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Bluebook 20th ed.

Carroll R. Wetzel & James L. Winokur, Corporations and the Public Interest - A Review
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Carroll R. Wetzel & James L. Winokur, Corporations and the Public Interest - A Review
of the Corporate Purpose and Business Judgment Rules, 27 Bus. Law 235 (1971).

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of the corporate purpose and business judgment rules. Business Lawyer, 27(1),
235-242.

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of the Corporate Purpose and Business Judgment Rules," Business Lawyer 27, no. 1
(November 1971): 235-242

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November 1971

CORPORATIONS AND THE PUBLIC INTEREST-

A REVIEW OF THE CORPORATE PURPOSE AND
BUSINESS JUDGMENT RULES
By
CARROLL R. WETZEL AND JAMES L. WINOKUR*
Philadelphia, Pennsylvania

Recent criticism of the modern American corporation deserves

thoughtful examination. One small. facet of any such examination will
be an analysis of existing law on such matters as the scope of the cor-
porate manager's discretion and the role, if any, assignable by the
courts to shareholders in determining the extent of corporate public
interest.
The number of decided cases in this field is not great. Until recently
the cases were largely in the field of corporate philanthropy. The pur-
pose of this paper is to review them and to have a guess as to probable
developments in this body of law.
Dodge v. Ford Motor Co.,1 is a good starting point. Owners of 10%
of Ford stock brought suit in opposition to Henry Ford's plan to in-
crease production and reduce prices at the same time, at the expense
of dividends at lease short term. In its fiscal year ended July, 1916, Ford
Motor Co. had enjoyed its most profitable year. The costs of expan-
sion made price stabilization difficult, but Ford chose to reduce pre-
viously high dividends rather than violate what he viewed as his public
obligation to keep prices down. In arguing the propriety of with-
holding dividends, Ford's attorney characterized the refusal to pay
dividends as "charitable works" carried on with "humanitarian mo-
tives," claiming that the company had an implied power to make such
business decisions. The court disagreed, and took the extraordinary
step of compelling the company to distribute dividends in violation of
Mr. Ford's plan. The opinion emphasized that all business discretion
exercised by management must be in keeping with the basic goal of
increasing shareholder profits. The court's analysis also briefly sug-
gested that company shareholders, being members of the public much
the same as car buyers, were entitled to at least the same economic
protection as consumers.
The Court's articulation of its theory in the Ford case is typical of
the time. 2 When charitable expenditures were questioned, courts ap-
proved them only when the primary motivation for the action was pro-
tection of the company's business interests, or so the courts always
* Members of the Pennsylvania Bar.
Editor's Note-This review was prepared for a program of this Section in
New York on July 6, 1971. For a scholarly study of the field see, Blumberg,
CorporateResponsibility and the Social Crisis, 50 B. U. L. REV. 157 (1970).
1. 204 Mich. 459, 1970 N.W. 668, 3 A.L.R. 413 (1919).
2. See, Annot., 3 A.L.R. 443 (1919).
 The Business Lawyer

said. Thus, when the Steinway Piano Company made considerable ex-
penditures on facilities for its "company town" prior to the turn of the
century, a shareholder challenge was rejected by New York courts on
the theory that these expenditures, though not directly for the manu-
facture of pianos, conferred a significant benefit on the corporation by
assuring the continued availability of contented employees.3 Similarly,
another New York decision permitted a corporation to establish a
music school open to the public, on the theory that the school served
to publicize one of the company's musical products. 4 Courts have long
permitted corporate expenditures to safeguard the health of company
employees. 5 Expenditures to promote industrial fairs and the like, with
a view toward enhancing the donor's business, have been generally sus-
tained since the 1800s. 6
Despite what the courts said in those cases, it is not inappropriate
to remember that in virtually every one of them except the Ford case
the Court declined to overturn the managers' decision as to the use of
corporate funds.
In the aftermath of the depression of the thirties, the narrow con-
cept of corporations as no more than guardians of private profit began
to give way. In 1932, Professor Dodd reflected on the changing social
role of corporations in a landmark article 7 and predicted that increas-
ing attention of business leaders would be directed toward public
rather than merely profit-making matters. Commentators today uni-
versally cite this early forecast as having been correct. 8
Another development on the corporate stage during those same
years must be noted in passing-the growing separation of share-
holders from managers, the gradual weakening of the role of owners
in decision making. No doubt it is trite to repeat that with the dramatic
growth in size of the American corporation, the shareholding public
has become increasingly faceless. On the other hand, in the light of
today's intensive focus on "corporate democracy," it may not be im-

3. Steinway v. Steinway & Sons, 17 Misc. 43, 40 N.Y.S. 718 (1896). See also,
Whetstone v. Ottawa University, 13 Kan. 320 (1874).
4. Virgil v. Virgil Practice Clavier Co., 33 Misc. 200, 68 N.Y.S. 335 (1900).
5. E.g., People ex. rel. Metropolitan Life Insurance Co. v. Hotchkiss, 136 App.
Div. 150, 120 N.Y.S. 649 (1909).
6. E.g., Richelieu Hotel Co. v. International Military Encampment Co., 140
Ill. 248, 29 N.E. 1044 (1892); In re San Francisco Bay Exposition, 50 F. Supp.
344 (D.C. Cal. 1943).
7. Dodd, For Whom Are CorporateManagers Trustees?, 45 HAuv. L. REV.
1145 (1932).
8. Thus, for example, Professor Berle-who had originally challenged the
Dodd thesis, Berle, For Whom Corporate Managers Are Trustees: A Note, 45
HARV. L. REV. 1365 (1932)--concluded in 1954 that time had proven Dodd's
arguments correct. A. BERLE, TWENTIETH CENTURY AMERICAN CAPITALISM 169
(1954). See also, Berle, Corporate Decision-Making and Social Control, 24
THE BUSINESS LAWYER 149, 150 (1968); Weiner, The Berle-Dodd Dialog on
The Concept of The Corporation, 64 COLUM. L. REV. 1458 (1964); Blumberg,
Corporate Responsibility and the Social Crisis, 50 B. U. L. REV. 157, 174
(1970).
November 1971

proper to inquire whether this trend toward separation of management

from ownership deterred or in fact enhanced the allocation of corporate
effort to the general good. 9 The question may be ironic but it deserves
to be asked. As shareholders disappeared from the center of the cor-
porate stage, management came to be more and more closely identified
with the image of the American corporation. While they were relatively
insulated from shareholder attack by cumbersome proxy machinery,
and by legal doctrines such as the "business judgment rule," corporate
managers permitted themselves to become increasingly sensitive to
public pressures to make their corporations "good citizens."' 10 More-
over, just as the growth of corporations separated managers from share-
holder control and left the managers more vulnerable to public pressure
for socially responsible action, the same corporate growth has had the
effect of increasing the strength of the public pressure itself. As money
and power have become concentrated in corporate enterprises, those
enterprises have become an increasingly critical source of funds for
public works, and corporate decisions have come increasingly to deter-
mine the quality of American life. This has not been overlooked by the
managers or by the courts.
The widely cited case of A.P. Smith ManufacturingCo. v. Barlow,""
which rejected a challenge to the corporate right to make charitable
contributions, will serve as a post-depression starting point. In 1951,
the directors of the Smith company had voted to contribute $1,500
to the Annual Giving campaign of Princeton University. Although the
company's 55 years old charter gave no explicit authorization for such
donations, the company had actually made numerous contributions to
schools and other charities during its earlier years. In 1930, New Jersey
had passed a statute authorizing those corporate charitable contribu-
tions which tended to protect the donor's "business interests." When
the directors' action authorizing the Princeton contribution was ques-
tioned, the directors sought a declaratory judgment that the appropria-
tion was proper.
The company's arguments were wide-ranging, attempting to bring
the contribution within the economic benefit test previously used to
judge the propriety of corporate good works. According to the com-
pany's president, the contributions were designed to enhance his com-
pany's goodwill in the community, to assure "the free flow of properly
trained personnel for administrative and other corporate employ-
ment," and to bolster capitalism and free enterprise-the economic
systems to which the company owed its existence-by strengthening
liberal education and good government.

9. See generally, Hetherington, Fact and Legal Theory: Shareholders, Man-

agers, And CorporateSocial Responsibility, 21 STAN. L. REV. 248 (1969).
10. Fears of such pressure are expressed in Levitt, The Dangers of Social
Responsibility, 26 HARV. Bus. REV.41 (1968).
11. 13 N.J. 145, 98 A.2d 581, 39 A.L.R.2d 1179 (1953).
 The Business Lawyer

Judge Jacobs' opinion, which holds the contribution tobe intra vires
and free from attack, comes very close to abolishing the economic
benefit test for charitable works. First, the opinion reviews cases hold-
ing philanthropic expenditures intra vires under the traditional eco-
nomic benefit criteria.12 Despite this listing of past precedents, the
opinion emphasizes as in the Steinway case, supra, that the court is
required to take notice of changed circumstances which require ad-
justment of old legal doctrines. Charitable institutions in America, says
the court, have become more and more dependent on corporate giving
as our national wealth has continued to concentrate in the hands of
our largest companies. Therefore, regardless of prior doctrines or tech-
nicalities, the court finds an urgent social necessity that corporations
be permitted to make charitable contributions. In the end, the court
refuses a clear break withthe old limitations, finding room even within
the restrictions of the corporate benefit test for the result it feels re-
quired to reach:
"But even if we confine ourselves to the terms of the common law
rule in its application to current conditions, such expenditures may
likewise readily be justified as being for the benefit of the cor-
poration; indeed, if need be the matter may be viewed strictly in
terms of actual survival of the corporation in a free enterprise
system. 13 N.J. at 154, 93 A.2d at 586, 39 A.L.R.2d at 1188."
Nonetheless, while tipping a hat to the old common law restrictions on
contributions, the court makes it clear that a broader rule is being
enunciated. Thus for example, although the court finds the 1930 statute
authorizing contributions to be applicable, the power of corporations
to make contributions is viewed as existing "even apart from express
statutory conditions," and provisions of the statute are said to "simply
constitute helpful and confirmatory declarations of such power .... 13
The Smith decision was relied on by the Supreme Court of Utah in
Union Pacific R. Co. v. Trustees, Inc.,14 which continued the trend
toward legitimizing socially motivated corporate conduct. In that case,
the Union Pacific had contributed $5,000 to a non-profit corporation
which it had created to serve charitable purposes. As in the Smith
case, adverse stockholder reaction led the company's directors to seek
a declaratory judgment upholding their appropriation. The Utah court
chose to rely on that part of Smith which found the implied power of
corporations in modern America to make charitable donations. But,
in doing so, the court thought it necessary to stress the various benefits

12. The opinion also refers to some isolated earlier cases which had already
stretched the normal corporate benefit limitation, e.g., State ex. rel. Sorenson v.
Chicago B. & Q. R. Co., 112 Neb. 24, 189 N.W. 534 (1924); Carey v. Corpora-
tion Commission of Oklahoma, 168 Okla. 487, 33 P 2d 784 (1934).
13. 13 N.J. at 160, 98 A.2d at 590, 39 A.L.R.2d at 1191.
14. 8 Utah 2d 101, 329 P 2d 398 (1958).
November 1971

e.g., public relations) that would accrue to the company from its dona-
tions, thus raising again the corporate benefit test which the Smith court
had seemed to deemphasize.
Despite the language in the Union Pacific case regarding economic
benefits, the freedom of corporate officers to allocate sums to charitable
institutions is now concededly "largely free from doubt."'" Legislation
explicitly empowering such expenditures has been enacted in all but
two states. 1 6 The broad statutory authorization of public spirited cot-
porate expenditures, combined with the forceful and widely accepted
reasoning of Judge Jacobs in the Smith case, has probably left cor-
porate managers largely free to exercise discretion in committing cor-
7
porate assets to serve public interests.1
Despite the growth of corporate philanthropy, legal challenges have
been rare. Following the Smith decision in 1953, and through 1965,
only two court challenges of charitable contributions were reported. 18
Although the late '60's witnessed three more such challenges, Sylvia
Martin Foundation, Inc. v. Swearingen;19 Kelly v. Bell;20 Theodora
Holding Corporationv. Henderson,2' possibly signalling a new round
of controversy, judicial refusal to limit the freedom previously granted
serves to reinforce the corporate philanthropic power. The language
and reasoning in each of these cases suggest an increasingly strong
resolve to protect the rights of corporations to act on bases other than
profit-maximization.
Significantly, for the first time in the corporate philanthropy cases,
two courts in the late '60's brought public spirited corporate action
within the scope of the venerable "business judgment rule."' 22 In Sylvia
Martin Foundation,Inc. v. Swearingen,23 the Southern District of New
York was asked to review a decision by executives of Standard Oil of
Indiana to float a bond offering overseas rather than in the U.S. The
decision, it was said, forced Standard to give a higher interest rate on

15. CARY, CASES AND MATERIALS ON CORPORATIONS 62 (Unabridged 4th ed.

1969).
16. For a compilation and description of such legislation see Blumberg, Cor-
porate Responsibility and the Social Crisis, 50 B. U. L. REV. 157, 192-202,
208-10 (1970).
17. Annual charitable contributions by corporations, estimated in 1953 to ex-
ceed $300 million per year, 13 N.J. at 153, 98 A.2d at 586, 39 A.L.R.2d at 1187,
had reached the I billion dollar mark in 1970. HENN, LAW OF CORPORATIONS,
350 n. 33 (1970 2d ed.).
18. Union Pacific R.R. v. Trustees, Inc., supra, and Memorial Hosp. Ass'n v.
Pacific Grape Prods. Co., 45 Cal. 2d 634, 280 P.2d 481 (1955).
19. 260 F. Supp. 281 (S.D.N.Y., 1966).
20. 266 A.2d 878 (Del. Ch. 1970).
21. 257 A.2d 398 (Del. Ch. 1969).
22. This doctrine, well articulated in Selheimer v. Manganese Corporation of
America, 224 A.2d 634 (Pa. 1966) and Barnes v. Andrews, 298 F. 614 (S.D.N.Y.
1924), generally permits corporate officials to take corporate action free from
personal liability despite errors in judgment, as long as such action falls within
rather loose standards of reasonableness.
23. 260 F. Supp. 281 (1966).
 The Business Lawyer

the bonds than would have been required in this country. Officers of
Standard reportedly made the decision in an effort to aid the then severe
U.S. balance of payments problem. The case was thrown out for the
plaintiff's failure to join certain indispensable parties and other proce-
dural problems, but the court could not resist the opportunity to speak
out on the merits:
[H]ad our decision [on the procedural matters] been otherwise,
the ultimate result would-not have differed since, as a matter of
law, the complaint does not plead a claim over which ,the court
would presume to act involving as it does an attack on a matter
of business judgment and policy of defendant's directors in the
management of corporate affairs for which, absent an allegation
of fraud, personal profit or gain, the undisputed facts show com-
plete justification. 260 F. Supp. at 235.
Just last year, the Supreme Court of Delaware also applied the busi-
ness judgment rule to corporate payments by United States Steel Cor-
poration which were at least somewhat motivated by concern for com-
munity welfare. 24 U.S. Steel had long sought an exemption from certain
taxes on equipment and machinery levied by Allegheny County in Penn-
sylvania. U.S. Steel was concerned by the tax not so much because of
direct effect of paying the tax, but rather because the unavailability
of the machinery exemption in Allegheny County, while it was available
in other Pennsylvania counties, severely discouraged new companies
from locating in Allegheny. By way of inducing the legislature to pro-
vide the machinery exemption, U.S. Steel joined other resident com-
panies in a commitment that, despite passage of an exemption, they
would continue to pay the tax on all machinery and equipment on the
county tax rolls prior 'to enactment of the exemption. In upholding
the right of U.S. Steel to pay the amounts promised, the Delaware court
refused to characterize the payments as donations or business expenses,
but rather said that the sole issue for decision was whether the de-
fendants "exercised sound business judgment" in making the commit-
ment to the legislature, defined by the court to require merely an ab-
sence of bad faith or a motivation to do other than what was best for
the company.
The other recent challenge to corporate good works, Theodora
Holding Corporation v. Henderson,25 resulted in a decision which
seems to whittle away somewhat even the limitation on corporate
philanthropy originally articulated by the Smith case. The opinion in
the case had been careful to distinguish the facts there from cases
where contributions were made "indiscriminately or to a pet charity
of the corporate directors in furtherance of personal rather than cor-

24. Kelly v. Bell, 226 A.2d 878 (Del. Ch. 1970).

25. 257 A.2d 289 (Del. Ch. 1969).
November 1971

porate ends."'26 But the Theodora decision intimated that the Smith
limitation against contributions to pet charities might be too restrictive,
and viewed the general concept of "reasonableness" as the only valid
limitation on the power to make contributions. 27 The same opinion also
refer-red to the 5% tax deductibility limit set by Section 170 of the
Internal Revenue Code as an appropriate factor in determining reason-
ableness, a suggestion that has also been mentioned by other com-
28
mentators.
The history of corporate philanthropy since the Smith case suggests
that such action can be taken, in general, without fear of legal attack.
Since well before the New Deal, no court has invalidated corporate
philanthropy (other than political activities explicitly prohibited by
statute), and, even before that, the corporate action was invariably
affirmed in most instances. As we move further into the 70's, the issues
regarding corporate activity and the public good are no longer whether
corporations can or should serve public interests, but rather how far
can such service be carried, and which methods will be most effective.
The cases reviewed here indicate that corporate action in the public
arena need not be limited to simple charitable contributions. Judicial
reaction to the situations in the Sylvia Martin Foundationcase, supra,
(involving the decision to offer bonds overseas and thus aid U.S. balance
of payments policy) and .the Kelly v. Bell case (involving the U.S.
Steel agreement to pay taxes no longer on the statute books) suggests
that the judicial permissiveness will be applied to a broad range of
corporate activity. Thus, to -the extent that corporate executives wish,
for example, to meet social responsibilities by extra recruitment in
minority communities, or development of safer, less polluting manu-
facturing techniques and final products, such decisions will probably
enjoy the same judicial sympathy as have corporate gifts. This is not
to say that the profit motive has been expunged from the law books
but that, if history is any guide, the courts can be expected to take a
broad and sympathetic view of new efforts by corporate managers to
solve new problems. This suggests another conclusion: to the extent
that corporate managers are responsive to the needs of the time as
those needs become apparent, the "business judgment" rule will grow
in corresponding vigor for their protection.
Despite what has just been said, the outer limits of permissible pro
bono corporate commitment will seldom be quantitatively definable.
As liability insurance of at least some effectiveness, and in keeping
with the spirit of their fiduciary obligations, it would seem wise for
corporate managers to present their philanthropic plans to share-
holders 'for advance approval whenever the nature of the subject is
such that this course is feasible. For years this has been a widely used
26. 13 N.J. at 161, 98 A.2d at 590, 39 A.L.R.2d at 1191.
27. 257 A.2d at 405.
28. E.g., CARY, supra.
 The Business Lawyer

though certainly not universal corporate practice with respect to char-

itable donations. While such approval will often not be a technical
prerequisite to corporate expenditures, shareholder approval cannot
help but improve the posture of the managers in the event of future
challenge.
Although the issue of shareholder approval has rarely affected judi-
cial treatment of corporate philanthropy, two post-Smith decisions sug-
gest -thatsuch approval would be 'helpful. In Memorial Hospital Assoc.
v. Pacific Grape Products Co.,2 9 the Supreme Court of California re-
peatedly cited the 73% ownership of Pacific's stock by that company's
president as a basis for sustaining the validity of a charitable pledge
signed by the president. No suggestion was made that shareholder ap-
proval was technically required (or obtained) in that case; the court
merely inferred that the president's strong equity position broadened
his implied power to act 'for the company. Shareholder approval of
30
political expenditures was an issue in U.S. v. Lewis Food Company,
which dealt with criminal charges brought for violation of Federal Cor-
rupt Practices Legislation. It is impossible to know the extent to which
shareholder approval may have forestalled litigation in cases that
never reached the courts.
Perhaps one further comment is in order. Voluntary corporate ac-
tion cannot be expected to remedy all social ills. In areas such as
pollution control, for example, the changes required are in the long
run-some say in the short run-so massive that no individual cor-
poration can be expected to solve all its own ecological problems with-
out regard to its competitors. While some observers seem to hold out
hope that changes in the corporate constituency would lead to such
incredibly selfless corporate decisions, experience elsewhere has shown
adjustment of the corporate constituency to be far from the ideal solu-
tion. 31 Thus, in some areas where basic changes in business practices
may be required in the public interest, government regulation, hope-
fully simple and enlightened, will be needed. But government regula-
tion can be effective only if complimented by voluntary action. In-
creasing corporate concern for the public interest, which was perhaps
first visible in corporate charitable donations has invariably been ac-
companied and aided, at least 'for many years, by sympathetic judicial
pronouncements.

29. 290 P.2d 481 (Cal. 1955).

30. 366 F.2d 710 (9th Cir. 1966).
3 1. See, e.g., Vagts, Reforming the "Modern" Corporation:Perspectives from
the German, 80 HARv. L. REV. 23 (1966).