Fundamental Corporate Changes, Minority Shareholders, and Business Purposes

Abstract

In an effort to promote business flexibility and efficiency, corporation law has moved from a rule of unanimous shareholder consent to simple majority rule for fundamental changes. A strong utilitarian theme runs through much of the discussion of this change—that some individual hardship might be necessary in order to promote group welfare. But the creation of power in the majority to effect such changes also created the power to squeeze out the minority through self-dealing. While the business-purpose test has been developed to preserve the goal of group wealth maximization, in practice it bears little relationship to this goal. The test provides no means for measuring the costs and benefits of a fundamental change, and attempts to judge what are proper or improper business purposes intrude on the domain of business judgment. The assumption that all decisions reached by a disinterested majority maximize aggregate welfare is based on a logical fallacy, so that not even arm's-length transactions approved by a majority are free from risks of inefficiency. Further development of judicial restraints on majority rule promises little in the way of efficiency, and a re-examination of alternative rules of group decision making is required.