synthesis Report, Contribution of Working Groups I, II, and III to the Fourth Assessment Report of the IPCC (R.K. Pachauri & A. Reisinger, eds., 2007), [hereinafter Synthesis Report]available at
_data/ar4/syr/en/main.html.  This is not a new wake-up call and is perhaps better perceived as a final warning.  See Our Common Future, supra note 3, ¶ 126 (“We are unanimous in our conviction that the security, well-being, and very survival of the planet depend on such changes, now.”).

        [6].   As stated in the conservative magazine The Economist, about “trying to avert the risk of boiling the planet”: the “costs are not huge.  The dangers are.”Economics of Climate Change: Stern Warning, Economist, Nov. 2, 2006, at 14.  The Stern Review has characterized climate change as “the greatest and widest-ranging market failure ever seen,” pointing out that it poses “a unique challenge for economics” (and, may we add, for law).  Nicholas Stern, Stern Review: The Economics of Climate Change (2006), available at

        [7].   “The resilience of many ecosystems is likely to be exceeded this century by an unprecedented combination of climate change, associated disturbances (e.g., flooding, drought, wildfire, insects, ocean acidification), and other global change drivers (e.g., land-use change, pollution, over-exploitation of resources).”  Neil Adger et al., Summary for Policymakers, in Climate Change 2007: Impacts, Adaptation and Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (M.L. Parry et al. eds., 2007), available at

        [8].   See supra notes 5 and 7 and accompanying text.

        [9].   See Millennium Ecosystem Assessment, Ecosystems and Human Well-Being: Biodiversity Synthesis 2 (José Sarukhán et al. eds., 2005), available at [hereinafter Biodiversity Synthesis] (“Human actions are fundamentally, and to a significant extent irreversibly, changing the diversity of life on Earth, and most of these changes represent a loss of biodiversity.  Changes in important components of biological diversity were more rapid in the past 50 years than at any time in human history.  Projections and scenarios indicate that these rates will continue, or accelerate, in the future.”).  See also, e.g., Alison Benjamin, Fears for Crops as Shock Figures from America Show Scale of Bee Catastrophe, Observer, May 1, 2010,

      [10].   See, e.g., Jeremy Leggett, After the Credit Crisis—Next It Will Be Oil, Fin. Times, June 8, 2010,
-ae73-00144feabdc0.html#axzz1dX3qlp00 (“[T]he ITPOES companies fear an irrecoverable fall in global oil supply by 2015 at the latest and that if oil producers then husband resources, a global energy crisis could abruptly morph into energy famine for some oil-consuming nations.”); Indus. Taskforce on Peak Oil & Energy Sec., The Oil Crunch: A Wake-up Call for the UK Economy (Simon Roberts ed., 2010), available at

      [11].   See Ban Ki-Moon, Foreword to U.N., Millennium Dev. Goals Rep. 2010 (June 24, 2010) (“[I]t is clear that improvements in the lives of the poor have been unacceptably slow, and some hard-won gains are being eroded by the climate, food and economic crises.”).  And more recently, see Mark Tran, UN Declares Famine in Somalia, The Guardian, July 20, 2011,  The U.N.’s official declaration that two parts of Somalia are in famine amid the worst drought in east Africa for sixty years poignantly illustrates the devastating situation many people face: “The drought in east Africa has left an estimated 11 million people at risk, but Somalia has been the worst hit country as it is already wracked by decades of conflict.” Id.  Andrew Mitchell, the UK’s international development secretary, is quoted as saying: “In Somalia, men, women, and children are dying of starvation.  The fact that a famine has been declared shows just how grave the situation has become.”  Id.

      [12].   The tensions in the international economy and the efforts to revive it are aptly captured in Chris Giles, Alan Beattie & Hugh Carnegy, G20 Strains Cast Shadow Over Meeting, Fin. Times, Oct. 13, 2011,

      [13].   See Press Release, U.N. Env’t Programme, “Global Green New Deal”—Environmentally-Focused Investment Historic Opportunity for 21st Century Prosperity and Job Generation, (Oct. 22, 2008),
/Default.aspx?DocumentID=548&ArticleID=5957; see also Edward B. Barbier, Rethinking the Economic Recovery: A Global Green New Deal (2009), available at
%5D%20A%20global%20green%20new%20deal.pdf; Green Economy, United Nations Env’t Programme, (last visited Mar. 11, 2012).

      [14].   As pointed out by professor of economics Edward B. Barbier: “Fossil fuel subsidies and other market distortions, as well as the lack of effective environmental pricing policies and regulations, will diminish the impacts of G20 green stimulus investments on long-term investment and job creation in green sectors.  Without correcting existing market and policy distortions that underprice the use of natural resources, contribute to environmental degradation and worsen carbon dependency, public investments to stimulate clean energy and other green sectors in the economy will be short lived.  The failure to implement and coordinate green stimulus measures across all G20 economies also limits their effectiveness in ‘greening’ the global economy.  Finally, the G20 has devoted less effort to assisting developing economies that have faced worsening poverty and environmental degradation as a result of the global recession.”  Edward B. Barbier, Green Stimulus is Not Sufficient for a Global Green Recovery, Vox (June 3, 2010),

      [15].   Whether the current global uprising against the financial system can transmute into a call for sustainability in all three dimensions remains to be seen.  SeeMichael Stothard, Shannon Bond & Matt Kennard, Wall St Protests Spread to Global Stage, Fin. Times, Oct. 14, 2011,
/611665f0-f65e-11e0-86dc-00144feab49a.html; see also Shannon Bond, Obama Extends Support for Protesters, Fin. Times, Oct. 16, 2011,
/cms/s/0/052226f8-f80c-11e0-a419-00144feab49a.html (“Others stressed they were part of a global movement for justice.  ‘First came the Arab Spring and Spain’sindignados.  Then came the Wall Street protests.  In London, we are now part of this movement campaigning for a better world.’”).

      [16].   Although the U.N. cites some positive results in terms of the Millennium Development Goals, the 2010 Millennium Development Goals Report also indicates that progress against hunger has been impacted more severely by economic troubles: “The ability of the poor to feed their families was hit consecutively by skyrocketing food prices in 2008 and falling incomes in 2009, and the number of malnourished, already growing since the beginning of the decade, may have grown at a faster pace after 2008.”  U.N., Millennium Development Goals Report 2010 (June 24, 2010) [hereinafter MDG Report], available at

      [17].   See Joachim von Braun, The World Food Situation: New Driving Forces and Required Actions 12 (2007), available at (“When taking into account the effects of [unmitigated] climate change, the number of undernourished people in Sub-Saharan Africa may triple between 1990 and 2080 . . . .”); see also Synthesis Report, supra note 5.

      [18].   See, e.g., MDG Report, supra note 16.

      [19].   See, e.g., Climate Change 2007: Mitigation of Climate Change, Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz et al. eds., 2007) [hereinafter Mitigation], available at
/wg3/en/contents.html (calling for emissions to peak before 2015).

      [20].   See generally Beate Sjåfjell, If Not Now, Then When?: European Company Law in a Sustainable Development Perspective, 7 Eur. Company L. 187 (2010).

      [21].   Tending to be ignored or left to the realm of voluntary corporate social responsibility initiatives, a case may be made for including the regulation of companies in the toolbox of regulators pursuing sustainable development.  See generally Sjåfjell, supra note 3.

      [22].   Id.

      [23].   Lenny Bernstein et al., Industry, in Mitigation, supra note 20.

      [24].   See Sjåfjell, supra note 3, § 4.3.5.

      [25].   See generally Beate Sjåfjell, Why Law Matters: Corporate Social Irresponsibility and the Futility of Voluntary Climate Change Mitigation, 8 Eur. Company L. 56 (2011).

      [26].   Beate Sjåfjell, Internalizing Externalities in E.U. Law: Why Neither Corporate Governance nor Corporate Social Responsibility Provides the Answers, 40 Geo. Wash. Int’l L. Rev. 977, 981 (2009).

      [27].   For example, including the three dimensions of sustainable development: environmental protection, social justice, and economic development, in CSR debates also known simply as “Planet, People and Profit.”  See T. Lambooy, Corporate Social Responsibility: Legal and Semi-legal Frameworks Supporting CSR 10 (Deventer: Kluwer, 2010).

      [28].   Sjåfjell, supra note 25, at 56–64.

      [29].   See, e.g., Communication from the Commission Concerning Corporate Social Responsibility: A Business Contribution to Sustainable Development, at 5, COM (2002) 347 final (July 2, 2002), available at
/LexUriServ/ (“CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”).  For an example on a national level, see Beate Sjåfjell, Report from Norway: Another CSR Victory for the Business Lobbyists, 5 Eur. Company Law 235 (2009), available at
=1413388.  We may, however, be seeing the first indications of the EU definition of CSR attempting to get out of the straight-jacket of voluntarism, see the Commission’s newest Green Paper on CSR.  See A renewed EU strategy 2011-14 for Corporate Social Responsibility, COM (2011) 681 final (Oct. 25, 2011), available at

      [30].   Sjåfjell, supra note 25.

      [31].   Id.

      [32].   Id.

      [33].   This was heralded by the Norwegian business newspaper Dagens Næringsliv in December of 2010 as an example of CSR.

      [34].   See Sponsor, Filharmonien Oslo,
/en/filharmonien/sponsor/ (last visited Mar. 11, 2012).

      [35].   See Our Values, Norsk Hydro,
/NorthAmerica/About-Hydro/Our-values/ (last visited Mar. 11, 2012).

      [36].   It could be argued, of course, that corporate charity work (“CCW”) is a part of an extended concept of CSR, but we should distinguish between CSR in the wide sense, including CCW, and the core of true CSR; for further explanation, see Sjåfjell, supra note 25.  For different definitions of CSR, see generally Archie B. Carroll & Kareem M. Shabana, The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice, 12 Int’l J. Mgmt. Revs. 85 (2010).

      [37].   Sjåfjell, supra note 3, § 4.1 (explaining the current debates including the mainstream corporate governance, and introducing a new structure for analysis of issues concerning companies, involved parties and affected interests).

      [38].   See Council Directive 2007/36/EC, O.J. 2007 (L 184/17–24) (on the exercise of certain rights of shareholders in listed companies).  For an overview of corporate governance codes, see Index of Codes, European Corporate Governance Institute, (last visited Mar. 11, 2012).  For a critical perspective, see generally Steen Thomsen, The Hidden Meaning of Codes: Corporate Governance and Investor Rent Seeking, 7 Eur. Bus. Org. L. Rev. 845 (2006).

      [39].   Beate Sjåfjell, More Than Meets the Eye: Law and Economics in Modern Company Law, in Law and Economics. Essays in Honour of Erling Eide, 217 (Erik Røsæg et al. eds., 2010), available at

      [40].   Id.  See also Sjåfjell, supra note 3, § 4.3.5.  See also Kent Greenfield, From Rights to Regulation in Corporate Law, in Perspectives on Company Law: 2, 1 (Fiona Patfield ed., 1997).  However, indications on EU level may now be found that these alleged truths are questioned and that the problems with a too short-term perspective that the shareholder primacy drive entails are acknowledged.  See, e.g., The EU Corporate Governance Framework, COM (2011) 264 final (Apr. 5, 2011),available at

      [41].   A.A. Berle, Jr., Corporate Powers as Powers in Trust, 149 Harv. L. Rev. 1049, 1049 (1931).

      [42].   As opposed to the internal regulation of the competence, duties, and decision making in companies through company law.

      [43].   Michael Anderson, Transnational Corporations and Environmental Damage: Is Tort Law the Answer?, 41 Washburn L.J. 399, 409 (2002).

      [44].   See generally Janet Dine, Companies, International Trade and Human Rights (2005) (discussing the complex relationships between corporations, nation states, and international organizations).

      [45].   See United Nations, Econ. & Soc. Council, Comm. on Human Rights, Sub-Comm. on the Promotion and Protection of Human Rights, U.N. Doc. E/CN.4/Sub.2/2003/12/Rev.2 (2003); Surya Deva, UN’s Human Rights Norms for Transnational Corporations and Other Business Enterprises: An Imperfect Step in the Right Direction?, 10 ILSA J. Int’l & Comp. L. 493 (2003); Carolin F. Hillemanns, UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights, 4 German L.J. 1065 (2003).

      [46].   D.G. Goyder, The Just Enterprise 36 (1987) (giving the example of the countryside of Northamptonshire being dug up in search of iron ore: “It was some years before the government passed legislation imposing on companies the legal duty of reinstating fields and woods devastated by open-cast mining, and by then it was too late to recover much of the amenity value lost.”).

      [47].   Sjåfjell, supra note 25.

      [48].   See infra Part III.C.

      [49].   See infra Part III.D.

      [50].   For more information about this project, which is financed by the Research Council of Norway and has a dedicated team of thirty-five scholars from many regions of the world, see Sustainable Companies, Univ. of Oslo, (last visited Mar. 11, 2012) [hereinafter Sustainable Companies].

      [51].   Sjåfjell, supra note 26, at 1003–04.

      [52].   See Sustainable Companies, supra note 50.

      [53].   See generally Benjamin J. Richardson, Sustainability and Company Law: An Improbable Union?, 8 Eur. Company L. 54 (2011).

      [54].   See Sustainable Companies, supra note 50 (listing the team members).  The tentative analysis below is based on draft mapping papers, many of which are still works in progress.  Direct reference to the draft mapping papers are generally not made in this Article.  The final versions will be made available in 2012 on the website’s publications page.  The jurisdiction-specific papers published in the Sustainable Companies project referred to below are initial discussions of some of the issues that are analysed over a broader scale in the mapping papers.

      [55].   All three draft papers were presented at the international conference “Towards Sustainable Companies: Identifying New Avenues” in Oslo on August 29 and 30, 2011.  For more information about the conference, see Towards Sustainable Companies: Identifying New Avenues, Univ. of Oslo,‑companies/events/conferences/sustainable-companies-conference-2011.html (last visited Mar. 11, 2012).

      [56].   Again, the tentative summary of the results and what they entail for possible future reform is my own personal view, not necessarily representative of the view of the whole project team, nor of my co-authors for the cross-jurisdictional paper in core company law.

      [57].   This is apparent in the emphasis placed on these issues by those who sell sustainability services to companies.  See, e.g., Global Sustainability, PwC (last visited Mar. 11, 2012).

      [58].   The two debates are introduced infra Part II.A.

      [59].   For an illustrative example of Norway, see generally Sjåfjell, Towards a Sustainable Development: Internalising Externalities in Norwegian Company Law, 8 Int’l & Comp. Corp. L.J. 103 (2011).

      [60].   See generally Charlotte Villiers, Directors’ Duties and the Company’s Internal Structures Under the UK Companies Act 2006: Obstacles for Sustainable Development, 8 Int’l & Comp. Corp. L.J. 47 (2011).

      [61].   Id.

      [62].   Gudula Deipenbrock, Sustainable Development, the Interest(s) of the Company and the Role of the Board from the Perspective of a German Aktiengesellschaft, 8 Int’l & Comp. Corp. L.J 15 (2011).

      [63].   See generally Richard Croucher & Lilian Miles, Corporate Governance and Employees in South Africa 10 J. Corp. L. Stud. 367 (2010).

      [64].   See Sjåfjell, supra note 59.

      [65].   And other societal externalities.

      [66].   Karin Buhmann, Reflexive Regulation of CSR to Promote Sustainability: Understanding EU Public-Private Regulation on CSR Through the Case of Human Rights 18 (Univ. of Oslo Faculty of Law Research Paper Series, Paper No. 2010-07), available at

      [67].   Sjåfjell, supra note 25.

      [68].   Karin Buhmann, The Danish CSR Reporting Requirement: Migration of CSR-Related International Norms into Companies’ Self-Regulation Through Company Law?, 8 Eur. Company L. 65 (2011).

      [69].   Tineke Lambooy, Corporate Social Responsibility: Legal and Semi-legal Frameworks Supporting CSR 107–46 (2010).

      [70].   Although the Supreme Court expressly indicated the result in Hempel was an interpretation of the Norwegian Pollution Act, the case may arguably be the forerunner of a special type of piercing the corporate veil, with its own set of conditions.  Beate Sjåfjell, Environmental Piercing of the Corporate Veil: The Norwegian Supreme Court Decision in the Hempel Case, 7 Eur. Company L. 154, 154–60 (2010), available at

      [71].   See Deipenbrock, supra note 62, at 7–8 (explaining the concept of the German “econsense”).

      [72].   Anita M. Halvorssen, Addressing Climate Change Through the Norwegian Sovereign Wealth Fund (SWF)—Using Responsible Investments to Encourage Corporations to Take ESG Issues Into Account in Their Decision-Making 13–14 (Univ. of Oslo Faculty of Law Research Paper Series, Paper No. 2010-06), available at  See generally Benjamin J. Richardson, Socially Responsible Investment Law: Regulating the Unseen Polluters (2008) (providing background material on socially responsible investment).

      [73].   See, e.g., Oliver Ralph, All Change: Long-term Success Requires Flexibility and Co-operation, Fin. Times, Oct. 10, 2011,
/cms/s/2/097d7244-f10d-11e0-b56f-00144feab49a.html (discussing how companies must maintain strong relationships with consumers, staff, shareholders, and investors when facing productivity challenges).

      [74].   See generally Sylvie Berthelot et al., Environmental Disclosure Research: Review and Synthesis, 22  J. Acct. Literature 1 (2003) (analyzing environmental disclosures and concerns over their reliability).

      [75].   Id. at 20.

      [76].   William. S. Laufer, Social Accountability and Corporate Greenwashing, 43 J. Bus. Ethics 253, 255–57 (2003).

      [77].   Sjåfjell, supra note 25.

      [78].   See generally Surya Deva, Sustainable Development: What Role for the Company Law?, 8 Int’l & Comp. Corp. L.J. 76 (2011).  The question may even be raised whether what has been seen as a codification of a previously existing enlightened shareholder value norm may have been a shift to the detriment of the environmental and other societal interests through the clear hierarchy that has now been set out in the Act, with other interests to be taken into account as far as that benefits the shareholders—previously that relationship could at least be seen, by some, as open for discussion.

      [79].   Martin Wolf, Britain Must Escape its Longest Depression, Fin. Times, Sept. 1, 2011,

      [80].   “[A]n acceptable environment is not the product of social development, but a prerequisite for it to exist, and is a right bound up with human life, without which there is neither mankind nor society nor law.”  Case C-176/03, Comm’n v. Council, 2005 E.C.R. I-7879, I-7896 n.51 (citing Demetrio Loperena Rota, 3 Los derechos al Medio Ambiente adecuado y a su protección, 3 Revista Electrónica de Derecho Ambiental 87 (1999)).

      [81].   Sjåfjell, supra note 3.

      [82].   Id.

      [83].   Id.

      [84].   Simon Deakin, The Coming Transformation of Shareholder Value, 13 Corp. Governance: An Int’l Rev. 11, 11 (2005) (“Shareholder primacy originates not in company law, but rather in the norms and practices surrounding the rise of the hostile takeover movement in Britain and America in the 1970s and 1980s.  It is . . . essentially a cultural rather than a legal point of reference.”).

      [85].   Id. at 13–14.

      [86].   See generally Watson, supra note 1.

      [87].   John Micklethwait & Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea, 4 (2003).

      [88].   Id. at 46–54.

      [89].   Jesper Lau Hansen, Nordic Company Law: The Regulation of Public Companies in Denmark, Finland, Iceland, Norway, and Sweden 34–36 (2003).

      [90].   Id. at 31–36.

      [91].   Sjåfjell, supra note 3, § 3.3.3.

      [92].   Some, such as the Norwegian Companies Acts, also include rules on the involvement of employees in the decision making of companies, while the most central rules concerning the protection of employees is in a separate act—the Working Environment Act.  Norway has two limited liability companies acts: the Public Limited Liability Companies Act of June 13, 1997, No. 45 and the Private Limited Liability Companies Act of June 13, 1997, No. 46, both available (for a fee) in English translations in the Norwegian Institute of Public Accountants’ product Norwegian Company Legislation.  Revisorforeningen, (last visited Mar. 11, 2012).  The Working Environment Act of June 17, 2005, No. 62 is freely available in an English translation.  Working Environment Act, Arbeidstilsynet,
=92156 (last visited Mar. 11, 2012).

      [93].   See Norwegian Public Limited Liability Companies Act § 2-2(2) (“If the objective of the company’s activities is not to generate a financial return for its shareholders, the articles of association must contain provisions on the allocation of profit and the distribution of assets upon dissolution of the company.” (my translation)).

      [94].   The development and rise of shareholder primacy has other explanations as well, but in a legal analysis this is a main point.  For a broader discussion, see generally Andrew Keay, Moving Towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value, and More: Much Ado about Little?, 22 Eur. Bus. L. Rev. 1 (2011).

      [95].   The positive contributions of law and economics to our understanding of company law and the consequences of various forms of regulation are, in my opinion, indisputable.  However, so are the negative effects of the abuse of legal-economic theories meant to be descriptive as normative, and of the abundance of postulates based on concepts and ideas removed from the theories in which they originated and disconnected from the assumptions on which they are based.  SeeSjåfjell, supra note 25.

      [96].   To the extent that the end of history at one point was declared, see generally Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law(Yale L. Sch., L. & Econ. Working Paper No. 235, 2000), available at

      [97].   Even in jurisdictions where the prioritization of shareholders over other interests may be said to have legal basis, such as the U.K., see Deakin, supra note 88, at 11.

      [98].   See Sjåfjell, supra note 3, § (discussing the means and end).

      [99].   Report of the Reflection Group on the Future of EU Company Law, European Comm’n (Apr. 5, 2011),

    [100].   Id. at 37.  “[Promoting the interests of the company] may have priority over the interest of individual shareholders if these two are in conflict and if serving the short term interest of shareholders would have a direct negative impact on the long-term viability of the company.”  Id. at 37–38.

    [101].   Id.

    [102].   Id. at 7–8.

    [103].   Sjåfjell, supra note 59.

    [104].   Which in itself may be assumed to have severe, negative effects, as the IPCC has in its very reticent form shown us.  See generally Intergovernmental Panel on Climate Change, (last visited Mar. 11, 2012) (containing various reports on the scientific, technical and socio-economic aspects of climate change).  And climate change is but one of several pressing issues as a case in point for sustainable development.

    [105].   See Sjåfjell, supra note 3.

    [106].   Id. at ch. 5; see also Sjåfjell, supra note 26, at 987, 1003–06.

    [107].   Through the end of 2012.

    [108].   The project’s results—our proposals for reform—will be presented at the final conference in Oslo on November 12 and 13, 2012.  Updated information will be available at

    [109].   Europe was the starting point for the project, but the project happily has developed into an international research endeavour.

    [110].   Sjåfjell, supra note 3, § 10.7; Beate Sjåfjell, Quo Vadis, Europe? The Significance of Sustainable Development as Objective, Principle and Rule of EU Law,in Non State Actors, Soft Law and Protective Regimes (C. Bailliet ed., forthcoming 2012).

    [111].   See Nele Dhondt, Integration of Environmental Protection into other EC Policies: Legal Theory and Practice 482 (2003).

    [112].   Which I expect legislators on a national level have worldwide through their general competence.

    [113].   Quo Vadis, Europe?, supra note 110.

    [114].   See Sjåfjell, supra note 3, pt. V.

    [115].   A list of the research team members and their countries of representation is available at

    [116].   “The economic analysis must therefore be global, deal with long time horizons, have the economics of risk and uncertainty at centre stage, and examine the possibility of major, non-marginal change.”  Nicholas Stern, Stern Review on the Economics of Climate Change: Executive Summary i, xxii (Report presented to the UK Government on Oct. 30, 2006), available at‑

    [117].   IPCC recommends a peak by 2015 and a reduction of at least fifty per cent by 2050.  See Brian Fisher et al., Issues Related to Mitigation in the Long Term Context, in Mitigation, supra note 19.

    [118].   See, e.g., Biodiversity Synthesis, supra note 9, at 2; Benjamin, supra note 9.

    [119].   For more information, see the issue from the Wake Forest Law Review Symposium “The Sustainable Corporation,” 46 Wake Forest L. Rev. 383 (2011).


By: Shmuel Leshem*

Empirical evidence shows that termination fees (“lockups”) in merger agreements of public companies discourage competition for the target company but do not necessarily harm target shareholders.  This Article presents a signaling theory consistent with this evidence and considers the theory’s normative implications.  The chief argument is that the presence of a lockup in an agreement signals the acquirer’s high valuation of the target, and this discourages other potential acquirers from competing.  By increasing the deal price in exchange for the inclusion of a lockup in the agreement and thereby restricting competition, a target company and a high-valuing acquirer are able to divide between them the surplus that results from avoiding the transaction costs of a bidding contest.  Building on that analysis, this Article shows that although lockups increase target shareholder wealth, they may nevertheless be socially undesirable.


The bulk of merger and acquisition deals of public companies in the United States are negotiated transactions.[1]  A distinctive feature of these deals is a built-in delay between the signing of the purchase agreement and closing upon approval by the target shareholders.[2]  In this interim period, potential acquirers may attempt to disrupt the pending deal by making a competitive bid.  Merger and acquisition agreements therefore often contain termination provisions (“lockups”), whereby the target company (the “target”) promises to pay the acquirer if the target is eventually sold to another acquirer.  The use of lockups not only has increased over time,[3]but has also become increasingly important in merger and acquisition deals.[4]

The effects of lockups on mergers and acquisitions have been the subject of extensive empirical research.  The empirical evidence on lockups provides two main findings.  First, lockups are associated with a higher probability of deal completion and a lower probability of third-party competition.[5]  This suggests that lockups truncate the natural course of a takeover bidding process.[6]  Second, lockups benefit target shareholders through higher deal premiums.[7]  Taken together, the evidence suggests that bidders use lockups not only to ensure a minimum return if the deal fails, but also to deter potential higher-valuing bidders from competing.[8] These observed effects of lockups pose a twofold conundrum: Given that lockups deter competition from other potential acquirers, what do target companies gain by agreeing to include them in the merger agreement?  And if target companies agree to lockups because the higher deal price outweighs their loss from the reduced competition, what do acquirers gain from lockups?[9]

Perhaps surprisingly, the existing law and economics literature provides no explanation for this conundrum.  Furthermore, the dominant theory of lockups, proposed in a seminal article by Ian Ayres in 1990, projects that lockups would have no effect on the outcome on bidding competitions and therefore lockups will not deter potential higher-valuing acquirers from competing.[10]  The empirical findings on lockups, therefore, seem all the more puzzling in light of the previous theoretical literature.  The following analysis seeks to fill this gap between theory and evidence and to thereby shed light on parties’ interests to employ lockups in merger and acquisition agreements.

This Article argues that lockups are often used to save acquirers substantial costs that they would incur if a competition occurred.  First, a bidding contest forces acquirers to incur significant costs in financing bidding rounds, irrespective of whether they eventually win or lose the contest.  Second, a competition increases acquirers’ opportunity costs resulting from a prolonged bidding process—for example, if an auction occurs, the acquirer’s board must devote time and effort to managing the bidding.  Third, the prospect of competition reduces the value of acquirers’ early expenditure on reliance investments.[11]  By negotiating for a lockup, acquirers indicate their high value for the target, which in turn deters other potential acquirers from initiating a bidding contest.  The savings from lockups allow such high-valuing acquirers to compensate the target for its loss from the reduced competition.

Drawing on insights from game theory, this Article treats a bidding contest as a strategic interaction between an acquirer, a target, and potential contesters under conditions of incomplete information.[12]  Because a lockup is exchanged for an increase in the merger price, and a higher lockup amount is given for a higher increase in the deal price, a lockup and its amount constitute a signal revealing the acquirer’s high valuation for the target.  Potential bidders who must decide whether to incur bidding costs would be reluctant to compete once they observed that the deal contains a lockup.  The inclusion of a lockup, therefore, generates a surplus that the acquirer and the target can share.  Finally, a lockup is a credible signal for the acquirer’s high valuation because the target itself is ignorant of the acquirer’s valuation and thus will only agree to a lockup for a sufficiently high increase in the deal price.[13]

This Article unfolds as follows.  Part I surveys existing lockup theories in the law and economics literature.  Part II presents a background of signaling theory, surveys the financial literature on signaling in takeovers, and explicates why these signaling strategies are less effective in friendly than in hostile corporate acquisitions.  Part III lays out the intuition for having a separating equilibrium in which high-valuing acquirers credibly distinguish themselves from low-valuing acquirers by purchasing a lockup.  This Part then presents a numerical example that illustrates this intuition.  Part IV discusses the normative implications of the theory.

I.  A Survey of Lockup Theories

The early view of lockups perceived them as instruments by which merger parties could reduce the target valuation for potential acquirers, and thereby to interfere with the natural course of bidding contests.[14]  This perception was called into question by Ayres, who pointed out that lockups reduce the target valuation both for the lockup recipient as well as for potential acquirers.[15] Accordingly, lockups do not affect the outcome of bidding contests.  Only above-expectation lockups, or foreclosing lockups, may alter the course of a bidding contest by decreasing bidders’ valuations of the target below the deal price.  In a subsequent study, Hanson and Fraidin pushed Ayres’s argument to its logical conclusion by stating that “like chicken soup, [lockups] can’t hurt but may well help.”[16]

Acknowledging Ayres’s reasoning, Kahan and Klausner argue that the existence of bidding costs might render lockups foreclosing.[17]  Kahan and Klausner’s argument is based on the asymmetry between the first bidder’s and potential rivals’ entry costs: whereas the first bidder’s bidding costs are sunk, potential contesters have yet to incur these costs.  By granting a lockup, the target confers on the first bidder the advantage of having its costs sunk, and thereby can induce a first bidder to bring forward a bid.  Kahan and Klausner’s theory thus predicts that first-bidder lockups might affect second bidders’ motivation to enter a bidding contest for the target, yet fails to explain the higher return for target shareholders in lockup deals.[18]

Later scholarship further refined the upshot of Ayres’s analysis.  Roosevelt, drawing on Cramton and Schwartz’s analysis, invoked auction theory to explain the use of lockups to reduce entry in common value auctions.[19]  Roosevelt’s explanation acknowledges the negotiation over lockups that takes place between the target and the first bidder and suggests that a lockup is given to the first bidder in exchange for increasing the deal price.[20]  A first bidder will be willing to increase the deal price because a lockup reduces the number of bidders in equilibrium and thereby increases the first bidder’s expected profit from making a bid.  Roosevelt’s explanation, however, does not apply to the more common independent private-values auctions.

Other studies have suggested various explanations for the use of “stock lockups.”[21]  Burch points to the fact that a stock lockup gives the first bidder an equity stake in the target, which induces him to bid more aggressively if competition occurs, but overlooks the target’s motivation in selling a termination fee.[22]  Officer stresses the public-good nature of a first bid and suggests that lockups may be a means for internalizing the positive externality of a first bid, but fails to explain how lockups would reduce competition.[23]

II.  Signaling in Takeovers

A.     Incomplete Information and Signaling

In situations of asymmetric information, one party possesses private information that cannot be communicated credibly to other parties.  The informed party can thus benefit from taking a costly action (“signal”) aimed at credibly conveying his information.  By observing the signal, the uninformed parties can update their belief about the information possessed by the informed party, thereby taking a different action than that which they would otherwise have taken.  The informed party’s profit will consequently be greater than if he had not signaled his information.  For signaling to be effective, however, other parties must not find it optimal to mimic the informed party by incurring the cost associated with the signal.[24]

Signaling models have been harnessed to explain a myriad of economic phenomena.  For example, a signaling theory was invoked to explain why public companies distribute dividends despite the double taxation imposed on such distribution.[25]  According to this theory, high-quality firms will find it optimal to incur the extra cost involved in distributing dividends if they thereby separate themselves from low-quality firms.  By signaling their type, high-quality firms reduce the cost of future equity issuance.  The effectiveness of a dividend distribution as an indicator for a company’s quality is conditioned on low-quality firms not finding it profitable to imitate that strategy even if they could lower the cost of raising capital by disguising as high-quality firms.  Dividend distribution will be used to signal quality so long as the profit resulting from the lower cost of raising capital outweighs the cost associated with distributing dividends.[26]

B.     Bidders’ Signaling Strategies in Takeovers

A natural starting point for evaluating takeover contests is to compare them to English auctions.  In a takeover contest, as in an English auction, bidders raise their bids until the highest-valuing bidder wins the target at the reservation price of the second highest-valuing bidder.[27]  Like an English auction, bidders in takeover battles are ignorant of their opponents’ valuations of the target.  A takeover contest, however, entails costs that are not present in the classic English auction.  In particular, in an English auction, bidders have relatively low (or zero) investigation and bidding costs.  In takeover contests, by contrast, these costs are substantial.[28]  In addition, a takeover battle––as opposed to an English auction––is launched with a first bidder’s bid that identifies the target as a takeover candidate.  Potential competitors thus have to decide whether to compete after observing the first bidder’s bid.  The presence of investigation and bidding costs implies that the decision whether to compete involves weighing the costs of acquiring information about the target against the expected profit from entering a competition (that is, the probability of winning multiplied by the profit from acquiring the target).  The higher the first bidder values the target, the lower the expected profit of subsequent bidders who enter a bidding contest.  Thus, a potential bidder’s decision whether to acquire information about the target is derived from, among other things, its belief about the first bidder’s valuation of the target.  The first bidder could therefore profit from a bidding strategy that dissuades potential rivals from competing by signaling a high valuation.

The finance literature has suggested that bidders can signal their high valuation, and thereby discourage potential contesters from competing, by bidding preemptively: offering a high premium initial bid.[29]  A natural setting for preemptive bidding is a unilateral bid (or a tender offer), in which the target does not negotiate the deal price directly with the bidder.  A bidder’s decision to increase its bid over the target’s market price thus amounts to a (voluntary) cost incurred by the bidder, and therefore is likely to be interpreted by potential bidders as an indication of that bidder’s high valuation of the target.  In friendly acquisitions, in which the deal price is determined jointly by the target and the acquirer, the ability to bid preemptively is limited.  This is because the merger price is the product of both parties’ private information on the deal’s profitability and therefore also reflects the target’s private information on its reservation price.  Accordingly, potential rivals may be reluctant to interpret a high merger price as a signal of the acquirer’s high valuation of the target, and instead will attribute the higher price to private information possessed by the target regarding its own value.  Consequently, an acquirer may not be able to simply increase the merger price to deter entry.  Moreover, the acquirer may not be able to choose the form of transaction and therefore may have available only a limited arsenal of signaling strategies.  For example, if the target installed antitakeover measures such as a poison pill, the first bidder would be unable to launch a hostile bid.  The only alternative then would be a (friendly) merger, in which the acquirer should negotiate directly with the target board to gain support for the merger.

III.  Lockups as Signals

A.     A Signaling Theory of Lockups

Imagine a world in which there are two types of first bidders: high- and low-valuing.  Suppose that a first bidder negotiates with the target for a lockup in return for an increase in the merger price.  Suppose further that a potential second bidder is considering whether to investigate the target to decide whether to pursue bidding.[30]  What would be the effect of including a lockup provision on the second bidder’s belief about the first bidder’s valuation of the target, and thereby on the second bidder’s motivation to investigate the target value?[31]

The main argument of this Article is that a first bidder’s decision to buy a lockup is driven by signaling motivations.  The signaling property of lockups emanates from the fact that the first bidder is required to incur an additional cost––a higher merger price––in exchange for having a lockup.  Because high-valuing first bidders stand to lose more from competition than low-valuing first bidders, they will be willing to incur that additional cost to differentiate themselves from low-valuing first bidders.  Having a lockup signals that the first bidder values the target highly and thereby discourages potential rivals from competing.[32]

Signaling a high valuation for the target reduces competition because potential second bidders’ decision whether to enter a bidding contest is dependent on their beliefs about the first bidder’s valuation of the target.  Thus, if potential second bidders believe that the first bidder values the target highly, they will be reluctant to incur investigation costs and will choose to bid only upon observing a high target valuation.  Likewise, potential bidders will be more amenable to investigate the target and will bid upon observing a low target valuation, if they believe that the first bidder attaches a low value to the target.

B.     The First Bidder’s Strategy

This Subpart uses a numerical example to illustrate the argument that lockups are used as entry-deterrence signals.  I begin by fixing the lockup price and demonstrating that high-valuing first bidders will differentiate themselves from low-valuing first bidders by purchasing a lockup.  The intuition behind this outcome is that low-valuing first bidders stand to profit less from reducing competition, and therefore will not find it profitable to mimic high-valuing first bidders’ strategy even at the expense of revealing their vulnerability.  For analytical purposes, I defer to the next Part the analysis of the target’s decision as to whether to consent to include a lockup in the agreement.

To explicate the first bidder’s decision whether to buy a lockup, consider the following stylized example.  Assume that first bidders could be either high- or low-valuing with equal probability.  High-valuing first bidders value the target at 740, whereas low-valuing first bidders value the target at 700.  During the merger negotiations, the first bidder could choose between paying a lower price for the target without a lockup and paying a higher price for the target accompanied by a lockup.  In particular, suppose that the first bidder could buy a lockup of 20 in return for an increase of 10 in the merger price.[33]  Suppose further that the deal price is set at 670 without a lockup and that, if a competition evolves, both types of first bidders will incur an additional cost of 10, irrespective of the value of its counter bid; that is, the first bidder incurs an additional cost of 10 even if it does not counter bid the second bidder’s bid.[34]

After a merger agreement between the target and the first bidder has been signed, a second bidder has to decide whether to compete.  This decision is made in two stages.  In the first stage, the second bidder has to decide whether to incur investigation costs of 5 in order to estimate the target value.  In the second stage, depending on its valuation of the target, the second bidder has to decide whether to make a bid for the target.  If the second bidder decides to enter a competition, it will have to incur additional bidding costs of 10.  For simplicity, assume that after finding its valuation of the target, the second bidder faces no uncertainty as to the outcome of a bidding contest.  Thus, assume that after incurring investigation costs of 5 there is an 80% chance that the second bidder will find the value of the target to be lower than 700 and a 20% chance that the second bidder will find the value of the target to be 760.  Thus, given that the first bidder is equally likely to be high- or low-valuing, the second bidder’s expected profit from investigation is positive ((0.8 × -5) + (0.2 × 25) > 0).[35]  Note that the second bidder’s expected profit from investigation is negative if the probability that the first bidder is high-valuing is greater than 5/8.[36]  This, in turn, prompts the high-valuing first bidder to signal its high valuation and to thereby deter the second bidder from investigating the target.

Consider next first bidders’ profit if there is no competition.  The high-valuing first bidder would profit 70 if it did not buy a lockup and 60 if it did.  Similarly, the low-valuing first bidder would profit 30 if it did not buy a lockup and 20 if it did.[37]  I assume that, if a competition occurs, the first bidder and the second bidder will bid up to their reservation price.[38]  The first bidder’s profit, however, is reduced by the amount of its bidding costs.[39]  Recall also that the first bidder’s reservation price is reduced by the lockup value.  Therefore, the high-valuing first bidder would bid up to 740 if it did not buy a lockup and up to 720 if it did.  Likewise, the low-valuing first bidder would bid up to 700 if it did not buy a lockup and will refrain from bidding if it did (note that in this case the merger price is also the low-valuing first bidder’s reservation price of the target).

The second bidder’s profit depends on the first bidder’s type.  If the second bidder competes against the high-valuing first bidder, it will win the target at 740 or 720––depending on whether a lockup is included in the agreement.  If the second bidder competes against the low-valuing first bidder, it will win the target at 700 or 680––again depending on whether a lockup is present in the agreement.  Note that the second bidder’s profit does not depend on the presence of a lockup, but rather on the first bidder’s type.  The irrelevance of the lockup to the second bidder’s profit is a corollary of Ayres’s argument: a lockup reduces first and second bidder’s reservation prices by the lockup value.[40]  As a result, the cost of a lockup is borne by the target shareholders who receive a lower price for their shares if a competition for the target occurs.

The following table summarizes first and second bidders’ profits under different contingencies in a tabular form:




The game starts with Nature (or chance) selecting the first bidder’s type––high- or low-valuing––with equal probabilities.  The open nodes in the center represent Nature’s choice of the first bidder’s type and the numbers in brackets, beside the first bidder’s type, indicate the prior probabilities for each type.  As the game starts, the first bidder knows its type and has to decide whether to buy a lockup of 20 in exchange for an increase of 10 in the merger price.  The two pairs of arrows stemming from the central nodes denote the first bidder’s choice whether to buy a lockup.  After the first bidder chooses whether to buy a lockup, the second bidder has to decide whether to investigate the target.  The four corner nodes denote the circumstances under which the second bidder’s decision is made, so that each node corresponds to a different combination of first bidders’ type and decision to buy a lockup.  The four pairs of diagonal arrows originating from the corner nodes denote the second bidder’s choice whether to investigate the target.[41]  When the second bidder chooses whether to investigate the target value, it knows whether the first bidder bought a lockup, but does not know the first bidder’s type.  The dashed line connecting each pair of corner nodes depicts the second bidder’s ignorance of the first bidder’s type.

I proceed by showing that the high-valuing first bidder’s decision to buy a lockup signals its high valuation of the target.  For that end, I will show that the unique perfect Bayesian equilibrium,[42] which satisfies the intuitive criterion,[43] is as follows: (1) the high-valuing first bidder buys a lockup and the low-valuing first bidder does not buy a lockup; (2) the second bidder investigates the target only if the first bidder did not buy a lockup; and (3) the second bidder’s belief is that the presence of a lockup indicates that the first bidder is high-valuing, whereas the absence of a lockup implies that the first bidder is low-valuing.

To see that this is indeed a perfect Bayesian equilibrium, consider first bidders’ expected profits under the above equilibrium strategies.  The high-valuing first bidder’s expected profit would be 60 if it bought a lockup (recall that the second bidder would not compete if the first bidder bought a lockup) and 54 otherwise ((0.8 × 70) + (0.2 × -10)).  Given the second bidder’s equilibrium strategy, the high-valuing first bidder has no incentive to deviate from its equilibrium strategy (that is, buy a lockup).  The low-valuing first bidder’s expected profit would be 20 if it bought a lockup (recall that the second bidder would not compete if the first bidder bought a lockup) and 22 otherwise ((0.8 × 30) + (0.2 × -10)).  Given second bidders’ equilibrium strategies, the low-valuing first bidder as well lacks an incentive to deviate from its equilibrium strategy (that is, to not buy a lockup).

Table 2 summarizes the first bidders’ profit contingent on their decision to buy a lockup, given the second bidders’ equilibrium strategy:


Table 2: Bidder’s Profit


Type/ Strategy

With lockup

Without lockup

Low-valuing first bidder



((0.8 × 30) + (0.2 × -10))

High-valuing first bidder



((0.8 × 70) + (0.2 × -10))


Table 2 shows that the high-valuing first bidder is better off buying a lockup, whereas the low-valuing first bidder is better off not buying a lockup, given that the second bidder believes that a lockup is a signal of the first bidder’s high valuation of the target.

Consider next the second bidder’s expected profit under the above equilibrium strategies.  Recall that under the proposed equilibrium, the high-valuing first bidder buys a lockup and the low-valuing first bidder does not buy a lockup.  The second bidder’s expected profit from incurring investigation costs if a lockup is not included in the merger agreement (that is, if the first bidder is low-valuing) is 5 ((0.8 × -5) + (0.2 × 45)).  Because the expected profit from incurring investigation costs is positive, the second bidder has no incentive to deviate from its equilibrium strategy (to investigate if a lockup is not included in the merger agreement).  By contrast, the second bidder’s expected profit from incurring investigation costs if a lockup is included in the merger agreement (that is, if the first bidder is high-valuing) is -3 ((0.8 × -5) + (0.2 × 5)).  Because the expected profit from incurring investigation costs is negative, the second bidder has no incentive to deviate from its equilibrium strategy (to not investigate if a lockup is included in the merger agreement).

C.         The Target’s Strategy

The previous Subpart has shown that high-valuing first bidders profit from signaling their type through the purchase of a lockup. The inclusion of a lockup in a merger agreement, however, requires the target’s consent.  Yet discouraging potential bidders from competing reduces the target’s expected profit from signing the merger agreement.  What then do targets gain by agreeing to include a lockup in a merger agreement?[44]  This question is further supported by empirical evidence showing that targets are better off in auctioned sales.[45]

The answer to this question is that the effect of a reduced competition for the target depends on the first bidder’s type: a low-valuing first bidder would drive up the bid price less than a high-valuing bidder.  Therefore, if an auction occurs, the target’s expected profit is lower if the first bidder is low-valuing than if it is high-valuing.  The target is ignorant of the first bidder’s type, however. The low-valuing first bidder cannot credibly propose the target a low lockup price, because the target will suspect it to be a high-valuing first bidder.  Offering a high price, on the other hand, is not profitable for the low-valuing first bidder.  Because a low price is not indicative of the first bidder’s type, the target must only accept a high price, which only high-valuing first bidders could afford.  By offering the target a high lockup price, a first bidder credibly signals its high valuation to potential bidders and concomitantly proposes the target to share the surplus brought about by preventing competition.

To gain insight into the negotiations between the target and the first bidder, consider a reverse “market for lemons.”[46]  In the classic “market for lemons” model, George Akerlof used the market for used cars as an illustrative example of a market where sellers possess more information about the quality of the goods offered for sale than buyers.[47]  Akerlof argues that in such markets, low-quality units are more likely to be traded than high-quality units.[48]  High-quality units are not offered in the market because buyers, ignorant of individual asset quality, discount all used-asset prices not knowing which units on the market are the lemons.  In response to buyers’ strategy regarding the maximum price for an unidentified unit, owners of high-quality units will stay out of the market.  This, in turn, will cause buyers to further discount the maximum price that they are willing to pay for an asset whose value is uncertain.  This process repeats itself so that in equilibrium the market consists of predominantly low-quality units.  The market thus becomes biased toward “lemons.”

A parallel dynamic takes place in markets where buyers possess more information about the quality of the goods offered for sale than sellers (a reverse “market for lemons”).  In such markets, high-quality units are more likely to be traded than low-quality units.  Low-quality units are not traded in the market because sellers must take into account the fact that for any price they set, buyers will accept the offer when the value of the asset being sold is lower than the price set.  Thus, if a low price is set, sellers cannot deduce from buyers’ acceptance that the asset sold is low-quality.  In contrast, by setting a high price sellers are assured that they are not selling a high-quality asset at too low a price.  In equilibrium the market consists of predominantly high-quality units.  The market thus becomes biased toward “cherries.”

Consider now the sale of a lockup.  In the “market for lockups,” the unit of trade is the signaling property of lockups.  The buyer (the first bidder) possesses more information about the value of the signal than the uninformed seller (the target).  The value of a lockup as a signal depends on the first bidder’s private information regarding its valuation of the target.  In this informational setting, a reverse “market for lemons” emerges.  When setting the minimum price it would accept, the target must take into account the fact that the first bidder will offer a high price only when it values the lockup highly (that is, when the first bidder is high-valuing).  The uncertainty about the value of the lockup increases the minimum price at which the target will agree to sell a lockup.  A sale of a lockup is nevertheless mutually profitable because there are sufficient gains to be realized by restricting competition, as the first bidder’s expected loss from competition is higher than the target’s expected profit.  By setting the minimum lockup price sufficiently high, the target is assured that the first bidder is high-valuing, and therefore is guaranteed that it will not sell a lockup for too low a price.  Thus, it is the existence of asymmetric information between the target and the first bidder that produces a credible signal regarding the first bidder’s high valuation of the target.

To illustrate this argument, recall the numerical example presented in the previous Part.  Consider the highest price that the first bidder will be willing to pay for a lockup given that a lockup deters the second bidder from competing.  The high-valuing first bidder’s expected profit if it did not buy a lockup would be 54 ((0.8 × 70) + (0.2 × -10)).[49]  With a lockup, the high-valuing first bidder’s profit is 70.  Therefore, the highest price that the high-valuing first bidder would pay for a lockup is 16.  The low-valuing first bidder’s expected profit if it did not buy a lockup would be 22 ((0.8 × 30) + (0.2 × -10)).[50]  With a lockup, the high-valuing first bidder’s profit is 30.  Therefore, the highest price that the low-valuing first bidder would pay for a lockup is 8.

Consider now the target’s decision whether to include a lockup in the agreement.  Because the target does not know the first bidder’s valuation, it will agree to a lockup if its expected profit from competition given that the first bidder is high-valuing is higher than (or equal to) its expected profit if competition does not occur.  The target’s expected profit from competition, given that the first bidder is high-valuing, is 684 ((0.8 × 670) + (0.2 × 740)).[51]  Therefore, the target will agree to a lockup in exchange for a minimum price increase of 14.

Note that the difference between the target’s minimum acceptable lockup price and the high-valuing first bidder’s maximum lockup price is equal to the first bidder’s expected bidding costs of 2.  Thus, the negotiation range within which a sale of a lockup may take place is derived from the presence of bidding costs for the first bidder.

IV.  A Normative Analysis

A.     Economic Analysis Framework

Two standards are invoked to evaluate takeover regulation: efficiency[52] and revenue maximization.[53]  Efficiency involves three main concerns.  The first has to do with management’s incentive to engage in self-dealing prior to and while negotiating with a potential acquirer;[54] the second looks to initial bidders’ incentive to search and make bids for acquisition candidates; and the third involves the net benefit (loss) from transferring the target’s assets to a higher-valuing user, less the transaction costs involved in such a transfer.[55]  The standard of revenue maximization involves maximizing returns for target shareholders.

Commentators usually favor efficiency over revenue maximization, because increasing target shareholders’ wealth usually entails a corresponding decrease in the acquirer’s profit.  From a social standpoint, there is no reason to favor the target shareholders over the acquirer shareholders.[56]  Courts, however, resort to revenue maximization because management’s conduct is reviewed in light of its fiduciary duty to maximize target shareholders’ wealth.[57]

Consider first management’s conflict of interest.  Management’s interest diverges from that of shareholders when negotiating a merger or acquisition with a potential acquirer.  Whereas shareholders face a valuable “exit” opportunity, managers might lose their jobs if the new acquirer prefers a fresh management team to run the target.  Because board approval is required in most acquisition methods, the target board is given significant power to control the outcome of negotiated acquisitions.[58]

The Board’s power to control the outcome of the negotiations may be exploited to the detriment of the target shareholders.  For instance, target managements might agree to a lower acquisition price in exchange for side payments or certain board positions.  Likewise, target managements might strike a deal with a favored acquirer to prevent an unfriendly acquirer from taking over the target.  Managements’ self-dealing, in turn, weakens the disciplinary power of the market for corporate control.  Takeover regulation should thus restrict managements’ ability to engage in such self-dealing conduct.

Consider next potential bidders’ incentives to search and make bids for target candidates.  Initial bidders’ incentive to engage in search activity depends on their ability to recoup their investment in identifying undervalued target companies.[59]  Yet, a prospective acquirer is not certain to harvest its investment in discovering a potential target.  In the period between the signing and closing of the purchase agreement, potential rivals might make a competitive bid for the target.  The initial bidder’s commitment to acquire the target provides those potential bidders with valuable information regarding the target valuation, thus lowering their costs of investigating the target.[60]  Allowing competition between rival bidders shifts the acquisition surplus away from acquirers and toward target shareholders.  As a consequence of the absence of exclusivity, potential acquirers’ motivation to search and make bids declines.  A potential contester’s decision whether to enter a competition for the target thus involves a negative externality as it does not take into account the effect of competition on the level of search by initial bidders.[61]  Takeover regulation should respond to this externality by protecting initial bidders’ investment in information acquisition, thereby providing bidders sufficient incentive to engage in search activity.

Finally, consider the social gains from transferring the target’s assets to a higher-valuing bidder compared to the transaction costs involved in such a transfer.  An auction facilitates an expeditious transfer of the target’s assets to a higher valuing user, but also involves transaction costs.  When considering whether to initiate a takeover auction, a second bidder does not take into account the costs incurred by the first bidder as a result of such competition.  As noted above, those costs include not only direct bidding costs but also costs associated with a greater uncertainty as to whether the deal will close.  As a consequence, a second bidder’s decision to compete for the target involves a second type of negative externality: higher transaction costs for the first bidder.[62]  Takeover regulation should thus encourage only those acquisitions in which the value realized through transferring the target assets to a higher-valuing user is higher than the transaction costs involved in such a transfer.

B.     Normative Implications

1.     Efficiency

According to the theory proposed in this Article, lockups are likely to deter potential higher-valuing second bidders from competing by indicating that a first bidder attaches a high valuation to the target.  This, in turn, provides managements with greater power to preclude competition from higher-valuing bidders than is suggested by current theories.  By consenting to a lockup, managements decrease the probability of competitive bids; and by refusing a lockup provision, managements increase the probability of such bids.  Managements might exploit this power to attain private benefits.  Granting a lockup in exchange for private benefits not only harms target shareholders but may also detract allocational efficiency by precluding a higher-valuing bidder from acquiring the target.[63]  Some empirical studies show that deal premiums in lockup deals are higher than in non-lockup deals, suggesting that lockups are exchanged for an increase in the deal price, and therefore that managers do not systematically engage in self-dealing when granting lockups.[64]

The theory proposed in the Article differs from previous analyses in its emphasis on transaction costs and in its consideration of the efficiency effects of the absence of a lockup from a merger agreement.  First, although lockups deter potential higher-valuing second bidders from competing, they nevertheless may promote efficiency through saving in transaction costs.  Previous analyses usually disregard the costs involved in bidding competitions, and those scholars who considered them restricted the benefit resulting from the saved transaction costs to common value auctions.[65]  This Article argues, in contrast, that in private-value auctions as well, efficiency may be served by preventing competition, because a competition involves socially wasteful transaction costs.  Second, and perhaps more important, the analysis in this Article suggests that in considering the efficiency effects of lockups, one should take into account the consequences of the absence of lockups on the level of competition.  Thus, the absence of a lockup from a merger agreement will raise the level of competition (relative to a world without lockups) and thereby increase the transaction costs associated with bidding competitions.  This, in turn, may lead to an inefficient outcome relative to a world without lockups.  Transaction costs thus turn out to be a crucial factor in evaluating the efficiency effect of lockups.  Third, consideration of the implications of the absence of a lockup from a merger agreement has ramifications for initial bidders’ incentives to search.  Prior analyses conclude that reducing the level of competition boosts the level of search.  These analyses did not, however, consider the effect of the absence of a lockup on the level of competition.  This Article suggests that the absence of a lockup increases the likelihood of competing bids and therefore may diminish potential bidders’ incentive to search.

2.     Target Shareholders’ Returns

According to the theory proposed in this Article, because the acquirer is able to fully compensate the target for its loss from the prevention of competition, target shareholders’ returns in lockup deals are at least as high as in a world without lockups.  If, in contrast, a lockup is not included in the deal, then the probability of competition is higher relative to a world without lockups.  This is because the absence of a lockup indicates that the acquirer is low-valuing, and therefore induces potential competitors to investigate the target.  In non-lockup deals, therefore, target shareholders are better off than in a world without lockups.  Overall, then, target shareholders’ returns are higher in a world with lockups than in a world without them.  Although it does not affect allocational efficiency, this corollary is important because shareholders’ revenue maximization is often invoked by courts when assessing takeover regulations.

3.     Normative Prescriptions

The analysis above suggests that the efficiency effects of lockups are ambiguous: lockups may either advance or reduce social welfare.  Target shareholders’ returns, in contrast, are higher in a world with lockups if lockups are negotiated at arm’s length.  It follows that in reviewing the use of lockups, courts should focus on maximizing target shareholders’ returns, as this criterion provides clearer guidance than that of efficiency maximization. [66]  The implication of this observation is that in reviewing lockups courts should focus on the negotiation process that led to the inclusion of a lockup in the deal and ensure that the lockup was negotiated at arm’s length.[67] Notice also that court reviews of the negotiation process of lockups endow the process with greater credibility—and the more credible signals for acquirers’ high valuation lockups become, the better managements are able to use them to maximize target shareholders’ returns.


Empirical evidence shows that lockups are associated with a lower probability of third-party competition and that they benefit target shareholders through higher deal premiums.  This Article suggests a signaling theory consistent with this evidence.  The chief argument is that lockups are used by acquirers to signal their high valuation of the target to potential rivals.  Because high-valuing acquirers stand to lose more from competition than do low-valuing acquirers, high-valuing acquirers can distinguish themselves by negotiating for a lockup in exchange of a higher deal price.  The target’s incentive to agree to a lockup and thereby to restrict competition stems from the fact that a bidding contest involves substantial transaction costs.  By limiting competition, the target and a high-valuing acquirer are able to share the surplus that results from avoiding these costs.  Lockups are credible signals because the target is ignorant of the acquirer’s valuation; the target’s loss from agreeing to a lockup is higher if the acquirer is high-valuing than if he is low-valuing.  As a result, the target will only agree to a lockup for a sufficiently high increase in the deal price.

This Article complements existing theories by providing an account of potential acquirers’ decision whether to enter a bidding contest in the face of uncertainty regarding the existing acquirer’s valuation of the target as well as an explanation of the target’s motivation to include lockups in merger agreements.  This explanation suggests in turn an important role for courts in reviewing lockups.  Rather than focusing on the lockup amount, courts should primarily focus on the negotiation process that led to the inclusion of a lockup in the deal.


        *    Associate Professor, University of Southern California.  This Article is based on my J.S.D. dissertation at New York University School of Law.  I am very grateful to William Allen, Lewis Kornhauser, and Stanley Siegel for their continued support and advice.

      [1].   See Gregor Andrade, Mark Mitchell & Erik Stafford, New Evidence and Perspectives on Mergers, 15 J. Econ. Persp. 103, 106 (2001) (“Only 4 percent of transactions in the 1990s involved a hostile bid at any point.”).

      [2].   The reasons for the delay between signing and closing are several.  First, bids to merge are indirectly subject to disclosure provisions of federal securities law.  David Hirshleifer & I.P.L. Png, Facilitation of Competing Bids and the Price of a Takeover Target, 2 Rev. Fin. Stud. 587, 588 (1989).  Second, the consideration for the merger may be securities, the offer of which must be registered under the Securities Act of 1933. 15 U.S.C. § 77a-77aa (2006).  Third, additional delays may be caused by the pre-transaction competition filing.  Thus, for example, the Hart-Scott-Rodino Act may require a filing and a waiting period.  15 U.S.C. § 18a(a)-(c) (2006).  Finally, delay may result from the nature of the transaction itself.  For instance, the acquirer may request a delay in affecting the transaction in order to line up financing.  In addition, due diligence for some deals can take considerable time.  As a consequence of these factors, mergers seldom close within ninety days of the execution of the merger agreement, and are sometimes delayed for as long as a year.  Moreover, in a series of cases in the late 1990s, the Delaware Chancery put further limitations on a target’s ability to restrict potential bidders from competing by prohibiting the use of “no-shop” and “no-talk” clauses.  See Phelps Dodge Corp. v. Cyprus Amax Minerals Co., Nos. CIV.A. 17398, CIV.A. 17383, CIV.A. 17427, 1999 WL 1054255, at *1–2 (Del Ch. Sept. 27, 1999); Ace Ltd. v. Capital Re Corp., 747 A.2d 95, 109 (Del. Ch. 1999).

      [3].   See Thomas W. Bates & Michael L. Lemmon, Breaking Up Is Hard to Do? An Analysis of Termination Fee Provisions and Merger Outcomes, 69 J. Fin. Econ. 469, 470 (2003) (“The use of termination fees was a relatively uncommon practice in 1989, with approximately 2% of all deals including target fee provisions . . . .  By 1998, however, termination provisions were significantly more prevalent with over 60% of all deals including target fee arrangements . . . .”); John C. Coates IV & Guhan Subramanian, A Buy-Side Model of M&A Lockups: Theory and Evidence, 53 Stan. L. Rev. 307, 315 (2000) (“Lockup incidence has generally increased over the period, growing from 40% of all deals in 1988 to 80% of all deals by 1998.”); Micah S. Officer, Termination Fees in Mergers and Acquisitions, 69 J. Fin. Econ. 431, 441 (2003) (“There is a marked increase over time in the number of deals in which the target agrees to pay a termination fee to the bidder.”).

      [4].   Officer, for example, finds that the average value of termination fees as a percentage of total deal value stands at 3.80%.  Officer, supra note 3, at 441.  An oft-cited example that has diverted much attention to the use of lockups is Warner-Lambert’s 2000 decision to cancel its merger with American Home Products in favor of a merger with Pfizer, which resulted in payment of a $1.8 billion breakup fee to American Home Products.  Robert Langreth, Behind Pfizer’s Takeover Battle: An Urgent Need, Wall St. J., Feb. 8, 2000, at B1.

      [5].   See Coates & Subramanian, supra note 3, at 350 (“[T]he mere presence of a breakup fee (regardless of size) increases the recipient’s likelihood of closing . . . and larger fees have a larger impact . . . .”).  Coates and Subramanian explain their findings through a myriad of buy-side distortions.  They find similar results, though less pronounced, with regard to stock lockups.  See id.; see also Bates & Lemmon, supra note 3, at 486 (“Overall, our results indicate that the presence of target termination fees is positively associated with deal completion . . . .”); Timothy R. Burch, Locking Out Rival Bidders: The Use of Lockup Options in Corporate Mergers, 60 J. Fin. Econ. 103, 114–15 (2001) (“[D]eals with lockup options are much more likely to be successfully completed . . . than are deals without lockup options . . . .”).  Officer finds only weak evidence that termination fees discourage competition for the target.  Officer, supra note 3, at 462.

      [6].   See, e.g., Bates & Lemmon, supra note 3, at 471 (“Our results indicate that termination fee grants by merger targets have a substantial and positive effect on the probability of deal completion, suggesting that the use of termination fees may truncate an otherwise natural bidding process.”); Burch, supra note 5, at 109 (“The logical conclusion, then, is that lockup options are granted to deter third-party bidders, consistent with their observed effect and with the contentions of their critics.”); Coates & Subramanian, supra note 3, at 389 (“Lockups should be recognized for what they are—deal protection.”).

      [7].   See Bates & Lemmon, supra note 3, at 494 (finding that “bid premiums are between 3.7% and 6.3% higher in deals that include target termination fees compared to deals that do not”); Burch, supra note 5, at 124 (finding that deals that include stock lockups result in a higher abnormal announcement return for target shareholders as compared to deals that do not include any type of lockup); Officer, supra note 3, at 462 (finding that “takeover premiums are not lower when a target termination fee is included in the merger terms and are potentially as much as 7% higher”).  Coates and Subramanian, by contrast, find that “a higher premium is more likely with a stock lockup, or a larger stock lockup, but not with breakup fees . . . .”  Coates & Subramanian, supra note 3, at 391.  A recent empirical study found that third parties are not likely to make competing bids if termination fees are overly high, whereas moderate fees do not deter competition.  Jin Q. Jeon & James A. Ligon,How Much is Reasonable? The Size of Termination Fees in Mergers and Acquisitions, 17 J. Corp. Fin. 959, 961 (2011).

      [8].   A lockup is beneficial to a first bidder in that it reduces the reservation price of potential rivals and thereby allows the first bidder to win an auction for the target at a lower price.  I regard this benefit as part of lockups’ compensatory role.

      [9].   Note that the target’s loss from reduced competition is exactly offset by the acquirer’s profit.

    [10].   See Ian Ayres, Analyzing Stock Lock-Ups: Do Target Treasury Sales Foreclose or Facilitate Takeover Auctions?, 90 Colum. L. Rev. 682, 715 (1990).

    [11].   Reliance investment includes switching and coordination adaptations that will improve the target valuation for the specific acquirer.  Accordingly, the greater the uncertainty of whether the deal will close, the lower the target valuation is for the acquirer.

    [12].   First bidders’ valuation of the target is nonverifiable because bidders lack a direct means to convey their valuation of the target to potential rivals.  Signaling serves as an indirect means of conveying such nonverifiable information.  For a glossary of basic terms in game theory, see Douglas G. Baird, Robert H. Gertner & Randal C. Picker, Game Theory and the Law 301 (1994).  Bidders differ in their valuations of the target because the synergy gains from acquiring the target depend on the specific characteristics of the acquiring firm and therefore vary among different companies.  See, e.g., Lucian A. Bebchuk, The Case for Facilitating Competing Tender Offers, 95 Harv. L. Rev. 1028, 1034 (1982).  Synergy gains include, inter alia, economies of scale in production and reduced costs of capital.

    [13].   The technical argument I will make is that there exists a signaling equilibrium, under which lockups serve as signals differentiating high-valuing from low-valuing bidders.  Signaling equilibrium is a specific case of a perfect Bayesian equilibrium, a solution concept wherein every player begins the game with beliefs that must be updated in light of new information and must be consistent with other players’ actions in equilibrium (that is, other players’ actions in equilibrium constitute an optimal response given that belief).  See Baird, Gertner & Picker, supra note 12, at 312.

    [14].   See Robert Charles Clark, Corporate Law 573 (1986) (“During a bidding war, of course, the shareholders would not approve any [lockup], but would prefer a free and unhampered auction for their shares.”); Lucian A. Bebchuk, The Case for Facilitating Competing Tender Offers: A Reply and Extension, 35 Stan. L. Rev. 23, 47 (1982) (“All the participants in this exchange agree that obstructive defense tactics [such as lockup arrangements with a white knight] should be prohibited.”).

    [15].   Ayres, supra note 10, at 688.

    [16].   Stephen Fraidin & Jon D. Hanson, Toward Unlocking Lockups, 103 Yale L.J. 1739, 1745 (1994) (footnote omitted).  Fraidin and Hanson accordingly suggested enforcing all termination provisions, subject only to the business judgment rule.  Id. at 1743.

    [17].   Marcel Kahan & Michael Klausner, Lockups and the Market for Corporate Control, 48 Stan. L. Rev. 1539, 1565–66 (1996).

    [18].   Id. at 1546.

    [19].   Kermit Roosevelt III, Understanding Lockups: Effects in Bankruptcy and the Market For Corporate Control, 17 Yale J. on Reg. 93, 93 (2000); Peter Cramton & Alan Schwartz, Using Auction Theory to Inform Takeover Regulation, 7 J.L. Econ. & Org. 27, 29 (1991).  Common value auctions involve an asset with the same underlying value for different bidders.  Bidders differ only with regard to their estimations of that value.  Independent private-value auctions, by contrast, involve an asset whose value varies among bidders.  Each bidder’s valuation of the auctioned asset is independent of other bidders’ valuations.

    [20].   See Roosevelt, supra note 19, at 111–12.

    [21].   See generally Kahan & Klausner, supra note 17.  A typical stock lockup gives the locked-in bidder a right to purchase a block of treasury shares (or authorized but not issued shares) at a predetermined price (a negotiated price or the merger price).  The stock lockup recipient could then sell these shares to the second bidder at the latter’s offer price.  Thus, the payoff under the stock lockup increases as the second bidder increases his bid for the target.  Stock lockups that consist of only treasury shares are generally limited to 19.9% due to exchange rules that require shareholder approval of any action causing a higher percentage of additional shares to be listed.  See, e.g., New York Stock Exchange Listed Company Manual § 312.03(c)(2).  A less frequent form of a lockup is an asset lockup, which gives the acquirer a call option on a certain asset of the target at a predetermined price.  See Fraidin & Hanson, supra note 16, at 1747.  An asset lockup usually involves a particularly profitable or valuable unit of the target (a “crown jewel”) that might drive potential bidders’ interest in the target.  Roosevelt, supra note 19, at 94.

    [22].   See Burch, supra note 5, at 109.

    [23].   See Officer, supra note 3, at 438–39.

    [24].   The inception of the signaling literature is attributed to Michael Spence, Job Market Signaling, 87 Q.J. Econ. 355 (1973).  Spence showed that workers could signal their competence to prospective employers by acquiring education that has no real value except for allowing employers to infer the worker’s quality.  Id. at 356–58.  For a comprehensive survey of the signaling literature, see generally John G. Riley, Silver Signals: Twenty-Five Years of Screening and Signaling, 39 J. Econ. Literature 432 (2001).

    [25].   See, e.g., Sudipto Bhattacharya, Imperfect Information, Dividend Policy, and ‘The Bird in the Hand’ Fallacy, 10 Bell J. Econ. 259, 259 (1979).

    [26].   Another example, pertinent to the analysis below, concerns the study of entry.  Consider an incumbent monopoly that faces potential competition.  If potential competitors have complete information about the incumbent’s unit cost (or any other relevant private information regarding the incumbent’s payoff), they will not be influenced by the incumbent pre-entry price.  If, however, potential competitors face uncertainty with regard to the incumbent’s unit cost, the incumbent may profitably deter potential competitors by setting a “limit price” lower than the monopoly price it would have set in order to maximize short-run profit.  Limit price strategy is a credible signal of an incumbent’s unit cost only if incumbents with high unit costs will not find it profitable to replicate the price policy of low-unit-cost incumbents.  Also, limit price strategy will be employed only if low-unit-cost incumbents find that the profit resulting from reducing entry is greater than the short-run fall in profit due to charging lower prices.  See generally Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 Econometrica 443, 444–45 (1982).

    [27].   For a rigorous economic analysis of signaling motivation in English auctions, see generally Christopher Avery, Strategic Jump Bidding in English Auctions, 65 Rev. Econ. Stud. 185 (1998).

    [28].   See Cramton & Schwartz, supra note 19, at 28 (pointing out the differences between an English auction and a takeover contest).

    [29].   See Michael J. Fishman, A Theory of Preemptive Takeover Bidding, 19 RAND J. Econ. 88, 88–90 (1988) (outlining a model that assumes that there are no costs involved in revising bids as the bid price rises).  See also Avery, supra note 27, at 187; Hirshleifer & Png, supra note 2, at 590 (outlining a model that assumes that bidders have to incur costs when revising their bids).

    [30].   I assume throughout that takeover contests amount to independent private-value auctions, so that different bidders attach different values to the target depending on their expected synergy from acquiring the target.

    [31].   I assume that the expected profit of second bidders from competing without ascertaining their valuation of the target is negative.  Therefore, a second bidder considering whether to compete for the target will incur investigation costs aimed at learning its valuation of the target.  A second bidder would incur these costs only if it believed that the first bidder’s valuation of the target is lower than some threshold value.

    [32].   Bidders may resort to less credible strategies to convey their high valuation of the target to potential rivals.  For example, in QVC Network, Inc. v. Paramount Communications, Inc., the merger was declared to offer the “greatest long-term benefits to stockholders and audiences around the world.”  635 A.2d 1245, 1252 (Del. Ch. 1993), aff’d, 637 A.2d 34 (Del. 1994).  Sumner Redstone, Viacom Chairman and Chief Executive Officer, announced at a press conference that the deal was a “marriage made in heaven . . . [that would] never be torn asunder.”  Id.  He emphasized further that only a “nuclear attack” would break up the deal.  Id.

    [33].   I assume that the target would sell a lockup for an increase of 10 in the deal price, so that the decision to have a lockup is dependent solely upon the first bidder’s preference.  See infra Part III.C.

    [34].   For example, suppose that the emergence of a second bidder disrupts the first bidder’s strategic plans.

    [35].   More specifically, with a probability of 0.8 the second bidder will find that its valuation of the target is below 700 and therefore will refrain from competing.  In this case, it will lose 5—its investigation cost.  With a probability of 0.2, the second bidder will find that it values the target at 760 and therefore will enter a competition.  In this case, its profit depends on the first bidder’s type.  The second bidder’s expected return is 40 ((0.5 × 60) + (0.5 × 20)), and because its bidding and investigation costs sum up to 15, its expected profit is 25.

    [36].   If the second bidder believes that the probability that the first bidder is high-valuing is 5/8, its expected profit from investigating the target is 0 ((0.8 × -5) + (0.2 × (((3/8) × 45) + ((5/8) × 5)))).

    [37].   A first bidder’s profit is equal to the difference between its valuation of the target and the deal price.

    [38].   This assumption is made to simplify the example.  Bidding up to its reservation price of the target is a best response for the first bidder (to the second bidder’s strategy), but not a unique best response (for example, not bidding at all is also a best response).

    [39].   I assume that the first bidder is not allowed to drop from the auction once the second bidder has made a competitive bid.  Bidding costs should therefore be interpreted broadly to include any costs resulting from the possibility of third-party competition.  These costs need not be incurred when a third party actually enters a competition.  For example, bidding costs might include loss of reputation or deal-specific investment.

    40.   Ayres,   supra note 10, at 688.

    [41].   Note that the first bidder’s type is not observable and not verifiable; that is, the second bidder cannot directly infer the first bidder’s type, and the high-valuing first bidder has no direct means to convey its type to the second bidder.

    [42].   A perfect Bayesian equilibrium is a solution concept whereby each player begins the game with beliefs that must be updated according to Bayes’s rule.  The action that each player takes in equilibrium must be sequentially rational; that is, it must be optimal given the beliefs of the player and the actions of all other players. See David M. Kreps & Robert Wilson, Sequential Equilibria, 50 Econometrica 863, 863 (1982).

    [43].   The Intuitive Criterion is an equilibrium refinement in signaling games. An equilibrium refinement reduces the set of potential equilibria to the most plausible ones by restricting players’ beliefs off the equilibrium path.  The Intuitive Criterion was introduced in In-Koo Cho and David M. Kreps, Signaling Games and Stable Equilibria. Quarterly Journal of Economics 102, (1987).

    [44].   I assume that both parties are risk-neutral and that they share a common belief concerning the probability of third-party competition.

    [45].   See Ajeyo Banerjee & James E. Owers, The Impact of the Nature and Sequence of Multiple Bids in Corporate Control Contests, 3 J. Corp. Fin. 23, 39–41 (1996) (showing that target returns to corporate control contests involving multiple bids and bidders are consistently higher than deals with noncompetitive bidding); Robert H. Jennings & Michael A. Mazzeo, Competing Bids, Target Management Resistance, and the Structure of Takeover Bids, 6 Rev. Fin. Stud. 883, 891–94 (1993).

    [46].   See generally George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488 (1970).

    [47].   Id. at 489.

    [48].   Id.

    [49].   With a probability of 0.8, the second bidder will not compete and the high-valuing first bidder’s profit will be 70.  If a competition occurs, the low-valuing first bidder’s loss is -10, which constitutes its bidding costs.  Therefore, the high-valuing first bidder’s expected profit, if it does not buy a lockup, is (0.8 × 70) – (0.2 × 10) = 54.

    [50].   With a probability of 0.8 the second bidder will not compete and the low-valuing first bidder’s profit will be 30.  If a competition occurs, the low-valuing first bidder’s loss is -10, its bidding costs.  Therefore, the low-valuing first bidder’s expected profit if it does not buy a lockup is (0.8 × 30) – (0.2 × 10) = 22.

    [51].   With a probability of 0.8 the second bidders will not compete and the target profit will be 670, the merger price.  If a competition occurs, the high-valuing first bidder will bid up to 740, its reservation price of the target.  Therefore, if a lockup is included in the agreement, the target’s expected profit, given that the first bidder is high type, is (0.8 × 670) + (0.2 × 740) = 684.

    [52].   Analyses that focus on efficiency are often referred to as ex ante analyses.  See Roosevelt, supra note 19, at 97–98.

    [53].   See, e.g., Cramton & Schwartz, supra note 19, at 29.

    [54].   This is especially important with respect to hostile takeovers.  The seminal work on the disciplinary effects of the market for corporate control is Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110, 113 (1965) (“Only the take-over scheme provides some assurance of competitive efficiency among corporate managers and thereby affords strong protection to the interests of vast numbers of small, non-controlling shareholders.”).  Numerous articles have stressed the importance of the market for corporate control for controlling agency problems.  See, e.g., Andrei Shleifer & Robert W. Vishny, A Survey of Corporate Governance, 52 J. Fin. 737, 756 (1997) (“Takeovers are widely interpreted as the critical corporate governance mechanism in the United States, without which managerial discretion cannot be effectively controlled.”); see also Lucian Arye Bebchuk, Toward Undistorted Choice and Equal Treatment in Corporate Takeovers, 98 Harv. L. Rev. 1693 (1985) (discussing the effect of current takeover rules); Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target’s Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981) (discussing the effect of a corporation’s managers’ resistance to premium tender offers); Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819 (1981) (arguing for a different approach to tender offers).

    [55].   See Bebchuk, supra note 12, at 1048 (“[A]cquirers may vary substantially in the amount of synergistic or managerial gains they can produce, and a rule of auctioneering increases the likelihood that the target will be acquired by the first to which its assets are most valuable.”).

    [56].   See Easterbrook & Fischel, supra note 54, at 1175 (“Even resistance [by target managers] that ultimately elicits a higher bid is socially wasteful.  Although the target’s shareholders may receive a higher price, these gains are exactly offset by the bidder’s payment and thus by a loss to the bidder’s shareholders.  Shareholders as a group gain nothing; the increase in the price is simply a transfer payment from the bidder’s shareholders to the target’s shareholders.”).

    [57].   See Cramton & Schwartz, supra note 19, at 29 (“The revenue maximization goal entered the law because of the way takeover litigations are conducted, but has no intellectual support. . . . The board is a fiduciary for target shareholders.  Hence, the question for courts is whether the board fulfilled its fiduciary duty; in the takeover context, the duty is fulfilled by maximizing revenue to target shareholders.”); see also Coates & Subramanian, supra note 3, at 382–83 nn.213–14 and accompanying text.

    [58].   See, e.g., Del. Code Ann. tit. 8, § 251 (2006) (explaining that mergers require board member action).

    [59].   More generally, if the private gains are lower than the social return from search, parties will invest too little in searching for suitable contracting parties.  Search costs will exceed the optimal social level, by contrast, if the social return is lower than the private gains from search.  The social return for search in the context of corporate control transactions consists of two components: first, these transactions create value through synergies and management improvement; second, the prospect of corporate control transactions engenders a disciplinary effect for the management of public companies, thereby benefiting shareholders.  See Cramton & Schwartz, supra note 19, at 30.

    [60].   This is similar to the free rider problem in hostile takeovers.  See Elazar Berkovitch et al., Tender Offer Auctions, Resistance Strategies, and Social Welfare, 5 J.L. Econ. & Org. 395, 396 (1989) (“By making an offer, the bidder signals the existence of synergy gains to other potential bidders and reduces their search costs.  This reduction represents an externality, which is the public-good aspect of tender offers.”).

    [61].   The argument that search is suboptimal is controversial among legal scholars.  Some claim that a first bidder can insure its investment in identifying the target by making a toehold purchase of the target stock.  See Lucian Arye Bebchuk, The Case for Facilitating Competing Tender Offers: A Last (?) Reply, 2 J.L. Econ. & Org. 253, 255–57 (1986).  In the event that he loses a bidding contest, the first bidder can still make a profit by selling his shares in the target to a higher-valuing bidder.  The possibility of a toehold purchase, in turn, provides sufficient incentive to search for acquisition candidates.  See id. at 255 n.2; Ronald J. Gilson, Seeking Competitive Bids Versus Pure Passivity in Tender Offer Defense, 35 Stan. L. Rev. 51, 52 (1982).  Others have argued that initial bidders nevertheless possess insufficient incentives to invest in search and therefore that encouraging search is efficient.  See Berkovitch et al., supra note 60, at 399; Cramton & Schwartz, supranote 19, at 33 n.14; see also Roosevelt, supra note 19, at 108 n.62 (“But the excessive search thesis appears to be disfavored.  In fact, it seems more plausible to suppose that efficiency is best served by allowing acquirers to capture all of the surplus from an acquisition.”).

    [62].   An analogous case concerns the decision of a plaintiff to bring a suit against a defendant.  The plaintiff’s decision involves a negative externality, as his decision forces the defendant to incur litigation costs.  In the case of a plaintiff’s decision to initiate a suit, there is an additional negative externality concerning the administrative costs of the court system, as well as a positive externality concerning the social value of setting precedent.

    [63].   Two comments are in order.  First, even if lockups do not serve as signals, they can be used to preclude competition—although not from higher-valuing second bidders.  This is because lockups deter competition from bidders who value the target higher than the merger price but lower than the sum of the merger price and the lockup amount.  In this case, however, the preclusion of competition does not involve efficiency loss.  The concern that target managements might usurp their authority thus exists even if lockups are not used as signals.  Second, the efficiency effects associated with granting a lockup for no adequate consideration are indeterminate because the level of competition in a world without lockups may be higher than the first-best level.

    [64].   See Coates & Subramanian, supra note 3, at 324–25.

    [65].   See Cramton & Schwartz, supra note 19, at 33–36; Roosevelt, supra note 19, at 114–18.

    [66].   Indeed, courts have employed a similar criterion in reviewing lockups.  See Cottle v. Storer Commc’n, Inc., 849 F.2d 570, 576–77 (11th Cir. 1988) (“In exchange for the asset lock-up, Storer ultimately received a cash price of $91 per share, $16 more per share than KKR’s previous offer . . . .  This improvement in the bid distinguishes Hanson, where the improvement was ‘at best one dollar and change’ above the previous $72 cash bid, and Revlon, where there was similarly ‘very little improvement’ in the subsequent bid.”) (citations omitted).  In parentheses, the judge in Cottle describes the case as follows: “This is a shareholder derivative action involving white knights, poison pills, shark repellants, stalking horses, crown jewels, hello fees, goodbye fees and asset lock-up options.”  Id. at 572.  In other cases courts enjoined lockups because the resultant bid increases were insubstantial.  See Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1286 (Del. 1988) (“MacMillan cannot seriously contend that they received a final bid from KKR that materially enhanced general stockholder interests. . . . When one compares what KKR received for the lockup, in contrast to its inconsiderable offer, the invalidity of the agreement becomes patent.”); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 184 (Del. 1986) (“[T]he Revlon board ended the auction in return for very little actual improvement in the final bid.”); Hanson Trust PLC v. ML SCM Acquisition Inc., 781 F.2d 264, 281–82 (2d Cir. 1986) (invalidating lockup in part because bid increase was minimal).

    [67].               For a similar view, see Brian C. Brantley, Note, Deal Protection or Deal Preclusion? A Business Judgment Rule Approach to M&A Lockups, 81 Tex. L. Rev. 345, 379–80 (2002) (“By focusing on the board’s process rather than whether a certain provision within the agreement is preclusive or not, courts will not replace provisions that are heavily negotiated between sophisticated parties with their own judgment.”).


By: Leo E. Strine, Jr.*

This Essay addresses an issue that, to be candid, perplexes me. That issue is the continuing dismay evidenced in Western, capitalist nations when public corporations that pursue profit for their stockholders take actions that adversely affect the nation’s economic stability, the corporation’s employees, or the environment.

When a corporation’s ardor for profits leads it to take excessive risks that endanger the firm’s solvency, commentators react with shock and dismay.  How can corporate managers be so blinded by the immediate prospect of profit that they would ignore what, in hindsight, seem like such obvious risks?  Likewise, we rent our garments in anger and chagrin when energy companies take environmental shortcuts in drilling for oil or mining coal, surprised that profit-maximizing firms have been less than optimally protective of the environment and their workers, that they did not go beyond what was simply necessary to ensure that regulators allowed them to operate.  Similarly, we anguish when the board of a venerable homeland corporate icon reacts receptively to a premium takeover bid from a foreign acquirer.  How could the board sell out and undermine the traditional values the firm stands for?  It cannot be that the long-term stockholders would put their desire for a one-time, short-term profit ahead of the continued independence of a nationally important institution?

Although I am sympathetic to many of the sentiments and policy concerns that motivate these dismayed reactions, I confess to being weary of the naïveté they manifest.  More importantly, the continued failure of our societies to be clear-eyed about the role of the for-profit corporation endangers the public interest.  Instead of recognizing that for-profit corporations will seek profit for their stockholders using all legal means available, we imbue these corporations with a personality and assume they are moral beings capable of being “better” in the long-run than the lowest common denominator.  We act as if entities in which only capital has a vote will somehow be able to deny the stockholders their desires, when a choice has to be made between profit for those who control the board’s reelection prospects and positive outcomes for the employees and communities who do not.

In this Essay, I identify some recent instances that reflect our continued inability to view the for-profit corporation with a gimlet eye.  These examples track recurrent patterns.  I begin with a couple stories in the headlines of corporate greed at BP in connection with the Deepwater disaster in the Gulf of Mexico and at the U.S. banks that were bailed out by the federal government.  I then proceed to less obvious stories where courts have affirmed the preeminence of stockholders in the for-profit corporation, the first in an older case challenging Henry Ford’s stated preference for employees over stockholders and the second in a recent one challenging Craigslist’s attempt to protect its online community from stockholders selling in a takeover.  Next, I consider how stockholders have fared in other capitalist countries, looking at Kraft’s successful takeover of Cadbury in the United Kingdom and BHP Billiton’s failed bid to acquire the Potash Corporation of Saskatchewan.  In the end, policy makers should not delude themselves about the corporation’s ability to police itself; government still has a critical role in setting the rules of the game.

I.  Oil Spills and Bailed-Out Banks: Relearning Obvious Lessons of History

The first situations I address exemplify the tendency to underestimate the extent to which firms subject to pressures to deliver short-term profits for their stockholders pose a serious risk of generating societally destructive externalities.  I will only briefly discuss these examples because they are, at least in my estimation, so obvious.

A.     Risk Taking with Underwater Drilling

The first story is the BP oil spill disaster in the Gulf.  In the wake of the spill, there was widespread outrage about corporate callousness.[1]  How could a corporation drill so deep with no reliable plans as to how to address a leak in the well?[2]  How could so many safety features be inoperable?[3]  To me, it is to be expected that a corporation that stands to gain large profits from aggressive drilling activity would less than optimally consider the environmental risks and occupational hazards that novel drilling activity posed.[4]  BP, after all, stood to gain all the profits from its activities, while the risks to the environment would be borne largely by others.[5]

Not only do corporations have incentives to disregard risks for the sake of profits, but there is a natural tendency to pay attention to short-term profits over long-term risks.  In fact, most of us place a higher value on immediate satisfaction than on the long-term risks created by such satisfaction.[6]  If we can get all the benefits of the immediate satisfaction for ourselves, and know that the longer-term costs will be shared with a lot of others, we go for today over tomorrow even more.  And, when an industry is among the leaders in having lobbyists precisely for the purpose of minimizing governmental regulation of its activity,[7] trusting that industry to balance environmental concerns and worker safety responsibly against the prospect of immediate profit would seem even more naïve.

B.     Risk Taking with Now Underwater Mortgages

The other rather obvious example of silly surprise is the recent financial crisis.  This crisis was in no small measure caused by the signing of trillions of dollars in risk-shifting transactions, the bulk of which had at their root packages containing subprime mortgages.[8]  The parties who wrote these mortgages did not act or think as typical lenders.[9]  They did not expect the borrowers to pay off the mortgage contracts as written.[10]  Instead, the idea was that the mortgages would be refinanced again as already inflated real estate prices continued to rise.[11]  Even better, of course, the loans were securitized so the underwriters—the first-instance “lenders”—could pass the risk down the line.[12]  Buyers of these securities were plentiful.  Most of these transactions were motivated by a desire to make speculative trading profits, not to hedge risks.[13]  And the willingness of rating agencies to give the packages a triple-A rating[14] allowed fiduciaries[15]—so-called “sophisticated investors”—to buy them for pension funds.[16]

Now, how any loan tranche dependent on subprime loans could be rated triple A—the very best—is difficult for a definitionally disciplined mind to grasp, but men and women of finance, making bets largely with other people’s money, did not hesitate over the linguistic or even financial illogic of such labeling.  Nor mind you, did very real risk indicators give them pause, such as the need for the American credit card industry to secure the passage of a bill making it harder for their increasingly defaulting clients to file for bankruptcy.[17]  Nay, that bill encouraged this risk-taking as sub-prime mortgages were marketed to people on the idea that the new mortgage would provide cash needed to pay off credit card debt, buy a new big screen TV, and come with a great feature—no need to pay principal for five years at a time of unprecedentedly low interest rates.[18]  This was the real blue-chip stuff, the obvious triple A.  But on top of it was built an Everest of money, much of it backed in the end by AIG, which at one point was contractually responsible for $2.7 trillion in potential risk.[19]

As Professor Lynn Stout has recently pointed out, there was an even bigger warning sign.  In 2008, the $67 trillion credit default swap market was made up almost exclusively of credit default swaps written on mortgage-backed bonds in a market in which the total value of all underlying asset-backed and corporate bonds in the United States that year was a mere $15 trillion.[20]  Rank speculation was thus the rule, not the exception.[21]

In hindsight, this is the kind of stuff Planters® honey roasts and sells in a can.  There were many who knew enough financial history to be very nervous about a system that combined core banking with speculative trading, that hid greatly relaxed capital requirements, and that allowed outright speculative gambling in the form of unregulated credit default swaps.[22]  In the typical credit default swap, a kind of insurance contract, the party providing the insurance neither had to have an insurable interest in the matter[23] nor, more importantly, sufficient capital to make good on the insurance protection it had sold.  As it turns out, AIG’s riskiest insurance operation was its writing of trillions of credit default swaps, contracts it was not capitalized to fulfill and which were outside the province of state regulators.  Similarly absurd was the idea that swap protection was purchased from hedge funds,[24] whose only obligation to make good was to issue capital calls to its investors.  Good luck with that.

The mismatch between immediate reward and the bearing of ultimate risk could not have been more extreme, as speculation ran wild in the wake of the erosion of key legal barriers to gambling of this kind.[25]  But legislators and regulators had become drunk on their own cocktails, having naïvely (or worse) assumed that markets would “price” these risks.  So, indeed, had many academics, such as many of my law and economics scholar-friends in the academy who confidently told me in the years before the meltdown that my worries over the credit bubble and increased leverage in the financial sector reflected my inadequate appreciation of the keen ability of current financial and capital markets to price risks accurately.

Nor, of course, did one need worry that financial institutions that had regularly received government bailouts because of their systemic importance would be less than optimally incentivized to prudently assess risks.  And the growing complexity of financial institutions themselves was no worry, again, for the same reasons.  Markets would take care of it and price it, ignoring of course that the capital markets themselves had grown in complexity and churned like a meth-fueled gerbil’s wheel.[26]  Whatever these capital markets were driven by, a deep examination of the long-term risks of transactions generating large short-term profits did not, in the end, turn out to be high on the list.[27]

And when it all crashed down, the first to receive treatment were those who had profited most.  No doubt they felt pain, but not enough that one can confidently believe they are worse off today than if they had not behaved recklessly.  Most obviously, though, the importance of these institutions to our economies made it impossible not to bail them out.  And bailed out they were, given huge subsidies, partly comprised of free money to borrow in order to make profitable trades and return to health.[28]

The borrowers, who share a good deal of responsibility, too, but whose need to take risks was perhaps easier to rationalize as moral—a house to live in and bills paid off versus the ability to buy an even cooler sports car—got a rawer deal.  Rawest of all, though, was the deal for millions of hard working people who were paying their bills until the calamity destroyed economic growth and resulted in double-digit, persistent unemployment.[29]  They continue to suffer as do many others who have retained their jobs but endured furloughs, benefit cuts and pay freezes, and seen their local taxes increase as services by budget-crunched governments diminish.

For now, however, the important lesson is simple.  For-profit businesses have incentives toward current profit-maximization that make them poorly positioned to evaluate risk and be safe regulators. The environmental wreckage in the Gulf of Mexico and the global human wreckage caused by the financial sector’s imprudence should be rather plain evidence of that truth.

II.  “Community Values” on the Assembly Line and in Online Classifieds: Recognizing the Incentives in the Stockholder-Financed Corporation

Another enduring myth is that there exist “special” for-profit corporations, ones that will behave differently from others over the long-run because they are controlled by visionaries who will place some idea of the public good ahead of profit.  In saying this is a myth, I don’t mean to imply that there are not very talented entrepreneurs who figure out how to do well by doing good.  There are, thankfully, a number of businesses that do pay good wages, provide safe working environments and livable weekly hours, treat the environment with respect, and play the competitive game fairly.  Instead, my point is that managers in stockholder-financed corporations are inevitably answerable to the stockholders, whatever the “community values” articulated by the corporation’s founders or others, which is why regulations designed to protect against the externality risks inherent in profit-seeking are critical.

A.     A Taste of History: Henry Ford’s Social Vision for Ford Motor Company

Ultimately, any for-profit corporation that sells shares to others has to be accountable to its stockholders for delivering a financial return.  This is not a new notion.  An American entrepreneur by the name of Henry Ford tested that proposition and lost some ninety-three years ago in a famous case.[30]  In that case, Ford brazenly proclaimed that he was not managing Ford Motor Company to generate the best sustainable return for its stockholders.[31]  Rather, he announced that the stockholders should be content with the relatively small dividend they were getting and that Ford Motor Company would focus more on helping its consumers by lowering prices and on bettering the lives of its workers and society at large by raising wages and creating more jobs.[32]

To simplify, the Michigan Supreme Court held that Ford could not justify his actions that way, and that although he could help other constituencies such as workers and consumers, as an instrument to the end of benefiting stockholders, he could not subordinate the stockholders’ best interest.[33]  This holding was central, in my view, to the court’s embrace of what we call the business judgment rule.[34]  Under that rule, the judiciary does not second-guess the decision of a well-motivated, non-conflicted fiduciary.[35]  Fundamental to the rule, however, is that the fiduciary be motivated by a desire to increase the value of the corporation for the benefit of the stockholders.[36]  By confessing that he was placing his altruistic interest in helping workers and consumers over his duty to stockholders,[37] Henry Ford made it impossible for the court to afford him business judgment deference.

B.     History Repeats Itself: Craigslist as a “Community” Corporation

In 2010, Chancellor Chandler decided a case in Delaware with some striking similarities to Dodge v. Ford Motor.  The case[38] pitted the founder of Craigslist, the online classifieds firm, against eBay, the well-known online auction giant.  As with the Dodge brothers and Ford, eBay (the suing stockholder) was also a competitor of the firm being sued.  Also, as in Dodge v. Ford Motor, the firm being sued had a leader who openly argued that he was running the firm primarily to the end of something other than stockholder wealth, subordinating stockholders’ financial well-being to his own unique social perspective.  At Craigslist, according to this argument, the superior interest was the supposed community of users of its services, services the firm had been selling cheaply or giving away, when higher prices seemed to be readily attainable.[39]

But that core issue was not the subject of eBay’s lawsuit, which instead focused on the measures Craigslist’s founder took to ensure that he and his heirs would control Craigslist and to cement his vision that Craigslist be a community-oriented and community-driven corporation, not a cold-blooded profit machine.  To that end, Craig Newmark (the Craigslist founder, controlling stockholder, and director) and Jim Buckmaster (the other controlling stockholder and director on Craigslist’s three-member board) implemented actions aimed at stopping or slowing eBay’s ability to acquire Craigslist, or otherwise disrupt what Craig and Jim called Craigslist’s “corporate culture.”[40]

The most important antitakeover measure was the adoption of a shareholder rights plan that would have diluted eBay’s ownership of Craigslist upon even a minor increase in eBay’s minority stockholding position.  In defending their decision in court, Jim and Craig did not argue that they employed the poison pill to protect the economic interests of the company’s stockholders.  No, instead Jim and Craig argued that the pill was justified by their heartfelt desire to protect Craigslist’s coveted social values and community-centered culture from the disruption an eBay acquisition might have on those values and culture.[41]

Echoing what I view as a standard notion behind the business judgment rule, Chancellor Chandler rejected Jim and Craig’s argument.  In so ruling, he stated, “Directors for a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors’ fiduciary duty under Delaware law.”[42]  This, to my view, rather expected statement, drew fire from both ends of our corporate law political spectrum, if there be such a thing.

A group promoting a new form of for-profit corporation, the charter of which indicates that other ends, such as philanthropic or community-aimed ends, can be put ahead of profit, reacted with hyperbole, urging corporations to leave Delaware.[43]  If, they said, you remain incorporated in Delaware, your stockholders will be able to hold you accountable for putting their interests first.[44]  You must go elsewhere, to a fictional land where you can take other people’s money, use it as you wish, and ignore the best interests of those with the only right to vote.[45]  In this fictional land, I suppose a fictional accountability mechanism will exist whereby the fiduciaries, if they are a controlling interest, will be held accountable for responsibly balancing all these interests.  Of course, a very distinguished mind of the political left, Adolph Berle, believed that when corporate fiduciaries were allowed to consider all interests without legally binding constraints, they were freed of accountability to any.[46]  Equally unrealistic is the idea that corporations authorized to consider other interests will be able to do so at the expense of stockholder profits if voting control of the corporation remains in the stock market.[47]  Just how long will hedge funds and mutual funds subordinate their desire for returns to the desire of a founder to do good?

From a different political perspective come those who seem to take umbrage at plain statements like the Chancellor’s for unmasking the face of capitalism.  These commentators seem dismayed when anyone starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.  Maxwell Kennerly, in his review of the eBay decision, noted what he perceived to be a triad of conservative academic commentators who were unhappy with Senator Al Franken’s statement that “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits”—a statement, that in Kennerly’s view, encapsulates a material portion of the holding in the eBay opinion.[48]

One suspects that this vein of commentary does not fear the unmasking because these commentators believe that courts would actually prevent corporations from pursuing profit in an enlightened manner.[49]  To the contrary, one senses that they may be uncomfortable with a plain acknowledgment that corporate managers’ primary duty is to seek as much profit as can be achieved within the limits of the law, precisely because to do so emphasizes the importance of the law in channeling corporate behavior.  Preferable is suggesting that corporate managers themselves while seeking to maximize corporate profits will take care of the public interest, and that government should leave it to corporate managers.[50]

The consternation at Chancellor Chandler’s eBay decision is surprising for another related reason.  The whole design of corporate law in the United States is built around the relationship between corporate managers and stockholders, not relationships with other constituencies.  In the corporate republic, only stockholders get to vote and only stockholders get to sue to enforce directors’ fiduciary duties.[51]  The natural focus of the managers in such a system is therefore supposed to be on advancing the best interests of the stockholders, subject to the legal constraints within which the firm operates.[52]  Precisely because it is ultimately the equity market that is the primary accountability system for public firms, efforts to tinker around with the margins of corporate law through initiatives like constituency statutes, the so-called Corporate Social Responsibility movement, and antitakeover provisions have been of very little utility in insulating corporate boards from stockholder and stock market pressures.[53]

The eBay case also points out again the idiosyncratic nature of a reliance on special founders.  The founder of Craigslist apparently cares about users of online classifieds, but who knows about his other views.  Henry Ford said he cared about labor, but was responsible for one of the most violent crack-downs on labor in American history during the “Battle of the Overpass” at Ford’s River Rouge plant in Dearborn, Michigan in 1937.  Other entrepreneurs have unique religious or social views, which they seek to spread to their workers and customers.[54]  As many have noted, the legitimacy of such managers to use others’ money to advance their own view of the good is suspect.[55]  And over time, as transitions in industries like the newspapers show, the ability of a founder to sustain a vision after having taken investors’ money is extremely limited.  The point here is not that views on these matters are not contestable, but that the idea of a public corporation with outside investors pursuing a controversial political or moral agenda is intrinsically problematic because that is not why investors invest nor is that the basis on which boards are elected.

The public interest, in the end, depends on protection by the public’s elected representatives in the form of law.  The well-intentioned efforts of many entrepreneurs and company managers, who have a duty to their investors to deliver a profit, to be responsible employers and corporate citizens is undoubtedly socially valuable. But it is no adequate substitute for a sound legally determined baseline.

By so stating, I do not mean to imply that the corporate law requires directors to maximize short-term profits for stockholders.  Rather, I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.  The directors, of course, retain substantial discretion, outside the context of a change of control, to decide how best to achieve that goal and the appropriate time frame for delivering those returns.[56]  But, as I have noted in other writings, the market pressures on corporate boards are making it more difficult for boards to resist the pressure to emphasize the delivery of immediate profits over the implementation of longer-term strategies that might yield more durable and more substantial benefits to stockholders, as well as society in general.[57]  In these other writings, I have suggested some modest initiatives to better align the corporate governance system so that the shared interests of the end-user providers of capital and the interests of talented managers and societies in sound, long-term wealth creation are given greater weight.[58]

III.  National Interests in Community Icons: Some Instructive Lessons from Abroad

The power of stockholders’ ardor for profits shows up especially in corporate takeovers, where the benefits to stockholders are on full display and the costs to other corporate constituencies can be stark.  The tension revealed in a takeover is highlighted when the corporation is an icon with a long history of presence and responsibility in a community.  How does corporate and takeover law choose?  Two interesting answers come from outside the United States.  In Kraft’s takeover of the iconic Cadbury, long-standing U.K. law tilted decidedly in favor of stockholder interests, but U.K. politicans found the logical consequences of their own settled law dismaying.  By contrast, when the Australian mining firm BHP Billiton sought to acquire the Potash Corporation of Saskatchewan, the Canadian government had the legal authority to express its objection in full conformity with the law, and did so.  It turns out that even in capitalist societies whose economies are premised on profit-seeking, the full implications of giving stockholders the power to make societally-important decisions remains controversial.

A.         Frustrations of Nonfrustration: Lessons from the Odd Case of Cadbury

Perhaps the most surprising manifestation of political naïveté about the nature of the corporation comes from England and the controversy over Kraft’s acquisition of Cadbury, the maker of very sweet, nearly chocolate products.[59]  The idea that the maker of Dairy Milk would be acquired by a maker of boxed macaroni and cheese was seen as a threat to a British icon, and to British jobs, rather than as a natural alliance of culinary co-travelers.  Despite the fact that Kraft was already an employer of many in England[60] and had a good reputation as a quality employer responsive to environmental and free trade concerns,[61] opposition to a Kraft takeover was widespread in the United Kingdom.

A wide range of commentators, the British public, and Members of Parliament from not just the Labour party, but also the Tory and Liberal Democrat parties, voiced objection to the idea that an English icon would be owned by an American company.  Even though the current British ownership was already well on its way to shutting down some of the company’s most historic operations and shipping production to lower wage Poland,[62] U.S. ownership was thought to make the prospect of even more moves of this kind possible.  Despite the fact that Cadbury was itself a company that had prospered by buying up other nation’s icons—remember A&W Root Beer,[63] or Dr. Pepper, or Canada Dry Ginger Ale[64]—its Chairman, Sir Roger Carr, was aghast that so-called short-term stockholders had taken shares from the company’s long-term investors when Kraft made its bid public.[65]  How could these long- term stockholders have abandoned the company, and why should these new short-termers decide the fate of a 200 year old British treasure?[66]

What surprised me about this was not that the English would wish Cadbury could remain independent.  As an American, I get that.  Our largest American beer company is now the Boston Beer Company, brewers of Samuel Adams,[67] a former upstart microbrewery founded only twenty-seven years ago![68]  But what makes the Cadbury situation so odd is that the United Kingdom has long trumpeted its approach to corporate takeovers.  The British have boasted that their legal regime—which prohibits corporate boards from taking any action to frustrate a fully financed, firm offer like Kraft’s[69]—is the best model.  The United Kingdom supported adoption of similar laws by the European Union[70] and has touted its model as being superior to that of the United States,[71] where boards are entitled to defend against bids they believe are inadequate.[72]  The U.K. regime leaves no real room for a board to block a financed bid except by convincing its stockholders that the price is too low.  If the stockholders believe the price is right, they get to accept the bid.

Given that reality, it was hardly surprising to see Kraft eventually succeed in its bid.  After all, the whole focus of the U.K. approach is that if the stockholders like the price of a takeover bid, they get to take it.[73]  And all market evidence has long made clear that, absent board or government interposition, stockholders will sell out into any bid offering a substantial premium.[74]  What was more surprising was to see politicians of all the major parties in the United Kingdom bemoan the foreordained result that followed from the United Kingdom’s long-standing approach,[75] especially given that Cadbury could have had a lot of suitors less savory than Kraft.[76]

The world’s most venerable parliamentary assembly even issued a hand-wringing report deploring the situation[77] but failed to identify any tangible policy proposal to address future situations like it, which are inevitable under the long-standing nonfrustration rule.  The new Tory-Liberal coalition government then commissioned an inquiry to explore certain proposals made by Roger Carr,[78] including requiring that a supermajority of stockholders decide whether to accept a takeover bid and disenfranchising short-term holders.  But the key regulatory body—the Takeover Panel—has already looked at and rejected those proposals,[79] and its response to the Cadbury takeover actually seems likely to make it even more difficult for targets to resist a hostile bid.[80]  The Cadbury takeover confirms how deeply rooted the power of the stockholder profit motive is in the for-profit corporation.

It is revealing to consider the aftermath of the Cadbury takeover.  After the Code of the Takeover Panel rejected all three of Carr’s proposals, it instead offered its own proposals as to how the Takeover Code might be amended to prevent future Cadbury-like hostile takeovers.  I offer a couple of the most material proposals as examples.  First, the Code Committee recommended that the formal offer period—the period in which an interested acquirer may make an offer or bid for the target—be shortened by requiring a potential offeror to make a bid within twenty-eight days of announcing its interest to make a bid.[81]            Second, the Code Committee proposed a prohibition of certain deal protection devices currently legal under the Code—very limited termination fees and matching rights.[82]

Upon a preliminary inspection of the Code Committee’s proposals, however, it appears that were the Takeover Code modified as proposed, it might actually make hostile takeovers more, not less, likely, at least insofar as the proposed changes would make it more difficult for U.K. target companies to negotiate and secure a friendly acquisition over a hostile one.  That is, for those in England who decried the result in the Cadbury/Kraft saga as the tragic end of British Dairy Milk at the sword of a cheesy American JELL-O-molded company, and who would presumably have been less outraged by an acquisition of Cadbury by British Hob Nobs,[83]          the proposed changes to the Takeover Code seem likely to make it even easier for future hostile foreign takeovers of U.K. corporations.

For instance, take the proposal that would truncate the put-up or shut-up time period and require that target companies make public the identity of any potential offeror that has expressed an interest in making a bid.  Although the purpose of this change is to dissuade the practice of making so-called “virtual bids”—ones where a would-be hostile acquirer announces that it is interested in making a bid well before that potential acquirer has any intention of doing so in order to: (i) alter the stockholder makeup of the target company by attracting hedge funds and other short-term investors (recall Carr’s lament about the rapid influx of short-term stockholders in Cadbury after Kraft made its bid public); and (ii) put pressure on the target management—the Committee’s proposal to make mandatory the reporting and public disclosure of the interested bidder’s identity might have the unintended consequence of dissuading overtures from would-be friendly acquirers, particularly friendly strategic acquirers, who would rather remain anonymous and maintain the confidentiality of merger negotiations with the target until a binding contract is inked.[84]

The Code Committee’s second material proposed modification, the prohibition of termination fees and matching rights, poses a similar deterrent to would-be friendly acquirers that would—if the proposal is adopted—be unable to secure any, even trivial, deal protections to offset the risks posed to a friendly bidder who has made its intentions public and therefore has put itself in a compromised position as to its employees, suppliers and creditors, and as to hungry competitors eager to make a hostile bid for the now weakened friendly bidder.[85]         Viewed differently, a friendly bidder is less likely to negotiate an acquisition with a target if it is unable to secure assurances from the target that the target is serious about doing a deal, and more crucially to the friendly bidder, serious about doing the deal proposed by the friendly bidder.  Without the availability of modest deal protection devices, friendly acquisition partners may be even more reluctant to emerge than now, where the current regime already leaves strategic partners and private equity funds with very little compensation if they get topped.[86]

For an American, the Cadbury situation is, as our philosopher Yogi Berra put it, like déjà vu all over again.  For over thirty years in the United States, a variety of palliatives, such as state constituency statutes allowing boards to block bids harmful to other constituencies,[87] and the infamous poison pill, have done little but give target boards some room to get a better deal from a so-called white knight if a hostile bid loomed.[88]  The pressures boards faced from their stockholders to accept lucrative bids made resistance in most cases futile.[89]  As a result, U.S. communities have seen icon after icon fall into foreign hands, and our own major stock exchange may soon be a subsidiary of a merger vehicle formed by the owners of the German Boerse.[90]

But in our case, the United States, for all its capitalist leanings, never embraced takeovers with anything but deep ambivalence.  Our British friends across the pond all the while trumpeted these contrary, nakedly pro-takeover policies.  The acquisition of the beloved maker of Dairy Milk has, however, revealed that underneath the cold, simplistic, and single-minded, short-term focus of stockholders on stock price may result in outcomes that, from a broader societal perspective, are deeply uncomfortable.

B.     Candid Canada: The Refreshing Honesty of the Potash Decision

By comparison, I come now to the Canadian government’s decision to block the $40 billion bid of an Australian corporation, BHP Billiton, Ltd. (“BHP”), to acquire the Potash Corporation of Saskatchewan.  As I have learned, potash is not an illicit admixture to add to brownies, but a valuable crop nutrient and with a capital letter, for our purposes, a company.  And Saskatchewan is the Saudi Arabia of potash with a little “p” and the current home of Potash with a capital “P.”[91]  As I have further learned, the province has an economic strategy to leverage its advantage in potash (and the resulting stream of governmental royalties) into a better overall economic position.  Potash Corporation was already managed from the United States and BHP made certain assurances that it would protect provincial interests.  But the provincial government was dubious that under BHP’s ownership, Potash would maintain its commitment to the province’s version of OPEC, Canpotex.  Canpotex is an industry-wide marketing initiative fostered by the province.[92]  Rather, the provincial government concluded that BHP’s commercial interests as a profit-maximizing firm might lead it to cut prices, reduce royalties to the province, and otherwise be less likely to generate royalties and jobs for the province than if Potash remained independent.[93]

The Investment Canada Act was the tool used by the province to get its way.  Under that statute, the Canadian government can block any transaction above C$312 million if the transaction does not promise “net benefits” to Canada.[94]  After extensive advocacy by the Provincial government, Canadian Industry Minister Tony Clement blocked BHP’s bid, finding that it would not produce a net benefit for Canada.[95]  That this action was taken by a conservative government that generally advocates for a more open form of capitalism had special resonance.[96]

For present purposes, however, I wish to focus only on one refreshing aspect of the application of the Investment Canada Act to the Potash situation, which is its total lack of pretense or sham.  The statute is a naked grant of power to the national government to block a takeover when it believes Canada will be better off without it.  Obviously, there are legitimate questions to be asked about the overall utility of such a statute and I do not intend to comment one way or the other on the wisdom of the decision to use the statute to block the BHP bid.  But I do think that the statute’s candor deserves applause because it forces Canadian society to ask genuine questions about what is in the public interest.  In other analogous situations, governments have twisted their antitrust rules, come up with situation-specific corporate law rules, or taken a strained view of what was a national security (i.e., military-terrorist) threat in order to find a basis to block transactions that were, in reality, feared to be economically injurious to the target company’s nation.[97]

Although Australians may have been chagrined by the Canadian government’s blockage of BHP’s bid, Aussies could not claim shock because their nation has a similar statute.[98]  Moreover, the reality that another possible bidder for Potash was a Chinese-government-owned firm highlights the difficult reality of the so-called global market.[99]  Canada faced a situation in which a corporation that controlled an important national resource could pass into the hands of owners who either (in the case of BHP) were deemed more likely to be driven by market forces to reduce the benefits to Saskatchewan of the company’s operations or (in the case of a potential Chinese-government-owned bidder) would have been free to take actions not directed primarily at producing benefits for stockholders, but rather for advancing the self-interest of another nation.

C.     Globalized Capital and Product Markets Make Regulation in the Public Interest More, Not Less, Vital

The candor of the Canadian government’s Potash decision highlights the most critical issue before us.  We have globalized capital markets.  These capital markets put more intense pressure than ever on corporations to deliver short-term profits.  In almost all the Organization for Economic Cooperation and Development (“OECD”) nations,[100] only capital has a vote on who comprises the board of directors.  With increasing institutional ownership and greatly decreased holding periods, corporate electorates are more demanding than ever and unlikely to give serious thought to the long-term, given that few stockholders hold their shares for longer than a year at a time.

Although we have globalized capital markets and have opened our product markets to exports, we have done little to effectively globalize the regulatory structures that ensure that for-profit corporations do not generate unacceptable levels of harm to others in their pursuit of profit.[101]  Although the World Trade Organization does in fact at times act as an effective club in keeping nations from preventing exports from entering their markets,[102] no similarly powerful international body ensures that all corporations participating in international commerce must meet minimally decent standards of labor treatment or environmental safety and respect.[103]  Likewise, although financial institutions can and do take actions that affect the stability of all nations, their safety and soundness is remitted to a patchwork of national regulation.[104]

We have opened up global capital and product markets and forced our corporations to compete in such markets, without simultaneously extending the regulatory protections that enabled the West to implement an enlightened form of capitalism that helped defeat communism and fascism.  As a result, strong pressure has been exerted to diminish national protections in these areas.  Nations fear that if they require fair treatment of workers, protection of the environment, the payment of taxes to support the nation’s needs, and sound capital requirements for financial institutions, corporate activity will flee to other nations where there is little or no regulation.[105]

The examples I have discussed above are not designed to convince you that any particular level of regulation is optimal.  But they are designed to point out this reality: if, as I do, you believe that the temptations of profit can lead to corporate behavior that can harm society, you should be skeptical about claims that corporations are better-positioned to regulate themselves now than they used to be.

In many ways, the opposite is in fact true.  Corporations increasingly have no genuine connection to any particular community or even nation.  A huge disconnect has arisen between the wealth, lifestyle, daily experiences, and interests of the top corporate managers and that of most of the employees in the various nations in which their corporations have operations.[106]  Corporate managers are increasingly subject to removal at the instance of highly aggressive institutional investors who do not hold shares or think long-term.[107]  The actual long-term providers of capital are more and more divorced from the ownership of the shares of particular companies, and have largely yielded their votes to money managers compensated largely on short-term metrics.  Providers of debt are also less well positioned to act as monitors, as corporate debt is syndicated and trades largely like equity capital, leading to far less stable lender-borrower relationships and less intensive, long-term monitoring of corporate risk-taking.[108]

To deliver profits, corporations must endure competition from competitors willing to locate jobs in nations without labor or environmental protection.  That creates incentives to reduce wage rolls and pay, particularly in the European Union or in nations like Canada and the United States that have responsible regulatory standards, and to take fewer product safety and environmental precautions.  When their competitors seem to be making large, short-term profits by suspect means that have substantial long-term risk—see the subprime debacle discussed above—corporate managers face strong pressure from the capital markets to get in the game, regardless of whether they personally believe the game to be just another form of gambling.

Concluding Thoughts: Rules for the Global Game

Milton Friedman is a person who has written a lot of things I don’t necessarily agree with.  But he wrote a famous article in which he said that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game . . . .”[109]  When the pressure to deliver profits becomes, as it has, more intense, the rules of the game become even more important.  Human nature, the founders of my nation teach,[110] should be taken into account in designing those rules, and we should not assume that men and women of commerce are somehow better than average.

To ensure that for-profit corporations do not generate excessive externalities, strong boundaries remain critical.  To address externality risk and fundamental concerns about appropriate protection of workers and the environment in globalized capital and product markets, the rules of the game must ultimately become global, too.[111] But in the meantime, enlightened societies must resist the temptation to roll back the societal protections that spread the blessings of capitalism more broadly, ended child labor, gave workers safe places to work, protected consumers from harmful products, provided decent wages and humane working hours, and ensured that the pursuit of profit would not pollute the world in which we live.  After all, it was speedy national, not international, action that kept the financial crisis from being even worse.[112]  We cannot dispense with the protections provided by the nation-state until we come up with an effective replacement.

The coalition- and consensus-building required to develop an effective global (or at the least, OECD-wide) scheme of externality regulation will require enormous leadership and dedication.  But it cannot even begin if we delude ourselves into believing that corporations will effectively regulate themselves.  That is not what they are built to do and enormous harm will result if we pretend otherwise.  All you have to do is look at the unemployment rate or the Louisiana marshlands to know that that is true.


*            Leo E. Strine, Jr. is Chancellor of the Delaware Court of Chancery; Austin Wakeman Scott Lecturer on Law and Senior Fellow, Program on Corporate Governance, Harvard Law School; Adjunct Professor of Law, University of Pennsylvania Law School and Vanderbilt University Law School; Special Judicial Consultant to the Corporate Laws Committee of the American Bar Association; Henry Crown Fellow, Aspen Institute.  This Essay was adapted from The Beattie Family Lecture in Business Law, delivered at the University of Western Ontario on March 8, 2011.  The original title of the speech was “Bailed Out Bankers, Oil Spills, Online Classifieds, Dairy Milk, and Potash: Our Continuing Struggle with the Idea that For-Profit Firms Seek Profit.”

   [1].           After being criticized for a tepid response toward BP in the wake of the spill, President Obama came out strong against BP as the oil spill neared its third month. See Mail Foreign Service, ‘Furious’ Obama Blasts BP Again as Tony Hayward Gets Set to Shell Out Billions to Investors, Mail Online (June 5, 2010),
-Barack-Obama-BP-felt-anger-Gulf-Mexico-oil-disaster.html (reporting that Obama, when asked whether he was “angry at BP,” responded that he was “furious at this entire situation because this is an example where somebody didn’t think through the consequences of their actions”).  Other U.S. politicians of both parties also skewered BP’s embattled then-CEO, Tony Hayward, and other BP executives in the weeks that followed the spill.  See Rep. Cau Suggests BP Exec Commit ‘Hara-Kiri’ Over Spill, (June 16, 2010),‑cao‑suggests‑bp‑exec‑commit‑hari-kari-spill/ (quoting Louisiana Republican House Representative Joseph Cao as telling BP America President Lamar McKay that “in the Asian culture, we do things differently.  During the Samurai days, we’d just give you the knife and ask you to commit hara-kiri . . . .”); Kim Landers, US Congressional Panel Roasts BP Chief, ABC News (June 18, 2010),
/stories/2010/06/18/2930221.htm (quoting Michigan Democratic House Representative Bart Stupak) (“Mr. Hayward I’m sure you’ll get your life back and with a golden parachute back to England, but we in America are left with the terrible consequences of BP’s reckless disregard for safety . . . .”); Holbrook Mohr, et al., BP’s Gulf Oil Spill Response Plan Lists the Walrus as a Local Species. Louisiana Gov. Bobby Jindal is Furious, Christian Sci. Monitor (June 9, 2010),
-oil-spill-response-plan-lists-the-walrus-as-a-local-species.-Louisiana-Gov.-Bobby-Jindal-is-furious (“Look, it’s obvious to everybody in south Louisiana that they didn’t have a plan, they didn’t have an adequate plan to deal with this spill. . . . They didn’t anticipate the BOP [(blowout preventer)] failure.  They didn’t anticipate this much oil hitting our coast.  From the very first days, they kept telling us, ‘Don’t worry, the oil’s not going to make it to your coast.’” (quoting Louisiana Republican Governor Bobby Jindal)).

   [2].           My use of the word “reliable” here seems measured in light of public reports about the plans BP apparently had in place to deal with an oil spill in the Gulf.  See Mohr, supra note 1 (noting that BP’s 2009 response plan for a Gulf of Mexico oil spill—among numerous other material deficiencies and inaccuracies—included the contact information of a national wildlife expert, Professor Peter Lutz, who died in 2005, and included, under a heading entitled “sensitive biological resources,” marine mammals such as walruses, sea otters, sea lions, and seals, “[n]one of which lives anywhere near the Gulf”).

   [3].           Daniel Bates, Oil Worker ‘Alerted BP About Rig Fault’—But Bosses Feared Cost of Halting Production, He Says, Mail Online (June 25, 2010),‑1288242/Gulf‑oil‑spill‑BP‑told-faulty-drill-safety-equipment-weeks-disaster.html (recounting the story of a BP rig worker who claims he told managers that a key blowout preventer was improperly leaking fluid but was ignored, purportedly because it would cost too much to shut down production to deal with the problem); Ian Urbina, Documents Show Earlier Fears About Safety of Wells, N.Y. Times, May 30, 2010, at N1, N18 (noting that internal BP emails and inspection reports show that the blowout preventer and casing had several problems that would have limited their effectiveness in the event of an actual blowout).

   [4].           See Little Spent on Oil Spill Cleanup Technology, ABC Action News (June 26, 2010),
-oil-spill-cleanup-technology (reporting that BP spent $29 million on safer drilling operations research in the prior three years while BP and four other major oil drilling companies in the United States spent $33.8 billion on oil exploration over the same time period).

   [5].           See, e.g., Henry N. Butler & Jonathan R. Macey, Externalities and the Matching Principle: The Case for Reallocating Environmental Regulatory Authority, 14 Yale L. & Pol’y Rev. 23, 29 (1996) (noting that the “goal of government regulation of pollution is to force polluters to bear the full costs of their activities,” rather than allowing those costs, or “externalities,” to be borne by society at large); Margaret Tortorella, Will the Commerce Clause “Pull the Plug” on Minnesota’s Quantification of the Environmental Externalities of Electricity Production?, 79 Minn. L. Rev. 1547, 1549 n.15 (1995) (“Economic theory provides insight into the need for governmental regulation of externalities . . . [in the energy industry because w]hen economic activity affects the external environment, the market mechanism fails to reach the social optim[al allocation of resources] because society, rather than the economic actor, bears the cost of production.” (citing Wilfred Beckerman, Pricing For Pollution 24, 25 (2d ed. 1990)).

   [6].           This phenomenon is perhaps most easily observed at crowded American fast-food drive-thru lanes where Big Macs are, in comparison to those who frequently order and consume them, not so big at all.

   [7].           John M. Broder, Coal Industry Spending to Sway Next Congress, N.Y. Times, Oct. 29, 2010, at A12 (reporting that the coal industry is spending millions of dollars in lobbying and campaign donations to influence the makeup of the next Congress in an effort to stave off tightened health and safety regulations); Dan Eggen & Kimberly Kindy, Three of Every Four Oil and Gas Lobbyists Worked for Federal Government, Wash. Post, July 22, 2010, at A1 (“With more than 600 registered lobbyists, the [oil and gas] industry has among the biggest and most powerful contingents in Washington.”); Anne C. Mulkern, Obama’s SOTU Nod Unleashes Lobbying on Clean-Power Goal, N.Y. Times Greenwire (Jan. 26, 2011),
/26greenwire‑obamas‑sotu‑nod‑unleashes‑lobbying‑on‑clean‑pow‑3140.html?pagewanted=1 (reporting that the American Coalition for Clean Coal Electricity’s lobbying efforts have focused on stopping the U.S. EPA from regulating greenhouse gas emissions); see also Lobbying: Oil and Gas Industry Profile,,
=E01&year=a (last updated Dec. 11, 2011) (reporting, based on publicly available information from the Senate Office of Public Records, that oil and gas lobbyists spent a mere $146,296,424 on lobbying efforts in 2010, down from nearly $175 million in 2009).

   [8].           See, e.g., William Poole, Causes and Consequences of the Financial Crisis of 2007–2009, 33 Harv. J.L. & Pub. Pol’y 421, 424–26 (2010) (describing collateralized debt obligations backed by subprime mortgages as the leading cause of the financial crisis); see generally Atif Mian & Amir Sufi, The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis, 124 Q.J. Econ. 1449 (2009) (conducting an analysis of the mortgage default crisis in the United States by empirically examining subprime mortgages in the years leading up to the financial crisis, and observing the sharp increase in mortgage defaults in areas of the country that represent a disproportionately large share of subprime borrowers and that the period between 2002 and 2005 is the only time in the last eighteen years when income and mortgage credit growth were negatively correlated).  But see Lynn A. Stout, The Legal Origin of the 2008 Credit Crisis 24–25 (UCLA Sch. of Law, Working Paper No. 11-05, 2011), available at (admitting that subprime mortgages often undergirded the derivatives whose value plummeted, but making the point that the value of all U.S. subprime mortgages was only slightly over $1 trillion and noting that it was the writing of speculative contracts worth many times that amount related to those mortgages that required the U.S. government to make emergency loans of over $3 trillion and to take other actions to alleviate some of the harm and economic dislocation arising when the value of those contracts plummeted).

   [9].           Cf. Giovanni Dell’Ariccia et al., Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market (Int’l Monetary Fund, Working Paper No. 08/106, 2008), available at
?abstract_id=1153728 (associating the rapid expansion in the subprime mortgage market predating the financial crisis with relaxed lending
standards and further observing that the areas hardest hit by the crisis were those where lending standards declined the most); Ken Kupchik, Regrets of a Subprime Mortgage Lender, Salon (Feb. 1, 2011),
/mortgage_crisis/?story=/mwt/pinched/2011/02/01/confessions_of_a_subprime_lender_open2011 (chronicling the author’s experience working for a subprime mortgage company and confessing that company policy was to make the sale, regardless of whether the loan put the borrower in a better financial position, which in the author’s opinion, it rarely did).

   [10].         See The Fin. Crisis Inquiry Comm’n, 111th Cong., The Financial Crisis Inquiry Report xxiii (2011) [hereinafter Fin. Crisis Report] (“Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay.”) (emphasis added); id. (noting that in 2005, 68% of so-called “option ARM” loans (Adjustable Rate Mortgage) originated by Countrywide and Washington Mutual had “low- or no-documentation requirements”).

   [11].         See, e.g., William W. Bratton & Michael L. Wachter, The Case Against Shareholder Empowerment, 158 U. Pa. L. Rev. 653, 717 (2010) (observing that the burst of the housing bubble in 2007 exposed banks that were heavily invested in the residential mortgage sector to severe losses and that the initial reason for the banks’ decision to invest heavily in that market was the “assumption that the price of real estate securing the loans would continue to rise,” an assumption based in part on the “increasing demand for housing fueled by ever-riskier real estate financing”); Peter Grier, Commission: Three Reasons Why the Financial Crisis Happened, Christian Sci. Monitor (Jan. 14, 2010),‑three‑reasons‑why‑the‑financial-crisis-happened (noting that the financial industry in the United States, in the years leading up to the financial crisis, “did not consider that it was possible housing prices could decline”); Brent T. White,Underwater and Not Walking Away: Shame, Fear, and the Social Management of the Housing Crisis, 45 Wake Forest L. Rev. 971, 988 (2010) (arguing that homeowners in the years before the crisis suffered from “selective perception” that caused them to fail to see evidence that the value of their home was not rising but falling, and that “many homebuyers . . . ignore[d] signs of the impending housing-market collapse in the first place, and optimistic overconfidence may have caused many homeowners to take out interest-only adjustable-rate mortgages . . . in the misplaced belief that they . . . would refinance as their home’s value grew exponentially”).  But not everyone was drinking the home price Kool-Aid.  Indeed, some, years before the crisis, almost prophetically questioned the propriety of the assumption that housing prices would continue an upward climb indefinitely.  See, e.g., House Prices: After the Fall, The Economist, June 18, 2005, at 11 (observing that American and global house prices “have reached dangerous levels” and that a devastating drop in prices is inevitable that “could decide the course of the entire world economy over the next few years”).

   [12].         Private securitization, or structured finance securities, had two key benefits from both the standpoint of the financial institutions creating and selling them and the investors that bought them: pooling and tranching. Fin. Crisis Report, supra note 10, at 43.  By pooling many mortgage loans, a few defaults would have minimal effect.  By tranching the same loans, sellers of the securities could fine tune them to meet particular investor preferences based on the investor’s desired level of risk it wished to take on.  Id.  At the same time, however, pooling and tranching greatly reduced an investor’s ability to understand and price these securities because to do so required the calculation of the statistical probability that certain types of mortgages would default and the lost revenues attributable to those defaults.  Id.  This difficulty, according to the National Commission on the Causes of the Financial and Economic Crisis in the United States, brought the leading credit rating agencies—Standard & Poor’s, Moody’s, and Fitch—to prominence.  Id.  It became a common practice by the packagers of these mortgage-backed securities, i.e., financial institutions, to pay “handsome fees to the rating agencies to obtain the desired ratings.”  Id. at 44.

   [13].         See Stout, supra note 8, at 20–21 (observing that most of the OTC derivative trading in the years leading up to the financial crisis was “dominated by speculative trading,” not by investors seeking to hedge their market positions).

   [14].         “From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A.  This compares with six private-sector companies in the United States that carried this coveted rating in early 2010.  In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-backed securities every working day. . . . 83% of the mortgage securities rated triple-A that year ultimately were downgraded.”  Fin. Crisis Report, supra note 10, at xxv.  Of course, Moody’s and the rest of the ratings agencies made nice profits for their services.  In 2005, 2006, and 2007, for example, the rating of structured finance products made up nearly half of Moody’s rating revenues, representing a fourfold increase from levels in 2000.  Id. at 118.

   [15].         See John C. Coffee Jr., Gatekeepers: The Professions And Corporate Governance 303 (2006) (“[F]or over a century institutional investors have been found by courts to have satisfied their due diligence obligation as fiduciaries when they relied on ‘investment grade’ ratings from the ratings agencies.”).

   [16].         See Margarita S. Brose & Bill Nichols, Toxic Assets: Untangling the Web, BYU Int’l L. & Mgmt. Rev., Winter 2009, at 1, 16 (“In a process that now looks to be a tragic combination of magic and wishful thinking, some of these tranches somehow ended up with AAA investment ratings and were marketed as high quality investments, which dramatically broadened the base of potential investors to include pension funds and asset managers.”); Charles W. Murdock, Why Not Tell the Truth?: Deceptive Practices and the Economic Meltdown, 41 Loy. U. Chi. L.J. 801, 868 (2010) (observing that many investors in mortgage-backed securities were “fiduciaries subject to fiduciary standards as to the instruments in which they could invest” and that therefore, “[t]he only way these investments could be sold was to receive the imprimatur [i.e. a triple AAA stamp] of the credit agencies”); Greg Farrell, SEC Slams Credit-Rating Agencies over Standards, USA Today, July 11, 2008, at 3B (“Because many institutional investors [and pension funds] can put money into only investment-grade bonds (i.e., bonds with a rating of ‘AAA’), investment banks scrambled to win the highest rating for the mortgage-backed securities they developed during the real estate bubble.”).

   [17].         The bill was named the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Pub. L. No. 09-8, 119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C.).

   [18].         See, e.g., Kevin T. Jackson, The Scandal Beneath the Financial Crisis: Getting a View from a Moral-Cultural Mental Model, 33 Harv. J.L. & Pub. Pol’y 735, 762 (2010) (noting Countrywide Financial Corporation’s “practice of predatory lending, which involves entering into unsound secured loans for inappropriate purposes” through the use of “a bait-and-switch technique, advertising low interest rates for home refinancing[s]” that would tout a 1% or 1.5% interest rate but swap out an adjustable rate mortgage contract at closing that would allow the homeowner “to make interest-only payments, yet the interest charged is more than the amount of interest paid”); see also Mark Brown, Countrywide Wasn’t Really on Your Side, Chi. Sun-Times, June 26, 2008, at 8 (reporting that one of Countrywide’s most popular mortgage products was the “PayOption ARM,” an adjustable rate mortgage, that allowed consumers to “pay the monthly minimum on their credit cards as the balance owed g[ot] bigger and bigger and bigger” and that Countrywide, in selling these mortgages, was “indifferent to whether homeowners could afford to repay its loans,” often “ignoring the fact that the borrowers . . . didn’t make enough money to repay the loans, especially the higher payments that would later come due on adjustable rate mortgages”).

   [19].         Carol J. Loomis, AIG’s Wind-Down Has $1.6 Trillion Left, CNNMoney (Mar. 26, 2009),
.fortune/index.htm (noting that AIG’s exposure on derivatives was, at its height in 2008, $2.7 trillion); Rick Newman, 7 Surprises Buried Beneath AIG Bonuses, U.S. News & World Rep. (Mar. 20, 2009),
/flowchart/2009/03/20/7-surprises-buried-beneath-the-aig-bonuses (noting that at its highest point before the bailout, AIG faced exposure on its derivatives in the amount of $2.7 trillion).  Interestingly, AIG’s public disclosures noted that AIG was on the hook for a shockingly large $527 billion.  Am. Int’l Grp., Inc., Annual Report (Form 10-K) (Dec. 31, 2007), available at

   [20].         See Stout, supra note 8, at 21 (noting that the value of all asset-backed securities and corporate bonds in the United States was $15 trillion in 2008 and yet there were $67 trillion in outstanding credit default swap (“CDS”) contracts written that were backed only by a small fraction of those bonds).

   [21].         See id. at 19–25 (arguing that reductions in legal regulations that limited the ability to use hedging contracts for the purpose of speculation fueled the huge increase in speculative trading in credit default swaps and other derivatives that resulted in the financial crisis).

   [22].         E.g., Elaine Lafferty, The Woman Who Predicted the Mortgage Crisis Goes on the Record About the Future, Women’s Voices For Change (Apr. 30, 2008),
-mortgage-crisis-goes-on-the-record-about-the-future.htm (reporting on Karen Weaver, a Wall Street analyst who voiced concern in 2005 about the artificial and unsustainable rise in home prices underlying many mortgage-backed securities); Cyrus Sanati, How Value Investing Paid Off in the Crisis, N.Y. Times Dealbook (Mar. 16, 2010),
-value-investing-paid-off-in-the-meltdown/ (reporting that Michael Burry of Scion Capital made $100 million by betting against mortgage-backed securities (i.e., purchasing credit default swaps on pools of mortgages), and that Burry did so because “he knew [subprime mortgage-backed securities] were troubled”).

   [23].         See, e.g., Stout, supra note 8, at 5 (“Neither the ‘buyer’ nor the ‘seller’ of a CDS contract on a particular corporate or mortgage-backed bond needs to actually own the underlying bond in question.” (citing Michael Lewis, The Big Short: Inside The Doomsday Machine 29 (2010)).

   [24].         See David Evans, Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults, Bloomberg (May 20, 2008),
/news?pid=newsarchive&sid=aCFGw7GYxY14 (noting that although hedge funds have provided 31% of all credit default swap protection, such protection is not likely to be of any value because few hedge funds have the cash available to meet bankers’ requests and the law does not require sellers of protection to set aside reserves).

   [25].         See Stout, supra note 8, at 19–25 (arguing that reductions in legal regulations that limited the ability to use hedging contracts for the purpose of speculation fueled the huge increase in speculative trading in credit default swaps and other derivatives that resulted in the financial crisis).

   [26].         As I observed in an earlier article dealing with activism by institutional shareholders:

Responsible commentators estimate hedge fund turnover at around 300 percent annually.  What is even more disturbing than hedge fund turnover is the gerbil-like trading activity of the mutual fund industry which is the primary investor of Americans’ 401(k) contributions.  The average portfolio turnover at actively managed mutual funds, for example, is approximately 100 percent a year. Median turnover is in the 65 percent range. . . . [The] annual[] turnover of stocks traded on the New York Stock Exchange [is] well over 100 percent, with turnover approaching 138 percent in 2008.  And . . . market capitalization data from the U.S. Statistical Abstract reveals that turnover across all U.S. exchanges reached approximately 311 percent in 2008.

Leo E. Strine, Jr., One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?, 66 Bus. Law. 1, 10–11 (2010) (footnotes omitted).

   [27].         See generally Bratton & Wachter, supra note 11, at 653–54, 720–21 (demonstrating that financial institutions that engaged in the speculation activities that triggered firm failures and the financial crisis had received a stock market premium over institutions that had not in the years before the crisis).

   [28].         Binyamin Appelbaum, Bailout Overseer Says Banks Misused TARP Funds, Wash. Post, July 20, 2009, at A6 (noting that according to a report from the special inspector general charged with overseeing the government’s financial rescue program, many banks that received federal TARP money that was supposed to be used for increased lending instead used a portion of that money to make new investments, repay debts, or buy other banks).

   [29].         At its high point, U.S. unemployment reached 10.1% in October 2009.  As of December 2011, it remains at 8.5%, a figure that may be understated due to the way unemployment statistics are calculated. U.S. Bureau of Labor Statistics, (last visited Feb. 27, 2012); see alsoVincent Del Giudice & Thomas R. Keene, U.S. Unemployment Probably Higher Than Reported, Silvia Says, Bloomberg (Oct. 2, 2009), (noting that the unemployment rate in the United States is probably higher than reported because many laid off people who have been out of work for a long period of time have given up the search for jobs and are therefore no longer factored in to the unemployment calculation).

   [30].         Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).

   [31].         Id. at 683–84.

   [32].         Id. at 671; see also Thomas A. Edison, Henry Ford Explains Why He Gives Away $10,000,000, N.Y. Times, Jan. 11, 1914, § 5, at 3, available at‑free/pdf?res=F2091EFE355D13738DDDA80994D9405B848DF1D3 (explaining that Henry Ford advocated for a more direct role for businesses to play in improving social welfare not by paying higher wages, but by “dividing profits with his employees”).  Ford is also quoted as having said that he “believe[s] it is better for the nation, and far better for humanity, that between 20,000 and 30,000 should be contented and well fed than that a few millionaires should be made.”  Id.  Of course, given that his litigation adversaries were the Dodge brothers, Ford’s desire to deny them dividends that could be used to fund their own eponymous car manufacturing operations might have also contributed to Henry Ford’s high-mindedness.

   [33].         Dodge, 170 N.W. at 684 (“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 the means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.”); see also M. Todd Henderson,Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company, in Corporate Law Stories 37, 66 (J. Mark Ramseyer ed., 2009) (noting that the Michigan Supreme Court’s concern in Dodge was that a majority stockholder might use his control to “divert[] resources [of the corporation] to self-serving ends”).

   [34].         It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize corporate profits currently.  They may do so, however, because such activities are rationalized as producing greater profits over the long-term.  See, e.g., Shlensky v. Wrigley, 237 N.E. 776, 780 (Ill. App. Ct. 1968) (rejecting a plaintiff shareholder’s allegation of mismanagement against the corporation’s directors for their refusal to install lights at Wrigley Field because the court was “not satisfied that the motives assigned [to the directors] are contrary to the best interests of the corporation and the stockholders” when adding lights for night baseball games might have reduced surrounding property values and that the “the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating”); Melvin Aron Eisenberg, Corporate Conduct That Does Not Maximize Shareholder Gain: Legal Conduct, Ethical Conduct, The Penumbra Effect, Reciprocity, The Prisoner’s Dilemma, Sheep’s Clothing, Social Conduct, and Disclosure, 28 Stetson L. Rev. 1, 14–15 (1998) (explaining that sometimes business decisions that appear to be profit-nonmaximizing, such as charitable donations, can in fact be justified on a “straight maximizing basis” and in fact, “frequently a corporation can earn greater profits by appearing to be philanthropic than by appearing to maximize [profits]”); Ian B. Lee, Efficiency and Ethics in the Debate About Shareholder Primacy, 31 Del. J. Corp. L. 533, 555–56 (2006) (“Similarly, few would disagree . . . with the claim that eliminating . . . discretion [to make profit-sacrificing decisions] would be counterproductive even from the standpoint of shareholder profit-maximization.”).  The Delaware Supreme Court’s contrasting treatment of the consideration directors can give to other constituencies in its famous Unocal andRevlon decisions makes this point.  When a corporation is ongoing, it may consider the interests of other constituencies in pursuing a long-term course to maximize profits.  Unocal v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (holding that a board, in considering a threat that a hostile bid poses to the corporation, may consider “the nature of the takeover bid and its effect on the corporate enterprise” which entails, among other things, an analysis of “the inadequacy of the price offered, [the] nature and timing of the offer, questions of illegality, the impact on ‘constituencies’ other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange”).  But when there is no long-term, as when a sale is inevitable, directors must maximize value for the stockholders immediately.  Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.  However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.”) (emphasis added) (internal citation omitted).  These cases, when read together, mean stockholders’ best interest must always, within legal limits, be the end.  Other constituencies may be considered only instrumentally to advance that end.

   [35].         Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“[The business judgment rule] is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”); see also Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971) (“A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose.  A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.”).

   [36].         See, e.g., Kelli A. Alces, Revisiting Berle and Rethinking the Corporate Structure, 33 Seattle U. L. Rev. 787, 792 (2010) (“[In Delaware, a] strong business judgment rule is coupled with strong, though rarely enforced, fiduciary rhetoric to try to keep managers faithful to shareholder wealth maximization . . . .”); Steven L. Schwarcz, Fiduciaries With Conflicting Obligations, 94 Minn. L. Rev. 1867, 1909 (2010) (“In the corporate decisionmaking process, the business judgment rule encourages qualified directors to serve by limiting liability risk, [and] encourages inherently risky but value-maximizing transactions . . . .”); see also Revlon, 506 A.2d at 182 (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.” (emphasis added) (citing Unocal, 493 A.2d at 955)).

   [37].         In reaching its conclusion, the Michigan Supreme Court observed the “attitude and . . . expressions of Mr. Henry Ford,” quoting part of Ford’s testimony: “My ambition . . . is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.  To do this we are putting the greatest share of our profits back in the business.”  Dodge, 170 N.W. at 683.

   [38].         eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010).

   [39].         Id. at 8.

   [40].         Id. at 15–16.

   [41].         Id. at 32.

   [42].         Id. at 35.

   [43].         See Jay Coen Gilbert, What eBay’s Court Fight With Craigslist Reveals, Forbes (Sept. 21, 2010, 10:56 AM),
/what-ebays-court-fight-with-craigslist-reveals/ (“If you want to maintain the social mission of your company, don’t incorporate in Delaware.”).

   [44].         Id.  Although he believes that “in general, a shareholder invests in a for-profit Corporation for the purpose of maximizing their returns,” Maxwell S. Kennerly, a liberal commentator and lawyer, believes that that general principle must be “considered in light of the specifics of each company.”  Maxwell S. Kennerly, eBay v. Newmark: Al Franken Was Right, Corporations Are Legally Required To Maximize Profits, Litig. & Trial (Sept. 13, 2010),‑law/for‑lawyers/ebay‑v‑newmark‑al‑franken‑was‑right‑corporations‑are‑legally‑required‑to‑maximize‑profits/.  In that vein, Kennerly believes that because eBay bought its shares in Craigslist in an arms-length transaction and knew that Craigslist, for better or worse, had a “tangibly different idea of ‘for-profit,’” eBay should not be able to complain that Jim and Craig had no “sound business reasons for their decision to protect the highly successful, if idiosyncratic, corporate culture at craigslist, and that decision should be protected by the business judgment rule.”  Id.  See also Joshua P. Fershee, The Wake of the eBay Decision: Is Ben & Jerry’s Next?, Bus. L. Prof Blog (Dec. 6, 2010),
_law/2010/12/the-wake-of-the-ebay-decision-is-ben-jerrys-next-.html (“I still find myself troubled by the determination that, by embracing its ‘community service mission,’ craigslist was being run improperly as [a] corporate entity.”).

   [45].         The new B Corporation movement is an interesting attempt to address constituency concerns within corporate law.  The idea is that the B Corporation would have a charter that would permit or even require the directors to consider interests, such as the public interest or more specific constituency concerns, and not just the interests of stockholders.  Legal Requirement, Certified B Corp., (last visited Feb. 27, 2012).  The problem with the B Corporation, though, is that the only stakeholders with a vote would continue to be the stockholders, who by electing a new board who supported a change, could presumably change the charter. See, e.g., Del. Code Ann. tit. 8, § 242(a) (2010) (allowing corporation to amend its certificate of incorporation in any manner which would have been lawful in the first instance); id. § 242(b)(1) (setting forth procedural requirements for amending the certificate of incorporation and requiring, in addition to a stockholder vote, a resolution adopted by the board of directors setting forth the amendment and declaring its advisability).  Moreover, it is not clear to what extent the B Corporation concept is designed to give standing to other constituencies to sue to enforce the directors’ duty to them.  The weight to be given to other constituencies would seem to be a matter entrusted to the judgment of the directors (albeit a calculus not so easily called a “business judgment”) and would be difficult for courts to second guess.  This reality, of course, is reflected in a long-standing concern that by permitting directors to justify their actions by reference to virtually everything, they will not be accountable to any constituency for anything.  Adolf A. Berle, Jr., For Whom Corporate Managers Are Trustees: A Note, 45 Harv. L. Rev. 1365, 1367 (1932).

   [46].         See Berle, supra note 45, at 1367 (“When the fiduciary obligation of the corporate management and ‘control’ to stockholders is weakened or eliminated, the management and ‘control’ become for all practical purposes absolute.”).  Berle was not entirely against a corporate governance regime in which corporate managers could consider the interests of a larger polity outside the stockholders, but was steadfast in arguing that until a sensible system emerges—one that prudently monitors and constrains managers, even while they balance a wider host of interests—we must not deviate lightly from the status quo.  See id. at 1372 (“Unchecked by present legal balances, a social-economic absolutism of corporate administrators, even if benevolent, might be unsafe; and in any case it hardly affords the soundest base on which to construct the economic commonwealth which industrialism seems to require.  Meanwhile, as lawyers, we had best be protecting the interests we know, being no less swift to provide for the new interests as they successively appear.” (emphasis added)).

   [47].         The “practical consequence” of an adherence to the so-called “property model” of the corporation is that the board of directors will, when faced with a conflict among the corporation’s stockholders and other corporate constituencies, almost always favor the stockholders’ interests because “in the intra-corporate republic, only capital has the right to vote!”  Leo E. Strine, Jr., The Social Responsibility of Boards of Directors and Stockholders in Charge of Control Transactions: Is There Any “There” There?, 75 S. Cal. L. Rev. 1169, 1186–87 (2002).

   [48].         Kennerly, supra note 44.  As recounted by Kennerly, Professor Todd Henderson argued that although “the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day-to-day basis, this is not legally required or enforceable.”  Id. (quoting Todd Henderson, The Shareholder Wealth Maximization Myth, Truth on the Market (July 27, 2010),
-shareholder-wealth-maximization-myth/).  Professor Stephen Bainbridge agreed, positing that “[t]he fact that corporate law does not intend to promote corporate social responsibility, but merely allows it to exist behind the shield of the business judgment rule, becomes rather significant in—and is confirmed by—cases where the business judgment rule does not apply.”  Stephen Bainbridge, Al Franken, Shareholder Wealth Maximization, and the Business Judgment Rule, (July 27, 2010),  Finally, Professor Larry Ribstein was also quick to contest Franken’s comment: “The Franken misconception is widely espoused by those in the radical anti-corporate camp. . . . This is why the corporate social responsibility debate is largely empty.  While many corporate social responsibility proponents argue for giving managers more legal freedom to serve society’s needs, managers already have that freedom.”  Larry Ribstein, The Shareholder Maximization Canard, Truth on the Market (July 28, 2010),
-shareholder-maximization-canard/.  Kennerly attributed this dismissal of Franken’s views to an underappreciation of what he describes as a legal requirement that corporations, even if allowed to engage in certain philanthropic efforts, undertake to maximize profits.  See Kennerly, supra note 44 (“[T]he duty to maximize profits isn’t, as Henderson said, a ‘canard.’  It’s an enforceable . . . legal doctrine, and it was just enforced against craigslist.”).

   [49].         This sense comes from the conservative response discussed supra in note 48, in which the commentators appear to argue that corporations already enjoy the prerogative to pursue philanthropic ends to the extent that those who would argue, as Al Franken does, that corporations are legally required to maximize profits, underemphasize the wide latitude managers already enjoy under the business judgment rule.

   [50].         To this extent, this position echoes the “just trust the business leaders” approach of Merrick Dodd, in his debate with Adolph Berle.  E. Merrick Dodd, Jr.,For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1153 (1932) (“If, however, as much recent writing suggests, we are undergoing a substantial change in our public opinion with regard to the obligations of business to the community, it is natural to expect that this change of opinion will have some effect upon the attitude of those who manage business.  If, therefore, the managers of modern businesses were also its owners, the development of a public opinion to the effect that business has responsibilities to its employees and its customers would, quite apart from any legal compulsion, tend to affect the conduct of the better type of business man.  The principal object of legal compulsion might then be to keep those who failed to catch the new spirit up to the standards which their more enlightened competitors would desire to adopt voluntarily.  Business might then become a profession of public service, not primarily because the law had made it such but because a public opinion shared in by business men themselves had brought about a professional attitude.”).  By contrast, Berle believed that corporate managers needed to be subject to regulation in the public interest.  See, e.g., Berle, supra note 45, at 1368 (“Either you have a system based on individual ownership of property or you do not.  If not—and there are at the moment plenty of reasons why capitalism does not seem ideal—it becomes necessary to present a system (none has been presented) of law or government, or both, by which responsibility for control of national wealth and income is so apportioned and enforced that the community as a whole, or at least the great bulk of it, is properly taken care of.  Otherwise the economic power now mobilized and massed under the corporate form, in the hands of a few thousand directors, and the few hundred individuals holding ‘control,’ is simply handed over, weakly, to the present administrators with a pious wish that something nice will come out of it all.” (internal citations omitted)).

   [51].         See Strine, supra note 47, at 1187 (observing that in the “intra-corporate republic,” only stockholders have the right to vote); see also Franklin Balotti & Jesse A. Finkelstein, Delaware Law Of Corporations & Business Organizations § 13.11 (3d ed. 2009) (“Thus, a plaintiff who is not a stockholder, or who ceases to be a stockholder during the pendency of his [derivative] suit, loses standing to maintain a derivative action.”); 5 William Mead Fletcher et al., Fletcher Cyclopedia of the Law of Corporations § 2025 (perm. ed., rev. vol. 2009) (“Generally, the right to vote is a right that is inherent in and incidental to the ownership of corporate stock . . . .”); cf. J. Travis Laster, Goodbye to the Contemporary Ownership Requirement, 33 Del. J. Corp. L. 673, 681 (2008) (“[B]ecause the selling stockholder no longer has stockholder status, the right to sue [derivatively] with respect to those shares is extinguished by the sale.”).

   [52].         See, e.g., Strine, supra note 47, at 1187 n.35 (“‘I’m gonna take two weeks, gonna have a fine vacation/I’m gonna take my problem to the United Nations/Well I called my congressman and he said, quote/’I’d love to help you, son, but you’re too young to vote.’” (quoting Eddie Cochran, Summertime Blues (Liberty Records 1958))).

   [53].         See, e.g., Marcel Kahan & Edward B. Rock, How I Learned To Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law, 69 U. Chi. L. Rev. 871, 909 (2002) (citing statistics which show takeover activity in the United States has actually increased over time); Robert E. Spatt, The Four Ring Circus–Round Twelve: A Further Updated View of the Mating Dance Among Announced Merger Partners and an Unsolicited Second or Third Bidder, Simpson Thacher & Bartlett LLP 1 (Mar. 24, 2008), (cataloging numerous instances of “deal jumping” in which additional bids are made for a target by third parties after the signing of a merger agreement, and noting that such instances have “become a standard execution risk of getting a deal done, and tend[] to reflect the ebb and flow of hostile acquisition activity”).

   [54].         Take Chick-fil-A, for example.  Its founder, Truett Cathy, has closed all of its restaurants on Sundays since he opened the first restaurant in 1946 to enable its employees to attend church.  Melissa Lee, Chick-fil-A Does Business with Religious Conviction, CNBC (Dec. 6, 2007),
/22114420/Chick_Fil_A_Does_Business_With_Religious_Conviction.  Recently, there has been concern about the company’s subsidy of groups that believe that homosexuality is immoral.  Alex Pareene, Koch Brothers, Christian Chicken-Sellers Besieged by Thuggish Liberal Criticism, Salon (Feb. 3, 2011),

   [55].         See, e.g., William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 Cardozo L. Rev. 261, 275 (1992) (“[M]any people would find . . . disturbing [the proposition] that directors know what is better for shareholder[s] than they themselves do. . . . May [directors] act to protect others (and themselves) from claims of shareholder exploitation?”); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 Wash. & Lee L. Rev. 1423, 1445 (1993) (arguing against displacing the shareholder wealth maximization model with a model that allows corporate managers to consider various nonshareholder interests in line with their own ethical preferences because of the “very real risk that some corporate directors and officers will use nonshareholder interests as a cloak for actions taken to advance their own interests”); Milton Friedman, The Social Responsibility of Business is to Increase Its Profits, N.Y. Times Mag., Sept. 13, 1970, at 33 (arguing that the notion that corporations have a “social responsibility” impermissibly displaces the democratic political process with a doctrine that permits minorities to effect extra-political changes that may or may not be the best policies); Mark E. Van Der Weide, Against Fiduciary Duties to Corporate Stakeholders, 21 Del. J. Corp. L. 27, 54–55, 69–70 (1996) (arguing against displacing the shareholder wealth maximization norm with one that allows more leeway to corporate directors, whose ability to redistribute wealth between different social groups is “doubtful,” and that the ability to consider and balance a host of nonstockholder constituencies and personal views of the good would, among other undesired results, create a system where protection from managerial self-interest would “dissolve” because managers could in effect “reallocate the costs of the duty of loyalty among stakeholders groups”); cf. City Capital Assocs. Ltd. P’ship v. Interco Inc., 551 A.2d 787, 796 (Del. Ch. 1988) (“[H]uman nature may incline even one acting in subjective good faith to rationalize as right that which is merely personally beneficial.”).

   [56].         Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. Ch. 1989) (“Delaware law confers the management of the corporate enterprise to the stockholders’ duly elected board representatives.  The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. . . . Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy.” (internal citations omitted)).

   [57].         See Strine, supra note 26, at 16–17 (citing various sources); Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. Corp. L. 1, 15 (2007) [hereinafter Strine, Toward Common Sense]; Leo E. Strine, Jr., Why Excessive Risk-Taking is Not Unexpected, N.Y. Times Dealbook (Oct. 5, 2009),
/2009/10/05/dealbook-dialogue-leo-strine/ [hereinafter Strine, Risk-Taking].

   [58].         See, e.g., Strine, Toward Common Sense, supra note 57, at 15; Strine, supra note 26, at 18–19; Strine, Risk-Taking, supra note 57.

   [59].         Cadbury’s signature product, Dairy Milk, is made from 26% cocoa solids, which qualifies it to be called “Milk Chocolate” in the European Union, but not “Chocolate.”  See Products, Cadbury,
/Products/Blocks-of-Chocolate/Dairy-Milk-Block/Dairy-Milk-Ingredients.aspx (last visited Feb. 27, 2012); Council Directive 2000/36, Annex I, 2000 O.J. (L 197) 19, 22 (requiring that “Milk Chocolate” contain at least 25% cocoa solids and “Chocolate” contain at least 35% of the same).  But, the name “Dairy Milk” long pre-dates the European Union’s naming convention, having been used since the bars were introduced in 1905 as a testament to the fact that there has “always [been] a glass and a half of fresh, natural milk in each half pound of chocolate.”  Cadbury Dairy Brands, Kraft Foods, (last visited Feb. 27, 2012).

   [60].         See Amy Wilson & James Quinn, Kraft Moves Fast to Silence the Doubters, The Telegraph, Jan. 23, 2010, at 8 (reporting that even before the purchase of Cadbury, Kraft employed about 1500 workers in the United Kingdom).

   [61].         See, e.g., Press Release, Kraft Foods, Kraft Foods Makes Dow Jones Sustainability Index Sixth Year in a Row (Sept. 9, 2010), available at (noting that Kraft Foods was named to the Dow Jones Sustainability Index for the sixth year in a row, received the food industry’s leading scores in operational eco-efficiency for the third year in a row, and received leading scores in corporate citizenship/philanthropy).

   [62].         See Roger Carr, Chairman, Cadbury, Distinguished Speaker Seminar at Said Business School at University of Oxford (Feb. 9, 2010) [hereinafter Carr Speech], available at
_1845_NMLT_Roger_Carr.mp3 (noting that some of Cadbury’s “most recent and material manufacturing investments” in the years before the Kraft acquisition had been in Poland with an eye towards replacing U.K. production); Cadbury Factory Closure by Kraft “Despicable”, BBC (Feb. 10, 2010), (“Plans to close the Keynsham plant, at the cost of 400 jobs, were announced by Cadbury in 2007.  Kraft said it had only become aware of how advanced plans for the new Poland factory were after the takeover deal had been agreed.”).

   [63].         A&W Root Beer was founded as an American company in 1919 by founder Roy Allen.  A&W History, A&W Root Beer,
/history/ (last visited Feb. 27, 2012).  The name A&W comes from Allen’s business partner, Frank Wright, with whom Allen partnered in 1922.  Id.

   [64].         In 1986, Cadbury Schweppes, plc, purchased Canada Dry from RJR Nabisco, Inc.  Richard Stevenson, Cadbury Will Buy RJR Nabisco Units, N.Y. Times, June 3, 1986, at D4, available at

   [65].         Carr Speech, supra note 62 (“In the final analysis, it was the shift in the register that lost the battle for Cadbury—the owners were progressively not long-term stewards of the business but financially motivated investors, judged solely on their own quarterly financial performance.  At the end of the day, there were simply not enough shareholders prepared to take a long term view of Cadbury and prepared to forego short term gain for longer term prosperity. . . . At the end of the day, individuals controlling shares which they had held for only a few days or weeks determined the destiny of a company that had been built over almost 200 years.”).  Others in the U.K. political establishment in place at the time of the Kraft-Cadbury acquisition were also upset by short-termism’s alleged evils.  See Blanaid Clarke,Directors’ Duties during an Offer Period—Lessons from the Cadbury Plc Takeover 5–6 (UCD Working Papers in Law, Criminology & Socio-Legal Studies, Research Paper No. 44/2011), available at (quoting Lord Mandelson, Sec’y of State for Bus., Innovation and Skills, Speech at the Trade and Indus. Dinner, Guildhall, the Mansion House, London (Mar. 1, 2010))  (“Lord Mandelson, the Business Secretary at the time of the [Kraft] takeover complained that ‘In the case of Cadbury and Kraft it is hard to ignore the fact that the fate of a company with a long history and many tens of thousands of employees was decided by people who had not owned the company a few weeks earlier, and probably had no intention of owning it a few weeks later.’”); id. at 6 (“Vince Cable[, the current Business Secretary,] subsequently referred to ‘short term investors and financial gamblers [who] value a quick buck above all else.’” (quoting Press Release, Dep’t of Bus., Innovation, and Skills (Sept. 22, 2010))).

   [66].         Our Story, Cadbury,
/ourstory/Pages/ourstoryFlash.aspx (last visited Feb. 27, 2012).

   [67].         After Anheuser-Busch was sold to Belgian-based InBev in 2008, Boston Beer Co., the makers of Sam Adams, became the largest, independent, publicly traded brewery in the United States.  Beth Kowitt, Meet the New King of Beers, CNN Money (Aug. 8, 2008),

   [68].         In 1984, “Better Beer” Did Not Exist, Samuel Adams, (last visited Feb. 27, 2012).  Larger American beer companies, like Anheuser-Busch and Miller Brewing Company, are now owned by foreign companies.  Clementine Fletcher, SABMiller Spurning Femsa Means Higher Foster’s Price: Real M&A, Bloomberg (Feb. 24, 2011),
-02-24/sabmiller-spurning-femsa-means-increased-price-for-foster-s-beer-real-m-a.html (noting that South African Breweries Plc, a South African company, purchased Miller Brewing Company in 2002); William Spain & Steve Goldstein, Anheuser-Busch Accepts $52 Billion InBev Offer, Wall St. J. Marketwatch (July 14, 2008),

   [69].         City Code on Takeovers and Mergers r. 21 (Panel on Takeovers & Mergers 2011) [hereinafter Takeover Code], available at

   [70].         Cf. Panel on Takeovers & Mergers, The European Directive on Takeover Bids 2 (2005) (lamenting the fact that the United Kingdom was unable to secure passage of an EU directive that would have required EU member states to adopt a nonfrustration provision in their takeover codes like Rule 21 of the U.K.’s Takeover Code).

   [71].         See, e.g., Paul Davies, Shareholder Value, Company Law and Securities Markets Law: A British View 22–24 (Oct. 2000) (unpublished manuscript),available at (observing that the U.S. takeover rules are “clearly less responsive to the conflicts of interest to which target boards are subject in hostile bids and more responsive to the argument that setting business strategy is the preserve of centralised management rather than of the shareholders” and questioning “whether the U.S. rules do more than permit the entrenchment of target management under the guise of protecting target shareholders against bidder opportunism or protecting the interests of non-shareholder groups”); see also John C. Coates, IV, M&A Break Fees: US Litigation vs. UK Regulation 30 (Harvard Law Sch. Public Law & Legal Theory Working Paper No. 09-57, 2009), available at (“The UK’s regulatory approach exhibits clear benefits.  It generates little or no litigation, provides clear guidance for market participants, keeps fees low, and increases bid competition. . . . [I]t may make it harder for target fiduciaries to favor bidders for private benefits . . . .”).  But others disagree.  Lipton and Rowe point out that since 1985 and Delaware’s embrace of the poison pill, the volume of merger activity in the United States has increased.  Martin Lipton & Paul K. Rowe, Pills, Polls, and Professors: A Reply to Professor Gilson, 27 Del. J. Corp. L. 1, 20–21 (2002).  They also highlight two J.P. Morgan & Co. studies that show that “premiums paid to firms with pills were forty-two percent higher than the market price of the acquired firm’s shares five days prior to the initial offer, while companies that did not adopt pills received an average premium of only thirty percent[,]” and they reject as lacking empirical support the proposition that hostile takeovers “either increase aggregate returns to shareholders or effectively ‘discipline’ corporate management[.]”  Id.

   [72].         See, e.g., eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 29 n.86 (Del. Ch. 2010) (citing Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)) (noting that Delaware has recognized the propriety of a board’s adoption of a rights plan in order to counter the threat posed by a hostile takeover at a price that the board reasonably concludes is below the corporation’s intrinsic value).

   [73].         John Armour & David A. Skeel, Who Writes the Rules for Hostile Takeovers, and Why?, 96 Geo. L.J. 1727, 1729 (noting that in the U.K., poison pills and other defensive measures that “will have the effect of impeding target shareholders’ ability to decide on the merits of a takeover offer” are strictly forbidden).

   [74].         Cf. Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 Del. J. Corp. L. 769, 816 (2006) (rejecting the proposition that directors should be precluded from interfering with a stockholder’s desire to tender his stock because it would allow the bidder, instead of bargaining hard with the target board for a merger, to acquire stock at a “low-ball tender offer” at a premium to market price); Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110, 118 (1965) (“The shareholders should ordinarily be willing to accept any offer of a tax-free exchange of new marketable shares worth more than their old shares.”); Guhan Subramanian, Bargaining in the Shadow of Takeover Defenses, 113 Yale L.J. 621, 643 (2003) (noting that in the absence of takeover defenses, stockholders will accept a bid at a premium to market price).

   [75].         See, e.g., Clegg Attacks Brown over RBS Funding for Cadbury Bid, BBC (Jan. 20, 2010), (noting that British politicians from the Labour Party and the Liberal Democrat Party expressed anger over Kraft’s acquisition of Cadbury and reporting former Business Secretary Lord Peter Mandelson’s declaration that the British government would mount a “huge opposition” to Kraft’s takeover of Cadbury); Sarah O’Grady, Famous Chocolate Factory Cadbury’s Gets Chop, Express (Jan. 15, 2011),
-Cadbury-s-gets-chop (noting Conservative Party member Jacob Rees-Mogg’s anger at the Kraft takeover and Kraft’s decision, despite its promises, to close a Cadbury production plant in Somerdale).

   [76].         See supra notes 60–61 and accompanying text.

   [77].         See Business, Innovation, and Skills Committee, Mergers, Acquisitions, and Takeovers: the Takeover of Cadbury by Kraft, 2009–10, H.C. 234.

   [78].         Robert Hutton, Cable Slams Finance Industry, Pledges Takeover Probe, Bloomberg Businessweek (Sept. 22, 2010), http://www.globe‑
/quixplorer/filestorage/Interfocus/3‑Economie/31‑Europe/31‑SRCNL‑BusinessWeek_com_‑‑_Europe/201009/Cable_to_Continue_Finance_Attack_With_UK_Takeover_Pay_Probe.html (reporting that U.K. Business Secretary Vince Cable, a Liberal Democrat member of the governing coalition, announced an “inquiry into corporate-governance rules, with takeovers and pay both in the spotlight,” and denied that his outspoken stance against the finance industry had created a rift with his Tory colleagues in the coalition government).

   [79].         Roger Carr, the chairman of the Cadbury board of directors and one of the leading figures in the British corporate arena, made three key proposals in the wake of Kraft’s acquisition of Cadbury, all of which were rejected by the U.K. Takeover Panel, whose Code Committee conducted a review of certain provisions of the Takeover Code in late 2010.  First, Carr proposed that the threshold stock ownership that triggers a stockholder’s disclosure obligation under Rule 8.3 of the Takeover Code be reduced from 1% to 0.5%.  Carr Speech, supra note 62.  Rule 8.3(a) currently requires a stockholder owning 1% of the target company’s stock to publicly disclose such holdings following the commencement of the offer period (which begins after a “proposed or possible” offer is made by the hopeful acquirer).  Takeover Code, supra note 69, at r. 8.3(a).  Rule 8.3(b), in turn, requires a stockholder who owns, or comes to own during the offer period, 1% of the target company’s stock to disclose the details of any transaction involving the target company’s stock.  Id. r. 8.3(b).  Carr also proposed what even he called “a more radical move,” which was to raise the acceptance threshold from 50.1%, as currently required under Rule 9.2 of the Code, to 60% of the target corporation’s voting stock voting in favor of the proposed acquisition.  Carr Speech, supra note 62.  Finally, Carr suggested “an even more radical move”: disenfranchising stockholders who acquire their shares during the formal offer period in order to, in Carr’s words, “ensure short term money does not determine long term futures.”  Id.

   [80].         After receiving an “unprecedented number of responses” to its Consultation Paper (an official public request for commentary on suggested proposals), on October 21, 2010, the U.K. Takeover Panel Code Committee published its statement of the proposed changes to the Takeover Code it recommended.  Code Committee, Panel on Takeovers & Mergers, Review of Certain Aspects of the Regulation of Takeover Bids (Oct. 21, 2010) [hereinafter Committee Report], available at

   [81].         Under the Takeover Code as it is now written, if a potential bidder announces an interest in making a bid to purchase the target company, but does not commit to doing so, the target company may go to the Takeover Panel and request that the Panel impose a deadline on the potential bidder, the so-called “put-up or shut-up” date.  Takeover Code, supra note 69, at r. 2.4(b).  When the “put-up or shut-up” deadline arrives, the potential bidder either has to “put-up” a bid or “shut-up” and is forbidden to make any further bid for the target for a period of six months as a sanction.  Id. r. 2.8.  The amount of time given to the potential acquirer varies case by case, but is typically six to eight weeks.  Committee Report, supra note 80, at 4.  Although the purpose of the put-up or shut-up mechanism was to protect the target from being under “protracted siege,” in practice there were many instances where the target board would decline to ask the Panel to impose a put-up or shut-up deadline when approached by a potential acquirer because of pressure exerted by stockholders eager to allow the potential acquirer to have all the time it desired to formulate an offer.  Id. at 6–7.  Thus, in practice, the put-up or shut-up deadline was much less potent than what was originally contemplated.  Id.  Under the Code Committee’s proposal, however, it will no longer be up to the target company whether or not to approach the Panel and seek the initiation of the put-up or shut-up clock.  Rather, under the Code Committee’s proposal, as soon as the potential offeror is identified—and under the proposal the potential offeror must be made known, even if it wishes to remain anonymous in a friendly deal—the put-up or shut-up clock begins to tick and the potential offeror has 28 days to either make a bid, announce a firm intention to make a bid, or announce its intention not to make a bid and subject itself to the restrictions in Rule 2.8 of the Code.  Id. at 11.

   [82].         Committee Report, supra note 80, at 15.

   [83].         Hob Nobs are a popular “biscuit” or cookie in England manufactured by the U.K. multinational, McVitie’s.

   [84].         See In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 603–04 (Del. Ch. 2010) (“It is no small thing for a strategic acquirer to come public about its desire to buy another industry player.  Although management-side doctrinal junkies will cry that a board’s interest in buying another industry competitor does not mean that the company would be well served by a similar transaction in which it is the seller—i.e., that the company is ‘in play’—the reality is that the announcement of interest in a strategic transaction does signal that some other business strategy rather than the status quo would, in the board’s judgment, be optimal.”).

   [85].         See NACCO Indus. v. Applica Inc., 997 A.2d 1, 19 (Del. Ch. 2009) (“Bidders in particular secure rights under acquisition agreements to protect themselves against being used as a stalking horse and as consideration for making target-specific investments of time and resources in particular acquisitions.”).

   [86].         Others in the United Kingdom agree that the proposed changes are unlikely to have a meaningful effect in changing how takeover bids turn out in the United Kingdom.  See Richard Lambert, Takeover Code Tweaks Won’t Affect Corporate Behaviour, The Guardian (July 28, 2010),
/commentisfree/2010/jul/28/takeover-panel-corporate-behaviour (arguing that “in the end, tweaking the [T]akeover [C]ode will not make any substantial difference to corporate behaviour in the UK,” and that instead, the United Kingdom should focus on regulatory and tax changes that would encourage and make more permanent long-term investments by holders such as pension funds).

   [87].         A majority of American states, but not Delaware, have such statutes.  See William J. Carney & George B. Shepherd, The Mystery of Delaware Law’s Continuing Success, 2009 U. Ill. L. Rev. 1, 35–36 (2009) (noting that thirty states in the United States have adopted “other constituency statutes” that “effectively give directors carte blanche discretion by allowing them to consider other constituencies, which effectively makes them unaccountable to shareholders”).

   [88].         See supra note 53 and accompanying text; see also John C. Coates, IV, Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence, 79 Tex. L. Rev. 271, 312 (2000) (stating that the “principal finding” of an early study about the poison pill’s effectiveness has held up over time: “firms that have adopted pills before a bid or other acquisition receive higher premiums than firms that have not” (citing Georgeson & Co. Inc., Poison Pill Impact Study (Mar. 31, 1988))); Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L. Rev. 1037, 1054 (2002) (“The pill and the proxy contest have proved to yield the perfect balance. . . . A board cannot say ‘never,’ but it can say ‘no’ in order to obtain the best deal for its shareholders.”).

   [89].         See, e.g., Marcel Kahan & Edward B. Rock, supra note 53, at 897–98 (noting the high level of M&A activity despite the various protections, including poison pills, that corporate law affords target boards and arguing that shareholders will apply pressure to boards that do not effectively use takeover defenses to enhance shareholder value rather than entrench management); Coates, supra note 71 (showing, on the basis of empirical data from the years 1990–2008, that there is a higher incidence of bids for control of U.S. companies than there is for U.K. companies).

   [90].         Ken Sweet, NYSE, Deutsche Boerse Agree to Merge, CnnMoney (Feb. 15, 2011),

   [91].         The Canadian Press, Potash Corp. Making Good on Pledge Made to Saskatchewan in Bitter Takeover Battle, (Feb. 14, 2011), (noting that Saskatchewan is the world’s leading producer of potash and accounts for approximately 25–30% of world production).

   [92].         See Canpotex Company Profile, Canpotex, (last visited Feb. 27, 2012) (“[Canpotex’s] sole marketing focus is overseas, and [Canpotex’s] main objectives are to maximize exports and efficiently serve [Canpotex’s] customers to the benefit of [Canpotex’s member producers] and the Province of Saskatchewan.”).

   [93].         E.g., Rob Gillies, Canada Wary of Potential Foreign Takeover of Potash, (Sept. 21, 2010),
/LawArticleFriendlyIntl.jsp?id=1202472308213 (noting that the premier of Saskatchewan, Brad Wall, expressed doubt as to whether the Saskatchewan people would be better off after a BHP acquisition); James Wood, Say No BHP Takeover of PotashCorp, Saskatchewan Legislature Urges Federal Government, Leader-Post (Oct. 29, 2010),
+PotashCorp+Saskatchewan+legislature+urges+federal+government/3742049/story.html (reporting that the Saskatchewan provincial legislature unanimously passed a resolution calling on Ottawa to not approve the BHP bid for Potash Corporation).

   [94].         Investment Canada Act, R.S.C. 1985, c. 28 § 16; Thresholds, Industry Canada, (last modified Dec. 21, 2011).

   [95].         Ian Austen, Canada Blocks BHP’s Purchase of Potash, N.Y. Times, Nov. 4, 2010, at B14; Alexander Deslongchamps & Greg Quinn, BHP May Fail to Save Potash Bid in Politicized Rebuff, Bloomberg (Nov. 5, 2010),‑11‑05/bhp‑may‑fail‑to‑save‑potash‑bid‑after-canada-s-highly-politicized-rebuff.html.

   [96].         See, e.g., Founding Principles, Conservative Party Of Can., (last visited Feb. 27, 2012) (“The Conservative Party will be guided in its constitutional framework and its policy basis by the following principles: . . . A belief that the greatest potential for achieving social and economic objectives is under a global trading regime that is free and fair.”).

   [97].         See, e.g., I. Serdar Dinc & Isil Erel, Economic Nationalism in Mergers & Acquisitions (June 28, 2010) (working paper), available at
/dinc/www/research/assets/Dinc%20and%20Erel%20‑‑%20Nationalism%20in%20Corporate%20Mergers.pdf (observing that “[g]overnment interventions are very effective in preventing foreign bidders from completing the merger and in helping domestic bidders succeed”); id. at 12 (describing a situation that took place in 2006 in Spain in which the Spanish government, in response to a German hostile bid for a Spanish energy company, “laid down onerous requirements for the [German company’s] bid through its influence over the supposedly-independent Spanish energy regulator”); see also Bernard S. Black, The First International Merger Wave (and the Fifth and Last U.S. Wave), 54 U. Miami L. Rev. 799, 808 (2000) (observing that although it is an “exception[] to a more liberal general rule,” national governments still block mergers when doing so would “stop a major company from falling into foreign hands”); Will Germany Control Europe’s Power Switch?, TheTrumpet (Mar. 1, 2006), (reporting that the Spanish government denounced the German hostile takeover bid of the Spanish energy company Endesa as a “national security threat”).

   [98].         Foreign Acquisitions and Takeovers Act 1975 (Cth) (Austl.), available at

   [99].         Dinny McMahon et al., Chinese Investors Mull Bid for Potash, Wall St. J., Aug. 24, 2010, at B1.

   [100].        I use the OECD label as a rough proxy for the United States, Canada, the EU nations, Australia, New Zealand, Japan, and South Korea.  The United States, Canada, Australia, New Zealand, Japan, and South Korea are all currently members of OECD as are twenty-one of the twenty-seven member states of the European Union (Bulgaria, Cyprus, Latvia, Lithuania, Malta, and Romania are members of the European Union but not OECD).  List of OECD Member Countries, OECD,,2340,en_2649
_201185_1889402_1_1_1_1,00.html (last visited Feb. 27, 2012).

   [101].        For a succinct and provocative discussion of the perils of globalizing markets without globalizing effective and just regulatory institutions, see Dani Rodrik, Hooray for Nation States, The New Republic, Feb. 17, 2011, at 12, 13.

   [102].        Donald McRae, Measuring the Effectiveness of the WTO Dispute Settlement System, (Working Paper, 2008), available at
=1140452 (citing William J. Davey, The WTO Dispute Settlement System: The First Ten Years, 8 J. Int’l Econ. L. 17, 50 (2005)) (hailing the WTO’s success in channeling disputes into its highly regarded dispute resolution mechanism and noting that WTO-authorized sanctions are not compensatory, but instead retaliatory measures that can incentivize countries to comply with WTO Dispute Settlement Body reports); see, e.g., Press Release, European Commission, European Union Welcomes Suspensions of US Sanctions Following Resolution of WTO Banana Dispute (July 2, 2001) (IP/01/930) (announcing that in consideration for the European Union’s agreement to loosen import restrictions on bananas coming from the United States, the United States had agreed to suspend the increased duties it was assessing on certain EU exports that had been authorized by the WTO as a sanction against the EU).

   [103].        Kenneth W. Abbott & Duncan Snidal, Strengthening International Regulation Through Transnational New Governance: Overcoming the Orchestration Deficit, 42 Vand. J. Transnat’l L. 501, 501 (2009) (noting the failure of traditional international law mechanisms such as treaties and intergovernmental organizations to adequately regulate international business and observing that “[n]ongovernmental organizations, business firms, and other actors, singly and in novel combinations, are creating innovative institutions to apply transnational norms to business”); Patrick Macklem, Labour Law Beyond Borders, J. Int’l Econ. L. 605, 605 (2002) (noting that despite the fact that international organizations, such as the International Labour Organization, have articulated core principles which firms ought to comply with as a matter of public international law, “these developments [still] primarily relate to international efforts to hold states accountable to public international labour standards when devising domestic labour market policy” and further that privately adopted “[c]orporate codes of conduct potentially enable transnational implementation of international labour standards in ways that do not rely on traditional modes of international legal authority”); Chantal Thomas, Should the World Trade Organization Incorporate Labor and Environmental Standards?, 61 Wash. & Lee L. Rev. 347, 350–57 (characterizing both international labor law and international environmental law as severely lacking in their enforcement capabilities); Charles Sabel et al., Ratcheting Labor Standards: Regulation for Continuous Improvement in the Global Workplace (John F. Kennedy Sch. of Gov’t Harvard Univ., Faculty Res. Working Paper No. RWP00-010, 2000) (noting that in the absence of an international organization charged with monitoring working conditions many have proposed the creation of such international organization responsible for promulgating universal minimum working standards, but that “the machinery to compel global producers to adopt those standards does not exist and will be quite difficult to build”).

   [104].        See Carl Felsenfeld & Genci Bilali, The Role of the Bank for International Settlements in Shaping the World Financial System, 25 U. Pa. J. Int’l Econ. L. 945, 1017 (2004) (observing that although all major banks engage in international, cross border activity, “each bank has a strong domestic orientation” and is subject to each country’s domestic regulation, which “do not match each other”); R. Michael Gadbaw, Systemic Regulation of Global Trade and Finance: A Tale of Two Systems, 13 J. Int’l Econ. L. 551, 563 (2010) (“The international financial regulatory system became a fragmented, complex, multi-tiered, multi-dimensional, resource-oriented system that accommodates the different domains and regulatory prerogatives of financial officials, central bankers, and bank regulators as well as the private financial community by creating a variety of different organizations . . . .”).

   [105].        E.g., Alvin K. Klevorick, Reflections on the Race to the Bottom, in 1 Fair Trade And Harmonization 459, 459–60 (Jagdish N. Bhagwati & Robert E. Hudec eds., 1996) (“[G]overnments will choose policies—for example, environmental standards, occupational health and safety standards, competition policy—that entail suboptimal requirements, which afford their citizens too little protection—whether from environmental hazards, unsafe or unhealthy working conditions, or cartel behavior.  The idea is that to make its country a hospitable location in which to do business, a government would establish lax standards to be imposed upon those it wishes to draw.”); Chris Brummer, Post-American Securities Regulation, 98 Cal. L. Rev. 327, 333 (2010) (observing that securities regulators and lawmakers compete globally by fashioning regulatory regimes to attract capital).

   [106].        E.g., Chrystia Freeland, The Rise of the New Global Elite, The Atlantic, Jan.–Feb. 2011, at 44, 44 (“Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth.  Its members are hardworking, highly educated, jet-setting meritocrats who feel they are deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly.  Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home.  Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.” (emphasis added)); Randall S. Thomas & Harwell Wells, Executive Compensation in the Courts: Board Capture, Optimal Contracting, and Officers’ Fiduciary Duties, 95 Minn. L. Rev. 846, 862 (2011) (reporting that in 2007 the average U.S. CEO of a major company earned 275 times more than a typical worker (citing Lawrence Mishel et al., The State of Working America 2008/2009, at 220 (2009))).  Current CEO pay and the gap between that pay and the salary of ordinary workers is much larger today than it has been in the past.  See, e.g., Shanon Lynn, CEO Salaries: What is the Average Salary of a CEO?, Payscale (July 31, 2008),
-salaries—1.html (reporting that in 1970, the average CEO salary was around $700,000 and that that number represented a salary 25 times the salary of an average production worker).

   [107].        Marcel Kahan & Edward Rock, Embattled CEOs, 88 Tex. L. Rev. 987, 1007, 1031 (2010) (observing that the rise in institutional shareholder activism has led to decreased CEO power and a correspondent tendency, on the part of boards of directors, to be increasingly willing to remove CEOs even in mere anticipation of poor future performance); Murali Jagannathan & A.C. Pritchard, Does Delaware Entrench Management? 23 (Univ. of Mich. Law and Econ., Olin Working Paper No. 08-024, 2011), available at
/papers.cfm?abstract_id=1313274 (arguing that Delaware CEOs experience greater turnover in part because large institutional investors exert pressure on board members to be active monitors of management performance).

   [108].        Cf. Lawrence E. Mitchell, Financialism: A Lecture Delivered at Creighton University School of Law, 43 Creighton L. Rev. 323, 332 (2010) (“Traditional small lending institutions thus became further removed from their clients, and banks sought greater profits in the process of securitization, which brought higher profits than mere lending and allowed banks to evade capital restrictions.  Securitization . . . [also] allowed loan officers to pay less attention to the safety of their loans, since they were promptly to be sold off and removed from banks’ balance sheets (although not entirely from the risk assumed by the banks).”).

   [109].        Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. Times Mag., Sept. 13, 1970 (quoting Milton Friedman, Capitalism and Freedom 134 (University of Chicago Press 2002) (1962)).  Others in the academy have harbored similar misgivings toward the notion that corporations, nonhumans, can have a “social responsibility.”  See, e.g., Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, in The Economic Nature of the Firm 209, 215–16 (Louis Putterman ed., 1996) (“Viewing the firm as the nexus of a set of contracting relationships among individuals also serves to make it clear that the personalization of the firm implied by asking questions such as ‘what should be the objective function of the firm’, or ‘does the firm have a social responsibility’ is seriously misleading.  The firm is not an individual.  It is a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may ‘represent’ other organizations) are brought into equilibrium within a framework of contractual relations.  In this sense the ‘behavior’ of the firm is like the behavior of a market; i.e., the outcome of a complex equilibrium process.  We seldom fall into the trap of characterizing the wheat or stock market as an individual, but we often make this error by thinking about organizations as if they were persons with motivations and intentions.”).

   [110].        See The Federalist No. 51 (James Madison) (“If men were angels, no government would be necessary.  If angels were to govern men, neither external nor internal controls on government would be necessary.  In framing a government which is to be administered by men over men, the great difficulty lies in this: You must first enable the government to control the governed; and in the next place, oblige it to control itself.  A dependence on the people is no doubt the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.”).

   [111].        Leo E. Strine, Jr., Human Freedom and Two Friedmen: Musings on the Implications of Globalization for the Effective Regulation of Corporate Behaviour, 58 U. Toronto L.J. 241, 272–73 (2008) (arguing that the globalization of capital in recent decades counsels strongly in favor of establishing a globalized regulatory system capable of monitoring responsible corporate behavior that “advances social welfare”).

   [112].        Dani Rodrik, Hooray for Nation States, The New Republic, Feb. 17, 2011, at 12.



By: Judd F. Sneirson*


What is a sustainable corporation and why aren’t there more of them?  This Article argues that corporate law’s conventional focus on shareholder profits stifles sustainability efforts inasmuch as sustainable corporations take a broader view of the firm and its goals.  The Article also weighs alternatives for increasing the number of sustainable corporations and encouraging corporations of all stripes to act more sustainably.  These alternatives include imposing sustainability on corporations, requiring or encouraging sustainability disclosures, and raising awareness that sustainable business practices fully comport with corporate laws and even typically enhance long-term firm value for all of a corporation’s stakeholders.


Sustainable businesses, both corporate and otherwise, seem to be everywhere, trumpeting their bona fides to garner the interest and dollars of consumers and investors.  Yet a closer examination of these businesses reveals that their dedication to sustainability is often superficial, driven by and limited to their pursuit of shareholder profits.  That is, most mainstream corporations today engage in sustainable business practices only when they appear to create immediate financial benefits for the firm.  This Article blames this limitation on corporate law’s conventional focus on shareholder profits and suggests that corporations need not so restrict themselves.  In making this argument, this Article addresses three related questions: (1) what is a sustainable corporation, (2) why aren’t there more of them, and (3) what can be done about it?

I.  What Is a Sustainable Corporation?

Sustainability, according to its first and best-known definition, denotes the ability to meet current needs without impairing the ability to continue to do so in the future.[1]  For a society to be sustainable, it

needs to meet three conditions: its rates of use of renewable resources should not exceed their rates of regeneration; its rates of use of non-renewable resources should not exceed the rate at which sustainable renewable substitutes are developed; and its rates of pollution should not exceed the assimilative capacity of the environment.[2]

The concept of sustainability, originally balancing development with conservation,[3] has since evolved into a broader principle that governments, organizations, and individuals should conduct themselves without impinging on the environment and society, now or in the future.[4]

Applied to the business context, sustainability involves attaining financial goals while simultaneously improving, or at least not worsening, the environment and society in the short or long term.[5]  This three-dimensional view of a company’s performance has come to be known as its “triple bottom line”: “the traditional bottom line of financial performance (most often expressed in terms of profits, return on investment . . . , or shareholder value)” plus two additional bottom lines reflecting the business’s environmental and social performance.[6]  One commentator prefers the term “triple top line,” taking the more positive view that sustainable businesses should seek to create “financial benefits for the company, natural world benefits, and social benefits for employees and members of the local community.”[7]  From whichever perspective, sustainability measures these impacts or benefits over the long term.  As a result, a sustainable business takes a view of the firm that is both broader and longer than the typical, conventional focus on short-term financial gains.[8]

A sustainable business should therefore pursue financial goals while at the same time treading as lightly as possible on the earth and its natural resources, supporting the business’s employees and local communities, and developing products, services, and technologies that contribute to larger societal efforts to live more sustainably.[9]  This might entail being more than minimally compliant with environmental regulations, more than minimally generous with employees and communities, or paying more for goods and services that are sustainably harvested or produced.

Such efforts might sacrifice profits, at least in the short run in that money that might otherwise be distributed to shareholders as dividends is reinvested in the company, environmental efforts, or employees and communities.  But such expenditures often benefit the firm, financially and otherwise, over the long run; indeed, several studies have shown that—particularly in consumer-oriented industries, but in the business-to-business context as well—sustainable business practices tend to pay for themselves and frequently turn a profit.[10]

One means of putting these sustainable business concepts into practice is to seek out areas where the firm’s financial, environmental, and social goals overlap.[11]  For example, reductions in energy consumption and waste save on production, fuel, and disposal costs while also improving environmental impact and, in the case of fuel costs, reducing dependence on foreign oil.[12]  Firms can also realize “eco-efficiencies” through better design: by designing (or reconfiguring) production systems and products with sustainability in mind, a firm can make better use of manufacturing inputs, use fewer chemicals, create less pollution, make workplaces safer, and benefit financially.[13]

Firms may also use the triple bottom line as an accounting tool.  By measuring environmental, social, as well as financial activity over a given period, firms can track and report their performance in each of the triple bottom line areas.  In the environmental component, for example, a firm might include its “compliance against [environmental] regulations and other standards; the performance of internal management systems; trends in energy usage, waste production, and recycling; and the use of eco-efficient technologies.”[14]  And on the social front, a firm might address “community relations, product safety, training and education initiatives, sponsorship, charitable donations of money and time, and employment of disadvantaged groups.”[15]  To the extent that “managers ‘manage what they measure,’” such recordkeeping might impel managers to run their firms in a way that maximizes financial, social, and environmental benefits while minimizing related costs.[16]

Firms may incorporate these sustainability principles in their operations to varying degrees.  At one end of the spectrum, a firm may have no sustainability ambitions whatsoever and may in fact be out of compliance with applicable labor and environmental laws and regulations.[17]  This first type of firm focuses on profits to the exclusion of all other considerations and may even deliberately violate laws in order to maximize profits.[18]  A second, slightly more sustainable firm, complies with applicable laws and perhaps engages in generic corporate philanthropy but does little beyond that.[19]  Such firms see “no business case” for going beyond compliance or serving stakeholders’ interests; by bare compliance (and paying taxes), these firms see themselves as fulfilling their societal obligations.[20]

A third type of firm goes beyond bare compliance with applicable social and environmental laws but does so only where it would be profitable.[21]  These profit-driven firms may view sustainability and social responsibility primarily as a public relations matter, for particularly in consumer-focused industries social responsibility attracts customers and social irresponsibility repels them.[22]  Or these companies may simply want to save resources, reduce waste, achieve production efficiencies, and anticipate changing conditions, regulations, and consumer preferences.[23]  While these firms may incorporate environmental, ethical, and social considerations at all levels of their operations and decision making, they only act upon these decisions when it would benefit their financial bottom lines.[24]

A fourth type of firm routinely balances economic, social and environmental considerations and does so not in order to comply with applicable laws or to make a profit.[25]  Rather, these firms are motivated to “do good” for their various constituencies and for the planet, while still producing returns for their shareholders.[26]  These firms also tend to be more pro-active, partnering with government, suppliers, customers, and others in their industry to together innovate sustainable solutions to environmental and other problems.[27]

At the next level, a fifth type of firm integrates sustainability principles into its strategy and business processes, starting with product or service development, such that the way of doing business is “built in, not bolted on.”[28]  For example, companies at this stage may rethink their design and production processes to reduce waste and utilize improved, sustainable, and even reusable materials, and in some cases eliminate the use of harmful materials altogether.[29]

And at the sixth and highest level, sustainability “is fully integrated and embedded in every aspect of the organization, which is committed to contributing to the quality and continuation of life of every being and entity, now and into the future.”[30]  Here, companies also redesign or “reengineer” their business models, finances, and markets to identify and root out any underlying causes inconsistent with sustainability and social responsibility.

Aside from a few outliers, however, most businesses limit themselves to the first three of these levels; that is, most firms engage in sustainable business practices, if at all, only to the extent it returns profits.[31]  While this might encompass a great deal of sustainable business behavior,[32] and have an enormous impact,[33] this limitation is unfortunate and unnecessary.  As the next part of this Article argues, corporate law’s conventional focus on shareholder profits fuels this limitation, stifling corporate efforts toward greater sustainability and perpetuating an overly narrow view of the firm and its purposes.

II.  Why Aren’t There More Sustainable Businesses?

Why aren’t there more sustainable businesses and why are mainstream businesses seemingly unable to move beyond a profit focus and deepen their commitments to sustainability?  The answer to both of these questions lies in the conventional view in law and business that corporations are to be managed for the sole purpose of maximizing shareholder profits.

This attitude—known as “shareholder primacy”—prioritizes shareholder interests above all other considerations and renders deep commitments to sustainability difficult.[34]  According to this view, corporate managers may not sacrifice potential profits to benefit society, the environment, or future generations; rather, firms should aim to maximize shareholder returns and eschew sustainable alternatives that are not profit-maximizing.  For example, a firm should incur workplace safety costs only to the extent necessary to comply with applicable laws and regulations, or to the extent such expenditures are otherwise financially justifiable (in that they improve employee morale, attendance, or productivity, or that they result in lower insurance premiums or other corporate outlays).[35]  Some profit-maximizing firms may even deliberately violate applicable laws and regulations on the view that any fines or penalties incurred are mere costs of doing business and preferable if outweighed by expected costs of compliance.[36]

Perhaps the most famous expression of the shareholder primacy view appears in Dodge v. Ford Motor Company.[37]  There, in rejecting the decision of company founder and majority shareholder Henry Ford to suspend the company’s practice of paying special dividends, the Supreme Court of Michigan wrote:

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 its stockholders in order to devote them to other purposes.[38]

Noted economist Milton Friedman echoed this sentiment some fifty years later, writing that a corporate executive’s responsibility is “to make as much money as possible” for the firm’s shareholders, and that expenditures not tied to shareholder wealth amount to stealing what rightfully belongs to shareholders.[39]

These and similar statements create the impression that shareholder primacy is a corporate-law mandate, a social norm that should be abided, and the proper result of market forces.  The following sections examine these propositions, and their implications for sustainability, in more detail.

A.            Law

No corporate law statute or court decision explicitly requires firms to adhere to the shareholder primacy view.[40]  While the Dodge case speaks of shareholder profit as the central purpose of the corporation,[41]and three subsequent decisions contain similar expressions,[42] all of these passages appear in dicta, and none of these cases hold or stand for the legal proposition that a corporation must maximize shareholder profits.  In fact, later decisions cite these cases for other points of law, if at all.[43]

A few corporate law decisions do seemingly endorse and encourage shareholder primacy, however subtly.  For example, under Delaware law, corporate decision makers may have regard for nonshareholder constituencies like workers and the environment, but any decisions that benefit these stakeholders must benefit the firm’s shareholders as well.[44]  Thus, in choosing between two competing merger partners, a board may opt for the less generous proposal only if it represents a better strategic combination, preserves valuable company culture, or similarly enhances firm value in the long term.[45]  Similarly, in making normal operational decisions, corporate fiduciaries may only benefit nonshareholder constituencies if some benefit will ultimately redound to shareholders.

Corporate law also projects a shareholder-centric bent in describing the nature of corporate fiduciaries’ legal obligations.  Although corporate fiduciary duties are generally understood to run to the enterprise,[46] many judicial opinions state “that corporate directors have a fiduciary duty to act in the best interests of the corporation’s shareholders,”[47] or alternatively, that corporate fiduciaries must act in the best interests of the corporation and its shareholders.[48]  While, at least in the long run, there may not even be a discernable difference between these three statements,[49] the recurring message is that shareholders and their profits trump all other considerations.[50]

Perhaps the American Law Institute’s (“ALI”) Principles of Corporate Governance best summarizes corporate law on this point.[51]  According to the ALI, “a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.”[52]  This “enhancing” (as opposed to maximizing)[53] is to be over the long term,[54] and firms may also pursue limited objectives beyond profit and shareholder gain:

Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business . . . may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of businesses; and may devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes.[55]

Complicating this conclusion somewhat is the business judgment rule—even if corporate law requires some degree of shareholder focus, the business judgment rule affords corporate decision makers so much latitude as to render any such requirement unenforceable and meaningless.[56]  Under the business judgment rule, courts defer to fiduciaries’ business judgments so long as no conflict of interest is present and the decision is reached conscientiously, on the basis of reasonably full information, and with a good-faith belief that the decision is in the best interests of the firm.[57]  If these predicates are met, company decisions, including sustainability-motivated decisions that depart from a profit-maximizing objective, will withstand shareholder challenges.[58]

Further, most state corporation codes contain provisions reaffirming this stance.  These “other constituency” statutes further protect business decisions made in the interests of the entire firm, typically stating that directors and officers may consider all of the firm’s constituencies—not just its shareholders—when determining what constitutes the company’s best interests.[59]  About two-thirds of these provisions are generally applicable, providing an extra measure of comfort where corporate managers make decisions that serve the firm through its nonshareholder constituencies; the remaining third are limited to the takeover context and therefore only offer this statutory protection to a narrower class of decisions.[60]

In sum, while corporate law can be read to encourage adherence to the shareholder primacy view, it simultaneously refuses to enforce any such requirement.[61]  Perhaps by this contradiction courts intend to endorse but not enforce a profit-focused norm, in keeping with corporate law’s traditional deference to informed business judgments.[62]  For whatever reason, the law fosters this ambivalence, lending support both to the view that corporations exist to serve their shareholders through profit maximization, and to the contrary view that firms may safely engage in sustainable business practices that might detract from shareholder profits.  The resulting uncertainty may be enough to dissuade interested firms from aspiring to deeper levels of sustainability.

B.            Norms

Even if no law requires shareholder primacy, a prevalent social norm can have much the same effect.[63]  That is, whether or not corporate law requires managers to maximize shareholder wealth, social norms may induce many of them to do so, because that is what they learned in business school, because that is how they view their jobs, because that is what they perceive is expected of them, and because they believe—rightly or wrongly—that the law requires them to do so.[64]  Some have concluded that such a norm grips mainstream American business culture, has “been fully internalized by American managers,”[65] and constitutes “the appropriate goal in American business circles.”[66]

Others argue that this description vastly overstates the prevalence of the shareholder primacy norm, observing that corporate managers routinely make decisions that do not maximize shareholder value and citing studies showing “ambivalence” among directors toward shareholder wealth maximization.[67]  What is more, norms governing business decision making may be evolving to reflect a business purpose broader than shareholder profit as environmental and social issues continue to enter the American mainstream.[68]  Business schools have reflected “this trend, integrating [stakeholder] concepts in core and extracurricular courses, and in the increasing desire by MBA students to fuse social endeavors with profit-making ones.”[69]  While these changes may not indicate a wholesale abandonment of the shareholder primacy norm, they perhaps portend a “paradigm shift” toward a new norm of balancing the shareholder-profit objective with longer-term, sustainable, and socially responsible business practices.[70]

C.            Markets

Markets—the stock market, the market for capital, the market for managerial talent, and the market for corporate control—also influence corporate decision making by focusing corporate decision makers, in many instances, on shareholder returns.[71]  Because stock price is a commonly used metric for assessing executive performance, executives pay considerable attention to it, particularly when their compensation is tied to it.[72]  Robust stock prices also facilitate raising capital and fend off unwelcome takeover attempts which might culminate in corporate executives losing their positions.[73]  To this extent, corporate decision makers have strong incentives to maximize shareholder returns and stock prices and avoid sustainable behaviors that might detract from them.

However, these pressures should not discourage all sustainable business efforts.  As noted above, a great many sustainable business practices contribute to, rather than reduce, corporate profits.[74]  These market forces should therefore encourage corporate decision makers to pursue such initiatives, not discourage them from being more sustainable.  Furthermore, according to a leading financial economist, running a business in this way—with a broader understanding of the firm, and focused on more than just shareholders and profits—best maximizes the value of the firm over the long run.[75]

III.  What Can Be Done About It?

While corporate law, norms, and markets each have the potential to impede sustainability efforts, such does not have to be the case: corporate law permits sustainability considerations in decision making, markets affirmatively encourage a great number of sustainable business practices, and sustainable business concepts are gradually gaining acceptance as a new social norm.  What can be done to further sustainability in light of this state of affairs?  Some options include requiring firms to be more sustainable through legal requirements, encouraging sustainable behavior through legal and nonlegal means, or simply continuing the current practice of permitting firms to engage in sustainable business practices but doing nothing to promote such activity.

Sustainability is not for every firm, and broadly imposing it would disrupt central tenets of modern corporate law.  For one, requiring firms to be sustainable would be inconsistent with corporate law’s enabling approach that permits firms to engage in a broad range of business activity with few mandatory rules.[76]  A law requiring sustainability would also be difficult to enforce—under the business judgment rule, informed and disinterested decisions thought to be in the best interest of the firm enjoy deference, whether they are sustainable, unsustainable, or somewhere in between.[77]  Discarding the business judgment rule and limiting board authority would constitute a radical change to corporate law, and it would be most unrealistic to expect legislatures or courts in Delaware or elsewhere to take such extreme measures.[78]

A slightly more palatable approach would offer firms the choice of complying with sustainability goals, such as triple bottom line reporting, or following sustainable decision-making procedures, or explaining publicly to their shareholders why they have not done so.[79]  This middle ground between mandatory reforms and voluntary action can work to establish the suggested behaviors as new norms supporting sustainability and exert subtle pressure on firms to comply instead of explain.

Other, strictly voluntary ways of encouraging sustainable business would require no changes to current corporate law.  One of these involves sustainability reporting.  Although the securities laws do not currently require it,[80] many firms voluntarily disclose their environmental and social activities,[81] and investor pressure seems to induce even more firms to follow suit.[82]  As noted above, disclosing environmental and social performance alongside financial performance creates incentives to produce results one would be proud or at least not embarrassed to report.[83]  Two recognized drawbacks with voluntary triple bottom line reporting have been the variability in formats and related difficulty in comparing different companies’ performances, but the Global Reporting Initiative Sustainability Reporting Guidelines, now in their third version, provide some standardization and may alleviate these problems.[84]

Another voluntary means of encouraging sustainable business draws on private certifications.  Like a Good Housekeeping seal of approval, private certifications can be used to harness consumer and investor preferences for sustainable businesses and products.[85]  B Labs offers one such certification, blessing corporations that are sufficiently benevolent and responsible with its “B Corporation” mark,[86] and similar private certifications exist for fair-trade coffee and chocolate and for sustainably-harvested wood.[87]  As these and similar symbols develop further prominence, they may encourage greater sustainability through the force of the markets for goods, services, and capital.

A final way of encouraging greater sustainability is simply to raise awareness in law and business circles that corporate law does not require shareholder primacy and profit maximization, that firms may wholeheartedly engage in sustainable business practices without breaching legal duties or contravening social norms, and that such efforts even tend to pay off financially.[88]  Such efforts, including this symposium, can perhaps have a greater impact on business, the environment, and society than any set of corporate law reforms.


For too long, the shareholder primacy view and its incessant focus on profits have stifled corporate efforts to become more sustainable.  As a result, shareholders have profited at the expense of the environment, society, and the future.  This need not be the case: corporate laws, norms, and markets should not stand in the way of sustainable business efforts and, to a large degree, should affirmatively encourage corporate decision makers to pursue sustainable goals for the benefit of the entire enterprise.  Only then, when corporations take a broader view of the firm, its purposes, and fiduciary obligations to it, will we create a future where business, the environment, and society may all continue to thrive.



* Visiting Associate Professor, Hofstra University School of Law.  B.A. Williams College; J.D. University of Pennsylvania.  I thank Alan Palmiter and Kent Greenfield for inviting me to take part in this wonderful symposium, my fellow panelists and conference participants for their helpful and insightful comments, the dedicated editors of the Wake Forest Law Review for their hard work on this symposium and Article, and Joshua Ebersole for his adept research assistance.

[1]. Rep. of  U.N. World Comm’n on Env’t & Dev., 14th Sess., Our Common Future 43, U.N. Doc. A/43/427 (1987) (defining sustainability, in the context of sustainable development, as “[meeting] the needs of the present without compromising the ability of future generations to meet their own needs”).  The document is commonly known as the “Brundtland Report” after Norwegian Prime Minister Gro Harlem Brundtland, who led the commission.  See Brundtland Report: Our Common Future, Sustainable Cities,
-our-common-future (last visited Aug. 28, 2011).

[2]. John Elkington, Cannibals with Forks: The Triple Bottom Line of 21st Century Business 55–56 (1998) (paraphrasing economist Herman Daly of the World Bank).  Buckminster Fuller expressed a similar sentiment about the earth’s finite resources and renewable energy in R. Buckminster Fuller, Operating Manual for Spaceship Earth 110–12 (1969).

[3]. Robert W. Kates et al., What Is Sustainable Development? Goals, Indicators, Values, and Practice, 47 Env’t: Sci. & Pol’y for Sustainable Dev. 8, 10 (2005).

[4]. See Elkington, supra note 2, at 70–71; see also John R. Ehrenfeld, Sustainability by Design: A Subversive Strategy for Transforming Our Consumer Culture 6 (2008) (defining sustainability as “the possibility that human and other life will flourish on the planet forever”).

[5]. The terms “green business” and “sustainable business” have much in common.  A green business looks to improve the natural environment while at the same time benefit financially.  See, e.g., Dennis D. Hirsch,Green Business and the Importance of Reflexive Law: What Michael Porter Didn’t Say, 62 Admin. L. Rev. 1063, 1065 (2010) (defining green business as taking “voluntary actions . . . aimed at achieving better environmental performance and, simultaneously, making the company more competitive”).  Green business lacks sustainability’s “social” component, although people of course benefit from an improved environment.

[6]. Andrew W. Savitz & Karl Weber, The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social, and Environmental Success—and How You Can Too xii (2006).

[7]. Matthew Tueth, Fundamentals of Sustainable Business 45–46 (2010).  Some depict sustainability’s financial, environmental, and social goals with a metaphorical three-legged stool, where an imbalance among the three axes would cause the seat to topple.  See Judd F. Sneirson, Green Is Good: Sustainability, Profitability, and a New Paradigm for Corporate Governance, 94 Iowa L. Rev. 987, 991 n.12 (2009).

[8]. See David Millon, Two Models of Corporate Social Responsibility, 46 Wake Forest L. Rev. 523, 530–33 (2011) (emphasizing the long view sustainable businesses take).

[9]. See id. at 530 (noting that profit remains an important sustainability goal, in that without it the business would cease to exist).

[10]. See generally Marc Orlitzky et al., Corporate Social and Financial Performance: A Meta Analysis, 24 Org. Stud. 403, 427 (2003) (“[P]ortraying managers’ choices with respect to [sustainability and profitability] as an either/or trade-off is not justified in light of 30 years of empirical data.”); Joshua D. Margolis et al., Does It Pay to be Good? A Meta-Analysis and Redirection of Research on the Relationship Between Corporate Social and Financial Performance 21 (July 2007) (unpublished manuscript), available at,%20Jim%20Does%20It%20Pay%20to%20Be%20Good.pdf.  On consumer-oriented industries, see Janet E. Kerr, Sustainability Meets Profitability: The Convenient Truth of How the Business Judgment Rule Protects a Board’s Decision to Engage in Social Entrepreneurship, 29 Cardozo L. Rev. 623, 664–65 (2007) (citing studies measuring “a strong positive relationship between CSR [“Corporate Social Responsibility”] behaviors and consumers’ reactions to a company’s products and services”); Raymond J. Fisman et al., Corporate Social Responsibility: Doing Well by Doing Good? (Sept. 2005) (unpublished manuscript), available at
/heal.pdf (noting that corporate social responsibility is more positively related to profitability in advertising-intensive, consumer-oriented industries); see also Elkington, supra note 2, at 110, 119 (relating anecdotes on business-to-business transactions).

[11]. See Savitz, supra note 6, at 22–27 (terming this area of overlap “the sustainability sweet spot”).  Dennis Hirsch’s work on green business identifies several areas in which environmental and financial goals overlap:

(1) directly reducing their own regulated—or unregulated—environmental impacts in ways that will reduce regulatory risk, improve company brand, and allow firms to get out in front of anticipated regulations; (2) reducing their customers’ environmental impacts and decreasing their customers’ exposure to unhealthy substances; (3) increasing their reuse and recycling of materials used in the production process; (4) improving their energy efficiency or that of their customers; (5) improving their resource productivity or that of their customers; (6) implementing systems to indentify waste reduction, pollution prevention, energy efficiency, or resource productivity opportunities throughout the company or facility; (7) collecting and disseminating more information about the firm’s environmental impacts and performance than the law requires; (8) providing more opportunities for stakeholder input into corporate environmental decision making than the law requires; and (9) financing and investing in green products and business models, such as those described above.

Hirsch, supra note 5, at 1072.

[12]. Amory B. Lovins et al., A Road Map for Natural Capitalism, 77 Harv. Bus. Rev. 145, 146 (1999) (advocating the more productive use of manufacturing inputs); Allison Linn, Wal-Mart Aims to Cut Energy Use—and Costs, MSNBC, Apr. 19, 2007, (discussing the retailer’s fuel-efficiency efforts, which reduced emissions, fuel consumption, and transportation costs by between $35 and $50 million annually).

[13]. William McDonough and Michael Braungart offer an extended example of this involving their design of a better upholstery fabric:

The team decided on a mixture of safe, pesticide-free plant and animal fibers for the fabric: wool, which provides insulation in winter and summer, and ramie, which wicks moisture away. Together these fibers would make for a strong and comfortable fabric.  Then we began working on the most difficult aspect of the design: the finishes, dyes, and other process chemicals. Instead of filtering out mutagens, carcinogens, endocrine disrupters, persistent toxins, and bioaccumulative substances at the end of the process, we would filter them out at the beginning. . . .

[W]e eliminated from consideration almost eight thousand chemicals that are commonly used in the textile industry; we also thereby eliminated the need for additives and corrective processes. Not using a given dye, for example, removed the need for additional toxic chemicals and processes to ensure ultraviolet-light stabilization (that is, colorfastness) . . . .  What might seem like an expensive and laborious research process turned out to solve multiple problems and to contribute to a higher-quality product that was ultimately more economical.

The fabric went into production.  The factory director later told us that when regulators came on their rounds and tested the effluent (the water coming out of the factory), they thought their instruments were broken . . . .  Not only did our new design process bypass the traditional responses to environmental problems (reduce, reuse, recycle), it also eliminated the need for regulation, something that any businessperson will appreciate as extremely valuable.

The process had additional positive side effects.  Employees began to use, for recreation and additional workspace, rooms that were previously reserved for hazardous-chemical storage.  Regulatory paperwork was eliminated.  Workers stopped wearing the gloves and masks that had given them a thin veil of protection against workplace toxins.  The mill’s products became so successful that it faced a new problem: financial success, just the kind of problem businesses want to have.

William McDonough & Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things 107–09 (2002); see also Sneirson, supra note 7, at 994 (discussing Nike’s efforts at “considered design,” including the sportswear company’s switch from chemical adhesives to stitching in some of its footwear lines).

[14]. Elkington, supra note 2, at 82.

[15]. Id. at 87–88.

[16]. Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197, 1295 (1999) (arguing for social and environmental disclosures and alluding to Louis Lowenstein, Financial Transparency and Corporate Governance: You Manage What You Measure, 96 Colum. L. Rev. 1355 (1996)).

[17]. See Marcel van Marrewijk & Marco Werre, Multiple Levels of Corporate Sustainability, 44 J. of Bus. Ethics 107, 112 (2003) (deriving levels of sustainability from Clare Graves’s psychology research on value systems and levels of existence and terming this first sustainability level “pre corporate sustainability”).

[18]. On intentional noncompliance to maximize profits, see infra note 36 and accompanying text.

[19]. See Janet E. Kerr, The Creative Capitalism Spectrum: Evaluating Corporate Social Responsibility Through a Legal Lens, 81 Temp. L. Rev. 831, 857 (2008) (terming this category “mere or reactive compliance”); SustainAbility Ltd., Gearing Up: From Corporate Responsibility to Good Governance and Scalable Solutions 34–37 (2004) [hereinafter “Gearing Up”] (terming this category “compliance”); van Marrewijk & Werre, supra note 17, at 112 (terming this category “compliance-driven” corporate sustainability).

[20]. See Gearing Up, supra note 19, at 35.

[21]. See id. at 35 (labeling this type of firm a corporate social responsibility “volunteer”); van Marrewijk & Werre, supra note 17, at 112 (describing this level as “profit-driven” corporate sustainability).

[22]. See supra note 10; see also Jayne W. Barnard, Corporate Boards and the New Environmentalism, 31 Wm. & Mary Envtl. L. & Pol’y Rev. 291, 291 (2007) (noting a “growing consumer preference for products sold by companies that are good corporate citizens”).

[23]. See supra notes 11–13 and accompanying text; see also Barnard, supra note 22, at 291 (noting that “sophisticated corporate managers” are “[taking] into account the possibility of increased governmental regulation; the increasing risk of a costly response to changing environmental conditions”).

[24]. See van Marrewijk & Werre, supra note 17, at 112.

[25]. See Gearing Up, supra note 19, at 36 (labeling this the “partner” level); van Marrewijk & Werre,supra note 17, at 112 (describing this level as “caring” corporate sustainability); Kerr, supra note 19, at 857–58 (labeling these firms “pro-active” in corporate social responsibility).

[26]. See van Marrewijk & Werre, supra note 17, at 112.

[27]. See Gearing Up, supra note 19, at 36; van Marrewijk & Werre, supra note 17, at 110; see, e.g., Linn,supra note 12 (noting Wal-Mart’s efforts to reduce its suppliers’ needless packaging).

[28]. See Gearing Up, supra note 19, at 36 (labeling this level “integrate”); van Marrewijk & Werre, supranote 17, at 112 (describing this level as “synergistic” corporate sustainability); Cynthia A. McEwen & John D. Schmidt, Leadership and the Corporate Sustainability Challenge, Avastone Consulting,  1, 17 (2007), (“What you have to do is build responsibility into every aspect of the way you do business, so it’s built in, not bolted on.” (quoting a pharmaceutical manufacturer’s vice president of corporate responsibility)).

[29]. See supra note 13.

[30]. Marcel van Marrweijk, A Developmental Approach Towards Corporate Sustainability: The European Corporate Sustainability Framework for Managing Complexity and Corporate Transition 1, 5 (2005),available at; seeGearing Up, supra note 19, at 36 (calling this level “reengineer”); Kerr, supra note 19, at 858 (calling this “creative capitalism”); van Marrewijk & Werre, supra note 17, at 112 (terming this level “holistic” corporate sustainability).

[31]. See Gearing Up, supra note 19, at 37.

[32]. Joseph A. Grundfest, Corporate Social Responsibility: Why the Concept Is, and Will Always Be, Confusing and Controversial, Keynote Address at Hofstra University Zarb School of Business (Dec. 1, 2011) (estimating that eighty percent of socially responsible business behavior can be rationalized as profitable over the long term and that the remaining twenty percent involves much heavy lifting for little gain).

[33]. For example, whether it is motivated by profit or by a genuine care for the environment, Wal-Mart’s success in conserving fuel and reducing wasteful packaging has had a significant impact environmentally and on the retail industry.  See Linn, supra note 12 (“The company is so big, and the network of companies that supply its products so vast, that experts see the potential for Wal-Mart to have a tangible impact on problems such as greenhouse gas emissions.”).

[34]. See, e.g., D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 290–91 (1998).

[35]. See Miriam A. Cherry & Judd F. Sneirson, Beyond Profit: Rethinking Corporate Social Responsibility and Greenwashing After the BP Oil Disaster, 85 Tulane L. Rev. 983, 984 (2011) (arguing that BP’s environmental compliance and workplace safety suffered as a result of the company’s undue focus on shareholder profits); see also Sabrina Tavernise, Report Faults Mine Owner for Explosion That Killed 29, N.Y. Times, May 20, 2011, at A11 (quoting a government report that faulted Massey Energy’s workplace safety compliance in the company’s 2010 coal mine disaster).

[36]. In weighing costs of compliance and the potential fines and penalties, firms often discount the latter according to the likelihood of getting caught, prosecuted, and found liable.  See Kent Greenfield, The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities 73–74 (2006) (criticizing the view that “[t]he obligation to obey the law is subservient to the obligation to make money” and arguing that courts should treat decisions not to comply with applicable laws as ultra vires and hold decision makers personally liable to the corporation for any fees and penalties).  For arguments in favor of the “law as price” view of corporate compliance, see Robert Cooter, Prices and Sanctions, 84 Colum. L. Rev. 1523, 1524–25 (1984); Frank H. Easterbrook & Daniel R. Fischel, Antitrust Suits by Targets of Tender Offers, 80 Mich. L. Rev. 1155, 1168 n.36 (1982); David Engel, An Approach to Corporate Social Responsibility, 32 Stan. L. Rev. 1, 1 (1979).

[37]. Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).

[38]. Id. at 684 (stating also that “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholder and for the primary purpose of benefitting [sic] others”).

[39]. Milton Friedman, The Social Responsibility of Business is to Increase Its Profits, N.Y. Times Mag., Sept. 13, 1970, at 33.

[40]. See Sneirson, supra note 7, at 995–1007 (arguing that corporate law contains no requirement of shareholder profit maximization).

[41]. See supra note 38 and accompanying text.

[42]. See Granada Invs., Inc. v. DWG Corp., 823 F. Supp. 448, 459 (N.D. Ohio 1993) (“[T]he sole duty of a corporation’s officers is to maximize shareholder wealth.”); Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1986) (“It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.”); Long v. Norwood Hills Corp., 380 S.W.2d 451, 476 (Mo. Ct. App. 1964) (“[T]he ultimate object of every ordinary trading corporation is the pecuniary gain of its stockholders . . . .”).  The recent decision in eBay Domestic Holdings, Inc. v. Newmark, C.A. No. 3705-CC, 2010 WL 3516473 (Del. Ch. Sept. 9, 2010), suggests something similar in dicta.  There, in invalidating the controlling shareholders’ dead-hand poison pill, the Chancery Court wrote, “Having chosen a for-profit corporate form, the craigslist directors are bound . . . to promote the value of the corporation for the benefit of its stockholders.  The ‘Inc.’ after the company name has to mean at least that.”  See id. at *34.  This statement is closer to the Delaware requirement that corporate decisions ultimately benefit the firm’s shareholders than a requirement to maximize, as oppose to merely promote, shareholder welfare. See infra note 44,

[43]. See Sneirson, supra note 7, at 1003–04 (examining the citation history of these decisions).  Interestingly, a recent reexamination of Dodge v. Ford concluded that the case was more about close corporations and minority-shareholder oppression than dividends and shareholder wealth.  See Smith,supra note 34, at 318–19.

[44]. See Revlon, Inc. v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173, 182 (Del. 1985) (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”); see also eBay, 2010 WL 3516473, at *33 (“Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders.”).  This rule and caveat applies to normal governance issues under Delaware corporate law; where the company is undergoing a “change in control” or sale and inevitable breakup, shareholder-centric duties kick in and preclude the board from sacrificing shareholder interests to serve other stakeholders. See Revlon, 506 A.2d at 182.

[45]. See, e.g., Paramount Comms., Inc. v. Time, Inc., 571 A.2d 1140, 1144 n.4 (Del. 1989) (validating Time’s efforts to prefer Warner over Paramount as merger partners, a preference which was ostensibly motivated to protect the “Time culture” of  journalistic integrity).  This assumes that the Revlon duties described in the previous footnote have not been triggered.  See supra note 44.

[46]. See E. Norman Veasey & Christine T. DiGuglielmo, How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors, 63 Bus. Law. 761, 764 (2008) (citing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“It is well settled that directors owe fiduciary duties to the corporation.”)).

[47]. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (“[O]ur analysis begins with the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation’s stockholders.”).

[48]. See Veseay & DiGuglielmo, supra note 46, at 764 (citing a different passage in N. Am. Catholic Educ. Programming Found., Inc., 930 A.2d at 99) (“It is well established that the directors owe their fiduciary obligation to the corporation and its shareholders.”).  For a cogent explanation of this inconsistency, see Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 Tex. L. Rev. 579, 590–96 (1992) (positing that courts speak in terms of the corporation’s best interests when resolving a “vertical conflict of interest” between the firm and its managers, and the shareholders’ best interests when resolving a “horizontal conflict of interest” between shareholders and other stakeholder groups).

[49]. See Smith, supra note 34, at 285 (“‘[T]he best interests of the corporation’ are generally understood to coincide with the best long-term interests of the shareholders.”); see also Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 Wash. & Lee L. Rev. 1423, 1439 (1993) (“In most situations, shareholder and nonshareholder constituency interests coincide.”); Millon, supra note 8, at 530; Veasey & Di Guglielmo, supra note 46, at 764–65 & n.9 (acknowledging that “operating a business in an environmentally sustainable way” may make “good business sense and therefore increase[] long-term financial value”).

[50]. Corporate law also prefers shareholders by granting them, but no other corporate constituency, the power to elect directors and sue derivatively on behalf of the organization.

[51]. See American Law Institute, Principles of Corporate Governance: Analysis and Recommendations (1994).

[52]. See id. § 2.01(a).

[53]. See William W. Bratton, Confronting the Ethical Case Against the Ethical Case for Constituency Rights, 50 Wash. & Lee L. Rev. 1449, 1456 (1993) (noting that the ALI eschews the term “maximization” for the more equivocal term “enhancement”).

[54]. See ALI, supra note 51, § 2.01(a) cmt. f (“[E]nhancing corporate profit and shareholder gain . . . does not mean that the objective of the corporation must be to realize corporate profit and shareholder gain in the short run.”); see also id. illus. 1 & 2.

[55]. See id. § 2.01(b).

[56]. See Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. Corp. L. 637, 651 (2007) (“Although Dodge v. Ford is frequently cited, no modern court has struck down an operational decision on the ground that it favors stakeholder interests over shareholder interests.”); Thomas W. Joo, Race, Corporate Law, and Shareholder Value, 54 J. Legal Educ. 351, 361 (2004) (“[D]irectors’ supposed duty to ‘maximize’ shareholder wealth is a toothless one.  No courts actually require management to maximize shareholder wealth . . . [i]ndeed, such a showing would be all but impossible.”); Jonathan R. Macey, A Close Read of an Excellent Commentary on Dodge v. Ford, 3 Va. L. & Bus. Rev. 177, 180–81 (2008) (arguing that corporate law requires shareholder wealth maximization but conceding that, like the speed limit on the Merritt Parkway, it is not enforced because enforcement would prove to be difficult or impossible); Mark J. Roe, The Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. Pa. L. Rev. 2063, 2072 (2001) (noting that “corporate law’s instructions to managers” to enhance shareholder gain do not “determine what they do”); Smith, supra note 34, at 286 (“[T]he business judgment rule makes the shareholder primacy norm virtually unenforceable against public corporations’ managers.”).

[57]. See Joy v. North, 692 F.2d 880, 885–86 (2d Cir. 1982) (presenting rationales for the business judgment rule); William T. Allen et al., Function over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. Lawyer 1287, 1297 (2001) (describing the business judgment rule as “an expression of a policy of non-review of a board of directors’ decision”); see also Stephen M. Bainbridge, Corporation Law & Economics § 6.2 (2002) (viewing the business judgment rule as an abstention doctrine).  For an analysis of the “reasonably full information” predicate, see Judd F. Sneirson,Doing Well By Doing Good: Leveraging Due Care for Better, More Socially Responsible Corporate Decisionmaking, 3 Corp. Governance L. Rev. 438, 465–68 (arguing that the duty of care’s information component requires fiduciaries to assess and consider effects on the firm’s nonshareholder constituencies).

[58]. See, e.g., Joy, 692 F.2d at 880; Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996); Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. 1968) (upholding the decision not to install lights at Wrigley Field); Kamin v. Am. Express Co., 383 N.Y.S.2d 807 (Sup. Ct. 1976) (upholding a dividend that squandered a sizable corporate tax deduction).

[59]. The Illinois provision is typical of the American statutes.  It provides:

In discharging the duties of their respective positions, the board of directors, committees of the board, individual directors and individual officers may, in considering the best long term and short term interests of the corporation, consider the effects of any action (including without limitation, action which may involve or relate to a change or potential change in control of the corporation) upon employees, suppliers and customers of the corporation or its subsidiaries, communities in which offices or other establishments of the corporation or its subsidiaries are located, and all other pertinent factors.

805 Ill. Comp. Stat. 5/8.85 (2011).  Most of the states that enacted these provisions did so during the surge of corporate-takeover activity in the 1980s, often to help local corporations fend off out-of-state suitors. See Sneirson, supra note 7, at 997–98.

[60]. See Sneirson, supra note 7, at 998 nn.52–53 (surveying “other constituency” statutes).

[61]. See William T. Allen et al., The Great Takeover Debate: A Meditation on Bridging the Conceptual Divide, 69 U. Chi. L. Rev. 1067, 1068 (2002) (identifying this ambivalence); Christopher M. Bruner, The Enduring Ambivalence of Corporate Law, 59 Ala. L. Rev. 1385, 1386 (2008) (same); Lyman Johnson, The Delaware Judiciary and the Meaning of Corporate Life and Corporate Law, 68 Tex. L. Rev. 865, 902 (1990) (same).

[62]. Brett McDonnell, Comment to Shareholders Versus Stockholders, (May 5, 2010, 8:00 AM), (“[Perhaps] courts put forth a norm that boards should maximize return to shareholders but outside a few special circumstances they do not enforce that norm in a way that gives rise to liability for violating it.”).

[63]. Norms are “informal social regularities that individuals feel obligated to follow because of an internalized sense of duty, because of a fear of external non-legal sanctions, or both.”  See Richard H. MacAdams, The Origin, Development, and Regulation of Norms, 96 Mich. L. Rev. 338, 340 (1997); see also Lawrence Lessig, Code and Other Laws of Cyberspace 235 (1999) (defining norms as “those normative constraints imposed not through the organized or centralized actions of a state, but through the many slight and sometimes forceful sanctions that members of a community impose on each other”); Cass R. Sunstein, Social Norms and Social Roles, 96 Colum. L. Rev. 903, 914 (1996) (defining norms as “social attitudes of approval and disapproval, specifying what ought to be done and what ought not to be done”). See generally Symposium, Norms & Corporate Law, 149 U. Pa. L. Rev. 1607 (2001).

[64]. See Fisch, supra note 56, at 654–55 (noting a study finding “that the norm of shareholder wealth maximization was implicit in most business school courses”); Lawrence E. Mitchell, A Critical Look at Corporate Governance, 45 Vand. L. Rev. 1263, 1288 (1992) (“Directors seem to believe that their legal duty is to the stockholders.”); Roe, supra note 56, at 2073 (“Norms in American business circles, starting with business school education, emphasize the value, appropriateness, and indeed the justice of maximizing shareholder wealth.”).

[65]. Stephen M. Bainbridge, Participatory Management Within a Theory of the Firm, 21 J. Corp. L. 657, 717 (1996).

[66]. Roe, supra note 56, at 2065.

[67]. See Smith, supra note 34, at 290–91 (citing studies and relating that “managers often make decisions that do not maximize value for shareholders”); Fisch, supra note 56, at 655 (citing similar, subsequent studies).

[68]. See Lisa M. Fairfax, The Rhetoric of Corporate Law: The Impact of Stakeholder Rhetoric on Corporate Norms, 31 J. Corp. L. 675, 677–78, 699, 710 (2006) (suggesting “a growing [societal and investor] dissatisfaction with the shareholder primacy norm” and that these groups find the broader stakeholder model of corporate governance “acceptable if not more palatable than shareholder primacy”); Robert C. Illig, Al Gore, Oprah, and Silicon Valley: Bringing Main Street and Corporate America into the Environmental Movement, 23 J. Envtl. L. & Litig. 223, 229 (2008) (noting popular acceptance of environmental concerns).

[69]. Fairfax, supra note 68, at 677.

[70]. See Sneirson, supra note 7, at 1012.

[71]. See Lessig, supra note 63, at 235–36 (identifying four categories of regulators in cyberspace and elsewhere: “the law, social norms, the market, and architecture”).

[72]. See, e.g., Richard A. Posner, Are American CEOs Overpaid, and, if so, What if Anything Should be Done About It?, 58 Duke L.J. 1013, 1026–27 (2009) (criticizing the common practice of showering CEOs with stock options as unduly focusing executives on the short term).

[73]. See Sneirson, supra note 7, at 1007–09.

[74]. See supra notes 10–13 and accompanying text.

[75]. See Michael C. Jensen, Value Maximization, Stakeholder Theory, and the Corporate Objective Function, 14 J. Applied Corp. Fin. 8, 16–17 (2001) (setting forth an “enlightened stakeholder theory” whereby corporate decision  makers maximize the long-term value of the firm by tending to all of the firm’s constituencies).

[76]. See Bainbridge, supra note 57, § 2.1, at 40 (characterizing modern corporate law as “enabling”); Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face, 30 Del. J. Corp. L. 673, 674 (2005) (“[O]ur statute is, by design, a broad enabling one that permits and facilitates company-specific procedures . . . [and] keeps statutory mandates to a minimum.”).

[77]. See supra notes 56–58 and accompanying text.

[78]. See, e.g., David G. Yosifon, The Public Choice Problem in Corporate Law: Corporate Social Responsibility After Citizens United, 89 N.C. L. Rev. 1198 (forthcoming 2011) (expressing pessimism about the future of corporate influence over legislatures).

[79]. Cf. Sarbanes-Oxley Act of 2002 § 406, 15 U.S.C. § 7264(a) (2011) (requiring issuers to adopt ethics codes for senior financial officers or explain why they have not done so); Jennifer G. Hill, Regulatory Responses to Global Corporate Scandals, 23 Wis. Int’l L.J. 367, 377 (2005) (discussing the “comply or explain” approach of recent British corporate law reforms).

[80]. See Thomas Joo, Global Warming and the Management-Centered Corporation, 44 Wake Forest L. Rev. 671, 672 (2009) (concluding that climate-change disclosures are not required per the securities laws’ materiality filter).

[81]. See, e.g., Fairfax, supra note 68, at 691–93, 713–15 (noting that most of the Fortune 500 in 2005 made voluntary social-responsibility disclosures in their annual reports or in separate social-responsibility reports).  This trend has continued through at least 2010, with all but four of the Fortune 50 making voluntary social-responsibility disclosures in their annual reports or in separate social-responsibility reports.  See generally Jousha T. Ebersole, Voluntary CSR Disclosures of Fortune 50 Companies (Apr. 25, 2011) (on file with author).

[82]. See id. at 691, 702–03 (noting such a trend and concluding that investors desire such information as well as socially responsible corporate behavior).

[83]. See supra note 16 and accompanying text.

[84]. See Elkington, supra note 2, at 82, 84 (noting difficult comparisons); Marc J. Epstein, Making Sustainability Work: Best Practices in Managing and Measuring Corporate Social, Environmental, and Economic Impacts 224–25 (2008) (discussing the “GRI” guidelines and noting that nearly one thousand firms in more than sixty countries use the GRI framework and “34 companies in the [Standard & Poor’s] 100 Index use . . . it for their external reporting”).  But see Holger Meyer, Varieties of Capitalism and Environmental Sustainability: Institutional Explanation for differences in Firms’ Corporate Environmental Responsibility Reporting Across 21 OECD Economies, Soc. Sci. Res. Network, (last visited Aug. 28, 2011) (challenging “the common perception of a trend towards more homogeneous global corporate responsibility” reporting and arguing instead that reporting standards “remain embedded in national institutional frameworks”).

[85]. See supra note 10 (noting sustainable businesses’ success in consumer-oriented industries); see alsoGood Housekeeping Seal,‑testing/history/about‑good‑housekeeping-seal (last visited Aug. 28, 2011).  Good Housekeeping also maintains a “green” version of its seal for products that meet the magazine’s environmental criteria.  See id.

[86]. See Sneirson, supra note 7, at 1017–19 (discussing the “B Corporation” concept and mark).  Several states recently enacted legislation to create a statutory counterpart to “B Corporation” certifications.  SeeDana Brakman Reiser, Benefit Corporations—A Sustainable Form of Organization?, 46 Wake Forest L. Rev. 591, 594 (2011) (describing “benefit corporation” enactments in Maryland, New Jersey, Vermont, and Virginia).  For a different state statutory model, see Sneirson, supra note 7, at 1019–20 (discussing Oregon’s 2007 corporate law amendment, codified at Or. Rev. Stat. § 60.047(2)(e), permitting Oregon corporations to include in their articles of incorporation a provision “authorizing” or “directing” that the firm be run in an environmentally and socially responsible manner).

[87]. See Fair Trade USA, (last visited Aug. 28, 2011); Forest Stewardship Council, (last visited Aug. 28, 2011).

[88]. See supra Part II.


By: Thomas Joo*


* Professor, University of California, Davis, School of Law. I would like to thank my fellow symposium participants, Alan Palmiter, Wake Forest School of Law, and the Wake Forest Law Review for a fascinating and productive conference. I would also like to thank Holly Doremus for her invaluable suggestions and the UC Davis School of Law and Dean Kevin Johnson for support of this project.