As I’ve noted before, the Journal of Corporation Law asked me to write a response to Ann Lipton’s article, The Legitimation of Shareholder Primacy.1 As noted in an earlier post, a working draft of my response is available from SSRN:
There’s a lot going on in Lipton’s article. Due to the space limits on the JCL response, I have been posting a series of additional comments here. I assume familiarity with those posts:
Lipton’s article depends heavily on these propositions:
Corporate authority requires visible social legitimacy.
Governance procedures serve symbolic as well as economic functions.
Shareholder welfare and public welfare sometimes diverge in ways external regulation does not adequately resolve.
In this post, I focus on the first proposition.
Lipton starts with a simple but important distinction: there is a difference between having legal power and having legitimate authority. Corporations may have the legal right to own property, hire workers, sign contracts, shut down factories, develop new technologies, influence elections, and decide how billions of dollars are spent. But just because corporations are legally allowed to exercise this kind of power does not automatically mean that society will continue to accept it without demanding greater political oversight.
For Lipton, legitimacy comes from a broader sense that corporate power is being used within reasonable boundaries and in ways that do not conflict with the public good. That does not mean corporations have to be popular, morally perfect, or simply follow the law. Instead, legitimacy depends on an ongoing public belief that the corporate system is worthy of acceptance, respect, and institutional protection. When that belief weakens, society becomes more likely to question corporate power and demand stronger limits on it.
In my response, I focus on the portions of Lipton’s article most directly relevant to the debate over DExit. But her legitimacy thesis also pertains to DExit. Specifically, her DExit story ultimately depends on a legitimacy mechanism rather than a conventional charter-competition mechanism. She is not primarily arguing that companies leave because Delaware law has become economically inefficient. She is arguing that polarization exposes the political content concealed within shareholder primacy, which in turn destroys Delaware’s ability to market its corporate law as politically neutral. Once that neutrality is lost, states can compete not merely on legal quality but on different normative visions of corporate governance, making DExit a structural threat to Delaware’s traditional dominance.