Shareholder Primacy and the Meta Decision

Readers of this space know The Shareholder Commons was involved in a lawsuit against Meta Platforms (the owner of Facebook, Instagram, and other internet services). At the end of April, that litigation came to an end when the Delaware Chancery Court dismissed the lawsuit. Although technically a loss, the result wasn’t unexpected, and the thoughtfully written decision of the trial court established some important, helpful points for system stewardship.

In this piece, we briefly explain the argument the shareholder made, why the court rejected it, and three ways the decision nevertheless advances the role of system stewards. We end by suggesting that the Court’s analysis provides a basis for further development of the law, and the eventual rejection of the Court’s narrow, single-firm application of shareholder primacy.

The Case

The case was brought by a shareholder who claimed Meta’s directors and officers violated their duties to shareholders by maximizing the company’s financial returns without considering the impact its products had on broader systems. The complaint argued that most Meta shareholders hold diversified portfolios, and that the company’s decision to maximize its own cash flows created dangerous social conditions that threatened the long-term value of these portfolios.

To be clear, the lawsuit didn’t embrace what is sometimes labeled “stakeholder capitalism,” the theory that corporations should balance the interests of all stakeholders. Instead, the complaint assumed that Delaware law follows shareholder primacy—the idea that directors are fiduciaries for shareholders and must prioritize their financial interests over the interests of other stakeholders. This is frequently expressed through the mandate that directors must “maximize the value of the corporation for the benefit of its shareholders.”

The suit argued modern investors diversify their portfolios, and therefore a company doesn’t “benefit” its shareholders when it maximizes value through conduct that threatens the value of investment markets more broadly. Specifically, it claimed Meta threatened its shareholders’ financial interests by ignoring the enormous risk its products imposed on them:

Conventional Delaware corporations are managed for the benefit of one constituency—the stockholders—with one goal—financial returns. Plaintiff does not challenge that verity. In 2023, however, returns cannot be optimized for the benefit of stockholders if fiduciaries ignore the effect of their decisions on stockholders’ portfolios.

Meta asked the court to throw out the case; it argued shareholder primacy means company primacy and the only goal of a corporation should be to maximize the financial return of the corporation itself, without accounting for the impact its business has on the other investments of its shareholders. In other words, Meta argued it must maximize corporate profits, even if it knows doing so will harm the portfolios of most investors.

The court accepted Meta’s position and dismissed the complaint, finding that Delaware law did not require Meta’s directors to look beyond a narrow, “single-firm orientation” (but see point 2 below). The decision is admittedly consistent with market practice—cautious lawyers regularly advise Delaware corporations that board decisions should be justified as maximizing company financial returns (at least over the long term).

3 Important Takeaways for System Stewardship

Despite the outcome, the decision contains three encouraging items for investors who recognize the real threat of companies that fail to account for their effects on systems that undergird investment portfolios.

Case of first impression. First, the Court conceded that no court has previously addressed how the phrase “for the benefit of shareholders” is to be interpreted when most shareholders own diversified portfolios. This means if a different trial judge or the Delaware Supreme Court were to consider this question, they would not be bound by the Meta case, and could consider policy arguments that implied a different conclusion. This is promising because, as the plaintiff’s papers argued, consistent application of the policy considerations that support shareholder primacy also support factoring portfolio effects into fiduciary decisions.

Recognition that shareholders will focus on portfolio-wide impacts. Second, the decision acknowledged scholarly work showing shareholders will increasingly engage with companies on system-level concerns that implicate portfolio value. (For a recent example, see the article below on the Exxon “vote no” effort.) The Court cited two articles finding directors can accommodate shareholders who want their companies to address portfolio-level risk:

In the first article, Professor Jeffrey Gordon… argues that institutional investors should use their rights to encourage directors to act as if [“director fiduciary duties flow towards diversified investors”] and that the law is sufficiently flexible that directors will not be held liable if they comply.

The other law review article is by Professor Jack Coffee. He makes the same general points as Professor Gordon, then adds that exculpatory provisions will protect disinterested and independent directors who follow a diversified-investor model and can provide credible rationales for their decisions.

Both articles say directors can rationalize portfolio-oriented decisions as single-company oriented, and courts will not second guess those rationalizations under the business judgment rule, which gives directors broad decision-making latitude. The Court’s citation of these articles should provide comfort to shareholders engaging in system stewardship as well as to companies that want to be responsive.

Affirmative statement that in some cases, directors can or must independently account for portfolio effects. Third, the case contains language that suggests that in some cases a board would be permitted or required to account for portfolio effects as such:

According to the plaintiff, a single firm orientation means that “fiduciaries have no duty (or ability) to consider the costs of their decisions on the typical stockholders’ portfolios, even if those costs far outweigh any benefit received as holders of company shares.” That is not true. 

Together, these two sentences appear to mean that in some cases, directors can or must account for the fact that shareholders will be harmed if the negative portfolio impacts of a board decision outweigh the benefits of that decision on the corporation’s shares themselves. The court then provides the following example:

Directors who cause their corporation to become a pariah because its actions consistently or profoundly harm the broader economy will not be able to create durable long-term value for firm-specific stockholders. Directors can and should consider those issues when making decisions about what will promote the value of the firm over the long-term [sic].

Curiously, this hypothetical is not actually a counterexample to the plaintiff’s quoted assertion, since it states the decision to become a “pariah” would ultimately harm the shares themselves. Nevertheless, the “not true” sentence suggests there is some scope of permitted decisions that is broader than those that are purely firm oriented. While this might be read to contradict the Court’s holding, it may also suggest law is still developing.

Shares v. Shareholders

Finally, it’s quite notable that although prior cases talk in terms of duties to “shareholders/stockholders,” the Court switched terminology, and held the directors’ duties run to shares themselves:

Technically, under this framework, the directors’ duties run to the corporation for the ultimate benefit of the shares. Stockholders enter the mix only because shares have owners, and the owners of shares benefit when the value of the firm increases because that value accrues proportionately to the shares… from the directors’ standpoint, the ultimate human beneficiaries of that value are incidental. The obligation is an economic one: care for the capital entrusted to the firm, protect and grow the value of the firm, and thereby increase the value of the shares. 

The Meta case examined a wide swath of Delaware case law and provided a history of Anglo-American corporate law that extended back two centuries. In finding the precedents implied that directors could simply ignore portfolio impact that did not affect company value, the court concluded that the many references in the law to shareholders and stockholders must be interpreted as references to the shares themselves, and that any additional financial impact on the “human beneficiaries” should be ignored.

The awkwardness of changing terminology and expressly incidentalizing human beings signals the old idea of single-firm orientation is not fit for purpose when factoring in the reality of diversified investing. They suggest we need to reexamine the market-based policies that underlay the development of the shareholder primacy rule. We believe doing so would show that rather than shifting its focus to shares (or stakeholders), Delaware should retain its focus on shareholders, but recognize most shareholders are diversified and are deeply affected by portfolio effects.

Intuitively, it makes no sense to establish a fiduciary system that purports to ignore the financial interests of the very people it’s meant to protect. The rules that govern our financial system should be designed to protect the human beings it serves.