Tag: business judgment rule
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?
You must be logged in to post a comment.