Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decision maker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail? On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. On the ends question, prior scholarship has tended to favor either shareholder primacy or various stakeholder theories. In contrast, this author has proposed a “director primacy” model in which the board of directors is the ultimate decision maker but is required to evaluate decisions using shareholder wealth maximization as the governing normative rule. Shareholder primacy is widely assumed to be a defining characteristic of New Zealand company law. In assessing that assumption, it is essential to distinguish between the means and ends of corporate governance. As to the latter, New Zealand law does establish shareholder wealth maximization as the corporate objective. As to the former, despite assigning managerial authority to the board of directors, New Zealand company law gives shareholders significant control rights. Comparing New Zealand company law to the considerably more board-centric regime of U.S. corporate law raises a critical policy issue. If the separation of ownership and control mandated by the latter has significant efficiency advantages, as this article has argued, why has New Zealand opted for a more shareholder-centric model? The most plausible explanation focuses on domain issues, which suggest that there are a small number of New Zealand firms for which director primacy would be optimal. The unitary nature of the New Zealand government may also be a factor, because the competitive federalism inherent in the U.S. system of government promotes a race to the top in which efficient corporate law rules are favored.

1. May 27, 2014
Director Versus Shareholder Primacy in New Zealand
Company Law as Compared to U.S.A. Corporate Law
Stephen Bainbridge
UCLA School of Law

2. The Means and Ends of Corporate Governance
Stakeholders Corporate Objective Shareholders
ShareholdersControlDirectors Shareholder Primacy
Team Production
Communitarians
?

3. The Means and Ends of Corporate Governance
Stakeholders Corporate Objective Shareholders
ShareholdersControlDirectors Shareholder Primacy
Team Production
Communitarians
?
“A new theory of the firm has
emerged that appears more
complete than its predecessors:
Professor Stephen M. Bainbridge’s
model of director primacy.”
Seth W. Ashby, 2005 U. ILL. L. REV.
521, 533

4. Part I
How Do Shareholder Primacy and Director
Primacy Differ?

5.  “Allen is one of the most respected
jurists on corporate governance. When
he writes, lawyers listen.”
• James Lyons, Conflicting Interests, Forbes,
Mar. 30, 1992, at 48
 “It is the obligation for directors to
attempt, within the law, to maximize the
long-run interests of the corporation’s
stockholders.”
• Katz v. Oak Indus., Inc. (Del. Ch. 1989)
 “The theory of our corporation law
confers power upon directors as the
agents of the shareholders; it does not
create Platonic masters.”
• Blasius Industries, Inc. v. Atlas Corp. (Del. Ch.
1988)
The Shareholder Primacy Model

6.  “The business and affairs of every corporation organized under this chapter
shall be managed by or under the direction of a board of directors” DGCL
141(a)
• The board’s powers are “original and undelegated” - Manson v. Curtis, 119
N.E. 559, 562 (N.Y. 1918)
– Shareholders have “the regular opportunity to elect the members of the
board, but during the directors’ terms, the board has the power, informed
by each director’s decisions in the exercise of his or her fiduciary duties, to
direct and oversee the pursuit of the board’s vision of what is best for the
corporation.” (ABA 2010)
– Shareholder control rights limited
– Voting rights limited to review of a few fundamental decisions
– Proxy system and 13(d) restrictions on shareholder voting and communication
– Derivative litigation burdened by procedural barriers and BJR
– Market for corporate control hampered by combination of poison pill and
classified boards
The director primacy model

7. The ABA Committee on Corporate Laws (2010)Hollinger Inc. v. Hollinger Intern., Inc. (Del.Ch.2004)
Klaassen v. Allegro Development Corporation (Del. Ch. 2013) Kevin L. Turner, 57 ALA. L. REV. 907
Larry Ribstein, 1 BERKELEY BUS. L.J. 183In re CNX Gas Corp. S'holders Litig. (Del.Ch.2010)
Cases and Commentators
“[D]irector primacy remains the centerpiece
of Delaware law, even when a controlling
stockholder is present.”
Noting “the bedrock statutory principle
of director primacy established by
Section 141(a) of the DGCL.”
“It is through … centralized
management that stockholder wealth is
largely created.”
“Corporate governance is best
characterized as based on ‘director
primacy.’”
“Delaware jurisprudence favors director
primacy in terms of the definitive
decision-making power …”
Reaffirmed MBCA policy of vesting “the
power to direct and oversee the
management of the corporation in the
board of directors, rather than in the
shareholders.”

8. Kamin v. American
Express (N.Y. Sup.
Ct. 1976)
“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.”
Bayer v. Beran (N.Y.
Sup. Ct. 1944)
“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.”
Marx v. Axers (N.Y.
1996).
“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”
Smith v. Van
Gorkom (Del. 1985).
“The business judgment rule is the offspring of the fundamental … 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.”
Illustration: The Business Judgment Rule

9. Part II
Is Director Primacy Descriptive?
Comparing New Zealand and US Law

10. USA New Zealand
 Dodge v. Ford Motor Co. (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.”
 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.”
The Corporate Objective

11. NZ USA
Allows shareholders to
give “themselves the
right to select the
company’s CEO” (Watts
2012)
CEO selection a board
prerogative. (MBCA §
8.40)
Comparing New Zealand Company Law to U.S. Corporate Law

12. NZ USA
Allows shareholders to
remove “from directorial
control the majority, if not
all parts, of business
decision making” (Watts
2012)
Limits on board
managerial power
allowed in closely held
corporations buy only by
unanimous shareholder
agreement. (MBCA §
8.01)
Comparing New Zealand Company Law to U.S. Corporate Law

13. NZ USA
Requires shareholder
approval of “major
transactions.” (§ 129)
Shareholder approval
only of fundamental
transactions (e.g.,
mergers or sales of
substantially all assets).
Comparing New Zealand Company Law to U.S. Corporate Law

14. NZ USA
 Shareholders with > 5% of
voting power can call a
special meeting. (§ 121)
 Shareholders can petition
court to order special
meeting. (§ 123)
 Shareholders with > 10% of
voting power can call a
special meeting. (MBCA §
7.02)
• Threshold can be raised to 25%
• Delaware allows elimination of
shareholder right to call a special
meeting.
 Court can only order special
meeting if annual meeting
has not been held within 15
months of last meeting.
(MBCA § 7.03)
Comparing New Zealand Company Law to U.S. Corporate Law

15. NZ USA
If constitution of company
so provides,
shareholders can pass
binding resolutions
relating to management
of company. (§ 109)
 Shareholder resolutions
on ordinary business
matters can be
excluded from proxy
statement. (SEC Rule
14a-8)
• Shareholder resolutions
infringing on substantive
managerial power improper.
CA v. AFSCME (Del. 2010)
Comparing New Zealand Company Law to U.S. Corporate Law

16. 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

17. Part III
The Normative Case for Director Primacy

18. Kenneth Arrow
• The Limits of
Organization
(1974)
Michael Dooley
• Two Models of
Corporate
Governance,
47 Bus. Law.
461 (1992)
Director primacy
• Authority
versus
accountability
• The case for
authority
Key waypoints

19. Consensus Authority
Arrow’s models
 Collective decision making
• E.g., partnerships
 Central decision making
body
• E.g., public corporation

20. “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

21. Arrow:
• Accountability mechanisms
“must be capable of
correcting errors but should
not be such as to destroy
the genuine values of
authority”
• “If every decision of A is to
be reviewed by B, then all
we have really is a shift in
the locus of authority from
A to B”
• Constraints on shareholder
powers both with respect to
voting and litigation follow.
But what about agency costs?

22. Part IV
Choosing Sides

23. 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

24. Assume shareholder primacy is “alive and well” in New Zealand company law (Watts 2012):
The role of competitive federalism

25. Assume shareholder primacy is “alive and well” in New Zealand company law (Watts 2012):
The role of competitive federalism

26. Choosing
Director Primacy, if:
Many large public corporations
Dispersed shareholders
Shareholder Primacy, if:
Few large public corporations
Concentrated shareholders