I am greatly honored to be invited to speak to such a distinguished audience of scholars at this highly regarded law school. Because I am not an academic, and, in the scholarly realm, more of a dilettante, my comments may more appropriately be regarded as light luncheon entertainment. All I bring to the table is the perspective of a judge. For eighteen years, before I went on the Delaware Supreme Court, I was a Court of Chancery trial judge, where many of the cases I decided were corporate law, and more specifically, fiduciary duty disputes. I still do that, but not as much, since the Court of Chancery is only one of three courts from which my current court hears appeals. The upside, though, is that being an appellate judge gives one the luxury of more time to think deeply. Appellate courts, unlike trial courts, do not have to operate in "real time."
From that perspective, I would like to share with you some thoughts about a subject that I hope will interest you as legal scholars. The subject is the ongoing vitality of the implicitly empirical corporate law model (or profile) of the shareholder base of publicly held U.S. companies. What do I mean by that? For a long time, courts have implicitly assumed a portrait of shareholders that has driven our corporate law jurisprudence. Our decisions often speak of "the shareholders," and the duties that officers and directors owe to "the shareholders."' But those cases rarely, if ever, explicitly identify precisely whom we are talking about. Shareholders, as we all know, come in many sizes, shapes, and flavors.
Since the early 1930s when the federal securities laws were enacted, the implicit portrait or model underlying our corporate law decisions has been that of a diffuse, disaggregated group of retail ("mom and pop") shareholders who, although educated and intelligent, are financially unsophisticated and lack the power and motivation to influence corporate governance or policy. Implicit in that picture was the notion that those shareholders were long-term oriented, meaning they were content to receive a return on their risk capital over the longer term. It is that implicit, unstated portrait - that public company shareholders as a group are unable to act collectively to protect themselves2 - which underlies the cardinal corporate law principle that courts must be the agency to protect shareholders against overreaching fiduciaries.
My thesis today is that, however accurate that model may have been in the past, it is now inconsistent with the reality on the ground and has been for some time. Our capital markets are now "deretailized." Today, the shareholder base of U.S. public companies consists of highly-sophisticated institutions that have the resources and power - both economic and legal - to act collectively and influence governance. These institutions are also highly short-term oriented. The question becomes: what implications does this new reality have for the formulation and application of judge-made fiduciary duty principles? My hope is to persuade you, as corporate law scholars, that this subject merits your attention.
My talk comes in two parts. The first will flesh out this new shareholder reality and how it came about. The second will ponder what effect, if any, it may have for corporate law theory and judicial decisionmaking.
THE NEW REALITY
Our current shareholder model evolved from a reality that arose in the wake of World War II. After 1945, the U.S. economy experienced its historically highest level of growth. That led to the emergence of the American middle class, which, in turn, generated unprecedented and widespread investments in our capital markets by retail, "mom and pop," investors who typically purchased shares in relatively small blocks. As noted, those shareholders were widely dispersed, were unable to act collectively to influence management or governance policy,3 and had a long-term investment horizon. …