Notes

Introduction: A Corporate Lawyer’s Journey

1. Lynn Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (San Francisco: Berrett-Koehler, 2012).

2. Simon Deakin, “Corporate Governance and Financial Crisis in the Long Run,” in The Embedded Firm: Corporate Governance, Labor, and Finance Capitalism, ed. Cynthia A. Williams and Peer Zumbansen (Cambridge: Cambridge University Press, 2011), 15.

3. Colin Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust In It (Oxford: Oxford University Press, 2013).

Chapter 1. Corporations and Investors: Setting The Stage

1. I use the term “entities” rather than “corporation” because several jurisdictions now permit the formation of limited liability companies (LLCs) with benefit corporation characteristics. See chapter 11, present volume.

2. For ease of reference, this book will generally refer to “corporations” and “benefit corporations.” However, depending on jurisdiction and circumstance, other entities may take on the essential characteristics of corporations. In the United States, for example, publicly traded master limited partnerships play the same economic role as corporations but receive beneficial tax treatment not available to widely held corporations. Many enterprises that are not publicly traded are formed as limited liability companies, which also share the essential characteristics of corporations but are subject to a more flexible legal regime than are corporations. See David McBride, General Corporation Laws: History and Economics, Law and Contemporary Problems 74 (Winter 2011): 5, noting the proliferation of forms of entity.

3. Cary Krosinsky, “Overcoming Distractions on the Road to Increased Levels of ESG Integration,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 614.

4. Henry W. Ballantine, Ballantine on Corporations (Chicago: Callaghan and Company, 1946), 1.

5. Colin Mayer, Reinventing the Corporation, Journal British Acad. 4 (2015): 59.

6. Ballantine, Ballantine on Corporations, 31–32; Mayer, “Reinventing the Corporation,” 53.

7. Mayer, “Reinventing the Corporation,” 54. Alongside the development of special charters granting the important privileges of limited liability, English business developed nonchartered “joint-stock companies” that permitted investment in transferable shares, but this did not adequately address the issue of liability for the company’s debts. See also Ballantine, Ballantine on Corporations, 33.

8. McBride, “General Corporation Laws,” 3; Ballantine, Ballantine on Corporations, 31–41.

9. Adolf Berle and Gardner Means, The Modern Corporation and Private Property (1932; reprint, New Brunswick: Transaction Publishers, 2010), 313: “The modern corporation may be regarded not simply as one form of social organization but potentially (if not actually) as the dominant institution of the modern world.” McBride, “General Corporation Laws,” 4: “By the end of the nineteenth century, the laws governing incorporation had evolved to respond to the needs of the economy and the objectives of the business and financial worlds. No longer a privilege, incorporation became a right.”

10. Will Hutton, Colin Mayer, and Philippe Schneider, The Rights and Wrongs of Shareholder Rights, Seattle Univ. L. Rev. 40 (2017): 376: “It was with freedom of incorporation in the middle of the nineteenth century that the focus on public purpose gave way to private interest.”

11. J. Haskell Murray, An Early Report on Benefit Corporations, W. Va. L. Rev. 118 (2015): 38: “Concession theory focuses on the grants of limited liability, transferability of ownership, and potentially permanent legal existence by the state to the corporation. Due to these grants by the state, concession theory assumes that the state may regulate the corporation and that the corporation should benefit society. Concession theory was most popular between the 17th and 19th centuries, and the theory stems from a time when the state granted charters individually and based on some social benefit.”

12. Krosinsky, “Overcoming Distractions,” 614, cites $10 trillion invested in private equity and venture capital backed entities. The vital corporate characteristics are possessed by a number of alternative entities that have proliferated in the United States, such as limited liability corporations and limited partnerships.

13. Bespoke Investment Group, “US Stock Market Tops $25 Trillion—Up $1.9 Trillion Since Election” (January 26, 2017), https://www.bespokepremium.com/think-big-blog/us-stock-market-tops-25-trillion-up-1-9-trillion-since-election.

14. See Hugues Letourneau, “The Responsible Investment Practices of the World’s Largest Government-Sponsored Investment Funds,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 446–447. As of 2012, worldwide assets under management at pension funds equaled $33.9 trillion, at insurance funds $26.5 trillion, at mutual funds $26.1 trillion, and at sovereign wealth funds $5.2 trillion.

15. See Anne Tucker, The Citizen Shareholder: Modernizing the Agency Paradigm to Reflect How and Why a Majority of Americans Invest in the Market, Seattle Univ. L. Rev. 35 (2012): 1302.

16. As of 2011, 90 million Americans and 54 percent of American households invested in mutual funds (Tucker, “The Citizen Shareholder,” 1315).

17. Sebastien Pouget, “Financial Markets’ Inefficiencies and Long-Term Investments,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 700.

18. See John Kay, Other People’s Money: The Real Business of Finance (New York: PublicAffairs, 2015), 193: “The economic functions of the investment channel are: to search for good investments for new savings; to secure the effective management of assets through stewardship; and to do these things while helping households transfer wealth across their lifetime and between generations.”

19. James Gifford, “The Changing Role of Asset Owners in Responsible Investment: Reflections on the Principles for Responsible Investment— The Last Decade and the Next,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 435–436.

20. See “Universal Owners: Making Concessions to Preserve the Commons” (chapter 4, present volume).

21. Leo E. Strine Jr., Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, Yale L. J. 126 (2017): 1912.

22. Raj Thamotheram and Aidan Ward, “Whose Risk Counts?,” in Cambridge Handbook of Institutional Investment and Fiduciary Duty, ed. James P. Hawley et al. (Cambridge: Cambridge University Press, 2014), 210. Many believe that this situation is aggravated by the finance industry itself. See Gifford, “The Changing Role of Asset Owners,” 441: “Citizens are realizing that their savings are being invested in ways that are not representing their interests. They are realizing that the status quo of Wall Street and the City of London has failed them. The agency chain is broken, and it is becoming clear that the finance sector is primarily there to serve itself, and not the function for which it exists; that is, to efficiently allocate capital to productive enterprises. See, generally, Stephen Davis, Jan Lukomnik, and David Pitt-Watson, What They Do with Your Money: How the Financial System Fails Us and How to Fix It (New Haven, CT: Yale University Press, 2016).

23. See Strine, “Who Bleeds,” 1927: “The alignment between the interest of fund managers and human investors is, at best, imperfect, and at worst, out of sync…. Nothing close to a serious attempt to subject fund managers to the risks of truly stuck-in 401(k) investors has been made”; Principles for Responsible Investment, Sustainable Financial System, Principles, Impact: Literature Review (June 2016), https://www.unpri.org/download_report/17907 (summarizing Aviva, A Roadmap for Sustainable Capital Markets, https://www.aviva.com/media/thought-leadership/roadmap-sustainable-capital-markets, which recommended that governments “incorporate sustainable development into the duties (e.g., fiduciary duty, duty of care) of asset owners, asset managers and investment consultants”; Rory Sullivan et al., Fiduciary Duty in the 21st Century (2015), http://www.unepfi.org/fileadmin/documents/fiduciary_duty_21st_century.pdf, page 18, reporting suggestions that “investors need to encourage the adoption of policy measures to correct market failures and to require companies and investors to internalize externalities as an integral part of their fiduciary duties.”

24. See FairPensions, “Protecting Our Best Interests: Rediscovering Fiduciary Obligation” (2015), http://shareaction.org/wp-content/uploads/2016/01/BestInterests.pdf., 5: “The key issue that arises here, both legally and practically, is the ‘remoteness problem’: individual investors may be too small to have a material impact on a given macroeconomic issue. This creates a serious collective action problem if—as with climate change—the optimal outcome for all beneficiaries would be universal action which could have a material effect on the problem.”

25. Judith Rodin and Margot Brandenburg, The Power of Impact Investing (Philadelphia, PA: Wharton Digital Press, 2014), xii.

Chapter 2. Fiduciary Duties for Conventional Corporations: Enforcing Shareholder Primacy

1. See, e.g., 8 Del. C. §§ 141(a) and 211; § 141(k); § 242 (charter amendments); § 251 and forward (mergers); § 271 (sales of substantially all assets); § 275 (dissolution); and § 220.

2. 8 Del. C. § 141(a). In the United States, corporate law is a state law question, so that a corporation’s internal affairs are guided by the law of the jurisdiction in which it is incorporated. Regardless of physical location, most corporations can freely choose their state of incorporation under the U.S. federal system. Delaware has come to hold the leading position among states, both in the number of significant businesses incorporated there and in the influence of its jurisprudence. See David Yosifon, The Law of Corporate Purpose, Berkeley Bus. L. J. 10 (2013): 184: “Delaware dominates the corporate law landscape in the United States”; Omari Simmons, Branding the Small Wonder: Delaware’s Dominance and the Market for Corporate Law, U. Rich. L. Rev. 42 (2008): 1129. Although only a few states actually follow Delaware’s statute, in many ways, Delaware corporate law is American corporate law. However, thirty-three jurisdictions follow the Model Business Corporation Act (MBCA), a model statute maintained by the influential Committee on Corporate Laws of the American Bar Association. Other states, including New York and California, follow neither the Delaware General Corporation Law nor the MBCA.

3. Section 8.01(b) of the MBCA contains a similar rule: “All corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors, subject to any limitation set forth in the articles of incorporation or in an agreement authorized under section 7.32.”

4. Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989): “Directors owe fiduciary duties of care and loyalty to the corporation and its shareholders”; Polk v. Good, 507 A.2d 531, 536 (Del. 1986): “In performing their duties the directors owe fundamental fiduciary duties of loyalty and care to the corporation and its shareholders.”

5. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984): “Directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties”; Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 368 (Del. 1993): “We have defined a board’s duty of care in a variety of settings. For example, we have stated that a director’s duty of care requires a director to take an active and direct role in the context of a sale of a company from beginning to end. In a merger or sale, we have stated that the director’s duty of care requires a director, before voting on a proposed plan of merger or sale, to inform himself… of all material information that is reasonably available to them”; Cede & Co., 634 A.2d at 368: “Directors individually and the board collectively failed to inform themselves fully and in a deliberate manner before voting on a board upon a transaction” (citing Smith v. Van Gorkom, 488 A.2d 858, 873 [Del. 1985]); Aronson, 473 A.2d at 812).

6. Cede & Co., 634 A.2d at 361: “The best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally”; Guth v. Loft, 5 A.2d 503, 510 (Del. 1939), holding that the duty of loyalty requires a director or officer not “to use their position of trust and confidence to further their private interests” and, therefore, a director or officer is required “to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his [or her] skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers”; Aronson, 473 A.2d at 812: “Directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally”; Ivanhoe Partners v. Newmont Min. Corp., 535 A.2d 1334, 1345 (Del. 1987), stating that the duty of loyalty “embodies not only an affirmative duty to protect the interests of the corporation, but also an obligation to refrain from conduct which would injure the corporation and its stockholders [emphasis added] or deprive them of profit or advantage.”

7. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006): good faith is “a subsidiary element, i.e., a condition, of the fundamental duty of loyalty.” Thus, “the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly.” However, “a director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation’s best interest” (Guttman v. Huang, 823 A.2d 492, 506 n. 34 [Del. Ch. 2003]). The Delaware Supreme Court in In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006) described conduct that would violate a director’s obligation to act in good faith: “A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.”

8. In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 33 (Del. Ch. 2014).

9. Of course, these two models are not the only possibilities. Corporations might be managed for the benefit of some other subset of stakeholders as well, and, as discussed in chapter 11 of the present volume, the social purpose corporation, a little-used alternative corporate form, does authorize governance that favors some other stakeholder group. But for purposes of the present discussion it is sufficient to contrast these two models.

10. Compare to William T. Allen, Our Schizophrenic Conception of the Business Corporation, Cardozo L. Rev. 14 (1992): 264: “I suggest that at least over the course of this century there have been, in our public life and in our law, two quite different and inconsistent ways to conceptualize the public corporation and legitimate its power. I will call them the property conception and the social entity conception.”

11. A. A. Berle Jr., Corporate Powers as Powers in Trust, Harv. L. Rev. 44 (1931): 1049, asserted that “all powers granted to a corporation or to the management of a corporation, or to any group within the corporation, whether derived from statute or charter or both, are necessarily and at all times be exercisable only for the ratable benefit of all the shareholders as their interest appears.” See also Leo E. Strine Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, Wake Forest L. Rev. 50 (2015): *10: “Despite attempts to muddy the doctrinal waters, a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.”

12. In response to Berle’s Harvard Law Review article (“Corporate Powers”), Dodd, in the same publication, argued for “a view of the business corporation as an economic institution which has a social service as well as a profit-making function.” See E. Merrick Dodd Jr., For Whom are Corporate Managers Trustees?, Harv. L. Rev. 45 (1932): 1148. See also Allen, “Our Schizophrenic Conception,” 265, describing the “social entity” conception of the corporation as encompassing the idea that “corporate purpose can be seen as including the advancement of the general welfare. The board of directors’ duties extend beyond assuring investors a fair return, to include a duty of loyalty, in some sense, to all those interested in or affected by the corporation.”

13. See also Hale v. Henkel, 201 U.S. 43, 74 (1906): “The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It receives certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law”; Allen, “Our Schizophrenic Conception,” 265: “The corporation comes into being and continues as a legal entity only with governmental concurrence. The legal institutions of government grant a corporation its juridical personality, its characteristic limited liability, and its perpetual life. This conception sees this public facilitation as justified by the state’s interest in promoting the general welfare. Thus, corporate purpose can be seen as including the advancement of the general welfare.”

14. Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919) at 671, 684.

15. Michael C. Jensen and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, J. Fin. Econ. 3 (1976): 305.

16. Allen, “Our Schizophrenic Conception,” 265.

17. See Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, S. Cal. L. Rev. 75 (2002): 1192–93, discussing Frank Easterbrook and Daniel Fischel of the Chicago school and their conceptions of shareholders as the residual risk bearers of the corporation; David Min, Corporate Political Activity and Non-Shareholder Costs, Yale J. on Reg. 33 (2016): 439, discussing the “canonical” work of Michael Jensen and William Meckling that described corporation as “nexus of contracts” in which shareholder bargain for control and economic residue.

18. James J. Hanks Jr., Playing with Fire: Nonshareholder Constituency Statutes in the 1990s, Stetson L. Rev. 21 [1991]: 115, has made the nexus of contracts argument for primacy: “The economic interests of employees, for example, are protected by minimum wage, safety, health, and plant-closing laws, and in many cases, collective bargaining agreements. Creditors are protected by fraudulent conveyance, preference, and bulk transfer statutes, as well as by contract. In recent years, after being battered by the increased debt burdens taken on by corporations acquired in leveraged buyouts, many lenders now include in their loan documents so-called ‘event risk’ provisions protecting them in the event of a restructuring that substantially increases debt or otherwise depresses the value of the lenders’ debt securities.”

19. Stout, “Bad and Not-So-Bad Arguments,” 1193, note 19, quoting Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press, 1991), 36–39.

20. This theoretical framework uses the term “agency,” but it is important to note that the concept does not involve legal agency, wherein an agent is subject to the direct command of her principal; the corporation law itself is quite clear that although management decisions are made on behalf of shareholders, the directors retain broad discretion over those decisions.

21. See Lawrence Mitchell, “Financialism: A (Very) Brief History,” in The Embedded Firm: Corporate Governance, Labor, and Finance Capitalism, ed. Cynthia A. Williams and Peer Zumbansen (Cambridge: Cambridge University Press, 2011), 42, 55: “Agency costs are the losses that result when corporate managers favor their own interest over that of the shareholders together with the expense of preventing this.”

22. See Eric D. Beinhocker, The Origin of Wealth (Boston, MA: Harvard Business Review Press, 2006), 406: “Shareholders want the company they own to be managed for the maximum value of their shares…. The CEO and the management team, if left to their own devices, might manage the company to maximize other things, like their salaries, the fancy artwork in the lobby, and the size of the corporate jet.”

23. E. Merrick Dodd Jr., For Whom are Corporate Managers Trustees?, Harv. L. Rev. 45 (1932): 1148.

24. Allen, “Our Schizophrenic Conception,” 271: “The corporation has other purposes of perhaps equal dignity [to shareholder wealth maximization]: satisfaction of consumer wants, the provision of meaningful employment opportunities, and the making of a contribution to the public life of its communities.”

25. Margaret M. Blair and Lynn A. Stout, A Team Production Theory of Corporate Law, Va. L. Rev. 85 (1999): 280–281; see also Allen, “Our Schizophrenic Conception,” 271: “Resolving the often conflicting claims of these various corporate constituencies calls for judgment, indeed calls for wisdom, by the board of directors of the corporation.”

26. Frank Abrams, chairman of Standard Oil of New Jersey, in a 1951 address, quoted in Fortune (October 1951).

27. “Business: The New Conservatism,” Time, November 26, 1956; see also Allen, “Our Schizophrenic Conception,” 271–72, writing in 1992 that the stakeholder model “appears to have been the dominant view among business lenders for at least the last fifty years”; David J. Berger, “In Search of Lost Time: What if Delaware Had Not Adopted Shareholder Primacy?,” https://ssrn.com/abstract=2916960, page 11: “The dominant view of corporate law for most of the 20th century eschewed the notion of ‘shareholder primacy,’ and still the modern corporation managed to exist quite nicely.”

28. Robert Reich, Saving Capitalism: For The Many, Not The Few (New York: Vintage, 2016), 18. See also Simon Deakin, “Corporate Governance and Financial Crisis in the Long Run,” in The Embedded Firm: Corporate Governance, Labor, and Finance Capitalism, ed. Cynthia A. Williams and Peer Zumbansen (Cambridge: Cambridge University Press, 2011), 18: “As recently as the 1960s, the mission statement of large companies and the public declarations of industry bodies such as the Confederation of British Industry (‘CBI’) in Britain and the U.S. Business Roundtable referred to companies in entirely different terms. Companies should, it was suggested, be providing secure jobs and good working conditions; they should minimize environmental damage; and they should seek close ties with local communities…. These corporate mission statements usually did not mention shareholders at all. This was deliberate. Shareholders were not seem just as passive, but as irrelevant to the running of the company” (emphasis in original).

29. Adolf Berle and Gardner Means, The Modern Corporation and Private Property (1932; reprint, New Brunswick: Transaction Publishers, 2010), 312–313. See Fenner Stewart Jr., Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration During the Rise of Finance, Seattle Univ. L. Rev. 34 (2011): 1458, contrasting Berle’s view of shareholder primacy, which “would make the corporation a tool for the wider polity,” with modern shareholder primacy, and its focus on shareholder wealth maximization.

30. Lynn Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (San Francisco, CA: Berrett-Koehler, 2012), quoting Michael C. Jensen, Value Maximization, Stakeholder Theory, and the Corporate Objective Function, Business Ethics Quarterly 12 (2002): 238.

31. Stout, The Shareholder Value Myth, 108: “Balancing interests—decently satisfying several sometimes compelling objectives, rather than trying to maximize only one—is the rule and not the exception in human affairs.” See also Colin Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust In It (Oxford: Oxford University Press, 2013), 193: “The condemnation of multiple targets confuses simplicity of execution with completeness of principles…. The corporation should have a simple set of objectives but a broad set of values by which it judges their implementation.”

32. See, e.g., U.K. Companies Act of 2006, § 172: directors must “have regard” to multiple stakeholders, but only in service of the interests of “members” (shareholders); Will Hutton, Colin Mayer, and Philippe Schneider, The Rights and Wrongs of Shareholder Rights, Seattle Univ. L. Rev. 40 (2017): 391: “Derivative responsibilities” to stakeholders under § 172 “subordinate to those of the owners of the company; they are not primary obligations in their own right.”

33. Pavlos E. Masouros, Corporate Law and Economic Stagnation (The Hague: Eleven International, 2013).

34. Joan MacLeod Heminway, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations, Seattle Univ. L. Rev. 40 (2017): 613: “Delaware decisional law is arguably particularly unfriendly to for-profit corporate boards that fail to place shareholder financial wealth maximization first in every decision they make.”

35. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), holding that when a corporation is to be sold in a cash-out merger, the directors’ duty is to maximize the short-term value to shareholders, regardless of the interests of other constituencies.

36. See Berger, “In Search of Lost Time,” 20: “Revlon planted the Delaware flag firmly in the ground of stockholder primacy.”

37. See Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986): “It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders; that they may sometimes do so ‘at the expense’ of others [e.g., debtholders]… does not… constitute a breach of duty”; Leo E. Strine Jr., The Social Responsibility of Boards of Directors and Stockholders in Change of Control Transactions: Is There Any “There” There?, S. Cal. L. Rev. 75 (2002): 1170: “The predominant academic answer is that corporations exist primarily to generate stockholder wealth, and that the interests of other constituencies are incidental and subordinate to that primary concern.”

38. 8 Del. C. § 101(b); 8 Del. C. § 102(a)(3): “It shall be sufficient to state [in the corporate charter]… that the purpose of the corporation is to engage in any lawful act or activity.”

39. eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010) at 15–16, 32; quote at 34–35.

40. See Alicia Plerhoples, Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations (Washington, DC: Georgetown University Law Center, 2016), 17: “[eBay] makes absolutely clear that Delaware corporate law espouses shareholder wealth maximization norm as the central corporate purpose.”

41. See, for example, Stout, The Shareholder Value Myth.

42. J. Haskell Murray, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, Hastings Bus. L. J. 9 (2013): 493 (footnotes omitted). See also William Clark and Elizabeth Babson, How Benefit Corporations Are Redefining the Purpose of Business Corporations, Wm. Mitchell L. Rev. 38 (2012): 825–826, acknowledging commentary denying precedential support for shareholder primacy, but concluding weight of precedent clearly favors primacy.

43. Leo E. Strine Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, Wake Forest L. Rev. 47 (2012): 151.

44. American Bar Association, “Sustainable Development Task Force,” http://www.americanbar.org/groups/leadership/office_of_the_president/sustainable_development_task_force.html; American Bar Association, Information for the United States Concerning Legal Perspectives on an Annual Board “Statement of Significant Audiences and Materiality,” http://www.americanbar.org/content/dam/aba/administrative/environment_energy_resources/resources/usa_legal_memo. authcheckdam.pdf (United States response).

45. Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine (September 13, 1970). See George A. Akerlof and Robert J. Shiller, Phishing For Phools: The Economics of Manipulation and Deception (Princeton, NJ: Princeton University Press, 2015), 150: “In contrast, the prominent economic story in the United States (and quite possibly the dominant one) since the 1950s has been that free markets… are always good for us; just so long as we are free to choose.” It should be noted that Akerlof and Shiller, both winners of the Nobel Prize in economics, were contrasting that “story” with the actual, very different, functioning of markets.

46. See Masouros, Corporate Law, 73; Berger, “In Search of Lost Time, ”15–18, discussing economic and political factors leading to growth of shareholder primacy in the late twentieth century.

47. Ben Hubbard, Dionne Searcey, and Nicholas Casey, “Under Rex Tillerson, Exxon Mobil Forged Its Own Path Abroad,” New York Times (December 13, 2016).

48. Some commentators point to the breadth of discretion under the business judgment rule as evidence that directors are not bound by shareholder primacy. Blair and Stout, “A Team Production Theory,” 299–303. However, as the cases cited in the text make clear, that discretion must be used with the intent to create shareholder value. For a discussion regarding the breadth of the business judgment rule, see “The Business Judgment Rule” (chapter 3, present volume).

49. According to TW Servs., Inc. v. SWT Acquisition Corp., 14 Del. J. Corp. L. 1169, 1183–84 (Del. Ch. 1989): “Directors, in managing the business and affairs of the corporation, may find it prudent (and are authorized) to make decisions that are expected to promote corporate (and shareholder) long run interests, even if short run share value can be expected to be negatively affected, and thus directors in pursuit of long run corporate (and shareholder) value may be sensitive to the claims of other ‘corporate constituencies.’” See also Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986): “A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders”; Mills Acq. Co. v. MacMillan, Inc., 449 A.2d 1261, 1282 n. 29 (Del. 1989), permitting a board to consider “the impact of both the bid and the potential acquisition on other constituencies, provided that it bears some reasonable relationship to general shareholder interests”; William B. Chandler III, Hostile M&A and the Poison Pill in Japan: A Judicial Perspective, Colum. Bus. L. Rev. 2004 (2004): 56: “Directors are permitted to consider the interests of other constituencies (such as creditors, employees, and the local community in which the company operates), but Delaware law emphasizes that they should consider these other interests only to the extent that they affect stockholder interest. This position obviously aligns the Delaware courts with the school of thought holding that the corporation’s sole purpose is to achieve the best financial return for the present group of stockholders” (emphasis added).

50. Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

51. See Leo E. Strine Jr., Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, Yale L. J. 126 (2017).

52. Unocal, 493 A.2d 946 (Del. 1985) at 955.

53. Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, Va. L. & Bus. Rev. 3 (2008): 170.

54. See Strine, “Dangers of Denial.” Compare Stout, “Bad and Not-So-Bad Arguments,” 1203–04 (“In Revlon, the Delaware Supreme Court held that in an ‘end-game’ situation where the directors of a publicly traded firm had decided to sell the firm to a company with a controlling shareholder— in brief, had decided to turn their publicly held company into a privately held one—the board had a duty to maximize shareholder wealth by getting the best possible price for the firm’s shares. Revlon thus defines the one context in which Delaware law mandates shareholder primacy”) with Yosifon, “Law of Corporate Purpose,” 199–200: “Stout does discuss Revlon, but, like many scholars, she misconstrues its point. Stout argues that Revlon stands for the proposition that directors are only obligated to maximize shareholder value when a firm is about to be sold…. In terms of formal logic, Stout has committed the fallacy of ‘denying the antecedent.’ For the logical statement, ‘if A, then B’ it is a fallacy to conclude ‘not A, therefore not B.’ In Revlon, the Delaware Supreme Court held that if [A] the firm is for sale, then [B] directors must maximize profits. Stout concludes from this that if the firm is not for sale, directors do not have to maximize profits. But this does not follow as a matter of logic, and it is not Revlon’s teaching…. Revlon… holds that so long as a business is a going concern Delaware will defer to the directors’ discretion in determining how to maximize shareholder value. This, the Unocal and Revlon courts recognize, may often include being good to non-shareholders. However, in the last period, where the shareholders will have no continuing interest in the firm, directorial attention to the interests of non-shareholders cannot possibly bear on shareholder interests, and, therefore, at the moment, attention to non-share-holder interests would necessarily violate the one duty that is always in place: the duty to the shareholders.” See also Clark and Babson, “How Benefit Corporations Are Redefining,” 833: “Delaware has addressed the issue of consideration of other constituencies, but only in the context of takeovers, and even then courts still require a connection to shareholder value maximization” (citing Unocal).

55. Strine, “Dangers of Denial,” 11–12. The historical implication of this anecdote should not be lost: before 1985, it was not clear, even to prominent Delaware practicing lawyers, that Delaware followed shareholder primacy. See Berger, “In Search of Lost Time,” 21, noting that Supreme Court acknowledged in the Revlon case that it had not previously addressed the issue.

56. Revlon, 506 A.2d 173, at 182, holding that “The rights of the [noteholders] were fixed by contract” and therefore the noteholders “required no further protection” from Revlon’s board of directors.

57. 8 Del. C. § 122(9).

58. Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969). See Strine, “Dangers of Denial,” 24: “When approving contested charitable gifts, Delaware courts have emphasized that the stockholders would ultimately benefit from the gift in the long run”; also (20): “Of course, it is true that the business judgment rule provides directors with wide discretion, and that it enables directors to justify by reference to long run stockholder interests a number of decisions that may in fact be motivated more by a concern for a charity the CEO cares about, or the community in which the corporate headquarters is located, or once in a while, even the company’s ordinary workers, than long run stockholder wealth. But that does not alter the reality of what the law is. Dodge v. Ford and eBay are hornbook law because they make clear that if a fiduciary admits that he is treating an interest other than stockholder wealth as an end in itself, rather than an instrument to stockholder wealth, he is committing a breach of fiduciary duty.”

59. N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 99 (Del. 2007), citing Prod. Res. Grp. v. NCT Grp., Inc., 863 A.2d 772, 790 (Del. Ch. 2004).

60. See, e.g., Simons v. Cogan, 549 A.2d 300, 304 (Del. 1988); Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986); Geyer v. Ingersoll Publ’ns Co., 621 A.2d 784, 787 (Del. Ch. 1992); Prod. Res. Grp., 863 A.2d at 787.

61. N. Am. Catholic, 930 A.2d at 101: “The need for providing directors with definitive guidance compels us to hold that no direct claim for breach of fiduciary duties may be asserted by the creditors of a solvent corporation that is operating in the zone of insolvency. When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”

62. Prod. Res. Grp., 863 A.2d at 794, note 67.

63. N. Am. Catholic, 930 A.2d at 103: “We hold that individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors. Creditors may nonetheless protect their interest by bringing derivative claims on behalf of the insolvent corporation or any other direct nonfiduciary claim… that may be available for individual creditors.”

64. In re Trados Inc. S’holder Litig., No. 1512-CC, 2009 WL 2225958, at *7 (Del. Ch. July 24, 2009); see also Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 594 (Del. Ch. 1986): “With respect to matters relating to preferences or limitations that distinguish preferred stock from common, the duty of the corporation and its directors is essentially contractual and the scope of the duty is appropriately defined by reference to the specific words evidencing that contract.”

65. Jedwab, 509 A.2d at 594, holding that preferred shareholders may be owed fiduciary where the right claimed is “a right shared equally with the common [stockholders].”

66. Trados, 2009 WL 2225958, at *7, note 42, quoting Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040, 1042 (Del. Ch. 1997).

67. LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 447 (Del. Ch. 2010): “The only protection for the preferred is if the directors, as the backstop fiduciaries managing the corporation that sold them their shares, figure out a fair way to fill the gap left by incomplete contracting.”

68. See Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., No. 12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991): “At least where a corporation is operating in the vicinity of insolvency, a board of directors is not merely the agent of the residue risk bearers, but owes its duty to the corporate enterprise.” In footnote 55 of that decision, Chancellor Allen poses a hypothetical in which a corporation’s sole asset is a judgment against a solvent debtor. With the case on appeal, the corporation’s directors must consider offers to settle for significantly less than the value of the judgment sought. Chancellor Allen discusses the differing incentives of shareholders, who would be likely to reject a settlement offer as the residual owners of the corporation entitled to any upside of a large judgment, and debtholders, who would likely be in favor of accepting a smaller settlement to avoid risk that the judgment would be overturned, so long as the settlement was enough to satisfy the corporation’s liabilities. Chancellor Allen speculated that a court should reject the shareholder primacy model where a corporation is in the “vicinity of insolvency,” indicating that in that situation directors could “consider the community of interests that the corporation represents,” and that “the right (both the efficient and the fair) course to follow for the corporation may diverge from the choice that the stockholders (or the creditors, or the employees, or any single group interested in the corporation) would make if given the opportunity to act.”

69. See, e.g., In re Answers Corp. S’holders Litig., No. 6170-VCN, 2012 WL 1253072, at *8, note 48 (Del. Ch. Apr. 11, 2012), finding that plaintiffs’ complaint adequately alleged facts sufficient to infer that (1) two directors appointed by a 30 percent shareholder were interested in a merger where the 30 percent shareholder desired to exit its otherwise illiquid investment, and (2) otherwise disinterested and independent directors acted in bad faith by consciously failing to seek the highest value reasonably available for all shareholders based on allegations that, against their own financial advisor’s advice, those directors acquiesced in an expedited sale process in order to accommodate the 30 percent shareholder; noting that the court “wonder[ed] if an explanation will emerge [for the independent directors’ decision to conduct an expedited market check] because disinterested and independent directors do not usually act in bad faith.”

70. In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1036 (Del. Ch. 2012): “It may be that there are very narrow circumstances in which a controlling stockholder’s immediate need for liquidity could constitute a disabling conflict of interest irrespective of pro rata treatment. Those circumstances would have to involve a crisis, fire sale where the controller, in order to satisfy an exigent need (such as a margin call or default in a larger investment) agreed to a sale of the corporation without any effort to make logical buyers aware of the chance to sell, give them a chance to do due diligence, and to raise the financing necessary to make a bid that would reflect the genuine fair market value of the corporation.” Synthes also states: “The world is diverse enough that it is conceivable that a mogul who needed to address an urgent debt situation at one of his coolest companies (say a sports team or entertainment or fashion business), would sell a smaller, less sexy, but fully solvent and healthy company in a finger snap (say two months) at 75% of what could be achieved if the company sought out a wider variety of possible buyers.” See also In re Trados Inc. S’holder Litig., 73 A.3d 17, 38 (Del. Ch. 2013): “Stockholders may have idiosyncratic reasons for preferring decisions that misallocate capital. Directors must exercise their independent fiduciary judgment; they need not cater to stockholder whim.”

71. See Walt Disney Co., 906 A.2d 27, 67 (Del. 2006).

Chapter 3. Standards of Review: How Judges Decide Whether Directors Are Putting Shareholders First

1. See William T. Allen, Jack B. Jacobs, and Leo E. Strine Jr., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, Del. J. Corp. L. 26 (2001): 867: “The standard of review defines the freedom of action (or, if you will, deference in the form of freedom from intrusion) that will be accorded to the persons who are subject to its reach.”

2. In re Trados Inc. S’holder Litig., 73 A.3d 17, 36 (Del. Ch. 2013): “The standard of review depends initially on whether the board members (i) were disinterested and independent (the business judgment rule), (ii) faced potential conflicts of interest because of the decision dynamics present in particular recurring and recognizable situations (enhanced scrutiny), or (iii) confronted actual conflicts of interest such that the directors making the decision did not comprise a disinterested and independent board majority (entire fairness). The standard of review may change further depending on whether the directors took steps to address the potential or actual conflict, such as by creating an independent committee, conditioning the transaction on approval by disinterested shareholders, or both.”

3. David Yosifon, The Law of Corporate Purpose, Berkeley Bus. L. J. 10 (2013): 223, note 155.

4. Aronson, 473 A.2d at 812: “The business judgment rule is… a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption”; Gagliardi v. Trifoods Int’l, Inc., 683 A.2d 1049, 1052–53 (Del. Ch. 1996), holding that the business judgment rule “provides that where a director is independent and disinterested, there can be no liability for corporate loss, unless the facts are such that no person could possibly authorize such a transaction if he or she were attempting in good faith to meet their duty.” The business judgment rule “posits a powerful presumption in favor of actions taken by… directors.” See also Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993); McMullin v. Beran, 765 A.2d 910, 916 (Del. 2000), holding that the business judgment rule “combines a judicial acknowledgement of the managerial prerogatives that are vested in the directors of a Delaware corporation by statute with a judicial recognition that the directors are acting as fiduciaries in discharging their statutory responsibilities to the corporation and its shareholders”; In re RJR Nabisco, Inc. S’holders Litig., No. 10389, 1989 WL 7036, at *1156 (Del. Ch. Jan. 31, 1989): In order to determine whether a transaction is entitled to the business judgment rule, the court will undertake “a threshold review of the objective financial interests of the board whose decision is under attack (i.e., independence), a review of the board’s subjective motivation (i.e., good faith), and an objective review of the process by which it reached the decision under review (i.e., due care).”

5. Brazen v. Bell Atlantic Corp., 695 A.2d 43, 49 (Del. 1997), stating that under the business judgment rule, “courts give deference to directors’ decisions reached by a proper process, and do not apply an objective reasonableness test in such a case to examine the wisdom of the decision itself ”; In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967–68 (Del. Ch. 1996): “Compliance with a director’s duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through ‘stupid’ to ‘egregious’ or ‘irrational,’ provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule—one that permitted an ‘objective’ evaluation of the decision—would expose directors to substantive second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests. Thus, the business judgment rule is process oriented and informed by a deep respect for all good faith board decisions.”

6. See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); Kaplan v. Centex Corp., 284 A.2d 119, 124 (Del. Ch. 1971).

7. Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971): Decision not to be disturbed if “attributed to any rational business purpose”; Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1373 (Del. 1995), holding that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be attributed to same; Gagliardi, 1052–53, holding that the business judgment rule “provides that where a director is independent and disinterested, there can be no liability for corporate loss, unless the facts are such that no person could possibly authorize such a transaction if he or she were attempting in good faith to meet their duty.”

8. In re RJR Nabisco, Inc. S’holders Litig., No. 10389, 1989 WL 7036, note 13: “As I conceptualize the matter, such limited review as the rule contemplates (i.e., is the judgment under review “egregious” or “irrational” or “so beyond reason,” etc.) really is a way of inferring bad faith.”

9. Compare chapter 5 of the present volume (discussing Model Benefit Corporation Legislation, which allows purely substantive challenges to trade off decisions) with chapter 6 (describing the Delaware model of benefit corporation law, which fully preserves the business judgment rule).

10. Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1989): “Absent a limited set of circumstances as defined under Revlon, a board of directors, while always required to act in an informed manner, is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover”; and 1154: “The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals…. Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy.” See also Corporate Laws Committee, Benefit Corporation White Paper, Bus. Law. 68 (2013): 1085: “When the corporation faces more general, day-to-day decisions, the conflict between shareholders and other constituencies is less pronounced and directors might more easily be able to arrive at the conclusion that a decision that directly benefits a non-shareholder constituency also increases the long-term value of the corporation’s stock, even if, in the view of the short-term market, it appears to come at a cost to shareholders.”

11. Committee on Corporate Laws, Other Constituencies Statutes: Potential for Confusion, Bus. Law 45 (1990): 2257–58: “It has long been clear that a corporation may properly expend corporate funds, for instance, for employee outings or other employee benefits; for charitable and community purposes in areas where it had operations; and to assist suppliers in staying in business, all at the expense of shareholders (in the sense that they had an equity in the funds used) on the theory that such expenditures advanced the long-term interests of the corporation.” See also Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, NYU L. Rev. 80 (2005): 770–772.

12. See, e.g., Blair and Stout, “A Team Production Theory,” 299–300.

13. Yosifon, “Law of Corporate Purpose,” 222–223: “Some scholars claim that corporate board can easily attend to non-shareholders at the expense of shareholders without getting caught or punished.”

14. Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983): “When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain. The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts”; Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997), holding that “when a controlling shareholder stands on both sides of the transaction the conduct of the parties will be viewed under the more exacting standard of entire fairness as opposed to the more deferential business judgment standard”; Frank v. Elgamal, No. 6120-VCN, 2014 WL 957550, at *28 (Del. Ch. Mar. 10, 2014): “The Court should subject a transaction to entire fairness review, even if the controlling stockholder does not stand on both sides, where the controlling stockholder and the minority stockholders are ‘competing’ for the consideration of the acquirer.”

15. The Delaware Supreme Court in Weinberger v. UOP, Inc., 457 A.2d at 711, explained the dual analysis of the entire fairness standard as follows: “The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock. However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.”

16. Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994): “It is a now well-established principle of Delaware corporate law that in an interested merger, the controlling or dominating shareholder proponent of the transaction bears the burden of proving its entire fairness.”

17. Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).

18. Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011): “[The intermediate standard of review] applies when the realities of the decision making context can subtly undermine the decisions of even independent and disinterested directors.”

19. Reis, 28 A.3d 442, quoting Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del. Ch. 2007).

20. Revlon, 506 A.2d 173 at 185 (Del. 1986), holding that, in a change of control situation, a “board’s action is not entitled to the deference accorded it by the business judgment rule”; In re Smurfit-Stone Container Corp. S’holder Litig., No. 6164-VCP, 2011 WL 2028076 at *13 (Del. Ch. May 20, 2011): “Heightened scrutiny is appropriate because of an ‘omnipresent specter’ that a board, which may have secured a continuing interest of some kind in the surviving entity, may favor its interests over those of the corporation’s stockholders.”

21. Corwin v. KKR Fin. Hldgs. LLC, 125 A/3d 304 (Del. 2015).

22. Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (internal quotation marks omitted); Smurfit-Stone Container Corp., at *12: (“If, for example, the resulting entity has a controlling stockholder or stockholder group such that the target’s stockholders are relegated to minority status in the combined entity, Delaware Courts have found a change of control would occur for Revlon purposes. But, if ownership shifts from one large unaffiliated group of public stockholders to another, that alone does not amount to a change of control.”).

23. Trados, 73 A.3d 17 at 44.

24. Corporate Laws Committee, “White Paper,” 1084: “When it becomes inevitable that a target corporation will be sold for cash, the target’s shareholders’ sole economic interest is limited to maximizing the cash to be received.”

25. Unocal, 493 A.2d 946 (Del. 1985) at 954: “Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred”; Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995).

26. Reis, 28 A.3d 442 at 457.

27. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 934 (Del. 2003), holding that “‘safety devices’ adopted to protect a transaction that did not result in a change of control are subject to enhanced judicial scrutiny under a Unocal analysis”; Reis, 28 A.3d at 459: “Enhanced scrutiny likewise extends to defensive measures that have the potential to insulate last period decision-making from market forces or undermine the ability of stockholders to reject the transaction.”

28. Unocal, 493 A.2d 946 (Del. 1985) at 955: “In the face of this inherent conflict directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person’s stock ownership.” Unocal also states: “If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed.” See also Moran v. Household Int’l, Inc., 500 A.2d 1346, 1356 (Del. 1985).

29. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995) at 1367, stating that the Court of Chancery should have focused its Unocal review “first, upon whether the [defensive measure] was draconian, by being either preclusive or coercive and; second, if it was not draconian, upon whether it was within a range of reasonable responses to the threat… posed”; see, generally, Allen, Jacobs, and Strine, “Function Over Form.”

30. Unitrin, 651 A.2d 1361, at 1387 (Del. 1995).

31. Revlon, 506 A.2d at 176.

32. Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, at 660 (Del. Ch. 1988), reasoning that enhanced scrutiny is necessary because “action designed principally to interfere with the effectiveness of a vote inevitably involves a conflict between the board and a shareholder majority.”

33. Schnell v. Chris Craft Industries, Inc., 285 A.2d 437, at 439 (Del. 1971). See also Allen, Jacobs, and Strine, “Function Over Form,” 885, note 99: “Blasius drew inspiration from the Schnell doctrine that action by fiduciaries, even if lawful, could be improper if it was inequitable”; and 885: “Blasius reaffirmed the traditional view that director actions primarily motivated to effect a disenfranchisement have a dim chance of being sustained.”

34. Blasius, 564 A.2d at 659.

35. See Yucaipa Am. All. Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010), aff’d, 15 A.3d 218 (Del. 2011). A rights plan consists of a dividend to each shareholder to purchase more shares at a deep discount if any one shareholder accumulates a set percentage of the outstanding shares (often 15 percent). The rights owned by the shareholder crossing the threshold immediately become void, however, so that anyone who crosses the line is diluted and suffers severe economic loss. The effect of a poison pill is to prevent anyone from obtaining control of the corporation by purchasing shares on the open market.

36. Yucaipa, 1 A.3d 310, at 335–336. See also Third Point LLC v. Ruprecht, No. 9469-VCP, No. 9467-VCP, No. 9508-VCP, 2014 WL 1922029, at *15 (Del. Ch. May 2, 2014), quoting MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1130 (Del. 2003): “The Blasius and Unocal standards of enhanced judicial review… are not mutually exclusive.”

Chapter 4. The Responsible Investing Movement and Shareholder Primacy

1. See Meg Vorhees, “Responsible Investment in the United States,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 58, 61: The 2012 U.S. market for “sustainable and responsible investing strategies” was valued at $3.7 trillion, including $2.5 trillion in institutional investment.

2. Principles for Responsible Investment, home page, https://www.unpri.org; Vorhees, “Responsible Investment,” 60–61. One hundred sixty-five U.S. owners and asset managers had signed principles.

3. See Eric D. Beinhocker, The Origin of Wealth (Boston, MA: Harvard Business Review Press, 2006), 413: “Few employees jump out of bed in the morning fired up to maximize shareholder value…. But employees can attach to the concepts of building a great, lasting institution that creates opportunities for people through growth.”

4. Researchers have attempted to value reputation. One 2014 study suggested that 17 percent of the S&P 500’s market capitalization reflected corporate reputation. Martin P. Thomas and Mark W. McElroy, The Multicapital Scorecard: Rethinking Organizational Performance (White River Junction, VT: Chelsea Green, 2016), 25, citing a study by Reputation Dividend, a management consultancy.

5. See Lynn Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (San Francisco, CA: Berrett-Koehler, 2012), 59, describing academic literature and theories that “do suggest, strongly, that the supposed divides between the interests of shareholders and the interests of stakeholders, society, and the environment may be much narrower than conventional shareholder value thinking admits. Public corporations are more likely to do well for their shareholders when they do good”; Gordon L. Clark, Andress Feiner, and Michael Viehs, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (2015), https://arabesque.com/docs/From_the_stockholder_to_the_stakeholder.pdf, a meta-analysis of more than two hundred studies and sources on sustainability, concluding, among other matters, that “companies with strong sustainability scores show better operational performance and are less risky.”

6. See Stephen Davis, Jan Lukomnik, and David Pitt-Watson, What They Do with Your Money: How the Financial System Fails Us and How to Fix It (New Haven, CT: Yale University Press, 2016), 66, discussing a speech by the chief economist of the Bank of England that cited a study of 624 large-cap U.S. and U.K. companies, showing deep discounting of future earnings.

7. See Sustainability Accounting Standards Board, home page, https://www.sasb.org.

8. See International Integrated Reporting Council, The International <IR> Framework, http://integratedreporting.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf.

9. Kyle Westaway and Dirk Sampselle, The Benefit Corporation: An Economic Analysis with Recommendations in Courts, Boards, and Legislatures, Emory L. J. 62 (2013): 1013, note 66 (emphasis in original). Business writers have also called out the paradoxical nature of mission-produced profit. See Jim Collins and Jerry I. Porras, Built to Last (New York: HarperBusiness, 1994): “Visionary companies pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one…. Yet paradoxically, the visionary companies make more money than the purely profit driven companies,” quoted in John Kay, Obliquity (New York: Penguin, 2010), 5. This paradox may also be thought of as an instance of what Kay, an esteemed economist, calls “obliquity,” the idea that our goals are best achieved indirectly. He discusses this idea in the context of corporations and profit maximizing: “Today, people who deplore the activities of modern business and those who applaud those activities both agree that business is distinguished from other forms of organization by having profit as its defining purpose. Yet this agreement encompasses evident nonsense…. Yet for years I struggled with the idea that if profit could not be the defining purpose of a corporation, there must be something else that was its defining purpose. If business did not maximize profit, what did it maximize? I was making the same mistake as those victims of the teleological fallacy who struggled for centuries with questions like ‘What is a tiger for’?” (169).

10. Robert G. Eccles, Jock Herron, and George Serafeim, “Promoting Corporate Sustainability Through Integrated Reporting: The Role of Investment Fiduciaries and the Responsibilities of the Corporation Board,” in Cambridge Handbook of Institutional Investment and Fiduciary Duty, ed. James P. Hawley et al. (Cambridge: Cambridge University Press, 2014), 412: “Commitment by the board of directors to effectively mediated stakeholder primacy is likely to create the type of well-informed, longer-term horizon, collaborative behavior within the corporate firm that ultimately leads to durable corporate sustainability—a goal that rewards investors as well.”

11. See Beinhocker, Origin of Wealth, 121: “Humans have strongly ingrained rules about fairness and reciprocity that override calculated ‘rationality.’”

12. Bridges Ventures, To B or Not To B: An Investor’s Guide to B Corps (London: Bridges Ventures, 2015).

13. Laureate Education, S-4/A, filed January 31, 2017, at iv.

14. Colin Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust In It (Oxford: Oxford University Press, 2013), 150–151. A reviewer of Mayer’s book captured the concept as follows: “If people are to make long-term commitments, trust is the only alternative. But a company whose goal in whatever seems profitable today can be trusted only to renege on implicit contracts. It is sure to act opportunistically. If its managers did not want to do so, they would be replaced.” Martin Wolf, “Opportunistic Shareholders Must Embrace Commitment,” Financial Times (August 26, 2014), cited in Will Hutton, Colin Mayer, and Philippe Schneider, The Rights and Wrongs of Shareholder Rights, Seattle Univ. L. Rev. 40 (2017): 381.

15. Stout, Shareholder Value Myth, 85. Observers have also cogently noted that the financial value thinking that predominates in a shareholder primacy model has infected the traditional employment bargain, financializing what was once a relationship of trust. See Davis, Lukomnik, and Pitt-Watson, What They Do with Your Money, 176: “Our top executives… are ‘incented’ through huge issues of shares, options, and bonuses, as if we otherwise didn’t trust them to do the job well. The predictable outcome is a legitimization of what to outsiders looks like outrageous greed.”

16. For a definition of “externalities,” see Roger Urwin, Pension Funds as Universal Owners: Opportunity Beckons and Leadership Calls, Rotman Int’l J. of Pension Management 4 (2011): 32, note 3: “The definition of externalities is of spill-over effects of production or consumption that produce unpriced costs or benefits on other unrelated parties—that could be other companies or society more generally” (emphasis in original). Jane Gleeson-White explains externalities by referring to a World Bank economist’s estimation that the real cost of a fast-food hamburger is $200, once the cost of carbon footprint, water use, soil degradation, and the health care costs of diet-related illness are factored in—but all those costs are mostly borne by society and future generations, not by the seller or buyer. Jane Gleeson-White, Six Capitals, or Can Accountants Save the Planet? Rethinking Capitalism for the Twenty-First Century (New York: W. W. Norton, 2014). For a view that the failure of markets extends beyond externalities, and imposes costs on imperfectly rational and underinformed market participants, see George A. Akerlof and Robert J. Shiller, Phishing For Phools: The Economics of Manipulation and Deception (Princeton, NJ: Princeton University Press, 2015), 166: “It may be standard economics to pretend that economic pathologies are only ‘externalities.’ But the ability of free markets to engender phishing for phools [the authors’ term for transactions in which one party earns a profit by taking advantage of a counterparty’s irrational or uninformed behavior] of many different varieties is not an externality. Rather, it is inherent in the workings of competitive markets.”

17. Leo E. Strine Jr., Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, Yale L. J. 126 (2017): 1872, arguing for modifications to corporate governance system, and noting that, in the current system, “top corporate managers… must focus intently on stock price growth and be willing to treat other corporate constituencies callously if that is necessary to please the stock market’s short-term wishes.”

18. See New York State Common Retirement Fund, Environmental, Social, and Governance Report (2017), 10: https://www.osc.state.ny.us/reports/esg-report-mar2017.pdf.: “As a ‘universal owner,’ the Fund is focused on ESG issues that affect the market as a whole because it cannot avoid exposure to them.”

19. See “The Structure of the Investment Chain” (chapter 1, present volume).

20. Raj Thamotheram and Aidan Ward, “Whose Risk Counts?,” in Cambridge Handbook of Institutional Investment and Fiduciary Duty, ed. James P. Hawley et al. (Cambridge: Cambridge University Press, 2014), 212: “About 80 percent of the ability of a fund to meet its liabilities comes from beta, the market return”; Davis, Lukomnik, and Pitt-Watson, What They Do with Your Money, 50: “Beta drives some 91 percent of the average portfolio’s return.”

21. See Beinhocker, Origin of Wealth, 407, citing a McKinsey & Co. study showing that “from 1991 to 2000, about 70 percent of the returns of individual companies was due to market factors and only 30 percent was due to company-specific factors.”

22. James Gifford, “The Changing Role of Asset Owners in Responsible Investment: Reflections on the Principles for Responsible Investment— The Last Decade and the Next,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 438. See also David Wood, “What Do We Mean By the S in ESG?,” in The Routledge Handbook, 553: “There also resides in the theory of responsible investing the belief that the field is itself is a step towards a better world, in which the integration of ESG information into investment decision making is tied to greater social utility from financial activity”; Stout, Shareholder Value Myth, 87: “[Shareholders] want to protect the value of their other investments, keep their jobs, lower their tax bills, and preserve their health. They are, to a greater or lesser extent, ‘universal’ owners with stakes in the economy, the community, and the planet.”

23. Wood, “What Do We Mean,” 561. See also Gordon L. Clark et al., “Addressing the Challenges of Transformation through Sustainable Investment,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 594; Anne Tucker, The Citizen Shareholder: Modernizing the Agency Paradigm to Reflect How and Why a Majority of Americans Invest in the Market, Seattle Univ. L. Rev. 35 (2012): 1319: “The phrase universal investor describes what an investor owns and her interest in the performance of the market as a whole, as compared to an interest in a specific company. The theory of universal investors also describes the reduction in firm-specific risks achieved through portfolio diversification, as well as an increased vulnerability to systemic risks or failures within the market”; Ivan Diaz-Rainey et al., “Institutional Investment in the European Union Emissions Trading Scheme,” in Cambridge Handbook of Institutional Investment and Fiduciary Duty, ed. James P. Hawley et al. (Cambridge: Cambridge University Press, 2014), 127: “The impact of environmental externalities such as pollution, waste or changes in the use of resources can cause institutional investors to suffer reduced cash flows from investments, increase environmental coasts and augment uncertainty in capital markets”; Strine, “Who Bleeds,” 1884: “Offshoring jobs to nations with pitiful wages and little protection for labor as shortcuts to more immediate profits, rather than making profits in an ethical manner that does not involve externalizing the real costs of business, hurts human investors.”

24. Strine, “Who Bleeds,” 1871: “In the back and forth about the Tobin’s Q, survivorship bias, and the like, the flesh-and-blood human beings our corporate governance system is supposed to serve get lost.”

25. Thomas and McElroy, The Multicapital Scorecard, 10, advocating a “MultiCapital Scorecard” as a means of assessing performance.

26. Tessa Hebb et al., eds., introduction to The Routledge Handbook of Responsible Investment (New York: Routledge, 2016), 3. See also Gifford, “The Changing Role of Asset Managers,” 442, note 5: “Most large corporations explicitly recognize the importance of stakeholders, corporate responsibility and the need to retain their ‘license to operate’ within the communities in which they operate. Even the most progressive investors rarely acknowledge this, and rather describe their responsible investment in terms of risk mitigation or being a better investor” (emphasis added); Wood, “What Do We Mean,” 559: “Advocates [of responsible investing] claim that the duties of loyalty and impartiality to beneficiaries supports ESG integration as a means to improve long-term performance and also the environment in which beneficiaries will enjoy their retirement benefits”; Thamotheram and Ward, “Whose Risk Counts?,” 207, 213: “By chasing headline alpha to succeed vis-àvis clients, we contend that the industry creates several risks to beta…. Real risk management— from the perspective of long-horizon, well-diversified investors—drives beta, the underlying real return on productive investment, by limiting the negative impact of real economy events.”

27. Steve Lydenberg, Integrating Systemic Risk into Modern Portfolio Theory and Practice, Jour. Applied Corp. Fin. 28 (2016): 56.

28. See Frederick Alexander, Whose Portfolio Is It, Anyway?, Stetson Law Review (forthcoming).

29. Angus Deaton, “It’s Not Just Unfair: Inequality Is a Threat to Our Governance,” New York Times (March 20, 2017): “The artificially inflated costs of health care are powering up inequality by producing large fortunes for a few while holding down wages; the pharmaceutical industry alone had 1,400 lobbyists in Washington in 2014. American health care does a poor job of delivering health, but is exquisitely designed as an inequality machine, commanding an even larger share of GDP and funneling resources to the top of the income distribution.”

30. David Min, Corporate Political Activity and Non-Shareholder Costs, Yale J. on Reg. 33 (2016): 473.

31. See Steven L. Schwarcz, Controlling Systemic Risk Through Corporate Governance, Policy brief no. 94 (Ontario: Centre for International Governance Innovation, 2017), 3–4: “Financial regulation of substance usually lags behind financial innovation, causing unanticipated consequences and allowing innovations to escape regulatory scrutiny.”

32. Hugues Letourneau, “The Responsible Investment Practices of the World’s Largest Government-Sponsored Investment Funds,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 447: “Responsible investment emerged at the beginning of the twenty-first century in an attempt to reconcile sustainability considerations with profit maximization.”

33. See Cary Krosinsky, “Overcoming Distractions on the Road to Increased Levels of ESG Integration,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016).

34. Fran Seegull, Response to “How Investors Can (and Can’t) Create Social Value,” Stanford Social Investor Review (December 8, 2016): “The global financial markets are more than $212 trillion, whereas private investment for impact is only about $77 billion worldwide. If we seek a more equitable allocation of value, the capital markets are a place to focus on.”

35. Because this argument has been rehearsed ad nauseam in academic literature, there is little to be gained by another treatment here. For the best articulation of this argument, see Stout, Shareholder Value Myth. Despite the excellent policy arguments made by the proponents of the theory that primacy is not the law in the United States (arguments with which I fully agree), the relevant authority continues to support primacy outside of constituency states. Westaway and Sampselle, “The Benefit Corporation,” 1005: “The prevailing view, even today, is that despite any decision-making leeway provided by the constituency statutes, nonshareholder interests may be considered only insofar as they relate rationally to the interests of the corporation and therefore its shareholders: nonshareholder stakeholder interests may be considered only as a means to the shareholder wealth maximization end, not as an end in and of themselves.” See, generally, chapter 2, present volume.

36. David J. Berger, “In Search of Lost Time: What if Delaware Had Not Adopted Shareholder Primacy?,” https://ssrn.com/abstract=2916960, page 3. See also Westaway and Sampselle, “The Benefit Corporation, ”1005: “Why would over half of the states in the United States need to pass constituency statutes if the shared wealth maximization norm—nay, duty—did not exist?” The following states have not adopted constituency statutes: Alaska, Arizona, Arkansas, California, Colorado, Delaware, Kansas, Montana, Nebraska, New Hampshire, North Carolina, Oklahoma, South Carolina, Utah, Virginia, and West Virginia.

37. William Clark and Elizabeth Babson, How Benefit Corporations Are Redefining the Purpose of Business Corporations, Wm. Mitchell L. Rev. 38 (2012): 834: “Without a constituency statute, the interests of other constituencies may be considered at the directors’ own risk.”

38. Berger, “In Search of Lost Time,” 3.

39. See Robert Daines, Does Delaware Law Improve Firm Value?, J. Fin. Econ. 62 (2001): 525, presenting evidence that Delaware law improves firm value; Omari Simmons, Branding the Small Wonder: Delaware’s Dominance and the Market for Corporate Law, U. Rich. L. Rev. 42 (2008), discussing the strength and resilience of Delaware “brand.”

40. See David A. Drexler, Lewis S. Black, and A. Gilchrist Sparks, Delaware Corporation Law and Practice (Newark, NJ: Matthew Bender, 2016), § 35.07(2), discussing the effect of mergers on contracts under “successors and assigns” or “no assignment” clauses, and otherwise.

41. See, e.g., Regina Robson, A New Look at Benefit Corporations: Game Theory and Game Changer, Am. Bus. L. J. 52 (2015): 513: “Even when not strictly compelled by the case law, a wealth maximization and ‘shareholder first’ mentality continued to dominate discussions of corporate purpose.”

42. See Antony Page and Robert Katz, Freezing Out Ben & Jerry: Corporate Law and the Sale of a Social Enterprise Icon, Vermont L. Rev 35 (2010): 232, analyzing whether, at the time Ben & Jerry’s was a publicly traded corporation, it was constrained from pursuing social goals by shareholder primacy norms, and noting that “Ben & Jerry’s could thus always claim that its social activities helped it achieve its financial goals.”

43. See Clark and Babson, “How Benefit Corporations Are Redefining,” 835: “While it is not true that all considerations that reflect consideration of non-shareholder interests lead to a reduction in shareholder value, and some in fact may lead to its increase, it is equally true that some might lead to reduced shareholder value, even over the long term” (emphasis added); and 832: Under uncertainty surrounding wealth maximization construct, “management is encouraged to lie, or at least couch their actions in terms of long term shareholder maximization. For companies that may wish to advertise and openly rely upon their non-shareholder driven policies, there is clearly a risk associated with this position.” See also David Yosifon, The Law of Corporate Purpose, Berkeley Bus. L. J. 10 (2013): 222: “A first interpretive move that has bred confusion on the law of corporate purpose is conflating of what the law requires with speculation about what directors can get away with.”

44. See “Revlon Standard: Changes in Control” (chapter 3, present volume). See also Clark and Babson, “How Benefit Corporations Are Redefining,” 837: “To ignore the impact of director duties in a sale situation is a glaring oversight.”

45. See, e.g., Schwarcz, Controlling Systemic Risk, 3: “Opponents of a public duty also argue that managers could not feasibly govern if they had to take into account the myriad small externalities that result from corporate risk taking.”

46. See Clark and Babson, “How Benefit Corporations Are Redefining,” 850: “Care should be taken to make sure the election process in a benefit corporation remains robust so that the directors cannot abuse the flexibility inherent in the benefit corporation form.”

47. See Stout, Shareholder Value Myth, 108: “This perspective ignores the obvious human capacity to balance, albeit imperfectly, competing interests and responsibilities…. Balancing interests— decently satisfying several sometimes-competing objectives, rather than trying to “maximize” only one—is the rule and not the exception in human affairs”; see also John Kay, Obliquity (New York: Penguin, 2010), 170: “Businesses do not maximize anything…. A great business is very good at doing the things we expect a business to do—rewarding its investors, providing satisfying employment, offering goods and services of good quality at reasonable prices, fulfilling a role in the community—and to fail in any of these is, in the long run, to fail at all of them.”

48. Beinhocker, Origin of Wealth, 410: “Profitability is in fact a multidimensional problem in pleasing lots of people”; see also 411.

49. Stout, Shareholder Value Myth, 60: “Real human beings have different investing time frames; different liquidity demands; different interests in other assets (including their own human capital); and different attitudes toward whether they should live their lives without regard for others or behave prosocially.”

50. See Akerlof and Shiller, Phishing For Phools, 150: “Free markets produce good-for-me/good-foryou’s, but they also produce good-for-me/bad-for-you’s. They do both, as long as a profit can be made.”

51. James P. Hawley, “Setting the Scene: The Basics of Responsible Investment,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 30, suggesting that benefit corporations may serve as “an alternative paradigm” that may “set a standard for what is possible, and indeed necessary.”

52. J. Haskell Murray, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, Hastings Bus. L. J. 9 (2013): 506.

53. Thomas and McElroy, The Multicapital Scorecard, 162.

Chapter 5. The Model Benefit Corporation Legislation

1. See chapter 4, present volume; J. Haskell Murray, An Early Report on Benefit Corporations, W. Va. L. Rev. 118 (2015): 29: “Benefit corporation proponents claim that the market is demanding social enterprise laws and that the traditional legal frameworks are insufficient for social entrepreneurs.”

2. See “Universal Owners: Making Concessions to Preserve the Commons” (chapter 4, present volume); Sean W. Brownridge, Canning Plum Organics: The Avant-Garde Campbell Soup Company Acquisition and Delaware Public Benefit Corporations Wandering Revlon-Land, Del. J. Corp. L. 39 (2015): 724: “Alternative shareholder preferences and interests are still shareholder preferences and interests, and financial investment in public benefit corporations is an affirmation of investor fidelity to those concerns.”

3. See Murray, “An Early Report,” 41–42: “Both Delaware and the [MBCL] draw on portions of concession theory. Both frameworks require directors to balance or consider the interests of a broad group of stakeholders, benefiting society, likely in part because of the various concessions of the state.” Compare Kyle Westaway and Dirk Sampselle, The Benefit Corporation: An Economic Analysis with Recommendations in Courts, Boards, and Legislatures, Emory L. J. 62 (2013): 1006: “[The benefit corporation] marks the return to a corporate form in which the investor limitation on liability is given in exchange for enterprises that are dedicated to benefitting the society and the environment in which the enterprise operates.” To be clear, while benefit corporation law echoes concession theory, the statutes do not represent an implementation of it; in order to do so, states would have to make the law mandatory, rather than optional, so that corporate charters would only be granted to entities that considered the interests of all stakeholders.

4. B Lab, “About B Lab,” https://www.bcorporation.net/what-are-b-corps/about-b-lab.

5. This view originated with the experience of the three founders, two of whom founded an athletic wear business and the third of whom was an early investor in the enterprise. All three founders believed that the company, AND 1, was managed under strict ethical principles, including searching supply chain audits and positive treatment of employees. Eventually, the company was sold, and the founders were constrained from allowing any element of consideration for stakeholders to enter into the sales process, due to the Revlon doctrine (see chapter 3, present volume). It was this experience that led the founders to create B Lab and to seek out a mechanism to allow ethical for-profit businesses to thrive, without sacrificing commitment to all stakeholders. See Ryan Honeyman, The B Corp Handbook: How to Use Business As A Force For Good (San Francisco, CA: Berrett-Koehler, 2014), 12–13.

6. See B Lab, “Corporation Legal Roadmap,” https://www.bcorporation.net/become-a-b-corp/how-to-become-a-b-corp/legal-roadmap/corporation-legal-roadmap.

7. See Westaway and Sampselle, “The Benefit Corporation,” 1010–11.

8. See William Clark and Elizabeth Babson, How Benefit Corporations Are Redefining the Purpose of Business Corporations, Wm. Mitchell L. Rev. 38 (2012): 817, note 3.

9. William H. Clark and Larry Vranka, The Need and Rationale for the Benefit Corporation (January 18, 2013), http://benefitcorp.net/sites/default/files/Benefit_Corporation_White_Paper.pdf, 1.

10. Joan MacLeod Heminway, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations, Seattle Univ. L. Rev. 40 (2017): 612: “The proliferation of benefit corporation statutes… can largely be attributed to the active promotion work of B Lab.”

11. Colorado: Colo. Rev. Stat. § 7-101-501 et seq. (2017); Delaware: 8 Del C. §§ 361 et seq. (2016); Kansas: H.B. 2125, 2016–2017 Leg. Sess. (Kan. 2017); Kentucky: Ken. Rev. Stat. Chap. 271B, Subtitle 11; Tennessee: Tenn. C. Ann. § 48-28-101 et seq.

12. See Corporate Laws Committee, Benefit Corporation White Paper, Bus. Law. 68 (2013). For ease of reference, I have used the term “benefit corporation” to refer to both models, and only use “public benefit corporation” (or PBC) when addressing a specific aspect of the Delaware model.

13. Heminway, “Corporate Purpose,” 614.

14. E-mail to author from April M. Wright, corporations administrator, Office of the Delaware Secretary of State (June 27, 2017).

15. J. Haskell Murray, Social Enterprise and Investment Professionals, Seattle Univ. L. Rev. 40 (2017): 776.

16. See Natalie Sherman, “Apollo Global, Abraaj Group Invest in Laureat before Possible IPO,” Baltimore Sun (December 21, 2016); Sherman, “Laureate Becomes Public Again, Raising $440 Million,” Baltimore Sun (February 1, 2017).

17. Murray, “Social Enterprise,” 783: “This profit-focused expectation makes benefit corporations risky bets for ERISA [Employee Retirement Income Security Act] fiduciaries.”

18. Christopher Geczy et al., Institutional Investing When Shareholders Are Not Supreme, Harv. Bus. L. Rev. 5 (2015): 73.

19. B Lab, Model Benefit Corporation Legislation (April 4, 2016), accessed June 12, 2017, http://benefitcorp.net/sites/default/files/Model%20Benefit%20Corp%20Legislation_4_16 ¡.pdf, § 102.

20. B Lab, Model Benefit Corporation Legislation § 301 (comment): “This section is at the heart of what it means to be a benefit corporation. By requiring the consideration of interests of constituencies other than the shareholders, the section rejects the holdings in Dodge v. Ford, 170 N.W. 668 (Mich. 1919), and eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010), that directors must maximize the financial value of a corporation.” See also § 303.

21. Clark and Vranka, “White Paper,” 24.

22. Clark and Vranka, “White Paper,” 22–23. But see B Lab, Model Benefit Corporation Legislation § 301(a)(3): “[Directors] need not give priority to a particular interest or factor referred to in paragraph (1) or (2) over any other interest or factor unless the benefit corporation has stated in its articles of incorporation its intention to give priority to certain interests or factors related to the accomplishment of its general public benefit purpose or of a specific public benefit purpose identified in its articles” (emphasis added). This apparent possibility of opting into a prioritization scheme is not discussed in the literature. In light of the clear intent of the MBCL to eliminate shareholder or other constituency primacy, it is unclear how far such a prioritization provision could go in subverting duties toward any particular class or classes of stakeholders.

23. See Clark and Vranka, “White Paper,” 24: “It is important to note that the consideration standard does not require a particular outcome of the directors’ decision-making, but rather that there is a decision-making process that considers all of the enumerated stakeholders.”

24. See “The Business Judgment Rule” (chapter 3, present volume). To be sure, in a case where the directors are found to be conflicted or to have acted in an uninformed or bad faith manner, courts may intervene and review the substance of a board decision. But the judicial authority to do so is based on concerns over loyalty, and if a court finds no reason to doubt the fidelity of directors, it will not examine the substance of a decision.

25. See, e.g., B Lab, Model Benefit Corporation Legislation § 301: “Every corporation incorporated under this Act has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation”; 8 Del. Code § 102(a)(3): “It shall be sufficient to state [in the certificate of incorporation], either alone or with other business or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.”

26. See, generally, B Lab, Model Benefit Corporation Legislation § 304 (comment).

27. B Lab, Model Benefit Corporation Legislation § 201.

28. B Lab, Model Benefit Corporation Legislation § 201(a), § 102.

29. B Lab, Model Benefit Corporation Legislation § 201 defines “third-party standard” as follows: A recognized standard for defining, reporting, and assessing corporate social and environmental performance that is:

(1) Comprehensive because it assesses the effects of the business and its operations upon the interests listed in section 301(a)(i) (ii), (iii), (iv), and (v).

(2) Developed by an entity that is not controlled by the benefit corporation.

(3) Credible because it is developed by an entity that both:

(i) has access to necessary expertise to assess overall corporate social and environmental performance; and

(ii) uses a balanced multistakeholder approach to develop the standard, including a reasonable public comment period.

(4) Transparent because the following information is publicly available:

(i) About the standard:

(A) The criteria considered when measuring the overall social and environmental performance of a business.

(B) The relative weightings, if any, of those criteria.

(ii) About the development and revision of the standard:

(A) The identity of the directors, officers, material owners, and the governing body of the entity that developed and controls revisions to the standard.

(B) The process by which revisions to the standard and changes to the membership of the governing body are made.

(C) An accounting of the revenue and sources of financial support for the entity, with sufficient detail to disclose any relationships that could reasonably be considered to present a potential conflict of interest.

30. See B Lab, Model Benefit Corporation Legislation § 201 (comment): “The requirement in section 401 that a benefit corporation prepare an annual benefit report that assesses its performance in creating general public benefit against a third-party standard provides an important protection against the abuse of benefit corporation status.” Also: “By requiring that the impact of a business on society and the environment be looked at ‘as a whole,’ the concept of general public benefit requires consideration of all of the effects of the business on society and the environment. What is involved in creating general public benefit is informed by section 301(a), which lists the specific interests and factors that the directors of a benefit corporation are required to consider.”

31. See Clark and Vranka, “White Paper,” 22–23.

32. Clark and Vranka, “White Paper,” 23.

33. Compare 8 Del. C. Section 362(b), defining “public benefit” to include “reduction of negative effects.”

34. B Lab, Model Benefit Corporation Legislation § 102. The definition has seven clauses:

(1) providing low-income or underserved individuals or communities with beneficial products or services;

(2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;

(3) protecting or restoring the environment;

(4) improving human health;

(5) promoting the arts, sciences, or advancement of knowledge;

(6) increasing the flow of capital to entities with a purpose to benefit society or the environment; and

(7) conferring any other particular benefit on society or the environment.

35. B Lab, Model Benefit Corporation Legislation § 102: “The identification of a specific public benefit under this subsection does not limit the purpose of a benefit corporation to create general public benefit under subsection (a).”

36. See B Lab, Model Benefit Corporation Legislation § 201(c).

37. Elizabeth Babson, a lawyer at Drinker Biddle who was involved in the drafting of both the MBCL and the white paper, explained the provision as follows, in correspondence with the author: “It makes it clear that a company has the ability to highlight a particular purpose, with the higher vote (so hard to change later), provides clarity for directors on that point, gives the ability to elevate it (if desired) by stating its priority in the charter, and makes it subject to specific reporting on performance re: that purpose.” See also Westaway and Sampselle, “The Benefit Corporation,” 1073: “Articulating specific public benefit…. ensures that the corporation is allowed to pursue activities in furtherance of that specific public benefit… but it also makes the corporation susceptible to derivative actions for failure to consider the creation of that specific public benefit, or perhaps even for the failure to affirmatively create that specific public benefit.”

38. B Lab, Model Benefit Corporation Legislation § 305. In contrast, as we will discuss (chapter 6, present volume), the drafters of the Delaware model chose not to include this concept of substantive judicial review. It should also be noted that Hawaii, Maryland, Minnesota, New York, and Oregon do not have benefit enforcement proceedings, so that shareholders do not have the express ability to bring suits beyond the type of procedural fiduciary claim that exist for conventional corporations. It remains to be seen whether a shareholder could bring a claim under Section 201 in those states and assert that a corporation had failed to meet its benefit purpose. Such a claim would not be subject to the Section 305 exclusivity provision discussed in the next section.

39. Elizabeth Babson, in correspondence with the author, described this move as providing the “teeth” “needed to address… the nature of the shift from a ‘lawful’ purpose to a general public benefit (and perhaps specific benefit) purpose.”

40. B Lab, Model Benefit Corporation Legislation § 305. See also § 201 (comment): “This definition not only describes the action that may be brought under section 305, but it also has the effect of excluding other actions against a benefit corporation and its directors and officers because section 305(a) provides that ‘no person may bring an action or assert a claim against a benefit corporation or its directors or officers’ with respect to violation of the provisions of this chapter except in a benefit enforcement proceeding.”

41. B Lab, Model Benefit Corporation Legislation §§ 305(b); 305(b)(2)(i) and (ii); and 301(d): “A director does not have a duty to a person that is a beneficiary of the general public benefit purpose or a specific public benefit purpose of a benefit corporation arising from the status of the person as a beneficiary.”

42. B Lab, Model Benefit Corporation Legislation § 301(e); see also § 301 (comment): “Subsection 301(c) confirms that the business judgment rule applies to actions by directors under this section.”

43. See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del Ch.): Compliance with the duty of care “can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from the consideration of the good faith or rationality of the process employed”; In re RJR Nabisco, Inc., S’holders Litig., C.A. No. 10389 1989 WL 1 (Del. Ch. Jan. 31, 1989), at *23, note 13: Substantive review under the business judgment rule is “really way of inferring bad faith.” See, generally, Frederick Alexander, The Delaware Corporation: Legal Aspects of Organization and Operation, 5th ed. (Arlington, VA: Bloomberg BNA, 2014), 37, note 35, and accompanying text.

44. B Lab, Model Benefit Corporation Legislation § 305(b): “A benefit corporation shall not be liable for monetary damages under this [chapter] for any failure of the benefit corporation to pursue or create general public benefit or a specific public benefit.”

45. Clark and Vranka, “White Paper,” 22: “By including both the failure to ‘create’ and ‘pursue,’ the drafters intended to clarify that the benefit enforcement proceeding is intended to be the sole cause of action available to shareholders with respect to general and specific public benefit purpose and that monetary damages are not available as a remedy.” But see Westaway and Sampselle, “The Benefit Corporation,” 1051–53, arguing that the only duty under statute should be to attempt to create general public benefit “in light of 100 years of judicial wisdom” requiring directors to carefully and loyally pursue shareholder value, rather than create it; “duty is to aim the gun, not hit the target.”

46. Westaway and Sampselle, “The Benefit Corporation,” 1034–35; also 1077: “Impact measurement has not yet reached the accuracy or precision of simple mathematics, and benefit corporation boards should be free to pursue solutions to social and environmental problems as they see fit, rather than being forced to adopt a draconian, procrustean mandate to pursue “general public benefit” as a standards organization sees it. Accordingly, courts should be free to find that boards have failed in their benefit related duties despite performing well according to third party standards, and, on the contrary, that they have performed their duties despite performing poorly according to a third party standard” (emphasis added).

47. See B Lab, “B Impact Assessment,” http://bimpactassessment.net; GRI, “G4 Sustainability Reporting Guidelines,” accessed July 11, 2017, https://www.globalreporting.org/information/g4/Pages/default.aspx, setting out economic, environment, and disclosure requirements without a scoring system; International Organization for Standardization, “Social Responsibility: Discovering ISO 26000,” https://www.iso.org/publication/PUB100258.html: “ISO 26000 is not a management system standard. It does not contain requirements and, as such, cannot be used for certification.”

48. See B Lab, Model Benefit Corporation Legislation, subchapter 4.

49. See Clark and Babson, “How Benefit Corporations Are Redefining,” 842: “To permit monitoring of the performance of the directors of a benefit corporation, the statues also require reporting on performance.”

50. See J. Haskell Murray, An Early Report on Benefit Corporations, W. Va. L. Rev. 118 (2015): 31: “The resistance to the state-filing requirement may be due to the already strained state resources…. A majority of states do not [require a filing].”

51. B Lab, Model Benefit Corporation Legislation § 401.

52. B Lab, Model Benefit Corporation Legislation § (a) (1)(i)–(iv); (a)(2).

53. See B Lab, Model Benefit Corporation Legislation § 302(c), requiring a report including:

(1) Whether the benefit corporation acted in accordance with its general public benefit purpose and any specific public benefit purpose in all material respects during the period covered by the report.

(2) Whether the directors and officers complied with sections 301(a) and 303(a), respectively.

(3) If the benefit director believes that the benefit corporation or its directors or officers failed to act or comply in the manner described in paragraphs (1) and (2), a description of the ways in which the benefit corporation or its directors or officers failed to act or comply.

54. See B Lab, Model Benefit Corporation Legislation § 102, defining “independent.”

55. B Lab, Model Benefit Corporation Legislation § 102, defining “minimum status” vote; § 104, requiring minimum status vote for certain amendments and mergers; and § 105.

56. See J. Haskell Murray, “Corporate Forms of Social Enterprise: Comparing the State Statutes” (updated January 15, 2015), accessed June 12, 2017, https://www.law.umich.edu/clinical/internationaltransactionclinic/Documents/May%2011%20Conference%20Docs/Corporate%20Forms%20of%20Social%20Enterprise.pdf (table).

Chapter 6. The Delaware Public Benefit Corporation Statute

1. See “Delaware Division of Corporations 2015 Annual Report,” accessed June 12, 2017, https://corp.delaware.gov/Corporations_2015%20Annual%20Report.pdf.: 86 percent of U.S. based initial public offerings in 2015 chose Delaware as corporate home; Startup Documents, “Why Do Startups Incorporate in Delaware?,” https://www.startupdocuments.com/incorporation/why-do-startups-incorporate-in-delaware.

2. See, e.g., Omari Simmons, Branding the Small Wonder: Delaware’s Dominance and the Market for Corporate Law, U. Rich. L. Rev. 42 (2008).

3. See “Delaware Division of Corporations 2015 Annual Report.” The state collected nearly $1 billion in filing fees and franchise taxes in 2015.

4. Brett H. McDonnell, Benefit Corporations and Public Markets: First Experiments and Next Steps, Seattle Univ. L. Rev. 40 (2017): 724.

5. See J. Haskell Murray, An Early Report on Benefit Corporations, W. Va. L. Rev. 118 (2015): 41: “The Delaware public benefit corporation law largely favors private ordering and appears to favor a nexus-of-contracts theory of the firm with fewer mandatory and more enabling provisions than the Model Benefit Corporation Legislation Framework.”

6. Colorado: Colo. Rev. Stat. § 7-101-501, et seq. (2017); Kansas: H.B. 2125, 2016–2017 Leg. Sess. (Kan. 2017); Kentucky: Ken. Rev. Stat. Chap. 271B, Subtitle 11; Tennessee: Tenn. C. Ann. § 48-28-101 et seq.; Texas: H.B. 3488 Leg. Sess. (Tex 85[R]). The operational provisions of the Colorado and Kansas statutes largely follow the Delaware public benefit corporation model, while its transparency provisions are closer to the MBCL. As in the case with the MBCL, the PBC statutes are entirely optional. They only apply to corporations that opt to become PBCs.

7. 8 Del. C. § 362(a).

8. See Jane Gleeson-White, Six Capitals, or Can Accountants Save the Planet? Rethinking Capitalism for the Twenty-First Century (New York: W. W. Norton, 2014), xix–xx: Sustainability denotes “long-term thinking with a view to the future viability of business in the context of the planet’s various and increasingly obvious environmental and social crises.”

9. 8 Del. C. § 362(a).

10. 8 Del. C. § 365(a).

11. While the public benefit corporation statute allows entities to form as or become public benefit corporations by following the statutory provisions, the statute expressly states that it has no effect on other corporations. See 8 Del. C. § 368: “This subchapter shall not affect a statute or rule of law that is applicable to a corporation that is not a public benefit corporation, except [for the voting and appraisal requirements of a non-public benefit entity becoming a public benefit corporation].” Accordingly, although the public benefit corporation subchapter provides beneficially oriented entities a legal regime from which to achieve their beneficial business goals, the statute does not disturb Delaware’s well-established governing law for traditional corporations.

12. Martin P. Thomas and Mark W. McElroy, The Multicapital Scorecard: Rethinking Organizational Performance (White River Junction, VT: Chelsea Green, 2016), 8: “In order for an organization’s use of, or impacts on, natural resources, for example, to be sustainable, it must put neither the sufficiency of such resources nor the well-being of those who depend upon them at risk. Rather, it should live within its fair, just, and proportionate share of ecological means.” The need for a concept of “fair share” at the corporate level mirrors the collective action problem raised at the investor level (see chapter 2).

13. United Nations Environmental Programme, Raising the Bar—Advancing Environmental Disclosure in Sustainability Reporting (Nairobi: United Nations Environmental Programme, 2015), 52: “All companies should apply a context-based approach to sustainability reporting, allocating their fair share impacts on common capital resources within thresholds of their carrying capacities,” cited in Thomas and McElroy, The Multicapital Scorecard, 156.

14. See 8 Del. C. § 362(a)(1): The PBC must “identify within its statement of business or purpose [in its certificate of incorporation] one or more specific public benefits to be promoted by the corporation”; John Montgomery, “Delaware Proposes Historic Benefit Corporation Legislation,” Great From the Start website (March 27, 2013), http://www.greatfromthestart.com/delaware-proposes-historic-benefit-corporation-legislation, quoting B Lab as explaining that, “in other words, Delaware goes a step further than the Model Benefit Corporation Legislation by requiring a declaration of a specific public benefit or benefits in addition to the general public benefit corporation of all stakeholders.”

15. 8 Del. C. § 362(b): “‘Public benefit’ means a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.”

16. See Frederick H. Alexander et al., M&A Under Delaware’s Public Benefit Corporation Statute: A Hypothetical Tour, Harv. Bus. L. Rev. 4 (2014): 278, recognizing that question could be raised whether “caring for homeless animals” is a public benefit, but concluding that “interests is a flexible term that could be infused with a broad range of content, and could readily be seen as reflecting a legislative intent to be as liberal as possible with regard to permissible public benefits. Consequently, an effort to avoid PBC obligations by this type of technical statutory construction is not likely to succeed.”

17. See Alicia Plerhoples, Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations (Washington, DC: Georgetown University Law Center, 2016), 11: “[The specific benefit] requirement is not only an attempt to put the stockholders on notice, but also to give shareholders control over the mission of the public benefit corporation and focus directors on a contractually agreed upon public benefit”; J. Haskell Murray, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, Hastings Bus. L. J. 9 (2013): 494, suggesting, before the Delaware statute is adopted, “that the [benefit corporation] statutes should at least require benefit corporations to choose their top priority to guide courts, directors and investors.”

18. See 8 Del. C. § 365(a) (PBCs); accord 8 Del. C. § 141(a), conventional Delaware corporations.

19. Commercial promotion of such interests has been referred to as managing toward the “triple bottom line” of people, profit, and planet. See, generally, Shruti Rana, Philanthropic Innovation and Creative Capitalism: A Historical and Comparative Perspective on Social Entrepreneurship and Corporate Social Responsibility, Ala. L. Rev. 64 (2013): 1121.

20. See 8 Del. C. § 365(a).

21. See Frederick H. Alexander, “Amendments to the DGCL Remove Obstacles to Adoption of Public Benefit Status,” Bloomberg BNA (May 1, 2015), https://www.bna.com/amendments-dgcl-remove-n17179926022. The legislative synopsis to the 2013 DGCL amendments, in which the PBCS was added, notes that “directors receive significant protections against claims by stockholders challenging disinterested decisions” and points to § 365(b) and § 365(c) as providing these protections. See Sen. 47, 147th Gen. Assembly, 79 Del. Laws, c. 122 § 8 (2013).

22. See “Clause 1: The Substantive Remedy—Power to the Courts?” (chapter 5, present volume). As discussed, however, the level of substantive scrutiny that will actually be applied under the MBCL remains to be seen.

23. See Alicia E. Plerhoples, Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In, U. C. Davis Bus. L. J. 1 (2014): 11: “Both statutes [the MBCL and the PBCS] confirm that the business judgment rule will apply.”

24. See 8 Del. C. § 365(b). In addition, directors of all Delaware corporations (including PBCs) are “fully protected” if they rely upon employees and officers or upon statements by persons the director has selected for guidance on the subject in question and which the director “reasonably believes are within such person’s professional or expert competence” (8 Del. C. § 141[e]). Section 141(e) thus ensures that the directors of PBCs will be able to rely on experts with respect to sustainability questions. This may encourage PBCs to make use of third-party standards even though there is no mandate to do so.

25. See 8 Del. C. § 365(b).

26. See Leo E. Strine Jr., Making It Easier for Directors To ‘Do the Right Thing,’ Harv. Bus. L. Rev. 4 (2014): 248, emphasizing importance of rule that “the board’s good faith balancing of the interests of all constituencies would be entitled to the protection of the business judgment rule”; Sean W. Brownridge, Canning Plum Organics: The Avant-Garde Campbell Soup Company Acquisition and Delaware Public Benefit Corporations Wandering Revlon-Land, Del. J. Corp. L. 39 (2015): 717–18: “Indeed, Section 365(b) explicitly states that the business judgment rule will apply to the decision making processes of Delaware public benefit corporation directors.” Compare B Lab, Model Benefit Corporation Legislation § 301(e), applying business judgment rule to benefit corporations.

27. See Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000): If a decision is irrational, it “may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule.” Under the business judgment rule, a Delaware court will not second-guess a director’s decision, but only “if [it] can be attributed to any rational business purpose.” See also Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971). However, the business judgment rule does not protect irrational decisions entered into “for a reason unrelated to a pursuit of the corporation’s best interests,” even if that decision does not provide a direct financial benefit to the director. See In re RJR Nabisco, Inc. S’holders Litig., 14 Del. J. Corp. L. 1132, 1159 (Del. Ch. 1989): “Greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge,… shame or pride. Indeed any human emotion may cause a director to place his own interests, preferences or appetites before the welfare of the corporation.” PBC law, of course, broadly expands the conception of “the corporation’s best interests.” Compare B Lab, Model Benefit Corporation Legislation § 102(c): “The creation of general public benefit and specific public benefit… is in the best interests of the benefit corporation.”

28. See Brehm, 746 A.2d at 261 and 264, describing waste as “an exchange that is so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration,” discussing irrational business behavior as it relates to “waste,” and stating that “irrationality may be the functional equivalent of the waste test.”

29. More precisely, there is no substantive test when the business judgment rule allies to a transaction. See Brehm at 264: “Courts do not measure, weigh or quantify directors’ judgments…. Due care in the decision-making context is process due care only.” When a transaction is subject to a stricter standard of review, there will be substantive review of the decision, as discussed in chapter 8 of the present volume.

30. See 8 Del. C. § 365(b): “A director of a public benefit corporation shall not, by virtue of the public benefit provisions or § 362(a) of this title, have any duty to any person on account of any interest of such person in the [corporation’s specific] public benefit… or on account of any interest materially affected by the corporation’s conduct.” Compare B Lab, Model Benefit Corporation Legislation § 301(d).

31. James Gifford, “The Changing Role of Asset Owners in Responsible Investment: Reflections on the Principles for Responsible Investment— The Last Decade and the Next,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 439. In fact, this idea of stakeholder interests protected by shareholder power was present in the original work that promoted shareholder primacy as a solution to management self-interest. See Will Hutton, Colin Mayer, and Philippe Schneider, The Rights and Wrongs of Shareholder Rights, Seattle Univ. L. Rev. 40 (2017): 376, discussing Adolf Berle and Gardner Means, The Modern Corporation and Private Property (1932), and stating, “The truth, now largely forgotten, is that this argument [for shareholder primacy] was embedded in a larger vision that wanted economic and political power, in all its guises, to be exercised to benefit the community at large.”

32. Robert G. Eccles, Jock Herron, and George Serafeim, “Promoting Corporate Sustainability Through Integrated Reporting: The Role of Investment Fiduciaries and the Responsibilities of the Corporation Board,” in Cambridge Handbook of Institutional Investment and Fiduciary Duty, ed. James P. Hawley et al. (Cambridge: Cambridge University Press, 2014), 412.

33. See 8 Del. C. § 361, stating that public benefit corporations are subject to the remaining provisions of the DGCL other than those explicitly outlined in the subchapter; 8 Del. C. § 367, permitting derivative suits to enforce the public benefit purpose of the corporation.

34. Specifically, Section 362 mandates the PBC be managed in a balanced fashion, and Section 365 imposes the obligation to so manage the corporation on the board; see 8 Del. C. §§ 362(a) and 365(a). Section 365 then provides that such obligation runs only to shareholders; see 8 Del. C. § 365(b). Similarly, because the statutory statement that PBCs are “intended… to operate in a responsible and sustainable manner” is only precatory, and supportive of the balancing requirement, such a derivative suit is also the only mechanism to address that concept in a lawsuit as well. See Brownridge, “Canning Plum Organics,” 716: “Section 367 limits actions against public benefit corporation directors for a violation of their duties under Section 365(a) to derivative suits”; Plerhoples, Nonprofit Displacement, 11, noting absence of benefit enforcement proceeding implies that derivative suit is “appropriate action… for failure to pursue a public benefit,” but also noting elimination of duty to benefit beneficiaries might be read to eliminate any duty with respect to stakeholders, although labeling the latter interpretation “unlikely.” One exception to this exclusivity might be a situation where board balancing is alleged to have directly harmed shareholders; see Tooley v. Donaldson Lufkin & Jenrette, Inc., 845 A.2d 1031 (2004) at 1033. Tooley held that a fiduciary claim against directors may be brought directly if the harm was suffered by shareholders, rather than the corporation, such that shareholders would receive the benefit from a recovery or remedy. Thus, a challenge to the fairness of a merger, where shares are allegedly undervalued, can be brought as a direct claim; see Parnes v. Bally Entertainment Corp., 722 A.2d 1243, 1245 (Del. 1999). Accordingly, shareholders challenging the balancing decision of a board in connection with a merger might contend that they are entitled to bring a direct claim if the balance harmed them (i.e., if they received a low price because the board went too far in protecting the interests of workers). However, such a claim would appear to constitute an “end run” around the intent of Section 367 that shareholders own a minimum percentage of shares before challenging a balancing decision.

35. See 8 Del. C. § 367.

36. See In re: Walt Disney Co. Deriv. Litig., 825 A.2d 275, 284 (Del. 2003): One test for bad faith is whether the director “consciously and intentionally disregarded responsibilities.”

37. See 8 Del. C. § 365(c).

38. 8 Del. C. § 102(b)(7). See David A. Drexler, Lewis S. Black, and A. Gilchrist Sparks, Delaware Corporation Law and Practice (Newark, NJ: Matthew Bender, 2016), § 6.02(7). Specifically, Section 102(b)(7) allows “a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.” However, the express language of the statute does not allow exculpation of a director’s actions or omissions that “breach the director’s duty of loyalty to the corporation or its stockholders,” are “not in good faith or which involve intentional misconduct or a knowing violation of the law,” include the declaration of an unlawful dividend or stock repurchase or redemption, or result in a transaction from which the director receives an improper personal benefit.

39. See Drexler, Black, and Sparks, Delaware Corporation Law, § 15.05(1); Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1151–54 (Del. Ch. 1994), analyzing the meaning of “interested” director.

40. See Alexander, “Amendments to the DGCL.”

41. See Quadrant Structured Prods. Co., Ltd. v. Vertin, 115 A.3d 535, 547 (Del. Ch. 2015): “Directors do not face a conflict of interest simply because they own common stock or owe duties to large common stockholders”; Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 958 (Del. 1985): “Nor does this become an ‘interested’ director transaction merely because certain board members are large stockholders”; Cheff v. Mathes, 199 A.2d 548, 554 (1964): “The mere fact that some of the other directors were substantial shareholders does not create a personal pecuniary interest in the decisions made by the board of directors.”

42. See 8 Del. C. § 361.

43. Lambrecht v. O’Neal, 3 A.3d 277, 281 (Del. 2010). See, generally, Drexler, Black, and Sparks, Delaware Corporation Law, chapter 42.

44. See Lambrecht at 281–282, defining double derivative suit; and 285–286: “[The court in Rales v. Blasband] held that the traditional Aronson v. Lewis demand excusal test would not be employed in considering whether a demand on the parent board was required in a double derivative action. Rather, a different test (the ‘Rales test’) would apply, which is whether the particularized factual allegations of the complaint create a reasonable doubt that the parent’s board of directors could properly have exercised its independent and disinterested business judgment in responding to a demand. This Court further held that in a double derivative action the Rales test would apply as of the time the complaint was filed, as distinguished from the time of the alleged wrongdoing.”

45. 8 Del. C. § 365(a).

46. That is to say, derivative plaintiffs in such a case would face the business judgment rule “squared.” They would need to show that the parent directors violated the lenient business judgment rule in deciding whether to pursue a claim that the subsidiary directors had violated the lenient business judgment rule. Furthermore, the first business judgment rule inquiry at the parent level is made even more difficult for plaintiffs due to the “Rales test.”

47. Compare 8 Del. C. § 366 with B Lab, Model Benefit Corporation Legislation § 401.

48. See 8 Del. C. § 366(b).

49. Again, compare 8 Del. C. § 366 with B Lab, Model Benefit Corporation Legislation § 401.

50. See 8 Del. C. § 366(c).

51. 8 Del. C. § 220(b), entitling a shareholder to books and records for “a purpose reasonably related to such person’s interest as a stockholder.” See, generally, Drexler, Black, and Sparks, Delaware Corporation Law, chapter 27.

52. Robert G. Eccles and Michael P. Krzus, with Sydney Ribot, The Integrated Reporting Movement (Hoboken, NJ: Wiley, 2015), 62: From 1999 to 2012, number of companies issuing sustainability reports using Global Reporting Initiative standards grew from 11 to 3,704.

53. See James P. Hawley, “Setting the Scene: The Basics of Responsible Investment,” in The Routledge Handbook of Responsible Investment, ed. Tessa Hebb et al. (New York: Routledge, 2016), 30: “Most large firms include a CSR [corporate social responsibility] section in their annual reports, while some issue separate (typically very glossy) CSR reports. But far too much of this is ‘green wash,’ rather than clearly reflecting actual changed behaviour”; Eccles and Krzus, Integrated Reporting Movement, 39: “Very few [companies] are publishing an integrated report. For us, this raises the question of how to separate sincerity from greenwashing.”

54. Corporate Laws Committee, Benefit Corporation White Paper, Bus. Law. 68 (2013): 1092.

55. European Commission, “Non-Financial Reporting” (updated December 13, 2016), accessed June 13, 2017, ec.europa.eu/finance/company-reporting/non-financial_reporting/index_en.htm.

56. Small Business Investment Company Program— Impact SBICs, 81 Fed. Reg. 5666, 5669 (proposed February 3, 2016, to be codified at 13 C.F.R. pt. 107).

57. Jean Rogers, “Investors Ask SEC for Better Sustainability Disclosure,” Sustainability Accounting Standards Board blog (August 16, 2016), https://www.sasb.org/investors-sec-sustainability-disclosure, noting that out of 227 non–form letters the SEC received in response to the entire concept release, 66 percent discussed sustainability disclosures, even though “only 3.2 percent of the concept release (11 of 341 pages) discussed sustainability disclosure.”

58. McDonnell, “Benefit Corporations and Public Markets,” 725–726, citing Sarah Dadush, Regulating Social Finance: Can Social Stock Exchanges Meet the Challenge?, U. Pa. J. Int’l. L. 37 (2015): 139.

59. McDonnell, “Benefit Corporations and Public Markets,” 732.

60. Such an incorporation could encompass a certificate of incorporation filed in connection with a conversion of another term of entity into a Delaware corporation or the domestication of a non-U.S. entity into a Delaware corporation. See 8 Del. C. §§ 265 and 388, authorizing conversion and domestication by filing a certificate of conversion or of domestication, respectively, in each case, along with a certificate of incorporation.

61. See 8 Del. C. §§ 363(a) and (b). Compare 8 Del. C. § 363(a) (requiring a supermajority vote to convert from a traditional entity to a public benefit corporation) with 8 Del. C. § 251(c) (requiring “a majority of the outstanding stock of the corporation entitled to vote thereon” to effectuate a merger of a traditional Delaware corporation), and 8 Del. C. § 242 (requiring majority shareholder approval to amend the certificate of incorporation of a conventional Delaware corporation). This high vote only applies if the target corporation is incorporated in the state that has adopted the PBCS.

62. See 8 Del. C. § 363(a) (2013), amended by S. B. No. 75, Section 12, 148th Gen. Assemb. (Del. 2015).

63. See Alexander, “Amendments to the DGCL.”

64. 8 Del. C. § 363(c). There is not a supermajority vote required to initially adopt extra-statutory reporting requirements in a benefit corporation certificate of incorporation. Although 365(c)(3), which only uses the terms “amend,” would not impose the supermajority vote in a merger effect solely for the purpose of amending the public benefit provisions, see, e.g., Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 855 (Del. 1998), holding that where a certificate of incorporation grants a class vote on an amendment, alteration, or repeal of the certificate, there is no implicit right to a class vote on a merger that results in such an amendment, alteration, or repeal unless the certificate specifically provides for rights in such context by adding terms such as “whether by merger, consolidation or otherwise.” Section 365(c)(2) would, in fact, impose a supermajority vote on such a transaction, because the outstanding shares would “become” shares of non-benefit corporations. Compare 8 Del. C. § 363(c) with 8 Del. C. § 363(a).

65. 8 Del. C. § 363(a)(2).

66. A social purpose corporation is a form of corporation that has been adopted in California, Florida, Minnesota, Texas, and Washington, although these states do not use consistent terminology. These statutes allow companies to create one or more specific purposes but do not require that companies pursue broad, general benefit. social purpose corporations are discussed in chapter 11 of the present volume.

67. 8 Del. C. § 363(c)(2).

68. See, e.g., Elliot Associates, L.P. v. Avatex Corp., 715 A.2d 843 (Del. 1998); Benchmark Capital Ptnrs. IV, L.P. v. Vague, 2002 Del. Ch. Lexis 90 (July 15, 2002); Starkman v. United Parcel Service of Am., Inc., C.A. No. 17747 (Del. Ch. October 18, 1999) (transcript).

69. 8 Del. C. § 363(b): To avoid appraisal rights, the shareholder must receive shares of stock (or depository receipts in respect thereof) in a corporation that is traded on a national securities exchange or publicly held by more than two thousand holders of record, cash in lieu of fractional shares (or fractional depository receipts in respect thereof) in a corporation that is traded on a national securities exchange or publicly held by more than two thousand holders of record, or any combination of these types of consideration.

70. Compare 8 Del. C. § 363(b) (public benefit corporations) with 8 Del. C. § 262 (traditional corporations).

71. 8 Del. C. § 262(h): “Through such proceeding the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.” See also Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 257–266, stating that “it follows that Delaware’s general appraisal statute applies to PBCs,” and providing further analysis of how the Court of Chancery might value a public benefit corporation’s stock for appraisal purposes.

72. See Drexler, Black, and Sparks, Delaware Corporation Law, § 36.02.

73. See 8 Del. C. § 262(d); Enstar Corp. v. Senouf, 535 A.2d 1351 (Del. 1987); Gilliland v. Motorola, Inc., 859 A.2d 80 (Del. Ch. 2004), holding that material information necessary for shareholders to decide whether to seek appraisal must be included in the short-form merger context.

74. Shell Petroleum, Inc. v. Smith, 606 A.2d 112, 114 (Del. 1992).

75. Shell Petroleum, 606 A.2d 112, 114, quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).

76. See Drexler, Black, and Sparks, Delaware Corporation Law, 36.06–36.07.

77. Drexler, Black, and Sparks, Delaware Corporation Law, 36.06–36.07.

78. See Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983).

79. See Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988).

80. See Tri-Continental Corp v. Battye, 74 A.2d 71, 72 (Del. 1950); accord Rosenblatt v. Getty Oil Co., 493 A.2d 929, 942 (Del. 1985); Weinberger, 457 A.2d 701, 713 (Del. 1983); Robbins & Co. v. A.C. Israel Enters., Inc., 11 Del. J. Corp. L. 968, 980 (Del. Ch. 1985).

81. See 8 Del. C. § 262(h): “In determining such fair value, the Court shall take into account all relevant factors.”

82. See Drexler, Black, and Sparks, Delaware Corporation Law, § 36.07(3).

83. Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 260–266.

84. Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 262–263, citing Tri-Continental Corp., 74 A.2d at 72.

85. See 8 Del. C. § 362(a).

86. See 8 Del. C. § 362(c). Compare 8 Del. C. § 362(c) (2015) with 8 Del. C. § 362(c) (2013), amended by S. B. No. 75, § 11, 148th Gen. Assemb. (Del. 2015).

87. See 8 Del. C. § 364.

Chapter 7. Operating Benefit Corporations in the Normal Course

1. B Lab, Model Benefit Corporation Legislation § 201(a).

2. 8 Del. C. § 362: “A ‘public benefit corporation’ is a for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.” See Leo E. Strine Jr., Making It Easier for Directors To ‘Do the Right Thing,’ Harv. Bus. L. Rev. 4 (2014): 244: “A Delaware benefit corporation must be an overall good corporate citizen, and not just be indulgent toward one narrow cause or interest.”

3. See 8 Del. C. § 365(b), specifying that the balancing of interests completed by a board of directors will “satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve”; B Lab, Model Benefit Corporation Legislation § 301(e), applying business judgment rule to benefit corporations.

4. Furthermore, as we have noted, the statute contains explicit terms in order to ensure that benefit corporation status does not result in increased nuisance litigation. See “Clause 1: The Substantive Remedy—Power to the Courts?” (chapter 5, present volume) and “Duties of Directors” (chapter 6, present volume).

5. As discussed in Argument 3 in “Shareholder Primacy and Responsible Investing” (chapter 4, present volume), some commentators believe that directors of conventional Delaware corporations already have this protection, because they can always claim that such decisions ultimately favored shareholders as well. Under the PBCS, however, there is no need to apply such misdirection; directors can explicitly consider the interests of non-shareholders as a primary concern and still receive business judgment protection.

6. This is a fertile area for thought experiments. Posit a billion-dollar-revenue company deciding whether to spend an additional million dollars to expunge child labor in toxic mines from its supply chain. Would a decision to save the million dollars in order to make sure that profits matched or beat expectations test that line? Would directors want to test that proposition?

7. The actual source of this statement, sometimes attributed to business writer Peter Drucker, seems to have been lost.

8. In “Clause 1: The Substantive Remedy—Power to the Courts?” (chapter 5, present volume), we looked at the question of whether it was enough to pursue general public benefit without achieving it. For purposes of this discussion, we note that this issue is likely to be litigated and decided at some point and that, even if the bar is set at mere pursuit, the question whether benefit is being pursued will involve substantive questions that would not be addressed in a pure business judgment proceeding.

9. But see Kyle Westaway and Dirk Sampselle, The Benefit Corporation: An Economic Analysis with Recommendations in Courts, Boards, and Legislatures, Emory L. J. 62 (2013): 1051–53, 1057, arguing that courts construing MBCL, as well as PBCS, should “limit their interpretations of public benefit purpose and consideration to this process-oriented analysis.”

10. To be clear, some critics may believe that even the inducement under the MBCL is insufficient to create a real pull toward stakeholder values, particularly in light of the dynamics of corporate governance, where shareholders hold the ultimate power. Compare Leo E. Strine Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, Wake Forest L. Rev. 50 (2015): 9: “If we believe that other constituencies should be given more protection within corporation law itself, then statutes should be adopted giving those constituencies enforceable rights that they can wield.”

11. Joan Heminway of the University of Tennessee College of Law has suggested that the legal accountability under benefit corporation statutes is low. Joan MacLeod Heminway, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations, Seattle Univ. L. Rev. 40 (2017): 640: “When layered onto the liability protections that benefit corporation management may have available, the regulation of causes of action in the benefit corporation context complete an overall picture of limited accountability.”

12. Bridges Ventures, To B or Not To B: An Investor’s Guide to B Corps (London: Bridges Ventures, 2015), 10. See also Leo E. Strine Jr., Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, Yale L. J. 126 (2017): 1922, suggesting that pension funds should be managed with regard to the fact that their beneficiaries “need continuing access to quality jobs and wage growth to live a dignified and secure life.”

13. Indeed, activist shareholders often pressure companies to “rationalize their capital structure,” meaning returning cash to shareholders and taking on debt.

14. See United Nations Environment Programme, The Financial System We Need: Aligning the Financial System with Sustainable Development (Geneva: International Environment House, 2015): “Sustainable development is not the same as having a long-term time horizon, as there are many immediate social and environmental externalities that need to be addressed. Short-termism does, however, aggravate the externalities problem, especially where much of the investment needed for sustainable development is characterized by relatively high up-front costs and returns spread over a longer period.”

15. BlackRock, “Annual Letter to CEOs,” letter from Laurence D. Fink, chairman and CEO of BlackRock, https://www.blackrock.com/corporate/en-no/investor-relations/larry-fink-ceo-letter. Yet more than 90 percent of large U.S. companies base compensation for top officers on performance over three years or less. Stephen Davis, Jan Lukomnik, and David Pitt-Watson, What They Do with Your Money: How the Financial System Fails Us and How to Fix It (New Haven, CT: Yale University Press, 2016), 68.

16. See, e.g., John Kay, Other People’s Money: The Real Business of Finance (New York: PublicAffairs, 2015), 194–195: “The short time horizons characteristic of actors in the investment channel today are not imposed by the needs of savers or investees—just the contrary. They have been created by the bias to action within the process of intermediation…. and aggravated by the use of investment consultants and the pursuit of benchmarks.”

17. B Lab, Model Benefit Corporation Legislation § 401; 8 Del. C. § 366(b): “A public benefit corporation shall no less than biennially provide its stockholders with a statement as to the corporation’s promotion of the public benefit or public benefits identified in the certificate of incorporation and of the best interests of those materially affected by the corporation’s conduct”; appendix F includes a rubric that can be used as a starting point for decision making by Delaware PBCs.

18. See 8 Del. C. § 366(b), listing what must be included on the PBCs statement; 8 Del. C. § 366(c)(1): “The certificate of incorporation or bylaws of a public benefit corporation may require that the corporation: (1) Provide the statement described in subsection (b) of this section more frequently than biennially.”

19. 8 Del. C. § 366(c)(1); see also appendix F. Using a third-party standard to measure the effects a public benefit corporation has on its stakeholders may also give board decisions greater protection under the relevant statute. For example, the directors of Delaware corporations are “fully protected in relying in good faith” on experts selected with reasonable care (8 Del. C. § 141[e]).

20. Robert G. Eccles, Ioannis Ioannou, and George Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance, Mgmt. Sci. 60 (2014): 7.

21. Generally, committees may be delegated to full power of the board, with limited exceptions. See, e.g., 8 Del. C. § 141(c)(2): Committees have full power of board other than as to matters requiring a shareholder vote or amending bylaws.

22. See appendix F; Leo E. Strine Jr., Documenting the Deal: How Quality Control and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target Zone, Bus. Law. 70 (2015): 699–702.

23. See Joseph W. Yockey, Does Social Enterprise Law Matter?, Ala. L. Rev. 66 (2014): 818–819, discussing the contention that “board composition takes on more significance for larger benefit corporations…. A specialist on the board can help to ensure that specific issues like social mission feature in every high-level discussion about organizational objectives. She will have the ear of key executives and can apprise them of matters that bear on mission in the face of potential pressure to focus exclusively on profit.”

24. B Lab, Model Benefit Corporation Legislation. A significant number of jurisdictions following the MBCL do not require benefit directors. J. Haskell Murray, “Corporate Forms of Social Enterprise: Comparing the State Statutes” (updated January 15, 2015), accessed June 12, 2017, https://www.law.umich.edu/clinical/international-transactionclinic/Documents/May%2011%20Conference%20Docs/Corporate%20Forms%20of%20Social%20Enterprise.pdf.

Chapter 8. Operating Benefit Corporations in Extraordinary Situations

1. 8 Del. C. § 365(b); B Lab, Model Benefit Corporation Legislation (April 4, 2016), accessed June 12, 2017, http://benefitcorp.net/sites/default/files/Model%20Benefit%20Corp%20Legislation_4_16.pdf § 301. See “The Entire Fairness Standard” (chapter 3, present volume) for further discussion of the standard with respect to conventional corporations; Leo E. Strine Jr., Making It Easier for Directors To ‘Do the Right Thing,’ Harv. Bus. L. Rev. 4 (2014): 249: “No kind of equity investor has any rational incentive to tolerate self-interested action by top dogs like directors and key executives, because such behavior has a negative effect on all corporate constituencies, not just stockholders.”

2. Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993).

3. In re Walt Disney Co. Derivative Litig., 731 A.2d 342, 354 (Del. Ch. 1998) aff ’d in part, rev’d in part and remanded sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

4. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Compare 8 Del. C. § 365(b) (“With respect to a decision implicating the balance requirement in subsection [a] of this section, will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve” [emphasis added]), with 8 Del. C. § 144(a)(1) (referring to vote of “disinterested directors” [emphasis added]). See also B Lab, Model Benefit Corporation Legislation § 301 (comment), citing American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 401(c) as the source of the MBCL business judgment rule. Section 4.01(c) notes that the “basic principle to be discussed is that the director should not use his corporate position to make a personal profit or gain or other personal advantage.”

5. Chen v. Howard-Anderson, 87 A.3d 648, 671 (Del. Ch. 2014), quoting Orman v. Cullman, 794 A.2d 5, 27 n. 56 (Del. Ch. 2002), citing In re Mobile Commc’ns Corp. of Am., Inc. Consol. Litig., No. 10627, No. 10638, No. 10644, No. 10656, No. 10697, 1991 WL 1392, at *9 (Del. Ch. Jan. 7, 1991).

6. American Law Institute, Principles of Corporate Governance § 401.

7. However, the MBCL, in its criteria for “independence” (which applies to benefit directors), does provide that shareholding of more than 5 percent is disqualifying (B Lab, Model Benefit Corporation Legislation § 102). On the other hand, the MBCL does not use that definition for determining whether a director has a conflict for the purpose of determining whether a director receives the benefit of the business judgment rule or exculpation. In those cases, the question is whether the director was “interested,” either “in the subject matter of the decision,” or “with respect to the action or inaction,” respectively (§§ 301[c][1] and [b][1]).

8. See 8 Del. C. § 367; B Lab, Model Benefit Corporation Legislation § 305. Not all states that have adopted the MBCL follow this requirement for standing. See J. Haskell Murray, “Corporate Forms of Social Enterprise: Comparing the State Statutes” (updated January 15, 2015), accessed June 12, 2017, https://www.law.umich.edu/clinical/internationaltransactionclinic/Documents/May%2011%20Conference%20Docs/Corporate%20Forms%20of%20Social%20Enterprise.pdf.

9. See Sean W. Brownridge, Canning Plum Organics: The Avant-Garde Campbell Soup Company Acquisition and Delaware Public Benefit Corporations Wandering Revlon-Land, Del. J. Corp. L. 39 (2015): 724, suggesting that one interpretation of the Delaware statute is as providing directors authority “to consider shareholder interests extrinsic to the company’s financial performance.”

10. See “Revlon Standard: Changes in Control” and “The Unocal Standard: Defensive Actions” (chapter 3, present volume).

11. See Michal Barzuza, The State of State Antitakeover Law, Va. L. Rev. 95 (2009): 1997–2014.

12. See Strine, Making It Easier for Directors To ‘Do the Right Thing,’ 245; Frederick H. Alexander et al., M&A Under Delaware’s Public Benefit Corporation Statute: A Hypothetical Tour, Harv. Bus. L. Rev. 4 (2014): 270, addressing the expectation that traditional corporate law precepts requiring the pursuit of maximization of shareholder gain “would operate differently in the case of a PBC.”

13. See Strine, “Making It Easier,” 245–246, contending that “one of the most important consequences of the Delaware statute is that it makes clear that the Revlon doctrine does not apply to benefit corporations” and that “the board must use its own judgment to choose the best sale partner based on a consideration of all corporate constituencies”; Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 270: “It seems clear that stockholder pecuniary gain is no longer the only permissible objective.”

14. J. Haskell Murray, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, Hastings Bus. L. J. 9 (2013): 512: “If, however, the directors decide to sell or break up the benefit corporation, then the directors should be required to sell to the highest bidder, if the state follows Revlon”; also 513.

15. See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 270, expressing doubt that “courts [will] really abandon the level of scrutiny they have come to apply to a sale of the company” and predicting various applications of the Revlon doctrine to PBCs.

16. Brownridge, “Canning Plum Organics,” 722: “Revlon is incongruous with these [Section 365(a)] duties to the extent that it requires, in the first instance, the maximization of shareholder value.”

17. See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 270, explaining the requirement of traditional directors to function to maximize shareholder gain “even in managing the corporation’s ordinary business affairs,” that all of the interests directors can permissibly take into account must provide “rationally related benefits accruing to the stockholders,” and that “one of the motivating factors behind the enactment of the PBC statute was the desire of entrepreneurs for assurance that in their vitally important, last period decision to sell the company, they could still bring to bear the considerations of public purpose that led them to create and operate the PBC.” See also Strine, “Making It Easier,” 246, stating that the PBC statute gives “directors a clear legal duty to… consider how all corporate constituencies and society generally will be regarded by various bidders.”

18. 8 Del. C. § 365(b). See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 271, discussing various ways a court could look at the board’s balancing of obligations in the context of a sale of the company. But compare Strine, “Making It Easier,” 246, concluding that to act in accordance with the PBC statute, directors, “in a situation involving the sale of a public benefit corporation[,] where two bidders are both offering a substantial premium to the company’s shareholders that is within a fair range, the board could—and in fact, would have to—prefer a reasonable bidder at $44 per share who has a track record of and is willing to make a binding commitment to managing in manner that is fair to the corporation’s other constituencies and society generally, over a bidder at $46 per share with a track record of poor treatment of workers, consumers, and the environment” (emphasis added).

19. See Shepard v. Hanke, No. IP 01–1103-C H/K, 2002 WL 1800311 (S.D. Ind. Jul. 9, 2002): Allegations of misrepresentations and involving a breakup fee could constitute a claim that directors failed to act in the best interests of all constituencies.

20. Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 271.

21. Brownridge, “Canning Plum Organics,” 730: “Even with enhanced scrutiny applied [to a Delaware public benefit corporation subject to Revlon], good process and a reasonable connection to impact investor interests should shield a director’s decision in the wake of a change of control transaction.”

22. It should be noted that not all mergers are subject to Revlon scrutiny. When a conventional corporation is sold for stock in the acquirer (in a noncontrolled entity), immediate value maximization is not required, and shareholders may continue to benefit from long-term value that may be created through relationships with stakeholders. Nevertheless, such transactions generally are still subject to heightened scrutiny under the Unocal test, because of the protective contractual provisions that often make it difficult for third parties to propose competing transactions. See “Intermediate Standards of Review: Enhanced Business Judgment Rule” (chapter 3, present volume).

23. See Antony Page and Robert Katz, Freezing Out Ben & Jerry: Corporate Law and the Sale of a Social Enterprise Icon, Vermont L. Rev 35 (2010): 226–228, describing terms of sale, including the right of the independent board of Ben & Jerry’s to enforce terms of merger agreement after the sale closed.

24. See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 272, suggesting that Unocal will continue to apply to deal protections, as “it might be argued that the statute was only meant to address matters within board authority, and not to allow the board more authority or influence over matters that come within stockholder authority, such as votes on mergers so that Unocal will still apply”; Murray, “Defending Patagonia,” 494, recognizing that the Unocal test is “used in evaluating a benefit corporation’s takeover defense, but the threats and the reasonableness of the response would be evaluated in light of the purpose of the benefit corporation.” But compare Barzuza, “State of State Antitakeover Law,” 1998–2008, finding that most courts interpreted expanded director discretion under constituency statutes as eliminating the Unocal test.

25. See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 28 (Del. Ch. 2010): “The decision to deploy a rights plan will fall within the range of reasonableness if the directors use the plan in a good faith effort to promote stockholder value…. Using a rights plan to promote stockholder value is a legitimate exercise of board authority that accords with the directors’ fiduciary duties”; Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 112–13 (Del. Ch. 2011), illustrating the concept in Delaware law that a board can appropriately deploy defensive devices to protect shareholders from threat of mistakenly tendering into an inadequate offer; Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1376 (Del. 1995), noting that a board can “properly employ a poison pill as a proportionate defensive response to protect its stockholders from a ‘low-ball’ bid” if the board has a good faith belief that an offer is inadequate.

26. See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 272: “The range of permissibly identifiable threats to a PBC would extend to threats of the accomplishment of the PBC’s stated public purpose, as well as threats of a more traditional, financial type”; Murray, “Defending Patagonia,” 511, giving an example of a threat to Patagonia’s mission of protecting the environment and arguing that it “could be considered, even to the extreme detriment of shareholder wealth”; Kyle Westaway and Dirk Sampselle, The Benefit Corporation: An Economic Analysis with Recommendations in Courts, Boards, and Legislatures, Emory L. J. 62 (2013): 1062–1063: “The traditional [Unocal] substantive test should be applied to scenarios involving defensive measures. Of course, the test must be reconstructed to account for the additional purposes of the corporation, but the principles upon which the test is founded—concern over directors’ self-interested attempts to regain control of the expense of shareholders or, in the case of benefit corporations, stakeholders— remain valid.”

27. See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 273, explaining that the “range of reasonableness standard” that courts employ to evaluate defensive devices “would be even looser in the case of a PBC.”

28. See Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 272; Westaway and Sampselle, “The Benefit Corporation,” 1063: “Courts should be skeptical of benefit corporation board claims of pursuing public benefit in a given defensive measure when the board’s record does not reflect actual consideration of public benefit and stakeholder interest in the reasoning and discussion of the board meeting.”

29. Third Point, LLC v. Ruprecht, WL19220 (Del. Ch. 2014) at 21–22.

30. Versata Enters, Inc. v. Selectica, Inc., 5 A.2d 586 (Del. 2010), permitting a rights plan with a 5 percent trigger to protect a company from losing valuable tax assets upon certain ownership changes.

31. Murray, “Defending Patagonia,” 506; see also 504: “The benefit corporation [signals] that it is interested in a different type of investor—an investor focused on multiple bottom lines.”

32. See “Standards for the Exercise of Shareholder Voting Rights” (chapter 3, present volume); 8 Del. C. § 367; B Lab, Model Benefit Corporation Legislation § 305. But compare Murray, “Corporate Forms of Social Enterprise,” showing some states that have unclear standing requirements.

33. See Barzuza, “State of State Antitakeover Law,” 2014–18, concluding that, with one exception, courts in states that had adopted other constituency statutes continued to follow Blasius. For more discussion of this issue, see “Application to Voting Rights” (chapter 9, present volume).

34. See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988).

35. See Strine, “Making It Easier,” 249, noting that PBC directors cannot take “actions that might be motivated by a desire to remain in office.”

36. Alexander et al., “M&A Under Delaware’s Public Benefit Corporation Statute,” 273.

37. Robert P. Bartlett III, Shareholder Wealth Maximization as Means to an End, Seattle Univ. L. Rev. 38 (2015): 255–256.

Chapter 9. Constituency Statutes: A Viable Alternative for Stakeholder Governance?

1. See, generally, Christopher Geczy et al., Institutional Investing When Shareholders Are Not Supreme, Harv. Bus. L. Rev. 5 (2015), providing an overview of constituency statutes; William T. Allen, Our Schizophrenic Conception of the Business Corporation, Cardozo L. Rev. 14 (1992): 276: “The entity conception was even more clearly endorsed by the law in a remarkable series of legislative acts adopted… over the course of the last few years of the 1980s.”

2. See Geczy et al., “Institutional Investing,” 94; 114: “Constituency statutes did not open litigation floodgates as some critics cautioned”; 127: “We cannot rule out that constituency statutes had some effect on [high fiduciary duty institution] investment, but we can rule out that these investors significantly altered investment behavior after the passage of the statutes”; Roberta Romano, What Is the Value of Other Constituency Statutes to Shareholders?, U. Toronto L. J. 43 (1993): 537.

3. See, e.g., Committee on Corporate Laws, Other Constituencies Statutes: Potential for Confusion, Bus. Law 45 (1990): 2253: “These statutes variously authorize… directors to take into account the interests of other ‘constituencies’—persons or groups other than shareholders—in performing their duties, including the making of change-of-control decisions.”

4. See Geczy et al., “Institutional Investing,” 95: “Constituency statutes expand the protection of the business judgment rule,” citing Stephen M. Bainbridge, Corporate Law, 2nd ed. (New York: Thomson Reuters/Foundation Press, 2009), 96–102.

5. See, e.g., Jonathan D. Springer, Corporate Constituency Statutes: Hollow Hopes and False Fears, Ann. Surv. Am. L. (1999): 99, noting that official comment on the Indiana statute “implies that, like Pennsylvania, Indiana rejects the Revlon duty to auction”; 92–94, explaining statutes’ origins in anti-takeover movement of 1980s; John H. Matheson and Brent A. Olson, Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation, Geo. Wash. L. Rev. 59 (1991): 1448–50, discussing how increased discretion from statutes “bolster[s] the board’s anti-takeover decisions.”

6. Brett McDonnell, Corporate Constituency Statutes and Employee Governance, Wm. Mitchell L. Rev. 30 (2004): 1228: “Many commentators have charged that [the statutes’] main intent and effect is to help entrench incumbent managers”; and 1235, observing how management initiation of statutes “helps explain why the statutes are permissive rather than mandatory.”

7. See Committee on Corporate Laws, “Other Constituencies Statutes,” 2261, listing factors permitted for consideration in constituency statutes.

8. Springer, “Corporate Constituency Statutes,” 98: “Most statutes do not address [whether constituency interests may trump those of shareholders] directly,” discussing statutes rejecting dominance of any single interest over others.

9. See Geczy et al., “Institutional Investing,” 96–97.

10. See Edward S. Adams and John H. Matheson, A Statutory Model for Corporate Constituency Concerns, Emory L. J. 49 (2000): 1089: “Permissive statutes authorize directors to consider a wider group of interests when making corporate decisions if they so choose. Accordingly, permissive statutes allow consideration of stakeholder interests without demanding it.”

11. Ind. Code Ann. § 23-1-35-1(d) (2015).

12. See Eric W. Orts, Beyond Shareholders: Interpreting Corporate Constituency Statutes, Geo. Wash. L. Rev. 61 (1992): 29, providing original language of Connecticut statute, which mandated that directors “shall consider” non-shareholder interests.

13. See Adams and Matheson, “A Statutory Model,” 1089: “Mandating statutes strictly require directors to take into account a wider group of interests when making corporate decisions. Instead of granting authority, these statutes impose a strict obligation on directors to consider stakeholder interest when making corporate decisions.”

14. Conn. Gen. Stat. § 33-756(d) (2015). The new provision reads: “(d) [A] director of a corporation [with registered securities] may consider, in determining what he reasonably believes to be in the best interests of the corporation, (1) the long-term as well as the short-term interests of the corporation, (2) the interests of the shareholders, long-term as well as short-term, including the possibility that those interests may be best served by the continued independence of the corporation, (3) the interests of the corporation’s employees, customers, creditors and suppliers, and (4) community and societal considerations including those of any community in which any office or other facility of the corporation is located. A director may also in his discretion consider any other factors he reasonably considers appropriate in determining what he reasonably believes to be in the best interests of the corporation” (emphasis added).

15. See Geczy et al., “Institutional Investing,” 96: “Idaho provides a slight deviation from the permissive grant.”

16. Idaho Code Ann. §§ 30-1602, 30-1702 (2015) Comparison of the hybrid language in the Idaho statute with the more conventional language in the Indiana and Connecticut statutes suggests that a literal reading of a typical constituency statute frees directors from the obligation to give any consideration to shareholder interests.

17. See Leo E. Strine Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, Wake Forest L. Rev. 50 (2015): 25–26: “Furthermore, when other states moved to adopt express constituency statutes that allowed their boards of directors to consider the interests of other constituencies on equal footing with stockholders, Delaware did not join them.”

18. See Geczy et al., “Institutional Investing,” 102, explaining that constituency statutes apply to all corporations in a state; Springer, “Corporate Constituency Statutes,” 101–102, describing the optional nature of some constituency statutes: in opt-in states, “constituency statutes are not default measures, but rather are language that a corporation may choose to include in its charter”; Geczy et al., “Institutional Investing” 97, identifying two jurisdictions, Georgia and Maryland, as having these “opt-in” statutes; Tenn. Code Ann. § 48-103-204, allowing consideration of other interests “if such factors… are permitted to be considered by the board of directors under the charter for such resident domestic corporation in connection with a merger, exchange, tender offer or significant disposition of assets” (emphasis added).

19. Ga. Code Ann. § 14-2-202(b)(5) (2015).

20. See Committee on Corporate Laws, “Other Constituencies Statutes,” 2253: “The Committee has reviewed the so-called ‘other constituencies’ statutes enacted during the last several years by at least twenty-five states to determine whether or not the Model Act should include such a provision.”

21. Committee on Corporate Laws, “Other Constituencies Statutes,” 2270–71.

22. Committee on Corporate Laws, “Other Constituencies Statutes,” 2261: “We believe the Delaware courts have stated the prevailing corporate common law in this country.”

23. Committee on Corporate Laws, “Other Constituencies Statutes,” 2269. Such ramifications included confusion of directors caused by balancing interests, deterrence from serving on boards due to a new class of plaintiffs, reduction of shareholders’ ability to monitor director conduct, and a lack of director accountability. See also 2269–70, identifying potential unintended consequences of constituency statutes.

24. See Allen, “Our Schizophrenic Conception.”

25. See McDonnell, “Corporate Constituency Statutes,” 1232–33, noting opposition to constituency statutes was not surprising because they challenge the dominant view of shareholder primacy: “The traditional argument for [shareholder primacy] is that shareholders are the owners of the corporation. Hence they have the right to expect that their property is managed in their interest.” Adams and Matheson, “A Statutory Model,” 1090, provide an overview of the historical debate. On the other hand, proponents of stakeholder governance welcomed constituency statutes as a vehicle for promoting corporate social responsibility. See Springer, “Corporate Constituency Statutes,” 102–104, explaining proponents’ hopes for constituency statutes to protect stakeholder interests.

26. Springer, “Corporate Constituency Statutes,” 106. See also Adams and Matheson, “A Statutory Model,” 1095: “Not only do opponents believe constituency statutes are contradictory to shareholder supremacy, some argue that existing law already adequately protects the interests of stakeholders”; Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, Stetson L. Rev. 21 (1991): 23; Mark E. Van Der Wide, Against Fiduciary Duties to Corporate Stakeholders, Del. J. Corp. L. 21 (1996): 27.

27. Committee on Corporate Laws, “Other Constituencies Statutes,” 2255; 2268; 2269: “When directors must not only decide what their duty of loyalty mandates, but also to whom their duty of loyalty runs (and in what proportions), poorer decisions can be expected.”

28. See, e.g., Committee on Corporate Laws, “Other Constituencies Statutes,” 2262: “[Constituency statutes] seem designed to protect directors against claims of breach of fiduciary duty if they choose to take into account interests other than those of shareholders.”

29. Brian J. M. Quinn, Constituency Provisions and Intermediate Scrutiny Outside of Delaware, M&A Law Prof Blog (November 23, 2009), http://lawprofessors.typepad.com/mergers/2009/11/unocal-duties-outside-of-delaware.html.

30. See Roberta Romano, A Guide to Takeovers: Theory, Evidence, and Regulation, Yale J. on Reg. 9 (1992): 171: “The statutes, ironically, protect managers more effectively than workers. Workers have no right to challenge board decisions for failing to consider their interest, while shareholders’ ability to sue managers successfully for opposing a bid is diminished”; Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, Wash. & Lee L. Rev. 50 (1993): 1438–39, noting that, under a “multi-fiduciary duty” standard, “management could freely pursue its own self-interest by playing shareholders off against nonshareholders. When management’s interests coincide with those of shareholders, management could justify its decision by saying that shareholder interests prevailed in this instance, and vice-versa”; McDonnell, “Corporate Constituency Statutes,” 1231, “The statutes reduce the disciplinary pressure of shareholder suits on directors without a concomitant increase in pressure from other groups. The statutes are a shield for managers, not a sword for employees or other non-share-holder groups.”

31. J. Haskell Murray, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, Hastings Bus. L. J. 9 (2013): 505. One correspondent has noted that shareholder value dominates board decision making at public companies, even at corporations in constituency statute states. John Montgomery, in an e-mail to the author (April 2, 2017), pointed out that when Medtronic, a public company incorporated in Minnesota, merged with Covidien and redomiciled in Ireland, a so-called inversion that reduced its taxes significantly, its proxy statement had “pages of the required disclosure about board process and… next to nothing about considerations to other stakeholders or Medtronics’ elaborate mission and values, one of which was to be a good corporate citizen.” See also David Min, Corporate Political Activity and Non-Shareholder Costs, Yale J. on Reg. 33 (2016): 443: “While these theories [stakeholder and team production models that reject shareholder primacy] may be theoretically compelling, they have not been widely adopted by practitioners, policy makers, or judges, who have tended to view corporate law as prioritizing the interests of shareholders over those of other corporate stakeholders or team members.”

32. See Steven L. Schwarcz, Controlling Systemic Risk Through Corporate Governance, Policy brief no. 94 (Ontario: Centre for International Governance Innovation, 2017), 5: “Any given legislature would be unlikely to want to pioneer [a public governance] duty because it could discourage firms from incorporating in its state.”

33. See Geczy et al., “Institutional Investing,” 111: “The number of enforcement cases reviewed in this study, forty-seven in total, is not large, but not unexpectedly small given the limited enforcement mechanisms in all statutes, and further restrictions in state variations limiting the scope to takeovers, public companies, or both”; Springer, “Corporate Constituency Statutes,” 109–110, noting the infrequency of constituency statute litigation, and “the fact that cases generally do not turn on constituency statutes alone is a function of… the availability of other anti-takeover mechanisms that do not seem to call into question directors’ fiduciary duties.”

34. See Geczy et al., “Institutional Investing,” 112, observing the cases concerned statutes from thirteen jurisdictions, with Ohio, Pennsylvania, and Nevada analyzed most frequently, and that thirty-two cases were resolved after 2000; 113 (table 3): seventeen cases claimed breach of fiduciary duty in a takeover setting, twelve in bankruptcy or insolvency, and eleven in other situations.

35. Geczy et al., “Institutional Investing,” 111, provides an overview of results of study and enforcement coding.

36. See Geczy et al., “Institutional Investing,” 106– 112. The Positive category was subdivided into two categories, Subcategory A, which addressed directors’ expanded rights, and Subcategory B, which addressed lack of standing for non-share-holder constituents. Similarly to the Positive category, Neutral/Positive cases were divided into subcategory A, where the court discussed expanded director rights, and B, where the court discussed the absence of a right of action for nonshareholders. Subcategory A Neutral cases simply had citations to constituency statutes, and Subcategory B cases had references by name or “other nonsubstantive discussions.” “Only four court opinions were classified as Neutral/Negative because they did not recognize expanded director duties nor depart from Revlon duties in takeover settings.” Finally, “We did not find cases that fell under the Negative category.”

37. See Geczy et al., “Institutional Investing,” 106–107.

38. Kloha v. Duda, 246 F. Supp. 2d 1237 (M.D. Fla. 2003) at 1244: “Plaintiff claims that Defendant Directors caused the Company to remain in the losing operations of vegetables and citrus because they were beholden to F. S. Duda, who wanted to ensure continued family employment”; see also 1246.

39. See Safety-Kleen Corp. v. Laidlaw Envtl. Servs. Inc., No. 97 C 8003, 1999 WL 601039 (N.D. Ill. Feb. 4, 1998) at *18; also *12: “Directors have fiduciary duties to the shareholders which cannot be ignored.”

40. Shepard v. Humke, No. IP 01–1103-C H/K, 2002 WL 1800311 (S.D. Ind. Jul. 9, 2002) at *8–*9.

41. Warehime v. Warehime, 777 A.2d 469 (Pa. Super. Ct. 2001), rev’d on other grounds, 860 A.2d 41 (2004) at 480–481. The court ultimately determined the “directors impermissibly exercised their power to retain their own positions by purposely depriving the majority shareholders of any real opportunity to affect the outcome of any vote. Such abuse of position, even if exercised in the belief that the company was thereby well served, violates the principles of corporate democracy that enable shareholders to control their own company.” See Michal Barzuza, The State of State Antitakeover Law, Va. L. Rev. 95 (2009): 2014–17, finding three cases in which courts applied the Blasius standard where a constituency statute was in effect.

42. Invacare Corp. v. Healthdyne Techs., Inc., 968 F. Supp. 1578 (N.D. Ga. 1997).

43. See Barzuza, “State of State Antitakeover Law,” 1996–2014.

44. See Geczy et al., “Institutional Investing,” 115: “[Constituency statutes] did not create an enforceable right in any of the nonshare-holder constituents”; Steven M. H. Wallman, The Proper Interpretation of Corporate Constituency Statutes and Formulation of Director Duties, Stetson L. Rev. 21 (1991): 188– 189: “[Constituency] statutes are not intended to create in these other constituencies any legally enforceable rights, or to provide nonshareholder constituents with a direct voice in corporate governance.”

45. See, e.g., Washington Penn Plastic Co., Inc. v. Creative Engineered Polymer Prods., LLC, No. 5:06CV1224, 2007 WL 2509873, at *2 (N.D. Ohio Aug. 30, 2007): “The permissive language of the statute forecloses the contention that the directors’ duty to the corporation’s creditor is fiduciary in nature.”

46. Official Comm. of Unsecured Creditors of PHD, Inc. v. Bank One, No. 1:03CV2466, 2004 WL 3721325 (N.D. Ohio Apr. 23, 2004) at *5.

47. In re I.E. Liquidation, Inc., No. 08–6007, 2009 WL 2707233 (Bankr. N.D. Ohio Aug. 25, 2009) at *5: “The Court cannot conclude that the law imposes a mandatory obligation on a director to consider creditor interests, even when the entity is insolvent or operating in the zone of insolvency. The Court will therefore dismiss count five to the extent that it attempts to hold Counter-defendants liable for a breach of fiduciary duty for failing to consider creditor interests, as well as any other counts that similarly attempt to improperly impose upon a director the duty to act on behalf of creditors.”

48. See 8 Del. C. § 365(b), providing directors have “no duty to any person” under balancing obligation; 8 Del. C. § 367, providing shareholders with minimum holdings a right to bring derivative such as challenging the balancing; Geczy et al., “Institutional Investing,” 102, noting that under both statutory regimes non-shareholders lack enforcement rights.

49. See William Clark and Elizabeth Babson, How Benefit Corporations Are Redefining the Purpose of Business Corporations, Wm. Mitchell L. Rev. 38 (2012): 849: “The [MBCL] explicitly does not create a fiduciary duty to anyone who cannot bring a ‘benefit enforcement proceeding.’” This is limited to directors, shareholders with a threshold percentage interests, and other persons identified in the articles of incorporation.

50. But see Geczy et al., “Institutional Investing,” 117: “If under constituency statutes creditors were denied standing because directors had permission, but no obligation, to consider creditors, the mandatory ‘shall’ language in benefit corporation statutes may prove a viable argument.” Benefit corporation legislation seems to do away with that concern by explicitly denying any duty to third parties.

51. See Geczy et al., “Institutional Investing,” 114: “It is clear that constituency statutes were seen, for the most part, as a true expansion of directors’ authority and not merely a codification of earlier common law. The low number of Negative and Neutral/Negative cases supports this assertion.”

52. Geczy et al., “Institutional Investing,” 115; Barzuza, “State of State Antitakeover Law,” 229.

53. See Geczy et al., “Institutional Investing,” 115: “Constituency statutes expanded directors’ authority to consider nonshareholder constituents, but that expansion only protected directors and did not create an enforceable right in any of the nonshareholder constituents.”

54. Romano, “What Is the Value,” 283. Romano examined twenty-five states with constituency statutes and the change in stock prices on the day the bill was introduced, the first day the bill got a favorable vote, and the day the bill was signed into law (536–37, detailing the methodology of event study). Romano identifies a number of factors that could have impacted the results of the study, such as combined impact with other anti-takeover legislation, problems with use of dates that may have been prior to public announcements, and variations in firm characteristics (537–41). Alternatively, and “most compelling,” Romano speculates that “other constituency statutes are not perceived to have a negative wealth effect because they do not create dramatic changes in the common law of take-overs or in management’s behaviour in responding to hostile bids” (541).

55. See Geczy et al., “Institutional Investing,” 75, 80.

56. Geczy et al., “Institutional Investing,” 127. However, the difference between constituency statutes and the benefit corporation legislation may pose certain challenges for benefit corporations not indicated by the study.

57. Caroline Flammer and Aleksandra Kacperczyk, The Impact of Stakeholder Orientation on Innovation: Evidence From a Natural Experiment, Management Reference (November 12, 2015); Julian Atanassov, “Corporate Governance, Non-Financial Stakeholders, and Innovation: Evidence From a Natural Experiment” (June 2013), https://ssrn.com/abstract=2181766.

Chapter 10. Could a Conventional Delaware Corporation Adopt Stakeholder Values Without Becoming a Public Benefit Corporation?

1. See, e.g., Frank H. Easterbrook and Daniel R. Fischel, Contract and Fiduciary Duty, J. L. & Econ. 36 (1993): 427: “Fiduciary duties are not special duties; they have no moral footing; they are the same sort of obligations, derived and enforced in the same way, as other contractual undertakings”; David Rosenberg, Making Sense of Good Faith in Delaware Corporate Fiduciary Law: A Contractarian Approach, Del. J. Corp. L. 29 (2004): 493: “The relationship between corporate directors and stockholders can be viewed, then, essentially as a contract, the terms of which may be crafted according to the parties’ own understanding of what the market will bear.” But also: “Opponents of this point of view believe that fiduciary duties originate from the unique ethical and moral implications of relationships in which one party entrusts his wealth or property to another. Further, they believe that the law must make these obligations unwaivable to protect potential victims from the misuse of the extraordinary degree of power entrusted to corporate directors.”

2. See Jones Apparel Grp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845 (2004): “Delaware’s corporate statute is widely regarded as the most flexible in the nation because it leaves the parties to the corporate contract (managers and stockholders) with great leeway to structure their relations, subject to relatively loose statutory constraints and to the policing of director misconduct through equitable review”; Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, S. Cal. L. Rev. 75 (2002): 1206: “Delaware corporate law, like most corporate law, is an enabling system. This means that most of the rules provided by Delaware are default rules that corporate promoters are free to modify through charter and bylaw provisions.”

3. 8 Del. C. § 102(b)(7), permitting inclusion of a provision in the certificate of incorporation of a traditional Delaware corporation that would eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for certain fiduciary duty breaches; but not permitting exculpation for (i) breach of the duty of loyalty, (ii) acts or omissions not in good faith, (iii) liability under the distribution provisions of the statute, or (iv) transactions from which the director derived an improper personal benefit.

4. 8 Del. C. § 122(17), empowering a traditional Delaware corporation to “renounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or one or more of its officers, directors or stockholders.”

5. 6 Del. C. § 17-1101, permitting limitations or elimination of any and all liabilities for “breach of duties” in limited partnership agreement; 6 Del. C. § 18–1101, permitting the same with respect to limited liability agreements. These provisions have been interpreted to authorize the complete elimination of the duties of care and loyalty in limited partnerships and limited liability companies. See Lonergan v. EPE Holdings, LLC, 5 A.3d 1008, 1017 (Del. Ch. 2010): “The complaint frames each of these theories using the implied covenant of good faith and fair dealing because the Holdings LP Agreement eliminates default fiduciary duties in accordance with the authority granted by the Delaware Limited Partnership Act”; Fisk Ventures, LLC v. Segal, No. 3017-CC, 2008 WL 1961156, at *11 (Del. Ch. May 7, 2008), dismissing breach of fiduciary duty claims because “the LLC Agreement, in accordance with Delaware law, greatly restricts or even eliminates fiduciary duties” (aff’d, 984 A.2d 124 [Del. 2009]).

6. 8 Del. C. § 102(b)(1).

7. See Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 118 (Del. Ch. 1952): “The stockholders of a Delaware corporation may by contract embody in the charter a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself ”; Jones Apparel Grp., 883 A.2d 837 at 846, noting that when evaluating a certificate provision, the court must “only invalidate a certificate provision if it ‘transgress[es]’—i.e., vitiates or contravenes—a mandatory rule of our corporate code or common law.”

8. Jones Apparel Grp., 883 A.2d 837 at 848. For example, in Rohe v. Reliance Training Network, Inc. No. 17992, 2000 WL 1038190, at *10–*11 (Del. Ch. July 21, 2000), the Delaware Court of Chancery held that a certificate of incorporation could not contain a provision eliminating the annual meeting requirement and purporting to give directors on a nonstaggered board three-year terms. The court determined that those particular certificate provisions were contrary to Delaware’s public policy and therefore violate the limitation in § 102(b)(1).

9. Siegman v. Tri-Star Pictures, Inc., 15 Del. J. Corp. L. 218, 236 (Del. Ch. 1989): “At least one scenario (and perhaps others) could plausibly be constructed where Article Sixth [the charter provision purporting to limit the liability of the corporation’s directors in certain circumstances] would eliminate or limit the liability of Tri-Star directors for breach of their fiduciary duty of loyalty-a result proscribed by § 102(b)(7).”

10. Victor Brudney, Contract and Fiduciary Duty in Corporate Law, B.C. L. Rev. 38 (1997): 627, and 627, note 82: “Not only do traditional fiduciary loyalty restrictions thus differ from classic contract rules in content, but fiduciary strictures are not designed like contract background rules to fill gaps in, or enforce, explicitly specified preferences or protective provisions that the parties selected…. The functional role of management, as actor for the stockholders, and the structural bargaining incapacity and passive posture of the public stockholder which result in the state thus imposing broad fiduciary restrictions, preclude a court from ‘interpreting’ the meaning or scope of these so-called background rules as if they were deliberately and freely adopted by contracting parties.”

11. Frederick H. Alexander, An Optimal Mix of Clarity and Flexibility, Delaware Lawyer 26 (2008): 31: “Given the capitalistic milieu of the business corporation, it may seem counterintuitive to preclude participants from opting out of any rule. The theoretical answer is that too much freedom may sow confusion. By assuring a minimum level of governance, mandatory rules provide important clarity—an investor in a Delaware corporation need not read the charter of bylaws to know that there are certain bottom-line protections.”

Chapter 11. Limited Liability Companies and Social Purpose Corporations

1. See Auriga Capital Corp. v. Gatz Props., LLC, 40 A.3d 839, 852 (Del. Ch. 2012), expressing a view that default fiduciary duties exist in the LLC context, but that they can be supplanted or modified by clear contractual provisions; Auriga Capital Corp. v. Gatz Props., LLC, 59 A.3d 1206, 1218 (Del. 2012), aff’g 40 A.3d 839, noting that the Court of Chancery’s “statutory pronouncements” regarding existence vel non of default fiduciary duties in the LLC context “must be regarded as dictum without any precedential value.”

2. 6 Del. C. § 18-1104: “In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”

3. 6 Del. C. § 18-1101(c).

4. See, e.g., Greenmont Capital Partners I, LP v. Mary’s Gone Crackers, Inc., No. 7265-VCP, 2012 WL 4479999, at *6, note 24 (Del. Ch. Sept. 28, 2012), quoting Seidensticker v. Gasparilla Inn, Inc., No. 2555-CC, 2007 WL 4054473, at *3 (Del. Ch. Nov. 8, 2007).

5. 6 Del. C. § 18–1101(c).

6. See Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010), aff’g No. 3878-CC, 3934-CC, 2009 WL 1204346 (Del. Ch. Apr. 30, 2009): “The implied covenant of good faith and fair dealing involves a ‘cautious enterprise,’ inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated.”

7. Nemec v. Shrader, 991 A.2d 1120 at 1125–26, quoting Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005).

8. Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005), quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985).

9. See B Lab, “Find a B Corp,” https://www.bcorporation.net/community/find-a-b-corp.

10. William H. Clark Jr., and Larry Vranka, The Need and Rationale for the Benefit Corporations: Why It Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public, White paper (January 18, 2013), http://benefitcorp.net/sites/default/files/Benefit_Corporation_White_Paper.pdf., appendix C at 3: “While some LLCs have gone public, LLCs still represent a small minority of initial public offerings over the last decade.”

11. See B Lab, “What Is a Benefit Corporation?,” http://benefitcorp.net/attorneys.

12. See J. Haskell Murray, Social Enterprise and Investment Professionals, Seattle Univ. L. Rev. 40 (2017):767–769.

13. See ORS 65.750 (1), defining Oregon benefit company as either corporation or LLC; Md. C. Ann., §§ 4A-1201 to 4A-1303, establishing Maryland Benefit LLCs; Pennsylvania Uniform Limited Liability Company Act of 2016.

14. See Rev. Wash. 23B25.005 et seq.; Cal. Corp. Code § 2500 et seq.; Tx. Bus. Ore. Code § 23.001 et seq.; Fla. State. Ann. § 607.501 et seq.; Minn. Stat. Ann. § 304A.001 et seq., combining benefit corporation and social purpose corporation authorization into one statute, and using terminology of “general benefit corporation” and “specific benefit corporation.”

15. See B Lab, “Social Purpose Corporations and the B Corp Legal Requirement for Certification,” accessed July 11, 2017, https://www.bcorporation.net/sites/default/files/documents/legalreq/SPC_Legal-Requirement_9222016.pdf.