The titular question is prompted by a Twitter exchange this morning:
The Washington Post reports:
Google announced Wednesday that it will ban all payday loan ads from its site, bowing to concerns by advocates who say the lending practice exploits the poor and vulnerable by offering them immediate cash that must be paid back under sky-high interest rates.
The decision is the first time Google has announced a global ban on ads for a broad category of financial products. To this point, the search giant has prohibited ads for largely illicit activities such as selling guns, explosives and drugs, and limited those that are sexually explicit or graphic in nature, for example. Critics of payday lenders say they hope the move by Google and other tech companies might undercut the business which finds huge numbers of willing customers on the internet. ...
"We’ll continue to review the effectiveness of this policy, but our hope is that fewer people will be exposed to misleading or harmful products," Google global product policy director David Graff said in a blog post about the change.
This is, of course, just another iteration of the perennial question of whether directors of a corporation can be held liable when they engage in "socially responsible" behavior that reduces profits. (I'll assume for purposes of this analysis that the decision was made by the board. If it were made solely by the top management team, most of the analysis--except for the part about 102(b)(7) clauses, which only protect directors--would still apply.
There is, of course, an active debate over whether CSR activities that reduce profits are a breach of the directors' duties in the first place. Those who think they are a breach typically point to cases like Dodge, which held that:
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.
Dodge v. Ford Motor Co., 204 Mich. 459, 507, 170 N.W. 668, 684 (1919). They would also cite to a recent article by Delaware Chief Justice Leo Strine, which is discussed below and takes a very Dodge-like view of the law.
Those who think CSR activity is consistent with the directors' duties, however, point towards authorities such as the ALI Principles:
(b) Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business:(1) Is obliged, to the same extent as a natural person, to act within the boundaries set by law;(2) May take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; and(3) May devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes.
Principles of Corp. Governance § 2.01 (1994).
One huge reason these debates persist, of course, is that so few cases ever get to the merits. To understand why CSR challenges almost never reach the merits, you have to understand some basic principles of corporate law and shareholder litigation.
There are two basic types of shareholder lawsuits: direct and derivative (see this flowchart).
A suit on these facts would almost certainly be derivative. Any harm to the shareholders (such as a reduction in the stock price) results from a prior injury to the entity (the reduction in profits). See 9 Andrews M & A Litig. Rep. 7 (1998) (“wrongdoing that allegedly hurts the company stock price is nearly always derivative rather than direct”).
If a suit is derivative, a shareholder-plaintiff must make demand on the board of directors that they sue (would they sue themselves? we're coming to that). See Allison on Behalf of Gen. Motors Corp. v. Gen. Motors Corp., 604 F. Supp. 1106, 1117 (D. Del.), aff'd, 782 F.2d 1026 (3d Cir. 1985) ("At a minimum, a demand must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief."
The task of a board of directors in responding to a stockholder demand letter is a two-step process. First, the directors must determine the best method to inform themselves of the facts relating to the alleged wrongdoing and the considerations, both legal and financial, bearing on a response to the demand. If a factual investigation is required, it must be conducted reasonably and in good faith. ... Second, the board must weigh the alternatives available to it, including the advisability of implementing internal corrective action and commencing legal proceedings. See Weiss v. Temporary Inv. Fund, Inc., 692 F.2d 928, 941 (3d Cir.1982) (observing that directors, when faced with a stockholder demand, “can exercise their discretion to accept the demand and prosecute the action, to resolve the grievance internally without resort to litigation, or to refuse the demand”), judgment vacated on other grounds, 465 U.S. 1001, 104 S.Ct. 989, 79 L.Ed.2d 224 (1984).
Typically, a plaintiff will not make demand, but rather will file suit and argue that demand should be excused as futile. They do so because boards typically refuse the demand and the standard of review applicable to that decision is extremely lenient.
“A shareholder who makes a demand can no longer argue that demand is excused.” Spiegel, 571 A.2d at 775 (citation omitted). Accordingly, Plaintiff here may only challenge the Board's refusal to act. In a wrongful refusal scenario, the only issues for courts to consider are the good faith and reasonableness of the Board's investigation. Levine, 591 A.2d at 212 (quoting Spiegel, 571 A.2d at 777). While the business judgment rule creates a presumption that the Board made an informed decision, Plaintiff may rebut such presumption of deference by pleading particularized facts that create a reasonable doubt that the Board was informed and validly exercised its business judgment. Grimes v. DSC Commc'ns Corp., 724 A.2d 561, 565 (Del.Ch.1998) (citing Scattered Corp. v. Chicago Stock Exch., 701 A.2d 70, 73 (Del.1997)); Levine, 591 A.2d at 205–06; cf. Brehm, 746 A.2d at 255 (Del.2000) (explaining that a stockholder may control a suit only where reasonable doubt is created as to either the independence of the corporation's decisionmakers or that the business judgment rule protects the challenged decision). Although this reasonable doubt standard initially arose in the context of demand futility, Delaware law applies this heightened pleading requirement to wrongful refusal situations as well, as both situations are subject to a rebuttal of the business judgment rule and its protections of corporate decisions. Levine, 591 A.2d at 210–11 (rejecting a lenient pleading standard requiring merely “legally sufficient reasons for questioning the validity of a board's judgment” and explaining that the “reasonable doubt” pleading standard applies equally to allegations of demand futility and wrongful refusal of demand); see also In re General Motors Class E Stock Buyout Sec. Litig., 790 F.Supp. 77, 80 (D.Del.1992) (citing Levine, 591 A.2d at 211) (noting that a plaintiff alleging wrongful refusal of demand can only survive a motion to dismiss for failure to meet the demand pleading of Rule 23.1 where the complaint “contain[s] ‘well-pleaded allegations of fact which create a reasonable doubt that a board of directors' decision is protected by the business judgment rule”). The burden of demonstrating that a board's decision was in bad faith or unreasonable is a “considerable” one, presenting an obstacle that “few, if any, plaintiff's surmount.” RCM Sec. Fund, 928 F.2d at 1328 (applying Delaware law).
Because "few, if any" plaintiffs are able to surmount the standard for proving that a board decision to refuse demand was wrongful, few cases in which demand is made ever get past this stage of the process. Plaintiff makes demand, the board refuses it (after an expensive investigation), and the court upholds that refusal, which terminates the suit.
So plaintiffs prefer to file suit and then litigate whether demand was excused. These days most corporations (including Google) have what are known as 102(b)(7) exculpation provisions:
Exculpatory clauses—or, in the parlance of Delaware law, section 102(b)(7) clauses—provide a defense [to many shareholder lawsuits]. When properly invoked, exculpatory clauses can provide a basis for the dismissal at the outset of a case of certain types of breach of duciary duty damages claims brought derivatively by shareholders. ...
Specifically, section 102(b)(7) authorizes shareholders to include a clause in a corporation’s charter eliminating personal liability of a director to shareholders for monetary damages for breach of fiduciary duty, provided that such clause does not eliminate liability (1) for “any breach of the director’s duty of loyalty,” (2) “for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law,” and (3) “for any transaction from which the director derived an improper personal benefit.”
And the presence of such a provision in the certificate of incorporation makes it extremely difficult for a plaintiff to show that demand should be excused:
Under Delaware Supreme Court precedent, where an exculpation provision exists, a plaintiff arguing that demand is excused because of a substantial likelihood of director liability must plead 'particularized facts that demonstrate that the directors acted with scienter, i.e., that they had 'actual or constructive knowledge' that their conduct was legally improper." "A plaintiff can thus plead bad faith by alleging with particularity that a director knowingly violated a fiduciary duty or failed to act in violation of a known duty to act, demonstrating a conscious disregard for her duties.”
Jonathan C. Dickey & Marshall R. King, Delaware’s Duty of Oversight—Directors Prevail in the Citigroup Subprime Litigation, 6 NO. 4 Sec. Litig. Rep. 1 (2009).
This is an extremely difficult standard to meet and I see no evidence that Google's directors acted in bad faith. Did they act knowing that their conduct was illegal? As we have seen, there is an active debate about the legality of such actions, which makes it unlikely that this prong of the excusal test would be met. If the board had the common sense God gave gravel, moreover, they would have gotten an opinion from legal counsel saying that the law allows them to do this.
Did they consciously decide to ignore their fiduciary duties? If they have any common sense and their lawyer has at least the IQ of a slug, they will have spent a reasonable amount of time evaluating the decision, consulting with experts about the likely impact of the decision, and otherwise becoming fully informed. Because making an informed decision is the sina qua non of the directors' duty of care, this prong also will not be satisfied.
Finally, and I think crucially, there is no evidence of a breach of the duty of loyalty. Although derivative suits in theory can be brought when directors breach either the duty of care or the duty of loyalty, the rules of the game have been designed so that derivative suits get to the merits typically only when there has been a breach of the duty of loyalty by a majority of the board.
By their very nature, shareholder derivative actions infringe upon the managerial discretion of corporate boards. ... Consequently, we have historically been reluctant to permit shareholder derivative suits, noting that the power of courts to direct the management of a corporation's affairs should be “exercised with restraint”
So if a Google shareholder filed suit, demand would be required, demand would be made, demand would be refused, the court would uphold that refusal, and the case would end.
But let us suppose that by some miracle the case actually got to the merits. It would then bump into the business judgment rule. Which leads me to the classic case of Kamin v. American Express, 383 N.Y.S.2d 807, in which the court explained:
A complaint which alleges merely that some course of action other than that pursued by the Board of Directors would have been more advantageous gives rise to no cognizable cause of action. Courts have more than enough to do in adjudicating legal rights and devising remedies for wrongs. The directors’ room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact on profits, market prices, competitive situations, or tax advantages.
To be sure, Kamin was not a CSR case. But the principle would almost surely be the same in a CSR case:
Of course, it is true that the business judgment rule provides directors with wide discretion, and thus 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, the community in which the corporate headquarters is located, or once in a while, even the company's ordinary workers, rather than long-run stockholder wealth.
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, 50 Wake Forest L. Rev. 761, 776 (2015).
I note en passant that some scholars think the business judgment rule is intended to protect CSR decisions. I reject that view, having argued (correctly IMHO) in an older post that while the rule has that effect, it is an unintended consequence of achieving the rule's true purposes. But this post has run on far too long, so suffice it to say that Delaware Chief Justice Leo Strine appears to agree with me, having opined that:
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. And these confession cases illustrate the very foundation for the business judgment rule itself.
Id. at 776-77.
So, no. I don't see how a Google shareholder could successfully sue over this decision.