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{\field{\*\fldinst {\lang4105  SEQ CHAPTER \\h \\r 1}}{\fldrslt }}\pard \fs24\qc 
{\plain \fs24 \b The Role of Shareholder Primacy in Institutional Choice}{\plain \fs24 \par
}\pard \fs24
{\plain \fs24 \par
}\ftnrstcont\pard \fs24\qc 
{\plain \fs24 Jill E. Fisch{}{\plain \fs24 \super *{\footnote \fs20\pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super *}{}{\plain \fs24 }{\plain \fs20 \fs20   Alpin J. Cameron Professor of Law, Fordham Law School.  E-mail: }{\field{\*\fldinst   { HYPERLINK "mailto:jfisch@law.fordham.edu" }}{\fldrslt{{\*\cs83\ul\cf6\fs20 jfisch@law.fordham.edu}}}}{\plain \fs20 \fs20 . Copyright \softline
2004 by Jill E. Fisch.  Preliminary Draft {\u8211\'96} comments welcome.}}}
}{\plain \fs24 \pard \fs24\qc 
\par
}\pard \fs24
{\plain \fs24 \par
}\ftnrstcont\pard \fs24\sl360\slmult1 
{\plain \fs24 \tab Corporate law scholarship has traditionally incorporated a comparative institutional analysis.  \softline
Unlike some other areas in the law, in business law,  a variety of institutional actors {\u8211\'96} including state \softline
and federal courts and legislators, the Securities and Exchange Commission, state attorneys general, \softline
and self regulatory organizations such as the New York Stock Exchange {\u8211\'96} produce legal rules.  \softline
Business law also deals with the ongoing question about the extent to which the contractual \softline
agreements produced by free market operation should be displaced by regulation.  In analyzing any \softline
particular rule, academics and policymakers consistently consider the relationship between \softline
institutional choice and regulatory product, with particular emphasis on efficiency considerations.  \softline
Thus, for example, the literature on regulatory competition considers the extent to which the relative \softline
efficiency of state corporate law is a functional of institutional characteristics such as state size, \softline
financial structure, judicial organization, and the participation of particular interest groups.  Similarly, \softline
in evaluating recent examples of misconduct on Wall Street and within major public corporations, \softline
commentators have contrasted the institutional context within which different regulators, such as New \softline
York Attorney General Eliot Spitzer and the SEC, operate.\par
}{\plain \fs24 \tab Despite the extensive academic writing on these questions of institutional choice within \softline
business law, the literature is rarely able to identify the most appropriate institutional actor.  Scholars \softline
continue to debate whether state regulatory competition is efficient, asking whether it has resulted in a \softline
race to the bottom, a race to the top, or a race to nowhere in particular.  Although most commentators \softline
view the congressional intrusions into corporate governance through the Sarbanes-Oxley of 2002 as \softline
ill-advised, many concede that the federal government has played an extensive and valuable role in \softline
corporate governance, albeit indirectly, through the adoption and implementation of the federal \softline
securities laws.  Efficiency considerations also underlie questions of regulatory authority.  Thus, when \softline
the Securities and Exchange Commission considers adopting rules that address corporate governance \softline
issues, it struggles both with the positive question of whether such rulemaking is legislatively \softline
authorized and the normative question of whether its proposed rules, to the extent they displace state 
corporate law, are desirable.\par
}{\plain \fs24 \tab This Article identifies a limitation in the existing scholarship{\u8217\'92}s evaluation of the relative \softline
efficiency of competing lawmaking institutions: an incomplete evaluation of the appropriate metric by \softline
which to measure efficiency in corporate law.  Corporate scholarship has embraced the norm of \softline
shareholder primacy {\u8211\'96} developed in the context of fiduciary principles {\u8211\'96} and applied that norm to \softline
efficiency analysis.  This norm has led corporate scholars to conceptualize efficiency exclusively in \softline
terms of shareholder wealth maximization.  Accordingly, commentators evaluate lawmaking \softline
institutions based on their ability to maximize shareholder value and analyze institutions in terms of \softline
the effectiveness of shareholder participation or representation in the rule-making process.  As a \softline
result, empirical studies fail to incorporate non-shareholder value into their efficiency analysis.  \par
}{\plain \fs24 \tab This Article addresses that limitation by exploring the extent to which shareholder primacy is \softline
an appropriate measure of regulatory efficiency.  In so doing, the Article exposes the centrality of the \softline
shareholder primacy norm to existing claims about the relative efficiency of Delaware corporate law \softline
and the resulting implications for theories of regulatory competition.  \par
}{\plain \fs24 \tab More generally, the Article demonstrates the role of shareholder primacy in institutional \softline
analysis in corporate law.  In particular, the Article argues that, among lawmaking institutions, courts \softline
are particularly well positioned to address shareholder interests in corporate law.  In contrast, other \softline
institutions, including markets and legislatures, are likely to be responsive to non-shareholder \softline
interests.  Because fiduciary principles are the ticket by which shareholders gain access to judicial \softline
lawmaking, this difference in institutional competence offers as compelling explanation for the scope \softline
of officer and director fiduciary duties in corporate law.  In particular, institutional analysis explains \softline
why shareholders, but not employees, creditors and other stakeholders, can sue officers and directors \softline
for breach of fiduciary duty.  By identifying shareholder focus as an explanation for the dominant role \softline
of judicial lawmaking in Delaware and, to some extent, in the federal system, institutional analysis \softline
refines the theory of Delaware{\u8217\'92}s position in the market for corporate charters.\par
}{\plain \fs24 \tab The Article proceeds as follows.  Section I briefly reviews the debate over regulatory \softline
competition in corporate law, demonstrating the role of comparative institutional analysis and \softline
exploring the centrality of the shareholder primacy norm to the evaluation of regulatory efficiency.  \softline
Section II locates the foundations of the shareholder primacy norm and explores the bases for its use 
as a metric of regulatory efficiency.  Section III considers the implications of these efficiency \softline
considerations for institutional analysis.  In particular, Section III demonstrates the role of fiduciary \softline
principles in allocating lawmaking authority among institutional actors. \par
}{\plain \fs24 \tab }{\plain \fs24 \b I.  Regulatory Competition and Comparative Institutional Analysis }{\plain \fs24 \par
}{\plain \fs24 \tab }{\plain \fs24 \b A.  The Debate over Regulatory Competition\par
}{\plain \fs24 \ul0 \tab The foundations of this Article lie in the subject of regulatory competition in corporate law.  \softline
Debate over regulatory competition has been a core theme in the corporate law literature for the past \softline
thirty years.  Its origins lie in the classic Cary-Winter debate.  Former SEC Commissioner William \softline
Cary argued that the dominance of Delaware as a corporate domicile {\u8211\'96} and thus the source of state \softline
corporate law for more than half of all publicly traded U.S. corporations {\u8211\'96} reflected the appeal of \softline
Delaware{\u8217\'92}s law to corporate management.{}{\plain \fs24 \super 1{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 1}{}{\plain \fs24   }{\plain \fs20 \fs20 William L. Cary, }{\plain \fs20 \i\fs20 Federalism and Corporate Law: Reflections Upon Delaware}{\plain \fs20 \fs20 , 83 }{\plain \fs20 \scaps\fs20 Yale L.J. }{\plain \fs20 \fs20 663 (1974).}}}
}{\plain \fs24   Cary attributed this appeal to the laxity of Delaware law {\u8211\'96} \softline
its failure to provide shareholders with optimal protection from management malfeasance and self-dealing {\u8211\'96} and thus termed the federalist system in which incorporating businesses can choose the state \softline
law that will govern their internal affairs a {\u8220\'93}race for the bottom.{\u8221\'94}{}{\plain \fs24 \super 2{\footnote \pard \fs24
{\ul0 \tab }{\plain \fs24 \super 2}{\par
}\pard \fs20\ri540\sa240 
{\plain \fs24   }{\plain \fs20 \i\fs20 Id.}{\plain \fs20 \fs20  at 705.}}}
}{\plain \fs24  \par
}{\plain \fs24 \tab Cary{\u8217\'92}s conclusions were challenged by Judge Ralph Winter.{}{\plain \fs24 \super 3{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 3}{}{\plain \fs24   }{\plain \fs20 \fs20 Ralph K. Winter, Jr.,}{\plain \fs20 \i\fs20  State Law, Shareholder Protection, and the Theory of the Corporation}{\plain \fs20 \fs20 , 6 }{\plain \fs20 \scaps\fs20 J. Legal \softline
Stud}{\plain \fs20 \fs20 . 251 (1977)}}}
}{\plain \fs24   Judge Winter argued that \softline
corporations are subject to a variety of constraints imposed by the markets in which they operate such \softline
as the market for corporate control, the market for management services, and the markets in which \softline
their products are sold.  If Delaware law was inefficient, Winter reasoned, Delaware corporations \softline
would earn lower than normal returns, leading to an outflow of capital.{}{\plain \fs24 \super 4{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 4}{}{\plain \fs24   }{\plain \fs20 \i\fs20 Id.}}}
}{\plain \fs24   Winter therefore concluded \softline
that Delaware{\u8217\'92}s success in attracting incorporation could only be explained by the relative superiority \softline
of Delaware law in maximizing firm value.  Regulatory competition, in Judge Winter{\u8217\'92}s view,\par
}{\plain \fs24  produced a {\u8220\'93}race to the top.{\u8221\'94}{}{\plain \fs24 \super 5{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 5}{}{\plain \fs24   }{\plain \fs20 \i\fs20 Id.}{\plain \fs20 \fs20   Judge Winter subsequently conceded the race to the top might, in fact, merely be a {\u8220\'93}leisurely walk.{\u8221\'94}  \softline
that Ralph K. Winter, }{\plain \fs20 \i\fs20 The "Race for the Top" Revisited: A Comment on Eisenberg}{\plain \fs20 \fs20 , 89 }{\plain \fs20 \scaps\fs20 Colum L Rev. }{\plain \fs20 \fs20 1526, 1529 \softline
(1989).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab Subsequent scholars, aligning themselves with either Cary or Winter, have refined the \softline
arguments on either side of the debate.{}{\plain \fs24 \super 6{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 6}{}{\plain \fs24   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Jill E.  Fisch, }{\plain \fs20 \i\fs20 The Peculiar Role of the Delaware Courts in the Competition  for Corporate Charters}{\plain \fs20 \fs20 , \softline
68 }{\plain \fs20 \scaps\fs20 U. Cin. L. Rev}{\plain \fs20 \fs20 . 1061, 1065-66 (2000) (summarizing academic debate).}}}
}{\plain \fs24   Although the majority of academic endorse the Winter \softline
position, thirty years of scholarly debate have failed to produce a consensus.  In fact, scholars disagree \softline
on three key questions: whether the race is to the top or the bottom, whether the race even exists, and \softline
the extent to which variation and experimentation in state law is constrained by the presence or the \softline
prospect of federal regulation.  \par
}{\plain \fs24 \tab Much of the recent scholarship on regulatory competition has taken the form of empirical \softline
work.  A highly influential study by Rob Daines found that Delaware firms were worth more than \softline
non-Delaware firms.{}{\plain \fs24 \super 7{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 7}{}{\plain \fs24   }{\plain \fs20 \fs20 Robert Daines, }{\plain \fs20 \i\fs20 Does Delaware Law Improve Firm Value?}{\plain \fs20 \fs20  , 62 }{\plain \fs20 \scaps\fs20 J. Fin. Econ}{\plain \fs20 \fs20 . 525 (2001). }}}
}{\plain \fs24   Specifically, Daines found that incorporation in Delaware was associated with \softline
higher Tobins Qs for most years between 1981 and 1996.  Indeed, Daines found that, in 1996, \softline
Delaware firms were worth an average of 5% more than non-Delaware firms.  This, along with \softline
Daines{\u8217\'92} analysis of Delaware{\u8217\'92}s regulation of corporate takeovers, led him to conclude that \softline
incorporation in Delaware led to higher firm value.  The Daines study, along with other empirical \softline
work,{}{\plain \fs24 \super 8{\footnote \fs20\pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 8}{}{\plain \fs24   }{\plain \fs20 \fs20 See, e.g., Roberta Romano, }{\plain \fs20 \i\fs20 The Need for Competition in International Securities Regulation}{\plain \fs20 \fs20 , 2 \softline
}{\plain \fs20 \scaps\fs20 Theoretical Inquiries in L}{\plain \fs20 \fs20 . 1, 113 (2001), at }{\field{\*\fldinst   { HYPERLINK "http://www.bepress.com/til/default/vol2/iss2/art1," }}{\fldrslt{{\*\cs83\ul\cf6\fs20 http://www.bepress.com/til/default/vol2/iss2/art1,}}}}{\plain \fs20 \fs20  Roberta Romano,}{\plain \fs20 \i\fs20  \softline
Law as a Product: Some Pieces of the Incorporation Puzzle}{\plain \fs20 \fs20 , 1 }{\plain \fs20 \scaps\fs20 J. L. Econ. & Org}{\plain \fs20 \fs20 . 225, 273 (1985), Peter Dodd & \softline
Richard Leftwich, }{\plain \fs20 \i\fs20 The Market for Corporate Charters: {\u8220\'93}Unhealthy Competition{\u8221\'94} versu.s Federal Regulation}{\plain \fs20 \fs20 , 53 }{\plain \fs20 \scaps\fs20 J. \softline
Bus}{\plain \fs20 \fs20 . 59 (1980).}}}
}{\plain \fs24  is widely cited to support Winter{\u8217\'92}s claim that regulatory competition has produced a race to the \softline
top.\par
}{\plain \fs24 \tab Daines{\u8217\'92} conclusions were subsequently disputed by Guhan Subramanian.{}{\plain \fs24 \super 9{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 9}{}{\plain \fs24   }{\plain \fs20 \fs20 Guhan Subramanian, }{\plain \fs20 \i\fs20 The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the \softline
{\u8220\'93}Race{\u8221\'94} Debate and Antitakeover Overreaching}{\plain \fs20 \fs20 , 150 }{\plain \fs20 \scaps\fs20 U. Pa. L. Rev.}{\plain \fs20 \fs20  1795 (2002).}}}
}{\plain \fs24   In a study \softline
extending the Daines model, Subramanian found first that the reported Delaware effect was driven by 
small firms {\u8211\'96} those with less than $50 million in net sales.  Second, and more importantly, \softline
Subramanian found that the Delaware effect disappeared, even for smaller firms, during the period \softline
from 1997 to 2002.  Subramanian concluded that Daines had failed to provide convincing empirical \softline
support for the race to the top theory.  Lucian Bebchuk, writing with various co-authors, has reached a \softline
similar conclusion, arguing that the empirical evidence failed to establish causation and that the \softline
selection of firms that choose to incorporate in Delaware is not random.{}{\plain \fs24 \super 10{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 10}{}{\plain \fs24   }{\plain \fs20 \fs20 Lucian A. Bebchuk, Alma Cohen & Allen Ferrell,}{\plain \fs20 \i\fs20  Does the Evidence Favor State Competition in \softline
Corporate Law?}{\plain \fs20 \fs20 , 90 }{\plain \fs20 \scaps\fs20 Calif. L. Rev. }{\plain \fs20 \fs20 1775, 1780 (2002).}}}
}{\plain \fs24   Moreover, Bebchuk and \softline
Alma Cohen also present empirical evidence questioning whether there is a race at all.{}{\plain \fs24 \super 11{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 11}{}{\plain \fs24 }{\plain \fs20 \fs20   Lucian A. Bebchuk & Alma Cohen, }{\plain \fs20 \i\fs20 Firms' Decisions Where to Incorporate}{\plain \fs20 \fs20 , 46 }{\plain \fs20 \scaps\fs20 J.L. & Econ}{\plain \fs20 \fs20 . 383 \softline
(2003). }}}
}{\plain \fs24   According to \softline
Bebchuk and Cohen, Delaware faces very limited competition for out-of-state incorporations, \softline
suggesting that existing market pressure may be insufficient to produce efficient legal rules.{}{\plain \fs24 \super 12{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 12}{}{\plain \fs24 }{\plain \fs24 \i   }{\plain \fs20 \i\fs20 Id.  See also}{\plain \fs20 \fs20  Lucian A. Bebchuk & Assaf Hamdani, }{\plain \fs20 \i\fs20 Vigorous Race or Leisurely Walk: Reconsidering \softline
the Competition over Corporate Charters, }{\plain \fs20 \fs20 112 }{\plain \fs20 \scaps\fs20 Yale L.J. }{\plain \fs20 \fs20 553 (2002); Marcel Kahan and Ehud Kamar, }{\plain \fs20 \i\fs20 The Myth of \softline
State Competition in Corporate Law}{\plain \fs20 \fs20 , 55 }{\plain \fs20 \scaps\fs20 Stan. L. Rev}{\plain \fs20 \fs20 . 679 (2002).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab Recently the debate over regulatory competition has incorporated an increased appreciation for \softline
the role of the federal government.  Although regulation of the corporation has traditionally been \softline
divided into corporate law {\u8211\'96} supplied by the state of incorporation {\u8211\'96} and securities law {\u8211\'96} supplied by \softline
the federal government, federal law has long addressed particular governance issues that might appear \softline
to fall more properly within the purview of state corporate law.  As a result, the line of authority \softline
between states and the federal government as producers of corporate law is blurred.  The extent to \softline
which states retain lawmaking authority depends, at least in part, on the federal government{\u8217\'92}s \softline
acceptance of state lawmaking choices and, to the extent that federal lawmakers disagree with those \softline
choices, it can and does overrule them.{}{\plain \fs24 \super 13{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 13}{}{\plain \fs24   }{\plain \fs20 \fs20 See, e.g., Mark J. Roe, }{\plain \fs20 \i\fs20 Delaware{\u8217\'92}s Competition}{\plain \fs20 \fs20 , 117 }{\plain \fs20 \scaps\fs20 Harv. L. Rev}{\plain \fs20 \fs20 . 588 (2003) (explaining that \softline
prospect of federal override provides implicit limit on scope of state lawmaking). An obvious example is the \softline
regulation of shareholder voting which, although structured in the first instance by state statutes, is dominated by \softline
federal oversight through the adoption and implementation of the federal proxy rules.  Board and committee \softline
structure and composition is largely the product of national standards imposed through SRO listing requirements.  \softline
More recently, Sarbanes-Oxley has imposed federal standards on audit committee composition and responsibilities \softline
as well as prohibiting specified conflict of interest transactions within the corporation such as loans to officers and \softline
directors. }}}
}{\plain \fs24   Importantly, several federal institutions have the power to 
overrule state choices by supplying their own corporate law, including Congress, the Securities and \softline
Exchange Commission, and the federal courts. \par
}{\plain \fs24 \tab Although the regulatory competition debate is not explicitly argued in terms of institutional \softline
choice, many scholars have identified and explored institutional differences between state lawmaking \softline
processes and argued that those differences are key factors leading to substantial differences in the \softline
resulting legal product.  One of the most extensive analyses was conducted by Roberta Romano in her \softline
book, the Genius of American Corporate Law.  Romano argued that several of Delaware{\u8217\'92}s distinctive \softline
attributes, including its dependence on franchise taxes as a substantial component of state revenue, its \softline
specialized court system, and its specialized corporate bar whose revenues depend on its success in \softline
attracting incorporation, have led Delaware both to specialize in provide efficient corporate law and to \softline
commit to maintaining the superiority of its product.  \par
}{\plain \fs24 \tab In particular, Romano noted the presence of the corporate bar as a significant participant in the \softline
legislative lawmaking process.  Indeed, in Delaware, it is the corporate bar, not the legislature, that \softline
drafts corporate legislation.  In contrast to states such as New York, Delaware legislation is crafted by \softline
a specialized and expert group.  Some commentators have argued that the role of the Delaware bar in \softline
the lawmaking process increases the representation of shareholder interests.  As Curtis Alva reasons \softline
{\u8220\'93}the  corporate bar  is the group whose interests are most closely aligned with shareholders.{\u8221\'94}{}{\plain \fs24 \super 14{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 14}{}{\plain \fs24 }{\plain \fs20 \fs20   Curtis Alva, }{\plain \fs20 \i\fs20 Delaware and the Market for Corporate Charters: History and Agency}{\plain \fs20 \fs20 ,  15 }{\plain \fs20 \scaps\fs20 Del. J. Corp. \softline
L}{\plain \fs20 \fs20 . 885, 896-916 (1990) (describing process by which Delaware corporate legislation is drafted and enacted).}}}
}{\plain \fs24  \softline
Moreover, because most Delaware corporations do not conduct substantial operations within the state, \softline
the potential influence of other constituencies, particularly labor, is reduced.\par
}{\plain \fs24 \tab I have previously argued that regulatory competition in corporate law extends beyond \softline
differences in the state legislative processes and that, in fact, Delaware{\u8217\'92}s success in attracting \softline
corporations can be attributed to Delaware{\u8217\'92}s substantial judicial rather than legislative lawmaking.{}{\plain \fs24 \super 15{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 15}{}{\plain \fs24   }{\plain \fs20 \fs20 Fisch, }{\plain \fs20 \i\fs20 supra}{\plain \fs20 \fs20  note .}}}
}{\plain \fs24   \softline
The indeterminate nature of Delaware statutory law delegates a substantial lawmaking role to the \softline
Delaware Chancery court.  This delegation, coupled with the unique attributes of the Delaware court \softline
system, results in a distinctive institutional lawmaking structure. \par
}{\plain \fs24 \tab I have further argued that courts offer specific advantages in the production of corporate law 
Courts provide greater }{\plain \fs24 flexibility, responsiveness, insulation from undue political influence, and \softline
transparency}{\plain \fs24  in corporate lawmaking.  I have reasoned that these attributes are particularly important \softline
in the area of corporate law.  In part, I concluded, Delaware{\u8217\'92}s institutional choices with respect to the \softline
production of corporate law, explain Delaware{\u8217\'92}s continued dominance in the competition for \softline
corporate charters.\par
}{\plain \fs24 \tab The allocation of corporate regulation between the states and the federal government also \softline
depends on an assessment of comparative institutional competence.  Roberta Romano has defended \softline
the state system by reasoning that the {\u8220\'93}national political dynamic . . . favors managers{\u8221\'94} and that \softline
shareholders are likely to face greater collective action problems than managers in lobbying \softline
Congress.{}{\plain \fs24 \super 16{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 16}{}{\plain \fs24 }{\plain \fs20 \fs20   Roberta Romano, }{\plain \fs20 \scaps\fs20 The Genius of American Corporate Law}{\plain \fs20 \fs20  76 (1993).}}}
}{\plain \fs24   In particular, Romano notes that, in addition to possessing higher stakes, managers can \softline
use corporate funds to pay their lobbying expenditures.{}{\plain \fs24 \super 17{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 17}{}{\plain \fs24  }{\plain \fs20 \i\fs20  Id.}}}
}{\plain \fs24   Other commentators have identified \softline
limitations in the SEC{\u8217\'92}s ability to address deficiencies in state law through its rule-making authority.{}{\plain \fs24 \super 18{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 18}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See, e.g}{\plain \fs20 \fs20 ., J. Robert Brown, Jr.,}{\plain \fs20 \i\fs20  The Irrelevance of State Corporate Law in the Governance of Public \softline
Companies}{\plain \fs20 \fs20 , 38 }{\plain \fs20 \scaps\fs20 U. Rich. L. Rev}{\plain \fs20 \fs20 . 317, 321 (2004) (describing as {\u8220\'93}unsuccessful{\u8221\'94} the SEC{\u8217\'92}s efforts to compensate for \softline
deficiencies in state laws concerning corporate governance).}}}
}{\plain \fs24   \softline
Although an analysis of the SEC{\u8217\'92}s institutional competence is beyond the scope of this Article, \softline
institutional characteristics such as expertise, the potential for industry capture, the extent of agency \softline
independence versus susceptibility to political influence, and the explicit and implicitly delegated \softline
scope of rule-making authority are all relevant to this issue.  Finally, commentators have recently \softline
highlighted the growing albeit indirect federalization of fiduciary duty law by the federal courts in the \softline
context of federal securities fraud litigation.{}{\plain \fs24 \super 19{\footnote \pard \fs20\ri540 
{\ul0 \tab }{\plain \fs24 \super 19}{}{\plain \fs24 }{\plain \fs20 \fs20   Robert B. Thompson & Hillary A. Sale, }{\plain \fs20 \i\fs20 Securities Fraud as Corporate\par
}\pard \fs24\ri540\sa240 
{\plain \fs20 \i\fs20 Governance: Reflections upon Federalism, }{\plain \fs20 \fs20 56 }{\plain \fs20 \scaps\fs20 Vand. L. Rev}{\plain \fs20 \fs20 . 859 (2003).}}}
}{\plain \fs24   Hillary Sale and Robert Thompson argue\par
}{\plain \fs24 that the enforcement of federal securities law through securities fraud class actions has {\u8220\'93}become the \softline
most visible means of regulating corporate governance.{\u8221\'94}{}{\plain \fs24 \super 20{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 20}{}{\plain \fs24   }{\plain \fs20 \i\fs20 Id.}{\plain \fs20 \fs20  at 860.}}}
}{\plain \fs24   They then identify as the key question \softline
posed by their results whether the existing allocation of corporate governance is desirable or whether 
{\u8220\'93}whether we should proceed to regulate corporate governance more directly at the federal level.{\u8221\'94}{}{\plain \fs24 \super 21{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 21}{}{\plain \fs24   }{\plain \fs20 \i\fs20 Id}{\plain \fs20 \fs20 . at 910.}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab }{\plain \fs24 \b B.  Efficiency in corporate law {\u8211\'96} Maximization of Shareholder Wealth}{\plain \fs24 \par
}{\plain \fs24 \tab The debate over regulatory competition in corporate law seeks to address the question of \softline
whether the existing regulatory structure produces efficient legal rules.  As Fischel and Easterbrook \softline
ask: {\u8220\'93}Is corporate law efficient or not?{}{\plain \fs24 \super 22{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 22}{}{\plain \fs24   }{\plain \fs20 \fs20 Frank H. Easterbrook & Daniel R. Fischel, }{\plain \fs20 \scaps\fs20 The Economic Structure of Corporate Law }{\plain \fs20 \fs20 212 (1991).}}}
}{\plain \fs24   Accepting, for the purposes of this Article, that efficiency is \softline
the appropriate metric by which to evaluate corporate law, the appropriate definition of efficiency \softline
remains somewhat unclear.  From a societal standpoint, efficient legal rules are those that maximize \softline
aggregate social welfare.{}{\plain \fs24 \super 23{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 23}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See, e.g.}{\plain \fs20 \fs20 , A. Mitchell Polinsky, }{\plain \fs20 \scaps\fs20 An Introduction to Law and Economics }{\plain \fs20 \fs20 7-10 (1983). }}}
}{\plain \fs24   Lucian Bebchuk correctly observes that, because {\u8220\'93}a given corporate law \softline
issue ... implicates not only the interests of shareholders, but also those of third parties . . . . these \softline
[third party] interests must be taken into account in arriving at the socially optimal rule.{}{\plain \fs24 \super 24{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 24}{}{\plain \fs24   }{\plain \fs20 \fs20 Lucian A. Bebchuk, }{\plain \fs20 \i\fs20 Federalism and the Corporation: The Desirable Limits on State Competition in \softline
Corporate Law}{\plain \fs20 \fs20 , 105 }{\plain \fs20 \scaps\fs20 Harv. L. Rev}{\plain \fs20 \fs20 .1437, 1485 (1992).}}}
}{\plain \fs24   Corporate \softline
scholars have typically viewed corporate law as private law, however, and focused on corporate or \softline
firm value.  Moreover, for reasons that will be developed further below, corporate law scholarship has \softline
largely equated firm value with shareholder value.  Accordingly, corporate scholars typically define \softline
the corporation{\u8217\'92}s objective as maximization of shareholder wealth.{}{\plain \fs24 \super 25{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 25}{}{\plain \fs24    }{\plain \fs20 \i\fs20 See, e.g.}{\plain \fs20 \fs20 , Bernard Black and Reinier Kraakman, }{\plain \fs20 \i\fs20 A Self-Enforcing Model of Corporate Law}{\plain \fs20 \fs20 , 109 }{\plain \fs20 \scaps\fs20 Harv. \softline
L. Rev}{\plain \fs20 \fs20 . 1911, 1920 (1996) (describing function of corporate law as {\u8220\'93}maximizing the value of corporate enterprises \softline
to investors and therefore (on the whole) to society{\u8221\'94}); }{\plain \fs20 \i\fs20 see also }{\plain \fs20 \fs20 Michael Bradley, Cindy A. Schipani, Anant K. \softline
Sundaram and James P. Walsh, }{\plain \fs20 \i\fs20 The Purposes and Accountability of the Corporation in Contemporary Society: \softline
Corporate Governance at a Crossroads}{\plain \fs20 \fs20 , 62 }{\plain \fs20 \scaps\fs20 Law & Contemp. Probs}{\plain \fs20 \fs20 . 9 (1999); Roberta Romano,}{\plain \fs20 \i\fs20  The Political \softline
Economy of Takeover Statutes}{\plain \fs20 \fs20 , 73 }{\plain \fs20 \scaps\fs20 Va. L. Rev. }{\plain \fs20 \fs20 111, 113 (1987) (describing {\u8220\'93}the maximization of equity share prices \softline
[as] the core goal of corporation law{\u8221\'94}).}}}
}{\plain \fs24   Scholars evaluate regulatory \softline
choices in terms of their impact upon a shareholder-based component of corporate value such as \softline
profitability, stock price or Tobin{\u8217\'92}s Q.{}{\plain \fs24 \super 26{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 26}{}{\plain \fs24     }{\plain \fs20 \fs20 Standard market efficiency analysis suggests that, in general, there should be no meaningful difference \softline
between measuring corporate performance in terms of a performance-based variable such as profitability or a \softline
shareholder return variable such as stock price, because, in an efficient market, stock price should reflect an issuer{\u8217\'92}s \softline
profitability.  }}}
}{\plain \fs24   Efficient corporate laws are those that maximize shareholder 
value.\par
}{\plain \fs24 \tab The empirical literature incorporates this methodology.  Thus in their efforts to evaluate the \softline
efficiency of Delaware law relative to that of other states, both Rob Daines and Guhan Subramanian \softline
looked to the effect of Delaware incorporation on Tobin{\u8217\'92}s Q {\u8211\'96} the ratio of firm{\u8217\'92}s stock market value \softline
to the book value of its assets.  Similarly, Gompers, Ishii and Metrick argued that the statistical \softline
relationship between their governance index and Tobin{\u8217\'92}s Q demonstrated the inefficiency of firm \softline
takeover defenses.  Other commentators have used event studies to capture the effect of regulatory \softline
changes on firm value.  For example, in evaluating legislative adoption of director exculpation \softline
statutes, Michael Bradley and Cindy Schipiani looked at changes in firm stock price and concluded \softline
that director exculpation statutes inefficiently lowered firm value.{}{\plain \fs24 \super 27{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 27}{}{\plain \fs24 }{\plain \fs20 \fs20   Michael Bradley & Cindy A. Schipani, }{\plain \fs20 \i\fs20 The Relevance of the Duty of Care Standard in Corporate \softline
Governance}{\plain \fs20 \fs20 , 75 }{\plain \fs20 \scaps\fs20 Iowa L. Rev}{\plain \fs20 \fs20 . 1 (1989); Michael Bradley & Cindy A.  Schipiani,  }{\plain \fs20 \i\fs20 The Economic Importance of the \softline
Business Judgment Rule: An Empirical Investigation of the Trans Union Decision and Subsequent Delaware \softline
Legislation}{\plain \fs20 \fs20 , in }{\plain \fs20 \scaps\fs20 The Battle for Corporate Control105 }{\plain \fs20 \fs20 (Arnold N. Sametz ed., 1991) (finding that the passage of \softline
{\u167\'a7} 102(b)(7) actually lowered the value of Delaware corporations)}}}
}{\plain \fs24    Still other studies focus on \softline
accounting profitability.  Thus, in seeking to determine whether greater board independence produced \softline
{\u8220\'93}better corporate performance,{\u8221\'94} Bernard Black and Sanjai Bhagat looked at a range of accounting \softline
variables.{}{\plain \fs24 \super 28{\footnote \pard \fs24\ri540\sa240\tx0\tx720\tx1440\tx2160\tx2880\tx3600\tx4320\tx5040\tx5760\tx6480\tx7200\tx7920 
{\ul0 \tab }{\plain \fs24 \super 28}{}{\plain \fs24   }{\plain \fs20 \f3\fs20 Sanjai Bhagat & Bernard S. Black, }{\plain \fs20 \i\f3\fs20 The Non-Correlation between Board Independence and Long-Term \softline
Firm Performance}{\plain \fs20 \f3\fs20 , 27 }{\plain \fs20 \scaps\f3\fs20 Iowa J. Corp. L}{\plain \fs20 \f3\fs20 . 231, 241-42 (2002).}{\plain \fs20 \fs20   Bhagat and Black also looked at stock price \softline
performance but recognized some of the limitations of this approach.  }{\plain \fs20 \i\fs20 See id. }{\plain \fs20 \fs20 at 242.}{\plain \fs24 \ul0 \tab \ul0 \tab }}}
}{\plain \fs24    Regardless of the precise variable selected, in each case, the purpose of the empirical \softline
research is to measure the efficiency of particular corporate law rules.  Whether the rules are the \softline
product of statutes, judicial decision-making or individual firm choice, the studies evaluate their \softline
efficiency by reference to their effect on shareholder value.  Accordingly, the empirical studies \softline
conclude that the efficient rules are those that are correlated with higher returns to shareholders.  \par
}{\plain \fs24 \tab Shareholders, however, are not the only participants in the corporation.  Corporations produce \softline
value not simply for shareholders, but also for a variety of non-shareholder groups, including \softline
management, employees, creditors, customers, and suppliers.  A corporation provides value to its \softline
creditors in the form of interest payments on its debt.  It provides value to management and other \softline
employees through the provision of jobs resulting in compensation, fringe benefits and, in some cases, \softline
the development of specialized skills or marketable reputations.  A corporation{\u8217\'92}s products provide 
value to its customers who engage in voluntary surplus-producing market transactions.  A corporation \softline
similarly produces value to its suppliers.  Corporations may also provide value to the communities in \softline
which they are located, through the property taxes that they pay, the services they provide, even the \softline
charitable activities in which they engage.  \par
}{\plain \fs24 \tab By measuring efficiency in terms of shareholder wealth, the methodology of the empirical \softline
studies explicitly excludes the effect of regulatory changes on non-shareholder constituencies within \softline
the corporation.  The value that a corporation produces and distributes to its stakeholders in the form \softline
of salaries, interest payments, charitable contributions and so forth, is subtracted from the \softline
corporation{\u8217\'92}s pre-tax revenues.  Thus, this stakeholder value is not incorporated into the calculation \softline
of corporate profits.  Similarly, because it is distributed to non-shareholder stakeholders, it does not \softline
affect shareholder returns.  As a result, non-shareholder value does not make its way into the \softline
empirical assessments of firm value that scholars use to evaluate the efficiency of corporate law.\par
}{\plain \fs24 \tab The implications of this omission are simple.  Empirical studies may identify as efficient \softline
regulatory changes that transfer wealth to shareholders from non-shareholder groups.  At the same \softline
time, empirical studies may fail to identify as efficient regulatory changes that increase value \softline
primarily for non-shareholder stakeholders.  The studies essentially reject the position that efficiency \softline
in corporate law is a function of aggregate firm value; instead they reflect the view that the \softline
shareholders{\u8217\'92} portion of the pie is the only relevant consideration.\par
}{\plain \fs24 \tab The dominance of shareholder wealth maximization in empirical studies of the efficiency of \softline
corporate law can be explained in several ways.  A combination of practical considerations operate in \softline
favor of relying on shareholder wealth.  Because corporate and securities law focus on the role and the \softline
rights of investors, scholars may believe that the impact of changes in corporate law on the value of \softline
non-shareholder interests is relatively minor and may be disregarded for purposes of their analysis.  \softline
Data on shareholder wealth, particularly changes in market capitalization, are also easy to obtain.  \softline
Although empirical research could probably incorporate a reasonable measure of creditor value, based \softline
on something like the market value of publicly traded corporate debt, neither the legal nor the \softline
financial literature has developed standardized measures of employee value, customer value, and so \softline
forth.  \par
}{\plain \fs24 \tab Moreover, researchers may believe that shareholder value is a reasonably good proxy for firm 
value.  Traditional economic analysis suggests that decisions that maximize shareholder value are \softline
likely to maximize firm value.  If maximizing shareholder value leads to efficiency from the \softline
perspective of all the firm{\u8217\'92}s stakeholders, or society generally, than shareholder value is an \softline
appropriate metric for assessing the efficiency of legal rules.   If shareholder value is closely \softline
correlated with firm value, than there is little reason to seek to incorporate a more complex measure \softline
of firm value.\par
}{\plain \fs24 \tab The problem with applying this reasoning to empirical assessments of corporate regulation is \softline
that the central focus of corporate law is to address the conflicts of interest among the various \softline
corporate constituencies.  Reinier Kraakman and his co-authors highlight this point in their recent \softline
book,}{\plain \fs24 \i  The Anatomy of Corporate Law}{\plain \fs24 .{}{\plain \fs24 \super 29{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 29}{}{\plain \fs24 }{\plain \fs20 \fs20   Kraakman, }{\plain \fs20 \i\fs20 et al.}{\plain \fs20 \fs20 ,}{\plain \fs20 \scaps\fs20  The Anatomy of Corporate Law: A Comparative and Functional Approach \softline
}{\plain \fs20 \fs20 (2004). }}}
}{\plain \fs24   Kraakman, }{\plain \fs24 \i et al.}{\plain \fs24 , explain that the dominant purpose of \softline
corporate law is to address the agency problems created by conflicts of interest between shareholders \softline
and management, between controlling and minority shareholders, and between shareholders and other \softline
stakeholders.{}{\plain \fs24 \super 30{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 30}{}{\plain \fs24 }{\plain \fs20 \fs20   See David A. Skeel, Jr., }{\plain \fs20 \i\fs20 Corporate Anatomy Lessons, }{\plain \fs20 \fs20 113 }{\plain \fs20 \scaps\fs20 Yale L.J. }{\plain \fs20 \fs20 1519, 1528-29 (explaining and \softline
evaluating Kraakman{\u8217\'92}s characterization).}}}
}{\plain \fs24   This characterization of corporate law reveals a problem in using shareholder value to \softline
evaluate the efficiency of corporate law.  It is precisely in situations involving a conflict of interest \softline
between corporate stakeholders in which an increase in value to one stakeholder group may result \softline
from costs imposed on another stakeholder group rather than net increases in the size of the corporate \softline
pie.  Shareholder value is not an appropriate measure of the efficiency of rules that allocate value \softline
between shareholders and other stakeholders.  \par
}{\plain \fs24 \tab Whether or not one agrees with Kraakman, }{\plain \fs24 \i et al.}{\plain \fs24 {\u8217\'92}s characterization of agency issues as the \softline
central focus of corporate law, it is clear that such agency issues are the focus of many of the \softline
empirical studies of corporate law.  Takeover regulation is perhaps the most dramatic example of \softline
legal rules that allocate firm value among shareholders, employees, and other corporate \softline
constituencies.  Indeed, some commentators have explicitly defended antitakeover regulation as \softline
necessary to respond to the appropriation of value by shareholders from other corporate stakeholders.  \softline
If shareholder gains from takeovers come as the result of losses imposed on employees or creditors, 
an empirical study that seeks to evaluate the efficiency of an antitakeover regulation by looking at its \softline
effect on stock price is clearly incomplete.  Instead, efficiency would require the study to determine \softline
the net effect of the regulation on firm value.  \par
}{\plain \fs24 \tab Alternatively, one might respond by rejecting the claim that the efficiency of corporate law is \softline
or should be measured by reference to aggregate firm value.  Some scholars have argued that \softline
shareholder value is the normatively appropriate focus of corporate law, and that the interests of other \softline
corporate stakeholders are better addressed through other bodies of law such as labor law, consumer \softline
law, and so forth.{}{\plain \fs24 \super 31{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 31}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See, e.g}{\plain \fs20 \fs20 ., Henry Hansmann and Reinier Kraakman, }{\plain \fs20 \i\fs20 The End of History for Corporate Law, }{\plain \fs20 \fs20 89 }{\plain \fs20 \scaps\fs20 Geo. L.J. \softline
}{\plain \fs20 \fs20 439 (2001).}}}
}{\plain \fs24   If corporate law does or should focus exclusively on shareholder value, then the \softline
empirical literature is not using shareholder value as a proxy for firm value, but rather is focusing on \softline
the appropriate efficiency metric.  Accordingly the next section considers the shareholder primacy \softline
norm and the claim that efficiency in corporate law should be defined by reference to shareholder \softline
wealth.\par
}{\plain \fs24 \tab }{\plain \fs24 \b II.  The Shareholder Primacy Norm}{\plain \fs24  \par
}{\plain \fs24 \tab }{\plain \fs24 \b A.  Origins of the Norm}{\plain \fs24 \par
}{\plain \fs24 \tab The focus on shareholder wealth in evaluating corporate law is based on the norm of \softline
shareholder primacy.  Shareholder primacy, the obligation of corporate decision-makers to focus on \softline
shareholder interests, is a dominant principle in corporate law.{}{\plain \fs24 \super 32{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 32}{}{\plain \fs24 }{\plain \fs20 \fs20   As Steve Bainbridge has observed, shareholder primacy actually encompasses {\u8220\'93}two distinct principles: \softline
1) the shareholder wealth maximization norm . . . and 2) the principle of ultimate shareholder control.  See Stephen \softline
M. Bainbridge, Director Primacy: }{\plain \fs20 \i\fs20 The Means and Ends of Corporate Governance}{\plain \fs20 \fs20 , 97 }{\plain \fs20 \scaps\fs20 Nw.U. L. Rev}{\plain \fs20 \fs20 . 547, 573 \softline
(2003).  In his analysis of director primacy, Bainbridge focuses on the second principle and does not discard the \softline
principle of shareholder wealth maximization.  Id. at 574.}}}
}{\plain \fs24   As the court explained in the \softline
textbook staple }{\plain \fs24 \i Dodge v. Ford Motor Corp}{\plain \fs24 .: {\u8220\'93}A business corporation is organized and carried on \softline
primarily for the profit of the stockholders.{\u8221\'94}{}{\plain \fs24 \super 33{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 33}{}{\plain \fs24 }{\plain \fs20 \fs20   204 Mich. 459, 170 N.W. 668 (Mich. 1919).}}}
}{\plain \fs24   Although some scholars, most notably progressive \softline
scholars, have questioned whether the norm is either descriptively accurate or normatively \softline
appropriate, the vast majority of commentators accept the premise that the primary objective of the \softline
corporation is to maximize shareholder wealth. \par
}{\plain \fs24 \ul0 \tab The origins of the shareholder primacy norm can be found in the classic debate between \softline
Merrick Dodd and Adolf Berle in the 1930, at the time that the U.S. corporation was expanding from \softline
an organization form used primarily for public work {\u8211\'96} building and operating railroads, ferry services, \softline
bridges and the like {\u8211\'96} to the foundational form for private business enterprise.  Berle and Dodd were \softline
actually debating two related questions {\u8211\'96} how properly to characterize the developing structure of \softline
corporate law and, relatedly, how corporate law should develop in the future.  Thus Berle, who \softline
espoused the conception of shareholder primacy in the debate, argued that corporate law was \softline
essentially a variant of trust law, in which corporate mangers owed fiduciary duties to manage the \softline
corporation in the interests of the shareholder-beneficiaries.{}{\plain \fs24 \super 34{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 34}{}{\plain \fs24   }{\plain \fs20 \fs20 Adolf Berle, }{\plain \fs20 \i\fs20 Corporate Powers as Powers in Trust}{\plain \fs20 \fs20 , 44 }{\plain \fs20 \scaps\fs20 Harv. L. Rev}{\plain \fs20 \fs20 . 1049 1074 (1931).}}}
}{\plain \fs24   Berle{\u8217\'92}s claim was primarily \softline
descriptive: {\u8220\'93}all powers granted to a corporation or to the management of a corporation . . . are . . . \softline
exercisable only for the ratable benefit of all shareholders as their interest appears.{\u8221\'94}{}{\plain \fs24 \super 35{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 35}{}{\plain \fs24 }{\plain \fs20 \i\fs20   Id. }{\plain \fs20 \fs20 at 1049.}}}
}{\plain \fs24   Berle{\u8217\'92}s \softline
argument was essentially premised on the conception of shareholders as owners of the corporation.  \softline
Managers{\u8217\'92} obligations to shareholders stem from their role as trustees or agents.\par
}{\plain \fs24 \tab Dodd responded with the essentially normative and largely aspirational argument, that \softline
managers {\u8220\'93}should concern themselves with the interests of employees, consumers, and the general \softline
public as well as of the stockholders. . . .{\u8221\'94}{}{\plain \fs24 \super 36{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 36}{}{\plain \fs24   }{\plain \fs20 \fs20 Merrick Dodd, }{\plain \fs20 \i\fs20 For Whom are Corporate Managers Trustees?}{\plain \fs20 \fs20 , 45 }{\plain \fs20 \scaps\fs20 Harv. L. Rev}{\plain \fs20 \fs20 . 1145, 1156 (1932).}}}
}{\plain \fs24   Dodd{\u8217\'92}s argument sought to distance corporate or \softline
business law from private law, claiming that public opinion was moving the law toward a view in \softline
which the business corporation has {\u8220\'93}a social service as well as a profit-making function.{\u8221\'94}{}{\plain \fs24 \super 37{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 37}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 Id}{\plain \fs20 \fs20 . at 1148.}}}
}{\plain \fs24   At least \softline
for a period of time, corporate law came to adopt Dodd{\u8217\'92}s position, granting managers wide discretion \softline
to manage the corporation in the general interests of society.{}{\plain \fs24 \super 38{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 38}{}{\plain \fs24    }{\plain \fs20 \fs20 See Hansmann & Kraakman, }{\plain \fs20 \i\fs20 supra}{\plain \fs20 \fs20  note  at 444 n. 6 (describing Berle{\u8217\'92}s subsequent statements on the \softline
issue).  }{\plain \fs20 \i\fs20 See also}{\plain \fs20 \fs20  Adolf Berle, Foreword, }{\plain \fs20 \scaps\fs20 The Corporation in Modern Society }{\plain \fs20 \fs20 xii (E. Mason ed. 1959) (conceding \softline
that corporate law had developed to be consistent with Dodd{\u8217\'92}s position but maintaining his misgivings about whether \softline
this was the {\u8220\'93}{\u8216\'91}right{\u8217\'92} disposition.{\u8221\'94}).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab A variety of commentators base their defense of shareholder primacy on the legal status of 
shareholders as owners of the corporation.{}{\plain \fs24 \super 39{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 39}{}{\plain \fs24   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Adolf A. Berle & Gardiner Means, }{\plain \fs20 \scaps\fs20 The Modern Corporation and Private Property}{\plain \fs20 \fs20  9 (1932) \softline
(referring to  shareholders as {\u8220\'93}owners{\u8221\'94} and noting that corporate governance must focus on the problems caused by \softline
the separation of ownership and control); David  Millon, }{\plain \fs20 \i\fs20 Redefining Corporate Law}{\plain \fs20 \fs20 , 24 }{\plain \fs20 \scaps\fs20 Ind. L. Rev}{\plain \fs20 \fs20 . 223, 229-30 \softline
(1991) (explaining idea that shareholders hold corporations as property).}}}
}{\plain \fs24   This argument defense has increasingly lost favor, \softline
leading Lynn Stout to characterize it recently as {\u8220\'93}the worst, of the standard arguments for shareholder \softline
primacy.{\u8221\'94}{}{\plain \fs24 \super 40{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 40}{}{\plain \fs24   }{\plain \fs20 \fs20 Lynn A. Stout, }{\plain \fs20 \i\fs20 Bad and Not-so-bad Arguments for Shareholder Primacy}{\plain \fs20 \fs20 , 75 }{\plain \fs20 \scaps\fs20 S. Cal. L. Rev}{\plain \fs20 \fs20 . 1189, 1190 \softline
(2002).}}}
}{\plain \fs24   Such a defense is weakened by the substantial legal and practical differences between \softline
shareholders and traditional property owners.{}{\plain \fs24 \super 41{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 41}{}{\plain \fs24 }{\plain \fs24 \i   }{\plain \fs20 \i\fs20 See, e.g.}{\plain \fs20 \fs20 , Margaret M. Blair,}{\plain \fs20 \scaps\fs20  Ownership and Control: Rethinking Corporate Governance for \softline
the Twenty-First Century }{\plain \fs20 \fs20 4-5 (1995) (describing as misleading the characterization of shareholders as owners).}}}
}{\plain \fs24   From a legal perspective, shareholders own stock, \softline
which gives them claims to certain control and financial rights within the corporation but not direct \softline
control over or even access to the firm{\u8217\'92}s underlying assets.  Other stakeholders, including creditors, \softline
options holders and managers have claims to different control and financial rights.  From a practical \softline
perspective, shareholders also do not resemble traditional owners.  They are a fluid and fluctuating \softline
group of investors.  Many are short term participants in the corporate enterprise.  Others hold stock as \softline
part of a diversified investment strategy in which they simply seek to obtain the market rate of return.  \softline
Large numbers of shareholders do not vote, do not read corporate disclosure statements, and do not \softline
maintain an ongoing interest in developments concerning their portfolio companies.  As a result, it \softline
seems inappropriate to privilege their claims by relying on a property rights conception of legal \softline
ownership.\par
}{\plain \fs24 \tab In the 1930s debates, Berle identified a key drawback to Dodd{\u8217\'92}s public law conception of \softline
managerial responsibilities.  Increasing management discretion in favor of other constituencies {\u8211\'96} so-called stakeholder capitalism {\u8211\'96}  would weaken management{\u8217\'92}s fiduciary obligations to shareholders.  \softline
This would have the effect, in Berle{\u8217\'92}s view, of making managerial power, {\u8220\'93}for all practical purposes \softline
absolute.{\u8221\'94}{}{\plain \fs24 \super 42{\footnote \pard \fs24
{\ul0 \tab }{\plain \fs24 \super 42}{\par
}\pard \fs24\ri540\sa240 
{\plain \fs24 }{\plain \fs20 \fs20   Adolf A. Berle, }{\plain \fs20 \i\fs20 For Whom Corporate Managers are Trustees: A Note}{\plain \fs20 \fs20 , 45 }{\plain \fs20 \scaps\fs20 Harv. L. Rev}{\plain \fs20 \fs20 . 1365, 1367 \softline
(1932).}}}
}{\plain \fs24   Berle{\u8217\'92}s analysis provides an alternative normative foundation for shareholder primacy: as \softline
a basis for constraining management discretion and, ultimately, management self-dealing.  Similarly 
modern scholars have defended shareholder capitalism against arguments in favor of stakeholder \softline
interests by arguing that legal recognition of such interests is unmanageable.  First, imposing upon \softline
management fiduciary obligations to multiple stakeholders creates irreconcilable conflicts in the \softline
frequent situations in which the interests of those stakeholders conflict.  Second, legal endorsement of \softline
stakeholder interests has the practical effect of vesting management with largely irreviewable degree \softline
of decision-making discretion that is likely to increase agency costs.  The shareholder primacy norm, \softline
in contrast, provides an objective standard by which to evaluate operational decisions.\par
}{\plain \fs24 \tab The imposition of trustee-like fiduciary duties, as Berle described, also offers a vehicle for \softline
enforcement of the shareholder primacy norm.  Shareholders can address deviations from shareholder \softline
primacy through derivative litigation against errant corporate decision-makers.  Today, the \softline
shareholder derivative suit enforces the use of fiduciary principles as a constraint on management \softline
decision-making, both to insure that management acts in furtherance of shareholder interests rather \softline
than its own and to limit management discretion to favor the interests of other corporate \softline
constituencies over the interests of shareholders.\par
}{\plain \fs24 \tab Concededly, shareholder capitalism only supplies a loose set of constraints on managerial \softline
discretion because there are a range of interests represented within the shareholder class.  \softline
Shareholders may differ in the temporal scope of their investment, the extent of their diversification \softline
and their willingness to bear risk.  Conflicts of interest between different shareholder groups limit the \softline
functionality of shareholder primacy as a decision-making constraint.\par
}{\plain \fs24 \tab }{\plain \fs24 \b B.  Shareholder Primacy and Existing Law}{\plain \fs24 \par
}{\plain \fs24 \tab Despite widespread academic endorsement of the shareholder primacy norm, it is unclear that \softline
existing law actually requires officers and directors to make operational decisions in an effort to \softline
maximize shareholder wealth.  Although Delaware law is generally described favoring the interests of \softline
shareholders relative to the law of other states, the Delaware statute does not explicitly require that a \softline
corporation be managed exclusively or even primarily in the interests of its shareholders.  Indeed, the \softline
Delaware statute is silent both with respect to the standard by which management decisions are to be \softline
evaluated and with respect to the stakeholders whose interests may legitimately be taken into account.  \softline
\ul0 \tab Delaware case law is similarly ambiguous.  Although shareholder primacy advocates point to \softline
the language of cases like}{\plain \fs24 \i  Dodge v. Ford}{\plain \fs24 , there is a surprising absence of modern precedent explicitly 
requiring management to maximize shareholder value.  Concededly the }{\plain \fs24 \i Revlon}{\plain \fs24  decision requires the \softline
directors, in the context of a cash sale of the company, to obtain the highest possible selling price.{}{\plain \fs24 \super 43{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 43}{}{\plain \fs24 }{\plain \fs20 \fs20   Revlon, Inc. v. MacAndrews  & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).}{\plain \fs24  }}}
}{\plain \fs24   \softline
But the }{\plain \fs24 \i Revlon}{\plain \fs24  decision is limited to the corporate control context and, even within that context, \softline
applies to an extremely limited set of cases.  \par
}{\plain \fs24 \tab In the operational context, the business judgment rule affords management ample discretion to \softline
consider the interests of other stakeholders.  Delaware courts have described the business judgment \softline
rule as imposing an obligation to act {\u8220\'93}in the best interests of the company.{\u8221\'94}{}{\plain \fs24 \super 44{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 44}{}{\plain \fs24 }{\plain \fs20 \fs20   Aronson v. Lewis, 473, A.2d 805, 812 (Del. 1984). }}}
}{\plain \fs24    Even in the takeover \softline
context, so long as the company has not entered the }{\plain \fs24 \i Revlon}{\plain \fs24  mode, Delaware law permits directors to \softline
consider the interests of {\u8220\'93}creditors, customers, employees, and perhaps even the community \softline
generally.{\u8221\'94}{}{\plain \fs24 \super 45{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 45}{}{\plain \fs24 }{\plain \fs20 \fs20   Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985). }}}
}{\plain \fs24   As the court explained in }{\plain \fs24 \i Paramount Communications Inc. v. Time Inc}{\plain \fs24 .: {\u8220\'93}[A] board of \softline
directors . . . is not under any per se duty to maximize shareholder value.{\u8221\'94}{}{\plain \fs24 \super 46{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 46}{}{\plain \fs24 }{\plain \fs20 \fs20   571 A.2d 1140, 1150 (Del. 1989).}}}
}{\plain \fs24   Rather, Delaware appears \softline
to endorse the right, if not the obligation of directors to manage the corporation as a legal and \softline
economic entity.{}{\plain \fs24 \super 47{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 47}{}{\plain \fs24 }{\plain \fs20 \i\fs20   See, e.g.,}{\plain \fs20 \fs20  William T. Allen,}{\plain \fs20 \i\fs20  Our Schizophrenic Conception of the Business Corporation}{\plain \fs20 \fs20 , 14 }{\plain \fs20 \scaps\fs20 Cardozo L. \softline
Rev}{\plain \fs20 \fs20 . 261 (1992).}}}
}{\plain \fs24   \par
}{\plain \fs24 \tab Moreover, it is important to distinguish two concepts in Delaware case law.  The Delaware \softline
courts have explicitly rejected the argument that management has a }{\plain \fs24 \i fiduciary obligation}{\plain \fs24  to other \softline
stakeholders at the expense of shareholders, at least so long as the corporation is not operating in the \softline
vicinity of insolvency.  Fiduciary obligations, enforceable through derivative litigation, operate only \softline
in favor of shareholder interests.  The exclusivity of fiduciary duties to shareholders does not, \softline
however, mandate shareholder primacy.  Similarly, the cases that reject stakeholder claims for breach \softline
of fiduciary duty do not contain anything }{\plain \fs24 \i preventing }{\plain \fs24 management from favoring stakeholder interests; \softline
they simply provide that management{\u8217\'92}s failure to favor such interests is not judicially remediable.  \par
}{\plain \fs24 \tab States other than Delaware have endorsed broader conceptions of firm value for the purposes 
of managerial decision-making.  The majority of states have adopted corporate constituency statutes \softline
which explicitly authorize directors to consider the interests of non-shareholder stakeholders.{}{\plain \fs24 \super 48{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 48}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Guhan Subramanian, }{\plain \fs20 \i\fs20 The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on \softline
the "Race" Debate and Antitakeover Overreaching}{\plain \fs20 \fs20 , 150 }{\plain \fs20 \scaps\fs20 U. Pa. L. Rev. }{\plain \fs20 \fs20 1795, 1801 (2002) (identifying thirty-one \softline
states that have adopted corporate constituency statutes).}}}
}{\plain \fs24   \softline
Although these statutes were adopted in response to hostile tender offers and several are limited to the \softline
change control context, the vast majority apply to all corporate decisions.  In many cases, the statutes \softline
explicitly provide that directors will not be required to the effects of a corporate decision on any \softline
particular group {\u8211\'96} including shareholders {\u8211\'96} as a dominant factor.{}{\plain \fs24 \super 49{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 49}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Ind. Code 23-1-35-1.  }}}
}{\plain \fs24   As former SEC Commissioner Al \softline
Sommer has observed, the salient point of these statutes is that they define the best interests of the \softline
corporation in terms of the interests of both shareholders and non-shareholder stakeholders, thereby \softline
omitting any requirement that decisions favoring non-shareholder stakeholders be justified in terms of \softline
a nexus to shareholder value.{}{\plain \fs24 \super 50{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 50}{}{\plain \fs24   }{\plain \fs20 \fs20 A. A. Sommer Jr., }{\plain \fs20 \i\fs20 Whom Should the Corporation Serve? The Berle-Dodd Debate Revisited Sixty Years \softline
Later}{\plain \fs20 \fs20 , 16 }{\plain \fs20 \scaps\fs20 Del. J. Corp. L}{\plain \fs20 \fs20 . 33, 42 (1991).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab It is true that the statutes {\u8211\'96} other than that of Connecticut {\u8211\'96} do not require directors to favor \softline
other stakeholders, nor do they impose fiduciary obligations on directors in favor of non-shareholder \softline
constituencies.  Nonetheless, the plain language of the statutes is inconsistent with the shareholder \softline
primacy norm.  In some cases, statutory provisions extend even further.  For example, the New York \softline
corporation statute authorizes corporations to make charitable donations {\u8220\'93}irrespective of corporate \softline
benefit.{\u8221\'94}{}{\plain \fs24 \super 51{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 51}{}{\plain \fs24 }{\plain \fs20 \fs20   N.Y. B.C.L. {\u167\'a7} 202(a)(12).   Similarly, the Delaware Supreme Court, in Kahn v. Sullivan, 594 A.2d 48 \softline
(Del. 1991), held that the appropriate standard to be applied in reviewing a corporate charitable donation was \softline
whether the donation constituted waste.  }}}
}{\plain \fs24   There is also ample case law rejecting an affirmative obligation on the part of directors to \softline
sacrifice the interests of other constituencies in order to maximize shareholder wealth.  As the court \softline
explained in }{\plain \fs24 \i GAF v. Union Carbide Corp.,{}{\plain \fs24 \super 52{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 52}{}{\plain \fs24 }{\plain \fs20 \fs20   624 F. Supp. 1016, 1018 (S.D.N.Y. 1985).}}}
}{\plain \fs24 }{\plain \fs24  the board must balance investors interests, on the one \softline
hand, and {\u8220\'93}the legitimate concerns and interests of employees and management . . . on the other.{\u8221\'94}{}{\plain \fs24 \super 53{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 53}{}{\plain \fs24 }{\plain \fs24 \i   }{\plain \fs20 \i\fs20 Id. }{\plain \fs20 \fs20 at 1019-20.  }}}
}{\plain \fs24 \par
}{\plain \fs24 \ul0 \tab Commentators have suggested that, in practice, the shareholder primacy norm is even less \softline
influential.  Lynn Stout has argued that the business world itself seems to favor director primacy over \softline
shareholder primacy, and that both law and practice condone a variety of standard practices {\u8211\'96} options \softline
repricings, retroactive increases in employee retirement benefits, and corporate charitable \softline
contributions {\u8211\'96}  in which shareholder interests are subordinated to those of other stakeholders.{}{\plain \fs24 \super 54{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 54}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Stout, }{\plain \fs20 \i\fs20 supra}{\plain \fs20 \fs20  note , at 1202-03.}}}
}{\plain \fs24   \softline
Thus, there are reasons to question the validity of the shareholder primacy norm both as a matter of \softline
legal obligation and existing corporate practice.\par
}{\plain \fs24 \tab }{\plain \fs24 \b C.  The Normative Foundations of Shareholder Primacy}{\plain \fs24 \par
}{\plain \fs24 \tab What explains the seeming disconnect between explicit legal doctrine and academic theory?  \softline
Many law and economics scholars defend shareholder primacy not by reference to some legal or \softline
theoretical conception of shareholder status but from a contractual perspective.  Normatively, if the \softline
corporation is a private enterprise in which the interests of its stakeholders are defined by their \softline
contractual agreements, the efficiency of legal rules should be measured by the extent to which they \softline
maximize the achievement of the parties{\u8217\'92} contractually specified objectives.\par
}{\plain \fs24 \tab Contractarian scholars describe the corporation as a hypothetical contract.{}{\plain \fs24 \super 55{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 55}{}{\plain \fs24   }{\plain \fs20 \i\fs20 See, e.g.,}{\plain \fs20 \fs20  Frank H. Easterbrook & Daniel R. Fischel, }{\plain \fs20 \i\fs20 The Corporate Contract}{\plain \fs20 \fs20 , 89 }{\plain \fs20 \scaps\fs20 Colum. L. Rev}{\plain \fs20 \fs20 . 1416, \softline
1418 (1989) (describing the corporation as {\u8220\'93}a complex set of explicit and implicit contracts{\u8221\'94}).}}}
}{\plain \fs24   Shareholders \softline
provide capital and other stakeholders provide other inputs, such as labor.  Non-shareholder \softline
stakeholders implicitly or explicitly bargain for priority over shareholders in exchange for receiving a \softline
fixed claim.  Shareholders then, implicitly or explicitly bargain for the residual or surplus {\u8211\'96} what is \softline
left over after the fixed claimants are paid. The bargain makes sense only if management has some \softline
obligation to make decisions that are expected to maximize the surplus left over for the shareholders.  \par
}{\plain \fs24 \tab If shareholder primacy is part of the implicit bargain among all corporate participants, it is \softline
interesting that shareholders have not succeeded in making it an explicit contractual term, either \softline
through legislation or in the corporation{\u8217\'92}s charter.  Nonetheless, there are reasons that shareholder \softline
primacy makes sense.  First, it is a partial substitute for the priority that other stakeholders enjoy.  A \softline
bargain in which one receives only the surplus left over after other claims is of little benefit if the \softline
other participants in the venture have no obligation to generate any surplus.  Second, shareholders are 
passive investors.  Through their control, other stakeholders, particularly management, can protect \softline
their priority interests directly.  Third, shareholder primacy serves as a gapfiller.  A contract that \softline
would fully specify management{\u8217\'92}s decision-making obligations with respect to shareholders would be \softline
impossibly complex and arguably too inflexible to respond to developments in the business world.  \softline
Finally, and perhaps most importantly, shareholders cannot withdraw their investment from the \softline
corporation without substantial sacrifice.  Managers, employees, creditors and suppliers provide input \softline
to the corporation on an ongoing basis.  Thus market forces constrain the corporation{\u8217\'92}s ability to \softline
exploit these stakeholders in addition to explicit contract terms.  In contrast, a shareholder provides \softline
permanent capital to the corporation.  Although shareholders can exit the corporation if their interests \softline
are not adequately protected, they can do so only by selling their shares to another investor.  As a \softline
result, they will bear the costs of misdeeds or self-dealing by other stakeholders even if they exit. \par
}{\plain \fs24 \tab This effect is demonstrated in cases in which states of have adopted extreme antitakeover \softline
legislation.  Several states have adopted antitakeover statutes that are widely viewed as extreme, \softline
incluidng Ohio, Massachusetts and Pennsylvania.{}{\plain \fs24 \super 56{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 56}{}{\plain \fs24 }{\plain \fs20 \fs20   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Bebchuk }{\plain \fs20 \i\fs20 et al., supra }{\plain \fs20 \fs20 note }{\plain \fs20 \sa99 \fs20 , at 1804-5.}}}
}{\plain \fs24   Commenators widely agree that these statutes \softline
harm shareholders by 1) reducing the ability of the takeover market to discipline management \softline
decision-making; and 2) making a takeover, with its likely premium for shareholders, less probable.  \softline
These effects are borne out by empirical work, which shows a negative impact on stock price.  The \softline
stock price of affected firms drops because the market anticipates the effect of these harms on the \softline
future value of the stock.  Significantly, however, existing shareholders in these firms are the group \softline
that suffers the harm from the legislation, and shareholders cannot avoid the harm through exit.\par
}{\plain \fs24 \tab It is important to distinguish these justifications for shareholder primacy from the economic \softline
theory that shareholder capitalism leads to maximum firm productivity.  The economic theory behind \softline
shareholder primacy is that, because shareholders receive the firm surplus, maximizing shareholder \softline
wealth means maximizing this surplus, and thus corporate decisions should be made to maximize \softline
shareholder wealth.  This analysis is incomplete.  Although decisions that maximize the corporate \softline
surplus have the effect of maximizing aggregate firm value, this does not require that shareholder \softline
receive all or even a portion of that surplus.  So long as corporate decisions are made in the interests 
of the residual claimant, such decisions will maximize the surplus and thus maximize aggregate firm \softline
value.\par
}{\plain \fs24 \tab The claim that managing the corporation in the interests of the residual claimants is most \softline
likely to maximize corporate value has been disputed.{}{\plain \fs24 \super 57{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 57}{}{\plain \fs24 }{\plain \fs20 \fs20   See, e.g., Thomas A. Smith,}{\plain \fs20 \i\fs20  The Efficient Norm for Corporate Law: A Neotraditional Interpretation of \softline
Fiduciary Duty}{\plain \fs20 \fs20 , 98 }{\plain \fs20 \scaps\fs20 Mich L. Rev}{\plain \fs20 \fs20 . 214, 221 (1999) (arguing that {\u8220\'93}the shareholder value maximization norm, if strictly \softline
applied, would require firm managers to make socially inefficient choices{\u8221\'94}); Stout, }{\plain \fs20 \i\fs20 supra}{\plain \fs20 \fs20  note , at 1197-98 \softline
(demonstrating how shareholder primacy can lead to inefficient outcome).}}}
}{\plain \fs24   Jeffrey Gordon has observed that the \softline
argument that maximizing shareholder value will maximize firm value depends on strong \softline
assumptions about the operation of the various markets in which the firm participates, including the \softline
capital market, the labor market and the product market.{}{\plain \fs24 \super 58{\footnote \pard \fs20\ri540 
{\ul0 \tab }{\plain \fs24 \super 58}{}{\plain \fs24   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Jeffrey N. Gordon, }{\plain \fs20 \i\fs20 The Shareholder Wealth Maximization Hypothesis: An Empirical Test\par
}\pard \fs24\ri540\sa240 
{\plain \fs20 \i\fs20 Using an Airline Industry Example }{\plain \fs20 \fs20 (working paper dated Nov. 2002).}}}
}{\plain \fs24   He is currently testing empirically the \softline
relationship between shareholder value and a broader conception of firm value or surplus.{}{\plain \fs24 \super 59{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 59}{}{\plain \fs24   }{\plain \fs20 \i\fs20 Id.}}}
}{\plain \fs24   \softline
Moreover, particularly when a corporation is in financial difficulty, shareholders will prefer high risk \softline
decisions that may not maximize expected firm value.{}{\plain \fs24 \super 60{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 60}{}{\plain \fs24   }{\plain \fs20 \fs20 Smith, }{\plain \fs20 \i\fs20 supra}{\plain \fs20 \fs20  note , at 221-224 (offering example of inefficiently risky investment and then extending \softline
the analysis beyond the {\u8220\'93}vicinity of insolvency).}}}
}{\plain \fs24   A {\u8220\'93}bet the firm{\u8221\'94} investment may offer the \softline
greatest chance of producing some surplus value for shareholders, but at the risk of wiping out any \softline
potential value to other claimants.  Within that context, the interests of shareholders may be directly\par
}{\plain \fs24  in conflict with the interests of other corporate constituencies such as creditors and employees.  Thus \softline
the shareholders have an incentive to shift assets to unduly risky claims, benefitting themselves at the \softline
expense of fixed claimants.{}{\plain \fs24 \super 61{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 61}{}{\plain \fs24   }{\plain \fs20 \i\fs20 See}{\plain \fs20 \fs20  Jonathan R. Macey & Geoffrey P. Miller, }{\plain \fs20 \i\fs20 Corporate Governance and Commercial Banking: A \softline
Comparative Examination of Germany, Japan, and the United States}{\plain \fs20 \fs20 , 48 }{\plain \fs20 \scaps\fs20 Stan. L. Rev}{\plain \fs20 \fs20 . 73, 77 (1995) (explaining \softline
why equity holders have an incentive to shift assets to risky investments and how this shift constitutes a transfer of \softline
wealth from the fixed to the residual claimants).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab Moreover, as Thomas Smith has argued, it may not be realistic to focus on the narrow interests \softline
of hypothetical long term shareholders even if the agreed objective is the maximization of investor \softline
welfare.  If the modern investor owns a diversified portfolio of investments, including debt and 
equity, he or she should rationally prefer the firm to be managed in a way that maximizes the \softline
aggregate return to capital.  \par
}{\plain \fs24 \tab Even if economic theory supports managing the firm in order to maximize the interests of the \softline
residual claimant, arguably any of the firm{\u8217\'92}s stakeholders could serve as the residual claimant, and \softline
firm surplus could be directed toward those stakeholders rather than to the shareholders.{}{\plain \fs24 \super 62{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 62}{}{\plain \fs24 }{\plain \fs20 \fs20   Stout argues that non-shareholder stakeholders are accurately described as residual claimants, along with \softline
shareholders in the sense that they enjoy extra-contractual benefits when the corporation does well and suffer along \softline
with shareholders when the corporation does poorly.  Stout, }{\plain \fs20 \i\fs20 supra }{\plain \fs20 \fs20 note , at 1194.}}}
}{\plain \fs24   Managers \softline
and employees could receive surplus through bonuses, for example.  Customers could receive the \softline
firm{\u8217\'92}s surplus through price cuts or rebates.    Indeed, as Henry Hu observes, out of the money call \softline
option holders, who have a claim quite different from the type of ownership stake recognized by \softline
traditional property rights, are in fact the ultimate residual claimants.{}{\plain \fs24 \super 63{\footnote \pard \fs20\ri540 
{\ul0 \tab }{\plain \fs24 \super 63}{}{\plain \fs24 }{\plain \fs20 \fs20   Henry T.C. Hu, }{\plain \fs20 \i\fs20 New Financial Products, the Modern Process of Financial Innovation, \par
}\pard \fs24\ri540\sa240 
{\plain \fs20 \i\fs20 and the Puzzle of Shareholder Welfare}{\plain \fs20 \fs20 , 69 }{\plain \fs20 \scaps\fs20 Tex. L. Rev}{\plain \fs20 \fs20 . 1273 (1991).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab Within the framework of the contractual model, it is possible to posit alternatives to \softline
shareholder capitalism simply by arguing that shareholders have not bargained for the corporate \softline
surplus at all, but simply for a market rate of return on their investment.  The higher return on equity \softline
adequately compensates shareholders for the lower priority and higher risk that they assume, and any \softline
additional compensation through a share of the surplus is simply a windfall.  The reasoning that \softline
shareholders need not be residual claimants is at the core of the progressive model of corporate law, \softline
which rejects shareholders{\u8217\'92} exclusive claim to the corporate surplus.  Similarly, Lynn Stout and \softline
Margaret Blair argue that under the team production model of corporate law the board of directors \softline
should manage the corporation in an effort to maximize the sum of the risk adjusted returns enjoyed \softline
by all the corporation{\u8217\'92}s stakeholders.{}{\plain \fs24 \super 64{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 64}{}{\plain \fs24 }{\plain \fs20 \i\fs20   See, e.g.}{\plain \fs20 \fs20 , Margaret M. Blair and Lynn A. Stout, }{\plain \fs20 \i\fs20 A Team Production Model of Corporate Law}{\plain \fs20 \fs20 , 85 }{\plain \fs20 \scaps\fs20 Va. L. \softline
Rev}{\plain \fs20 \fs20 . 247 (1999).}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab Similar reasoning could be used to defend a model of managerial capitalism.  Although this \softline
model is seemingly considerably afield from existing legal theory, it is fairly consistent with evidence \softline
of recent corporate decisions in which managers seem to receive extraordinarily high compensation \softline
packages.  Management{\u8217\'92}s compensation seems high as a fixed market-based rate of payment for 
services, but not as a share of the corporate surplus remaining after shareholders have received their \softline
market rate of return.  Moreover if shareholders have bargained for a market rate of return, perhaps \softline
managers have a legitimate claim to this surplus.{}{\plain \fs24 \super 65{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 65}{}{\plain \fs24   }{\plain \fs20 \fs20 Alternatively, recent increases in managerial compensation may reflect shifts in the operational decision-making of the corporation in favor of greater risk taking.  }{\plain \fs20 \i\fs20 See, e.g.}{\plain \fs20 \fs20 , Marcel  Kahan and Edward B. Rock,  }{\plain \fs20 \i\fs20 How I \softline
Learned to Stop Worrying and Love the  Pill:  Adaptive Responses to Takeover Law}{\plain \fs20 \fs20 , 69 }{\plain \fs20 \scaps\fs20 U. Chi. L. Rev}{\plain \fs20 \fs20 . 871, 898 \softline
(2002) (describing the evolution of the poison pill together with shifts in executive compensation during period after \softline
pill was developed).}}}
}{\plain \fs24   From an economic standpoint, it may well be \softline
rational to structure corporations according to a managerial capitalism model.  Significantly, one \softline
could argue that corporate surplus is produced primary as a result of effective management \softline
decisionmaking.  By allowing managers to enjoy the surplus that they produce, managerial capitalism \softline
eliminates the standard agency problem in corporate law and perfectly incentivizes management to \softline
maximize firm productivity.{}{\plain \fs24 \super 66{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 66}{}{\plain \fs24 }{\plain \fs20 \i\fs20   Cf.}{\plain \fs20 \fs20  Hansmann & Kraakman, }{\plain \fs20 \i\fs20 supra }{\plain \fs20 \fs20 note  (arguing that managerial capitalism has been correlated with \softline
reduced productivity).  Managerial capitalism may also be inconsistent with existing doctrinal limits on management \softline
self-dealing.}}}
}{\plain \fs24 \ul0 \tab \ul0 \tab \par
}{\plain \fs24 \tab There are legitimate questions about the efficiency of managerial capitalism from a societal \softline
perspective.  Managerial capitalism may create excessive incentives for managers to engage in self-dealing or, conversely, may lead managers to sacrifice productivity in favor of reducing corporate \softline
risk-taking.  Moreover it may be necessary to assess management decisions from the perspective of \softline
shareholder value in order to provide accountability.  Shareholder primacy may be an appropriate \softline
legal criterion for constraining management discretion even under a holistic conception of firm value \softline
that extends beyond shareholder wealth maximization.  That is, the legal requirement that \softline
management maximize shareholder value is not the equivalent of regulatory judgment that \softline
shareholder value is the only value worth recognizing within the corporation.  At a minimum, it seems \softline
plausible that, from an efficiency perspective, the primary concern should be maximizing the \softline
aggregate value of the firm.  Questions about the appropriate division of that value should be \softline
subsidiary.\par
}{\plain \fs24 \b III.  The Implications for comparative institutional analysis\par
}{\plain \fs24 \b \tab A.  The role of shareholder primacy in comparative institutional analysis}{\plain \fs24 \par
}{\plain \fs24 \tab Why explore the normative foundations of shareholder primacy?  The answer is that efficiency 
assessments of regulatory competition in corporate law rely on empirical analyses of regulatory \softline
efficiency, and those analyses, in turn, incorporate a foundational assumption of shareholder primacy.  \softline
Because the studies accept without question that the appropriate objective of corporate law is to \softline
maximize shareholder wealth, they premise their conclusions about the appropriate regulatory policy \softline
on shareholder wealth effects.  The focus on shareholder wealth leads to conclusions about efficiency \softline
that may be driven by regulations that transfer value among stakeholder groups rather than policies \softline
that increase true firm productivity.\par
}{\plain \fs24 \tab These conclusions are used to support arguments about the most appropriate regulatory \softline
design.  Indeed, within the sphere of regulatory competition, institutional analysis has focused upon \softline
the ability of shareholders to participate effectively in the rule-making process relative to other \softline
corporate stakeholders, particularly corporate management.  State charter competition and the \softline
dominance of Delaware law are both defended in terms of their ability to protect shareholder interests.  \softline
Although these conclusions may be supported by empirical data on the shareholder wealth effects of \softline
Delaware law, they cannot be extended to a general defense of the efficiency of Delaware law absent \softline
a strong normative defense of shareholder primacy.\ul0 \tab \ul0 \tab \par
}{\plain \fs24 \tab Indeed, the failure of empirical studies systematically to incorporate stakeholder value \softline
suggests that important information is missing from the regulatory prescriptions that these studies \softline
offer.  In the takeover context, this conclusion is obvious - an empirical study that measures the \softline
shareholder wealth effect of a staggered board has not considered whether a loss to shareholders is \softline
offset by gains to creditors, workers, officers or directors.  Outside the takeover context, however, the \softline
same analysis holds.  Thus, although shareholders might benefit from compensating executives with \softline
stock options due to a reduction in agency costs, the executives might value the options at far less \softline
than their market value due to the increased risk, particularly because the risk magnifies their inability \softline
to diversify the firm specific risk associated with their position.  In turn, the executives might be \softline
driven to manage the firm in a way that maximizes short term stock market gains (average CEO \softline
tenure), leading to problems for lower level employees.  Suppliers might suffer through less favorable \softline
contract terms because provisions allowing for return of unsold product have to be disclosed in \softline
financial statements and affect stock price.\par
}{\plain \fs24 \tab Similarly, shareholder primacy privileges shareholder participation in the law-making process. 
In contrast a holistic or aggregate conception of firm value validates the participation of non-shareholder stakeholders.  In particular, such a conception may legitimize the participation of \softline
managers as independent stakeholders rather than solely as (faulty) shareholder agents.  Thus the \softline
identification of an appropriate efficiency metric is a key component of institutional analysis in \softline
corporate law because it determines the legitimacy of a given stakeholder{\u8217\'92}s participation in the \softline
lawmaking process. \par
}{\plain \fs24 \tab }{\plain \fs24 \b B.  Institutional Analysis Under the Shareholder Primacy Norm}{\plain \fs24 \par
}{\plain \fs24 \tab As indicated above, comparative institutional analysis in corporate law has typically pitted the \softline
role of shareholders in the institutional process against the role of management.  In his concern over \softline
the race to the bottom, for example, Cary observed that management effectively chooses the state of \softline
incorporation.  Other commentators have identified the ability of management to lobby state \softline
legislatures and obtain favorable regulatory changes, such as the adoption of state antitakeover \softline
statutes.  Thus, particularly if corporate law is concerned about the agency problem between \softline
shareholders and management, the lawmaking structure creates a particular risk that management will \softline
dominate the process and obtain rules that allow it to exploit the shareholders.\par
}{\plain \fs24 \tab The standard public choice considerations affect comparative institutional analysis in \softline
corporate law.  Public company stock in the United States is owned, directly or indirectly, by \softline
dispersed small shareholders.{}{\plain \fs24 \super 67{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 67}{}{\plain \fs24   Even the growth in institutional shareholder does not change this, as most institutions \softline
such as pension and mutual funds are simply vehicles through which small investors hold stock \softline
indirectly.}}}
}{\plain \fs24   Small stakes and collective action problems limit the effectiveness of \softline
investors, particularly in a forum such as a legislature in which the reputation and experience of repeat \softline
players is a major factor in their effectiveness.  Cost considerations and their own political \softline
vulnerability limit the ability of even instituitonal investors with comparatively larger stakes to \softline
overcome these problems.  Additionally, because much corporate law is enacted at the state level, \softline
shareholders lack even the minimum political power that they might otherwise be able to exert \softline
through the voting process.  Although Delaware supplies corporate law to more than half of all \softline
publicly traded companies, few investors have the power to vote on the election of Delaware \softline
legislators.  \par
}{\plain \fs24 \ul0 \tab In contrast, managers have substantial firm-specific stakes that make political activity rational. \softline
Corporations, pay substantial yearly franchise taxes to Delaware {\u8211\'96} revenue that Delaware risks losing \softline
if its corporate law fails to remain attractive to corporate management.  Corporations also provide \softline
substantial revenue to key interest groups in the creation of corporate law, such as Delaware corporate \softline
lawyers, through the consumption of legal services.  In addition, managers may exploit their firm{\u8217\'92}s \softline
political capital for their personal benefit.  \par
}{\plain \fs24 \tab Arguably the disparity in access between managers and shareholders is even greater with \softline
respect to federal law.  Roberta Romano has argued, for example, that Congress is even more likely \softline
than state legislatures to respond to interest group pressure.{}{\plain \fs24 \super 68{\footnote \pard \fs20\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 68}{}{\plain \fs24   }{\plain \fs20 \fs20 Romano,}{\plain \fs20 \i\fs20  supra}{\plain \fs20 \fs20  note }}}
}{\plain \fs24   Because interest groups such as \softline
managers, corporate lawyers and securities analysts are small in size and have concentrated stakes, \softline
they are able to dominate the regulatory agenda and obtain legislation that favors their interests over \softline
those of dispersed investors.  Romano identifies the Williams Act and mandatory disclosure as \softline
examples of this type of regulation.{}{\plain \fs24 \super 69{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 69}{}{\plain \fs24 }{\plain \fs20 \fs20  }{\plain \fs20 \i\fs20  Id.}}}
}{\plain \fs24 \par
}{\plain \fs24 \tab Consequently, public choice analysis suggests that corporate legislation is unlikely to serve the \softline
interests of investors relative to managers.  Shareholders may similarly be disadvantaged in the \softline
legislative process relative to other stakeholders.  Labor, suppliers and other businesses, customers, \softline
and community members all have the ability to participate in the political process.  Other corporate \softline
stakeholders may have particular advantages in political participation relative to shareholders.  Their \softline
interests may be aligned along a range of political issues.  They may be repeat players.  They may \softline
have greater stakes. Union lobbying and use of political action committees has enabled labor to \softline
develop a powerful political presence.  The Teamsters, for example, is one of the most powerful \softline
interest groups in Washington politics.  Corporate creditors and suppliers have the concentrated stakes \softline
and traditional resources of business interests.{}{\plain \fs24 \super 70{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 70}{}{\plain \fs24   }{\plain \fs20 \fs20 Note, for example, the range of explicit statutory protections for the interests of creditors, such as \softline
restrictions on dividend payments and personal liability of directors for approving an illegal dividend.}}}
}{\plain \fs24   Consumers have increasingly been able to exert \softline
political pressure through organizations such as AARP and through the potential voting power that 
they command.\par
}{\plain \fs24 \tab Some commentators such as Romano and Easterbrook and Fischel rely on this analysis to \softline
favor a market dominated approach in which investors have the option of using the pressure of the \softline
capital markets to pressure issues to modify statutory default rules.  There are reasons to believe, \softline
however, that the market based contractual approach is also better suited to serving the interests of \softline
non-shareholder stakeholders than to protecting shareholder interests.  Contractual modifications can \softline
be used to adjust risk, priority, or fixed claims.  Thus employees might respond to a rule that reduced \softline
employee perks by demanding higher cash compensation.  Bondholders might respond to adjustments \softline
to the takeover market by demanding the right to approve changes in control or providing that such \softline
changes trigger a put option.  Fixed claims also simplify a stakeholder{\u8217\'92}s task in monitoring; the only \softline
monitoring required is to determine adherence to the contract terms.  The limited duration of many \softline
stakeholder interests enables participants to adjust the contractual terms to reflect interim legal or \softline
market changes at the time of new investments.  At the same time, most stakeholders can exit, either \softline
continuously or periodically, at relatively low cost.  The value of the stakeholder{\u8217\'92}s investment is only \softline
affected to a limited extent by its withdrawal from the corporation.\par
}{\plain \fs24 \tab In contrast, the ability to use contract terms to adjust a residual stake is inherently limited.  By \softline
definition, shareholders receive what is left over after the fixed claims of other stakeholders have been \softline
satisfied.  If their legal rights are reduced relative to those of other stakeholders, they will get less, but \softline
they cannot compensate for this by putting themselves ahead or getting a bigger up front piece.  \softline
Similarly, exit is of overstated value for shareholders.  True, shareholders can exit an \softline
underperforming corporation, but in the absence of a fraudulent cover-up, the price at which they can \softline
exit will reflect the corporation{\u8217\'92}s poor performance.  Relative to an employee, who loses only the \softline
value of firm-specific sunk costs, the shareholder loses more.\par
}{\plain \fs24 \tab I have argued elsewhere, that there are reasons to believe courts may also offer a superior \softline
alternative to both the legislature and the market for the production of legal rules that protect \softline
shareholder interests.{}{\plain \fs24 \super 71{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 71}{}{\plain \fs24 }{\plain \fs20 \fs20   See Fisch, }{\plain \fs20 \i\fs20 supra}{\plain \fs20 \fs20  note .}}}
}{\plain \fs24   Courts are insulated from the financial and political pressure associated with \softline
the legislative process.  Moreover, the transparency of written opinions provides a level of 
accountability.  \par
}{\plain \fs24 \tab Moreover, shareholders have far greater access to the courts than to the legislatures.  The \softline
representative lawsuit, such as the shareholder derivative suit or securities class action, enables the \softline
small investor to obtain access to judicial lawmaking and allows the aggregation of small investor \softline
interests into substantial stakes while, at the same time, overcoming coordination and collective \softline
action problems (concededly there are substantial administrative costs imposed through the collection \softline
of legal fees).   In addition to the shareholder interests in a particular company, shareholders generally \softline
enjoy the deterrent effect of litigation on future self-dealing and other misconduct by corporate \softline
officers and directors.  \par
}{\plain \fs24 \tab In contrast, the access of non-shareholder stakeholders to judicial lawmaking is extremely \softline
limited.  This stems primarily from the judicial decisions that identify shareholders as the exclusive \softline
beneficiaries of management fiduciary obligations.  Despite the failure of both courts and statutes \softline
affirmatively to endorse the shareholder primacy norm, it is a fundamental principle of corporate law \softline
that, absent extraordinary circumstances,{}{\plain \fs24 \super 72{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 72}{}{\plain \fs24 }{\plain \fs20 \fs20   Creditors are protected with fiduciary duties when the corporation is in the {\u8220\'93}zone of insolvency.{\u8221\'94}  }{\plain \fs20 \i\fs20 See, \softline
e.g., }{\plain \fs20 \fs20 Credit  Lyonnais  Bank v. Pathe Communications, No. 12150, 1991 LEXIS 215 (Del. Ch. Dec. 30, 1991) \softline
(recognizing this protection).}}}
}{\plain \fs24  non-shareholder stakeholders are not protected by fiduciary \softline
principles.  Only shareholders can bring a lawsuit to remedy, directly or indirectly, a director or \softline
officer breach of fiduciary duty.  Fiduciary principles thus define the scope of participation in the \softline
judicial lawmaking process and limit that participation to shareholders.  Other stakeholders cannot \softline
solicit broad judicial lawmaking but can only enlist the assistance of the courts to enforce explicit \softline
contractual or legal claims.  The absence of fiduciary protection operates as a gatekeeping mechanism \softline
that reserves judicial lawmaking for shareholders and directs other stakeholders to the legislatures and \softline
the markets.\par
}{\plain \fs24 \tab Experience supports the conclusion that judicial lawmaking is more responsive to shareholder \softline
interests than the lawmaking of other institutions.  Many of the most pro-shareholder corporate law \softline
rules have been adopted through judge-made lawmaking {\u8211\'96} the auction requirement of Revlon, \softline
Unocal{\u8217\'92}s requirement of heightened judicial review of management decision-making in the takeover \softline
context, and the various expansive interpretations of the private right of action for federal securities 
fraud.  Notably, where legislatures have responded to these rules, they have cut back on shareholder \softline
protection.  Examples of these cutbacks include congressional adoption of the PSLRA which cut back \softline
on the imposition of fiduciary principles through federal securities fraud litigation, the Ohio \softline
legislature{\u8217\'92}s rejection of the Unocal standard of fiduciary principles in the takeover context, and the \softline
adoption of other constituency statutes by a variety of states to dilute the shareholder primacy norm.\par
}{\plain \fs24 \tab Thus, from the shareholder{\u8217\'92}s perspective, we see institutional advantages to judicial \softline
lawmaking.  This conclusion is consistent with the empirical data described in Section I.  To the \softline
extent that empirical studies seek to evaluate the efficiency of corporate law in terms of shareholder \softline
primacy, the findings suggest that Delaware{\u8217\'92}s lawmaking, which includes both a heightened role for \softline
the courts and an expert and specialized judiciary, is tailored to increase shareholder welfare.\par
}{\plain \fs24 \b \ul0 \tab C.  Institutional Specialization and Fiduciary Principles}{\plain \fs24 \par
}{\plain \fs24 \tab The foregoing analysis offers a broader perspective on the shareholder primacy norm.  \softline
Shareholder primacy, as we have seen, is primary a product of judicial lawmaking and academic \softline
commentary.  Corporate statutes do not explicitly require officers and directors to make operational \softline
decisions that favor shareholders over other stakeholders; indeed, other constituency statutes suggest \softline
just the opposite.  Shareholder primacy does, however, govern the scope of fiduciary principles, \softline
however, providing that shareholders, and not other stakeholders, can enlist judicial lawmaking to \softline
address problems of intra-stakeholder conflicts.  \par
}{\plain \fs24 \tab Shareholder primacy thus allocates institutional authority for protecting the interests of various \softline
corporate participants.  The markets and the political process generally function well with respect to \softline
corporate lawmaking {\u8211\'96} the interests of most corporate participants, including managers, employees, \softline
creditors, customers and suppliers, are protected through their access to those institutions.  \softline
Shareholders, however, are relatively disabled from using those institutions effectively.  As a \softline
consequence, shareholders are afforded an alternative institution {\u8211\'96} the courts.\par
}{\plain \fs24 \tab This analysis explains the limitation of fiduciary principles {\u8211\'96} and thus judicial access {\u8211\'96} to \softline
shareholders.  Shareholders are not protected because theirs are the only interests that count within the \softline
corporation.  Managers, customers, employees are people too, and empirical scholars should be wary \softline
of implicitly reflecting a normative perspective that shareholder value is inherently equivalent to firm \softline
value.  But, contrary to the claims of progressive scholars, the legitimacy of other stakeholder claims 
does not justify the extension of fiduciary principles to protect non-shareholder interests.  Rather the \softline
scope of existing fiduciary principles can be understood as a mechanism for institutional \softline
specialization {\u8212\'97} allowing the different institutions to serve the interests of different corporate \softline
participants.\par
}{\plain \fs24 \tab The analysis also explains some of the limitations on the scope of shareholder access to \softline
judicial lawmaking.  The reasons that shareholders require the special protection of the courts is \softline
because of limitations in their ability to obtain adequate protection through the market or the \softline
legislature.  In particular, the market is far more limited in its power to protect existing shareholders \softline
than future shareholders.{}{\plain \fs24 \super 73{\footnote \pard \fs24\ri540\sa240 
{\ul0 \tab }{\plain \fs24 \super 73}{}{\plain \fs24   }{\plain \fs20 \fs20 On the conflict between the interests of current and future investors, see Steven L. Schwarcz, }{\plain \fs20 \i\fs20 Temporal \softline
Perspectives: Resolving the Conflict Between Current and Future Investors}{\plain \fs20 \fs20  (working paper dated 6/7/04).}}}
}{\plain \fs24   As a consequence, legal doctrines such as the contemporaneous ownership \softline
requirement in derivative litigation and the standing requirement in securities fraud litigation limit the \softline
scope of the right to engage judicial lawmaking.}{\plain \fs24 \par
}{\plain \fs24 \b Conclusion}{\plain \fs24 \par
}{\plain \fs24 \tab The shareholder primacy norm is a powerful legal principle.  The norm is commonly \softline
understood as the normative claim that a corporation should be managed in order to maximize \softline
shareholder wealth.  It therefore follows, from this claim, that the efficiency of corporate law can be \softline
assessed by empirically measuring the effect of regulation on shareholder wealth.\par
}{\plain \fs24 \tab This article challenges that analysis.  The article demonstrates the support for shareholder \softline
primacy either as a description of existing corporate or a normative principles.  Instead, the article \softline
demonstrates that the shareholder primacy norm is properly understood as an interpretive principle for \softline
judicial lawmaking in the context of applying fiduciary principles.  Within this context, the \softline
shareholder primacy norm is justified because judicial enforcement of fiduciary duties is a mechanism \softline
that specifically addresses the limitations of other institutions to protect shareholder interests. \par
}{\plain \fs24 \tab This article considers the relative ability of different lawmaking institutions to protect the \softline
interest of participants in the corporation.  After demonstrating the relative advantages of non-shareholder participants in protecting their interests through the legislatures and the courts, the article \softline
highlights the special role of the courts in protection of shareholder interests.  The shareholder \softline
primacy norm, enforced through fiduciary principles, remedies this imbalance by providing 
shareholders with access to judicial lawmaking.\pard \fs24\sl360\slmult1 
}}