The Shareholder Primacy Norm

48 Pages Posted: 4 Aug 1998

See all articles by D. Gordon Smith

D. Gordon Smith

Brigham Young University - J. Reuben Clark Law School

Abstract

Corporate directors have a fiduciary duty to make decisions in the best interests of the shareholders. This aspect of fiduciary duty is often called the shareholder primacy norm. Legal scholars generally assume that the shareholder primacy norm is a major factor considered by boards of directors of publicly traded corporations in making ordinary business decisions and that changing the shareholder primacy norm would have an effect on the substance of those decisions. This Article challenges this view and argues that the shareholder primacy norm was never equipped to mediate conflicts between shareholders and nonshareholder constituencies of a corporation. The origins and development of the shareholder primacy norm suggest that it was introduced into corporate law to perform a much different and somewhat surprising function: the shareholder primacy norm was first used by courts to resolve disputes among majority and minority shareholders, and over time this use of the shareholder primacy norm evolved into the modern doctrine of minority oppression. This application of the shareholder primacy norm seems incongruous today because minority oppression cases involve conflicts among shareholders, not conflicts between shareholders and nonshareholders. Nevertheless, when early courts employed rules requiring directors to act in the interests of all shareholders (not just the majority shareholders), they were creating the shareholder primacy norm. Once used to resolve minority oppression cases, the shareholder primacy norm easily found its way into cases involving publicly traded corporations because courts did not routinely distinguish closely held corporations from publicly traded corporations until the middle of this century. But the application of the shareholder primacy norm to the ordinary business decisions of publicly traded corporations is muted by the business judgment rule. As a result, even though the shareholder primacy norm is closely associated with debates about the social responsibility of publicly traded corporations, it's impact on the ordinary business decisions of such corporations is extremely limited.

Suggested Citation

Smith, D. Gordon, The Shareholder Primacy Norm. Available at SSRN: https://ssrn.com/abstract=10571 or http://dx.doi.org/10.2139/ssrn.10571

D. Gordon Smith (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

422 JRCB
Provo, UT 84602
United States
801.422.3233 (Phone)
801.422.0390 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,358
Abstract Views
14,806
Rank
11,468
PlumX Metrics