From the website of an outfit called "The Association of Mature American Citizens" (it came up on the RCP news aggregator):
In early June, Elon Musk wrote on Twitter that it “won’t be long before there are class-action lawsuits by shareholders against the company and board of directors for destruction of shareholder value,” referencing the rise of corporate wokeism and so-called “environmental, social, and governance,” or ESG policies.
The prospect held out by Musk is one that, according to former Assistant Secretary of State and experienced litigator and congressional counsel Robert Charles, could indicate a coming flurry of lawsuits against individual board members and directors for breaching their fiduciary duty to shareholders. In an interview with AMAC Newsline, Charles said that the recent spate of boycotts against woke corporations such as Anheuser-Busch and Target are not enough on their own, and litigation should also be on the table.
Shareholders should “pierce the corporate veil,” Charles said, by taking aim at members of the corporate boards themselves—arguing that in some cases, board members should be held personally liable for violating their legal obligation to act in the best financial interests of their shareholders.
Let's start with the idea that piercing the corporate veil is somehow relevant to the fiduciary duties of directors (woke or otherwise). It isn't. Not even a little bit.
As Todd Henderson and I explained in our book Limited Liability: A Legal and Economic Analysis, piercing the corporate veil is an equitable doctrine pursuant to which creditors of the corporation may under some circumstances disregard the corporation's separate legal personality in order to hold the corporation's shareholders personally liable. The general rule, of course, is that shareholders have limited liability. If a corporation cannot pay its debts, the creditors cannot go to the shareholders and collect the debt out of the shareholders' personal assets. If the shareholders have used the corporation as their alter ego and respecting the limited liability rule would promote fraud or injustice, the creditors cqn pierce the vail to reach the shareholders' personal assets. Note, by the way, that in addition to being doctrinally irrelevant the empirical studies discussed in our book make clear that no one has ever pierced the corporate veil to hold public corporation shareholders liable.
Second, as I discuss in my book The Profit Motive: Defending Shareholder Value Maximization, while it is true that directors have a fiduciary obligation to maximize shareholder value it is also true that the law generally gives directors great discretion in how they pursue that goal. And that brings us to the business judgment rule, the central doctrine of corporate law and which makes no appearance in the column.
Let us therefore turn to one of my favorite corporate law cases: Shlensky v. Wrigley.
Shlensky, a minority shareholder in the Chicago Cubs, challenged the decision by Wrigley, the majority shareholder, not to install lights at Wrigley Field. Shlensky claimed the Cubs were persistent money losers, which he attributed to poor home attendance, which in turn he attributed to the board’s refusal to install lights and play night baseball. According to Shlensky, Wrigley was indifferent to the effect of his continued intransigence on the team’s finances. Instead, Shlensky argued, Wrigley was motivated by his beliefs that baseball was a day-time sport and that night baseball might have a deteriorating effect on the neighborhood surrounding Wrigley Field.
Despite Shlensky’s apparently uncontested evidence that Wrigley was more concerned with interests other than those of the shareholders, the court did not even allow him to get up to bat. Instead, the court presumed that Wrigley’s decision was in the firm’s best interests. Indeed, the court basically invented reasons why a director might have made an honest decision against night baseball. The court opined, for example, “the effect on the surrounding neighborhood might well be considered by a director.” Again, the court said: “the long run interest” of the firm “might demand” protection of the neighborhood. Accordingly, Shlensky’s case was dismissed for failure to state a claim upon which relief could be granted.
So imagine a woke director who is accused of putting her personal political preferences ahead of shareholder value maximization. She will invoke the business judgment rule. She could defend her decision by arguing that business "have profit maximizing reasons for aligning themselves with woke coastal millennials, who are at the core of the supposedly most desirable marketing demographic." But she won't need to do so. The court will defer to the board's decision under the business judgment rule, absent evidence that a majority of the board (not an individual director) acted out of a conflict of interest.
Charles apparently thinks one could find such evidence:
Charles stressed that there are limits to a company’s freedom, comparing a company’s duty to its shareholders to a game of bowling.
“You can’t have a director bowl in the opposite direction or keep guttering the ball if the goal is to hit the pins. And so the bottom line here is if these directors—or any one of them—is vocal in board meeting minutes about the fact that they want to divert money to their personal political agenda, and this is not really being articulated to the investors, then I think you could make the [legal] argument that there’s been a breach of trust—that there’s been a breach of fiduciary duty.”'
I've been a corporate lawyer, consultant, and academic since 1986. In those 37-odd years, I have never seen a director so dumb as to put such a statement in the board minutes (or a corporate counsel so dumb as to include such a statement in the minutes). Remember that the minutes are not a word-by-word transcript of the meeting. They are carefully edited documents prepared in the knowledge that they could well be the subject of future litigation.
Also, notice Charles says you only need "any one of" the directors to make such a statement. As noted above, however, to rebut the business judgment rule you need to show that a majority of the board engaged in self-dealing, fraud, or some similar misconduct. See, e.g., Krasner v. Moffett, 826 A.2d 277, 287 (Del. 2003) ("when the majority of a board of directors is the ultimate decisionmaker and a majority of the board is interested in the transaction the presumption of the business judgment rule is rebutted").
In any case, even assuming that the tainted minutes exist and that they reflect the majority of the board laughing hysterically while spending money on woke causes their shareholders oppose, how does Charles think one would get one's hand on these tainted minutes? In Delaware (the home of most corporations that matter), you'd need to do a Section 220 books and records inspection. And our shareholder would thus bump up against the recent Disney decision.
In Simeone v. Walt Disney Co., 2022-1120-LWW, 2023 WL 4208481, at *1 (Del. Ch. June 27, 2023), a longtime Disney shareholder agreed to act as a nominal plaintiff so that some conservative activist lawyers could sue Disney's board of directors for opposing Florida's House Bill 1557, titled the “Parental Rights in Education” bill. Plaintiff's theory was that "that officers and directors of Disney may have breached their fiduciary duties to the Company and its stockholders by, inter alia, failing to appreciate the known risk that the Company's political stance would have on its financial position and the value of Disney stock.” (Sound familiar?)
Because (1) any lawsuit doubtless would have been derivative in nature, (2) the complainant in a derivative suit must allege facts with particularity, and (3) ine does not get pre-filing discovery in these cases, the plaintiff would have had to gather the requisite facts using what the Delaware courts call "the tools at hand." In other words, a shareholder request under DGCL 220 to inspect Disney's books and records. Which is what the plaintiff did.
(By the way, notice that I haven't even gotten into the problems that would be created for Charles' lawsuit by virtue of the suit being derivative in nature. It introduces a whole slew of procedural obstacles.)
The court began by observing that:
Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation's best interest to act (or not act).
This mattered because a Section 220 demand must state a proper purpose for inspecting the books and records. Shareholders are not allowed to paw through corporate files at will. They must get a judicial order and in order to do so they must demonstrate that they have a proper purpose for asking for the records in question, The court explained that:
The plaintiff's demand identifies four purposes; all center around the same desire to investigate wrongdoing. The second and fourth purposes—to determine whether Disney's opposition to HB 1557 was harmful to the company and to “explore possible remedial measures”—are derivative of and dependent upon whether there was mismanagement in the first place. ...
The plaintiff's theory is that Disney's “decision to express public opposition” to HB 1557 despite “the [G]overnor's warning” amounts to a possible breach of fiduciary duty by the Board and certain Disney officers.
But the problem was that:
The plaintiff is not describing potential wrongdoing. He is critiquing a business decision. “A stockholder cannot obtain books and records simply because the stockholder disagrees with a board decision, even if the decision turned out poorly in hindsight.” ...
At bottom, the plaintiff disagrees with Disney's opposition to HB 1557. He has every right to do so. But “disagreement with [a] business judgment” is not “evidence of wrongdoing” warranting a Section 220 inspection.Such an inspection would not be reasonably related to the plaintiff's interests as a Disney stockholder; it would intrude upon the “rights of directors to manage the business of the corporation without undue interference.”
Long time readers will recall that I've been accused of being a RINO as far back as the Gang of 14 filibuster deal. Maybe so. But this not about politics. It is about law. And the law is that suits claiming woke directors breached their fiduciary duties by their decisions about how the corporation behaves in the political arena are non-starters.
