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Introduction to the Law of Corporations: Cases and Materials

Theodora Holding Corp. v. Henderson

Theodora deals with the issue of corporate charity.  Until the post-World War II period, there was some question whether a corporation had the power to make donations to charity. On the one hand, there were those who felt that a board's sole duty was to maximize profits for stockholders and that absent express authority to make corporate charitable contributions in the corporation's certificate of incorporation, that a board does not have the authority to make such contributions. On the other hand, there were those who recognized corporations had – even back to the pre-enabling laws period – a broader social role beyond maximizing profit for stockholders in the short run.

Eventually, states legislatures put this question to rest by amending their corporate statutes to recognize the power of boards to make charitable corporate gifts. A series of court cases, including Theodora, reinforced the importance of corporate charitable contributions and the role of corporate charitable contributions in reinforcing the social compact that makes corporate form possible.

The power of a corporation to make charitable contributions is not unlimited, however. Theodora and AP Smith [cited in Theodora] hint at the limits to corporate largesse.

The debate about the extent of corporate power to make charitable donations runs parallel to a modern debate about corporate purpose. On the one side, there are those who argue that boards should be focused exclusively on maximizing stockholder value. On the other are those who argue that corporations have responsibilities to a broader group of stakeholders. Managing the tension that is reflected in this ongoing debate is central to understanding the corporate law and how modern boards make decisions.