ADW DRAFT 9/3/11
AP edits 9/5/11
Chapter 4. Corporate Social Responsibility
Primary Sources Used in this Chapter
 Ohio Revised Code § 1701.59
 ALI Principles of Corporate Governance. § 2.01
 MBCA § 302
 IRC § 170
 ABA Model Rules of Professional Conduct, Rule 2.1
 ALI Principles of Corporate Governance, §2.01
 Dodge v. Ford Motor Co
 Theodora Holding Corp. v. Henderson
 Kahn v. Sullivan, 594 A.2d 48 (Del. 1991)
Concepts for this Chapter
•
Who does the corporation serve?
•
Classic answer: Dodge v. Ford Motor
–
Meaning of case
–
Other constituency statutes
•
Modern answer: corporate charity
–
Corporate law
–
Who should decide?
•
Role of directors and lawyers
–
Choices in takeover
–
Choices in offshore operations
A. Who Does the Corporation Serve?
Question: Is the purpose of the corporation to serve as private property or as a social institution?
Answer: This is an overarching question in corporate law, and the tension exists both in
corporate law and in business reality.
What are the implications of the corporation as property? What social responsibility is
there beyond seeking to make money while complying with law? If a corporation is a
social institution, how should the tension between shareholders and other corporate
stakeholders be mediated? Profit maximization remains crucial, but the limits of its
pursuit are no longer just business and legal limits. Additional concerns— from living
wages to environmental sustainability—come into play.
Question: Who should decide this debate?
1
Answer: The board of directors (management) is given virtually all authority to manage
the business and affairs of the corporation. Does management have discretion to consider
the corporation’s impact on society and account for those considerations in doing
business? Can the corporation serve multiple masters?
The modern debate between advocates of “shareholder primacy” and proponents of what is now
known as “corporate social responsibility” (CSR) can trace it roots to the period following the
1929 Stock Market Crash, when the United States focused on the role of the corporation
(including Congressional hearings).
Consider the following description by Professor Lynn Stout:
In 1932, the Harvard Law Review published a debate between two preeminent
corporate scholars on the subject of the proper purpose of the public corporation.
On one side stood the renowned Adolph A. Berle, coauthor of the classic The
Modern Corporation and Private Property. Berle argued for what is now called
"shareholder primacy" - the view that the corporation exists only to make money
for its shareholders. According to Berle, "all powers granted to a corporation or
to the management of a corporation, or to any group within the corporation ...
[are] at all times exercisable only for the ratable benefit of all the shareholders as
their interest appears."
On the other side of the debate stood esteemed professor Merrick Dodd of
Harvard Law School. Dodd disagreed vehemently with Berle's shareholder
primacy thesis. He argued for "a view of the business corporation as an economic
institution which has a social service as well as a profit-making function." Dodd
claimed that the proper purpose of the corporation (and the proper goal of
corporate managers) was not confined to making money for shareholders. It also
included more secure jobs for employees, better quality products for consumers,
and greater contributions to the welfare of the community as a whole.
Lynn Stout, Lecture and Commentary on the Social Responsibility of Corporate Entities: Bad
and Not-So-Bad Arguments for Shareholder Primacy, 75 S. Cal. L. Rev. 1189 (2002) (citations
omitted).
Question: What is the argument in favor of the corporation as private property?
Answer: After Berle, Milton Friedman emerged as a leading proponent of the
shareholders primacy doctrine. Friedman argued:
When I hear businessmen speak eloquently about the "social responsibilities of
business in a free-enterprise system," I am reminded of the wonderful line about
the Frenchman who discovered at the age of 70 that he had been speaking prose
all his life. The businessmen believe that they are defending free enterprise when
they declaim that business is not concerned "merely" with profit but also with
promoting desirable "social" ends; that business has a "social conscience" and
2
takes seriously its responsibilities for providing employment, eliminating
discrimination, avoiding pollution and whatever else may be the catchwords of
the contemporary crop of reformers. In fact they are–or would be if they or
anyone else took them seriously–preaching pure and unadulterated socialism.
Businessmen who talk this way are unwitting puppets of the intellectual forces
that have been undermining the basis of a free society these past decades.
The discussions of the “social responsibilities of business” are notable for their
analytical looseness and lack of rigor. What does it mean to say that "business"
has responsibilities? Only people can have responsibilities. A corporation is an
artificial person and in this sense may have artificial responsibilities, but
"business" as a whole cannot be said to have responsibilities, even in this vague
sense
***
[T]he doctrine of "social responsibility" taken seriously would extend the scope of
the political mechanism to every human activity. It does not differ in philosophy
from the most explicitly collectivist doctrine. It differs only by professing to
believe that collectivist ends can be attained without collectivist means. That is
why, in my book Capitalism and Freedom, I have called it a “fundamentally
subversive doctrine” in a free society, and have said that in such a society, “there
is one and only one social responsibility of business–to use it resources and
engage in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free competition without
deception or fraud.”
Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, The New York
Times Magazine, September 13, 1970.
Delaware Chancellor William T. Allen has noted that this model of the corporation as existing to
generate shareholder wealth implies that the corporation is a form of privately held property.
Chancellor Allen described the view of the corporation as a nexus of contracts as “incomplete,”
noting that the directors have duties to the corporation itself as an entity, not merely to the
corporation’s shareholders:
The law and economics paradigm offers a highly coherent conception of
corporation law as a system of rules facilitating wealth maximization through
contracts, explicit or implicit. This is, to a substantial extent, an idealized version
of the corporation law in action. Like much of neoclassical economics, the law
and economics account of corporation law is at bottom not empirical description,
but normative prescription. It means to tell us how people would act with respect
to formation of legal rules concerning corporations if people acted rationally (as
they sometimes, if imperfectly, do).
***
The idealized law and economics version of corporation law makes a tremendous
contribution to our understanding of the nature of the firm, but it is not complete.
3
My own understanding, which is, I confess, incomplete as well, acknowledges the
power and utility of much of the law and economics story, but recognizes as well
the pressures on rule-creating agencies to view corporate directors as men and
women with obligations of loyalty which will be evaluated ex post on a fairness
standard. Courts have felt and responded to these pressures for over two hundred
years. To whom director duties of loyalty are owed can and has sustained earnest
debate in legislative chambers, in the press, and in the academy. Thus, either a
descriptive account or a normative account of corporation law that I might
advance would include a powerful element of wealth maximization, but it would
inescapably include as well a political-moral component. Corporation law is a
system of rules, principles and roles and a process by which they are defined,
redefined in legally significant interactions, and enforced. In that process the law,
or legal agents, mediate, pursuant to the processes of law, between the wealth
maximizing value and the ex ante analytical style of the liberal model and the
fairness value and the ex post analytical style of equity.
William T. Allen, New Directions in Corporate Law: Contracts and Communities in
Corporation Law, 50 Wash. & Lee L. Rev. 1395, 1404-5 (1993) (citations omitted)
Question: What are some of the arguments in favor of corporate citizenship and responsibility?
Answer: Some possible answers to this question are:





CSR advances the corporations long-term interests/sustainability
Consumers demand CSR
Shareholders demand CSR
Ethical reasons
Public relations
Professor Merrick Dodd made the case for what we now consider CSR in 1932:
That the duty of the managers is to employ the funds of the corporate institution
which they manage solely for the purposes of their institution is indisputable. That
that purpose, both factually and legally, is maximum stockholder profit has
commonly been assumed by lawyers. That such is factually the purpose of the
stockholders in creating the association may be granted. Nevertheless, the
association, once it becomes a going concern, takes its place in a business world
with certain ethical standards which appear to be developing in the direction of
increased social responsibility. If we think of it as an institution which differs in
the nature of things from the individuals who compose it, we may then readily
conceive of it as a person, which, like other persons engaged in business, is
affected not only by the laws which regulate business but by the attitude of public
and business opinion as to the social obligations of business. If business is
tending to become a profession, then a corporate person engaged in business is a
professional even though its stockholders, who take no active part in the conduct
of the business, may not be. Those through whom it acts may therefore employ its
4
funds in a manner appropriate to a person practising a profession and imbued with
a sense of social responsibility without thereby being guilty of a breach of trust.
E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees, 45 Harv. L. Rev.
1145,1161 (1932)
The Corporate Social Responsibility movement is not without its critics. See for example,
Professor Aneel Karnani’s August 2010 article in the Wall Street Journal, The Case Against
Corporate Social Responsibility.
http://online.wsj.com/article/SB10001424052748703338004575230112664504890.html
Question: Does the board of directors have the discretion to decide whether the corporation
should exclusively maximize shareholder value, or instead pursue a different agenda?
Answer: Maybe. In fact, many state corporate statutes specifically recognize the
discretion of the board to consider the interests of the corporations other stakeholders.
Consider as an example § 1701.59 of the Ohio Revised Code governing the Authority of
Directors (reprinted on p. 99). The Ohio provision authorizes the directors to consider:




the corporation’s employees, suppliers, creditors and customers,
the economy of the state and the nation
community and societal considerations, and
the long-term and short-term interests of the corporation and the shareholders.
This seems like a very broad authorization.
B. CSR in Two Legal Contexts
1. The “Classic” Case
The classic CSR conflict in corporate law concerns the proper role of the corporation, and the
conflict between CSR and a strict adherence to a shareholder primacy doctrine.
Dodge v. Ford Motor Co. addresses the question “who does the corporation serve?” and
presents the classic private property vs. social institution debate. In its mixed ruling, the court
first required a payment of dividends (despite Ford’s view that his business plan and cutting of
dividends would raise the lives of employees and customers), but then the court chose not to stop
his expansion plans (accepting that judges are not business people). In the process the court
seemed to both rebuke and exalt Ford’s business plans.
Dodge v. Ford Motor Co., 204 Mich. 459. 170 N.W. 668 (1919)
Facts: Ford. Motor Company was organized in 1903 with an initial capital of $150,000. At the
time of this case, the company’s capital had grown to $2,000,000. After distributing special
dividends from 1911-1915, in 1916 Henry Ford had declared it to be the policy of the company
to cease paying any special dividends (other than the regular dividend) and instead put that
5
money back into the business for the development of the company and good of its workers. This
decision came after years of loyalty to the shareholders—steady growth and dividend
distribution.
On its face, Ford’s new plan certainly did not appear an act solely in service of the shareholders.
Ford was taking into account the business’ effect on others, namely the employees and potential
employees, to the point of depriving shareholders of what they believed were profits they were
entitled to.
The Dodge brothers, who had begun to manufacture cars in competition with Ford, brought suit
as two minority shareholders (they owned 22% of the company’s stock) against the Ford Motor
Company to compel payment of a dividend, to enjoin construction of the Ford company’s River
Rouge plant, and for other relief. The Dodges needed Ford’s special dividends to finance a
planned expansion of their manufacturing operations. In addition, a decision by Ford to reduce
the selling price of its cars further threatened the Dodges operations through increased
competition.
For what purpose was Ford reducing special dividends and putting money back into the
company? Ford had ambitious plans for an unprecedented expansion.
First, he was considering vertically integrating the stages of production required to build
automobiles—mining the company’s own iron ore, building its own ships to transport the ore,
and building smelters to make steel.
Second, Ford planned to reduce the price of cars from $440 to $360. At this price, the court
found, Ford had no intention of making the business more profitable; its only effect would be to
diminish the value of shares and returns to shareholders.
Third, Ford sought to continue the corporation not as a business institution but as a “semieleemosynary” (charitable) institution. Henry Ford’s vision, he said, was “to employ still more
men, to spread the benefits of this industrial system to the greatest possible number, to help them
build up their lives and their homes. To do this we are putting the greatest share of the profits
back in the business.” The hope of his vision was to bring global peace through consumerism.
Question: What was the real purpose of his plan?
Answer: Perhaps Ford had a brilliant trick up his sleeve to maximize the company’s
profitability in hatching his expansion project.
Just what was going on at Ford’s corporate offices? We know Ford wanted to help put
people to work, but in what way was he reimagining the industrial landscape? Was
Ford’s sense of corporate social responsibility still subservient to earning profits? Or was
something bigger in place than just helping folks find jobs?
Maybe Henry Ford had a vision of his corporation beyond serving shareholders. Ford saw
not just a responsibility owed by the corporation to society, but the potential for
6
collaboration between the two. The corporation and society, Ford believed, functioned in
a symbiotic relationship. To this end, he hoped to use industry to increase trade and spur
international peace. Ford’s sense of corporate social responsibility, in short, was global.
Question: How did Ford plan to finance the expansion? How are corporate expansions usually
financed?
Answer: This is a good place to introduce general principles of debt and equity financing
and the limited options a corporation has in financing itself and its projects.
Unlike more traditional methods of debt and equity financing, Ford planned to finance
the expansion internally. Ford planned to terminate the company’s history of generous
special dividends and use that money to fully self-finance the expansion. This was very
much consistent with his general business philosophy of maintaining proud independence
and self-reliance.
Question: What is product pricing? Why was Ford product pricing by reducing prices of cars
from $440 to $360?
Answer: Product pricing is part of any business strategy. Prices should cover costs,
maintain and grow a customer base, and maximize profits. Ford’s product pricing
reduced prices from $440 to $360 – to increase the customer base and perhaps the Ford
Motor workers. The method also helped Ford workers afford to buy the cars they were
making.
Question: Was this contrary to profit maximization?
Answer: The Dodge brothers argued Ford’s plan was not one of profit maximization but
instead to transition the company into a “semi-eleemosynary” institution—a private
enterprise that put customer interests and job creation over profitability. But maybe this
was a way of becoming dominant – ultimately a highly profitable monopolist!
Question: For what purpose was Ford seeking to employ “still more men” at $5.00 a day?
Answer: Ford sought to employ more and more people out of a sense of corporate social
responsibility – or so he said. As the Prometheus of American industry, he sought to
share its benefits with everyone. He saw his corporation as bringing industry and social
need together. Ford believed he could pay more and more people a living wage if he
reinvested Ford’s staggering profits back into the company. But not all workers made
above-market wages – only white men who lived proper family lives. Many other
workers earned market wages. These higher wages allowed his workers to buy cars,
crating pressure for a system of highways – just like the “networks” that Microsoft sought
to create with its computer software.
Question: Why was Ford seeking to acquire mines, ships and smelters?
7
Answer: Ford wished to acquire mines, ships and smelters in order to vertically integrate
his company. Vertical integration is the bringing of supply chain components under
common ownership. In this case, Ford hoped to bring mines, ships and smelters under the
Ford company banner. That way, Ford owned each stage of the means of production—
promoting maximum efficiency (and possibly putting more people to work).
Issues: (1) Can the corporation be compelled to pay a dividend? (2) Can the corporation be
prevented from undertaking a costly vertical integration plan?
Holdings: (1) Yes. The primary purpose of the corporation is to maximize shareholder profits.
(2) No. Business judgment rule.
Reasoning: (1) On the dividend issue, the court ruled:
“A business corporation is organized and carried on primarily for the profit of the stockholders.
The powers of the directors are to be employed for that end. The discretion of directors is to be
exercised in the choice of means to attain that end, and does not extend to a change in the end
itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order
to devote them to other purposes."
Question: Could Ford Motor give money to support a local hospital?
Answer. Probably. The court artfully suggested that “an incidental humanitarian
expenditure for the benefit of the employees” would be permissible.
(2) On the vertical integration issue, the court demonstrated an unwavering commitment to the
business judgment rule. Ford’s plan could be seen as unorthodox and did not promise to be
profitable. But the Court held that business judgment must be considered in the context of both
its short and long term trajectory. Business decisions that appeared to lack profitability in the
short term might appear shrewd and judicious judgments as they played out over time.
In disposing of the issue of vertical integration, the court declined to halt Ford’s planned
expansion and refused to second guess the business decisions of a company that had made it so
successful. This is an excellent example of the business judgment rule in action. The Michigan
Supreme Court, speaking for the judiciary in general, declined to second-guess the business
judgments of Ford management.
Note: The chapter poses the question—is the purpose of the corporation to exist as private
property or as a social institution? The Michigan court’s answer is that the primary purpose of
the corporation is to maximize shareholder profits. But the case is often cited as establishing that
the directors’ sole duty is to maximize shareholder profits. In fact, the qualifier of “primary” is
used in sort of a parallel structure to establish what the board is to do and not do:
• “A business corporation is organized and carried on primarily for the profit of the
stockholders . . . ”
8
• “. . . it is not within the lawful powers of a board of directors to shape and conduct the
affairs of a corporation for the merely incidental benefit of the shareholders and for the
primary purpose of benefiting others . . .”
Question: As Ford Motor’s lawyer, what would your advice have been regarding whether a
business plan can deviate from profit maximization?
Answer: Arguably, Ford was trying to maximize profits by preventing the Dodge
Brothers from having access to capital for their car company – and growing Ford Motor
in the process. Or maybe he had a social vision for his company that involved taking less
profit in order to create a new industrial society.
Question: Ford Motor is one of the great business success stories of all time. Its early profits
were doubling almost every year. If the numbers were extrapolated Ford Motor would become
larger than the US GDP by the year 1955. (This may actually have been the hope of Henry Ford,
who had been planning to rename the company “The Big Corporation”). Can you think of a
modern corporation with the same success story?
Answer: There are a number of companies that have created an industry and remade
society. Microsoft often comes to mind.
Points for Discussion (pp. 105-6)
1. Shareholder wealth maximization
First, notice that the court appears to leave room for the permissibility of “an incidental
humanitarian expenditure . . . for the benefit of employees” by posing it against the activity it
forbids: corporate work not carried out primarily for the benefit of the shareholders.
Furthermore, the court states that “a business corporation is organized and carried on primarily
for the profit of the stockholders.” Thus, for the court, it would seem that discretion is granted to
engage in activity that is not profit maximizing so long as such activity is “incidental” to the
primary purpose of the corporation (maximizing profits for the shareholders).
2. Precedential value - Why didn’t the Dodge brothers accept the $30 million offer that
Ford made for their interest in the company?
They seemed to think they could get more. And maybe they thought they could close down the
vertical integration. In any event, it is unlikely they would have much trouble getting financing
for their company. There is no reason to think they were cash-starved
3. What was the Court’s view on CSR?
In disposing of the two issues in the case, the court appears to give two markedly different
treatments to CSR. As to one issue, the court defers to Ford’s discretion about how to best price
9
its cars and whether to expand its plant. As to the other issue, the court refuses to accept Ford’s
judgment that it needed to maintain large cash reserves for its expansion.
Perhaps behind the inconsistent treatment of the issues is the court’s attempt to engineer and
promote competition according to its own social vision. The Michigan court may have been less
concerned with shareholder rights and more concerned with the state’s auto industry as well as
the social, political, and economic effects that a one-company industry might have on the state.
The state of Michigan had a strong interest in maintaining its position at the forefront of auto
manufacturing, and Ford’s social vision threatened the state’s own.
4. Long-term vs. short-term? Was Henry Ford really sacrificing corporate profits for the
welfare of non-shareholder constituents?
The long-term vs. short-term distinction raises issues apparently not considered by the court in
deciding against Ford as to its dividends policy. It is very possible that Ford’s dispensing of
short-term profits actually maximized profits in the long-term, and therefore should have been
offered the protection of the business judgment rule.
In putting people to work and keeping the prices of cars down, Ford was not running a scorched
earth business plan but instead cultivating loyalty and goodwill. This may well have contributed
more in the long run than the short-term profits to be had by keeping car prices up and
employing less people. This idea raises another question—in considering corporate loyalty to
shareholders, which shareholders are we to account for? Present shareholders? Future
shareholders?
Bonus Hypothetical (Non-Shareholder Constituents)
Question: Suppose the Ford business plan is not designed to benefit employees or customers,
but to do the opposite – namely lower wages and increase the price of cars.
Assume Ford has new plans:
• Drop workers' wages to $2 per day -- the market rate.
• Raise the price of Ford cars by 20% -- the market will bear it.
Both should raise the company’s profitability.
Can employees and customers complain under modern "other constituencies" statutes? As a
model of such statutes, use Ohio Revised Code §1701.59 on p. 99.
Answer: The dividends issue in Dodge v. Ford essentially asked whether a corporation
can consider the social impact of its policy on its workers and craft business plans to
account for that impact. The hypothetical we pose here asks a different question—must a
corporation account for its impact on stakeholders under modern “other constituencies”
statutes? Has the law evolved from a prohibition against such considerations to a mandate
to include them?
10
The statutory language says the board of directors “may” consider these effects of their
decisions. The word “may” is ambiguous – capable of more than one meaning. Perhaps
“may consider” means the board “is permitted to and should consider.” Ambiguity, when
a term has a limited number of often-inconsistent meanings, is not vagueness (such as
“reasonable” with a continuum of meaning that may vary with the circumstances).
Question: Where did the other-constituents statutes come from?
Answer: These statutes were actually the brainchild of Ralph Nader, but were later
introduced by incumbent management to justify antitakeover measures that arguably hurt
shareholders, while protecting other company constituents.
Question: Should corporate law recognize the interests of non-shareholder stakeholders?
Answer: Perhaps. Perhaps not. They have already been compensated for their
participation and the risks they take in the corporation. In addition, employees and
customers – and other stakeholders -- are protected by contract or by non-corporate law.
Question: What do the American Law Institute Principles of Corporate Governance provide
regarding the purpose of the corporation?
Answer:
ALI Principles of Corporate Governance
§ 2.01 The Objective and Conduct of the Corporation
(a) Subject to the provisions of Subsection (b), a corporation should have as its
objective the conduct of business activities with a view to enhancing corporate
profit and shareholder gain.
(b) Even if corporate profit and shareholder gain are not thereby enhanced, the
corporation, in the conduct of its business:
(1) Is obliged, to the same extent as a natural person, to act within the
boundaries set by law;
(2) May take into account ethical considerations that are reasonably regarded
as appropriate to the responsible conduct of business; and
(3) May devote a reasonable amount of resources to public welfare,
humanitarian, educational, and philanthropic purposes
The other-constituent statutes are consistent with the much-debated section in the ALI Principles
on the purpose of the corporation.
2. Corporate Charitable Contributions
11
Corporate social responsibility issues run the gamut in the corporation -- from questions of
treatment of workers and charitable contributions raised here to environmental policy and tax
issues.
Corporate charity reintroduces questions of :
 duty vs power,
 management discretion,
 conflicts of interest,
 the role of the shareholders, and
 SWM vs CSR.
Question: Should corporations be able to donate company money to charities?
Answer: Students normally answer “sure.”
Question: Should banks be able to give a certain amount of interest on bank accounts to the
bank managers’ favorite charities?
Answer: Students normally answer “no” to this.
Question: Why are many people OK with company managers giving away some of their
shareholder returns but not their bank interest?
Answer: The answer to this question demonstrates the corporation’s special place, and
responsibilities, in society.
Legality is the first and perhaps most germane issue raised by corporate charity. Can the
corporation give away money – shareholders’ money? After all, if charity is against the law, the
inquiry ends there.
Dodge v. Ford Motor talked about “incidental humanitarian expenditures” – is that the legal test?
What about expenditures that are not incidental to the company’s business or operations? For
example, what about giving to earthquake victims in places the company does no business?
The Legality of Corporate Charity
The legality of charitable duties is a question of corporate power.
Question: Where would you look to see if the corporation has the power to do something?
Answer: Statute, then articles (perhaps limitations), then bylaws (further source of
limitations or procedures), then board resolutions (even more specificity).
Question: What does the MBCA, after which many states have patterned their own statutes,
provide regarding the power of the corporation to make charitable contributions?
12
Answer: The MBCA includes the power to make charitable gifts as a power “without
limitation.”
MBCA § 302 General Powers
Unless its articles of incorporation provide otherwise, every corporation has
perpetual duration and succession in its corporate name and has the same powers
as an individual to do all things necessary or convenient to carry out its business
and affairs, including without limitation power:
(1) to sue and be sued, complain and defend in its corporate name;
(2) to have a corporate seal, which may be altered at will, and to use it, or a
facsimile of it, by impressing or affixing it or in any other manner reproducing it;
(3) to make and amend bylaws, not inconsistent with its articles of incorporation
or with the laws of this state, for managing the business and regulating the affairs
of the corporation;
(4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use,
and otherwise deal with, real or personal property, or any legal or equitable
interest in property, wherever located;
(5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of
all or any part of its property;
(6) to purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use,
sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares
or other interests in, or obligations of, any other entity;
(7) to make contracts and guarantees, incur liabilities, borrow money, issue its
notes, bonds, and other obligations (which may be convertible into or include the
option to purchase other securities of the corporation), and secure any of its
obligations by mortgage or pledge of any of its property, franchises, or income;
(8) to lend money, invest and reinvest its funds, and receive and hold real and
personal property as security for repayment;
(9) to be a promoter, partner, member, associate, or manager of any partnership,
joint venture, trust, or other entity;
(10) to conduct its business, locate offices, and exercise the powers granted by
this Act within or without this state;
(11) to elect directors and appoint officers, employees, and agents of the
corporation, define their duties, fix their compensation, and lend them money and
13
credit;
(12) to pay pensions and establish pension plans, pension trusts, profit sharing
plans, share bonus plans, share option plans, and benefit or incentive plans for any
or all of its current or former directors, officers, employees, and agents;
(13) to make donations for the public welfare or for charitable, scientific, or
educational purposes;
(14) to transact any lawful business that will aid governmental policy;
(15) to make payments or donations, or do any other act, not inconsistent with
law, that furthers the business and affairs of the corporation.
Question: Is this a mandatory provision or default provision?
Answer: The article could specify otherwise.
Question: Could limitations be in bylaws?
Answer: This raises an interesting question about the permissible scope of the bylaws –
maybe there could be procedures on charitable giving, but any limitations would have to
be consistent with articles.
So, under the MBCA charitable contributions are permitted – they are legal.
Question: Why have states opted to allow charitable contributions by corporations? Do
provisions like MBCA §3.02 originate in the legislature? In the boardroom? In the consciences
of the shareholders? Or pressures from charitable organizations?
Answer: If a state were to adopt a statutory provision like MBCA §3.02, before it was
prompted by the legislature, boardroom, shareholders or outside pressure, it would most
likely be spurred by a desire to keep up with the lead states in forging new statutory
corporate law. After that, with the exception of the shareholders, any of the other sources
are equally plausible as catalysts of change. Shareholders may or may not like to see
potential dividend distributions go to supporting even the noblest charity.
Question: Do provisions like MBCA §3.02 “legitimate” the corporation? Why does
management get this discretion over other people’s money?
Answer: Empowering corporations to make charitable donations encourages charitable
giving. Maybe it is one way for corporations to give back to society. Shareholders
understand this. Perhaps corporate charity is small recompense for externalities
corporations impose on society.
14
Question: What does the Internal Revenue Code provide regarding charitable giving?
Answer:
Internal Revenue Code § 170. Charitable contributions and gifts
(a) Allowance of deduction.
(1) General rule. There shall be allowed as a deduction any charitable
contribution payment of which is made within the taxable year. ***
(b) Percentage limitations. ***
(2) Corporations. In the case of a corporation-(A) In general. The total deductions under subsection (a) for any taxable
year … shall not exceed 10 percent of the taxpayer's taxable income.
Question: Does the IRC create corporate power?
Answer: No. Corporate power arises as a matter of state law. However, IRC §170 makes
it easier for corporations to give money by making the gifts deductible (thus reducing
corporate taxes), but subject to limits. The IRC prevents tax avoidance and also makes it
harder for corporations to give away too much shareholders’ money. Corporations can
also carry over losses if they donate when they are losing money (when deductions
exceed 10 percent of taxable income). §170(d)(2).
Question: Is giving away money, despite lack of value to corporation, contrary to SWM and
thus corporate purposes?
Answer: Arguably, SWM and corporate charity are inconsistent. The ultra vires
doctrine, which is now mostly vestigial, essentially limits a corporation to the powers in
the corporate statute and articles of incorporation. The Theodora Holding Corporation
case below explores this conflict.
Theodora Holding Corp. v. Henderson, 257 A.2d 398 (Del. Ch. 1969)
Facts: In 1955, Girard Henderson transferred 11,000 shares of common stock in Alexander
Dawson, Inc. to his wife, Ms. Theodora Henderson, as part of a separation agreement. In 1967,
Ms. Henderson formed the Theodora Holding Corp. with stock she had previously owned in
Alexander Dawson, Inc. and the 11,000 shares transferred to her by her former husband.
Mr. Henderson had long dominated the affairs of Alexander Dawson, Inc. From 1960 to 1966,
Henderson had caused Dawson to make annual corporate charitable contributions ranging from
$60,000 to over $70,000 to a charity he had formed in 1957, the Alexander Dawson Foundation.
These contributions had received unanimous approval from Alexander Dawson, Inc.
15
shareholders. An additional gift, a large tract of land valued at $467,750, was donated to the
charity in 1966 for the purpose of establishing a camp for under-privileged boys.
In April of 1967, Mr. Henderson proposed that the board approve a $528,000 gift of company
stock to the charity to finance the camp’s operations. One director, Theodora Ives (the daughter
of Theodora Henderson) spoke against the gift and suggested that instead be made to a charitable
contribution supported by her and her mother. In response, Mr. Henderson caused a reduction in
the company’s board of directors from eight to three. The board then approved the gift of stock,
and plaintiff brought suit.
Issue: Can the corporation donate money to a charity unconnected to the corporation’s business?
Holding: Yes. The gift was reasonable.
Reasoning: Introduces the “reasonableness” standard to strike a balance between the discretion
of management and the interests of the shareholder. Specifically, a corporate charitable gift must
“merely be within reasonable limits both as to time and purpose.”



The court began its opinion by laying out the policy concerns for corporate charitable
giving. First, it highlighted the recognition by contemporary courts of the very real
possibility of public backlash if corporations did not take an increasing role in the
obligation of supporting charitable and educational work.
Second, the court noted that states had overwhelmingly recognized this obligation
towards philanthropic, educational and artistic causes by statute.
Third, the court cited a case in which the charitable giving was viewed as a bolstering of
the “free enterprise system and the general social climate” in which corporations exist.
In finding for the defendant, the court subjected the actions of the board to what was essentially a
“reasonableness” test.


First, the $528,000 gift was made in a year in which Alexander Dawson, Inc’s total
income was $19,144,229.06, a sum easily within the federal tax deduction limitation of
5% of such income. This “cost” shareholders just fifteen cents per dollar of contribution.
It also reduced unrealized capital gains taxes by $130,000, increasing the balance sheet
net worth of the shareholders by the same amount.
Secondly, in providing for those in need, the gift benefited the company “in the long run”
in by generating justification for large private holdings. This was made all the more
important, the court noted, owing to the fact that the gift was made at a time in which
people were growing disillusioned with the social and economic system.
Specifically, the court said:
“The test to be applied ... on the validity of a [corporate] gift … is that of
reasonableness, [for which the IRC] furnishes a useful guide.”
16
“Contemporary courts recognize that unless corporations carry an increasing
share of the burden of supporting charitable and educational causes that the
business advantages now reposed in corporations by law may well prove to be
unacceptable to … an aroused public.”
“The contribution … "cost" … some fifteen cents per dollar of contribution,
taking into consideration the federal tax provisions … … rehabilitation and
education of deprived but deserving young people is peculiarly appropriate in an
age when a large segment of youth is alienated even from parents who are not
entirely satisfied with our present social and economic system.
Theodora Holding Corp. v. Henderson is a classic case in corporate law. The rule that emerges
from the case is that corporations have implicit powers to make charitable gifts that in the long
run may arguably benefit the corporation. These powers are subject to a reasonableness test: a
charitable gift must be reasonable both as to time and purpose.
In adopting a test of reasonableness, the court gives an excellent explanation of the growing
recognition by courts of the need for CSR. The facts in the case were not lost on the court—these
were dollars that were going to help make summers better for underprivileged boys. In light of
this and countless situations like it, corporate managers should be encouraged—not
discouraged—from contributing where others cannot.
Question: Who was Vice Chancellor Marvel?
Answer: Vice Chancellor Marvel, the author of the Theodora opinion, was a
distinguished and prolific jurist in the state of Delaware. He wrote thousands of opinions,
his very first— Simmons v. Steiner—resulted in the integration of Milford High School in
1955. Marvel was a friend of F. Scott Fitzgerald, and his own prose was of a type
“seldom seen in the 20th century.” Even in his seventies Marvel was known to drive to
Georgetown on a monthly basis to hold “Orphans Court,” always taking to the Chief
Deputy Register in Chancery, Mary Hill, a red rose. For more on Marvel and the
Delaware Court of Chancery, see
http://courts.delaware.gov/courts/Court%20of%20Chancery/?history.htm
Points for Discussion (pp. 110-1)
1. Relevance of statute
The court sees the issue as one of power, not duty. Notice also that the court largely disregards
the Delaware statute, even though it would seem to answer the question of corporate power.
2-4. Corporate gifts as profit maximizers/social function/self dealing
The Propriety of Corporate Charity
17
Corporate duties are different from corporate powers. What happens when corporate chairtable
giving is to a pet charity of the company’s CEO? Isn’t this a conflict of interest? Isn’t this like
giving the money to the CEO, for him to give to the charity – and reap the reputational benefit?
Although the corporation has the power, should the directors have a fiduciary duty not to
allow corporate giving to be abused?
For this, we look more closely at Kahn v. Sullivan, 594 A.2d 48 (Del. 1991)
Facts: On December 15, 1988, chief executive officer of Occidental Petroleum Corp. Armand
Hammer presented the company’s board of directors with a detailed plan to construct and fund
an art museum to house some of Hammer’s art collection.
The board put together a study of the proposal and retained a law firm to explore the museum
proposal and prepare a report addressing issues relevant to the board’s consideration of the
proposal. Another law firm was retained to represent the museum once it became a new legal
entity. Occidental’s public accountants were also asked to examine the museum proposal.
On February 6, 1989, ten days prior to the Board’s February 16 meeting, the law firm retained to
explore the museum proposal provided each member of the board with a comprehensive
memorandum. The memorandum reviewed the legality of the donation, concluding that it was
reasonable and that it stood to potentially benefit Occidental through goodwill. Following a
presentation by the law firm at the February 16 meeting, the Board resolved to appoint a Special
Committee of eight outside directors to further review the proposal. The Board then adjourned
to allow the Special Committee to meet.
After an extensive discussion with representatives of the law firm, the Special Committee
concluded that the establishment of the Museum, adjacent to Occidental’s corporate offices in
Los Angeles, would benefit Occidental for at least the term of the thirty-year lease. In addition, it
concluded that the proposed museum would serve as a new cultural landmark for the City of Los
Angeles.
 On February 16, 1989, the Special Committee unanimously approved the museum
proposal.
 On April 25, 1989, Occidental reported the Special Committee’s proposal to its
shareholders in the proxy statement for its annual meeting.
 On May 2, 1989, the first shareholder action (“the Kahn action”) was filed, challenging
Occidental’s decision to support the museum.
 On May 9, 1989, the second shareholder action (“the Sullivan action”) was filed against
Occidental for the same purpose.
 On June 9, 1989, the plaintiffs in the Kahn action moved for a preliminary injunction to
enjoin settlement in the second action and expedite discovery.
The Court of Chancery denied the motion for injunctive relief. The parties to the Sullivan action
provided the Court of Chancery with full documentation of their settlement on January 24, 1990.
On August 7, 1990, the Court of Chancery found the settlement to be reasonable under all the
circumstances. It concluded that if the Sullivan action proceeded, it was quite likely that in a
18
motion to dismiss, a motion for summary judgment, or a post-trial motion, the actions of the
“Special Committee” would be protected by the business judgment rule. Of particular
importance would have been the Special Committee’s role, which the court stated would have
been found to be independent and that it made an independent decision.
The Chancery Court held that the settlement was reasonable, given the likelihood of success and
the value of the gift to the corporation.
The court applied 8 Del.C § 122(9), and recognized that the statute expressly authorizes
charitable donations and places no limit on them other than they be “reasonable.” Applying the
Theodora Holding Corp. v. Henderson reasonableness test, the court found that the donation was
not a waste of Occidental’s corporate assets. The donation was found to be in the range of
reasonableness and not excessive, the court concluded, given Occidental’s net worth, its annual
net income before taxes, and the tax benefits to Occidental for making the donation. Despite the
Court of Chancery’s skepticism as to how shrewd the Occidental’s business decisions were, it
found against the plaintiffs.
Issue: Was Chancery Court conclusion that charitable donations approved by independent
directors are subject to review under the business judgment rule correct?
Holding: Yes. Upholds Chancery Court
Reasoning: Relying on Theodora Holdings’ reasonbleness test and use of BJR rationale, the
Delaware Supreme Court quoted the Vice Chancellor:
“If the Court was a stockholder of Occidental it might vote for new directors, if it
was on the Board it might vote for new management and if it was a member of the
Special Committee it might vote against the Museum project. “
“… gift to the Museum was within the range of reasonableness [Theodora
Holdings ]”
“… Occidental received an economic benefit in the form of good will from the
charitable donation …”
The Supreme Court reviewed the trial court’s acceptance of the settlement under an “abuse of
discretion” standard. Although Justice Holland says he would not have voted for the gift, the
settlement was OK – especially since the chances of proving a breach of fiduciary duty would
have been hard.
5. Shareholders decide?
Shareholders’ Role in Corporate Charity
19
Question: If corporations have the power to make charitable contributions and corporate
directors will rarely be faulted for approving such donations, should shareholders have a role in
deciding how their money is given away?
What can shareholders do when a corporation proposes a charitable contribution they are
dissatisfied with? Is their only option to sell their shares? Should they be given a more active role
in corporate charitable contributions? If so, what might that role be?
Answer: Professors Victor Brudney and Allan Ferrell have proposed that shareholders
should have a greater role in corporate charity. They propose that the board of directors
decide a set amount of money for the corporation to distribute as goodwill contributions
in a particular year. The board would then yield to the shareholders to choose the
beneficiaries of the donation.
Brudney and Ferrell support their idea on several bases.

First, goodwill seeking donations have little effect on company business activities
and selecting beneficiaries requires no special business training or managerial
competence. Such decisions are based on morals and preferences, areas the board of
directors has no monopoly on.

Secondly, Brudney and Ferrell warn that goodwill giving by corporate directors or
executives is often rewarded with intangible personal benefits (such as honors, board
membership, etc.). The authors argue that the benefits go to individuals, not the
corporation itself, and that such individualized benefits do not justify donating to one
recipient rather than another. Worse, it is ultimately the shareholders who lose on such
donations because they are derived from funds that would otherwise be distributable as
dividends or put back in the company.
Victor Brudney and Allan G. Ferrell, Corporate Charitable Giving, 69 U. Chicago L.
Rev. 1191 (2002).
C. Role of Corporate Lawyers in CSR?
Question: What is the proper role of the attorney in CSR.
Answer: Attorneys advise both shareholders and management in their most important
business decisions. Attorneys will also be representing these parties if the results of their
decisions go awry. This places a special importance on intelligent planning and wise
foresight on the part of the corporate attorney.
Below are brief summaries of the answers of three prominent jurists. They can be
simplified as follows:
(1) Morals of the Marketplace: be honest and competent - that’s it,
20
(2) Duty of Independence: show personal integrity and be prepared to walk away,
(3) Lawyer Interdependence: be involved, be moral, stick it out.
(1) Morals of the Marketplace In Justice Potter Stewart’s conception of corporate
ethics, the business lawyer need only observe “the morals of the market place” and
maintain a basic level of honor and professionalism—keeping the trust of clients,
refraining from lying, and eliminating from the legal profession those who have
embarrassed it. Stewart’s first principle for business lawyers is the provision of total
ability and effort, which are qualities shown through professional competence. It is in the
self-interest of lawyers, Stewart argues, to abide by this ethic of competence. Their jobs
depend on it. But they should do no more – questions of business ethics are for business
people. See Potter Stewart, Professional Ethics for the Business Lawyer: the Morals of
the Marketplace, 31 Bus Law 462 (1975)
(2) Duty of Independence. Chancellor William Allen suggests that among other duties,
lawyers owe a duty of independence: “the lawyer’s duty to the legal system itself and to
the substantive values it incorporates.” Allen warns that the zealous advocacy mentality,
so effective in the stage of litigation, can erode the duty of independence in the advisory
context of transaction planning and disclosure. Ultimately, Allen argues, compliance with
the duty of independence is also in the self-interest of lawyers. First, self-critical legal
advice is likely to be better legal advice. Secondly, such compliance can bolster corporate
legitimacy and create a strong bond of trust between lawyers and corporations.
This success results in corporations hiring dependable counsel on a repeated basis, with
lawyers, in turn, continuing to provide the excellent legal advice they have been rewarded
for. Allen Corporate Governance and a Business Lawyer’s Duty of Independence, 33
Suffolk 1 (2004).
(3) Lawyer Interdependence. Professor Richard Painter’s interdependence theory is that
the actions of lawyers and clients are not readily distinguishable, and conduct that is not
distinguishable is generally attributed to both parties. The work of lawyers and
businesspeople in running a corporation is symbiotic, and “neither lawyers nor clients can
effectively perform without cooperation from each other.” This, at heart, is the
interdependence of lawyers and clients. Painter contends that lawyers, who recognize that
they are participants in corporate decision making, and not just advisors to it, are more
likely to attempt to affect corporate conduct with moral considerations. The lawyer
realizes a degree of importance unattainable in the traditional role of remaining
independent from their clients. Painter, The oral interdepedence of corporate lawyers and
their client, Richard Painter, The Moral Interdependence of Corporate Lawyers and Their
Clients, 67 S Cal Rev 507 (1994)
Another source for the answer to the question might be the ABA Model Rules of
Professional Conduct, but they do not answer the question clearly, except to say that
21
lawyers are supposed to be competent, honest and independent. Still, it is not clear when
a lawyer should give CSR advice, walk away, or stick it out.
ABA Model Rules of Professional Conduct
Rule 2.1 Advisor
In representing a client, a lawyer shall exercise independent professional
judgment and render candid advice. In rendering advice, a lawyer may
refer not only to law but to other considerations such as moral, economic,
social and political factors, that my be relevant to the client’s situation.
1. Choices in Corporate Takeover
The James Trains Hypothetical
 You represent James Trains as outside counsel.
 James Trains is a CSR company that makes kids’ toys, but the board has decided the
company has to sell to a bigger firm to stay viable.
 All American Toys, another CSR firm, is interested in buying James Trains, and promises
to keep James Train’s plants and most employees - its bid is 35% over market.
 Two other bids come from (1) Toys of the World, a non-CSR firm that uses child labor but its bid is 40% over market, and (2) Piggy Banks, which proposes a leveraged buyout
that will lead to belt-tightening - its bid is the same as Toys of the World
 You read Delaware case law to require that the board take the highest bid.
Points for Discussion (p. 115)
Question: What is your advice to the board?.
Answer: The ABA Model Rules of Professional Conduct suggest that a lawyer
should render advice based not only on the law, but on moral, economic, social
and political factors as well. That isn’t very helpful.
The ALI Principles of Corporate Governance also do little to resolve the dilemma.
Section 2.01, The Objective and Conduct of the Corporation , is reprinted on p.
116 of the casebook. Section 2.01(a) requires that a corporation follow the law,
but Section 2.01(b) simply provides that ethics can be considered—it does not
require their consideration.
We study the ALI principles and model rules to point out to students that
questions of CSR often go beyond the clear delineations of rules and guideposts,
requiring the corporate lawyer to venture into uncharted territory.
22
2. Legal Arbitage in Multinational Corporation
Exogen Hypothetical
 You represent Exogen as outside counsel.
 The company has a “situation.” OSHA is thinking of banning one of the chemicals used in
the company’s manufacturing process – Durasol.
 The company, however, is about to move its manufacturing to Indonesia. The world is flat.
 The company just needs to buy some time. The general counsel has proposed a nifty legal
campaign – hearings, appeals, and even a trump card that can be played at the end (an
OSHA official’s daughter works for an Exogen competitor!) At least three years in
dilatory tactics.
Question: What options are available to Exogen?
Answer: Exogen’s options include:

Stop all use of Durasol in the United States and elsewhere

Continue use of Durasol, but proceed with caution while looking for
sustainable long-term solutions

Continue use of Durasol and proceed with dilatory tactics, just act with
honesty as Rule 11 requires

Proceed with gusto with both dilatory tactics and continue to use Durasol,
constrained only by the morals of the marketplace
Question: What is your advice to the board?
Answer: As with the James Trains hypothetical, the ALI principles do little to
resolve this dilemma. 2.01(a) requires that a corporation follow the law, but
2.01(b) simply provides that ethics can be considered—it does not require their
consideration.
Similarly, the model rules of Professional Conduct suggest that a lawyer should
render advice based not only on the law, but on moral, economic, social and
political factors as well. That is not very helpful.
Points for Discussion (p.)118
The decisions may look like this:
23
Role of lawyer?
Morals of marketplace –
• Independent (even if in-house counsel) • Interdependent • (Indeterminate) What to do with Durasol?
• Discontinue o and pressure OSHA to ban o and shame/pressure competitors) • Continue to use o while R&D on alternatives o without conditions How to proceed with OSHA?
• Pressure OSHA to ban • Keep on with hearings, though not COI card • Consider risk that will draw attention to Durasol • Possibility of foreign/international regulation • (no clear answer) Who to consider?
• Business reputation (PR when discontinue) • Risks of US and Indonesian employees suing • Shareholders (insurance rising) • Human rights groups Summary
The main points of this chapter are:

The property-social institution debate is not resolved: the modern corporation can be both

Dodge v. Ford, which orders payment of dividends despite the BJR, is not followed and
the result is ambiguous
o The court ordered payment of dividends since the corporation is “for profit of
stockholders” (SWM) but it did not enjoin Ford’s expansion plans because
“judges are not businessmen” (BJR)
o The court seemed to be a social engineer, concerned with Ford Motor’s
dominance in the car business
24

Non-shareholder constituency statutes (and ALI principles) allow boards to take into
account non-shareholder interests – like creditors, employees and communities
o Statutes are permissive and do not compel CSR
o Statues have not been applied

Charitable contributions are OK under corporate law
o Legality: corporate statues allow charity by corporations, even if they do not
increase corporate profits (not ultra vires)
o Propriety: corporate boards exercise fiduciary discretion to give away corporate
money if they believe some long-term corporate benefit will result
o Procedure and reasonableness

Lawyers advising corporate clients represent the corporation
o Role: morals of the marketplace, independent voice, interdependent actor?
o Lawyers can seek to help corporation advance both financial and social interests
25