July 14, 2006
An Ode to the Shareholder Franchise
Posted by Gordon Smith

One of my favorite Delaware decisions is Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), written by then-Chancellor Bill Allen. Blasius has a narrow assignment in Delaware jurisprudence, requiring a "compelling justification" for any corporate action "intended primarily to thwart effective exercise of the franchise." Not many corporate actions over the years have been subjected to that standard, but Allen's defense of the shareholder vote is a classic:

The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests. Generally, shareholders have only two protections against perceived inadequate business performance. They may sell their stock (which, if done in sufficient numbers, may so affect security prices as to create an incentive for altered managerial performance), or they may vote to replace incumbent board members.

It has, for a long time, been conventional to dismiss the stockholder vote as a vestige or ritual of little practical importance. It may be that we are now witnessing the emergence of new institutional voices and arrangements that will make the stockholder vote a less predictable affair than it has been. Be that as it may, however, whether the vote is seen functionally as an unimportant formalism, or as an important tool of discipline, it is clear that it is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. Thus, when viewed from a broad, institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve consideration not present in any other context in which directors exercise delegated power.


Corporate Governance, Corporate Law, Delaware | Bookmark

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