Shareholder Wealth Maximization and its Implementation under Corporate Law

The following comes to us from Bernard S. Sharfman, Visiting Assistant Professor of Law at Case Western Reserve University School of Law.

When should courts participate in determining if a corporate decision maximizes shareholder wealth? That is the question at the heart of my article, Shareholder Wealth Maximization and its Implementation under Corporate Law (forthcoming, Florida Law Review). This article takes a very traditional approach to answering that question.  It notes with approval that courts have historically been very hesitant to participate in the process of determining if a corporate decision is wealth maximizing.  The most obvious example of this is the business judgment rule, a judicial doctrine that provides great deference to board decision making. Courts have restrained themselves from interfering with board decision making because they understand that it is the board of directors (the “board”) in coordination with executive management that has the best information and expertise to best determine if a corporate decision meets the objective of shareholder wealth maximization.  As stated by the Michigan Supreme Court in the famous case of Dodge v. Ford, “judges are not business experts.”

Nevertheless, the courts have found that they can play a wealth enhancing role if they focus on making corporate authority accountable when there is sufficient evidence to show that the corporate decision was somehow tainted.  Therefore, the courts will interpose itself as a corrective mechanism when a board decision is tainted with a conflict of interest, lack of independence or where gross negligence in the process of becoming informed is implicated and exculpation clauses (eliminates a director’s of duty of care liability) do not apply.

As discussed in my article, when a chancellor or judge veers from this traditional model of corporate law the judicial opinion must be closely scrutinized to see if the court had valid reasons for implementing a different approach.  Such a veering from the traditional path can be found in  eBay v. Newark, an important Delaware Chancery Court case where a former Chancellor, in his review of a shareholder rights plan under the Unocal test (the test for determining if measures taken to defend against a hostile takeover are appropriate), required the directors to demonstrate that the corporate policy being defended by the defensive measure enhanced shareholder value prior to a determination that the business decision was somehow tainted as described above.  As argued in my article, the former Chancellor was wrong in his approach and that in general the courts should never be in the position of adding this additional burden prior to determining that the business decision was tainted with a conflict of interest, lack of independence or gross negligence.

The full article is found here.