1700-2000 word position paper, in which you review several possible approaches to an issue of corporate law and make an evaluation of whether a particular proposal is both possible and advisable.
Lu101
CorporateLawBusinessPurpose.pptxCorporate Law & Business Purpose
Jeff Van Duzer,
Dodge v. Ford (1919), and
eBay v. Newmark (2010)
BLAW 461.01, Sept. 17, 2018
Andy Little
Van Duzer’s Main Thesis
“I would conclude that at this time in history, there are two legitimate, first-order, intrinsic purposes of business: as stewards of God’s creation, business leaders should manage their businesses (1) to provide the community with goods and services that will enable it to flourish, and (2) to provide opportunities for meaningful work that will allow employees to express their God-given creativity. . . . When managers pursue these particular goals for their companies, they participate directly in God’s creation mandate. They engage in work of intrinsic and not just instrumental value.”
Jeff Van Duzer, Why Business Matters to God (IVP Academic, 2010), p. 42.
“Note that nothing in this … model supports the conclusion that business should be operated for the purpose of maximizing profits. In fact, this model turns the dominant business model on its head. . . . Profit is not important as an end in and of itself. Rather, it becomes the means of attracting sufficient capital to allow the business to do what, from God’s perspective, it is in business to do—that is, to serve its customers and employees.”
Ibid., pp. 45-46.
The challenge of articulating a different model of business in light of the law on corporate purpose
It seems like from a Christian perspective, Van Duzer has a point.
But, will the law even allow this prioritization of customers and employees, perhaps at the expense of shareholders? Haven’t we heard somewhere that profit maximization for shareholder benefit is the only moral and legal requirement of officers and directors?
Dodge v. Ford (Mich. Sup. Ct., 1919)
The Dodge brothers were seeking to extend their fortunes in the young American automobile industry in 1903. They decided to invest in a new company formed by an eccentric engineer and race car driver, Henry Ford. The Dodges became 10% owners of the new company, which was the third automobile company started by Ford since 1899.
By 1916, the Dodges decided to start their own company in competition with Ford, but Ford refused to declare a stock dividend because he knew his investors (the Dodges) would just use the cash to build cars that competed with his Model T.
Ford (59% owner) wanted to re-invest what would have been a dividend into a new factory, the River Rouge plant.
What Was Ford Thinking? --Is he really benevolent? --Is he just trying to play the role of populist folk hero?
Henry Ford did not premise his refusal to declare a dividend based on the long-term success of the River Rouge Plant and thereby the success of the company and its stockholders. Rather, he argued that cars were too expensive, and that he intended to lower the price of the Model T so that the average person could afford one, which, in his mind, would make society better.
Ford’s comment to the media: “I do not believe that we should make such an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and laborers….”
Ford’s testimony at trial, with questions posed by counsel:
Q: Do you still think those profits were awful profits?
A: Well, I guess I do, yes.
Q: And for that reason you were not satisfied to continue to make such awful profits?
A: We don’t seem to be able to keep the profits down.
Q: …What is the Ford Motor Company organized for except profits, will you tell me, Mr. Ford?
A: Organized to do as much good as we can, everywhere, for everybody concerned. And incidentally to make money.
The holding of the Michigan Supreme Court
The Michigan Supreme Court decided in favor of the Dodge Brothers, and against Henry Ford. The judges held that a majority shareholder like Ford (59%) can’t oppress minority shareholders (10% combined) and refuse to declare a dividend under these circumstances.
Famous language from the court, which still gets quoted occasionally:
"A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes."
Dodge v. Ford, a few notes
Some commentators say that Ford would have won the case had he premised his decision to build the River Rouge Plant on the long-term gains expected to be obtained by stockholders.
The case is, first and foremost, a minority oppression case. It answers questions about how majority owners treat owners with no control over the business. In this sense, it is about fiduciary duties owed in the context of rival, competing owners.
The business judgment rule allows managers and directors wide discretion in making decisions, so long as there is some connection between the managerial decision and a benefit to the corporation. It’s just that here, Ford failed to make the link between his decision and business success.
eBay v. Newmark (Del. 2010). A reassessment of Dodge v. Ford, ninety years later.
Craig Newmark is the 42.6% owner of craigslist. James Buckmaster owns 29% of the company. The third shareholder is eBay, which owns 28.4%. eBay decided to compete with craigslist, which was allowed under the parties’ various agreements, but which triggered certain actions.
In response, Newmark and Buckmaster attempted to deprive eBay from controlling one of the seats on the board of directors (which was previously allowed by agreement), and diluted eBay’s investment. The majority owners did so because they viewed craigslist as having a community information-sharing orientation, not the accumulation of profits.
Okay, this is starting to sound like a Dodge v. Ford situation….
The Delaware Chancery Court holding
"[Newmark and Buckmaster] did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire [Newmark's and Buckmaster's] desire to be of service to communities. The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders."
eBay v. Newmark: A few notes
This case, similarly to Dodge v. Ford, is a minority stockholder oppression case arising in the context of competition from the minority stockholder, up against majority shareholders who have more public-oriented values.
Lessons to be learned:
The BJR allows for wide latitude for managers and directors, but it has limits.
Investors like eBay want to have their cake and eat it too: eBay knew of Newmark and Buckmaster’s values at the time of investment, and wanted both: A) the community orientation of craigslist, and B) the ability to compete with the company in their own corporate vehicle that is not so community oriented. And the Delaware court allowed this.
The Delaware Chancery Court seems to imply there are only two corporate organizations for business owners: A) for profit, which are carried on for the benefit of stockholders, and B) non-profit, which are “purely philanthropic.” One result of this [perhaps false] dichotomy in corporate forms is the rise of the benefit corporation.
A continuum of opinion
Shareholder primacy is the law, and that’s a good thing.
Shareholder primacy is the law, and that’s a bad thing.
Shareholder primacy either isn’t the [only] law, or it’s largely irrelevant to managerial conduct.
