Meinhard v. Salmon and the Economics of Honor

Friday, January 1st, 1999 at 12:00 am by Nicholas L. Georgakopoulos
Nicholas L. Georgakopoulos, Meinhard v. Salmon and the Economics of Honor, 1999 Colum. Bus. L. Rev. 137

The utmost specimen of a classic corporate case is Meinhard v. Salmon. Cardozo’s powerful rhetoric and sensitive morality instills confidence in every student who doubts the propriety of this breed of capitalism. A fundamental paradox, however, lies in the attraction of Meinhard to corporate law teachers. The case’s appeal appears to lie in its rhetoric and morality, while most corporate law courses seek to make economic sense out of business law. No less an economic analysis scholar than Richard Posner, in studying Cardozo’s opinions closely in his book on Cardozo’s reputation, categorizes Meinhard as a moralistic case, which exemplifies Cardozo’s rhetorical powers. Posner, however, fails to realize that Cardozo’s uncanny economic intuition was equally at work here as in any other of his famous opinions. This short article seeks to overturn the myth that the decision in Meinhard was based on morality alone. If Meinhard is not Cardozo’s best opinion from an economic perspective, it is certainly one of the best examples of his astonishing gift to provide the economically advantageous rules in an irresistible dress of moral appeal and graceful prose. The economic principle of broad fiduciary obligations that lies behind Meinhard forms a cornerstone of managerial capitalism that has allowed passive investment in professionally managed corporations. The Meinhard principle also enabled the world-wide spread of managerial capitalism. Moreover, to the consternation of continental European legal systems that are currently trying to emulate the creative drive of common-law-developed venture capital, Cardozo has already proffered the answer: under narrow fiduciary duties, projects with primarily remote opportunities will not be financed. Indeed, the average venture capital investment in the U.S. is a minority equity stake in a young enterprise. By contrast, abroad minority equity investments are avoided, and the venture capitalists lend to much more established and safer enterprises.

Author Information

Professor, University of Connecticut School of Law