Financial History 140 Winter 2022 - Page 26

Courtesy of the Michigan Supreme Court Historical Society
Justice Russell Ostrander wrote the opinion in Dodge v . Ford , which was one of the most influential cases regarding profit maximization .
of America , a company founded by Dr . Camile Dreyfus , an immigrant from Switzerland , who , with his brother Henri , developed a variety of cellulose-based products , is the most emblematic of these cases . The suit was instigated by two public shareholders , Seymour Bayer and Benjamin F . Steinberg , who challenged actions by the board and sought to recover $ 1.35 million for the corporation . Their complaint focused on an approval of a radio advertising campaign , “ Celanese Hour ,” in which Jean Tennyson , a professional opera singer and Dreyfus ’ s wife , was sometimes featured ; Dreyfus was the corporation ’ s president . The campaign was introduced after the Federal Trade Commission issued a new rule , requiring all Celanese products to be labeled rayon ; the campaign ’ s implicit goal was to convince consumers that Celanese was better than rayon . The shareholders argued , first , that the directors were negligent in approving the campaign and , second , that they approved the campaign to further the career of the president ’ s wife .
Justice Bernard Lloyd Shientag of the Supreme Court of New York wrote the court ’ s opinion . Keen on encouraging managerial freedom , Shientag dismissed the complaint , holding that the directors exercised their honest business judgment , and that their conduct did not amount to negligence , waste or improvidence .
Seeking also to mitigate the plaintiffs ’ concerns , Shientag ’ s opinion emphasized two factors related to the responsibility of directors to maximize shareholders ’ value .
First , Shientag elaborated on the standard of fairness by which transactions involving directors ’ conflict of interest should be evaluated . Tennyson advised Dreyfus and helped create the advertising campaign , which consisted of a radio program offering classical music . She was also one of the singers on the program . Yet , Shientag found the campaign to be fair to the corporation . As he pointedly noted , “ It would be far-fetched to suggest that the directors caused the company to incur large expenditures for radio advertising to enable the president ’ s wife to make $ 24,000 in 1942 and $ 20,500 in 1943 .”
As to the claim that the directors failed to fulfil their duty of care , Shientag pointed out that the directors , all of whom were also executives , were sufficiently informed . Supporting his conclusion , Shientag noted that under the directors ’ administration , “ the company has thrived and prospered . Its assets increased from $ 44.5 million in 1935 to upwards of $ 103 million in 1942 . Its net profits , after taxes , doubled during that period , rising from $ 4 million in 1935 to $ 8 million in 1942 ; its net sales rose from $ 27 million to upwards of $ 86 million ; and its dividend disbursements to stockholders exceeded $ 29.5 million .”
While irrelevant to the legal analysis of directors ’ duties , profit mattered . Other cases , addressing a variety of duty-ofloyalty and duty-of-care claims similarly balanced the interests of managers and shareholders , shielding the former from liability while assuring the latter that their corporations were profitable . And the balance seemed attainable : directors were free to act , protected by the presumption of the business judgment rule , so long as , in the balance of equities , their companies were profitable . Corporate managers were offered a protective fairness standard while minority shareholders were promised earnings , in dicta .
Beginning in the 1960s , as concerns about upward mobility and the economic assimilation of second-generation Americans subsided , the business judgment presumption came to dominate corporate litigation and the discussion of profits receded . Proponents of modern finance
Ronald Perelman , whose rejected friendly purchase of Revlon led to the Revlon , Inc . v . MacAndrews & Forbes Holdings , Inc . case .
theory encouraged investors to offset their exposure to business misfortunes by diversifying their portfolios ( typically by choosing mutual funds over direct investment in corporate stock ), while a new economic theory of the firm described fiduciary obligations as overly restrictive and suggested that capital markets could eliminate concerns about efficiency associated with the separation of ownership from control in publicly held corporations . Informed by these ideas , judges no longer balanced managerial freedom with assurances to minority shareholders about profits ; instead , they upheld directors ’ actions unless the plaintiff shareholder rebutted the presumption of the business judgment rule . Dissatisfied shareholders were told to exercise their voting power or to sell their shares .
The pendulum seemed to swing back toward shareholder profit maximization in the 1980s , as investment bankers , focused on increasing the value of their portfolios , and institutional investors , keen on achieving the same , began using hostile takeovers to force corporations to maximize shareholder value . The Delaware courts , too , embraced high stock price , but not as corporate purpose or an affirmative duty . Rather , just as large corporations and well-to-do financiers replaced the minority , individual shareholder as the typical plaintiff in corporate litigation ,
24 FINANCIAL HISTORY | Winter 2022 | www . MoAF . org