TheCorporateCounsel.net

Investor activist Jim McRitchie recently filed a breach of fiduciary lawsuit against Meta in which he contends that in a system that emphasizes stockholder primacy, the directors’ fiduciary duties must consider the impact of the company’s actions on the diversified portfolios of its investors. As the complaint puts it, “if the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.” This excerpt from the complaint summarizes the theory of the case:

For a corporation whose impact is so widespread, the well-established doctrine of stockholder primacy cannot be rationally applied on behalf of investors without recognizing the impact of portfolio theory, which inextricably links common stock ownership to broad portfolio diversification. The economic benefits from—indeed the viability of—a system of corporate law rooted in maximizing financial value for stockholders would vanish if it forced directors to make decisions that increased corporate value but depressed portfolio values for most of its stockholders. But this is precisely how the Company has operated: Defendants have ignored the interests of all of its diversified stockholders, making decisions as if the costs that Meta imposes on such portfolios were not meaningful to stockholder

I can’t imagine that this argument is going to get any traction with the Delaware Chancery Court – and as UCLA’s Stephen Bainbridge has pointed out, it isn’t the first time someone has made this kind of argument. Bainbridge also notes the fundamental problems with the workability of such a standard:

I am dubious about whether managers have the training or expertise to manage a company in the interests of diversified investors at large. Suppose managers have come up with an idea for a new product. Do we really think they can–or should–evaluate whether selling the new product would injure competitors and thus be adverse to the interests of diversified investors?

My guess is that proponents of this fiduciary duty theory would likely respond that the BJR would continue to apply to the board’s ordinary course business decisions. As illustrated by Sarah Murphy’s comments in an interesting exchange with Doug Chia on LinkedIn, they appear to be making a more broadly focused argument:

The board’s job is to optimize value for the benefit of shareholders, but if most shareholders are diversified (as they are in public markets), then a value-maximization strategy that relies on externalizing costs that diversified portfolios internalize is clearly not “for the benefit” of those shareholders. As the plaintiff’s lawyer says, “Investment theory and the law governing investment fiduciaries is built around the importance of diversification, and we think it essential that the law governing corporate fiduciaries acknowledge that reality.”

For a more in-depth explication of this argument, check out Jim McRitchie’s blog.  Anyway, “externalized costs” are those that are generated by a particular enterprise but carried by society as a whole, and to me, that makes corporate law the wrong mechanism to use in sorting them out. It seems to me that issues about how to handle the social costs associated with business are best addressed through the political and regulatory process, not through corporate law concepts of fiduciary duty.

– John Jenkins