The fundamental question in the law of business organizations – what is the purpose of the corporation? – contains a related question of constituencies and, therefore, priorities among them: Whom does the corporation serve? If, for example, the purpose that justifies the existence of the corporation is the maximization of share price, then it follows that the corporation exists to serve the shareholders that are the beneficiaries of share price increases. The answers to such questions are encoded in the laws governing the decisions of a corporation’s directors and managers and regulating the transactions that allocate the benefits and the burdens of a corporation’s activity. Different societies have reached different conclusions and enshrined different priorities in their respective legal regimes. And while the modern global corporation does business – and may serve stakeholders – far beyond the borders of its jurisdiction of incorporation, these fundamental questions of purpose are generally still determined by the lawmakers in the corporation’s place of incorporation.
The corporate forms in the United States and in France share important features, such as limited liability, that are fundamental to the globally recognized concept of a corporation. But, as our article explores in greater depth, different corporate legal priorities developed in each jurisdiction over time, in certain cases resulting in the evolution of different rights and privileges for shareholders. At the same time, recent global governance trends, in particular, heightened awareness of environmental, sustainability, employee, and other stakeholder issues, have begun to reshape what some consider “traditional” thinking about the purpose of the corporation. In some cases, the changes flowing from these new conceptions of governance have led to a convergence of priorities, while in other cases reactions to these developments have diverged.
One of the most important areas of convergence relating to corporate legal priorities has been the return, in the United States, to a more stakeholder-centric, rather than shareholder-centric, vision of the corporate purpose. Shareholder primacy, while dominant over the last 50 years in the United States, has been shaken in recent years, as prominent investors, directors, executives, academics, and business advisors have assessed its results. The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, produced for the World Economic Forum by Wachtell, Lipton, Rosen & Katz, articulated a “set of principles designed to foster a balanced, symbiotic relationship between corporations and shareholders that focused not just on corporate behavior, but also on shareholder behavior.” While The New Paradigm “recognizes a pivotal role for boards of directors in harmonizing the interests of shareholders and other stakeholders, it also assumes that shareholders and other stakeholders have more shared objectives than differences – namely, they have the same basic interest in facilitating sustainable, long-term value creation.”
France has long emphasized precisely such a vision, in which the company’s corporate interest, or intérêt social, takes priority over the interest of any single stakeholder. The intérêt social is a broad concept that, according to the prevailing view, combines the interests of all corporate stakeholders (employees, customers, suppliers, shareholders, counterparties, etc.) to form an independent interest attributable to the legal entity itself. A French corporate manager’s autonomy is limited and grounded by the intérêt social as the defining purpose of the corporation. A desire to further align the corporation’s activities with greater social concerns culminated in a recent revision of the French Civil Code and Commercial Code, imposing an obligation to also take into account social and environmental considerations while pursuing the intérêt social. In the face of the intérêt social’s long history as well as such recent reforms, it is paradoxical that some in France should develop such sympathy for theories of shareholder primacy at a time when this approach has been increasingly called into question in the United States. We remain hopeful that the vocal movement in favor of a stakeholder-centric vision in the United States will continue to gain traction and also give further confidence to French courts, media, commentators and regulators to continue to uphold the traditional understanding of the intérêt social.
This post comes to us from Forrest G. Alogna, Hadrien Bourrellis, and Bertrand Cardi at the law firm of Darrois Villey Maillot Brochier in Paris and from Matthew T. Carpenter, Adam O. Emmerich, and Theodore N. Mirvis at the law firm of Wachtell, Lipton, Rosen & Katz in New York. It is based on their recent article, “The Shareholder in France and the United States: A Comparative Analysis of Corporate Legal Priorities,” available here.