1.
Stephen M. Bainbridge
William D. Warren Distinguished Professor of Law
2014 Cameron Visiting Fellow, University of Auckland Faculty of Law
A Quick Comparison of USA Corporate Law
and New Zealand Company Law
May 19, 2014

2.
Federal Law State Law (Delaware)
Disclosureandprocess
Securities Act of
1933
Primary Market
Securities Exchange
Act of 1934
Secondary Market
SubstantiveCorporate
Governance
Fiduciary duties
Voting rights
Powers of directors
Corporate objective
Corporate Federalism in the USA
2 © Stephen M. Bainbridge

3.
The incorporation process:
Choosing a state of incorporation
3
Paul v. Virginia (US 1869)
A state may not exclude a foreign*
corporation engaged in interstate
commerce
*: Foreign = another state
Alien = another country

4.
The incorporation process:
Choosing a state of incorporation
4

5.
 More than 300,000 companies are incorporated in
Delaware including:
• 60 percent of the Fortune 500
• 50 percent of the companies listed on the New York Stock Exchange
 Why?
• Race to the bottom
– William L. Cary, Federalism and Corporate Law: Reflections on
Delaware, 83 Yale L. J. 663 (1974)
• Race to the Top
– Ralph K. Winter, State Law, Shareholder Protection and the Theory
of Incorporation, 6 J.Leg.Stud 251 (1977)
Delaware’s dominance
5

6.
 No minimum capital requirements
 The need for only one incorporator (a corporation may be the
incorporator)
 Favorable franchise tax in comparison to other states.
 For companies doing business outside of Delaware:
• no corporation income tax
• no sales tax, personal property tax or intangible property tax on
corporations
• no taxation upon shares of stock held by non-residents and no
inheritance tax upon non-resident holders
 A corporation may keep all of its books and records outside of
Delaware and may have a principal place of business/address
outside of the state of Delaware as well
 Highly competent judiciary in company law and extensive and
detailed case law on this subject
Delaware’s dominance
6

7.
The Means and Ends of Corporate Governance
Stakeholders Corporate Objective Shareholders
ShareholdersControlDirectors Shareholder Primacy
Director PrimacyTeam Production
Communitarians
Socially responsible
investor

8.
New Zealand USA
 Companies Act § 131 provides that “a
director of a company, when exercising
powers or performing duties, must act
in good faith and in what the director
believes to be the best interests of the
company.”
• Peter Watts (2012): “While there is no
duty on directors to maximize profit,
there is also nothing to prevent them
doing so.”
• P.M. Vasudev (2012): “The company
statute in New Zealand retains more or
less the traditional principle of
shareholder primacy.”
 Dodge v. Ford Motor Co., 170 N.W.
668, 684 (Mich. 1919):
• 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.
 Katz v. Oak Indus., Inc., 508 A.2d 873,
879 (Del. Ch. 1989):
• “It is the obligation for directors to attempt,
within the law, to maximize the long-run
interests of the corporation’s stockholders.”
The Ends:
The Corporate Objective

9.
Kamin v. American Express (N.Y. Sup. Ct. 1976)Bayer v. Beran (N.Y. Sup. Ct. 1944)
Smith v. Van Gorkom (Del. 1985). Manson v. Curtis (N.Y. 1918).
Marx v. Axers (N.Y. 1996).DGCL § 141(a)
The Means:
Director or Shareholder Primacy?
 “The business and affairs of every corporation organized
under this chapter shall be managed by or under the
direction of a board of directors….”
 “the business judgment rule is the offspring of the
fundamental principle, codified in [Delaware General
Corporation Law] § 141(a), that the business and affairs of a
Delaware corporation are managed by or under its board of
directors. ... The business judgment rule exists to protect and
promote the full and free exercise of the managerial power
granted to Delaware directors.”
 “To encourage freedom of action on the part of directors,
or to put it another way, to discourage interference with
the exercise of their free and independent judgment,
there has grown up what is known as the “business
judgment rule.” “
 “By their very nature, shareholder derivative actions
infringe upon the managerial discretion of corporate
boards. . . . Consequently, we have historically been
reluctant to permit shareholder derivative suits, noting
that the power of courts to direct the management of a
corporation’s affairs should be “exercised with restraint”
The board’s powers are “original
and undelegated.”
 “The directors’ room rather than the courtroom is the
appropriate forum for thrashing out purely business
questions which will have an impact on profits, market
prices, competitive situations, or tax advantages.”

10.
NZ USA
1. Allows shareholders to give “themselves the
right to select the company’s CEO” (Watts
2012)
2. Allows shareholders to remove “from
directorial control the majority, if not all
parts, of business decision making” (Watts
2012)
3. Requires shareholder approval of “major
transactions.” (§ 129)
4. Shareholders with > 5% of voting power can
call a special meeting. (§ 121)
5. Shareholders can petition court to order
special meeting. (§ 123)
6. If constitution of company so provides,
shareholders can pass binding resolutions
relating to management of company. (§
109)
1. CEO selection a board prerogative. (MBCA § 8.40)
2. Limits on board managerial power allowed in closely
held corporations but only by unanimous
shareholder agreement. (MBCA § 8.01)
3. Shareholder approval only of fundamental
transactions (e.g., mergers or sales of substantially
all assets).
4. Shareholders with > 10% of voting power can call a
special meeting. (MBCA § 7.02)
a. Threshold can be raised to 25%
b. Delaware allows elimination of shareholder right to
call a special meeting.
5. Court can only order special meeting if annual
meeting has not been held within 15 months of last
meeting. (MBCA § 7.03)
6. Shareholder resolutions on ordinary business
matters can be excluded from proxy statement. (SEC
Rule 14a-8)
a. Shareholder resolutions infringing on substantive
managerial power improper. CA v. AFSCME (Del.
2010)
Comparing New Zealand Company Law to U.S. Corporate Law

11.
NZ USA
 Takeovers Code Rule 38(1):
“If a code company has received a takeover
notice or has reason to believe that a bona fide
offer is imminent, the directors of the company
must not take or permit any action, in relation
to the affairs of the code company, that could
effectively result in—
(a) an offer being frustrated; or
(b) the holders of equity securities of the code
company being denied an opportunity to
decide on the merits of an offer.
 Unitrin, Inc. v. American General Corp. (Del.
1995):
“When a corporation is not for sale, the board
of directors is the defender of the metaphorical
medieval corporate bastion and the protector
of the corporation's shareholders. The fact that
a defensive action must not be coercive or
preclusive does not prevent a board from
responding defensively before a bidder is at the
corporate bastion's gate.”
Comparing New Zealand Company Law to U.S. Corporate Law

12.
The domain of director
primacy is principally
public corporations
The domain of director
primacy is defined by
separation of
ownership and control
Assume shareholder primacy is “alive and well” in New Zealand company law (Watts 2012):
The domain of director primacy
New Zealand only has about 150 listed companies (i.e., public corporations).
• 95% of listed companies are small or medium-sized enterprises.
New Zealand companies characterized by concentrated ownership:
• “Majority control companies increased from 7% in 1974 to 22.1% in 1981, and
management control companies decreased from 48.8% to 30.4% over the same
period.” (Fox et al. 2012)
‒ Contemporaneous with adoption of Companies Act 1993

13.
Consensus Authority
Arrow’s models
 Collective decision making
• E.g., partnerships
 Central decision making
body
• E.g., public corporation

14.
“Cheaper and more
efficient to transmit
all the pieces of
information to a
central place” that
makes “the
collective choice and
transmit it rather
than retransmit all
the information on
which the decision is
based”
Asymmetric information
Divergent interests
Collective action
problems
When to opt for authority

15.
Choosing
Director Primacy, if:
Many large public corporations
Dispersed shareholders
Shareholder Primacy, if:
Few large public corporations
Concentrated shareholders