I am going back and forth with a friend and fellow Business Associations teacher as to whether it is possible for a Delaware business corporation to opt out of the shareholder wealth maximization norm in its certificate of incorporation. As you may have already guessed from the title of this post, I am quite sure that the answer is a resounding no.
(I note, in passing, that the fact that I am helping my friend even though s/he uses the wrong BA casebook, speaks volumes. Don't you think?)
My analysis starts with Sterling v. Mayflower Hotel Corp, 93 A.2d 107, 118 (Del. 1952), which held that “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.” That command must be read in conjunction with Chancellor Chandler's eBay opinion, which held that:
Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that.
eBay Dom. Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010) (emphasis in the original). If that is not a clear statement that shareholder wealth maximization is "a public policy settled by the common law" I don't know what it is.
I would next move on to Siegman v. Tri-Star Pictures, Inc., CIV. A. 9477, 1989 WL 48746, at *8 (Del. Ch. May 5, 1989), which held that an amendment to the articles that “would eliminate or limit the liability of Tri-Star directors for breach of their fiduciary duty of loyalty” is “proscribed by § 102(b)(7).”
I note that the Tri-Star case forced the legislature to adopt DGCL 122(17) to allow provisions in the articles that renounce specified corporate opportunities. But 122(17) does not speak to the duties at issue under eBay et al.
Accordingly. “there is substantial reason to doubt whether the Delaware Secretary of State would accept for filing a certificate of incorporation (other than for a benefit corporation) that included an expressly non-profit-maximizing mission.” David B. Guenther, The Strange Case of the Missing Doctrine and the "Odd Exercise" of Ebay: Why Exactly Must Corporations Maximize Profits to Shareholders?, 12 Va. L. & Bus. Rev. 427, 484 (2018).
Professor Guenther goes on to opine that:
Chancellor Chandler's language in eBay suggests that a non-profit-maximizing purpose may be invalid per se, regardless of whether shareholders have approved such purpose or embodied it in the corporate charter. The rights plan struck down in eBay, it must be recalled, had previously been approved by 71.6% - a supermajority - of craigslist's shareholders. If eBay is good law, whether shareholders of a Delaware for-profit corporation can simply “opt out” in the corporate charter from eBay's mandate to maximize profits appears unsettled in Delaware law.
Id. at 485.
Likewise, Larry Hammermesh and Jack Jacobs (who know a thing or two about Delaware law) opine that “we maintain that for an investor who has not expressly manifested a contrary preference, the purpose of the Delaware business corporation is maximization of the wealth of its stockholders. We further maintain that this is at least the default rule, and earnestly doubt that this rule could be changed even in the certificate of incorporation of a traditional corporation.” Lawrence A. Hamermesh & Jack B. Jacobs, Lyman Johnson's Invaluable Contribution to Delaware Corporate Jurisprudence, 74 Wash. & Lee L. Rev. 909, 933–34 (2017).
Additionally, as Joan Heminway has pointed out:
Professor Stephen Bainbridge's academic work in analyzing anti-takeover devices and non-shareholder constituency statutes also casts doubt on the validity of private ordering that displaces the shareholder wealth maximization norm,66 a norm that he argues is both the law and circumstantially compelled as an essential attribute of the for-profit corporation.67 Specifically, Professor Bainbridge opines on the potential invalidity of “shark repellents”--in effect, charter-based rejections of the shareholder wealth maximization norm in response to unsolicited business combinations--as a form of private ordering involving a significant alteration of the directors' fiduciary duties.
[S]tate law arguably does not permit corporate organic documents to redefine the directors' fiduciary duties. In general, a charter amendment may not derogate from common law rules if doing so conflicts with some settled public policy. In light of the well-settled shareholder wealth maximization policy, nonmonetary factors charter amendments therefore appear vulnerable.
Joan MacLeod Heminway, Shareholder Wealth Maximization As A Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939, 962 (2017).
She kindly cites: Stephen M. Bainbridge, Interpreting Non-Shareholder Constituency Statutes, 19 PEPP. L. REV. 971, 985 (1992) (questioning whether the law permits private ordering in derogation of director fiduciary duties and other common law rules); Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. REV. 547, 575-77 (2003) (“[S]hareholder wealth maximization is not only the law, but also is a basic feature of corporate ideology.”).
All of which seems to me to be reinforced by Delaware’s adoption of the public benefit corporation option. If somebody wants a Delaware corporation that has a purpose other than shareholder wealth maximization, they have to go the B Corp route.
