Stephen M. Bainbridge

William D. Warren Distinguished Professor of Law

2014 Cameron Visiting Fellow, University of Auckland Faculty of Law

A Quick Comparison of USA Corporate Law and New Zealand Company Law

May 19, 2014

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Federal Law State Law (Delaware)

Dis

clos

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and

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Securities Act of 1933 Primary Market

Securities Exchange Act of 1934 Secondary Market

Subs

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G

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Fiduciary duties

Voting rights

Powers of directors

Corporate objective

Corporate Federalism in the USA

© Stephen M. Bainbridge 2014

The incorporation process:Choosing a state of incorporation

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Paul v. Virginia (US 1869)A state may not exclude a foreign* corporation engaged in interstate

commerce

*: Foreign = another state

Alien = another country

The incorporation process:Choosing a state of incorporation

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More than 300,000 companies are incorporated in Delaware including:• 60 percent of the Fortune 500

• 50 percent of the companies listed on the New York Stock Exchange

Why?• Race to the bottom

– William L. Cary, Federalism and Corporate Law: Reflections on Delaware, 83 Yale L. J. 663 (1974)

• Race to the Top– Ralph K. Winter, State Law, Shareholder Protection and the Theory

of Incorporation, 6 J.Leg.Stud 251 (1977)

Delaware’s dominance

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No minimum capital requirementsThe need for only one incorporator (a corporation may be the

incorporator)Favorable franchise tax in comparison to other states.For companies doing business outside of Delaware:

• no corporation income tax

• no sales tax, personal property tax or intangible property tax on corporations

• no taxation upon shares of stock held by non-residents and no inheritance tax upon non-resident holders

A corporation may keep all of its books and records outside of Delaware and may have a principal place of business/address outside of the state of Delaware as well

Highly competent judiciary in company law and extensive and detailed case law on this subject

Delaware’s dominance

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The Means and Ends of Corporate Governance

Stakeholders Corporate Objective Shareholders

Shar

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Cont

rol

D

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Shareholder Primacy

Director PrimacyTeam ProductionCommunitarians

Socially responsible investor

New Zealand USA

Companies Act § 131 provides that “a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.” • Peter Watts (2012): “While there is no

duty on directors to maximize profit, there is also nothing to prevent them doing so.”

• P.M. Vasudev (2012): “The company statute in New Zealand retains more or less the traditional principle of shareholder primacy.”

Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919):• 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. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1989):• “It is the obligation for directors to attempt,

within the law, to maximize the long-run interests of the corporation’s stockholders.”

The Ends:The Corporate Objective

Kamin v. American Express (N.Y. Sup. Ct. 1976)Bayer v. Beran (N.Y. Sup. Ct. 1944)

Smith v. Van Gorkom (Del. 1985). Manson v. Curtis (N.Y. 1918).

Marx v. Axers (N.Y. 1996). DGCL § 141(a)

The Means:Director or Shareholder Primacy?

“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors….”

“the business judgment rule is the offspring of the fundamental principle, codified in [Delaware General Corporation Law] § 141(a), that the business and affairs of a Delaware corporation are managed by or under its board of directors. ... The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors.”

“To encourage freedom of action on the part of directors, or to put it another way, to discourage interference with the exercise of their free and independent judgment, there has grown up what is known as the “business judgment rule.” “

“By their very nature, shareholder derivative actions infringe upon the managerial discretion of corporate boards. . . . Consequently, we have historically been reluctant to permit shareholder derivative suits, noting that the power of courts to direct the management of a corporation’s affairs should be “exercised with restraint”

The board’s powers are “original and undelegated.”

“The directors’ room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact on profits, market prices, competitive situations, or tax advantages.”

NZ USA

1. Allows shareholders to give “themselves the right to select the company’s CEO” (Watts 2012)

2. Allows shareholders to remove “from directorial control the majority, if not all parts, of business decision making” (Watts 2012)

3. Requires shareholder approval of “major transactions.” (§ 129)

4. Shareholders with > 5% of voting power can call a special meeting. (§ 121)

5. Shareholders can petition court to order special meeting. (§ 123)

6. If constitution of company so provides, shareholders can pass binding resolutions relating to management of company. (§ 109)

1. CEO selection a board prerogative. (MBCA § 8.40)2. Limits on board managerial power allowed in

closely held corporations but only by unanimous shareholder agreement. (MBCA § 8.01)

3. Shareholder approval only of fundamental transactions (e.g., mergers or sales of substantially all assets).

4. Shareholders with > 10% of voting power can call a special meeting. (MBCA § 7.02)a. Threshold can be raised to 25%b. Delaware allows elimination of shareholder right to

call a special meeting.5. Court can only order special meeting if annual

meeting has not been held within 15 months of last meeting. (MBCA § 7.03)

6. Shareholder resolutions on ordinary business matters can be excluded from proxy statement. (SEC Rule 14a-8)a. Shareholder resolutions infringing on substantive

managerial power improper. CA v. AFSCME (Del. 2010)

Comparing New Zealand Company Law to U.S. Corporate Law

NZ USA

Takeovers Code Rule 38(1):

“If a code company has received a takeover notice or has reason to believe that a bona fide offer is imminent, the directors of the company must not take or permit any action, in relation to the affairs of the code company, that could effectively result in—(a) an offer being frustrated; or(b) the holders of equity securities of the code

company being denied an opportunity to decide on the merits of an offer.

Unitrin, Inc. v. American General Corp. (Del. 1995):

“When a corporation is not for sale, the board of directors is the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders. The fact that a defensive action must not be coercive or preclusive does not prevent a board from responding defensively before a bidder is at the corporate bastion's gate.”

Comparing New Zealand Company Law to U.S. Corporate Law

The domain of director primacy is principally public corporations

The domain of director primacy is defined by separation of ownership and control

Assume shareholder primacy is “alive and well” in New Zealand company law (Watts 2012): The domain of director primacy

New Zealand only has about 150 listed companies (i.e., public corporations).• 95% of listed companies are small or medium-sized enterprises.

New Zealand companies characterized by concentrated ownership:• “Majority control companies increased from 7% in 1974 to 22.1% in 1981, and

management control companies decreased from 48.8% to 30.4% over the same period.” (Fox et al. 2012)

‒ Contemporaneous with adoption of Companies Act 1993

Consensus Authority

Arrow’s models

Collective decision making• E.g., partnerships

Central decision making body• E.g., public corporation

“Cheaper and more efficient to transmit all the

pieces of information to a

central place” that makes “the

collective choice and transmit it

rather than retransmit all the

information on which the

decision is based”

Asymmetric information

Divergent interests

Collective action problems

When to opt for authority

Choosing

Director Primacy, if:Many large public corporations

Dispersed shareholders

Shareholder Primacy, if:Few large public corporations

Concentrated shareholders