Shareholder Control and the Delaware Dilemma: Is Private Capital Ruining Corporate Law?

The growing prevalence of controlling shareholders and new forms of shareholder control in large public companies poses a serious dilemma for corporate law—particularly in Delaware, the longstanding jurisdiction of choice for such firms. On the one hand, allowing controlling shareholders to act unfettered runs counter to corporate law’s classic board-centric governance model and its policy of closely scrutinizing conflicts of interest. More fundamentally, beyond a certain point controller power may erode shareholder value and the economic surplus generated by public companies—though it is vexingly difficult to determine where that point lies. On the other hand, holding the line against increasing controller power with traditional doctrine would mire these firms in procedure and litigation, while driving controllers to incorporate elsewhere or seek refuge in the private markets—a different but no less significant harm to public shareholders.

Faced with these tradeoffs, Delaware recently opted to loosen its constraints on shareholder control substantially. Whatever the merits of this choice, the heated debate surrounding it largely missed that Delaware’s dilemma stems not from problems internal to corporate law, but rather from external, long-term developments in securities law and corporate finance. The sweeping deregulation of private capital-raising and decades of abundant capital have made it vastly easier for firms to remain private and avoid the public markets. This has given large firms’ founders and other controllers extraordinary leverage over other investors at all stages of their firms’ lifecycle, allowing them to retain control even after an IPO. As a result, corporate law now confronts a difficult choice: accommodate governance arrangements that may erode firm value, or risk accelerating the withdrawal of major firms from the public markets. If controller dominance poses a problem for the investing public, it is one that corporate law did not create and cannot solve alone.