ProfessorBainbridge.com

Delaware Vice Chancellor Laster returns to the Moelis fray in Wagner v. BRP Group, Inc.

In West Palm Beach Firefighters' Pension Fund v. Moelis & Co.,[1] Vice Chancellor Travis Laster invalidated provisions of a stockholder agreement between Moelis & Company and Ken Moelis. Moelis & Co. is a publicly traded investment bank.[2] Ken Moelis is the firm’s founder, CEO, and Chairman of the Board.[3] Prior to Moelis & Co.;s IPO, Moelis and three affiliates entered into a stockholder agreement with the company, pursuant to which Moelis and his affiliates were granted extensive governance rights, which allegedly divested control from the Company's board.[4] The agreement was fully disclosed before the Company's 2014 IPO.[5]

In the opinion, the Vice Chancellor strongly reaffirmed the board centric nature of Delaware corporate law, which remains the rule even when the company has a controlling a shareholder.[6] After a lengthy review of Delaware case law on the distinction between invalid restrictions on board authority from valid contractual provisions impacting the board’s authority,[7] the Vice Chancellor concluded that the pre-approval rights, certain board composition provisions, and committee composition provisions fell on the invalid side of the line.[8] Although the Vice Chancellor acknowledged that agreements of the sort at issue in the case at bar had become common market practice, he emphasized that the statute controls when the two conflict.[9] Despite that seemingly self-evident truism, the decision generated substantial blowback from the practicing bar.[10] In particular, despite the opinion’s considerable length, it left practitioners frustrated by what they saw as considerable uncertainty as to how to apply the decision in the future.[11] This uncertainty had real world consequences, because it cast into doubt the validity of thousands of existing contracts[12] and “caused confusion about how such agreements should be prepared moving forward.”[13]

Three months later Vice Chancellor Laster returned to the fray in Wagner v BRP Group, Inc.,[14] in which a similar contract was at issue.[15] In Wagner, the Vice Chancellor described Moelis as having adopted a two pronged test. First, to determine whether the agreement implicates the boards authority under DGCL § 141(a), the court must evaluate “whether the challenged provision constitutes part of the corporation's internal governance arrangement. If not, then the inquiry ends.”[16] Second, the court must determine whether the arrangements “have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters” or “tend[ ] to limit in a substantial way the freedom of director decisions on matters of management policy ....”[17]

As for the initial inquiry, the Vice Chancellor identified seven considerations to be weighed.[18] He concluded that the agreement at issue “closely resembles the stockholder agreement at issue in the Moelis Merits decision, and it provides another prototype of an agreement that falls into that category.”[19] Although practitioners may take some solace in having a second example of an invalid contract, it may be doubted whether a seven factor, highly fact specific test will provide much in the way of new certainty.[20]

As for the second factor, the Vice Chancellor concluded that the agreements substantially limited the board’s authority and were thus invalid.[21] Among other problems, the agreement required the CEO’s prior written approval of a proposal before the board could act on it. Explaining that such a provision put the cart before the horse, the Vice Chancellor observed that the agreement put “the Board in the same position as a management team that proposes options for a board to review and approve.”[22] Quoting your truly, the Vice Chancellor observed that the “power to review is the power to decide.”[23] By giving the CEO the power to review, the agreement gave him the power to decide, which is a power the statute reserved to the board.[24]

The decision strikes me as sound on the merits. Speaking as an ex-transactional lawyer, however, I would like to have seen brighter lines than the opinion offers. Speaking as a case book author, I'd like to see a much shorter opinion. It's very very hard to whittle modern Chancery decisions down into a manageable length.

In Moelis, the Vice Chancellor practically invited the Delaware legislature to decide whether the statute should be amended so as to allow the pre-Moelis market practice to continue.[25] In fact, the Delaware bar has proposed legislation that, among other things, would reverse Moelis. Tulane law professor Ann Lipton has been commenting frequently on that legislation:

What is the value of the corporate charter, a reprise

What is the value of the corporate form?

The Delaware contretemps continues

What is the Value of the Corporate Charter?

In the most recent post (the first listed above), Lipton (correctly IMHO) observes that:

... these proposed DGCL changes have very far reaching social consequences that simply have not been explored by Delaware lawmakers, let alone The Rest of Society.

I should also note that our friend who runs the invaluable The Chancery Daily has also been covering the legislative maneuvers with great insight. Here's a collection of Chancery Daily links.

Somewhat more controversially, VC Laster has been blogging about them on LinkedIn:

The Unintended Beneficiaries Of Section 122(18)

Round 5

Although I've heard grumblings from various sources that the Vice Chancellor should not be essentially blogging on legal issues, I don't have a problem with it as a general matter. In a disclaimer to the first posted listed above, VC Laster states:

I offer the comments in this post in my personal capacity. Canon 4 of the Delaware Judges’ Code of Judicial Conduct permits a judge to engage in “activities to improve the law, the legal system, and the administration of justice.” That canon says that “[a] judge may speak, write, lecture, teach, and participate in other activities concerning the law, the legal system, and the administration of justice (including projects directed to the drafting of legislation).” By writing this post, I am attempting to “write” on an issue concerning “the law, the legal system, and the administration of justice.” If someone had scheduled a CLE about the market practice amendments, I would have said the same things there.

That strikes me as correct. There is a long tradition of Delaware jurists engaging with the bar by writing law review articles, speaking at conferences, and so on. (After all, what else is there to do in Wilmington? I ask with love, of course.) Blogging on LinkedIn doesn't strike me as differing in kind from those more traditional venues. 

 

 

Martin Lipton's Grossly Unfair Attack of Shareholder Value Maximization's Proponents

After making his bones defending entrenched corporate managers from the discipline of the market for corporate control, Martin Lipton lately has been defending entrenched corporate managers from the discipline of the stock market. (Admittedly, I also believe in deferring in some cases to board decisions about takeovers and to insulating boards to some extent from shareholder activism, although I do so for policy rather than business motives.)

In his latest screed, Lipton once again peddles the same gross misrepresentation upon which he seems to dote:

Since the 1970s, when the work of Milton Friedman, Michael Jensen, and Frank Easterbrook took hold in business schools, activists and raiders in high-profile proxy fights and hostile takeovers on Wall Street have wrapped their arms around the shareholder-primacy narrative to advance their own short-termist objectives.  Far from shared scholarly interest, their objective was plain:  To justify cutting off directors’ reasoned judgment, in favor of maximizing short-term shareholder value, notwithstanding the attendant harm to the health of our corporate and economic landscape and even our national security.  

It's as if he thinks the 1980s Chicago School set out to trash the country. In doing so, he completely misrepresents the Chicago School argument. All of which brings to mind Alex Edmans observation that "criticisms of Friedman are based on serious misunderstandings about what he actually wrote, casting doubt on whether their authors actually read beyond the title." 

As Glenn Hubbard observed:

Somewhat unfairly, Friedman’s focus has been taken to mean “short-term value,” generating gains to benefit current shareholders at the expense of other stakeholders. But Friedman is best read as embracing maximizing shareholder value over the long run. ... There is another rub, and Friedman anticipated it: Even long-term shareholder-value maximization can’t address all problems faced by a firm. Some problems — climate change, for example — are arguably more complex than Friedman envisioned. In these cases, public policy changes are required.

Turning to Jensen, Lipton's misrepresentation of his position is even more egregious. Jensen himself wrote:

... we must give employees and managers a structure that will help them resist the temptation to maximize the short-term financial performance (usually profits, or sometimes even more silly, earnings per share) of the organization. Such short-term profit maximization is a sure way to destroy value. ...

Indeed, it is obvious that we cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency. 

Does that even remotely resemble Lipton's disingenuous misrepresentation?

In fact, as I discuss at length in my book, The Profit Motive: Defending Shareholder Value Maximization, Friedman, Jensen, and other proponents of shareholder value maximization (yours truly included) favor long-term perspectives. Yet Lipton consistently misrepresents their position.

In the second place, it is not the shareholder value maximization principle that threatens our economy but rather the half-baked stakeholderism Lipton expounds. Steven Kaplan observes:

Professor Friedman was and is right. A world in which businesses maximise shareholder value has been immensely productive and successful over the past 50 years. Accordingly, business should continue to maximise shareholder value as long as it stays within the rules of the game. Any other goal incentivises disorder, disinvestment, government interference and, ultimately, decline.

Thisis, of course, the basic point of the second half of my book The Profit Motive: Defending Shareholder Value Maximization, in the course of which I critique Lipton's prior arguments at length.

The Trans-Atlantic Origin of Private Equity

British corporate law scholar Marc Moore has published a very interesting article on the trans-Atlantic origin of private equity, which he has summarized for the CLS Blue Sky Blog. Money quote:

Anglo-American private equity has a much longer, richer, and more complex history (or, if you like, pre-history) than is typically attributed to it. As such, modern manifestations of private equity from the 1970s onwards are not nearly as unusual in the broader context of historical investment practices as is commonly believed. Accordingly, there is much to be gained from viewing the modern private equity sector against the much longer, richer, and more contextually path-dependent backdrop that I set out in my paper. Moreover, the added value to students and scholars of private equity from taking such a long (and broad) view of their subject matter is especially pertinent in the contemporary context, as the private equity sector’s rapidly increasing bureaucratic scale and functional complexity present evolving new challenges for practitioners, policymakers, and external analysts alike.

Recommended reading.

Criticizing CalPERS for siding with shareholder activists rather than Exxon

The OC Register published my op-ed "CalPERS continues to play politics despite poor performance,"criticizing CalPERS for siding with shareholder activists versus Exxon.https://t.co/f4wVu3OEZJ

— Steve Bainbridge (@PrawfBainbridge) May 27, 2024

Why is Exxon suing climate change activist shareholders?

In response to my post Exxon's Lawsuit Against Activist Shareholders Continues, a friend and fellow corporate law academic sent along an interesting comment:

You think ExxonMobil's attempts to limit what kinds of proposals shareholders can put in management's proxy are good.  But are they as good for Exxon as the cost TO Exxon? That is, would a purely profit-maximizing ExxonMobil pursue the case? Presumably they would pay all the cost while only reaping a small portion of the benefit...

In response, I wrote that:

I am reminded of a couple of cases from my case book. Hoddeson v. Koos Bros., 47 N.J.Super. 224, 135 A.2d 702 (App.Div.1957). Koos Bros. went to trial over a $168.50 dispute. And then fought the case on appeal. The casebook then poses the question: “This is one of several cases in this text in which parties vigorously litigated disputes involving seemingly trivial amounts. Why on earth would Koos Bros. have gone to such lengths and expense?”

See also National Biscuit Company v. Stroud, 249 N.C. 467, 106 S.E.2d 692 (1959). National litigated a $171.04 bill all the way up to the North Carolina Supreme Court.

In 1954, according to a study by the Department of Commerce, the average income of lawyers in the United States was $10,220, more than twice as much as the average family income of the time. Slightly more than a quarter of these lawyers made less than $5,000 a year, and 18 percent earned $15,000 a year or more. The majority, almost two-thirds, earned between $5,000 and $10,000 yearly. So the fee likely exceeded the amount in dispute. So it seems to make no economic sense. So why did they do it? Granted, they may desire to set a precedent that benefits them, but most of the benefit would go to other businesses. As such, they bear all the costs of setting the precedent and reap only a small portion of the benefits. We puzzle some about that it in class, usually unsatisfactorily.

It seems to me not implausible that corporate executives are not always rational actors functioning on strict cost-benefit analyses. Perhaps Exxon management is simply fed up with climate activists trying to shut down their business. After all, they have had to put up with the Little Engine hedge fund fight and annual climate-related shareholder proposals.

Alternatively, the economics of the decision may be analogous to that of hedge fund activism. If a hedge fund succeeds in compelling a target company to make changes that raise the stock price, most of the gains flow to other shareholders who are freeriding on the activist. Yet, the activist makes enough money to justify the expense. Maybe Exxon thinks the costs to it of the shareholder proposal regime—including opportunity and reputational ones—justify setting a precedent.

Or maybe Exxon management thinks there will be non-pecuniary benefits to winning, such as the gratitude of public company CEOs everywhere.

Could corporate power statutes provide a way to end run Citizens United?

I was recently asked an interesting question: A corporation historically had only those powers that were specifically granted it by the legislature.  If the corporation took actions that it lacked power to undertake, those actions were deemed ultra vites and thus void.

Today, the ultra vires doctrine is mostly a dead letter. One of the reasons is that during the antebellum period states began abandoning any effort to regulate the substantive conduct of corporations through the incorporation process. In particular, MBCA § 3.02 says that every corporation shall have “the same powers as an individual to do all things necessary or convenient to carry out its business and affairs.” including a list of specified powers. I note by way of digression that this grant of power is subject to the qualification that the corporation possesses such power unless the articles of incorporation provide otherwise. Presumably, a corporation that wished to do so could include a provision in its articles of incorporation disavowing the power to make political contributions. This option provides little help for anti-Citizens United activists, however, because adopting an amendment to the articles to so provide requires approval by the board of directors and a vote of the shareholders. If the board does not approve the proposed amendment there is no way to get it before the shareholders and, of course, if the board did approve you would still need to persuade the shareholders to also do so.

DGCL § 122 sets out an extensive list of powers that corporations automatically possess by operation of law. In addition, DGCL § 121 provides that "every corporation, its officers, directors and stockholders shall possess and may exercise all the powers and privileges granted by this chapter or by any other law or by its certificate of incorporation, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes set forth in its certificate of incorporation." 

I discuss the issue of corporate powers and the ultra vires doctrine in more detail in my book Corporate Law (Concepts and Insights).

Let us suppose that the MBCA or the DGCL were amended so as to provide that corporations have no power to make political contributions. Would that fly? As a matter of corporate law, I assume so. In many states, many state statutes qualify the broad grants of power conferred by statutes like MBCA § 3.02 by including express limitations on the powers corporations may exercise. DGCL sec. 125, for example, provides that corporations have no “power to confer academic or honorary degrees unless the certificate of incorporation or an amendment thereof shall so provide and unless the certificate of incorporation or an amendment thereof prior to its being filed in the office of the Secretary of State shall have endorsed thereon the approval of the Department of Education of this State.” DGCL sec. 126 provides that no business corporation organized under the DGCL “shall possess the power of issuing bills, notes, or other evidences of debt for circulation as money, or the power of carrying on the business of receiving deposits of money.”

But would it be constitutional? Here we run into the perennial problem that the Supreme Court lacks a coherent theory of the corporation. Its opinions reflect little if any understanding of how corporate law and governance work, how various provisions interact, and the theoretical foundations that underlie corporate law and governance.

In my view, the unconstitutional conditions doctrine would come into play. Yes, corporations are creatures of state law and there is case law positing that incorporation is not a right but rather a privilege granted by the state. But "the modern 'unconstitutional conditions' doctrine holds that the government 'may not deny a benefit to a person on a basis that infringes his constitutionally protected ... freedom of speech' even if he has no entitlement to that benefit." Bd. of Cnty. Com'rs, Wabaunsee Cnty., Kan. v. Umbehr, 518 U.S. 668, 674 (1996). The same is true of other constitutional rights.

Notice, by the way, that we have been discussing so far a state amendment denying corporations the power to make political contributions. But what about independent expenditures? What about a proposal that said corporations may not speak on political issues. Setting aside the practical issues of how you constitutionally carve out an exception for corporations like the New York Times, such a proposal would even more explicitly raise speech issues and thus the unconstitutional condition issue.

In Am. Tradition Partn., Inc. v. Bullock, 567 U.S. 516 (2012), a one paragraph per curiam opinion, a 5-4 majority held that a Montana state statute providing that a “corporation may not make ... an expenditure in connection with a candidate or a political committee that supports or opposes a candidate or a political party” was unconstitutional. "The question presented in this case is whether the holding of Citizens United applies to the Montana state law. There can be no serious doubt that it does." 

Bullock would seem dispositive. After all, as the Supreme Court observed in Citizens United:

Either as support for its antidistortion rationale or as a further argument, the Austin majority undertook to distinguish wealthy individuals from corporations on the ground that “[s]tate law grants corporations special advantages—such as limited liability, perpetual life, and favorable treatment of the accumulation and distribution of assets.” This does not suffice, however, to allow laws prohibiting speech. “It is rudimentary that the State cannot exact as the price of those special advantages the forfeiture of First Amendment rights.”

Director Primacy is not Managerialist

According to Wikipedia:

Director primacy is a theory of the firm that was introduced by Bainbridge in an article in Northwestern University Law Review in 2003 (Vol 97 No 2). He argues that traditional firm theory is based on a false premise that the board's authority derives from the owners. He argues that while the board is appointed by the owners, the nature of the appointment is one in which the power to be exercised is not under the control of the appointing members. Once appointed then, directors are almost unfettered in their exercise of their powers. However, they are subject to overarching fiduciary responsibility which aligns their required actions with a shareholder wealth maximization principle.

For a concise summary of director primacy, see my 2011 blog post Director primacy in 5 minutes worth of bullet points.

Bill Bratton is a fellow corporate law scholar and one for whom I have great admiration. But I must quibble with something he wrote recently:

For most of the twentieth century there had prevailed a managerialist model of corporate governance that endorsed the delegation of substantial discretion to managers. But, at the century's close, the absolutist view represented a minority perspective.⁴⁶⁸

⁴⁶⁸ Steve Bainbridge was the leading proponent. See, e.g., Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U. L. Rev. 547 (2003); Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 Stan. L. Rev. 866 (2002).

William W. Bratton, A History of Corporate Law Federalism in the Twentieth Century, 47 Seattle U.L. Rev. 781, 859 (2024).

In fact, I have always tried very hard to distinguish director primacy from managerialism. Director primacy is not intended to explain or defend "delegation of substantial discretion to managers." It is intended to explain and defend delegation of substantial discretion to directors.

In my view, that distinction is critical. As I explain at some length, "Director primacy should not be confused with what might be termed contractarian managerialism.'” Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 561 (2003). (The argument extends to page 563.)

I critiqued classic accounts of corporate governance because they failed "to distinguish between directors and officers. They thus ignored significant attributes of the board of directors that deserve special attention." Id. at 561. And I concluded that:

In situations of overt conflict between the board and top management, the board's authority prevails as a matter of law, if not always in practice. In sum, because the formal structure of corporation law mandates that management is subordinate to the board of directors and because board capture no longer has as much real-world relevance as it once did, director primacy proves superior to managerialism from both normative and positive perspectives.

Exxon's Lawsuit Against Activist Shareholders Continues

Climate activist investment funds Arjuna Capital and Follow This filed shareholder proposals with Exxon. If included in the proxy statement and approved by the shareholders, the proposal would have asked Exxon to “go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions ... and to summarize new plans, targets, and timetables.” 

As Exxon pointed out:

• The proposal addresses substantially the same subject matter as the 2022 and 2023 proposals – both of which were overwhelmingly rejected by our shareholders.
• This proposal was designed to do one thing – put us out of business. That’s literally what the proponents said.
  • Arjuna Capital believes “Exxon should shrink.”
  • Follow This says its proposals are “Trojan Horse” proposals designed to wind down the company’s business in oil and natural gas.

Activist shareholders (the vast majority being progressives advancing progressive policy goals) have long used the shareholder proposal rule to publicize their causes and seek to change corporate behavior. Since Gary Gensler became SAEC Chairman, the SEC has made it ever easier for progressive activists to get their proposals on proxy statements.

When an issuer wishes to exclude a proposal fro its proxy statement, the usual move is to ask the SEC for permission to do so via a no action letter request. But Gensler's SEC is widely regarded as leaning heavily on the activist side.

So Exxon decided to bypass the usual process and sued the activists in federal court:

• The intent of our lawsuit is simple – we want clarity on a process that has become ripe for abuse. 
• The current process to get proxy proposals excluded is flawed.
• We believe activists with minimal or even no shares should not be permitted to re-submit proposals that do not grow long-term shareholder value.

A few days ago, the LA Times business columnist Michael Hiltzik--who is undoubtedly the country's most progressive anti-business columnist charged with covering business--published a rant against Exxon's suit. Hilzick accuses Exxon of being the "world’s biggest corporate bully" for having to tried to defend its shareholders against a pair of activists whose interests are totally opposed to those of other Exxon shareholders. After all, the proponents themselves admitted is intended to “shrink” the company – which would ultimately hurt shareholders.

However, the SEC became political first when it changed its policy to explicitly allow proposals dealing with issues of “broad social significance” onto corporate ballots. Since that change, an unprecedented number of proposals dealing with Democratic policy priorities, namely climate and DEI matters, have been voted on and overwhelmingly rejected by shareholders.

Exxon’s ask of the court is simple and uncontroversial: protect our public markets by affirming the rules governing the shareholder proposal process that’s meant to empower shareholder and company collaboration instead of creating a company-funded forum for activist grandstanding.

Exxon's suit has survived a motion to dismiss on mootness grounds:

U.S. District Judge Mark Pittman ruled that Exxon could continue its case against Arjuna Capital, citing jurisdiction to hear the case over a U.S.-based firm. However, he said it could not pursue its claim against Follow This as it is Netherlands-based and outside the court's jurisdiction.

Duck Fat Roasted Baby Carrots

• 8 ounces baby carrots
• 1 ½ tablespoons duck fat, melted
• ¼ teaspoon sweet paprika
• ¾ teaspoon dried thyme
• ½ teaspoon kosher salt
• ¼ teaspoon black pepper
• 1 tablespoon honey, briefly warmed in microwave so it is runny

Preheat oven to 425 degrees.

Mix duck fat with thyme, paprika, salt, and pepper in a bowl large enough to hold the carrots.

I like the Earth Exotics baby carrots, which come pre-peeled, are just the right length, and actually look like carrots.

Add the carrots to the bowl with the duck fat mixture and toss until well coated. Put carrots on a baking sheet covered with a Silpat silicon baking mat (makes serving and cleanup much easier).

Bake carrots for 25 minutes or until they pierce easily with a parking knife. Using a small pastry brush, brush carrots with honey. Serve.

Smith-Madrone Riesling (Napa Valley; Spring Mountain District) 2019

Long time readers will recall my affection for Napa Valley's Smith-Madrone wine. It's a 34 acre vineyard perched on a steep slope high atop Spring Mountain on the western side of Napa Valley, with beautiful views. It's run by great people who make excellent wines that they price very fairly with high quality per dollar.

We drank the 2019 Estate Riesling with some moderately spicy Thai food, for which it made a great match. Unlike some vintages, the 2019 did not exhibit the trademark Riesling whiff of petrol (which can be a good thing). Instead, its lovely yellow-gold body offered up a complex bouquet of citrus, peach, pear, almonds, and honey. On the palate, it suggests Meyer lemon, papaya, peach, and a note of flint. This wine still has a lot of youthful vitality. Unlike most California white wines, this one will age well. Past experience with vintages that were allowed to mature suggests it will develop into a mature wine with lots of character. 

Highly recommended.

BigLaw's Moronic New Approach to Hiring Summer Associates

Bloomberg reports:

BIG LAW’S accelerated summer recruiting push for top law school students—often beginning before their first year ends—poses particular challenges for first-generation students who may be less prepared for what to expect early on, Tatyana Monnay and Meghan Tribe report.

Leading firms are now urging students to apply for coveted summer jobs while they’re still juggling classes and preparing for first-year finals. The competition among firms to identify and lock down the best young legal talent means students have less time to adjust to the rigors of law school—and are being vetted based on just one full semester’s performance.

I would have been seriously screwed under this policy if it had been in effect whenI were a law student. I was the first member of our family to attend law school. Worse yet, in both college and law school, I had one of those "shows (a lot of) improvement" transcripts. My grades after my first semester put me in the middle of the class. But by the time I graduated my grades put me third. I got a BigLaw job for which I had not interviewed until during my clerkship. Under a system in which BigLaw locks down its choices based on fall semester first year grades, people with my sort of law school career--who could have gone on to successful BigLaw careers--will be blocked out. Both students and law firms will miss out.

But somehow I'm not surprised. I've never thought law firms--especially BigLaw--had very intelligent approaches to human resources.

Some Preliminary Thoughts About VC Laster's New Delaware Chancery Court Opinion in McRitchire v. Zuckerberg

Meta is the world's largest social media network, encompassing Facebook, Instagram, Messenger, and WhatsApp, used by 3.59 billion monthly and 2.82 billion daily users. These platforms collectively handle over 140 billion messages daily. In 2021, Meta reported $118 billion in revenue and $39.3 billion in profit, primarily through advertising. User engagement is critical as it increases ad views and revenue.

Plaintiff James McRitchie is a self-described shareholder activist. In this complaint, MacRitchie alleged that Meta's directors, being concentrated investors with substantial holdings in Meta stock, prioritize firm-specific gains over broader economic interests. This supposedly conflicts with diversified investors' interests, who benefit when company performance aligns with general economic trends.

The complaint argued that under Modern Portfolio Theory, investors should diversify. It suggested that fiduciary duties should serve diversified investors, implying that corporate management should focus on the broader economy's health.

The plaintiff argued that Delaware law has adopted—or should adopt— a diversified-investor model, particularly for systemically significant corporations like Meta, which the plaintiff claims impacts the economy significantly.

The complaint alleged that Meta's management, driven by Mark Zuckerberg's control, maximizes user engagement and profits at the cost of user safety and the economy. This claim was supported by whistleblower revelations and the "The Facebook Files" series by The Wall Street Journal.

In response, Meta's defendants argued that Delaware law currently supports a firm-specific model, which justifies their management approach. They sought to dismiss the complaint for failure to state a valid claim.

The complaint listed three counts. Count I alleged Meta's Board members breached fiduciary duties by ignoring the interests of diversified stockholders, focusing solely on increasing Meta’s share price and profit. Count II accused Zuckerberg and Sandberg of breaching their duties as officers by engaging Meta in activities harmful to the diversified portfolios of the company’s stockholders. Count III asserted that Zuckerberg, acting as a controller, engaged in similar detrimental practices.

As the court pointed out, the plaintiff thus charged all major Meta fiduciaries with breaching the same fiduciary standards, assuming these standards apply uniformly across roles. The court devoted a very long footnote (omitted) to challenging the uniformity of standards applicable to each role. But the analysis primarily addressed the directors' actions. For simplicity’s sake, the edit focuses exclusively on the board.

VC Travis Laster granted the motion to dismiss:

Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.

I think the opinion is interesting for several reasons. First, if confirms that Delaware follows Dodge. Second, the discussion about using a firm-specific versus a diversified-investor approach to fiduciary duties is an long-standing issue in the academic literature. Third, it gives you an opportunity to talk about a wide variety of foundational issues. Having said that, however, from my perspective as a casebook author, the opinion is  problematic in several ways. One is its sheer length (over 100 pages in Westlaw). Another is the extensive discussion of issues to which students will not be exposed until much later in the casebook, such as the standard of review in conflicted interest transactions, cases that they will not read until later in the book, and lines of cases that the casebook simply does not address.  

Some thoughts:

1. Does it matter whether we think of a corporation’s stockholders as “shareholders” or as “investors”? VC Laster explained:

The plaintiff hitches its wagon to the word “stockholders.” The plaintiff points out that stockholders are investors, then observes that “[s]mart investors diversify.” Therefore, says the plaintiff, managing a corporation for the ultimate benefit of its stockholders must mean managing it for the benefit of diversified investors. The plaintiff next argues that “[f]or a diversified Meta stockholder, the critical factor determining financial return will not be how Meta or any other individual company performs (‘alpha’), but rather how the market performs as a whole (‘beta’).” The plaintiff asserts that over time, a diversified investor’s portfolio will track the returns from the market as a whole. Not only that, but market returns will generally track the performance of the economy itself. “While valuation multiples rise and fall, they revert to a mean, leaving GDP as the key determinant of diversified portfolio value.”

Other than a gloss on the word “stockholders,” the plaintiff offers scant support for this radical claim.

2. Is Delaware law as stated in MacRitchie consistent with Dodge v. Ford Motor Co.? Yes. Laster at least implicitly treats Dodge as being consistent with the trend of Delaware case law. (It would have been nice if he had cited my article,  Why We Should Keep Teaching Dodge v. Ford Motor Co., 48 Journal of Corporation Law 77 (2022), which makes the point at length. Available at SSRN: https://ssrn.com/abstract=4076182.)

3. Does Delaware law require directors to maximize profits in the short term or the long term? Should it encourage directors to favor one over the other? Laster explained:

Delaware decisions have long instructed directors to prioritize the long-term value of the corporation. The deep structure of Delaware corporate law explains why. Because a stockholder makes a presumptively permanent investment in a presumptively perpetual firm, the proper orientation of the directors’ fiduciary duties is toward maximizing the value of the firm over a long-term investment horizon. These features mean the corporation is “uniquely designed for extreme long-term capital allocation.”

4. The court asserts that businesses do not internalize the negative externalities they generate. Is that true of all businesses? Would you expect partnerships or close corporations to internalize more or less of their negative externalities than public corporations? The problem, of course, is limited liability. In the partnership setting, the prospect of unlimited personal liability doubtless operates as a constraint on which partners are willing to risk liability by externalizing costs. In the close corporation setting, veil piercing may have somewhat of a constraining influence.

5. Does the court’s analysis of private ordering suggest that a corporation could amend its articles of incorporation to opt out of the shareholder value maximization rule and into a more stakeholder-focused model? The question of whether one can use charter provisions to contract out of the shareholder value maximization norm is a highly contested one. My view is that Chancellor William Chandler was right when he wrote that:

Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that.

eBay Dom. Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010). If the shareholder value maximization norm is thus an inherent aspect of the corporation, it would seem unlikely that one can opt out. On the other hand, if VC Laster’s reading of the three relevant provisions is correct, there is no obvious firebreak between managing for diversified investors and managing for stakeholders.

6.  If the court is correct that the Board Power Exception would allow a corporation’s articles of incorporation to effectively adopt a public benefit corporation model of fiduciary duties, why did Delaware adopt the Public Benefit Corporation statute? I think the adoption of the Private Benefit Corporation statute casts doubt on whether you can get there through private ordering.

7. Should Delaware law be changed to allow (or even require) directors to manage for the interests of diversified investors? Laster explained:

[T]he plaintiff cites The Economic Structure of Corporate Law by Frank Easterbrook and Daniel Fischel. Published in 1991, the authors advance a book-length argument for reconceiving corporate law to fit the premises of the law-and-economics movement. Like other scholars from that movement, they assume that legal rules should be evaluated from the perspective of diversified investors. Thus, they argue that,

the investor wants to maximize the value of his holdings, not the value of a given stock. Whenever there is a question about the apportionment of gain, the investor prefers whatever rule maximizes the net gain to be had—which means increasing the probability of a gain-producing transaction and reducing the costs of realizing each gain. The rules for dealing with gain-creating opportunities will be established before any particular opportunity is in sight, and so each investor will prefer the set of rules that maximizes the total value (wealth) enjoyed by investors, without regard to how the return is shared among corporations.

They also anticipate the plaintiff’s argument that “[a] person who holds a diversified portfolio has an investment in the economy as a whole and therefore wants whatever social or private governance rules maximize the value of all firms put together. He is not interested in maximizing one firm’s value if that comes out of the hide of some other corporation.” …

Meanwhile, the plaintiff does not address compelling counterarguments to a diversified-investor model. An important article by Professors Marcel Kahan and Edward Rock explains that orienting fiduciary duties toward diversified investors creates pathologies of its own. They refer to the diversified-investor model as a form of “welfarism,” which

rejects the faith that market forces will promote general welfare and lacks confidence in the government’s ability to set proper boundary constraints. Because it rejects these underpinnings of shareholderism, it also departs from the focus that shareholderism places on firm value. Instead, it embraces a corporate purpose that includes objectives that are extraneous to the corporation. As the political system has proven itself ineffective in addressing major social problems, welfarism thus looks to corporations to internalize externalities, and promote social welfare, directly.

They identify three strands of welfarism: portfolio welfarism, shareholder welfarism, and direct social welfarism. The plaintiff’s diversified-investor model is a form of portfolio welfarism, endorsed by the Shareholder Commons, which argues that highly diversified investors should “adopt stewardship practices designed to curtail corporate activities that externalize social and environmental costs that are likely to decrease the returns of portfolios that are diversified in accordance with portfolio theory, even if such curtailment could decrease returns at the externalizing company.”

But as Kahan and Rock explain, portfolio welfarism has “a dark side.

Intra-portfolio externalities do not always align with social externalities. Consider, as an example, externalities among competing firms. By raising output, a firm may harm its competitors. While doing so may maximize the value of the firm, it may reduce the value of a portfolio held by an owner with stakes in the firm’s competitors. If competing companies took account of intra-portfolio externalities by, for example, lowering output and raising prices, portfolio values may increase—but, in this case, social welfare would decline.

Welfarism also has to confront the same lack of consensus about the proper responses to social and economic problems that inhibits political solutions. “[I]f we, as citizens and voters in political elections, cannot generate effective political solutions [to social and economic problems], why would we, as shareholders and voters in corporate elections, be more successful in inducing companies to create solutions at the firm level?” The lack of consensus also creates political vulnerability.

While supporters of welfarism may point to the government’s inability to adopt regulations like a carbon tax as evidence of political dysfunction, opponents may view that failure as the outcome of a functioning democratic process and view some forms of welfarism as ‘woke capitalism.’ The very lack of political consensus for substantive solutions will thus also reduce political support for welfarism.

In short, the diversified-stockholder model is not a panacea. It too generates tradeoffs.

Some Recent Ridge Vineyards Tasting Notes

Longtime readers know I am a fan of Ridge Vineyards wine sort of the way some people are Taylor Swift fans. But lately I've been drinking even more Ridge than usual. Herewith some recent notes:

Buchignani Ranch Carignane (Alexander Valley) 2022

100% Carignane. This is a varietal that doesn't get a ton of credit, but which I think can be a very versatile food wine. We had it with a roast chicken, for which it made a very enjoyable match. Blackberry, raspberry, black cherry. Less rustic than most Carignane-dominated wines. Very enjoable now. Probably not a wine to lay down for more than 3-5 years. Grade:91

Syrah Grenache Mataro (Dry Creek Valley) 2021

74% Syrah, 17% Grenache, 9% Mataro. Sourced from the Lytton Springs Vineyard. This was a really interesting wine what we had with a simple meal of grilled steaks, baked potato, and sald, for which it was a great match. Very drinkable now, although I think it would improve with a couple more years cellar age. Rich nose suggesting cassis, black pepper, mocha java, and violets. The palate followed, but also suggested plums. Grade: 90

Buchignani Ranch Zinfandel (Alexander Valley) 2019

75% Zinfandel, 25% Carignane. Relatively low alcohol compared to a lot of Zinfandels (13.9%). Good nose of blackberry, raspberry, plums, and pepper. The palate offered much the same associations. Not a vin de garde, but a nice casual dining wine for the short term. Grade: 89

Under Delaware Law, Text Based Communications--Even Real Time Communications--Cannot Constitute a Board Meeting

Keith Paul Bishop on California law:

I recently discussed whether chat messages constitute "minutes" of a meeting.  A related question is whether emails constitute a meeting.

The California General Corporation Law contemplates that a meeting of a corporation's board of directors does not require that directors be physically present at the same location.  Cal. Corp. Code § 307(a)(6).  If directors participate by conference telephone or electronic video screen communication, all directors participating in the meeting are able to hear one another.   Id.  If directors participate by electronic transmission by and to the corporation (other than conference telephone and electronic video screen communication), then each member participating in the meeting must be able to communicate with all of the other members concurrently and each member is provided the means of participating in all matters before the board, including, without limitation, the capacity to propose, or to interpose an objection to, a specific action to be taken by the corporation.  Id.  The same conditions are found in California's Nonprofit Mutual Benefit Corporation Law.   Cal. Corp. Code § 7211(a)(6).

He concludes that "an exchange of emails would likely fail to satisfy the requirement that each member of the board be able to communication with all other members concurrently."

I blogged about this issue under Delaware law all the way back in 2003:

Delaware General Corporation Law sec. 141(i) provides that directors may conduct a meeting:

by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other....

Web-based supplements to a telephone conference call thus are fine, but real-time text based messaging is OUT. To conduct a meeting exclusively online, in a Delaware corporation at least, you must use Internet telephony. I wonder if any Delaware corporations have held invalid text-based board meetings online? I emailed this post to the reporter who wrote the story and asked him. I'll report back if he answers. In the meanwhile, I once wrote an article motivated by DGCL section 141(i)'s requirement that directors be able to hear one another. Why a Board? Group Decision Making in Corporate Governance, 55 VANDERBILT LAW REVIEW 1 (2002). To be clear, the article's not about online meetings -- its a theoretical inquiry (neoinstitutional and behavioral economics with a dose of social norms theory) into why corporations are run by a board rather than an individual autocrat (of course, in practice, many CEOs are individual autocrats). But section 141(i) was what got me thinking about the theory issues.

The post goes on to discuss the theoretical reasons why a requirement that directors be able to hear each other makes sense.

FYI: There have been no subsequent pertinent changes to DGCL 141.

Divestment is back in the news. I'm still opposed.

I have written a fair bit about divestment campaigns over the years. See, for example:

Those Divesting Presbyterians

... divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.

As the Manhattan Institute's James Copeland explained, these results are entirely consistent with financial theory ....

Quoted re CSR/Divestment

Steven Bainbridge, a corporate law professor at UCLA, agrees and says social activist divestment tends to have little impact on its targets, but does reduce returns to investors who divest.

Todd Henderson inveighs against fossil fuel divestment

No matter what your views are on the climate change debate, no rational person should support divestment. There is no evidence to demonstrate it will do anything to help the climate, and it will ultimately cost the University hundreds of millions of dollars—Swarthmore estimates it would cost their endowment $200 million over 10 years to divest. This is money that could be spent on research, scholarships, or perhaps best of all for the cause, reducing the University’s carbon footprint.

Was the Presbyterian Divestment Anti-Semitic

Lefkowitz goes on to make a persuasive case that the Presbyterian divestment was anti-Semitic:

The recent action by the Presbyterian Church sadly satisfies Mr. Sharansky's test. The church has singled out Israel, alone among all the nations of the world, for divestment. It has demonized Israel's treatment of the Palestinians, and it has delegitimized Israel's right to self- defense.

The church is not calling for divestment of its $7 billion portfolio from China, despite China's denial of the most basic political and religious rights and its particularly harsh treatment of followers of Falun Gong. It is not condemning Russia, even though Russia's policies in Chechnya are by any human-rights standard atrocious.