Tag: business judgment rule
Cooley Alert: Delaware Supreme Court Holds Business Judgment Review Applies to TripAdvisor’s Decision to Reincorporate
There’s been a lot of noise in the media recently about some well-known companies deciding to change, or at least considering changing, their states of incorporation from Delaware to Texas, Nevada or another state. According to the WSJ, “[a]bout two-thirds of S&P 500 companies—regardless of where they are actually based—are incorporated in Delaware, largely because the tiny state has specialized courts that handle business matters and stacks of legal precedents for addressing disputes.” However, the WSJ continued, “[e]xecutives and controlling shareholders of public companies have long expressed frustration with the Delaware Court of Chancery, which has become home to a thriving shareholder plaintiffs’ bar.” To entice companies to reincorporate elsewhere, some states have made special efforts to establish “dedicated business courts, including four since 2019.” However, it remains to be seen whether, in the absence of Delaware’s legal expertise addressing business issues and the volume of important precedents that help to bolster predictability, these other states can match the influence of the Delaware courts. Nevertheless, in an interview with Business Insider, the new Governor of Delaware said that the state remained a “‘competitive environment’” and that “his state needed to take challenge seriously,” including addressing “issues such as the balance of shareholder and management rights….I think within the coming weeks, you’re going to see some things rolled out that will help move our state forward and bring us into 2025 and beyond to make sure we’re protecting and growing the corporate franchise….It certainly beats going to Vegas and rolling the dice.” As discussed in this excellent new Cooley Alert, Delaware Supreme Court Reverses Chancery Court, Holds Business Judgment Review Applicable to TripAdvisor’s Decision to Reincorporate in Nevada, from our Commercial Litigation Group and Securities Litigation + Enforcement Groups, the Delaware Supreme Court has just injected into the mix a new decision that could factor into the decision-making process for Delaware companies considering reincorporation in other states.
Delaware Supreme Court applies MFW framework to other conflicted transactions
In In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court answered some important questions about the standard of review applicable to conflicted transactions under Delaware law. The first question relates to the application of the model used in Kahn v. M & F Worldwide Corp., commonly referred to as the “MFW framework.” In that 2014 case, the Delaware Supreme Court held that, instead of the more stringent “entire fairness” standard of review that would ordinarily apply in the context of mergers between a controlling stockholder and its corporate subsidiary, the business judgment standard of review should govern “where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.” The question remained, however, whether, in the context of conflicted controlling stockholder transactions that do not involve freeze-out mergers, MFW may be applied to invoke the business judgment rule. And in a related question, can the business judgment rule be applied if the “defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote,” but not both? In addition, the Court addressed the question of whether all members of an “independent special committee” must be “independent” to satisfy the requirements of MFW.
Starbucks decision to adopt DEI initiative within Board’s business judgment
In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’” Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case. A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.” Are we starting to see a trend with regard to board business decisions about corporate social policy?
Disney decision to speak out on issue of social significance within board’s business judgment
Boards and their advisors seeking to navigate the culture wars and their often conflicting pressures from a variety of stakeholders and outside groups may find some comfort and guidance in this recent decision from the Delaware Chancery Court in Simeone v. The Walt Disney Company. The case involved a books-and-records demand from a stockholder asserting a potential breach of fiduciary duty by Disney’s directors and officers in their determination to publicly oppose Florida’s so-called “Don’t Say Gay” bill. Originally, Disney was silent on the bill. However, following reproaches from employees and other creative partners, Disney’s board deliberated at a special meeting, and the company changed course and publicly criticized the bill. The Court declined to grant the plaintiff’s books-and-records request, concluding that the plaintiff had not provided a credible basis from which to infer wrongdoing and thus had not “demonstrated a proper purpose to inspect books and records.” Rather, the Court concluded, the Disney board had made a business decision to reverse course—“a decision that cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome.” Under Delaware’s business judgment rule, directors have “significant discretion to guide corporate strategy—including on social and political issues.” Importantly, the Court confirmed that, in exercising its business judgment, a board may take into account the interests of non-stockholder corporate stakeholders where those interests are “rationally related” to building long-term value.
Will dual-class structures torpedo the business judgment rule?
While there has certainly been a lot of debate about the merits and demerits of dual-class stock, one interesting angle was raised by Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance Delaware Law. In an interview reported in Bloomberg BNA, Elson predicts that expanded use of dual-class corporate structures will lead the Delaware courts to reconsider the business judgment rule. For companies with no- or low-vote classes of shares, is the business judgment rule in jeopardy?
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