Research Handbooks in Law and Economics series
Edited by Claire A. Hill and Brett H. McDonnell
Chapter 2: Director Primacy
Stephen M. Bainbridge* 1. INTRODUCTION Ownership and control rights typically go hand in hand. A homeowner may eject trespassers, for example, even using force in appropriate cases.1 A principal is entitled to control his agent.2 Each partner is entitled to equal rights in the management of the partnership business.3 In the corporation, however, ownership and control are decisively separated. Control is vested by statute in the board of directors. The Delaware General Corporation Law, for example, provides that the corporation’s ‘business and affairs … shall be managed by or under the direction of the board of directors’.4 In contrast, the firm’s nominal owners – the shareholders – exercise virtually no control over either day-to-day operations or long-term policy. Shareholder voting rights are limited to the election of directors and a few relatively rare matters such as approval of charter or bylaw amendments, mergers, sales of substantially all of the corporation’s assets, and voluntary dissolution. As a formal matter, moreover, only the election of directors and amending the bylaws do not require board approval before shareholder action is possible (Dooley 1995). In practice, of course, even the election of directors (absent a proxy contest) is predetermined by virtue of the existing board’s power to nominate the next year’s board (Manning 1958). The shareholders’ limited control rights thus are almost entirely reactive rather than proactive. These direct restrictions on shareholder power are supplemented by a host of other rules that indirectly prevent shareholders from exercising significant influence over corporate decision making. Three sets of statutes...
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