As seasoned readers of this newsletter may recall, we’re supporting a lawsuit against Meta Platforms. The case claims Meta’s directors must consider the company’s impact on the economically important systems that support its shareholders’ diversified portfolios.
In a December hearing, Meta argued the case should be thrown out because Delaware law provides that directors’ only obligation is to maximize the corporation’s value, so that portfolio impacts are irrelevant from a fiduciary perspective. The shareholder countered that the law requires directors to maximize corporate value “for the benefit” of shareholders, and that most shareholders won’t benefit if a corporation harms the critical systems that support their diversified portfolios.
During the hearing, Vice Chancellor Laster didn’t question the legal, financial, and economic literature the shareholder cited to show that most investors are at risk if directors are guided only by the value of the corporation without regard to portfolio impact. Instead, he focused on the practical question of how a portfolio-aware duty is to be applied to specific circumstances. In doing so, however, he seemed to believe the shareholder’s argument for considering portfolio impact as well as company impact necessarily implied that directors should always prioritize portfolio value over company value.
Many of the Vice Chancellor’s questions focused on the often-litigated situation involving the sale of an entire company, where the company is required to pursue the highest sale price available for the benefit of shareholders; practitioners have understood this concept to leave no room for considering the impact (if any) such a transaction might have on portfolios more broadly.
In contrast, outside the sale context, the Vice Chancellor observed that directors could take portfolio impact into account if they took the “extra step” of relating that impact back to company impact, such as through the threat of regulation or reputational damage:
Because you could consider this and take the extra step, which is what is normally done in these stakeholder situations, and say, yes, these are problems; yes, these are problems that could rationally harm [diversified] stockholders. And over the long run, that will also harm our alpha company-specific stockholders because your [diversified] stockholders will agitate before Congress for laws to constrain us. We will get knocked out of the S&P 500 because we will be viewed as a bad actor. All these things will happen to us, so it’s rationale [sic] for us under an alpha company-specific model to consider these things.
In other words, he said, boards can address concerns about portfolio value when they do so for the purpose of preserving company value. But in a company sale situation, such future-looking considerations can’t relate to the corporation’s value to shareholders, because the shareholders are being immediately cashed out.
The Court was concerned about what he viewed as an alteration of the straightforward sale rule:
I at least would think that one would approach Revlon cases differently than we have if portfolio theory was the maximand. And it seemed to me, therefore, to be something of a disconfirming indicator…
Putting all this together, the Court appears to believe that (1) outside of a sale process, boards have broad discretion to address portfolio value issues within a company-value model; (2) within a sale process, it would be a mistake to change perceptions of a clear rule; and (3) any authentic accommodation of portfolio interests requires a replacement of company-value priority with portfolio-impact priority.
A few observations:
First, the “extra step” the Court describes as pertaining outside of a sale process does not adequately protect the systems that uphold portfolio value. If a board can only account for the portfolio impact of its decisions when those impacts will harm the corporation, then Delaware law still compels corporations to harm those systems and portfolios to the full extent that regulation or reputation do not provide the corporation itself with a countervailing incentive. But those are precisely the type of facts at issue in the Meta case, which is based on the record made public through the Facebook Papers. The availability of the “extra step” does not address the Meta shareholder’s concerns.
Furthermore, this company-only prioritization has profound implications for how we allocate society’s resources. While not all public companies are incorporated in Delaware, its rules are U.S. corporate law for most purposes. In 2021, the market capitalization of public companies in the United States was $47 trillion—twice its GDP. It would be very dangerous for there to be a legal rule that all the natural, human, and built capital represented by those companies must be used in a manner that harms both systems and shareholders.
While one might read the “extra step” language as a sort of “license to pretend,” we don’t think this is what the Court meant. That reading would be reminiscent of the late legal scholar Lynn Stout, who insisted that the existence of the business judgment rule—which gives directors great discretion in determining what’s best for shareholders—proves directors are not required to prioritize shareholder interests. But the fact that Delaware employs a lenient standard of review does not alter the standard of conduct required of fiduciaries.
Nor does the shareholder’s claim mandate the absolute prioritization of portfolio value. The shareholder’s arguments showed that the law requiring directors to maximize corporate value “for the benefit” of shareholders is best understood to mean that the Meta board should considerportfolio effects in its decision-making—the shareholder did not argue for absolute priority of those effects. In the first instance, directors serve their shareholders by pursuing value at the company level; the Meta shareholder only argued that when that pursuit involves the risk of material systemic harm, portfolio value impact becomes one significant factor in the fiduciary calculus.
Nothing in law or logic requires a single value must always be prioritized; fiduciaries can balance more than one interest. For example, it’s well known that there’s a trade-off between risk and return for investments, and while fiduciaries must seek to reduce risk and increase return, they’re able to make trade-offs between the two. Another example exists in Delaware’s “public benefit corporations” statute: directors of corporations that opt into that status are charged with balancing shareholders’ pecuniary interests and other stakeholders’ broader interests, with neither being an absolute priority. Moreover, many U.S. jurisdictions’ corporate laws include “other constituency” provisions that allow boards to consider interests other than shareholder value, again without imposing a single priority.
This absence of a single goal also makes sense when a company is sold. Recognizing the importance of portfolio impacts on shareholders would not put an end to courts’ ability to mandate a process that finds the best deal for shareholders—it would only give directors a tool to ensure the highest price did not include some significant cost to shareholders that would otherwise not be considered.
We are greatly concerned that a narrow, company-only view of shareholder primacy fails most shareholders, is inconsistent with modern investing practices, and threatens markets’ utility to allocate resources. It poses increasing danger to the systems that support not only investors, but our entire economy. Our hope is that as the law develops, it will directly address these critical questions, and won’t center itself on preserving a one-size-fits-all rule of value maximization that seems relatively easy for directors and courts to apply but is very dangerous for the economy and the systems upon which it is built.