Shareholder Wealth Maximization and Its Implementation under Corporate Law

44 Pages Posted: 10 Jan 2013 Last revised: 19 Apr 2014

See all articles by Bernard S. Sharfman

Bernard S. Sharfman

Law & Economics Center at George Mason University’s Antonin Scalia Law School

Date Written: April 18, 2014


As its theoretical foundation, this article accepts shareholder wealth maximization as both the primary norm of corporate governance and the objective of corporate law. If so, then any model of corporate law must explain why courts have historically shown little interest in reviewing a board decision to determine if shareholder wealth maximization was actually achieved. To explain why this restrained approach has been used, this article utilizes a model of corporate law that describes a world where the courts have designated the board of directors as the locus of authority for determining whether or not a corporate decision maximizes shareholder wealth. The courts take this approach because it understands that it is the board, not the courts, which has the information and expertise to determine if a corporate decision meets this objective. This approach is implemented by utilizing a strategy of protecting managerial discretion in corporate decision making as evidenced by the business judgment rule. A court will only interpose itself in this shareholder wealth maximizing determination if the board decision is tainted with a conflict of interest, lack of independence or where gross negligence in the process of becoming informed is implicated and exculpation clauses do not apply. Utilizing this triad of filters prior to a review for shareholder wealth maximization allows the courts to take both a light-handed and intermittent approach to board accountability, consistent with an Arrowian framework that sees great value in decision making by a centralized authority.

The model just described can be understood as the traditional model of corporate law and, as argued here, is still valid. Thus, when a chancellor or judge veers from this model the judicial opinion must be closely scrutinized to see if the court had valid reasons for implementing a different approach. Such a veering from the traditional path can be found in eBay v. Newark, a recent Delaware Chancery Court case where former Chancellor Chandler, in his review of a shareholder rights plan under the Unocal test, required the directors to demonstrate that the corporate policy being defended under the first prong of the test enhanced shareholder value (the Link) even though the decision to implement the rights plan was not yet ripe or even required to be reviewed under the traditional triad of filters. As also argued here, former Chancellor Chandler was wrong in adding shareholder wealth maximization as an additional burden for the board to bear under the first prong of the Unocal test.

Keywords: shareholder wealth maximization, corporate governance, Unocal test, Board of Directors, authority, accountability, Kenneth Arrow, theory of large organizations, rights plan, Revlon, eBay

JEL Classification: K22

Suggested Citation

Sharfman, Bernard S., Shareholder Wealth Maximization and Its Implementation under Corporate Law (April 18, 2014). Florida Law Review, Vol. 66, No. 1 (2014), Available at SSRN:

Bernard S. Sharfman (Contact Author)

Law & Economics Center at George Mason University’s Antonin Scalia Law School ( email )

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