Imágenes de páginas
PDF
EPUB

some remedial legislation in that area, although I am not actually sure what it ought to be.

Senator DURKIN. One other problem. It's not really necessarily going to be corrected by any Federal chartering. What happens when you have an American industry competing with a subsidized industry from overseas? No one is in favor of bribery and what have you, but isn't there a problem? Can our industry compete with foreign industry when the foreign industry may well be subsidized by the taxpayers of that foreign country?

Mr. WINTER. We are not talking about bribery now. We are talking about a subsidized industry.

Senator DURKIN. Well, if a subsidized industry can lower the price, if a subsidized foreign industry can provide a sales incentive by an artificially depressed price, taking the slack up with the tax dollars, how does an American company compete?

Mr. WINTER. You mean in the foreign country?

Senator DURKIN. In foreign countries.

Mr. WINTER. I would think they would be hard pressed to compete. I think it would be very hard for them to compete in a foreign country.

Senator DURKIN. This one bothers me. We are not condoning or arguing for bribery, but

Mr. WINTER. The bribery route is a very dangerous route. I would think that I haven't followed it all that closely but I am concerned that the State Department is not more-I mean, having followed as much as I have, I have no idea what their position on this is and I would think they are the agency of Government in the best position to know what ought to be done about this. I am not sure the American Government can control bribery, anyway, if foreign governments or foreign agencies force you to deal through a foreign agent who bribes, how do you stop that? You are really not paying a bribe. You are saying where the money is going.

Foreign countries will, I'm sure if they want to acquiesce in bribery of their officials, so arrange things that that is what happens.

Senator DURKIN. I am trying to wrap it up. I gather you feel there is an area that the Federal Government has a responsibility, pollution, criminal laws, disclosure, consistent with articulated Federal public purpose, but you feel Federal chartering does not meet any of those stated aims or goals.

Mr. WINTER. I wish I could have that paragraph published for myself, as my own work.

Senator DURKIN. Well, you are welcome to it. Unlike the Army, you don't have to tell them where you got it.

Thank you, professor. We appreciate it very much.

[The statement follows:]

STATEMENT OF RALPH K. WINTER, JR., PROFESSOR OF LAW, YALE UNIVERSITY I want to thank the Committee for the appointment to appear before it and to express my views on the issue of federal chartering of corporations. I will address my remarks to two issues raised by the proponents of chartering: (1) because the states compete for the revenue generating business of chartering and because the decision as to where to incorporate is a management decision, state law tends to favor management interests over shareholder interests and

federal law is necessary to enable the parties to optimize the arrangements between them; (2) federal chartering will provide appropriate remedies for certain federal regulatory policies.

1. Federal chartering and shareholder protection

A. Delaware and the "Race for the Bottom"

It is worth noting at the outset who it is that claims to be protecting shareholders against corporate management. In a nation which has seen more than its share of turmoil and of restlessness among many groups, probably the most quiescent and least desirous of federal regulatory help are investing shareholders in American corporations. Rather, the hue and cry is from a tiny group of shareholders who are less interested in investment than the fulfilling of a "social responsibility," so-called "consumer advocates" or "public citizens" imbued with an anti-business animus who care little whether firms survive or not, and academies whose distaste for the private sector and for profit maximizing is plain. Indeed, one may well question whether these "shareholder advocates" are not the problem rather than the solution, particularly since these same individuals frequently propose measures for corporate reorganization which are blatantly anti-shareholder.

No one denies that Delaware's open bidding for corporate charters has led to a steady lessening of the restrictiveness of state corporation codes. Restrictions on the life of a corporation, the businesses in which it might engage, the issuance of stock, the classes of stock issued, dividend policy, discretion as to the holding of shareholder's meetings, charter amendments, means of electing directors, sales of assets, mortgaging, and the indemnification of officers, among others, have all been eliminated or dimninshed in a series of amendments to state corporation codes. That the mechanism generating change has been a competition among the states for charters is not doubted. Both Delaware and its erstwhile competitors candidly admit that the purpose of corporate code revisions has been the attraction of charters to their state in order to produce revenue. Delaware, for example, has at times raised 25% of its total tax revenue from corporate franchise taxes. Delaware benefits in other ways. Not only is its corporation code an attraction to promoters and management but lawyers find it a hospitable jurisdiction in which to litigate issues of corporate law, with the result that the Delaware Bar enjoys an unusually busy and lucrative practice for a city the size of Wilmington. No one seems to dispute these propositions. Rather, the controversy is ever the effect of this process on the governance of many of the nation's major economic units. Here the preponderance of academic opinion-not to mention chronic attackers of the private sector such as Mr. Nader-has been that the impact has been to benefit corporate management at a cost to shareholders.

The most prominent writer in the area is probably Professor William Cary of the Columbia University Law School, a former Chairman of the Securities and Exchange Commission. Having characterized Delaware as leading a "movement toward the least common denominator" and a "race for the bottom," Professor Cary has argued that Delaware's lessening of the restrictiveness of its corporation code has rendered shareholders a prey to self-dealing management. To this unhappy conclusion he added an attack on the Delaware judiciary which argued that "Gresham's law applies" to its decisions, which "lean toward the status quo and adhere to minimal standards of director responsibility . . ."

Professor Cary, having rejected full federal chartering as "politically unrealistic," has called for federal minimum standards legislation. This legislation, designed to "raise" the standards of conduct by management, would, he claimed, increase public confidence-and public investment-in American corporation. In effect, state charters would become superfluous.

The Cary charge, it is important to note, is not that some overriding social goal is being sacrificed, but simply that Delaware is preventing private parties from optimizing their private arrangements. With all due respect both to Professor Cary and to the quantity and quality of academic support for his position, which is substantial, I find it not only unconvincing but wholly implausible. If Delaware permits management to profit at the expense of shareholders and other states do not, then shares in Delaware corporations must return less to their holders than shares in corporations of the other states and must trade at lower prices. A movement away from, rather than toward, Delaware incorporation would result.

This conclusion is implicit in Professor Cary's analysis itself, for if a "higher" standard of management conduct imposed by federal law will increase investor

confidence, then investor confidence in Delaware stocks must have been continuously less than in stocks of other states for more than a generation. This lack of confidence would have been long reflected in the price of shares.

However fashionable it may be to picture the consumer as the witless tool of sellers who is constantly in need of protection from his own ignorance, no such claim can be made about the consumer of securities. Better than half the equity of American corporations is held by institutional investors-insurance companies, mutual funds, pension funds, etc.-who are sophisticated and whose only interest is in the size of the return on their investment. Even a relatively unsophisticated investor responds to the risk, if Professor Cary is correct, for the investor need know none of the intricacies of corporate law. He needs know only the word "Delaware," which, after all, is only two letters longer than the word "Poison." Common observation of the success of Delaware corporations in attracting investors of all sorts-many of the largest corporations are chartered there strongly suggests that the conventional wisdom among academic lawyers is exactly backwards: the unrestrictiveness of the Delaware Code generally benefits both investors and management, and confidence in Delaware corporations is, if anything, higher than in corporations of other states. That this has been difficult to perceive, or at least to accept, is the result, first of a dilemma of regulation and, second, of an obsession with legal constraints which has obscured other less visible but more effective constraints on managerial discretion.

B. The cost of restricting management discretion by law

The regulatory dilemma is found in numerous contexts. Rules which prohibit undesirable conduct will often deter conduct which is blameless. Rigorous drug regulation impedes the introduction of beneficial as well as harmful drugs and thus harms those who would benefit from an earlier introduction. The foreclosure of advocacy in advertising will increase accuracy but also reduce the incentive to advertise and thus deprive the public of the benefits it would otherwise receive in the form of greater information and increased competition.

Much of the literature which attacks the performance of the private sector fails to recognize these trade-offs and the high price an imperfect world exacts for the elimination of all pollution, all defective products and all fraud. The literature of consumerism, for example, almost without exception ignores the higher costs which fall upon consumers as a result of requiring additional safety devices upon cars or compelling businesses to comply with a myriad of administrative requests for information.

So too, the legal literature dealing with the governance of corporations simply assumes that no costs will fall upon shareholders if "controls" are imposed on managerial discretion. To be sure, some self-dealing and fraud exist in corporate affairs and its elimination is desirable. But at some point the exercise of control by law must also impose costs on investors which damage them in both quantity and quality quite as much as self-dealing or fraud. And so the dilemma: maximizing the yield to investors generally may, indeed almost surely will, result in a number of cases of fraud or self-dealing, and the converse: eliminating some instances of fraud of self-dealing may decrease the yield to shareholders generally.

For example, numerous proposals have been made to increase the power of shareholders by enabling them to initiate proposals to be submitted to shareholders, by requiring cumulative voting, by compelling management to make extensive information available to any requesting shareholder, by requiring shareholder votes on certain matters, etc. But, to indulge in an understatement, there is no necessary connection between increasing shareholder power and increasing the yield to investors. Corporate efficiency may well call for decisional and operational processes wholly inconsistent with periodic much less constant intrusion by shareholders. Such intrusion not only may reduce efficiency but carries with it other costs, such as legal fees and increased personnel needs.

That this is so is nowhere better demonstrated than in the open and notorious fact that the vast majority of shareholders in large corporations do not want the power to interfere in corporate affairs and do not regard themselves as corporate overseers. Instead, they quite sensibly view themselves solely as investors. In fact, the calls for more power for shareholders are invariably more on behalf of a tiny group who happen not to view themselves solely as investors and who (like many of their academic supporters) are not particularly interested in maximizing the monetary yield to shareholders.

To be sure, this may (or may not) be an overstatement and the steadily diminishing shareholder "control" has probably allowed some managements 76-083 764

to profit from self-dealing. But the basic point remains: the elimination of selfdealing by increasing shareholder control involves a trade-off with corporate efficiency and may well reduce the monetary return to shareholders generally. Whether the amount saved in eliminating certain instances of self-dealing through increased shareholder control is greater than the general loss in corporate efficiency is the issue, and it is neither a priori nor empirically selfevident that the Delaware Code is not a satisfactory resolution.

Similarly, Professor Cary has criticized the Delaware courts for too easily ratifying management conduct and for not applying a rigorous standard of "fairness" to its actions. Even assuming his description of Delaware law is accurate and that is not without some considerable doubt-his analysis addresses the wrong issue.

For example, Professor Cary's resort to idiosyncratic notions of "fairness" provide little in the way of guidance as to the fashioning of a fiduciary duty which would serve shareholders' interests well. He attacks the Delaware Getty Oil decision, which permitted a parent company to continue to take advantage of its full quota of imported crude oil after a government agency had ruled that a subsidiary of Getty was not entitled to a quota of its own, since it was controlled by the parent. Not to have allocated the quota between the two, Professor Cary says, is unfair and an “abdication of responsibility by the court."

Of course, putting the loss on the subsidiary is unfair, but putting part of the loss on the parent is also unfair, because the administrative decision has created a no-win situation. One solution is just as arbitrary as another, after all, and Professor Cary's solution, which seems based entirely on a penchant for whoever seems in the minority at the time, has no monopoly on justice and little if any relation to shareholder protection. If one were to discover that the minority interests in the subsidiary were Saudi sheikhs of untold wealth while the parent was owned largely by a pension fund which was the sole support of miners disabled by black lung, the feeling in the pit of our stomach might lead the other way.

In truth, defining the scope of fiduciary duty in the corporate context is exceedingly difficult once one moves beyond blatant and egregious cases of selfdealing. Groups of shareholders frequently have conflicting interests and expectations which, when accommodated within the corporation, inevitably leave some feeling they have been treated unfairly. Those who would substitute the judgment of a court are surely obligated to offer more than idiosyncratic notions of "fairness" and to establish discernible criteria by which a court decides which group is to bear which loss under which circumstances.

In an analogous field, the field courts have generally declined to elaborate a pervasive fiduciary duty on the part of labor unions as bargaining representatives. This is particularly significant since constitutional overtones are present in that workers are by law barred from individual bargaining once a majority votes to be represented by a union. So long as discrimination on the basis of race, sex or anti-union activities is not proven, the federal courts have been most reluctant to second guess the union decision. For example, in a case very similar to Getty Oil, Britt v. Trailmobile, a union in a merged company was allowed to put the employees of the acquired firm at the bottom of the enlarged seniority list, thus giving junior employees of the acquiring company a significant advantage. Again, any result would be unfair to some but the lack of preexisting and discernible criteria induced the court to refrain from imposing its idiosyncratic preferences. An outbreak of extensive judicial second guessing would inevitably plunge the courts not only into the question of what is "fair" but also into what is the right business decision. If the assumption that business decisions are best left to entrepreneurs is correct, then Professor Cary's remedy may be more damaging than the disease. One Delaware case which he attacks, for instance, involved a parent corporation which held 97% of the stock of a subsidiary and which decided to contract the subsidiary's activities by paying out dividends far in excess of earnings. Although other firms held by the parent were at the time expanding, no corporate opportunities were lost to the subsidiary in question and the dividends were on a pro rata basis.

Professor Cary would have had the Delaware Court invoke a rule, based on "traditional concepts of fairness," prohibiting a parent from contracting the operations of a subsidiary during a period of expansion when there are minority stockholders. Consider how deeply such a rule intrudes on the corporation's power to make business decisions. Among the matters which are irrelevant

under such a rule are estimates of the subsidiary's likely success in expansion and the value of competing investment opportunities. Nor is weight given to the much greater risk taken by a 97% holder than a 3% holder. And what if the 3% holder blackmails the 97% with the threat of preventing the latter from pursuing the higher valued opportunities? In effect, Professor Cary would give the 3% holder a veto on these matters, a rule which, I submit, cannot be in the interests of shareholders generally.

As was true in the case of increased shareholder power, increased judicial intervention on behalf of complaining shareholders will not necessarily increase the yield to shareholders generally. Some self-dealing may be eliminated but again only at a price in economic efficiency. Such intervention will necessarily, as Professor Cary's analysis demonstrates, affect business judgments are well as attempts at self-dealing. This will increase the costs of the corporate enterprise by limiting management's ability to run the business and by saddling the corporate enterprise with the distractions and expense of litigation.

A final example involves the standard of care required of directors. Here the Delaware decision attacked held that directors might rely on summaries, reports and corporate records as evidence that no antitrust violations were being committed by the company, even though 19 years earlier the Federal Trade Commission had issued a cease and desist order against price fixing. It is probably the case that an internal control system to prevent repeated antitrust violations would have prevented the fines and treble damages paid by the company.

The issue, however, again is not whether damages might be avoided but whether, even employing a simple negligence calculus, the probability of having to pay a likely amount of damages is greater than the cost of avoiding them. Requiring perfect fail-safe systems in every corporation can be far more costly than any potential loss to shareholders. Professor Cary is on more solid ground in suggesting that the need for preventative measures was greater in the particular case in light of past violations since that is relevant to the likelihood of loss.

Again, the point is not that Professor Cary's position is or is not the "right" rule. Rather, the point is that interventionist rules may reduce the yield to shareholders generally and this cost must be weighed against the benefits to be gained by the reduction of self-dealing or mismanagement.

What rules of law optimally protect shareholders is unlikely to be selfevident except at ends of the spectrum. For example, the proposals to increase shareholder "power" in the case of widely held corporations seems as much designed to aid tiny groups of shareholders of forces outside the corporation to influence corporate behavior through obstruction as to protect shareholders generally. And proposals for extensive judicial intervention on behalf of 3 percent shareholders in the name of "fairness" will likely entail rigid rules restricting management's ability to make business judgments. Between these extremes, however, are a vast number of cases in which the cost benefit judgment seems inconclusive and the proper role of law unclear. What that role ought to be can be determined only after an excursion into the question of the extent to which economic market considerations discipline corporate management behavior.

C. Market constraints on managerial discretion

With a few exceptions, the legal literature is single-mindedly concerned with the unregulated discretion corporate management has achieved as a result of the "separation of ownership and control." This latter phrase, which accurately describes the lack of close supervision of corporate activities by shareholders but inaccurately suggests a lack of accountability on management's part, refers almost entirely to the fact that the legal controls on management behavior, e.g. shareholder approval, derivative suits, election of directors, etc., seem unsatisfactory methods of exerting direct control over corporate affairs.

And so they are, but the structure of a legal system does not necessarily reflect the reality of the institutions it governs. A literal student of the Constitution might well be appalled at the fact that voters in presidential elections are not even told the names of the people they are voting for (the electors) and that, once elected, these people rarely exercise any judgment in performing their functions. He might also conclude that there was, therefore, a "separation of voting and control" of presidential elections and call for a strengthening of the Electoral College.

We all know, of course, that a party system unsanctioned by the Constitution transformed the electoral college into an institution which has no functional

« AnteriorContinuar »