Osler, Hoskin & Harcourt LLP lecture debates shareholder ownership and primacy

Photo by Bernard Clark

Professor Julian Velasco of Notre Dame Law School takes a question from the audience during his lecture on “Shareholder Ownership and Primacy" in Macdonald Hall.

Queen’s Law continued its Osler, Hoskin and Harcourt LLP Distinguished Lectures in Business Law series with a presentation by Professor Julian Velasco of Notre Dame Law School on November 29, 2010. Velasco, a former corporate lawyer with Sullivan & Cromwell in New York and United States Court of Appeals law clerk, delivered his paper entitled “Shareholder Ownership and Primacy.”

Velasco began with a simple thesis: shareholders own corporations, and those corporations must be run in the shareholders’ interest.  Not everyone agrees with this statement – namely, ontractarian academics, who argue that a corporation is not something owned at all, but rather a network of investments with an expectation of returns, while communitarians argue that corporations should be run in the best interests of society directly, rather than focusing on wealth maximization for shareholders.

The problem with these views is that their conclusions are not inexorable; it is possible to accept the premise without accepting the conclusion. In their approach to the concept of shareholder ownership, Velasco said, “academics have done a better job of critiquing that view than disproving it.”

Velasco extrapolated the concept of ownership from a sole proprietorship scenario, in which ownership of the corporation is clear. From there he moved to partnership, then incorporation, in which ownership in assets is exchanged for ownership in the corporation. Even when a company goes public, federal law does not suggest you lose your ownership claim. Velasco argued there is no fundamental change in the business, but rather a change in circumstances.

“All businesses have owners,” Velasco said. “There is no reason why a major corporation should be any different than any other business organization. It is obvious that shareholders are owners.”

Looking to the American corporate law body, the Model Business Corporation Act says that shareholders are owners. Examining Delaware case law, he cited numerous supporting references on the subject of shareholder ownership.

“The fiduciary obligation of directors is to both the corporation and shareholders,” he said. “This indicates at least shareholder primacy, and from this follows ownership.”
While shareholders cannot take control over the assets of the corporation, Velasco argued that this does not mean they don’t own the corporation. “Shareholders don’t own the assets –  they own the corporation, which in turn controls the assets,” he said. “We can’t expect shareholders to freely control the assets; we need a governance mechanism. This does not undermine an ownership interest of shareholders.”

“Why does all this matter?” Velasco said near the end of his talk. “Because shareholder rights are stronger and more secure if grounded in property law rather than contract law. In America, property law is very robust; it gives you great freedom and control over property, and is constitutionally protected. The mythology of property law in America is indefeasible.”
   
During the question and answer period of the presentation, members of the audience pressed Velasco on the issue of a corporation’s separate legal entity, and how this can be rectified with the concept of corporate ownership. He contended that our common sense conception of corporate ownership did not present any issues with the concept of a corporation as a separate legal person.

The presentation was followed by a wine and cheese reception in the law lounge, where students and faculty had the opportunity to talk with Velasco further.

“I thought he did a really great job,” Andrew Lahey, Law ’11, said. “Because our discussion is so glossed by Canadian law, getting the perspective of U.S. law, having an American perspective, adds some depth to the discussion.”

In the distinguished business law lecture series generously sponsored by Osler, Hoskin & Harcourt LLP and directed by Professor Paul B. Miller, five internationally renowned academics delivered topical and scholarly papers in 2010-11. For more information on the other lecturers and to see a video and photo gallery of Professor Velasco's presentation, see http://law.queensu.ca/events/oslerDistinguishedLecturesInBusinessLaw.html.