about the power that corporations and their control groups held over individual investors and the economy at large . Public security financing of industry was introduced after the merger wave of the 1880s , just as changes to corporation laws , such as allowing a majority vote to approve fundamental transactions and limiting the voting rights of certain classes of stock , helped erode investors ’ ability to affect their corporations ’ affairs . While entrepreneurs found ways to convince the American public to invest in their enterprises , first in railroad bonds and industrial preferred stock , and then , by the second decade of the 20th century , in common stock , the control of productive property remained concentrated in the hands of a few wealthy industrialists and their bankers , raising grave concerns among Progressive jurists about the potential for abuse of power by those in control and the plight of the individual shareholder .
Calls for state and federal legislation to protect minority investors mounted , and courts held those in control of business enterprises to stricter obligations toward minority shareholders . Justice
Russell Ostrander , who wrote the opinion in Dodge v . Ford , stressed : “ There should be no confusion … of the duties which Mr . Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his co-directors owe to protesting , minority stockholders .” The duty to maximize profit to the shareholders applied only in the latter context .
Horace and John Dodge , successful businessmen , were unlike the individual shareholder on which the Progressives ’ attention focused . For the typical minority shareholder , ownership of productive property was often improbable . Still , at a time when corporations were seeking to convince investors , typically of middleclass background , to invest in their corporate stock while simultaneously lobbying for legal changes that minimized these investors ’ control , Ostrander ’ s statement was significant . Just as the Midwest was witnessing a rapid turn from agriculture to industry , Ostrander opted to encourage investment in factories by assuring minority shareholders that state courts would protect them from abuse of power by the control group .
By the 1940s , the New Deal regulatory state and war-production helped lessen concerns about the power of corporations and their control groups . No longer portrayed as a threat to the American dream , corporations were viewed as a vehicle for achieving the American democratic ideal . In New York , corporate litigation reflected these changes . Not infrequently , the defendants — directors and officers — were first- or second-generation Americans , who turned to entrepreneurship to solidify their place in society . The shareholder plaintiffs , typically with limited means and ownership stake , were invested for steady income and viewed their investment as a means of economic , as well as social and cultural , advancement . They , too , often were of minority social and cultural status , or women .
Moreover , shareholder plaintiffs were often represented by lawyers who were also descendants of recent immigrants ; many were Jewish , and their commitment to the protection of minority shareholders was borne out of their experiences of discrimination in American society . Excluded from the large corporate law firms , these lawyers made derivative litigation their means of entering the profession . Together , defendants , plaintiffs and their lawyers helped ensure that corporations remained attuned to the needs of different corporate constituencies .
Recognizing that the conflicts before them were economic and cultural , the New York courts sought to balance boosting entrepreneurial freedom with assurances to individual shareholders that their investments would yield profit . To achieve the former , the courts expanded the scope of the exemption from liability for honest mistakes from which directors benefited throughout the 19th century to develop the modern business judgment rule as a rule of deference to directors ’ expert opinion and , at the same time , transformed the duty of loyalty from a duty grounded in utmost trust and honor to the limited requirement that directors ’ actions do not unfairly disadvantage their corporations . To justify their growing deference to corporate management and encourage investment in securities , the courts began referring to corporate profits in their analyses of directors ’ duties .
Bayer v . Beran , a 1944 derivative litigation against the Celanese Corporation
www . MoAF . org | Winter 2022 | FINANCIAL HISTORY 23