The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption

The nineteenth century saw the standardization and rapid spread of the modern business corporation around the world. Yet those early corporations differed from their contemporary counterparts in important ways. Most obviously, they commonly deviated from the one-share-onevote rule that is customary today, instead adopting restricted voting schemes that favored small over large shareholders. In recent years, both legal scholars and economists have sought to explain these schemes as a rough form of investor protection, shielding small shareholders from exploitation by controlling shareholders in an era when investor protection law was weak. We argue, in contrast, that restricted voting rules generally served not to protect shareholders as investors, but to protect them as consumers. The firms adopting such rules were frequently local monopolies that provided vital infrastructural services such as transportation, banking, and insurance. The local merchants, farmers, and landholders who used these services were the firms’ principal shareholders. They commonly purchased shares not in the expectation of profit, but to finance collective goods. Restricted shareholder voting assured that control of the firms’ services would not fall into the hands of monopolists or competitors. In effect, the corporations had much the character of consumer cooperatives. This perspective also sheds light on the unusual importance given to the doctrine of ultra vires in the nineteenth century. While current legal and economic scholarship has focused incessantly on the separation between ownership and control, the prior separation between ownership and consumption, accomplished by the late nineteenth century, was another fundamental but generally overlooked turning point in the history of the business corporation. Understanding this transformation throws light not just on historical practices, but also on contemporary debates over deviations from the rule of one-share-onevote. authors. Henry Hansmann is Oscar M. Ruebhausen Professor of Law, Yale Law School. Mariana Pargendler is Professor of Law at Fundação Getulio Vargas Law School in São Paulo (Direito GV). For helpful comments and suggestions on earlier drafts of this article we specially wish to thank Ian Ayres, Howard Bodenhorn, Ronald Gilson, Timothy Guinnane, Leslie Hannah, Eric Hilt, Daniel Ho, Naomi Lamoreaux, John Langbein, David Le Bris, Aldo Musacchio, Claire Priest, Richard Sylla, Andrew Verstein, Charles Whitehead, and Robert Wright, as well as participants at the American Law and Economics Association 2011 Annual Meeting at Columbia Law School, the Latin American and Iberian Law and Economics Association 2012 Annual Meeting in Lima, and the Comparative Law and Economics Forum in Rio de Janeiro, and at conferences and workshops at Columbia Law School, Fundação Getulio Vargas Law School in São Paulo, Tel Aviv University, Toulouse School of Economics, Vanderbilt Law School, and Yale Law School. For valuable research assistance, we are grateful to Allison Gorsuch, Ian Masias, Nicholas Walter, Julie Wang, and particularly Joanne Williams. David Louk and his colleagues at the Yale Law Journal provided excellent editing. the evolution of shareholder voting rights 949 article contents