TheCorporateCounsel.net

Yesterday, in McRitchie v. Zuckerberg (Del. Ch.; 4/24), Vice Chancellor Laster confirmed that directors owe “firm-specific fiduciary duties” under Delaware corporate law. The plaintiff in this lawsuit against Meta is the well-known shareholder proposal proponent, shareholder advocate and corporate governance author, James McRitchie, who discussed the lawsuit in a blog post around the time it was filed. The lawsuit was supported by The Shareholder Commons (a non-profit that has been advocating for “beta stewardship” for the past several years) and, as described in this post after a December hearing, is predicated on the view 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.”

VC Laster explains the arguments as follows:

[U]nder Modern Portfolio Theory, prudent investors diversify. Therefore, says the plaintiff, the law must operate on the assumption that a corporation’s stockholders are diversified. The plaintiff concludes that owing fiduciary duties to the corporation and its stockholders must mean owing duties that run to the corporation and its stockholders as diversified equity investors. Furthermore, according to the plaintiff, because the returns that accrue to diversified equity investors should generally track the economy as a whole, complying with fiduciary duties oriented to diversified equity investors must mean managing the corporation based on what would be best for the economy as a whole.

The complaint contends that Delaware follows this model and, if it doesn’t, the law should change. As to Meta, it argues that Meta is “the poster child for a systemically significant firm” and that the Meta board has managed the company “to generate firm-specific value at the expense of the economy as a whole” at least partially due to the directors’ own wealth being overly invested in Meta shares creating a conflict of interest.

The Meta directors moved to dismiss, conceding that they manage the company under a firm-specific model, but maintaining that Delaware law requires them to do so. VC Laster agreed.

Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.

He notes that the plaintiff’s principal argument “rests on policy” — that is, corporations would treat externality-creating activities differently under a diversified investor model. While saying “[t]here are reasons to be skeptical” of that argument, he also points out that the DGCL authorizes private ordering and tailored director duties in a company’s certificate of incorporation.

In a footnote, he points to an article from former Chief Justice Leo Strine that supports federally mandating that public companies “become Delaware public benefit corporations under a worker co-determination model.” Despite former Chief Justice Leo Strine expressing solidarity with the movement to address externalities since retiring from the bench, he notes that the authors “did not argue for changing the traditional fiduciary orientation of corporate law.”

– Meredith Ervine