The Ringling case has fascinated me since I first researched a long note on the case for my casebook back in the early 1980s (p. 160). Among other things, I've wondered with generations of students why the parties fought so hard over board membership. Now the ever-interesting Mark Ramseyer has an explanation. Ringling Bros.-Barnum & Bailey Combined Shows V. Ringling: Bad Appointments and Empty-Core Cycling at the Circus. Here's an excerpt from the abstract:
The Ringling case presents itself as an irrational spat over board seats among spoiled investors. It is not. The investors were not fighting over board seats; they were fighting instead over corporate offices. Neither were they irrational. Although Edith Ringling pushed her incompetent son and Aubrey Haley her inappropriate husband, they did so to their private advantage. * * * The Ringling circus did not degenerate into the chaos in which it found itself because the investors were spoiled or irrational. It degenerated because the law could not enforce the duty of loyalty.
Here's some excerpts from the paper:
Why did the shareholders fight so bitterly and endlessly to put themselves or their relations in office? Posit a world where the circus paid its officers their market salary, and returned investors their proportional share of the profits. * * * In such a world, Edith, Aubrey, and John would care about the president's ability. They would not care about his kinship.
Yet Edith, Aubrey, and John did care about kinship. They cared about it more than managerial talent, and they probably cared because the circus let its senior officers collect more than their market salary. In the process, it returned controlling investors more than their proportional share of company profits, and other investors less. Given this dynamic, investors had an incentive to favor less talented relations over more talented strangers. And because no inter-investor alliance dominated all others, any promise a shareholder made to one shareholder could always be trumped by a promise to the other. * * *
During the season, senior officers (or partners, before 1933) traveled with the circus. They attached private cars to the end of the circus train, and lived the life of a circus impresario. According to contemporaneous accounts, they lived profligately appointed lives. Although the accounts do not detail the accounting, we can assume that they charged these lavish room, board, and travel expenses to the circus. Off season, senior officers scoured Europe for new talent. Again, contemporaneous reports detail flamboyant travel arrangements. * * *And again, we can assume they billed these expenses to the circus.
Worse, however, the officers who traveled with the circus could also skim door receipts off the top. * * * All told, senior circus officers took a significant portion of their compensation as perquisites that came with the job, and probably skimmed a substantial amount of cash. Necessarily, they "froze out" those investors working elsewhere. * * *
The circus could have mitigated this problem by selling stock to the public as planned in 1929. Although controlling officers could still pay themselves supra-market salaries (a problem potentially presented in Eisner), unhappy shareholders would at least have a market for their stock. They might have to sell at depressed prices, but at least they could sell. With the stock closely held, circus shareholders instead had an incentive to take control. Control did not just give them the chance to shape policy. It gave them access to resources other investors could not have. Most perversely, investors had an incentive to fight for control over the circus even when they could not properly run it -- and had that incentive because the law did not effectively enforce the duty of loyalty. * * *
Had courts effectively enforced the duty of loyalty, managers would receive only the market value of their services, and investors would earn returns proportional to their interests. Investors would look for work at the firm where they could contribute the most -- not where they invested the most. They would try to appoint to the presidency the man or woman best suited for the job -- not the closest blood relative.
Now let me consider a possible solution: the partnership. Had Ringling been a partnership, it would not have been remitted to weak fiduciary duties. Instead, it would, by default, have been dissolvable at will. Aggrieved members could have extricated themselves from the business, taking with them not just the stock market's depressed value of a mismanaged firm, but their share of the underlying value of the business.
Now, to be sure, that may not have been much if the business had to liquidate on dissolution. But the threat of liquidation might have brought all parties to their senses and promoted a buyout and continuation. This would have stopped the "cycling" and endless dissipation of business assets.
Perhaps a Ringling partnership agreement would have provided for a buyout and member right to continue the business. Perhaps the buyout amount would have been low enough to force something like corporate continuity. But in this situation the court would have had significant power to dissolve the partnership or fashion some alternative remedy.
To be sure, these remedies also exist in close corporations, though not necessarily when Ringling arose. But even now, close corporation remedies are often awkward and turn on proof of shareholder wrongdoing – which might gotten back to the weak loyalty duties Ramseyer complains of.
For a recent discussion of the potential advantages of partnership, including the tradeoff between fiduciary duties and liquidation and distribution rights, see my Rise of the Uncorporation. This paper, currently being revised, focuses on publicly held firms, which present different issues than in Ringling. But the partnership form is even more clearly suitable for closely held firms than for large firms.
Finally, I should add that Ramseyer's analysis explains why the parties were fighting, but not the somewhat strange judicial resolutions. I have my theories, but those are for another day.
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