United States corporate law

Incorporation and charter competition

The process of starting up a new corporation is quick, though each state differs.^[18] A corporation is not the only kind of business organization that can be chosen. People may wish to register a partnership or a Limited Liability Company, depending on the precise tax status and organizational form that is sought.^[19] Most frequently, however, people running major enterprises will choose corporations which have limited liability for those who become the shareholders: if the corporation goes bankrupt the default rule is that shareholders will only lose the money they paid for their shares, even if debts to commercial creditors are still unpaid. A state office, perhaps called the "Division of Corporations" or simply the "Secretary of State",^[20] will require the people who wish to incorporate to file "articles of incorporation" (sometimes called a "charter") and pay a fee. The articles of incorporation typically record the corporation's name, if there are any limits to its powers, purposes or duration, identify whether all shares will have the same rights. With this information filed with the state, a new corporation will come into existence, and be subject to the legal rights and duties that the people involved create on its behalf. The incorporators will also have to adopt "bylaws" which identify many more details such as the number of directors, the arrangement of the board, requirements for corporate meetings, duties of officer holders and so on. The certificate of incorporation will have identified whether the directors or the shareholders, or both have the competence to adopt and change these rules. All of this is typically achieved through the corporation's first meeting.

One of the most important things that the articles of incorporation determine is the state of incorporation. Different states can have different levels of corporate tax or franchise tax, different qualities of shareholder and stakeholder rights, more or less stringent directors' duties, and so on. However, it was held by the Supreme Court in Paul v Virginia that in principle states ought to allow corporations incorporated in a different state to do business freely.^[21] This appeared to remain true even if another state (e.g. Delaware) required significantly worse internal protections for shareholders, employees, or creditors than the state in which the corporation operated (e.g. New York). So far, federal regulation has affected more issues relating to the securities markets than the balance of power and duties among directors, shareholders, employees and other stakeholders. The Supreme Court has also acknowledged that one state's laws will govern the "internal affairs" of a corporation, to prevent conflicts among state laws.^[22] So on the present law, regardless of where a corporation operates in the 50 states, the rules of the state of incorporation (subject to federal law) will govern its operation.^[23] Early in the 20th century, it was recognized by some states, initially New Jersey, that the state could cut its tax rate in order to attract more incorporations, and thus bolster tax receipts.^[24] Quickly, Delaware emerged as a preferred state of incorporation.^[25] In the 1933 case of Louis K. Liggett Co v Lee,^[26] Brandeis J. represented the view that the resulting "race was one not of diligence, but of laxity", particularly in terms of corporate tax rates, and rules that might protect less powerful corporate stakeholders. Over the 20th century, the problem of a "race to the bottom" was increasingly thought to justify Federal regulation of corporations. The contrasting view was that regulatory competition among states could be beneficial, on the assumption that shareholders would choose to invest their money with corporations that were well governed. Thus the state's corporation regulations would be "priced" by efficient markets. In this way it was argued to be a "race to the top".^[27] An intermediate viewpoint in the academic literature,^[28] suggested that regulatory competition could in fact be either positive or negative, and could be used to the advantage of different groups, depending on which stakeholders would exercise most influence in the decision about which state to incorporate in.^[29] Under most state laws, directors hold the exclusive power to allow a vote on amending the articles of incorporation, and shareholders must approve directors' proposals by a majority, unless a higher threshold is in the articles.

Corporate personality

In principle a duly incorporated business acquires "legal personality" that is separate from the people who invest their capital, and their labor, into the corporation. Just as the common law had for municipal and church corporations for centuries,^[30] it was held by the Supreme Court in Bank of the United States v Deveaux^[31] that in principle corporations had legal capacity. At its center, corporations being "legal persons" mean they can make contracts and other obligations, hold property, sue to enforce their rights and be sued for breach of duty. Beyond the core of private law rights and duties the question has, however, continually arisen about the extent to which corporations and real people should be treated alike. The meaning of "person", when used in a statute or the US Bill of Rights is typically thought to turn on the construction of the statute, so that in different contexts the legislature or founding fathers could have intended different things by "person". For example, in an 1869 case named Paul v Virginia, the US Supreme Court held that the word "citizen" in the privileges and immunities clause of the US Constitution (article IV, section 2) did not include corporations.^[32] This meant that the Commonwealth of Virginia was entitled to require that a New York fire insurance corporation, run by Mr Samuel Paul, acquired a license to sell policies within Virginia, even though there were different rules for corporations incorporated within the state.^[33] By contrast, in Santa Clara County v Southern Pacific Railroad Co,^[34] a majority of the Supreme Court hinted that a corporation might be regarded as a "person" under the equal protection clause of the Fourteenth Amendment. The Southern Pacific Railroad Company had claimed it should not be subject to differential tax treatment, compared to natural persons, set by the State Board of Equalization acting under the Constitution of California. However, in the event Harlan J held that the company could not be assessed for tax on a technical point: the state county had included too much property in its calculations. Differential treatment between natural persons and corporations was therefore not squarely addressed.

In the late 20th century, however, the issue of whether a corporation counted as a "person" for all or some purposes acquired political significance. Initially, in Buckley v Valeo^[36] a slight majority of the US Supreme Court had held that natural persons were entitled to spend unlimited amounts of their own money on their political campaigns. Over a strong dissent, the majority therefore held that parts of the Federal Election Campaign Act of 1974 were unconstitutional since spending money was, in the majority's view, a manifestation of the right to freedom of speech under the First Amendment. This did not affect corporations, though the issue arose in Austin v Michigan Chamber of Commerce.^[37] A differently constituted US Supreme Court held, with three dissents, that the Michigan Campaign Finance Act could, compatibly with the First Amendment, prohibit political spending by corporations. However, by 2010, the Supreme Court had a different majority. In a five to four decision, Citizens United v Federal Election Commission^[35] held that corporations were persons that should be protected in the same was as natural people under the First Amendment, and so they were entitled to spend unlimited amounts of money in donations to political campaigns. This struck down the Bipartisan Campaign Reform Act of 2002, so that an anti-Hillary Clinton advertisement ("Hillary: The Movie") could be run by a pro-business lobby group. Subsequently, the same Supreme Court majority decided in 2014, in Burwell v Hobby Lobby Stores Inc^[38] that corporations were also persons for the protection of religion under the Religious Freedom Restoration Act. Specifically, this meant that a corporation had to have a right to opt out of provisions of the Patient Protection and Affordable Care Act of 2010, which could require giving health care to employees that the board of directors of the corporation might have religious objections to. It did not specifically address an alternative claim under the First Amendment. The dissenting four judges emphasized their view that previous cases provided "no support for the notion that free exercise [of religious] rights pertain to for-profit corporations."^[39] Accordingly, the issue of corporate personality has taken on an increasingly political character. Because corporations are typically capable of commanding greater economic power than individual people, and the actions of a corporation may be unduly influenced by directors and the largest shareholders, it raises the issue of the corruption of democratic politics.^[40]

Delegated management and agents

Although a corporation may be considered a separate legal person, it physically cannot act by itself. There are, therefore, necessarily rules from the corporation statutes and the law of agency that attribute the acts of real people to the corporation, to make contracts, deal with property, commission torts, and so on. First, the board of directors will be typically appointed at the first corporate meeting by whoever the articles of incorporation identify as entitled to elect them. The board is usually given the collective power to direct, manage and represent the corporation. This power (and its limits) is usually delegated to directors by the state's law, or the articles of incorporation.^[41] Second, corporation laws frequently set out roles for particular "officers" of the corporation, usually in senior management, on or outside of the board. US labor law views directors and officers as holding contracts of employment, although not for all purposes.^[42] If the state law, or the corporation's bylaws are silent, the terms of these contracts will define in further detail the role of the directors and officers. Third, directors and officers of the corporation will usually have the authority to delegate tasks, and hire employees for the jobs that need performing. Again, the terms of the employment contracts will shape the express terms on which employees act on behalf of the corporation.

Toward the outside world, the acts of directors, officers and other employees will be binding on the corporation depending on the law of agency and principles of vicarious liability (or respondeat superior). It used to be that the common law recognized constraints on the total capacity of the corporation. If a director or employee acted beyond the purposes or powers of the corporation (ultra vires), any contract would be ex ante void and unenforceable. This rule was abandoned in the earlier 20th century,^[44] and today corporations generally have unlimited capacity and purposes.^[45] However, not all actions by corporate agents are binding. For instance, in South Sacramento Drayage Co v Campbell Soup Co^[46] it was held that a traffic manager who worked for the Campbell Soup Company did not (unsurprisingly) have authority to enter a 15-year exclusive dealing contract for intrastate hauling of tomatoes. Standard principles of commercial agency apply ("apparent authority"). If a reasonable person would not think that an employee (given his or her position and role) has authority to enter a contract, then the corporation cannot be bound.^[47] However, corporations can always expressly confer greater authority on officers and employees, and so will be bound if the contracts give express or implied actual authority. The treatment of liability for contracts and other consent based obligations, however, differs to torts and other wrongs. Here the objective of the law to ensure the internalization of "externalities" or "enterprise risks" is generally seen to cast a wider scope of liability.

Shareholder liability for debts

One of the basic principles of modern corporate law is that people who invest in a corporation have limited liability. For example, as a general rule shareholders can only lose the money they invested in their shares. Practically, limited liability operates only as a default rule for creditors that can adjust their risk.^[48] Banks which lend money to corporations frequently contract with a corporation's directors or shareholders to get personal guarantees, or to take security interests their personal assets, or over a corporation's assets, to ensure their debts are paid in full. This means much of the time, shareholders are in fact liable beyond their initial investments. Similarly trade creditors, such as suppliers of raw materials, can use title retention clause or other device with the equivalent effect to security interests, to be paid before other creditors in bankruptcy.^[49] However, if creditors are unsecured, or for some reason guarantees and security are not enough, creditors cannot (unless there are exceptions) sue shareholders for outstanding debts. Metaphorically speaking, their liability is limited behind the "corporate veil". The same analysis, however has been rejected by the US Supreme Court in Davis v Alexander,^[50] where a railroad subsidiary company caused injury to cattle that were being transported. As Brandeis J put it, when one "company actually controls another and operates both as a single system, the dominant company will be liable for injuries due to the negligence of the subsidiary company."

There are a number of exceptions, which differ according to the law of each state, to the principle of limited liability. First, at the very least, as is recognized in public international law,^[51] courts will "pierce the corporate veil" if a corporation is being used to evade obligations in a dishonest manner. Defective organization, such as a failure to duly file the articles of incorporation with a state official, is another universally acknowledged ground.^[52] However, there is considerable diversity in state law, and controversy, over how much further the law ought to go. In Kinney Shoe Corp v Polan^[53] the Fourth Circuit Federal Court of Appeals held that it would also pierce the veil if (1) the corporation had been inadequately capitalized to meet its future obligations (2) if no corporate formalities (e.g. meetings and minutes) had been observed, or (3) the corporation was deliberately used to benefit an associated corporation. However, a subsequent opinion of the same court emphasized that piercing could not take place merely to prevent an abstract notion of "unfairness" or "injustice".^[54] A further, though technically different, equitable remedy is that according to the US Supreme Court in Taylor v Standard Gas Co^[55] corporate insiders (e.g. directors or major shareholders) who are also creditors of a company are subordinated to other creditors when the company goes bankrupt if the company is inadequately capitalized for the operations it was undertaking.

Tort victims differ from commercial creditors because they have no ability to contract around limited liability, and are therefore regarded differently under most state laws. The theory developed in the mid-20th century that beyond the corporation itself, it was more appropriate for the law to recognize the economic "enterprise", which usually composes groups of corporations, where the parent takes the benefit of a subsidiary's activities and is capable of exercising decisive influence.^[56] A concept of "enterprise liability" was developed in fields such as tax law, accounting practices, and antitrust law that were gradually received into the courts' jurisprudence. Older cases had suggested that there was no special right to pierce the veil in favor of tort victims, even where pedestrians had been hit by a tram owned by a bankrupt-subsidiary corporation,^[57] or by taxi-cabs that were owned by undercapitalized subsidiary corporations.^[58] More modern authority suggested a different approach. In a case concerning one of the worst oil spills in history, caused by the Amoco Cadiz which was owned through subsidiaries of the Amoco Corporation, the Illinois court that heard the case stated that the parent corporation was liable by the fact of its group structure.^[59] The courts therefore "usually apply more stringent standards to piercing the corporate veil in a contract case than they do in tort cases" because tort claimants do not voluntarily accept limited liability.^[60] Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the US Supreme Court in United States v Bestfoods^[61] held if a parent corporation "actively participated in, and exercised control over, the operations of" a subsidiary's facilities it "may be held directly liable". This leaves the question of the nature of the common law, in absence of a specific statute, or where a state law forbids piercing the veil except on very limited grounds.^[62] One possibility is that tort victims go uncompensated, even while a parent corporation is solvent and has insurance. A second possibility is that a compromise liability regime, such as pro rata rather than joint and several liability is imposed across all shareholders regardless of size.^[63] A third possibility, and one that does not interfere with the basics of corporate law, is that a direct duty of care could be owed in tort to the injured person by parent corporations and major shareholders to the extent they could exercise control. This route means corporate enterprise would not gain a subsidy at the expense of other people's health and environment, and that there is no need to pierce the veil.

Corporate constitutions

In principle, a corporation's constitution can be designed in any way so long as it complies with the compulsory rules set down by the state or federal legislature. Most state laws, and the federal government, give a broad freedom to corporations to design the relative rights of directors, shareholders, employees and other stakeholders in the articles of incorporation and the by-laws. These are written down during incorporation, and can usually be amended afterwards according to the state law's procedures, which sometimes place obstacles to amendment by a simple majority of shareholders.^[66] In the early 1819 case of Trustees of Dartmouth College v Woodward^[4] the US Supreme Court held by a majority that there was a presumption that once a corporate charter was made, the corporation's constitution was subject to "no other control on the part of the Crown than what is expressly or implicitly reserved by the charter itself."^[67] On the facts, this meant that because Dartmouth College's charter could not be amended by the New Hampshire legislature, though subsequent state corporation laws subsequently included provisions saying that this could be done. Today there is a general presumption that whatever balance of powers, rights and duties are set down in the constitution remain binding like a contract would.^[68] Most corporation statutes start with a presumption (in contrast to old ultra vires rules) that corporations may pursue any purpose that is lawful,^[69] whether that is running a profitable business, delivering services to the community, or any other objects that people involved in a corporation may choose. By default, the common law had historically suggested that all decisions are to be taken by a majority of the incorporators,^[70] and that by default the board could be removed by a majority of shareholders for a reason they themselves determined.^[71] However these default rules will take subject to the constitution that incorporators themselves define, which in turn take subject to state law and federal regulation.

Although it is possible to structure corporations differently, the two basic organs in a corporate constitution will invariably be the general meeting of its members (usually shareholders) and the board of directors.^[72] Boards of directors themselves have been subject in modern regulation to a growing number of requirements regarding their composition, particularly in federal law for public corporations. Particularly after the Enron scandal, companies listed on the major stock exchanges (the New York Stock Exchange, the NASDAQ, and AMEX) were required to adopt minimum standards on the number of independent directors, and their functions. These rules are enforced through the threat of delisting by the exchange, while the Securities and Exchange Commission works to ensure ultimate oversight. For example, the NYSE Listed Company Manual Rule 303A.01 requires that listed companies have a majority of "independent" directors.^[73] "Independence" is in turn defined by Rule 303A.02 as an absence of material business relationship with the corporation, not having worked for the last three years for the corporation as an employee, not receiving over $120,000 in pay, or generally having family members who are.^[74] The idea here is that "independent" directors will exercise superior oversight of the executive board members, and thus decrease the likelihood of abuse of power. Specifically, the nominations committee (which makes future board appointments), compensation committee (which sets director pay), and audit committee (which appoints the auditors), are required to be composed of independent directors, as defined by the Rules.^[75] Similar requirements for boards have proliferated across many countries,^[76] and so exchange rules allow foreign corporations that are listed on an American exchange to follow their home jurisdiction's rules, but to disclose and explain how their practices differ (if at all) to the market.^[77] The difficulty, however, is that oversight of executive directors by independent directors still leaves the possibility of personal relationships that develop into a conflict of interest. This raises the importance of the rights that can be exercised against the board as a whole.

Shareholder rights

While the board of directors is generally conferred the power to manage the day-to-day affairs of a corporation, either by the statute, or by the articles of incorporation, this is always subject to limits, including the rights that shareholders have. For example, the Delaware General Corporation Law §141(a) says the "business and affairs of every corporation ... shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation."^[78] However, directors themselves are ultimately accountable to the general meeting through the vote. Invariably, shareholders hold the voting rights,^[79] though the extent to which these are useful can be conditioned by the constitution. The DGCL §141(k) gives an option to corporations to have a unitary board that can be removed by a majority of members "without cause" (i.e. a reason determined by the general meeting and not by a court), which reflects the old default common law position.^[80] However, Delaware corporations may also opt for a classified board of directors (e.g. where only a third of directors come up for election each year) where directors can only be removed "with cause" scrutinized by the courts.^[81] More corporations have classified boards after initial public offerings than a few years after going public, because institutional investors typically seek to change the corporation's rules to make directors more accountable.^[82] In principle, shareholders in Delaware corporations can make appointments to the board through a majority vote,^[83] and can also act to expand the size of the board and elect new directors with a majority.^[84] However, directors themselves will often control which candidates can be nominated to be appointed to the board. Under the Dodd-Frank Act of 2010, §971 empowered the Securities and Exchange Commission to write a new SEC Rule 14a-11 that would allow shareholders to propose nominations for board candidates. The Act required the SEC to evaluate the economic effects of any rules it wrote, however when it did, the Business Roundtable challenged this in court. In Business Roundtable v SEC,^[85] Ginsburg J in the DC Circuit Court of Appeals went as far to say that the SEC had "acted arbitrarily and capriciously" in its rule making. After this, the Securities and Exchange Commission failed to challenge the decision, and abandoned drafting new rules. This means that in many corporations, directors continue to have a monopoly on nominating future directors.

Apart from elections of directors, shareholders' entitlements to vote have been significantly protected by federal regulation, either through stock exchanges or the Securities and Exchange Commission. Beginning in 1927, the New York Stock Exchange maintained a "one share, one vote" policy, which was backed by the Securities and Exchange Commission from 1940.^[87] This was thought to be necessary to halt corporations issuing non-voting shares, except to banks and other influential corporate insiders.^[88] However, in 1986, under competitive pressure from NASDAQ and AMEX, the NYSE sought to abandon the rule, and the SEC quickly drafted a new Rule 19c-4, requiring the one share, one vote principle. In Business Roundtable v SEC^[89] the DC Circuit Court of Appeals struck the rule down, though the exchanges and the SEC subsequently made an agreement to regulate shareholder voting rights "proportionately". Today, many corporations have unequal shareholder voting rights, up to a limit of ten votes per share.^[90] Stronger rights exist regarding shareholders ability to delegate their votes to nominees, or doing "proxy voting" under the Securities and Exchange Act of 1934. Its provisions were introduced to combat the accumulation of power by directors or management friendly voting trusts after the Wall Street Crash. Under SEC Rule 14a-1, proxy votes cannot be solicited except under its rules. Generally, one person soliciting others' proxy votes requires disclosure, although SEC Rule 14a-2 was amended in 1992 to allow shareholders to be exempt from filing requirements when simply communicating with one another,^[91] and therefore to take collective action against a board of directors more easily. SEC Rule 14a-9 prohibits any false or misleading statements being made in soliciting proxies. This all matters in a proxy contest, or whenever shareholders wish to change the board or another element of corporate policy. Generally speaking, and especially under Delaware law, this remains difficult. Shareholders often have no rights to call meetings unless the constitution allows,^[92] and in any case the conduct of meetings is often controlled by directors under a corporation's by-laws. However, under SEC Rule 14a-8, shareholders have a right to put forward proposals, but on a limited number of topics (and not director elections).^[93]

On a number of issues that are seen as very significant, or where directors have incurable conflicts of interest, many states and federal legislation give shareholders specific rights to veto or approve business decisions. Generally state laws give the right for shareholders to vote on decision by the corporation to sell off "all or substantially all assets" of the corporation.^[95] However fewer states give rights to shareholder to veto political contributions made by the board, unless this is in the articles of incorporation.^[96] One of the most contentious issues is the right for shareholders to have a "say on pay" of directors. As executive pay has grown beyond inflation, while average worker wages remained stagnant, this was seen important enough to regulate in the Dodd-Frank Act of 2010 §951. This provision, however, simply introduced a non-binding vote for shareholders, though better rights can always be introduced in the articles of incorporation. While some institutional shareholders, particularly pension funds, have been active in using shareholder rights, asset managers regulated by the Investment Advisers Act of 1940 have tended to be mute in opposing corporate boards, as they are often themselves disconnected from the people whose money they are voting upon.

Investor rights

Most state corporate laws require shareholders have governance rights against boards of directors, but fewer states guarantee governance rights to the real investors of capital. Currently investment managers control most voting rights in the economy using "other people's money".^[97] Investment management firms, such as Vanguard, Fidelity, Morgan Stanley or BlackRock, are often delegated the task of trading fund assets from three main types of institutional investors: pension funds, life insurance companies, and mutual funds.^[98] These are usually substitutes to save for retirement. Pensions are most important kind, but can be organized through different legal forms. Investment managers, who are subject to the Employee Retirement Income Security Act of 1974, are then often delegated the task of investment management. Over time, investment managers have also vote on corporate shares, assisted by a "proxy advice" firm such as ISS or Glass Lewis. Under ERISA 1974 §1102(a),^[99] a plan must merely have named fiduciaries who have "authority to control and manage the operation and administration of the plan", selected by "an employer or employee organization" or both jointly. Usually these fiduciaries or trustees, will delegate management to a professional firm, particularly because under §1105(d), if they do so, they will not be liable for an investment manager's breaches of duty.^[100] These investment managers buy a range of assets (e.g. government bonds, corporate bonds, commodities, real estate or derivatives) but particularly corporate stocks which have voting rights.

The largest form of retirement fund has become the 401(k) defined contribution scheme. This is often an individual account that an employer sets up, named after the Internal Revenue Code §401(k), which allows employers and employees to defer tax on money that is saved in the fund until an employee retires.^[101] The individual invariably loses any voice over how shareholder voting rights that their money buys will be exercised.^[102] Investment management firms, that are regulated by the Investment Company Act of 1940, the Investment Advisers Act of 1940 and ERISA 1974, will almost always take shareholder voting rights. By contrast, larger and collective pension funds, many still defined benefit schemes such as CalPERS or TIAA, organize to take voting in house, or to instruct their investment managers. Two main types of pension fund to do this are labor union organized Taft-Hartley plans,^[103] and state public pension plans. A major example of a mixture is TIAA, established on the initiative of Andrew Carnegie in 1918, which requires participants to have voting rights for the plan trustees.^[104] Under the amended National Labor Relations Act of 1935 §302(c)(5)(B) a union organized plan has to be jointly managed by representatives of employers and employees.^[105] Many local pension funds are not consolidated and have had critical funding notices from the U.S. Department of Labor.^[106] But more funds with beneficiary representation ensure that corporate voting rights are cast according to the preferences of their members. State public pensions are often larger, and have greater bargaining power to use on their members' behalf. State pension schemes usually disclose the way trustees are selected. In 2005, on average more than a third of trustees were elected by employees or beneficiaries.^[107] For example, the California Government Code §20090 requires that its public employee pension fund, CalPERS has 13 members on its board, 6 elected by employees and beneficiaries. However, only pension funds of sufficient size have acted to replace investment manager voting. No federal law requires voting rights for employees in pension funds, despite several proposals.^[108] For example, the Joint Trusteeship Bill of 1989, sponsored by Peter Visclosky in the US House of Representatives, would have required all single employer pension plans to have trustees appointed equally by employers and employee representatives.^[109] There is also currently no legislation to stop investment managers voting with other people's money, in the way that the Securities Exchange Act of 1934 §78f(b)(10) bans broker-dealers voting on significant issues without instructions.^[110]

Employee rights

While investment managers tend to exercise most voting rights in corporations, bought with pension, life insurance and mutual fund money, employees also exercise voice through collective bargaining rules in labor law.^[111] Increasingly, corporate law has converged with labor law.^[112] The United States is in a minority of Organisation for Economic Co-operation and Development countries that, as yet, has no law requiring employee voting rights in corporations, either in the general meeting or for representatives on the board of directors.^[113] On the other hand, the United States has the oldest voluntary codetermination statute for private corporations, in Massachusetts since 1919 passed under the Republican governor Calvin Coolidge, enabling manufacturing companies to have employee representatives on the board of directors, if corporate stockholders agreed.^[114] Also in 1919 both Procter & Gamble and the General Ice Delivery Company of Detroit had employee representation on boards.^[115] In the early 20th century, labor law theory split between those who advocated collective bargaining backed by strike action, those who advocated a greater role for binding arbitration,^[116] and proponents codetermination as "industrial democracy".^[117] Today, these methods are seen as complements, not alternatives. A majority of countries in the Organisation for Economic Co-operation and Development have laws requiring direct participation rights.^[118] In 1994, the Dunlop Commission on the Future of Worker-Management Relations: Final Report examined law reform to improve collective labor relations, and suggested minor amendments to encourage worker involvement.^[119] Congressional division prevented federal reform, but labor unions and state legislatures have experimented.

Corporations are chartered under state law, the larger mostly in Delaware, but leave investors free to organize voting rights and board representation as they choose.^[120] Because of unequal bargaining power, but also historic caution of labor unions,^[121] shareholders monopolize voting rights in American corporations. From the 1970s employees and unions sought representation on company boards. This could happen through collective agreements, as it historically occurred in Germany or other countries, or through employees demanding further representation through employee stock ownership plans, but they aimed for voice independent from capital risks that could not be diversified. Corporations included where workers attempted to secure board represented included United Airlines, the General Tire and Rubber Company, and the Providence and Worcester Railroad.^[122] However, in 1974 the Securities and Exchange Commission, run by appointees of Richard Nixon, rejected that employees who held shares in AT&T were entitled to make proposals to include employee representatives on the board of directors.^[123] This position was eventually reversed expressly by the Dodd-Frank Act of 2010 §971, which subject to rules by the Securities and Exchange Commission entitles shareholders to put forward nominations for the board.^[124] Instead of pursuing board seats through shareholder resolutions, for example, the United Auto Workers successfully sought board representation by collective agreement at Chrysler in 1980,^[125] and the United Steel Workers secured board representation in five corporations in 1993.^[126] However, it was clear that employee stock ownership plans were open to abuse, particularly after Enron collapsed in 2003. Workers had been enticed to invest an average of 62.5 per cent of their retirement savings from 401(k) plans in Enron stock, against basic principles of prudent, diversified investment, and had no board representation. This meant, employees lost a majority of pension savings.^[127] For this reason, employees and unions have sought representation simply for investment of labor, without taking on undiversifiable capital risk. Empirical research suggests by 1999 there were at least 35 major employee representation plans with worker directors, though often linked to corporate stock.^[128]

Stakeholder interests

Most corporate laws empower directors, as part of their management functions, to determine which strategies will promote a corporation's success in the interests of all stakeholders. Directors will periodically decide whether and how much of a corporation's revenue should be shared among directors' own pay, the pay for employees (e.g. whether to increase or not next financial year), the dividends or other returns to shareholders, whether to lower or raise prices for consumers, whether to retain and reinvest earnings in the business, or whether to make charitable and other donations. Most states have enacted "constituency statutes",^[133] which state expressly that directors are empowered to balance the interests of all stakeholders in the way that their conscience, or good faith decisions would dictate. This discretion typically applies when making a decision about the distribution of corporate resources among different groups, or in whether to defend against a takeover bid. For example, in Shlensky v Wrigley^[132] the president of the Chicago Cubs baseball team was sued by stockholders for allegedly failing to pursue the objective of shareholder profit maximization. The president had decided the corporation would not install flood lights over the baseball ground that would have allowed games to take place at night, because he wished to ensure baseball games were accessible for families, before children's bed time. The Illinois court held that this decision was sound because even though it could have made more money, the director was entitled to regard the interests of the community as more important. Following a similar logic in AP Smith Manufacturing Co v Barlow a New Jersey court held that the directors were entitled to make a charitable donation to Princeton University on the basis because there was "no suggestion that it was made indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends."^[134] So long as the directors could not be said to have conflicting interests, their actions would be sustained.

Delaware's law has also followed the same general logic, even though it has no specific constituency or stakeholder statute.^[136] The standard is, however, contested largely among business circles which favor a view that directors should act in the sole interests of shareholder value. Judicial support for this aim is typically found in a case from Michigan in 1919, called Dodge v Ford Motor Company.^[137] Here, the Ford Motor Company president Henry Ford had publicly announced that he wished not merely to maximize shareholder returns but to raise employee wages, decrease the price of cars for consumers, because he wished, as he put it, "to spread the benefits of this industrial system to the greatest possible number". A group of shareholders sued, and the Michigan Supreme Court said in an obiter dictum that a "business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end." However, in the case itself a damages claim against Ford did not succeed, and since then Michigan law has been changed.^[138] The US Supreme Court has also made it clear in Burwell v Hobby Lobby Stores Inc that shareholder value is not a default or overriding aim of corporate law,^[139] unless a corporation's rules expressly opt to define such an objective. In practice, many corporations do operate for the benefit of shareholders, but this is less because of duties, and more because shareholders typically exercise a monopoly on the control rights over electing the board. This assumes, however, that directors do not merely use their office to further their own personal goals over the interests of shareholders, employees, and other stakeholders.

Conflicts of interest

Since the earliest corporations were formed, courts have imposed minimum standards to prevent directors using their office to pursue their own interests over the interests of the corporation. Directors can have no conflict of interest. In trusts law, this core fiduciary duty was formulated after the collapse of the South Sea Company in 1719 in the United Kingdom. Keech v Sandford held that people in fiduciary positions had to avoid any possibility of a conflict of interest, and this rule "should be strictly pursued".^[140] It was later held that no inquiry should be made into transactions where the fiduciary was interested in both sides of the deal.^[141] These principles of equity were received into the law of the United States, and in a modern formulation Cardozo J said in Meinhard v Salmon that the law required "the punctilio of an honor the most sensitive ... at a level higher than that trodden by the crowd."^[142]

The standards applicable to directors, however, began to depart significantly from traditional principles of equity that required "no possibility" of conflict regarding corporate opportunities, and "no inquiry" into the actual terms of transactions if tainted by self-dealing. In a Delaware decision from 1939, Guth v Loft Inc,^[143] it was held that Charles Guth, the president of a drink manufacturer named Loft Inc., had breached his duty to avoid conflicts of interest by purchasing the Pepsi company and its syrup recipe in his own name, rather than offering it to Loft Inc. However, although the duty was breached, the Delaware Supreme Court held that the court will look at the particular circumstances, and will not regard a conflict as existing if the company it lacked finances to take the opportunity, if it is not in the same line of business, or did not have an "interest or reasonable expectancy". More recently, in Broz v Cellular Information Systems Inc,^[144] it was held that a non-executive director of CIS Inc, a man named Mr Broz, had not breached his duty when he bought telecommunications licenses for the Michigan area for his own company, RFB Cellular Inc. CIS Inc had been shedding licenses at the time, and so Broz alleged that he thought there was no need to inquire whether CIS Inc would be interested. CIS Inc was then taken over, and the new owners pushed for the claim to be brought. The Delaware Supreme Court held that because CIS Inc had not been financially capable at the time to buy licenses, and so there was no actual conflict of interest. In order to be sure, or at least avoid litigation, the Delaware General Corporation Law §144 provides that directors cannot be liable, and a transaction cannot be voidable if it was (1) approved by disinterested directors after full disclosure (2) approved by shareholders after disclosure, or (3) approved by a court as fair.^[145]

• Miller v Miller, 222 NW.2d 71 (1974)

Corporate officers and directors may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically "fair" to the corporation.

• Lieberman v Becker, 38 Del Ch 540, 155 A 2d 596 (Super Ct 1959)
• DGCL §144 contains the rule that the burden for proving unfairness remains on plaintiff after disclosure
• Flieger v Lawrence, 361 A2d 218 (Del 1976) the burden of proof shifts onto the plaintiff to show a transaction was conflicted if approval by disinterested stockholders or directors has been given to a transaction. Also Remillard Brick Co v Remillard-Dandini Co, 109 Cal App2d 405 (1952)
• Oberly v Kirby, 592 A2d 445, 467 (Del 1991)
• Cinerama Inc v Technicolor Inc, 663 A2d 1156, 1170 (Del. 1995)
• Benihana of Tokyo Inc v Benihana Inc., 906 A2d 114 (Del. 2006)

Duty of care

The duty of care that is owed by all people performing services for others is, in principle, also applicable to directors of corporations. Generally speaking, the duty of care requires an objective standard of diligence and skill when people perform services, which could be expected from a reasonable person in a similar position (e.g. auditors must act "with the care and caution proper to their calling",^[148] and builders must perform their work in line with "industry standards"^[149]). In a 1742 decision of the English Court of Chancery, The Charitable Corporation v Sutton,^[150] the directors of the Charitable Corporation, which gave out small loans to the needy, were held liable for failing to keep procedures in place that would have prevented three officers defrauding the corporation of a vast sum of money. Lord Hardwicke, noting that a director's office was of a "mixed nature", partly "of the nature of a public office" and partly like "agents" employed in "trust", held that the directors were liable. Though they were not to be judged with hindsight, Lord Hardwicke said he could "never determine that frauds of this kind are out of the reach of courts of law or equity, for an intolerable grievance would follow from such a determination." Many states have similarly maintained an objective baseline duty of care for corporate directors, while acknowledging different levels of care can be expected from directors of small or large corporations, and from directors with executive or non-executive roles on the board.^[151] However, in Delaware, as in a number of other states,^[152] the existence of a duty of care has become increasingly uncertain.

In 1985, the Delaware Supreme Court passed one of its most debated judgments, Smith v Van Gorkom.^[155] The directors of TransUnion, including Jerome W. Van Gorkom, were sued by the shareholders for failing to adequately research the corporation's value, before approving a sale price of $55 per share to the Marmon Group. The Court held that to be a protected business judgment, "the directors of a corporation [must have] acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Failing to act on an informed basis, if it caused loss, would amount to gross negligence, and here the directors were liable. The decision triggered a panic among corporate boards which believed they would be exposed to massive liability, and insurance firms who feared rising costs of providing directors and officers liability insurance to corporate boards. In response to lobbying, the Delaware General Corporation Law was amended to insert a new §102(b)(7). This allowed corporations to give directors immunity from liability for breach of the duty of care in their charter. However, for those corporations which did not introduce liability waivers, the courts subsequently proceeded to reduce the duty of care outright.^[156] In 1996, In re Caremark International Inc. Derivative Litigation^[157] required "an utter failure to attempt to assure a reasonable information and reporting system exists", and in 2003 In re Walt Disney Derivative Litigation^[158] went further. Chancellor Chandler held directors could only be liable for showing "reckless indifference to or a deliberate disregard of the whole body of stockholders" through actions that are "without the bounds of reason".^[159] In one of the cases that came out of the financial crisis of 2007–2008, the same line of reasoning was deployed in In re Citigroup Inc Shareholder Derivative Litigation.^[153] Chancellor Chandler, confirming his previous opinions in Re Walt Disney and the dicta of Re Caremark, held that the directors of Citigroup could not be liable for failing to have a warning system in place to guard against potential losses from sub-prime mortgage debt. Although there had been several indications of the significant risks, and Citigroup's practices along with its competitors were argued to have contributed to crashing the international economy, Chancellor Chandler held that "plaintiffs would ultimately have to prove bad faith conduct by the director defendants". This suggested that Delaware law had effectively negated any substantive duty of care. This suggested that corporate directors were exempt from duties that any other professional performing services would owe.

Derivative suits

Because directors owe their duties to the corporation and not, as a general rule, to specific shareholders or stakeholders, the right to sue for breaches of directors duty rests by default with the corporation itself. The corporation is necessarily party to the suit.^[160] This creates a difficulty because almost always, the right to litigate falls under the general powers of directors to manage the corporation day to day (e.g. Delaware General Corporation Law §141(a)). Often, cases arise (such as in Broz v Cellular Information Systems Inc^[144]) where an action is brought against a director because the corporation has been taken over and a new, non-friendly board is in place, or because the board has been replaced after bankruptcy. Otherwise, there is a possibility of a conflict of interest because directors will be reluctant to sue their colleagues, particularly when they develop personal ties. The law has sought to define further cases where groups other than directors can sue for breaches of duty. First, many jurisdictions outside the US allow a specific percentage of shareholders to bring a claim as of right (e.g. 1 per cent).^[161] This solution may still entail significant collective action problems where shareholders are dispersed, like the US. Second, some jurisdictions give standing to sue to non-shareholder groups, particularly creditors, whose collective action problems are less.^[162] Otherwise, third, the main alternative is that any individual shareholder may "derive" a claim on the corporation's behalf to sue for breach of duty, but such a derivative suit will be subject to permission from the court.

The risk of allowing individual shareholders to bring derivative suits is usually thought to be that it could encourage costly, distracting litigation, or "strike suits"^[165] – or simply that litigation (even if the director is guilty of a breach of duty) could be seen as counterproductive by a majority of shareholders or stakeholders who have no conflicts of interest. Accordingly, it is generally thought that oversight by the court is justified to ensure derivative suits match the corporation's interests as a whole because courts may be more independent. However, especially from the 1970s some states, and especially Delaware, began also to require that the board have a role. Most common law jurisdictions have abandoned role for the board in derivative claims,^[166] and in most US states before the 1980s, the board's role was no more than a formality.^[167] But then, a formal role for the board was reintroduced. In the procedure to bring a derivative suit, the first step is often that the shareholder had to make a "demand" on the board to bring a claim.^[168] Although it might appear strange to ask a group of directors who will be sued, or whose colleagues are being sued, for permission, Delaware courts took the view that the decision to litigate ought by default to lie within the legitimate scope of directors' business judgment. For example, in Aronson v Lewis^[169] a shareholder of the Meyers Parking System Inc claimed that the board had improperly wasted corporate assets by giving its 75-year-old director, Mr Fink, a large salary and bonus for consultancy work even though the contract did not require performance of any work. Mr Fink had also personally selected all of the directors. Nevertheless, Moore J. held for the Delaware Supreme Court that there was still a requirement to make a demand on the board before a derivative suit could be brought. There was "a presumption that in making a business decision, the directors of a corporation acted on an informed basis in good faith and in the honest belief that the action was taken in the best interests of the company", even if they owed their jobs to the person being sued. A requirement to make a demand on the board will, however, be excused if it is shown that it would be entirely "futile", primarily because a majority of the board is alleged to have breached its duty. Otherwise it must be shown that all board members are in some very strong sense conflicted, but merely working with the accused directors, and the personal ties this potentially creates, is insufficient for some courts.^[170] This indicated a significant and controversial change in Delaware's judicial policy, that prevented claims against boards.

In some cases corporate boards attempted to establish "independent litigation committees" to evaluate whether a shareholder's demand to bring a suit was justified. This strategy was used to pre-empt criticism that the board was conflicted. The directors would appoint the members of the "independent committee", which would then typically deliberate and come to the conclusion that there was no good cause for bringing litigation. In Zapata Corp v Maldonado^[171] the Delaware Supreme Court held that if the committee acted in good faith and showed reasonable grounds for its conclusion, and the court could be "satisfied [about] other reasons relating to the process", the committee's decision to not allow a claim could not be overturned. Applying Connecticut law, the Second Circuit Federal Court of Appeals held in Joy v North^[172] that the court could substitute its judgment for the decisions of a supposedly independent committee, and the board, on the ground that there was scope for conflicting interests. Then, the substantive merits for bringing the derivative claim would be assessed. Winter J held overall that shareholders would have the burden "to demonstrate that the action is more likely than not to be against the interests of the corporation". This would entail a cost benefit analysis. On the benefit side would be "the likely recoverable damages discounted by the probability of a finding of liability", and the costs side would include "attorney's fees and other out-of-pocket expenses", "time spent by corporate personnel", "the impact of distraction of key personnel", and potential lost profits which may result from the publicity of a trial." If it is thought that the costs exceed the benefits, then the shareholders acquire the right to sue on the corporation's behalf. A substantive hearing on the merits about the alleged breach of director's duty may be heard. The tendency in Delaware, however, has remained to allow the board to play a role in restricting litigation, and therefore minimize the chances that it could be held accountable for basic breaches of duty.^[173]

Securities markets

• Securities Act of 1933
• Securities Exchange Act of 1934
• Williams Act
• SEC Rule 10b-5, unlawful to make 'any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made ... not misleading.'
• Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) only those suffering direct loss from the purchase or sale of stock have standing to sue under federal securities law.
• TSC Industries v Northway 426 U.S. 438 (1976) Burger CJ, material means 'a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote'.
• Chiarella v. United States, 445 U.S. 222 (1980) an employee of a printer that figured out upcoming company positions from his work was not liable for securities fraud.
• Basic v Levinson 485 U.S. 224 (1988) every affected investor can sue for personal loss, under a rebuttable presumption of reliance on the information (the 'fraud-on-the-market theory').
• United States v. O'Hagan 521 U.S. 642 (1997)
• Matrixx Initiatives, Inc. v. Siracusano 563 U.S. ___ (2011) company reports on products a basis for securities fraud action
• Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) state law securities fraud class action claims were preempted by the Securities Litigation Uniform Standards Act of 1998
• Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. ___ (2011) 5 to 4 decision that related companies were not also liable under SEC Rule 10b-5

Investment businesses

• Investment Advisers Act of 1940
• Investment Company Act of 1940
• Credit Rating Agency Reform Act of 2006

Auditing

• Sarbanes–Oxley Act 2002 §404, listed corporations must document and disclose an enterprise-wide system of internal financial information. §301, CEO and CFO must personally certify integrity of annual financial statements.
• Schedule 13D, within 10 days anyone who acquires beneficial ownership of more than 5% of any class of publicly traded securities in a public company must tell the SEC.
• SEA 1934 §13 or 15(d) requires an annual report
• Form 10-K, the basic information required by the US Securities and Exchange Commission as an annual report
• Form 10-Q, required each quarter

Bankruptcy

• Chapter 11, Title 11, United States Code
• Claim in bankruptcy
• Taylor v Standard Gas and Electric Company
• Marrama v Citizens Bank of Massachusetts

Taxation