Private Law Theory

ABSTRACT
The conventional understanding in corporate law is that shareholders are the residual claimants of corporations because they own the residual right to profits. Based on this understanding, shareholders are entitled to a host of corporate law rights and protections – including the right to vote and fiduciary duty protections. However, a review of the origin and history of residual claimant theory shows that the theory originally envisaged a broad conception of the residual claim that goes beyond profits, leading to a diverse array of stakeholders being the residual claimants of corporations over time. Depending on which of the theories of rent, interest, wages, or profit was adopted, each of the landlord, capitalist, laborer, and entrepreneur has been considered the residual claimant of the corporation. This history shows that the prevailing view of shareholders as the exclusive residual claimants of the corporation is a relatively recent understanding and that the historical record supports a more diverse conception of the residual claimant. In that sense, residual claimant analysis is better understood as a theory for the stakeholder model of the firm than the shareholder primacy model, as it is presently understood.

Kim, Sung Eun, Tracing the Diverse History of Corporate Residual Claimants (January 14, 2022). Southern California Law Review Postscript, volume 95, 2021-2022, UC Irvine School of Law Research Paper No 2022-05.

First posted 2022-01-26 14:00:46