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survived until the general corporation law revision of eliminated in 1908 in favor of a provision that on a poll
each stockholder would have a vote for each share. 40 Pennsylvania and Massachusetts experimented with
By the end of the nineteenth century, then, statutory various methods of limiting the voting power of any single restrictions on the rule of one vote per share in business stockholder. The Pennsylvania act of 1836 gave å stock- corporations had virtually disappeared, and it is now holder one vote for each share up to two, for each two
unusual to find a statutory reference to any formula shares above two and up to ten, for each four shares above
other than one vote per share.“ ten and up to thirty, for each ten shares above thirty and
This brief history indicates that the emergence of a up to 100, and for each twenty shares above 100.23 This general rule of one vote per share did not result from enformula was abandoned in 1849 in favor of a provision that lightened awareness of the inadequacies of an inappro"each stockholder shall be entitled to as many votes as he
priate common law rule, but was the nineteenth-century owns shares of stock in said company, but no person shall
culmination of a 300-year political controversy over the in any case be entitled to more than one-third of the whole degree and type of control that should be retained over the number of votes to which the holders of all the shares
managers of corporations chartered for economic purposes. would . . . be entitled. .” 24 This restriction was
Indeed, there is no real indication that any common law finally eliminated by the Corporation Act of 1874.25
rule of one vote for each member of a business corporation
ever existed. Massachusetts made no mention of voting rights in its The case most often cited for such a proposition is the general incorporation laws for manufacturing companies 1834 decision of the New Jersey Supreme Court in Taylor v. in 1809 and 1830.20 In the laws governing special kinds of Griswold, 6 invalidating a by-law provision of a bridge corporations, however, while votes were on a per-share company which purported to give one vote for each share. basis up to a certain point, a stockholder in a bank was The court did not cite any earlier decisions on the question; limited to ten votes, 27 a stockholder in an insurance its only direct authority was a statement in Angell and company to thirty votes,28 and a stockholder in a railroad
Ames's treatise on corporations that “[i]n joint stock comwas not "entitled to any vote for any shares beyond one panies, the owner of one share or action of the capital tenth part of the whole number of shares ... of stock. stock, is, in general, a member of the company; a corpo
." 26 The restriction on voting in railroads appears to rator; and as such, entitled to, and cannot be denied, the have been eliminated in 1906,30 and that on banks in
entire rights and privileges of a member." 43 The court 1910.31 Restrictions on voting in insurance companies went on to state that were not completely eliminated until 1928.32 In manufacturing companies, Massachusetts tried a different
[t]hose rights and privileges ... cannot be difapproach by providing that no person could vote more
ferent in one member, than they are in oiher. than fifty shares as proxy unless they were all owned by
A man with one share is as much a member, as a one person, and that no officer of the corporation could
man with fifty; and it is difficult to perceive any cast more than twenty votes as proxy or attorney:33 This
substantial difference between a by-law, excludrestriction, too, disappeared by 1902.34
ing a member with one share from voting at all,
and a by-law reducing his one vote to a cipher, North Carolina's general incorporation law of 1836, for by giving another member fifty or a hundred silk and sugar companies, gave one vote for each share up votes." to five and one vote for each five shares above that,35 but the broader general incorporation law of 1850 left the 40 Corporations (Consolidation) Act, 8 Edw. 7, c. 69, $ 60, sched. matter of voting to be prescribed by the by-laws,36 as did
41 Under Vermont law, the articles of association or by-laws of a the first general incorporation law of Delaware."
corporation "may provide that each stockholder shall have one In England, the Companies Act of 1862 provided that vote for each share of stock held by him, or that each stockin default of regulations each member should have one
holder shall have but one vote, regardless of the amount of
stock held by him ...." Vr. Stat. Ann. tit. 11, $ 64(a)(4) (1958). vote, but the suggested regulations contained in the
In the absence of any provision stockholders apparently have one first schedule to the Act provided for one vote for each vote for each share. Id. 8 64(d). share up to ten, for each five shares above ten up to 100,
There appears to have been at least one area where the trend was and for each ten shares above 100.34 These provisions were
in the opposite direction. An 1859 Wisconsin law authorizing mutual insurance companies based voting rights "not on the democratic
principle of one vote per person but on a property-oriented principle 22 See Act of June 7, 1890, ch. 564, § 54, (1890) N. Y. Laws 1077. of one vote for each $200 of insurance.” S. KIMBALL, INSURANCE AND 23 Act of June 16, 1836, No. 194, 83, (1835–36) Pa. Laws 800. Public Policy 71 (1960). However, as a result of a continuing 24 Act of April 7, 1849, No. 368, § 4, (1849) Pa. Laws 564.
campaign, this rule was abandoned in favor of the democratic 25 Act of April 29, 1874, No. 32, § 10, (1874) Pa. Laws 79.
voting principle in 1929. Id. 26 Act of March 3, 1809, ch. 65, (1809) Mass. Laws 464; Act of 12 14 N.J.L. 222 (Sup. Ct. 1834). Feb. 23, 1830, ch. 53, (1829–30) Mass. Laws 325.
43 Id. at 237, quoting J. ANGELL & S. AMES, PRIVATE CORPORA27 Mass. Rev. Stat, pt. 1, tit. 13, ch. 36, $ 23 (1836).
TIONS 62 (1832). The statement in Angell and Ames, however, re28 Act of March 6, 1832, ch. 95, 83, (1831-33] Mass. Laws 334. lated solely to the right of a person who bought stock in a joint 2o Mass. Rev. Stat. pt. 1, tit. 13, ch. 39, $ 50 (1836).
stock corporation to become a member without a vote of admission. 30 Act of June 7, 1906, ch. 463, pt. 2, § 37, (1906) Mass. Acts & None of the editions of Angell and Ames from 1832 to 1882 dis& Resolves 521.
cussed the question of the number of votes to which a shareholder 31 Sce Act of April 14, 1910, ch. 399, & 14, (1910) Mass. Acts was entitled. Morawetz, in 1886, believed “the custom of giving the & Resolves 335.
shareholders : : : a vote for every share has become so well estab32 Act of April 2, 1928, ch. 185, (1928) Mass. Acts & Resolves 205. lished what it is fair to imply an intention to follow this custom in
33 Mass. GEN. Stat. ch 60, $7 (1860). Dodd found Massachusetts the absence of any indication to the contrary." IV. MORAWETZ, during this period far more prone than New York to discourage PRIVATE CORPORATIONS $ 476 (2d ed. 1886). See also W. Cook, concentration of control in the hands of large shareholders. Dodd, STOCK AND STOCKHOLDERS $ 608 (1887). Clark reached the same American Business Association Law, in 3 LAW, A CENTURY OF conclusion in 1897, and believed that “this is clearly the just rule, PROGRESS 254, 273 (1937).
for stockholders are interested not equally, but in proportion to the 34 Mass. Rev. Laws ch. 110, $ 25 (1902).
number of shares held by them.” W. CLARK, PRIVATE CORPORATIONS 25 2 N.C. Rev. Stat. 216, at $ 4 (1837).
477 (1897). He did note, however, that “often the number of votes 36 N.C. Rev. CODE ch. 26, § 2 (1855).
which a single stockholder shall be allowed to cast is limited. The 27 Act of March 14, 1883, ch. 147, § 18, (1883] Del. Laws 221. object is to prevent the corporation from getting into the control 38 Companies Act of 1862, 25 & 26 Vict., c. 89, $ 52.
of a single person.” Id. at 476. 39 Id. 44, sched. 1.
14 14 N.J.L. at 237-38 (emphasis in original).
The court noted that the legislature had "thought one-fifth in Sweden 50 and Argentina, one-quarter in proper, in some instances” to give one vote for each share Colombia, 62 and two-fifths in Belgium. In addition, in corporate charters and in other cases had provided for two of these countries limit the proportion of the issued graduated voting. The court believed, however, that as a shares that any one stockholder may vote---one-tenth in policy matter, it should not permit the members of the Argentina 64 and one-fifth in Belgium.“ corporation to adopt such a rule in the absence of specific Uruguay has the strictest limitation: no person may legislative authority, since
represent more than six votes (three, if the corporation has
less than 100 shares), ,66 and the restriction has been the tendency, at least, the apparent tendency, of the by-law in question, is to encourage specu
interpreted as applying to persons voting as proxies for lation and monopoly, to lessen the rights of the
others as well as to those voting for their own account. 57 smaller stockholders, depreciate the value of their
The laws of France, Germany, Switzerland, Nethershares, and throw the whole property and gov
lands, Denmark, and Brazil specifically authorize inclu
sion in the articles of incorporation of provisions limiting ernment of the company, into the hands of a few capitalists; and it may be, to the utter neglect or
the number of votes that may be cast by any one stock
holder. disregard of the public convenience and interest.46
The basic French rule, carried over into the 1966 What this opinion seems to indicate is not a rigid ad- corporation law, is that the number of votes to which stockherence to an old common law rule, since there does not seem to have been any, 48 but rather a judicial reluctance to
holders are entitled is proportional to the aggregate par abandon traditional democratic principles for the govern
value of the shares which they own.68 However, the articles ment of business corporations unless the legislature evidenced a clear intent to abandon them. The persistence of
50 Stock Corporation Act of 1944, $ 119(4), as amended, in Cor
PORATION LAWS OF SWEDEN 79 (Foreign Tax Law Ass'n 1965). this judicial concern can be seen in an 1890 decision by the
A stockholder may be required to make a written declaration that Supreme Court of Alabama upholding the effectiveness of he is the real owner of the shares he is voting and did not acquire a provision inserted by the legislature in the charter of a them for the purpose of evading any restrictions contained in the law coal and iron company, prohibiting any person from cast
or the articles of association, particularly those relating to voting
rights. The company's rules, however, can eliminate the restriction ing “more than one-fourth of all the votes at any election of
and give one vote per share. K. RODHE, AKTIEBOLAGSRATT 113 directors."
."' 47 Another coinpany, which had bought a ma- (1964). jority of the shares, attempted to evade the prohibition
61 CÓDIGO DE COMERCIO art. 350 (de Zavalía 1968). The Argentine by putting some of its shares in the names of its officers
provision has been criticized on the ground that, because it is too
easily avoided, it does not achieve its objective. 1 V. RIVAROLA, and directors. The court thought
SOCIEDADES ANONIMAS 150–152 (5th ed. 1957). It would be elimithe statutory restraint on the voting power
of the nated in a proposed revision of the corporation laws because, in the
great majority of Argentine corporations that have bearer shares, stockholders was enacted for very wise and con
the ease with which accommodation transfers can be made renders servative purposes
. . . It is perhaps to be the limitation virtually unenforceable. ANTEPROYECTO DE LEY Jamented that our organic law does not contain GENERAL DE SOCIEDADES 32 (1967). a provision applicable to all business corpora
52 Law No. 58 of 1931, art. 28, in THE COMMERCIAL CODE OF
COLOMBIA 405 (Foreign Tax Law Ass'n 1965). See V. RUEDA, tions aggregate, that no one person, whether nat
LAWS OF COLOMBIA IN MATTERS AFFECTING BUSINESS 45 (3d ural or artificial, can ever exercise a controlling ed. 1961). This limitation was reconfirmed and elaborated in Decree voice in their organization or government.
No. 2521 of 1950, art. 90, in The COMMERCIAL CODE OF COLOMBIA,
supra at 517. It would be carried forward in Article 592 of the new B. Perspectives From the Civilian 49
Commercial Code submitted by a committee of revision in 1958.
1 PROYECTO DE CÓDIGO DE COMERCIO 129 (1958). This limitation In many of the leading commercial countries with civil was made inapplicable to government holdings in public service law systems, the corporation law modifies the prevailing companies. Decree No. 2521 of 1950, art. 91, in The COMMERCIAL rule of one vote per share either by restricting the number
Code of COLOMBIA, supra at 518. Problems have arisen in applying of votes that any one stockholder can cast or by specifically SALGAR, DE LA ASAMBLEA GENERAL DE ACCIONISTAS 50-56 (1963).
it to majority-owned subsidiaries of other companies. See J. BENETTI authorizing the inclusion of such a limitation in the articles 53 Law of 1935, art. 76, in COMMERCIAL LAWS OF BELGIUM 12 of incorporation.
(Foreign Tax Law Ass'n 1965). The workings of this provision are Sweden, Argentina, Colombia, and Belgium limit the
described in A. GREGOIRE, MANUEL DES SociétÉS ANONYMES
63-66 (1968). A recent project for the revision of Belgian corporation proportion of the shares represented at a meeting that may
law proposes its elimination because it is objectionable in principle be voted by any one stockholder, the proportion being to the system of decision by majority vote, and because the ease
with which it can be evaded by the use of nominees often makes it 45 Id. at 241 (emphasis in original).
unworkable in practice. AVANT PROJECT DE LOI SUR LES Sociétés 46 The other case most often cited for the "common law rule" is
ANONYMES 53-54. Commonwealth v. Conover, 10 Phila. (Pa.) 55 (C.P. 1873), in which 0 CÓDIGO DE COMERCIO art.350 (de Zavalía 1968). the court stated, without authority:“We think it may with safety as Law of 1935, art. 76, in COMMERCIAL LAWS OF BELGIUM, be assumed, that at common law, the rights of the members of a
supra note 53. corporation stand upon the principle, that all are equal in the 58 CÓDIGO DE COMERCIO art. 420 (Barreiro y Ramos 1964). enjoyment of franchises granted, unless the contrary appears on This formula was adapted from the Dutch Commercial Code of the face of the charter . Id. at 56. Since this case involved the 1826. See Decree of May 26, 1949, in id. at 377. Vesper Yacht Club of Philadelphia, it did not involve any examina- 37 Decree of May 26, 1949, in id. at 377. Even this low limit is tion of the merits of voting procedures in business corporations.
apparently “qualified in practice through the splitting of the votes 47 Mack v. De Bardelaben Coal & Iron Co., 90 Ala. 396, 401, 8
by calling in nominee shareholders." J. O'FARRELL & C. FREIRA, So. 150, 152 (1890).
COMPANY, TAXATION, AND BANKING LAWS IN URUGUAY 2 (2d ed. 48 Id. at 403, 8 So. at 152.
1959). ** The research for this part was hampered both by the difficulty 88 Law No. 537 of July 24, 1966, art. 174, in A. DALSACE, MANUEL in obtaining up-to-date information on the law and practice in DES SOCIÉTÉS ANONYMES 403 (4th ed. 1967). See also Law of Nov. 13, various countries and by difficulty in reading the languages in which 1933, 4, in CODE DE COMMERCE art. 46 (60e ed. Petits Codes certain of the materials were found. The specific references should Dalloz 1964); E. Church, Business AssociATIONS UNDER FRENCH therefore be taken more as indicative than definitive.
Law 8 351 (1960).
may limit the number of votes that any single stockholder votes and that the restriction does not favor large sharemay cast at any meeting of shareholders, 59 provided that holders over small shareholders, or (b) deviate from the limitation is uniform for all shares.60 Limitations of this rule of one vote per share in any
way, provided that sort, such as a provision that no stockholder may cast no shareholder may cast more than six votes (three, if more than ten votes at the annual meeting, are reportedly the corporation has fewer than 100 shares outstanding).68 frequently employed.61
A provision limiting each shareholder to six votes is The German Corporation Law of 1965 carries forward apparently frequently found in the articles of large the provision of the prior law that the voting rights of corporations." large stockholders may be limited in the articles of incor- Denmark added a new section to its Companies Act in poration either by fixing a maximum number of votes or 1962, permitting a corporation, at a general meeting of by scaling down voting rights as the number of shares stockholders, to adopt a provision that no shareholder increases. To facilitate enforcement of such limitations, may possess voting rights for more than a specified prothe articles may also provide that shares held by one portion of the voting shares. The provision must be
' stockholder for the account of another may be included in approved by the holders of four-fifths of the outstanding the latter's holdings in determining the applicability of voting shares; dissenters have the right to require the the limitation.63
corporation to purchase their shares. 71 One special German provision is found in the law pro- Brazil simply permits the articles to establish limitaviding for the transfer of the Volkswagen Company to tions on the number of votes of each shareholder, in deropublic ownership, which limits each stockholder to a gation of the general rule of one vote per share.92 number of votes equal to the number that would be Japan, before World War II, authorized inclusion in conferred by ownership of one ten-thousandth of the the articles of a provision limiting the voting rights of outstanding shares.* This provision was apparently a stockholders having eleven or more shares; 73 this authorisignificant factor in preventing a merger of Volkswagen zation disappeared in a 1950 amendment of the Commerand Daimler-Benz, since the latter coinpany “is closely cial Code during the American occupation.74 The Italian held, and its owners presumably don't want to yield pre-War code also scaled down the voting rights of holders control of their company for Volkswagen stock they of more than five shares; this restriction was eliminated can't vote.” 65
in the 1942 code revision in favor of a rule of one vote In Switzerland, the articles may limit the number of votes that a single stockholder may cast, and the transfer It has been suggested that a mandatory restriction such of shares for the purpose of exercising voting rights at a
as that found in Argentina, Belgium, and Uruguay meeting is prohibited'if made for the purpose of avoiding “scarcely works in practice, since the holder of a large such limitations.67
number of shares will make a fictional transfer of them The Dutch corporation law has rather complex pro
before the meeting.” 76 This may well be true in Argenvisions. The articles may either (a) restrict the number of
tina or Belgium because the limits are so high, but a stockvotes any one holder may cast, provided that holders of
holder in a large Uruguayan corporation might be hard equal numbers of shares are entitled to equal number of pressed to round up enough “fictional transferees" with
à limit of six votes for each. The restrictions have also 59 Law No. 537 of July 24, 1966, art. 177, in A. DALSACE, supra been criticized on the ground that large shareholders have note 58. Under the old law, the limitation apparently could only the greatest interest in the prosperity of the company be made applicable to voting at annual meetings. Law of July 24, 1867, art. 27, in CODE DE COMMERCE art. 46 (60e ed. Petits Codes
and that their opinions are more enlightened than those Dalloz 1964).
of small shareholders." The merits of this argument are 60 Law No. 537 of July 24, 1966, art. 177, in A. DALSACE, supra considered in subsequent sections. note 58. In a 1957 decision, the Court of Appeals of Paris upheld a provision limiting any shareholder to 30 votes, reasoning that the 08 COMMERCIAL Code art. 44b, in Dutch CORPORATION LAW 19 provision was designed to protect & company formed by small (S. van der Meer transl. 1960). investors from coming under the control of capitalists motivated by 0% SUCCURSALES ET FILIALES DANS LE MARCHÉ COMMUN 165 speculative considerations. The court also held that a shareholder (Dalloz & Sirey 1963). representing himself and others at a meeting could vote the sum 70 Act No. 225 of June 22, 1962, $ 57a, in THE DANISH Comof all the shares they would severally have been entitled to vote. PANIES Act, at App. (Supp. 1962). 3 H. MOREAU, LA SOCIÉTÉ ANONYME $ 272 (2d ed. Supp. 1955).
61 H. MOREAU, H. BRESSAC & 0. McCANDLESS, FRENCH COR- 72 Law No. 2627 of Sept. 26, 1940, art. 80, in COMMERCIAL LAWS PORATIONS 12 (1956).
OF BRAZIL 32 (Foreign Tax Law Ass'n 1965). * Law of Sept. 6, 1965, § 134(1), (1965) BGB1. I 1120.
73 COMMERCIAL CODE art. 241, in Civil AFFAIRS HANDBOOK:
JAPAN 28 (W. Sebald transl. 1945). Law of July 21, 1960, $2(1), (1960) BGB1. I 585.
74 COMMERCIAL CODE art. 241, in CODE DE COMMERCE DU JAPON es Wall St. J., June 30, 1966, at 4, col. 4.
78 (S. Komachiya ed. & transl. 1954). The amendments were reU SCHWEIZERISCHES OBLIGATIONENRECHT art. 692 (Schulthess & portedly made under pressure from the occupation forces to reCo. 1966). Prior to 1937, Swiss law limited any single shareholder model Japanese corporation law to correspond to American law. to one-fifth of the votes represented at a meeting, and many com- CODE DE COMMERCE DU JAPON, supra at 14-18. Elimination of the panies have kept or adopted this provision, either because they possibility of restrictions on large shareholders has been characliked it or did not notice the change in the statute. 2 G. Brosset & terized as a strengthening of voting rights "through the abolition C. Schmidt, GUIDE DES SociÉTÉS EN DROIT SUISSE 92 (1963). of restrictions." Blakemore & Yazawa, Japanese Commercial Code However, many other companies reportedly fix a maximum number Revisions, 2 Am. J. Comp. L. 12, 20 (1953). of votes that any single shareholder may cast, or scale down the 75 1 V. RIVAROLA, supra note 51, at 150. See CODICE DI Comvoting rights of large shareholders. P. BÖCKLI, DAS AKTIENSTIM- MERCIO art. 157 (2d ed. Barbéra 1893); COMMENTADO art. 2351 MRECHT UND SEINE AUSBUNG DURCH STELLVERTRETER 43-48 (Laporta & Tamburrino 1963). (1961).
76 de Sola Canizares, The Rights of Shareholders, 2 INT'L & Comp. 67 SCHWEIZERISCHES OBLIGATIONENRECHT art. 691 (Schulthess & L.Q. 564, 569 n.37 (1953). Co. 1966).
17 1 V. RIVAROLA, supra note 51, at 152.
There is, however, another dilemma to which they have
not turned their attention: the principal effect of any The Large Shareholder
restriction that is imposed by law and respected by a
prospective seller of control may be to prevent the transfer A. Sales of Control
of control and leave it in the hands of the prospective seller. Fifteen years ago, the United States Court of Appeals control lodged in someone who is willing to purchase it at
Thus, the other stockholders are protected from having for the Second Circuit handed down its decision in Perlman V. Feldmann 78 and inaugurated a new era in discussion
a premium by a rule that leaves it firmly lodged in someone of the issue of sale of corporate control. The literature
who is willing to sell it at a premium. It is hard to detect
a sufficient difference in righteousness or responsiveness to spawned by that decision and the succeeding elaboration of the problem by the same court in Essex Universal fiduciary duty between the buyer and seller in these Corp. v. Yates 79 has been impressive not only in its bulk,
situations to warrant an assumption that the other share
holders will thereafter be treated any worse by the foriner but also in the stature of the gladiators who have entered the arena and the subtlety and elaboration of what they
than by the latter. have written. 80
The recognition of some limitation on the power of a Yet, having reviewed this vast outpouring, and having controlling shareholder to transfer control by selling his compared the latest contributions with the earliest, shares must lead inevitably to the question whether there and the most recent court decisions, such as Jones v. H.F. must not also be some corresponding limitation on his Ahmanson & Co., 81 with Perlman itself, it is evident right to control the corporation by virtue of his ownership that we are no closer to the development of a useful rule of the shares. To turn the question around, should the or rules for the guidance of prospective buyers and sellers ownership of the shares, by itself, give him any right to of control-or even to an understanding of what the
control the corporation? question is—than we were fifteen years ago.
As far as management and control are concerned, there The reason for this colossal failure, I suggest, is that the are two functionally different kinds of corporationsexamination has been limited to a surface manifestation privately-owned corporations and publicly-owned corof a much more serious question about the structure of porations. The determination of the draftsmen of state American corporation law, and that until that other corporation laws to force both kinds of corporations into question is exposed and analyzed, there can be neither a the same statutory molds 82 is responsible for much of the solution to, nor an understanding of, the problem of sale inadequacy of modern” corporation law. The privatelyof control.
owned corporation is one in which the entire equity inThe problem has arisen in the context of a corporation terest is owned by people who are, or have been, actively whose stock is widely distributed but in which one person, involved in the conduct of the business, or are related by or a small group of people, owns substantially more personal or business ties to people who are. The publiclystock than anyone else. This is the so-called "control owned corporation is one in which some or all of the equity stock," and the problem arises when the owner of this interest is owned by a substantial number of people who stock sells it-usually at a premium over the market price acquired it in the open market and have no other connecfor small quantities of the same stock—and passes to the tion with the corporation and its business. buyer the power to control the corporation.
In which category do we place the corporation that has The basic issue to which all the commentators have "public" shareholders but also has one or more large shareaddressed themselves is what limitations should be placed holders who participate actively in the selection of manageon the right of the seller to pass control of the corporation ment and in fact control the selection process? It is clearly in this manner without the participation or consent of the not the functional equivalent of a privately-owned corother shareholders. They have all recognized one dilemma poration. Looking at it as a publicly-held corporation, the that complicates their labors: any restriction on the right question becomes whether the owner of a substantial block to transfer control must be cast in a form that also restricts of shares, whether a majority of the outstanding shares or the free transferability of the underlying shares, and the not, should be entitled to control the corporation through free transferability of shares is quite properly recognized the selection of its management. à desirable means to the optimum utilization of
Almost forty years ago, Berle and Means examined the resources, an objective at least as important as ensuring problem of the divorce of ownership and control in the that those in control of corporations respect the rights of public corporation. The inquiry that has followed has all shareholders.
concentrated on finding the most appropriate agency for 78 219 F.2d 173 (2d Cir.), ccrt. denied, 349 U.S. 952 (1955). controlling the power of the managers in the corporations 79 305 F.2d 572 (2d Cir. 1962).
whose scattered shareholders have demonstrated their 80 E.4., Jennings, Trading in Corporate Control, 44 Calif. L. Rev.
incapacity for the task. This problem has not existed in 1 (1956); Leech, Transactions in Corporate Control, 104 U. Pa. L. Rev. 725 (1956); Hill, The Sale of Controlling Shares, 70 Harv.
those public corporations in which one concentrated holdL. Rev. 986 (1957); Berle, “Control” in Corporale Law, 58 Colum. ing of shares was sufficient to enable the holder to exercise I.. Rev. 1212 (1958); Berle, The Price of Power: Sale of Corporate ultimate control over the corporation's affairs. But there Control, 50 CORNELL L.Q. 628 (1965); Andrews, The Stockholder's
has been little analysis of whether this cure-or, rather, Righl lo Equal Opportunity in the Sale of Shares, 78 Harv. L. Rev. 505 (1965), Jayaras, Equal Opportunity in the sale of Controlling preventive-is more beneficial to the remaining shareShares: A Reply to Prosessor Andrews, 32 U. Chr. L. Rev. 420 (1965). A series of articles have been written on the subject by 62 This was prompted in large part, no doubt, by the desire of the Father Bayne, all cited in Bayne, The Sale of Control Premium: managers of large corporations, for political reasons, to maintain The Disposition, 57 Calif. L. REV. 615, 618 n.33 (1969).
their protective coloration of identification with small businessmen. 1 Cal. 3d 93, 460 P. 2d 464, 81 Cal. Rptr. 592 (1969), noted 8 A. BERLE & G. MEANS, THE MODERN CORPORATION AND in 83 Harv. L. Rev. 1904 (1970).
PRIVATE PROPERTY (1932).
holders than the ill of uncontrolled management dis- an unfair deprivation. But what if he has fifty-one percent, cretion.**
and the remaining shareholders forty-nine percent? Here In a corporation with no concentrated shareholdings, the his stake is not only larger than that of any other single most effective control over management that has been shareholder, but, in one sense, larger than all the others developed during the last thirty-five years is the require- put together. He would argue that is it inequitable to ment of disclosure-disclosure of financial information, of permit those with a smaller aggregate stake in the corpotransactions by insiders, of other types of information ration to override his views, simply because their holdings through which shareholders and others can measure man- are scattered and his are concentrated. agement's performance against general standards of com- There is undoubtedly surface appeal to the argument petence and integrity. To some extent, disclosure is a self- that logical application to business corporations of the effectuating control; many things are not done by corpo- putative common law rule of one vote per member will rate managements which would be done if they could be give to shareholders a vote for each share. Unfortunately, done without disclosure. But the requirement of disclosure there is little more than that. Policy may argue for such gains strength from the sanctions available to those to
a result, but logic cannot command it unless we accept whom the information is disclosed. Perhaps the most im- the further proposition that the directors represent the portant sanction is the derivative suit to recover for the shares rather than the shareholders. The members of a corporation the fruits of a manager's breach of his duty: non-business corporation or other institutional constitAnother is the threat that the management will be deposed uency do not have equal votes because their interests by an insurgent if its performance does not measure up to are "equal.". Their respective interests may be very the expected standards.
different, and interests cannot be measured in the same The first sanction is only effective where a legal standard
way that votes are. They are accorded equality in voting has been violated; it does not reach any other "wrong under the fundamental principle that votes are decisions, decisions. Where control of the corporation rests on a basis decisions are made by people, and one person's decision of one or a few large shareholdings, the second sanction is should not be given greater weight than another's unless missing. The management supported by the holder of a
some important reason of policy supports the distinction.86 majority, or near-majority, of the outstanding voting In business corporations, a method of allocating interests shares cannot be deposed no matter how far its perform- in profit and loss happens to have an analogue in voting ance falls below the standards expected by the other procedure that has the twin advantages of being simple shareholders.
and precise in application and being congenial to the What justification is there for giving the man with
interests of those who set up such corporations. It is thirty percent, or fifty-one percent, or even ninety-nine inherently no more logical than making voting rights in percent, of the voting shares, absolute power to choose the school district elections proportional to the school taxes management that controls the corporation's affairs? If paid by the voters or the numbers of their children enrolled there is justification, it should be found either in the inter- in the school system. 86 ests of the shareholders or in important interests relating to The situation of the shareholder who has ninety-nine the allocation of resources in our society. First, the interest of the controlling shareholder himself: from the preceding example. However, where the per
percent of the outstanding shares differs only in degree his interest, as a shareholder, is presumably in seeing that
centage of shares held by the scattered shareholders falls the corporation is run to achieve maximum benefit for the
below a certain point which could be five percent or shareholders, including himself. If he has thirty percent
10 percent-there should obviously be a method by which of the shares, and the remaining shareholders seventy the major shareholder could convert the corporation percent, his total stake in the corporation is less than half
from public to private status and buy out the interests as great as theirs. In this situation, it is hard to argue that
of the scattered shareholders subject to procedural safetaking away his right to choose the management would be guards like those now used in appraisal proceedings. 87 ** [T]he possibility should be considered that the public may
The second interest that may be thought to justify be less in jeopardy from a large business enterprise run control by the large shareholder is the interest of the by an unpropertied professional management-one scattered shareholders themselves. This could rest on said not to be “accountable”-than from a large enterprise personally owned and operated by an
either (or both) of two theories. individual or a small family group. To whom is such an First, because the large shareholder has a large investindividual or small family group "accountable''? It is ment, he will devote more time and care to it, and his perhaps unfair to recall that before World War II the managers of the basic industry of Germany and of
judgment as to what will most benefit all the shareholders Japan were directly "accountable" to their share- will be better than the collective, but uncollected, wisdom
holders--the Krupps and the four Zaibatsu families. of his scattered brethren. It is hard to know how much Manning, Corporate Power and Individual Freedom: Some General weight to give to this argument. The large shareholder Analysis and Particular Observations, 55 Nw. U.L. Rev. 38, 41 will almost certainly have better access to information (1960) (emphasis in original). On the specific issue of management to control by large shareholders or by financial interests tend to give him to use that information for his own personal advantage
about how the company is being managed, but unforcompensation, one study has concluded that companies not subject tunately there are many opportunities and incentives for higher rewards to management than companies in which those controls are present. Washington, The Corporate Executive's Living rather than for the common benefit of all the shareholders Wage, 54 HARV. L. Rev. 733, 761 (1941), discussed in 2 G, Wash- or of all the people interested in the company's operation. INGTON & V. Rothschild, COMPENSATING THE CORPORATE ExECUTIVE 926 (3d ed. 1962). See also J. LIVINGSTON, THE AMERICAN
The number of cases in which large shareholders are alleged STOCKHOLDER 226, 229 (1958). The presence of "outside" i.e., non-officer) directors on the board, however, does not seem to act
* See text accompanying notes 139-156 infra. as a control on management compensation, according to another
** See text accompanying notes 148–156 infra.
87 The conversion can be effected without even a vote of sharestudy which found that median salaries of executives of companies with a majority of outside directors were higher than those in com
holders in many states by use of a “short-form” merger. E.9., DEL.
CODE ANN. tit. 8, § 253 (Supp. 1968); N.Y. Bus. CORP. LAW parable companies in which a majority of the directors were also executives of the company. M. NEWCOMER, THE BIG BUSINESS
$ 905 (McKinney 1963). Occasionally a large publicly-held EXECUTIVE 128 (1955).
company is restored to private ownership, as was the George A. Fuller Company in 1965. N. Y. Times, June 8, 1965, at 59, col. 3.