CHAPTER TEN

Could a Conventional Corporation Adopt Stakeholder Values?

Some readers may understand the benefits of stakeholder governance but wonder why an entirely new statute is really needed. Most corporation laws are fairly flexible, after all. This chapter examines whether it would be possible for a conventional corporation to simply add language to its charter in order to adopt a stakeholder form of governance. The conclusion is that it is very questionable whether such provisions would be enforceable (especially in a state like Delaware, which has not adopted a constituency statute) and that, in any event, there is little reason to resort to such private ordering when there are so many clear alternatives provided under the entity laws in a variety of U.S. jurisdictions.

The Statutory Framework in Delaware

Although shareholder wealth maximization is the default law for Delaware corporations, there are no statutes that explicitly forbid a corporation from altering the duties of directors so that they are not bound to act solely in the interests of shareholders. Accordingly, potential users of the public benefit corporation provisions might question whether they could modify directors’ fiduciary duties to include duties to stakeholders by “private ordering”—by simply writing such provisions into a corporation’s certificate of incorporation (and thus without becoming a benefit corporation). Indeed, some scholars have posited that fiduciary duties to shareholders may be contracted away via the certificate of incorporation.¹ However, as we will see, there would be substantial uncertainty around the enforceability of such a provision.

Delaware law has various statutes that enable corporations to modify the default corporation law.² In addition, there are specific provisions in the Delaware General Corporation Law that permit the modification of fiduciary law applicable to a corporation. Specifically, Section 102(b)(7) permits a Delaware corporation to limit the personal liability of directors for certain fiduciary duty breaches,³ and Section 122(17) permits a corporation to limit the effect of the “corporate opportunity doctrine.”⁴ (The corporate opportunity doctrine is a subset of the duty of loyalty that limits the ability of a fiduciary to take advantage of business opportunities that are deemed to belong to the corporation.) Furthermore, Delaware statutes that govern noncorporate entities (such as LLCs) expressly permit broad modifications of fiduciary duty.⁵ Finally, Section 102(b)(1) expressly permits a company’s certificate of incorporation to contain “any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders… if such provisions are not contrary to the laws of this State.”⁶

Delaware Law Does Not Authorize Private Ordering of Fiduciary Duties

The viability of altering fiduciary duties through a provision in the certificate of incorporation adopted pursuant to Section 102(b)(1) would likely turn on the question of whether such a provision were “contrary to the laws of this state.” This phrase has been interpreted as encompassing the Delaware corporate common law as well as statutory law.⁷ However, the Delaware Court of Chancery has held that it may strike down a provision in the certificate of incorporation only if it “contravenes Delaware public policy.”⁸ Therefore, it seems likely that if litigation arose concerning a conventional corporation’s alteration of shareholder primacy in its certificate of incorporation, the Delaware courts would have to determine whether the common law precedents such as eBay and Revlon represent the type of public policy that cannot be overridden under Section 102(b)(1).

It seems likely that such a provision would be considered contrary to public policy and thus contrary to Delaware law and precluded under Section 102(b) (1). The fundamental nature of the duty that directors owe to shareholders, as well as the fact that the legislature has thought it necessary to authorize certain fiduciary duty modifications in both the DGCL and the statutes governing limited partnerships and limited liability companies, support this conclusion. Indeed, in one Court of Chancery case, the court specifically found that Section 102(b)(7), by negative implication, precluded charter provisions that limited director liability for breaching the duty of loyalty by usurping corporate opportunities.⁹ The case was decided after the adoption of Section 102(b)(7), which allows charter provisions that limit liability for breach of the duty of care, but not for breaches of the duty of loyalty, and before the adoption of Section 122(17), which authorizes limitations on liability for one category of loyalty claims: usurpation of corporate opportunities.

In addition, some scholars have posited that fiduciary principles stand separate from contract principles and serve as a protective measure for shareholders who have no bargained-for contractual rights in the corporation.¹⁰ This line of reasoning suggests that fiduciary duties should not be subject to contractual alteration, except where authorized by statute. This result is consistent with the idea that, despite the benefits of flexible corporate statutes, too much flexibility may be counterproductive.¹¹

A final argument against permitting a corporation to limit directors’ fiduciary duties in the same manner permitted by the Delaware benefit corporation statute is that such an interpretation would allow corporations to amend their charters to make the changes contemplated by the PBCS by simple majority vote, and without triggering appraisal rights. This would allow corporations to easily evade the statutory protections that the legislature thought were necessary in connection with such changes.

Other Jurisdictions and Practicalities

The foregoing analysis has only addressed Delaware law. Of course, one might ask a similar question with respect to any jurisdiction. The question becomes more interesting, perhaps, in states that have constituency statutes; are they less likely to find that there is a public policy that would be violated by mandatory stakeholder obligations? It would seem so, but ultimately, this question would require a close review of the relevant corporate statute and applicable case law.

As a practical matter, however, private ordering with respect to this issue does not seem to be advisable without clear authority. It risks having directors make stakeholder-based decisions, only to discover that, in fact, the charter provisions authorizing such consideration are void. On the other hand, to the extent such provisions are valid, there may be a risk that they create rights in stakeholders, since, unlike the situation that exists for benefit corporations, there is no statutory protection from stakeholder suits, nor statutory exculpation and business judgment rule protection. In light of these uncertainties, businesses that want to form with stakeholder governance would be well advised to use a benefit corporation statute in one of the states where it has been authorized, or to use an alternative entity, or social purpose corporation, as described in the next chapter.

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Now that we have established that conventional corporations are not good vehicles for establishing stakeholder governance, we turn to the next chapter, which discusses some more viable alternatives to the benefit corporation.