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Bainbridge, Stephen M. --- "Director Primacy" [2012] ELECD 457; in Hill, A. Claire; McDonnell, H. Brett (eds), "Research Handbook on the Economics of Corporate Law" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on the Economics of Corporate Law

Editor(s): Hill, A. Claire; McDonnell, H. Brett

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848449589

Section: Chapter 2

Section Title: Director Primacy

Author(s): Bainbridge, Stephen M.

Number of pages: 16

Extract:

2. Director primacy
Stephen M. Bainbridge*



1. INTRODUCTION
Ownership and control rights typically go hand in hand. A homeowner may eject trespassers,
for example, even using force in appropriate cases.1 A principal is entitled to control his
agent.2 Each partner is entitled to equal rights in the management of the partnership business.3
In the corporation, however, ownership and control are decisively separated. Control is
vested by statute in the board of directors. The Delaware General Corporation Law, for exam-
ple, provides that the corporation's `business and affairs ... shall be managed by or under the
direction of the board of directors'.4 In contrast, the firm's nominal owners ­ the sharehold-
ers ­ exercise virtually no control over either day-to-day operations or long-term policy.
Shareholder voting rights are limited to the election of directors and a few relatively rare
matters such as approval of charter or bylaw amendments, mergers, sales of substantially all
of the corporation's assets, and voluntary dissolution. As a formal matter, moreover, only the
election of directors and amending the bylaws do not require board approval before share-
holder action is possible (Dooley 1995). In practice, of course, even the election of directors
(absent a proxy contest) is predetermined by virtue of the existing board's power to nominate
the next year's board (Manning 1958). The shareholders' limited control rights thus are
almost entirely reactive rather than proactive.
These direct restrictions on shareholder power are supplemented by a host of ...