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Published online by Cambridge University Press: 24 January 2025
To say that managers should be accountable to the market only begins the analysis. The problematic downside to this glib norm is that a volatile market can be a fickle master who may regularly override the superior judgment of his manager-servant. Thus, the central question from a public law perspective is how much accountability is too much.
John C Coffee, Jr
The last two decades of corporate law scholarship in the United States have been marked by the ascendancy of law-and-economics research, the centrepiece of which is the contractarian theory of the corporation and the corporate law. Contractarians seek to explain the corporation as the focal point for a process of contracting between various constituencies. Contractarians explain corporate law as a corpus of “default rules” which fills gaps where these contracts are less than fully specified, but which can be excluded by the parties.
The authors wish to thank Stephen Bottomley, Ian Ramsay, Tracey Rowland, Stuart Rowland, John Seymour, and two anonymous referees for helpful comments; and Michelle Lowe and Oliver Bennett for their research assistance.
1 J Coffee, “Shareholders Versus Managers: The Strain in the Corporate Web” (1986) 85 Mich L Rev l at 109.
2 The key exposition of contractarian theory is F Easterbrook and D Fischel, The Economic Structure of Corporate Law (1991). A somewhat different view is articulated in H Butler and L Ribstein, “Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians” (1990) 65 Wash L Rev l.The implications of the concept were explored in a series of papers published in Symposium, “Contractual Freedom in Corporate Law” (1989) 89 Colum L Rev 1395. The concept of the corporation-as-contract has its origins in R Coase, “The Nature of the Firm” (1937) 4 Economica 386, which provided the impetus for a neo-classical theory of the firm in A Alchian and H Demsetz, “Production, Information Costs and Economic Organization” (1972) 62 Amer Econ Rev 777 and M Jensen and W Meckling, “Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure” (1976) 3 J Fin Econ 305. The first, and still the most trenchant critique of the theory is V Brudney, “Corporate Governance, Agency Costs, And The Rhetoric Of Contract” (1985) 85 Colum L Rev 1403; see also R Clark, “Agency Costs versus Fiduciary Duties” in J Pratt and R Zeckhauser (eds), Principals and Agents: The Structure of Business (1991) 55. An overview of the theory's place in corporate law scholarship is W Bratton, “The 'Nexus of Contracts' Corporation: A Critical Appraisal” (1989) 74 Cornell L Rev 407.
3 The notion of law as a means of filling incomplete contracts has its origin in R Coase, “The Problem of Social Cost” (1960) 3 J L & Econ l.An economic theory of default rules is developed in I Ayres and R Gertner, “Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules” (1989) 99 Yale LJ 87; I Ayres and R Gertner, “Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules” (1992) 101 Yale LJ 729; R Craswell, “Contract Law, Default Rules, and the Philosophy of Promising” (1989) 88 Mich L Rev 489; C Gillette, “Commercial Relationships and the Selection of Default Rules for Remote Risks” (1990) 19 J Leg Stud 535; A Schwartz, “Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies” (1992) 21 J Leg Stud 271; R Scott, “A Relational Theory of Default Rules for Commercial Contracts” (1990) 19 J Leg Stud 597.
4 See, eg, W Cary, “Federalism and Corporate Law: Reflections upon Delaware” (1974) 83 Yale LJ 663; V Brudney and M Chirelstein, “Fair Shares in Corporate Mergers and Takeovers” (1974) 88 Harv L Rev 297.
5 See generally M Jensen and W Meckling, above n 2.
6 Privatisation refers to the process of transfer of management of and property rights in publicly owned operations to the private sector. Privatisation has been employed as one of a number of means for improving government service delivery, including corporatisation and contracting out, all of which centre on the imposition of market-based regimes of efficiency. As an indication of current thinking regarding privatisation at Federal level, the National Commission of Audit recently recommended that the Federal government should “shut down or sell public sector assets [including business enterprises] where there appears to be no public interest reason for continued government ownership”: National Commission of Audit, Report to the Commonwealth Government (1996) at 25. The general focus on improving efficiency by subjecting the public sector to market processes is also revealed in the Industry Commission (now the Productivity Commission) report into Competitive Tendering and Contracting by Public Sector Agencies (1996). Cf Economic Planning Advisory Commission, Private Infrastructure Task Force Report (1995). See also Symposium, “Competitive Tendering and Contracting” (1996) 81 Canb Bull Pub Admin l.
7 Legislation enabling the privatisation of one-third of Telstra was passed by the Federal Parliament on 13 December 1996 in the form of the Telstra (Dilution of Public Ownership) Act 1996. See also A Davies, “Senate passes Telstra sale bill almost intact”, Sydney Morning Herald, 12 December 1996, 2. The legislation reserves the power to the Minister for Communications to direct the Telstra Board to act in the “national interest”.
8 J Hill, “At the Frontiers of Labour Law and Corporate Law: Enterprise Bargaining,Corporations and Employees” (1995) 23 f L Rev 204 at 204.
9 I Ramsay, “Company Law and the Economics of Federalism” (1990) 19 f L Rev 169; I McEwin, “Public Versus Shareholder Control of Directors” (1992) 10 C & SLJ 182; M Byrne, “An Economic Analysis of Directors' Duties in Favour of Creditors” (1994) 4 Aust J Corp L 275; B McCabe, “The Roles and Responsibilities of Company Directors in a Takeover”(1994) 4 Aust J Corp L 36; M Whincop, “Gambotto v. WCP Ltd: An Economic Analysis of Alterations to Articles and Expropriation Articles” (1995) 23 ABLR 276 (Gambotto); M Whincop, “A Theoretical and Policy Critique of the Modern Reformulation of Directors' Duties of Care” (Duties of Care); M Whincop, “Developments in Directors' Statutory Duties of Honesty and Propriety” (1996) 14 C & SLJ 157 (Honesty and Propriety); M Whincop, “An Economic Analysis of the Criminalisation and Content of Directors' Duties” (1996) 24 ABLR 273 (Criminalisation); M Whincop, “Insider Trading, Property Rights and Market Microstructure: The Case of Primary Securities Markets Transactions” (1996) 7 JBFLP 212 (Insider Trading); M Whincop, “Due Diligence in SME Fundraising: Reform Choices, Economics and Empiricism” (1996) 19 UNSWLJ 433 (Due Diligence); J Mannolini, “Creditors' Interests in the Corporate Contract: A Case for the Reform of our Insolvent Trading Provisions” (1996) 6 Aust J Corp L 14; R Campbell, “Opportunistic Amendment of the Corporate Governance Contract” (1996) 14 C & S LJ 200.
10 A governance structure might be thought of as the collective means by which parties to contracts (including webs of contracts such as corporations) protect themselves from hazards to the integrity of exchange:O Williamson, The Mechanisms of Governance (1996) at 5.
11 J Farrar and B McCabe, “Corporatisation, Corporate Governance and the Deregulation of the Public Sector Economy” (1995) 6 Pub L Rev 24.
12 M Friedman, Essays in Positive Economics (1953); R Nelson and S Winter, An Evolutionary Theory of Economic Change (1982); G Priest, “The Common Law Process and the Selection of Efficient Rules” (1977) 6 J Leg Stud 65; P Rubin, “Why is the Common Law Efficient?” (1977) 6 J Leg Stud 51.
13 M Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (1994); M Roe, “Chaos and Evolution in Law and Economics” (1996) 109 Harv L Rev 641; R Gilson, “Corporate Governance and Economic Efficiency: When do Institutions Matter?” (1996) 74 Wash ULQ 327.
14 We acknowledge the profound problems of dividing public from private: see A Wolfe, “The Modern Corporation: Private Agent or Public Actor?” (1993) 50 Wash & Lee L Rev 1673. Accordingly, our analysis concentrates on change towards one or the other of the ends of a public/private continuum.
15 See below text accompanying n 108.
16 P Finn, “Public Trust and Public Accountability” (1994) 3 Grif L Rev 224. Public administration has been dominated since the early 1980s by the “New Managerialism”, which has been concerned with improving accountability and efficiency. Public sector policy and practice seek to import market conditions by imposing contestability and increasing consumer choice in selection of products (including management): National Commission of Audit, above n 6, ch 2. See generally OECD, Governance in Transition: Public Management Reforms in OECD Countries (1995).
17 Sealy also has noted these trends in corporate law, arguing that the review of director
decision-making has become more interventionist, and has shifted from an emphasis on bona fides to proper purpose: see L Sealy, '"Bona Fides' and 'Proper Purposes' in Corporate Decisions” (1989) 15 Monash ULR 265. Sealy notes a parallel between this new law and the growth of judicial review of administrative decision making: ibid at 265-6.
18 This assumption rests on basic liberal concerns regarding the tension between individual freedom and state regulation, and is given practical effect in what Raz describes as “closure rules”: J Raz, The Authority of Law: Essays on Law and Morality (1979) at 61, 72 and 75-7. In the case of individuals, the closure rule operates as a presumption that anything which is not prohibited is permitted (to be contrasted with the closure rule applying to the state and its agents, which is that everything is prohibited which is not permitted): see the discussion in C Sampford, “Law, Insitutions and the Public/Private Divide” (1991) 20 F L Rev 185 at 201. Liberal theory equates private bodies with individuals, and so private bodies take the benefit of this presumption. See below text accompanying nn 88-89.
19 For discussions of accountability in the context of economic regulation, see, eg, S Bottomley, “Regulating Government-Owned Corporations: A Review of the Issues” (1994) 53 Aust J Pub Admin 521; J Coates, “Government-Owned Companies and Subsidiaries: Issues in Accounting, Auditing and Accountability” (1990) 49 Aust J Pub Admin 7; M Taggart, “The Impact of Corporatisation and Privatisation on Administrative Law” (1992) 51 Aust J Pub Admin 369 (Impact); M Taggart, “Corporatisation, Privatisation and Public Law” (1991) 2 Pub LR 77 (Corporatisation).
20 For example, A Alchian, “Some Economics of Property Rights” (1965) 30 II Politico 816; A Alchian and R Kessel, “Competition, Monopoly and the Pursuit of Pecuniary Gain” in Aspects of Labor Economics (1962) 157; H Demsetz, “Towards a Theory of Property Rights” (1967) 57 Amer Econ Rev 347; H Hansmann, 'The Role of Nonprofit Enterprise” (1980) 89 Yale LJ 835.
21 For a critique of this concept, see E Brody, “Agents Without Principals: The Economic Convergence of the Nonprofit and For-Profit Organizational Forms” (1996) 40 NYL Sch L Rev 457.
22 A residual claim is an interest in the assets and cash flows of the corporation after the discharge of the claims of those contracting for fixed returns (such as employees, lenders,and suppliers). The shareholders are the residual claimants in a corporation: see generally A Alchian and H Demsetz, above n 2; W Klien, “The Modern Business Organization: Bargaining Under Constraints” (1982) 91 Yale LJ 1521 at 1521-1522. Taxpayers come closest to being the residual claimants in a state-owned bureaucracy.
23 In the corporation, managers may capture some of the wealth effects of their management by holding shares. Nonetheless, the fraction of the corporation the manager holds will generally be small. Further, any motivating effect of shareholding may be confounded by the actions of other managers: see A Alchian and H Demsetz, above n 2; F Easterbrook and D Fischel, “The Proper Role of a Target Management in Responding to a Tender Offer” (1981) 94 Harv L Rev 1161 at 1172. Financial economists have demonstrated the inefficiency of significant shareholdings by managers. See below text accompanying nn 49-50.
24 A Alchian, above n 20 at 822-828; A Hirschman, Exit Voice and Loyalty (1970); W Baxter,“Enterprise Liability, Public and Private” (1978) 42 L & Contemp Probs 45.
25 The disjunction between shares and conventional property rights has been a cogent theme in corporate law: see A Berle and G Means, The Modern Corporation and Private Property (rev ed 1968) at 245-250. Compare A Alchian, above n 20 at 826-827. Contractarian theory denies the significance of the disjunction, by asserting that markets control managerial discretion.
26 J Farrar and B McCabe, above n 11.
27 Contractarian theory grew out of property rights economics. Both partake of similar neo-classical economic method. Property rights economics is dominated by its study of the incentives of “owners”; whereas contractarian theory is more responsive to explaining, justifying and, at limes, de-emphasising the management-controlled corporation.
28 Because agency theory is a general theory, bipartite relations are characterised as being between principal and agent. The agent exercises some discretionary power which has wealth effects on the principal. The principal's control over, and ability to observe, the agent are imperfect. Thus, in the shareholder-manager relation, the shareholders are the principals, the managers are the agents. Obviously, the theory does not rely on any legal concept of agency: R Clark, above n 2.
29 See generally K Arrow, “The Economics of Agency” in J Pratt and R Zeckhauser, above n 2,37; E Fama, “Agency Problems and the Theory of the Firm” (1980) 88 J Pol Econ 288; M Jensen and W Meckling, above n 2.
30 See generally E Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” (1970) 25 J Fin 383; E Fama, “Efficient Capital Markets II” (1991) 46 J Fin 1575; J Gordon and L Kornhauser, “Efficient Markets, Costly Information and Securities Research” (1985) 60 NYU L Rev 761.
31 This is what it means for a market to be efficient: prices need not be “correct”, but as information becomes available, its implications for price should be realised in a timely way and without systematic under-estimation or over-estimation. If the pricing process is unbiased, the risk of error can be eliminated by holding a diversified portfolio of securities.
32 J Farrar and B McCabe, above n 11 at 34-36.
33 Farrar and McCabe's other arguments that do not concern market monitoring are tenuous(ibid at 34). First, they assert that governments will be more closely monitored than entities in the private sector. They treat this extra monitoring as necessarily inefficient. However, less should be expended to monitor government organisations, because opportunities to profit from expenditure on information are minimal. Following the property rights economics model, there is no market to trade in the residual claims of the public entity: see references inn 24 above; A Alchian, above n 20 at 823; R Cass, “Privatisation: Politics, Law and Theory” (1988) 71 Marq L Rev 449 at 481; A Downes, An Economic Theory of Democracy (1957). The prediction of inefficient over-monitoring is genuinely strange, if one assumes (as economists do) that people act according to rational expectations. It would require that private gains of monitoring are greater than social gains, a result we do not profess to understand. Second, Farrar and McCabe argue that auditors will be more inefficient in the public sector. The notion that auditors feel a sense of duty to taxpayers collapses in the face of the agency analysis employed by Farrar and McCabe: auditors are rational utility maximisers, not altruists.
34 Economists argue that managers will refrain from opportunistic self-interest because it will negatively affect the value of their human capital as managers. Managers have incentives to act in the interests of residual claimants because to do so increases the value of that capital: see generally E Fama, above n 29. But cf B Black, “Is Corporate Law Trivial?: A Political and Economic Analysis” (1990) 84 Nw UL Rev 542 at 579, describing the Fama model as “plain wrong” because chief executives tend not to be mobile.
35 There should be no differentiation because the same managers compete simultaneously to manage private and public hierarchies.
36 The product market is the market in which an enterprise sells its products and services to customers. If a market is not monopolistic (as is the case for some public, and a few private services), a corporation that cannot supply products and services at a competitive price will exit the market because it will be unable to earn a sufficient return on invested capital.
37 J Farrar and B McCabe, above n 11 at 32.
38 See generally P Starr, “The Meaning of Privatisation” (1988) 6 Yale L & Pol Rev 6 at 18; J Foreman-Peck, “The Privatisation of Industry in Historical Perspective” (1989) 16 129 J L & Soc at 143; S King, “Competition: The Missing Link in Australia's Privatisation Program” (1995) 10 Policy 12 at 14-16; J Kay and D Thompson, “Privatisation: A Policy in Search of a Rationale” (1986) 96 Econ J 18; S Domberger and J Piggott, “Privatisation Policies and Public Enterprise: A Survey” (1986) 62 Econ Record 145; W Howard, “Privatisation and Management” (1989) Aust Q 87 at 104. For a contrary view, see W Megginson, R Nash and M Van Randenborgh, “The Financial and Operating Performance of Newly Privatised Firms: An International and Empirical Analysis” (1994) 49 J Fin 403. Chicago school economists have argued that the problem of technical monopoly can be resolved by means of the state conducting a form of franchise bidding for the right to the monopoly: see H Demsetz, “Why Regulate Utilities?” (1968) 11 J L & Econ 55; R Posner “The Appropriate Scope of Regulation in the Cable Television Industry” (1972) 3 Bell J Econ 98. However, Williamson has pointed out that this can create ex post contracting problems: see O Williamson, above n 10 at 85-86.
39 P Starr, above n 38 at 18.
40 See, eg, S King, above n 38 at 15.
41 For an explanation of the Kaldor-Hicks criterion, see M Polinsky, An Introduction to Law and Economics (2nd ed, 1989) at 7-10 and 119-130; R Posner, Economic Analysis of Law (4th ed, 1992) at 12-16. Before one can conclude such a change is efficient in this sense, one must consider the transaction costs of liberalisation (eg, the costs of a public share offering or the costs associated with any new regulatory bodies).
42 G Calabresi, “The Pointlessness of Pareto: Carrying Coase Further” (1991) 100 Yale LJ 1211 at 1221-1228 (critiquing Kaldor-Hicks as a sufficient basis for policy).
43 See, eg, R Epstein, “An Outline of Takings” (1986) 41 U Miami L Rev 3.
44 D McGrory, “Privatisation in the United Kingdom and Economic Regulation in the United States: Lessons in Administrative Law” (1989) 11 Liverp L Rev 117 at 123.
45 For analysis of the incentive problems faced by regulated, private firms, see J Laffont and J Tirole, “Privatisation and Incentives” (1991) 7 J L Econ & Org 84; T Olsen and G Tosvik, “The Ratchet Effect in Common Agency: Implications for Regulation and Privatisation” (1993) 9 J L Econ & Org 136. See also R Maddock, “Reforming Australia's Utilities: Deregulation and Reregulation” (1993) 9 Policy 14.
46 See above text accompanying n 24. Residual claims are defined above inn 22.
47 That judgment, as a means of assessing management performance, is nonetheless “noisy”,because management's contribution to rises and falls in stock price may be dominated by factors for which they are not responsible: see D Diamond and R Verecchia, “Optimal Managerial Contracts and Equilibrium Securities Prices” (1982) 37 J Fin 275 and L Stout, “The Unimportance of Being Efficient: An Economic Analysis of Stock Market Pricing and Securities Regulation” (1988) 87 Mich L Rev 613 at 678-681.
48 A share price depressed by inefficient management may lead to a takeover. This market for “corporate control” is discussed separately, as per Farrar and McCabe's analysis: see below text accompanying nn 70-79.
49 If the corporation enters insolvency, the manager's reputation is substantially injured. See generally K Arrow, above n 29 at 44-5; R Kraakman, “Corporate Liability Strategies and the Costs of Legal Controls” (1984) 93 Yale LJ 857 at 858-867; J Coffee, above n 1. See also above text accompanying n 23.
50 M Jensen and K Murphy, “Performance Pay and Top Management Incentives” (1990) 98 J Pol Econ 225; J Coffee, “No Exit?: Opting Out, the Contractual Theory of the Corporation, and the Special Case of Remedies” (1988) 53 Brooklyn L Rev 919 at 942-950; L Stout, above n 47 at 644-651. It has been argued that the ability of managers to affect their compensation unilaterally by undetectable insider trading causes problems for “bonding” in private corporations: R Haft, “The Effect of Insider Trading Rules on the Internal Efficiency of the Large Corporation” (1982) 80 Mich L Rev 1051; M O'Connor, “Toward a More Efficient Deterrence of Insider Trading: The Repeal of Section 16(b)” (1989) 58 Fordham L Rev 309 at 342-346. This is not a problem in public enterprise, where there are no shares to be traded.
51 See above text accompanying n 30-31.
52 M Jensen and W Meckling, above n 2; E Fama, above n 29.
53 V Brudney, above n 2; R Clark, above n 2. These authors critique the notion that capital markets function in a way which enables corporate governance to be treated as if it had a contractual basis between shareholders and managers. Brudney's critiques also attacks claims that capital markets provide strong, efficient monitoring of firms whose securities are traded.
54 J Coffee, above n 50 at 935-936. Compare H Butler and L Ribstein, above n 2 at 33-42. While the management team of the privatised enterprise may be better known than that of other initial public offerors, privatisation nonetheless involves considerable uncertainty. Its proponents have sketched privatisation as a profound restructuring of all aspects of the enterprise's management. Moreover, if each enterprise is a monopolist, market participants will have less experience with the pricing of securities in comparable firms.
55 G Akerlof, “The Market for 'Lemons': The Quality of Uncertainty and the Market Mechanism” (1970) 84 Q J Econ 488. This situation provides a sound economic reason not to privatise, as full value for the business would not be obtained: see below text accompanying nn 62-65. For evidence of mis-pricing of initial public offerings, see T Loughran and J Ritter, “The New Issues Puzzle” (1995) 50 J Fin 23 (US evidence); P Lee, S Taylor and T Walter, Australian IPO Pricing in the Short and Long Run, Working Paper No 94/6 (University of Sydney, Accounting Department, 1994) (Australian evidence). This evidence looks at returns generally, not at the pricing of “terms”. For a review of the implications of this evidence, see M Whincop, “Due Diligence”, above n 9 at 445-448.
56 Share offerings make an almost trivial contribution to the financing of publicly held corporations: see W Baumol, The Stock Market and Economic Efficiency (1965) at 69-70 (firms try to, and do avoid the direct disciplining influences of the market) and L Stout, above n 47. There is also a subtler point that while capital markets may be efficient, in the sense that information may be rapidly realised in prices, the relationship between this “speculative efficiency” and the efficiency of resource allocation is unclear: J Gordon and L Kornhauser, above n 30 at 825-830. This point qualifies Farrar and McCabe's reliance on markets as the basis for superior governance of resource allocation.
57 M Eisenberg, “The Structure Of Corporation Law” (1989) 89 Colum L Rev 1461 at 1515.
58 To put it another way, if the government is capable of designing an efficient governance structure, why should it bother privatising? Cf P Jackson and C Price, Privatisation and Regulation: A Review of the Issues (1994) at 11.
59 See below text accompanying nn 70-77.
60 J Farrar and B McCabe, above n 11 at 32, footnote 33. The subsequent offering may never happen.
61 J Gordon, 'The Mandatory Structure of Corporate Law” (1989) 89 Co/um L Rev 1549 at 1573- 1575.
62 J Shearmur, “Public Choice, Contracting Out and Communitarianism,” (1988) 71 Marq L Rev 445; C Gillette, “Who Puts the Public in the Public Good?: A Comment on Cass” (1988) 71 Marq L Rev 534 at 540-541; P Dunleavy, “Explaining the Privatisation Boom: Public Choice versus Radical Approaches” (1986) 64 Pub Admin 13; G Priest, “The Aims of Privatisation” (1988) 6 Yale L & Pol Rev 1 at 3.
63 C Hamilton, “Assessing the Arguments for Privatisation” (1995) 72 Curr Affs Bull (No 3) 14.Underpricing is well documented in the private sector as well: F Finn and R Higham, “The Performance of Unseasoned New Equity Issues-Cum-Stock Exchange Listings in Australia” (1988) 12 J Bank & Fin 333; I Ramsay and B Sidhu, “Underpricing of Initial Public Offerings and Due Diligence Costs: An Empirical Examination” (1995) 13 C & SLJ 186.
64 C Hamilton, above n 63; J Quiggin, Does Privatisation Pay?, Discussion Paper Number 2(The Australia Institute: Canberra, 1994). See also J Vickers and G Yarrow, Privatisation: An Economic Analysis (1988) at Table 7.1.
65 See above text accompanying nn 38-40.
66 The borrower-lender relationship can also be analysed as an agency relationship, the creditor being the principal, the borrower the agent. The borrower is the agent because the borrower has discretion in using the finance: M Jensen and W Meckling, above n 2; C Smith and J Warner, “On Financial Contracting: An Analysis of Bond Covenants”(1979)6 J Fin Econ 117.
67 See, eg, S Myers, “Determinants of Corporate Borrowing” (1977) 4 J Fin Econ 147; M Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers” (1986) 76 Amer Econ Rev 323.
68 J Coffee, above n 1 at 20-22.
69 M Jensen, above n 67.
70 J Farrar and B McCabe, above n 11 at 32, 36.
71 B Black, “Bidder Overpayment in Takeovers” (1989) 41 Stan L Rev 597; G Jarrell et al, “The Market for Corporate Control: The Empirical Evidence Since 1980” (1988) 2 J Econ Persp 49.
72 V Brudney, above n 2 at 1425.
73 See F Easterbrook and D Fischel, above n 23 at 1175-1176; D Fischel, “Efficient Capital Market Theory, The Market for Corporate Control and the Regulation of Cash Tender Offers” (1987) 57 Texas L Rev 1 at 30. For a critique of the market for corporate control as a discipline on corporate governance, see J Coffee, “Regulating the Market for Corporate Control: A Critical Assessment of the Tender Offer's Role in Corporate Governance” (1984) 84 Colum L Rev 1145 at 1203-1204.
74 H Manne, “Some Theoretical Aspects of Share Voting” (1964) 64 Colum L Rev 1427; A Alchian, above n 20 at 825; F Easterbrook and D Fischel, above n 2, ch 5.
75 A collective action problem implies that the achievement of something for the collective good of a group is hindered by the structure of the group itself. This can occur where the number of members in the group is large. If co-ordination of the group is costly, a common good may not be achieved because individual members lack sufficient incentives to attain the good personally: M Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (2nd ed, 1971); B Black, “Shareholder Passivity Re-examined” (1990) 89 Mich L Rev 520.
76 See, eg, Government-Owned Corporations Act 1993 (Qld), s 94; State Owned Enterprises Act 1992 (Vic), s 30. For anecdotal evidence, see R Wettenhall and I Beckett, “Movement in the Public Enterprises and Statutory Authority Sector” in J Halligan and R Wettenhall (eds), Hawke's Third Government (1991), ch 8 at 222-224 (expeditious removal of the former Managing Director of OTC, George Maltby). The termination of public officials' appointments depends on a number of issues, including whether the employee is the holder of an “office”, the legislation governing the appointment, and the terms of the contract of employment: E Campbell “Termination of Appointments to Public Offices” (1996) 24 FL Rev 1.
77 H Demsetz, “Information and Efficiency: Another Viewpoint” (1969) 12 J L & Econ 1 at 1-3.Cf M Eisenberg, above n 57 at 1525-1526.
78 C Graham and T Prosser, “Privatising Nationalised Industries: Constitutional Issues and New Legal Techniques” (1987) 50 MLR 17; M Taggart, “Corporatisation”, above n 19. The retention of the golden share may reflect naive beliefs amongst the public that “the people's assets” should stay in the hands of “the people” (ie, in the hands of a wide group of diversified shareholders), not those of a single entity. Such a belief fails to acknowledge that such a situation permits real control to remain in management's hands, not “the people's” hands.
79 See above text accompanying nn 62-65.
80 See above text accompanying nn 38-45, 62-65.
81 J Farrar and B McCabe, above n 11 at 43.
82 F Easterbrook and D Fischel, above n 2 at 91; D Fischel, “Insider Trading and Investment Analysts: An Economic Analysis of Dirks v. Securities and Exchange Commission” (1984) 13 Hofstra L Rev 127 at 130-131.
83 M Eisenberg, above n 57 at 1525.
84 See, eg, D Bos, Privatization: A Theoretical Treatment (1991) at 7-8, T Frankel, “Symposium: A Recipe for Effecting Institutional Changes to Achieve Privatization: Foreword” (1995) 13 Boston Uni Int LJ 295 at 299-300. Political parties do not have to “buy” the government, as a bidder might, in the market for corporate control. Politicians holding offices in the executive government therefore rarely accrue significant wealth effects from their own policy decisions. Their attenuated property rights in the assets they manage lead to inefficient resource allocation. Additionally, government decision-making may be unnecessarily risk averse, because politicians' human capital is not diversified. Government-owned corporations legislation sometimes reserves a power to the Minister to direct the Board to take a decision which the Board considers is not in the commercial interests of the corporation: see, eg, State Owned Corporations Act 1989 (NSW), s 11. A similar power is reserved to the Minister under the Telstra privatisation legislation: see aboven7.
85 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 134 per Greer LJ.
86 For an early economic analysis of why the discretion of public decision-makers should be more restricted, see A Alchian, above n 20 at 827-828. Administrative review is seen by some as a major source of inefficiency in public management: R Cole, “The Public Sector: The Conflict Between Accountability and Efficiency” (1988) 47 Aust J Pub Admin 223. Cf M Allars “Private Law but Public Power: Removing Administrative Law Review from Government Business Enterprises” (1995) 6 Pub L Rev 44.
87 This is based on the centrality of the protection of individual liberties in liberal theory and is reflected in the “closure” rule which applies to public entities: that is, anything which is not permitted is proscribed: see above n 18.
88 See generally G Frug, “The Ideology of Bureaucracy in American Law” (1984) 97 Harv L Rev 1277.
89 See, eg, F Hayek, The Constitution of Liberty (1960) at 258-262; 3 F Hayek, Law, Legislation and Liberty (1979) at 77-89. Hayek excluded private monopolies from this view.
90 See, eg, H Butler and L Ribstein, above n 2 at 8-10, R Hessen, “A New Concept of Corporations: A Contractual and Private Property Model” (1979) 30 Hastings LJ 1327. The same point has been made by at least one Australian “contractarian” scholar: see J Mannolini, above n 9 at 17.
91 See, eg, Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 171-172; Nicholson v Permakraft (NZ) Ltd (in liq) (1985) 3 ACLC 453 at 459. In constitutional cases, see Bank of NSW v The Commonwealth (1948) 76 CLR 1 at 202 per Latham CJ; Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330 at 394 per Isaacs J. A concession theory seems to pervade New South Wales v The Commonwealth (1990) 169 CLR 482.
92 W Bratton, above n 2 at 434-435. However cf S Bottomley, “Taking Corporations Seriously:Some Considerations for Corporate Regulation” (1990) 19 FL Rev 203 and M Lipton and S Rosenblum, “A New System of Corporate Governance: The Quinquennial Election of Directors” (1991) 58 U Chi L Rev 187.
93 W Bratton, above n 2 at 434.
94 This analysis draws on the seminal comparison of corporatism and pluralism by Professor Roberta Romano: R Romano, “Metapolitics and Corporate Law Reform” (1984) 36 Stan L Rev 923.
95 Ibid at 931.
96 Ibid at 934-937.
97 See above text accompanying nn 87-89.
98 R Romano, above n 94 at 940.
99 For example, contrast J Farrar and B McCabe, above n 11 and M Taggart, “Corporatisation”, above n 19.
100 For a sharp critique of the individualistic basis of contractarianism, see A Wolfe, above n 14 at 1687-1688.
101 W Bratton, above n 2 at 417-419. It seems neither author really wants much to do with that extreme position: H Demsetz, “The Theory of the Firm Revisited” in O Williamson and S Winter (eds), The Nature of the Firm: Origins, Evolution and Development (1993) 159 at 170; B Klein, R Crawford and A Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process” (1978) 21 J L & Econ 297.
102 The role for government defined by these externalities was profoundly shaken by the famous Coase theorem, which asserts that bargaining among private parties can, and in the absence of transaction costs, will, lead to the optimal social outcome: R Coase, above n 3. Compare R Coase, “1991 Nobel Lecture: The Institutional Structure of Production” reprinted in O Williamson and S Winter (eds), above n 101,227 at 232.
103 R Romano, above n 94 at 936-938.
104 Aboven n 25.
105 W Bratton, “The New Economic Theory of the Firm: Critical Perspectives from History” (1989) 41 Stan L Rev 1471 at 1493.
106 W Bratton, above n 2 at 413.
107 See generally G Frug, above n 88 at 1317-1322.
108 W Bratton, above n 2 at 414, 437-438; C Stone, “Corporate Vices and Corporate Virtues: Do Public/Private Distinctions Matter?” (1982) 130 U Pa L Rev 1441. Bratton notes that the anti-managerial view of corporations as public bodies existed in two forms. One form saw the corporation as functionally identical to the governmental hierarchies: see R Nader,M Green and J Seligman, Taming The Giant Corporation (1976) at 7. The other, weaker, form regarded the “public” as having a legitimate interest in the protection of reasonable expectations and the maximisation of efficiency: see above n 2 at 437-438.
109 R Romano, above n 94 at 930.
110 See J Weiner, “The Berle-Dodd Dialogue on the Concept of the Corporation” (1964) 64 Colum L Rev 1458. Note that Berle's corporatist views emerged after the debate with Dodd. See A Berle, The 20th Century Capitalist Revolution (1954) at 164-88.
111 J Hill, above n 8 at 212-217. See also S Fridman, “Super-Voting Shares: What's All the Fuss About” (1995) 13 C & S LJ 31.
112 See O Williamson, “Corporate Governance and Corporate Finance” (1988) 43 J Fin 567. For shareholders to remain the sole constituency in insolvency would lead to inefficient outcomes. Under conditions of limited liability, shareholders do not bear wealth effects of their actions. See also M Whincop, “A Transaction Cost Rationale for the Insolvent Trading Provisions” (1997) 5 Grif L Rev forthcoming.
113 J Hill, above n 8 at 216.
114 See below text accompanying nn 183-186. For a similar view, see J Gordon “Corporations,Markets and Courts” 91 Co/um L Rev 1931 at 1977.
115 Cf D Millon, “New Directions in Corporate Law: Communitarians, Contractarians, and the Crisis in Corporate Law” (1993) 50 Wash & Lee L Rev 1373 at 1374.
116 J Macey, “An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties” (1991) 21 Stetson L Rev 23.
117 See also F Easterbrook and D Fischel, “Contract and Fiduciary Duty” (1993) 36 J L & Econ 425; I Macneil, “Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical and Relational Contract Law” (1978) 72 Nw UL Rev 854.
118 O Williamson, The Economic Institutions of Capitalism (1986) at 304-306; Whincop, “Criminalisation”, above n 9 at 275.
119 J Macey above n 116 at 40. See also A Schwartz, above n 3; R Scott, above n 3.
120 J Coffee, above n 1 at 107-108. See also D Millon, above n 115 at 1375; W Simon, “What Difference Does it Make Whether Corporate Managers Have Public Responsibilities?” (1993) 50 Wash & Lee L Rev 1697 at 1698.
121 E Orts, “The Complexity and Legitimacy of Corporate Law” (1993) 50 Wash & Lee L Rev 1565 at 1622; J Macey, “Externalities, Firm-Specific Capital Investments, and the Legal Treatment of Fundamental Corporate Changes” [1989] Duke LJ 173.
122 N Deakin and K Walsh, “The Enabling State: The Role of Markets and Contracts” (1996) 74 Pub Admin 33 at 36-8. On the' use of contract in the regulation of a privatised entity, see C Graham and T Prosser, Privatising Public Entities: Constitutions, the State and Regulation in Comparative Perspective (1991) at 164-171. Proponents of the New Managerialism argue that community obligations are best addressed explicitly by contracts. The National Commission of Audit stated that “community service obligations can be met through a tendering process and explicit budget funding rather than through hidden cross-subsidies”: above n 6 at 24.
123 See above n 75.
124 Macey argues that the political process is the proper place for communities to address their concerns: above n 116 at 42-43. He does not see any inconsistency between this conclusion and a contractarian theory of corporate fiduciary duties: see above text accompanying nn 116-119.
125 See above text accompanying rm 85-89.
126 See above n 45.
127 That corporate law may serve such a function is the premise of “communitarian” corporate law scholars. For references, see D Millon, above n 115 at footnote 40 and 1387. Millon describes communitarianism as liberal and individualistic; however, it regards market “resolution” of social problems as inadequate: ibid at 1378, footnote 20. For a critique, see S Bainbridge, “Trust, Community, and Statism in Corporate Governance Scholarship: A Conservative Contractarian Critique of Progressive Corporate Communitarianism” (1996) 71 Cornell L Rev forthcoming.
128 See above text accompanying rm 111-113.
129 See generally S Bottomley, above n 19 at 530. Bottomley argues that it may be desirable to distinguish between different types of government owned corporations, depending on their functions. However, the challenge of providing for an efficient, tailored regulatory scheme may be undermined by the political activities of rent seeking coalitions.
130 Bratton expresses this point very clearly. He notes that the recognition of an externality of some sort should not be treated as a cue for introducing a remedial tort. It is instead necessary to consider other means of legal recognition: see W Bratton, “Confronting the Ethical Case Against the Ethical Case for Constituency Rights” (1993) 50 Wash & Lee L Rev 1449 at 1467-1468. See also E Orts, above n 121 at 1623.
131 See, eg, Burland v Earle [1902] AC 83 at 93.
132 As mentioned inn 17 above, Sealy has also noted that judicial review of director decision-making relies less on the absence of bona fides, and more on the propriety of purpose of the directors: L Sealy, above n 17. The concept of proper purposes has evolved considerably since Sealy's article was written, and is discussed below in connection with the jurisprudence of s 232(6) of the Corporations Law, the decision-in Gambotto v WCP Ltd (1995) 182 CLR 432, and the proposed reforms to shareholders' entitlements to bring derivative actions.
133 See, eg, Ngurli v McCann (1953) 90 CLR 425 at 438.
134 G Frug, above n 88. See also G Frug, “The City as a Legal Concept” (1980) 93 Harv L Rev 1057. It will be noted that contractarianism is but the latest in a series of constructs designed to legitimate bureaucratic power. It achieves this by the unorthodox tactic of denying such power exists.
135 G Frug, above n 88 at 1283 and 1334-1355.
136 Ibid at 1283-1284 and 1355-1377.
137 See, eg, I Eagles, “Public Law and Private Corporations” [1986] CLJ 406 at 406.
138 S Bottomley, “Shareholder Derivative Action Actions and Public Interest Suits: Two Versions of the Same Story?” (1991) 15 UNSWLJ 127.
139 See below text accompanying nn 238-280.
140 F Easterbrook and D Fischel, above n 2 at 2.
141 [1925] Ch 407.
142 Ibid at 428.
143 Ibid at 429.
144 M Whincop, “Duties of Care”, above n 9 at 81-82. For a recent application of an irrationality standard, see Wayde v New South Wales Rugby League (1985) 3 ACLC 799.
145 See, eg, Graham v Allis Chalmers, 188 A 2d 125 (1963); Sinclair Oil Co v Levien, 280 A 2d 717 (1971); Aronson v Lewis, 473 A 2d 805 (1984); Cede & Co v Technicolor, 634 A 2d 345 (1994). Although articulated in cases involving breaches of the duty to act in the best interests of the corporation, Anglo-Australian courts have similarly held that they are not tribunals for the review of bona fide business judgments: Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. See also Corporate Law Reform Act 1992 Explanatory Memorandum at para 87 and Corporations Law s 1318.
146 See above text accompanying nn 84-89.
147 One of us has done that: see M Whincop, “Duties of Care”, above n 9. See also K Scott, “Corporation Law and the American Law Institute Corporate Governance Project” (1983) 35 Stan L Rev 927.
148 K Davis, “Judicial Review of Fiduciary Decisionmaking - Some Theoretical Perspectives” (1985) 80 Nw UL Rev 1.
149 Ibid at 25-29.
150 This is the pricing argument: see above text accompanying nn 51-56.
151 See above text accompanying nn 48-50.
152 For connections drawn by courts between community opprobrium for mismanagement and revision of the law, see Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 at 412-413, 431; Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 126; AWA v Daniels (1992) 7 ACSR 759 at 875. See also Kirby P's dissenting judgment in Metal Manufacturers v Lewis (1991) 5 ACSR 255 at 271. The rhetoric of communitarianism is itself significant.
153 Corporations Law, ss 588G and 592; Companies Act, s 556.
154 Companies Acts, s 556(1)(6); Corporations Law, s 592(1)(6). There was a corresponding defence for the director: Companies Acts, s 556(2)(6); Corporations Law, s 592(2)(6).
155 Metal Manufacturers Ltd v Lewis (1986) 11 ACLR 122 at 129-131; Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 at 431-432 (affirmed on appeal (1992) 10 ACLC 1233 at 1245-1247); Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 125-126; Group Four Industries Pty Ltd v Brosnan (1992) 8 ACSR 463 at 497-498, 509,513.
156 Daniels v Anderson (1995) 16 ACSR 607 sub nom AWA Ltd v Daniels (1992) 7 ACSR 759.
157 (1995) 16 ACSR 607 at 666-667. Although the duty seems more imposing than the one envisaged by the trial judge, the revision may not be as great as it appears - see M Whincop, “Duties of Care”, above n 9 at 80-81. There is a grand irony about the Court of Appeal's decision, which other commentators have not considered. While the Court of Appeal identified a stronger conception of the duty of care, the effect of this was deleterious to the shareholders, because it was asserted-by a defendant seeking contribution from the company plaintiff. This shows how non-shareholder constituencies can be the beneficiaries of more demanding requirements 'of directors and managers.
158 (1995) 16 ACSR 607 at 666.
159 (1992) 7 ACSR 759 at 868.
160 M Whincop, “Duties of Care”, above n 9 at 87-88.
161 However, at the same time, the law seems to be expanding towards the bureaucracy itself. The statutory duty of care ins 232(4), and other duties in the Corporations Law, apply to a wider group than directors. The term “director” is defined expansively in s 60 to include anybody, within or outside of the corporation, who gives directions or instructions according to which the board is accustomed to act. The term can include a corporation: see Standard Chartered Bank of Australia Pty Ltd v Antico (1995) 18 ACSR 1. It can also include a professional adviser or a bank: see generally P Koh, “Shadow Director, Shadow Director, Who Art Thou” (1996) 14 C & SLJ 340. The public law parallel is interesting: in administrative law, decision-makers must not act on dictation. The so-called shadow director achieves a similar end by imposing all of the director's duties on such a person.
162 Turquand v Mitchell (1869) 4 LR 4 Ch App 379 at 386.
163 See, eg, Administrative Decisions Oudicial Review) Act 1977 (Cth) (ADJR Act), ss 5(1)(e), (h), 5(2)(a), (b) (cf s 5(3)); Padfield v Minister of Agriculture, Fisheries & Food [1968] AC 997; Murphyores Inc Pty Ltd v Commonwealth (1976) 136 CLR 1. In contrast, see Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 66 ALR 299 at 310.
164 Of the criminal offence constituted by a breach of the predecessor section of s 232(4), it has been held that the prosecution must prove a foreseeable risk of harm as a result of the acts or omissions alleged to breach the section: Vrisakis v ASC (1993) 11 ACSR 162 at 211-212 per Ipp J.
165 Section 1317HD.
166 While questions of causation do not (traditionally) arise in cases where compensation is sought for breach of fiduciary duty, modern authority suggests the duty of care is not fiduciary. Questions of causation therefore apply: Permanent Building Society v Wheele1 (1994) 14 ACSR 109 at 165-167.
167 (1994) 14 ACSR 109.
168 Ibid at 167.
169 J Coffee, above n 1 at 108 (local community can have undiversifiable investments ir corporation).
170 P Finn, “The Fiduciary Principle” in T Youdan (ed), Equity, Fiduciaries and Trusts, (1989) a! 1.
171 See above text accompanying nn 116-119.
172 See F Easterbrook and D Fischel, above n 2 at 92-93; F Easterbrook and D Fischel, above n 117.
173 H Butler and L Ribstein, above n 2 at 28-32. But contrast R Romano, “Answering the Wrong Question: the Tenuous Case for Mandatory Corporate Laws” (1989) 89 Colum L Rev 1599 at 1601.
174 815 F 2d 429 at 431 (1987). Judge Easterbrook regarded a contract of employment as not having excluded the fiduciary duty of an employer not to repurchase the shares of an employee without disclosing an imminent merger; Judge Posner dissented. See H Butler and L Ribstein, above n 2 at 30-31, footnote 129; J Coffee, “The Mandatory /Enabling Balance in Corporate Law: An Essay on the Judicial Role” (1989) 89 Colum L Rev 1618 at 1663-1664.
175 V Brudney, above n 2; D DeMott, “Beyond Metaphor: An Analysis of Fiduciary Obligation” [1988] Duke LJ 879. See also J Hill, above n 8 at 210.
176 See, eg, V Brudney, above n 2 at 1411, n 19.
177 See above text accompanying nn 147-151.
178 But not exclusion: J Coffee, above n 50 at 951-952.
179 Ibid. See also J Gordon, above n 61 at 1594-1595.
180 P Finn, above n 170 at 4.
181 J Coffee, above n 50 at 950.
182 See, eg, Anderson v Daniels (1995) 16 ACSR 607 at 658 per Clarke and Sheller JJA; Australian Securities Commission v AS Nominees Ltd (1995) 18 ACSR 459 at 470 per Finn J.
183 See generally J Coffee, above n 1; J Coffee, above n 174 at 1626-1627.
184 (1726) Sel Cases Ch 61, 25 ER 223.
185 [1967] 2 AC 134n. See also Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 at 473; - Liquidators of the Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189; Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488; • Gemstone Corporation of Australia Ltd v Grasso (1994) 13 ACSR 695.
186 See, eg, Australian Metropolitan Life Assurance Company Ltd v Ure (1923) 33 CLR 199 at 221- 222; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 835-837; Darvall v North, Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260 at 324-325; Pine Vale Investments Ltd v, McDonnell and East Ltd (1983) 8 ACLR 199 at 209. See also W Bratton, above n 130 at 1457-1459.
187 See P Finn, above n 170 at 1.
188 The purposive element was preferred by a majority of the High Court in Chew v R (1992) 101 ACLC 816 and Edwards v R (1992) 10 ACLC 859.
189 For examinations of the provision, its history, interpretation and policy, see M Whincop,, “Honesty and Propriety”, above n 9 and M Whincop, “Criminalisation”, above n 9.
190 (1986) 4 ACLC 654. Cited with approval in McNamara v Flavel (1988) 6 ACLC 802 at 807;; Jeffree v NCSC (1989) 7 ACLC 556 ai: 564-565; Southern Resources Ltd v Residues Treatment & Trading Company Ltd (1990) 8 ACLC 1151 at 1-168; Castrisios v McManus (1991) 9 ACLC 287'at 293-294; Chew v R (1992) 10 ACLC 816 at 823, 827; R v Yuill (1994) 15 ACSR 95 at 108;; ASC v Matthews (1995) 16 ACSR 313 at 317; R v Byrnes (1995) 17 ACSR 551 at 560.
191 (1986) 4 ACLC 654 at 659.
192 M Whincop, “Honesty and Propriety”, above n 9 at 170-172; M Whincop, “Criminalisation”, above n 9 at 281-282.
193 (1995) 183 CLR 501.
194 Cf Chew v R (1992) 10 AC LC 816 at 819-820, per Mason CJ, Brennan, Gaudron and McHugh JJ; R v Yuill (1994) 15 ACSR 313 and Byrnes v R (1994) 13 ACSR 219 (the decision was appealed to the High Court). See J Kluver, “Improper Use of Corporate Position: How Relevant is a Director's State of Mind to Criminal Liability” (1994) Butterworths Corp Law Bull [515].
195 (1995) 183 CLR 501 at 514-515 per Brennan, Deane, Toohey and Gaudron JJ, at 522 per McHugh J. Nonetheless, the Court considered that impropriety can be established with reference to subjective bad faith: ibid at 515
196 Ibid at 515 and 517.
197 Ibid at 515.
198 See Corporations Law Pt 9.4B. See below text accompanying nn 240-248.
199 See generally M Whincop, “Criminalisation”, above n 9 at 287-290.
200 Contrast P Finn, above n 170 at 25-26.
201 P Finn, above n 16; P Finn, “The Forgotten Trust: The People and the State” in M Cope (ed), Equity: Issues and Trends, (1995) 131; D Tan, “The Fiduciary as an Accordion Term: Can the Crown Play a Different Tune” (1995) 69 ALJ 440.
202 Section 1317EA. The standard of proof is the balance of probabilities: s 1332.
203 Jeffree v NCSC (1989) 7 ACLC 556. A sibling provision, s 232(5), which prohibits th, improper use of information acquired by virtue of position, has been similarly applied Grove v F/avel (1986) 4 ACLC 654; McNamara v F/avel (1988) 6 ACLC 802; Castrisios 1 McManus (1991) 9 ACLC 287.
204 F Easterbrook and D Fischel, “Antitrust Suits by Targets of Takeover Offers” (1982) 80 Mid L Rev 1155 at 1174 and 1177. Contrast R. Buxbaum, “Responsibilities of Transnationa Corporations to Host Nations” in LL Heng (ed), Current Legal Issues in th1 Internationalization of Business Enterprises (1996) 48.
205 See below n 282 for a discussion of a statutory procedure operating in a similar way.
206 See also R v Cook; ex parte Commonwealth Director of Public Prosecutions (1996) 20 ACSR 618.
207 See, eg, Attorney-Genera/ v Fulham Corporation [1921] 1 Ch 440.
208 C Sampford, above n 18 at 190.
209 [1900] 1 Ch 656.
210 Ibid at 671.
211 Sidebottom v Kershaw Leese & Company [1920] 2 Ch 124 at 136; Shuttleworth v Cox Brothers & Company (Maidenhead) [1927] 2 KB 9 at 22, 26.
212 [1925] Ch 407 at 428-429. See above text accompanying nn 141-146.
213 M Whincop, “Gambotto”, above n 9 at 280.
214 See above text accompanying nn 180-187 above.
215 See above text accompanying nn 148-150 above.
216 (1939) 61 CLR 457.
217 Ibid at 507. See also Latham CJ (with whom McTiernan J agreed) at 481-482.
218 Ibid at 508-512.
219 (1995) 182 CLR 432. For analysis of the decision, see M Whincop, “Gambotto”, above n 9; I Ramsay (ed), Gambotto v WCP Ltd: Its Implications for Corporate Regulation (1996); H Bird, What's in a Publicly Listed Share? One Analysis of the Conflict Between the Contractual and Proprietary Models of Share Entitlements Following Gambotto v WCP Ltd (Conference paper presented at Sixth National Corporate Law Teachers Conference 1996).
220 (1995) 182 CLR 432 at 445.
221 Ibid at 445-447. See also at 456-457per McHugh J.
222 Peters' case (1939) 61 CLR 457 at 504. For a strongly stated view of the shareholder's entitlement to act in self interest, see Pender v Lushington (1877) 6 Ch D 70 at 75-6.
223 See Allen v Hyatt (1914) 30 TLR 444; Coleman v Myers [1977] 2 NZLR 225; Glavanics v Brunninghausen (1996) 19 ACSR 204. See generally M Whincop, “Precontractual Disclosure by the Insiders of Closely Held Corporations: The Economics of Restrained Self Interest” (1997) 10 JCL forthcoming (arguing that the “fiduciary” standard in these cases more closely approximates a standard of good faith).
234 See generally R Gilson, above n 13; M Whincop, “An Economic Analysis of Gambotto” in I Ramsay, above n 219, 102 at 107, 111. For empirical evidence, see H Amour and D Teece, “Organizational Structure and Economic Performance: A Test of the Multidivisional Hypothesis” (1978) 9 Bell J Econ 106; P Joskow, “Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence” in O Williamson and S Winter, above n 101, 117.
225 See above text accompanying n 208.
226 (1995) 182 CLR 432 at 447. Cf M Whincop, “Gambotto”, above n 9 at 281-282.
227 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461.
228 Chan v Zachariah (1984) 154 CLR 178 at 198-9 per Deane J.
229 Directors, as fiduciaries, must exercise their powers for proper purposes: Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 288-289. Despite the literal parallel, the Gambotto limitation forbids certain alterations unless for a proper purpose; the fiduciary duty prohibits fraud on the power and invalidates exercises for improper purposes, rather than requiring a proper purpose as a precondition.
230 The impropriety of purpose for which a power is exercised is a long-standing ground of judicial review in administrative law: eg, Sydney Muncipal Council v Campbell [1925] AC 338; ADJR Act s 5(1)(e), 5(2)(c); but cf Arthur Yates and Company Pty Ltd v Vegetable Seeds Committee (1945) 72 CLR 37 at 68.
231 (1995) 183 CLR 432 at 445-446.
232 Ibid at 459.
233 See, eg, Victoria v Commonwealth (1975) 134 CLR 81 at 180 per Stephen J; J Evans,, “Mandatory and Directory Rules” (1981) 1 Leg Stud 227.
234 (1939) 61 CLR 457 at 513.
235 Legal . Committee of the Companies & Securities Advisory Committee, Compulsory, Acquisitions Report (1995) at 7-10; but cf H Bird, above n 219 at 57-59.
236 (1995) 18 ACSR 521.
237 See above text accompanying n 98.
238 (1843) 2 Hare 461; 67 ER 189.
239 See above text accompanying nn 198-202.
240 For the incompatibility of the two purposes, see M Whincop, “Criminalisation”, above n 9, 280-282.
241 Corporations Law, s 1317HD.
242 Section 1317EA. Under aggravated circumstances set out in s 1317FA, an offence will be committed. The offence can be punished by imprisonment.
243 On an application for a civil penalty order, a court can order compensation be paid to the corporation in the event of finding a civil penalty provision has been contravened: s 1317HA. Thus, shareholders can be compensated in these suits.
244 I Ramsay, “Enforcement of Corporate Rights and Duties by Shareholders and the Australian Securities Commission: Evidence and Analysis” (1995) 23 ABLR 174. Ramsay's evidence is, however, biased by its reliance on reported cases.
245 Millon describes the equivalent regulatory body in the United States, the Securities Exchange Commission, as pursuing a “single constituency agenda” (ie, shareholders): see above n 115 at 1376.
246 Australian Securities Commission Act 1989 (Cth).
247 See W Bratton, above n 130 at 1456.
248 Australian Securities Commission Act 1989 (Cth), s 50.
249 (1996) 21 ACSR 332.
250 Ibid at 364-365.
251 R Baxt, “Will Section 574 of the Companies Code Please Stand Up (And will Section 1324 of the Corporations Act Follow Suit)” (1989) 7 C & SL] 388. Cf J Kluver, “Derivative Actions and the Rule in Foss v Harbottle: Do We Need a Statutory Remedy” (1993) 11 C & SL] 7 at 11-12; I Ramsay, “Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action” (1992) 15 UNSWLJ 149 at 150.
252 Broken Hill Pty Co Ltd v Bell Resources Ltd (1984) 8 ACLC 609 at 613 per Hampel J.
253 QIW Retailers Ltd v Davids Holdings Pty Ltd (No 2) (1992) 10 ACLC 1162 at 1165. Cooper J nonetheless agreed with Justice Hampel's analysis: ibid. See also Allen v Atalay (1993) 11 ACSR 753 at 757-758.
254 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483.
255 Ibid at 488-9.
256 H Bird, “A Spanner in the Works: The Impact of Mesenberg v Cord Industrial Recntiters Pty Ltd on Enforcement Rights under the Corporations Law” (1997) 25 ABLR forthcoming.
257 Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785 at 847-848. See also Mesenberg v Cord Industrial Recniiters Pty Ltd (Nos 1 & 2) (1996) 19 ACSR 483; Ruralcorp Consulting Pty Ltd v Pynery Pty Ltd (1996) 21 ACSR 161.
258 See above text accompanying n 75.
259 Attorney-General (Cth), Proceedings on Behalf of a Company (Statutory Derivative Action) Draft Provisions and Commentary (Canberra, September 1995) (Report on Proposed Statutory Derivative Actions).
260 See (:ompanies and Securities Law Review Committee, Enforcement of the Duties of Directors and Officers of a Company by means of a Statutory Derivative Action (Report No 12, 1990).
261 Report on Proposed Statutory Derivative Actions, above n 259 at 2-4, proposed section 245A(3).
262 Section 260(2).
263 Proposed s 245A(l)(a). The section extends to former members and officers, and persons entitled to be registered as members. Section 260 only extends to present members of the corporation.
264 As has already been suggested in the context of the civil penalty regime (see above text accompanying nn 242-248), the fact that the ASC is permitted as of right to bring actions on behalf of a company may allow constituencies other than members and officers to litigate on behalf of the corporation.
265 Proposed s 245B(l). Both Federal and State Supreme Courts can exercise this jurisdiction: see definition of “Court” ins 9 of the Law.
266 Proposed s 245B(2).
267 Report on Proposed Statutory Derivative Actions, above n 259 at 3.
268 For an example of the application of the administrative standard of unreasonableness to the governance of a private organisation (the New Zealand Rugby Union Council), see Finnigan v New Zealand Rugby Union [1985] 2 NZLR 190, discussed and enthusiastically endorsed by I Eagles, above n 137 at 410.
269 As to this paraphrased administrative law concept of unreasonableness, see, eg, Associated Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 233; Paramatta City Council v Pestell (1972) 128 CLR 305 at 327; Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 at 356; Grech v Minister for Immigration, Local Government and Ethnic Affairs (No 2) (1991) 26 ALD 197 at 201-202. For an application of such a standard in modern corporate law, see Wayde v New South Wales Rugby League (1985) 3 ACLC 79.
270 Report on Proposed Statutory Derivative Actions, above n 259 at 6.
271 In United States jurisdictions, a board decision (usually made by a litigation sub-committee) to terminate a derivative suit is generally assessed with reference to the business judgment rule: see Auerbach v Bennett, 393 NE 2d 994 (1979), Roberts Alabama Power Co, 404 So 2d 629 (1981). Cf Zapata Corp v Maldonado, 430 A 2d 779 (1981). For a discussion of the business judgment rule, see above text accompanying nn 145-146.
272 Ironically, the fraud on the minority exception is also criticised for the costs and other problems of such “dress rehearsals” in which standing must be proved: Prudential Assurance Company Ltd v Newman (No.2) [1982] Ch 204; Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791.
273 In other words, making a correct decision requires costly information; the more information, the lower the probability of Type I and Type II errors.
274 Proposed s 245G.
275 For these and related criticisms of derivative actions, see, eg, D Fischel, “The Corporate Governance Movement” (1982) 35 Vand L Rev 1259; D Fischel and M Bradley, “The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis” (1986) 71 Cornell L Rev 261; M Dooley and E Veasey, “The Role of the Board in Derivative Litigation: Delaware Law and the Current ALI Proposals Compared” (1989) 44 Bus Law 503; R Romano, “The Shareholder Suit: Litigation Without Foundation?” (1991) 7 J L Econ & Org 55.
276 Proposed s 245D(l)(b) and (2).
277 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 at 684 per Samuels JA, at 706 per MahoneyJA.
278 See above text accompanying nn 198-204, 225-229.
279 See above text accompanying nn 221-223. See also North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589.
280 That is, must those relying on ratification prove that every person voting to ratify did not have an improper purpose, or must the plaintiff prove an improper purpose?
281 For empirical evidence, see D Fischel and M Bradley, above n 275. Fischel and Bradley were unable to detect any statistically significant benefits from continuance of derivative actions. Romano came to a similar conclusion: R Romano, above n 275.
282 An increase in the role of the courts in the judicial review of private decision-making is also apparent in the United States, although these developments do not demonstrate the public and procedural qualities observed herein: W Carney, “The ALI's Corporate Governance Project: The Death of Property Rights?” (1993) 61 Geo Wash L Rev 898.
283 We could also have discussed other statutory changes to the substantive law. An excellent example is Pt 3.2A of the Corporations Law, which applies to financial benefits conferred on the related parties of public companies. The Part mandates an extensive process of disclosure to, and approval by shareholders. The procedure publicises fiduciary self-dealing prohibitions in a similar manner to R v Byrnes. In particular, the Part's procedure requires a court to ignore that full value was given for the benefit: s 243G(3). Its application to public companies perhaps reinforces the idea that these companies are justifiably treated as public entities.
284 See above text accompanying rm 134-136.
285 G Barrie, “The Regulation of Public and Private Power” (1989) Pub L 552; M Taggart, “Corporatisation”, above n 19; M Taggart, “Impact”, above n 19.
286 C Sampford, above n 18.
287 M Taggart, “Impact”, above n 19 at 371.
288 This point is consistent with the leading economic theory explaining the existence of non-profit enterprises as a means of “bonding” the interests of those who control the enterprise to those who contribute resources to it: see generally H Hansmann, above n 20.