A Multi-Criteria Assessment of Corporate Residual Claimants

Abstract

Corporate law provides shareholders with key legal protections and rights – including voting and fiduciary duties – by virtue of their status as residual claimants of corporations. This status stems from the observation that shareholders are the parties who receive the residual profits of the corporation. This Article argues that this conventional view of residual claimancy is incomplete because it considers only one of the multiple criteria that should be relevant to the residual claimant analysis. The rationale behind residual claimant analysis is that it seeks to identify the party whose interests are aligned with the corporation’s collective interest, and collective interest should be understood to include not only shareholder profit but also other stakeholders’ interests. And indeed, a review of the history and development of residual claimant theory shows that the residual claimant theory originally contemplated a broad array of stakeholders being the residual claimants of corporations. Depending on which of the theories of rent, interest, wages, or profit was adopted, each of landlord, capitalist, laborer, and entrepreneur have been considered to be the residual claimants of the corporation over time. It was only rather recently that residual claimant analysis hardened into the shareholder primacy norm in corporate law, bolstered by the ascendancy of a single-criterion approach to residual claimancy that focuses only on residual profit. Both the history and the rationale of residual claimant analysis support a more diverse conception of the residual claimant, which strives not only for profit maximization, but also for the other goals underlying the recognition of residual claims, including rewarding effective monitors, preserving firm-specific investments, and protecting undiversified risk bearers. In this Article, I offer a multi-criteria assessment of the residual claimant that seeks to address and balance these broader goals. While this recognition of multiple residual claimant interests will necessarily increase the complexity of the analysis, it is expected to bring the allocation of key legal protections and rights more into line with the recent trend towards incorporating a broader understanding of corporate purpose. Furthermore, as greater emphasis is placed not only on investment capital but also information capital as the driver of corporate value, a more diverse conception of the residual claim which recognizes not only shareholders’ capital investments, but also other stakeholders’ contributions, notably of data, is more aligned with how value is created and sustained in today’s society.