De Facto Shareholder Primacy

Abstract

For generations, scholars have debated the purpose of corporations. Should they maximize shareholder value or balance shareholder interests against the corporation’s broader social and economic impact? A longstanding and fundamental premise of this debate is that, ultimately, it is up to corporations to decide. But this understanding is obsolete. Securities law robs corporations of this choice. Once corporations go public, the securities laws effectively require that they maximize share price at the expense of all other goals. This Article is the first to identify the profound impact that the securities laws have on the purpose of public firms — a phenomenon that it calls “de facto shareholder primacy.”

The Article makes three primary contributions to the literature. First, it provides a rich and layered account of de facto shareholder primacy. The phenomenon is not the result of considered legislation and regulatory decision. Rather, hedge-fund activists leverage the transparency that the securities laws afford to identify, and force companies to adopt, strategies that increase share prices. Their activities cast a shadow over the public market. Because firms must maximize share prices or face costly, disruptive, and protracted battles with activist hedge funds, they preemptively focus solely on stock values. The activists’ novel and opportunistic use of the securities laws has transformed the regulatory apparatus into a powerful lever of shareholder primacy. Second, this Article shows how this distortion of the regulations causes harm. The activities of activists bring the laws into conflict with principles of federalism and private ordering, which hurts entrepreneurs, investors, and equity markets. Finally, to address these concerns, the Article recommends a small change to the securities laws that would end hedge-fund activism and thereby disentangle the securities laws from corporate purpose.

Keywords: corporate purpose, stakeholder theory, shareholder primacy, securities law, corporate law, hedge fund activism, short-termism

JEL Classification: K22