Minorities, shareholder and otherwise.

AuthorChander, Anupam

INTRODUCTION

Corporate law understands what constitutional law does not. Minority status matters to law. Where today's constitutional jurisprudence of equal protection aspires to colorblindness, corporate law places minority concerns at the heart of its endeavor. The minorities of corporate law are minority shareholders--investors holding small, noncontrolling interests in the corporation. Law's solicitude, it seems, is limited to minority shareholders, not minority races. Where constitutional law sees only one race--"American" (1)--corporate law recognizes minority status as a central datum for legal decision. At the same time that constitutional law moves to limit affirmative action for racial minorities and women, (2) corporate law embraces affirmative action for minority shareholders. (3)

This Essay examines how two different areas of the law have solved the question--perhaps the "problem" (4)--of minorities. In so doing, it seeks to uncover the underlying dynamics of life as a "minority," abstracted from the context of the corporation and the constitutional realm. By contrasting corporate and constitutional law, this Essay begins to conceptualize "minority" status as a legal fact.

Being a member of a minority race is certainly different from being a minority investor in a corporation. The history of race is inflected with violence and struggle unparalleled in corporate disputes. But legal scholars have yet to ask the key question: Do the differences between race and shareholding justify the radically different approaches to minority status adopted by corporate and constitutional law? Even more crucially, do the differences between the two justify a greater solicitude for minority investors than for minority races? I consider possible differences--namely, history, a special concern for property rights, the possibility of exit in a liquid capital market, and the amorphousness of racial discrimination. I conclude that these differences should lead us to seek a reversal in legal priorities--stronger protection for minority races than for minority investors.

The central distinction between the two legal approaches to minorities can be summarized efficiently as follows: Constitutional law believes that equality requires blinding oneself to minority status. Corporate law, to the contrary, believes that equal treatment can only be assured by taking minority status into account. For corporate law, equality is not sameness.

This Essay responds to the recent "demoralization of the egalitarian project." (5) I demonstrate how the egalitarian spirit is alive and well--but in the materialistic world of capital. The current "assault on egalitarianism" (6) confines itself to seeking to dismantle programs protecting women and people of minority races and leaves undisturbed the elaborate legal structure that protects minority shareholders. This assault is best seen in the Supreme Court's 1995 decision in Adarand Constructors, Inc. v. Pena. (7) In that case, the Court subjected a preference for minority subcontractors to strict scrutiny, thereby requiring any affirmative action program in favor of people belonging to minority races to be both justified by a compelling state interest and narrowly tailored to further that interest. The fact that the race-based classification was motivated by benign, perhaps even noble, motives did not itself salvage the use of race. (8) The recent Term's decisions in Grutter v. Bollinger (9) and Gratz v. Bollinger (10) confirm that governmental race consciousness can survive strict scrutiny, yet seem far from embracing egalitarianism in either rhetoric or substance.

Constitutional law views discrimination against the majority with the same distaste as discrimination against the minority--requiring strict scrutiny in either case. Corporate law, on the other hand, routinely intrudes into the corporation to secure the protection of minority shareholders against controlling persons within corporations.

A simple thought experiment illustrates my inquiry. Imagine if we ran a corporation using the rules of constitutional law. Decisions would be rendered by majority rule of the shareholders (who become "citizens" of the corporation). This would not mean that the majority could do whatever it wanted. A constitutional charter, devised at the corporation's founding, would limit possible actions. Indeed, there would be a guarantee of "equal protection." But, as I show, this guarantee would be substantially less protective or demanding than the special duties that corporate law imposes on the board of the corporation and on any controlling shareholder vis-a-vis minority shareholders. The governors of the corporation would have no special duty to ensure that the benefits of their actions did not disproportionately redound to majority investors. There would be no ongoing obligation of fair treatment of the minority or duty to work on the minority's behalf. There would be no duty of loyalty that would prevent the board of directors and the controlling shareholders from exploiting their power for personal profit at the expense of the minority.

The converse experiment is equally illuminating. Imagine if we ran the government using the rules of corporate law. Decisions would be rendered by majority rule, but there would be special protections ensuring that the process would be fair. On occasion, there might even be such strict procedures as cumulative voting, (11) which would give minorities a presence in the governing legislature (including the nearly whites-only Senate). (12) But minorities would receive not only procedural rights, but also substantive rights. Minority citizens would be able to bring a cause of action for "oppression" when faced with inequitable distributions of social resources. Most importantly, they would find various legal doctrines--including derivative suits, freeze-out claims, and fiduciary obligations--that would seek to ensure their equitable treatment with respect to any transactions undertaken by the government.

But to say that corporate law approaches minority concerns in the manner described does not establish that constitutional law should adopt a similar approach, mutatis mutandis. That is not the goal of this endeavor. Nor is the goal to suggest that constitutional law should borrow mechanisms for minority protections from corporate law. Rather, it is to force a reexamination of constitutional law's great hesitancy to view information regarding minority status as crucial to administering justice.

At the same time, my goal is to reinterpret corporate law. Values of fairness and equality turn up in the sharp-elbowed world of business, exactly where we might least expect to find them. Despite scholarly commentary to the contrary, the watchwords of corporate law include not only wealth maximization, but also fairness. Oppression is a cause of action found not in constitutional law, but in corporate law. Indeed, I show that much of corporate law can be explained as protective of minority shareholders. This explanation sheds light on the mystery of what corporate law is about. Contrary to the law and economics meta-narrative popular today, (13) the shareholder wealth-maximization norm does not suffice as a complete specification of corporate law. I show that corporate law is sensitive not only to wealth maximization, but also to wealth distribution.

Rather than leave minority shareholders to the ruthless efficiency of the marketplace, corporate law steps in to provide mandatory and default protections for such shareholders. Corporate law's concern for minorities is evident in its elaborate framework protecting minority interests in the corporation. The vital mandatory core of corporate law (14) shows that the contractarian victory is incomplete. Even contractarians Easterbrook and Fischel, in their classic economic explanation of corporate law, find room for mandatory legal protections for minority capitalists. (15) Contractarians might have preferred to leave investors to negotiate protections for themselves, with investors denying corporations capital unless sufficient contractual safeguards were in place. But this is not the approach of current corporate law. In fact, minority investors need not rely entirely on their own well-struck bargains to protect themselves from unfair exploitation by dominant shareholders or self-dealing management. (16)

Minority shareholder protection is a central part of the corporate governance model that American scholars seek to export to transitional and developing economies. (17) Indeed, one of the most famous claims in the field of comparative corporate governance is that the protection of minority investors--both minority shareholders and outside creditors--offers the "legal DNA of good economies." (18) According to this claim, minority investor protection is one of the keys to the American success story (19) and is the future of corporate law worldwide. (20)

This Essay proceeds as follows. In Part I, I reread the canon of corporate law. While the economic reading of corporate law doctrines finds in them a concern for efficiency, my review reveals a simultaneous commitment to minority protection and egalitarianism. I identify a theory of power that underlies much of corporate law and that speaks to constitutional debates. I suggest that corporate law is more than a device "to reduce the transaction costs of private bargaining by providing a code of standard legal arrangements." (21) As crafted over the centuries by judges and legislators, corporate law is also a device to ensure that minorities will be treated fairly, even without a showing that they would have bargained for contractual safeguards in the absence of transaction costs. Although contractarian scholars have recently advocated lifting such protections, the Enron and WorldCom debacles have begun to turn the tide toward stronger, not weaker, protection. (22)

Part II...

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