The question of corporate purpose has been much in the news of late, triggering renewed attention by legal scholars to corporate social responsibility, ESG, and shareholder value maximization. Many of these scholars have been strongly influenced by the late Lynn Stout’s work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth, [1] which built on her earlier article, Why We Should Stop Teaching Dodge v. Ford.[2] As the latter title suggests, Stout’s principal doctrinal foil was the Dodge case.[3]
Stout’s focus on Dodge was well chosen, since the case and “its statement of shareholder primacy have taken on lives of their own in law school casebooks, in the academic literature, and in the minds and hearts of American businesspeople.”[4] Stout’s critique of Dodge has been described as “novel and provocative”[5] and “a compelling critique of the shareholder-centric view”[6] of corporate purpose.
Given the renewed attention to the corporate purpose question and the continuing influence of Stout’s work on that debate, it seems appropriate to revisit her arguments to determine whether she was correct that law professors should stop teaching Dodge.[7] I conclude that none of Stout’s doctrinal arguments were correct. Accordingly, law professors ought to keep teaching Dodge. It was good law when handed down in 1919 and remains good law today.
Stout contended that Dodge’s famous statement of shareholder value maximization was merely “an offhand remark” that can be dismissed as dicta.[8] In fact, however, the structure and text of the opinion itself demonstrate that the disputed passage was holding rather than dicta. In order to compel Ford Motor Company (FMC) to pay the special dividend demanded by the Dodge Brothers, the Michigan Supreme Court had to hold that Ford and FMC’s board abused their discretion by refusing to pay a dividend. In turn, to hold that the board had abused its discretion, the court had to conclude that the board was conducting FMC’s business “for the merely incidental benefit of shareholders and for the primary purpose of benefitting others . . ..”[9] The conclusion that Ford had abandoned shareholder value maximization was thus essential to the result, which makes the court’s statement of corporate purpose holding rather than dicta.
In addition, efforts to dismiss Dodge as mere dicta flounder on the fact that the decision was a logical extension of legal trends of the time and was accepted almost immediately by both judges and scholars as a correct statement of the law of corporate purpose. Although the relevant pre-Dodge case law is sparse, it is fair to say the Michigan Supreme Court did not invent the shareholder value maximization rule out of whole cloth. Instead, it rested on well-established legal precedents. In addition to numerous judicial antecedents, the efforts by Professor Stout and her allies to dismiss Dodge’s endorsement of shareholder value maximization as mere dicta are further undermined by the immediate acceptance of Dodge by lawyers and legal scholars as a well-established legal principle. A 1919 American Law Reports annotation, for example, described Dodge as bringing “into clear relief the principle, which earlier decisions had previously recognized, that the fundamental purpose of a business corporation is to earn as large a profit as trade conditions and the business sagacity of its management will permit . . ..”[10] Hence, as even proto-corporate social responsibility advocate Merrick Dodd admitted in 1932, Dodge represented the orthodox understanding at that time of the law governing directors’ duties.
Professor Stout asked, “[w]hy rely on a case that is nearly one hundred years old if there is more modern authority available?”[11] But her argument got it backwards. U.S. Supreme Court Justice Antonin Scalia observed, albeit in dissent, that “the respect accorded prior decisions increases, rather than decreases, with their antiquity, as the society adjusts itself to their existence, and the surrounding law becomes premised upon their validity.”[12]
Stout claimed that “shareholder wealth maximization is not a modern legal principle” in part because it is not supported by modern corporate case law.[13] While it is admittedly true that there have been relatively few modern cases on point, they have confirmed that Dodge remains a well-accepted holding. Michigan cases dealing with business corporations confirm the state’s continuing commitment to Dodge. Michigan Supreme Court decisions in 1931 and 1934 cited Dodge with approval,[14] for example, as did a 2006 Michigan Court of Appeals decision.[15]
Stout also claimed that Delaware law does not embrace shareholder value maximization as it is articulated by Dodge.[16] In fact, however, Delaware courts arguably have embraced an even stronger version of shareholder value maximization than did Dodge. Recall that the latter held that business corporations are “organized and carried on primarily for the profit of the stockholders.”[17] According to some commentators, the qualifier “primarily” “suggests that other things may be considered in the operation of the corporation.”[18] Whether or not that claim is correct,[19] the relevant Delaware cases contain no such limitation.[20]
In the course of making her argument, Stout faced a nearly insurmountable problem in the Delaware Supreme Court’s Revlon decision. Stout therefore attempted to explain it away. In her article advising law professors to stop teaching Dodge, she dismissed it as “a dead letter” that “for practical purposes” “is largely irrelevant to modern corporate law and practice.”[21] Put bluntly, this is simply false. In fact, Revlon governs “the majority of friendly deals affecting a Delaware public company.”[22] As such, Revlon is “the basis of the Delaware law governing negotiated transactions,”[23] which hardly sounds like a dead letter.
The decisive critique of Stout’s misinterpretation of Delaware law was offered by no less a figure than former Delaware Supreme Court Chief Justice Leo Strine. In a 2015 article, Strine more broadly addressed claims by Stout and numerous progressive corporate law scholars “that directors may subordinate what they believe is best for stockholder welfare to other interests, such as those of the company’s workers or society generally.”[24] In assessing that claim, the Chief Justice minced no words; to the contrary, he hurled multiple verbal grenades into the debate:
- “These well-meaning commentators, of course, ignore certain structural features of corporation law . . ..”[25]
- “Indeed, these commentators essentially argue that Delaware judges do not understand the very law they are applying, and the Delaware General Assembly does not understand the law it has created.”[26]
- “It is not only hollow but also injurious to social welfare to declare that directors can and should do the right thing by promoting interests other than stockholder interests.”[27]
Perhaps most damningly, however Strine essentially accused the commentators – whom he called out by name in lengthy string cites[28] – of misrepresenting the law, arguing that they “pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion, under the law of the most important American jurisdiction – Delaware.”[29] It is about as damning a dismissal of academic arguments as one encounters.
ENDNOTES
[1] Lynn Stout, The Shareholder Value Myth (2012).
[2] Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus. Rev. 163 (2008).
[3] 170 N.W. 668, 670 (Mich. 1919).
[4] Miriam A. Cherry & Judd F. Sneirson, Beyond Profit: Rethinking Corporate Social Responsibility and Greenwashing After the BP Oil Disaster, 85 Tul. L. Rev. 983, 1016 (2011).
[5] Jonathan R. Macey, Corporate Law As Myth, 93 S. Cal. L. Rev. 923, 937 (2020).
[6] Saule T. Omarova, Bank Governance and Systemic Stability: The “Golden Share” Approach, 68 Ala. L. Rev. 1029, 1070 (2017).
[7] Stout’s critique of Dodge was not limited to challenging its doctrinal merits. To the contrary, her critique of the shareholder value maximization principle set out in Dodge ranged widely across a number of arguments. Indeed, she was criticized for “attempting to argue that the shareholder primacy norm does not guide American corporate law theory by conflating prospective policy arguments for replacing shareholder primacy with stakeholder theory with claims that stakeholder theory is, in fact, already the guiding principle.” Marc A. Greendorfer, Discrimination as a Business Policy: The Misuse and Abuse of Corporate Social Responsibility Programs, 8 Am. U. Bus. L. Rev. 307, 322 n.60 (2020). In my article on which this post is based, however, I focus on the doctrinal aspects of the debate, leaving the normative debate for my forthcoming book. See Stephen M. Bainbridge, The Profit Motive: Defending Shareholder Value Maximization (2022).
[8] Stout, supra note 2, at 165.
[9] Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).
[10] Annot., Right of Business Corporation to Use Its Funds or Property for Humanitarian Purposes, 3 A. L. R. 443 (1919).
[11] Stout, supra note 2, at 166.
[12] South Carolina v. Gathers, 490 U.S. 805, 824 (1989) (Scalia, J., dissenting).
[13] Stout, supra note 2, at 168.
[14] Thompson v. Walker, 234 N.W. 144, 147 (Mich. 1931); Wagner Electric Corp. v. Hydraulic Brake Co., 257 N.W. 884, 887 (Mich. 1934).
[15] Wojcik v. McNish, 2006 WL 2061499, at *5 (Mich. App. July 25, 2006).
[16] Former Delaware Chief Justice Leo Strine helpfully collected a list of such claims in a long string cite in Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 763 n.7 (2015).
[17] Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919) (emphasis supplied).
[18] Eric C. Chaffee, A Theory of the Business Trust, 88 U. Cin. L. Rev. 797, 833 (2019); Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. Rev. 733, 773 (2005).
[19] The qualifier seems a very weak reed on which to rest a claim that Dodge validates stakeholder capitalism. The Michigan Supreme Court made clear that the discretion vested in the board of directors did not authorize “the reduction of profits” or “the nondistribution of profits among stockholders in order to devote them to other purposes.” Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).
[20] For a particularly detailed examination of Delaware law, see David Yosifon, Corporate Friction: How Corporate Law Impedes American Progress and What to do About It 60-95 (2018). Professor Yosifon concludes that “Delaware’s law requires shareholder primacy . . ..” Id. at 93.
[21] Stout, supra note 12, at 172. Again, Leo Strine helpfully collected a list of commentators making similar claims in a long string cite in Strine, supra note 196, at 766 n.20.
[22] Matteo Gatti, Upsetting Deals and Reform Loop: Can Companies and M&A Law in Europe Adapt to the Market for Corporate Control?, 25 Colum. J. Eur. L. 1, 74 n.381 (2019).
[23] Robert T. Miller, Smith v. Van Gorkom and the Kobayashi Maru: The Place of the Trans Union Case in the Development of Delaware Corporate Law, 9 Wm. & Mary Bus. L. Rev. 65, 73 (2017).
[24] Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 763 (2015).
[25] Id. at 765.
[26] Id. at 766-67.
[27] Id. at 767.
[28] Id. at 763-64 nn. 7 & 9.
[29] Id. at 763 (emphasis supplied).
This post comes to us from Stephen M. Bainbridge, the William D. Warren Distinguished Professor of Law at UCLA School of Law. It is based on his recent article “Why We Should Keep Teaching Dodge v. Ford Motor Co.,” available here and forthcoming in the Journal of Corporation Law.