In a recent case involving Meta (née Facebook), the Delaware Court of Chancery issued an important opinion that speaks to the fundamental nature of corporate governance. Nearly everyone knows that corporate directors owe fiduciary duties to “the corporation and its stockholders,” but what do those stockholders really want? Do they want the board of directors to promote the interests of their one, single corporation, regardless of the effects on other companies? Or, since stockholders are usually diversified, would they prefer that the board take into account the effects on other companies?
For example, if I own Meta plus 10 other companies, I don’t want Meta to grow profits by 10 percent by putting the other 10 out of business. Rather, I want Meta to take actions that grow the total pie, rather than benefit Meta at the expense of my other investments.
Hence, the plaintiff in McRitchie v. Zuckerberg alleged that Meta’s directors breached their fiduciary duties to its diversified stockholders by seeking to generate “firm-specific” value without considering the impact on other companies or the economy as a whole. The directors, for their part, admitted that this is exactly what they did and offered as a defense that Delaware corporate law requires them to manage Meta in the interest of Meta, and Meta alone.
This set up a pure and novel question of law: Do directors’ fiduciary duties run to stockholders in their capacity as diversified investors or as stockholders of just this one company? In a scholarly opinion that delved into the “deep structure of Delaware corporate law, ” Vice Chancellor Laster held that fiduciary duties are “firm-specific” and dismissed the case.
The decision isthe first to hold that directors are required to act in the interest of firm-specific investors. Yet the court played down its novelty, saying the “point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.”
After sketching out the factual background and the plaintiff’s argument, the opinion discusses a range of Delaware Supreme Court decisions that, “by necessary implication,” establish that “fiduciary duties run to firm-specific stockholders in their capacity as firm-specific stockholders and not in any other capacities they may have.” This is the core holding, and it is based on the various “capacities” that stockholders may have.
A single person will often “wear different hats” — have multiple ,simultaneous relationships — with a corporation. At Meta, for example, there are thousands of people who are both stockholders and employees — and probably customers, too. These individuals have a certain set of rights and duties in one capacity and a different set in another capacity. Most notably, they are owed fiduciary duties in their capacity as stockholders but not as employees or customers (see Unocal, Revlon, and Gheewalla).
“Diversified investor” is just one more “capacity,” like employee or creditor, that is simply not relevant to fiduciary duties. Rather, fiduciary duties are owed exclusively to “stockholders,” even if such stockholders also wear different hats. And they are owed fiduciary duties only in their capacity as stockholders in this specific firm and not in other capacities, whether as employees, creditors, community members — or “diversified investors.”
The court grounds its holding in Delaware case law, but the opinion also addresses the “historical arc of director duties,” concluding that it “confirms the single-firm focus.” Looking at cases from the 1800s, the court explains that “directors do not become fiduciaries for the stockholders as individuals,” trying to help them achieve “their hopes and dreams.” Rather, the directors’ fiduciary duties run to “the shares” themselves, which happen to be held by individuals. “That makes the resulting fiduciary obligation inherently . . . firm specific.”
After a brief detour to bring in the “perpetual entity model” of the corporation,[1] the court concludes by restating Delaware law as follows:
The fiduciary duties owed by directors of a Delaware corporation require the directors to seek to maximize the value of the corporation over the long-term for the benefit of the stockholders as residual claimants to the value created by the specific firm that the directors serve. It does not mean striving to maximize value for diversified investors who own equity investments across all firms.
Having established that fiduciary duties under Delaware law are firm-specific, the court takes up the plaintiff’s arguments for changing this rule and finds them “unpersuasive.” The court takes time to examine scholarly work cited by plaintiff, from professors Gordon, Coffee, Crespi, Booth, and even Easterbook and Fischel, but finds all of it either inapposite or not sufficiently grounded in law. The court also carefully examines an “important article” by professors Kahan and Rock that “explains that orienting fiduciary duties toward diversified investors creates pathologies of its own.”[2]
The opinion also suggests several ways that those who want directors to promote the interest of stockholders as diversified investors can implement such a directive as a matter of private ordering. Under DGCL Section 102(a)(3), corporate planners can eschew the usual “any lawful business” clause and instead draft a narrower statement of corporate purpose in the certificate of incorporation, such as “pursue only businesses that benefit diversified equity investors.” Here, however, Meta’s certificate had no such clause.
In the end, the court dismissed the case because Meta’s directors did exactly what they were supposed to do: promote the interests of Meta, and Meta alone, for the benefit of its stockholders “in their firm-specific capacities as long-term investors in Meta.”
In my view, this was a sound and persuasive decision. Directors are not philosopher-kings working generally toward the good of the nation — or the planet. They have the more limited, and achievable, task of promoting the long-term interests of their corporation.
ENDNOTES
[1] See Zachary J. Gubler, The Neoclassical View of Corporate Fiduciary Duty Law, 91 U. Chi. L. Rev. 165, 202-17 (2024) (explaining the perpetual entity model and relying on Andrew A. Schwartz, The Perpetual Corporation, 80 Geo. Wash. L. Rev. 764 (2012)). These articles are cited and discussed on pages 68-69 of the McRitchie opinion.
[2] Marcel Kahan and Edward Rock, Systemic Stewardship with Tradeoffs, 48 J. Corp. L. 497 (2023).
This post comes to us from Professor Andrew A. Schwartz at the University of Colorado Law School.