The relationship between directors’ fiduciary duties and shareholder wealth maximization under Delaware law has long been a prickly topic. Some commentators argue the relationship is merely a default capable of adjustment through private ordering.[1] Others, pointing to cases like eBay v. Newmark,[2] maintain that under common law directors’ fiduciary duties make shareholder wealth maximization mandatory.[3] In the recent cases of New Enterprise Associates v. Rich and McRitchie v. Zuckerberg the Delaware Court of Chancery has weighed in with a provisional answer.
The Cases
Two preliminary points are worth making. First, the answer is provisional because Vice Chancellor Laster’s remarks about the relationship between directors’ fiduciary duties and shareholder wealth maximization were obiter dicta. Second, and relatedly, this piece does not examine the central issues the court was tasked with deciding; others have focused on those core aspects elsewhere.
That said, according to Laster, Delaware corporate law does allow corporations to engage in fiduciary tailoring and deviate from shareholder wealth maximization through contract. Two notable pathways for doing so that both cases consider are Sections 102(a)(3) and 141(a) of the Delaware General Corporation Law (DGCL).
Under Section 102(a)(3), Laster stated that a “limited purpose clause effectively modifies the orientation of the directors’ fiduciary duties. Rather than being able to seek freely to maximize the value of the corporation, the board’s options are constrained in a manner that inherently confers benefits on other stakeholders.”[4] The vice chancellor went on to provide an illustration: “If, for example, a corporation has the narrow purpose of pursuing only the business of operating a river ferry, then its directors cannot decide to exit that business and construct a toll bridge. In practice, the limitations imposed…confer benefits on other stakeholders, such as workers…customers…and suppliers.”[5]
Section 141(a), likewise, is a method for modifying the ends to which directors’ fiduciary duties are calibrated. Noted by Laster, if a corporation alters directors’ authority and that “modification appears in the charter, then the board’s powers and duties shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.”[6] The vice chancellor cautioned that this so-called “board power exception” cannot be deployed to make a modification that is contrary to the laws of Delaware.[7] He reasoned that “extant statutory provisions should provide insight into what types of charter-based modifications comport with Delaware public policy and are permissible.”[8] One statutory provision the Chancery Court offered is Section 361 of the DGCL,[9] which deals with Delaware “public benefit corporations” and the pursuit of “public benefit.” Vice Chancellor Laster observed “that a comparable charter provision would be permissible” in the constitutions of traditional corporations (i.e., corporations that are not public benefit corporations but wish to pursue similar non-financial objectives instead of solely attending to shareholders’ interests).[10]
How Seriously Should We Take Vice Chancellor Laster’s Remarks?
The cases suggest that there are two tracks for Delaware corporations. One is a shareholder-focused track on which attention to non-shareholder interests by directors of a going concern must be “rationally related” to long-term profit maximization. In an auction context, where there is nothing left to do but sell the corporation to the highest bidder, directors’ sole focus must be on shareholders. The other track permits firms to opt into an alternative fiduciary configuration through private ordering. However, because Vice Chancellor Laster’s statements were dicta, their authoritativeness is uncertain. There is reason to believe, however, that his interpretation is likely correct.
For example, in Manti Holdings, LLC v. Authentix Acquisition Company, Inc., the Delaware Supreme Court had the opportunity to clarify the mandatory features of Delaware corporate law, both arising from the DGCL and the common law.[11] Nowhere in the discussion did the court even hint that directors’ fiduciary duties cannot be contractually shifted towards a non-shareholder focused goal. In other words, the court did not reference cases like the aforementioned eBay, Unocal v. Mesa Petroleum Co.[12] and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.[13]and collectively treat them as “public policy settled by the common law” that cannot be contravened through contract.[14] This, I think, creates an issue for commentators like Stephen Bainbridge who argue that “shareholder wealth maximization…is…an inherent aspect of the corporation” and that “it would seem unlikely that one can opt out.” Were it truly an “inherent aspect,” it seems to me the Supreme Court would have taken advantage of the facts before it and put the matter to rest. That the court did not indicates that Vice Chancellor Laster’s interpretation is likely correct.
Furthermore, the Delaware legislature maintains a watchful eye on its corporate law regime and has a history of swiftly amending the DGCL to counteract judicial rulings it deems unsatisfactory.[15] Recent amendments to the DGCL through the controversial S.B. 313 were, in part, a direct response to Vice Chancellor Laster’s opinion in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company.[16] Considering Laster was already in the Delaware legislature’s crosshairs following his decision in Moelis, it is reasonable to imagine that if it had any issues with his interpretation in the cases under review here, it would have addressed them, especially as legislators were already contemporaneously amending the DGCL through S.B. 313. The Delaware legislature’s decision not to intervene should, therefore, be seen as some indication of acquiescence to Laster’s view that the director-shareholder relationship is a default arrangement rather than a mandatory one.
What About the Delaware Public Benefit Corporation?
Although there are valid reasons to think that Vice Chancellor Laster’s interpretation is correct, the presence of the Delaware public benefit corporation suggests that it is the only route for corporations to pursue a non-shareholder focused objective. If this were not the case, “PBCs would be unnecessary;”[17] they would not exist. Comparatively speaking, this line of reasoning is unconvincing. For example, the UK Companies Act provides the same two options that emerge in New Enterprise Associates and McRitchie. Firms that operate under Section 172(1) must pursue shareholder wealth maximization, and corporations that organize under Section 172(2) opt out of that default position through private ordering. The latter have “unselfish objectives which prevail over the selfish interests of [shareholders].” In addition, UK corporate law also offers a discrete social enterprise form called the “community interest company” (CIC).[18] The existence of the CIC does not affect the operation of Section 172(2). Instead, the CIC and Section 172(2) are simply different menu options. In this regard, I agree with David Yosifon that the “Public Benefit Corporation should be understood as a ‘menu option,’ which promoters may select if they desire a highly specific form of multi-stakeholder governance with a recognizable ‘brand.’ But promoters remain free to order ‘off the menu,’ and get their own multi-stakeholder design.”[19]
ENDNOTES
[1] Such commentators typically justify their position by referencing the notion that the corporation is a “nexus of contracts” and that corporate rules are a species of standard-form contract that parties can change according to their needs. See, e.g., Jonathan R. Macey, “A Close Read of an Excellent Commentary on Dodge v. Ford” (2008) 3 Virginia Law & Business Review 177, 179; Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (1991) 35-36.
[2] 16 A.3d 1, 34 (Del. Ch. 2010) (commentators often cite this line from then Chancellor Chandler: in selecting a “for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The ‘Inc.’ after the company name has to mean at least that.”).
[3] See, e.g., Joan MacLeod Hemingway, “Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents” (2017) 74 Washington & Lee Law Review 939, 962; David B. Guenther, “The Strange Case of the Missing Doctrine and the ‘Odd Excuse’ of eBay: Why Exactly Must Corporations Maximize Profits to Shareholders” (2018) 12 Virginia Law & Business Review 427, 484; Lawrence Hamermesh and Jack B. Jacobs, “Lyman Johnson’s Invaluable Contribution to Delaware Corporate Jurisprudence” (2017) 74 Washington & Lee Law Review 909, 933-934.
[4] New Enterprise Associates v. Rich, 295 A.3d 520, 554 (Del. Ch. 2023).
[5] Ibid. For the parallel discussion on Section 102(a)(3) in the other case, see McRitchie v. Zuckerberg, 315 A.3d 518, 574-575 (Del. Ch. 2024).
[6] McRitchie (n 6) 577 (internal quotations omitted). For the parallel discussion of Section 141(a) in the other case see New Enterprise Associates (n 5) 554-556.
[7] See Manti Holdings, LLC v. Authentix Acquisition Company, Inc., 261 A.3d 1199, 1217 (Del. Supr. 2021) (holding a corporate charter can “contain virtually any provision that is related to the corporation’s governance”, subject to the caveat that it is not “contrary to the laws of this state.”).
[8] McRitchie (n 6) 577.
[9] Ibid; New Enterprise Associates (n 5) 557-558.
[10] McRitchie (n 6) 577.
[11] Manti Holdings (n 8) 1217-1218.
[12] 493 A.2d 946 (Del. Supr. 1985).
[13] 506 A.2d 173 (Del. Supr. 1986).
[14] See Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 118 (Del. Supr. 1952) (the Court held that “We…say that the stockholders of a Delaware corporation may by contract embody in the charter a provision departing from the rules of the common law, provided that it does not transgress…a public policy settled by the common law.”). Note also that there is no Delaware case law that expressly holds that shareholder wealth maximization is a public policy settled by the common law.
[15] For example, Section 102(b)(7) of the DGCL was a direct response to the Delaware Supreme Court’s decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. Supr. 1985).
[16] 311 A.3d 809 (Del. Ch. 2024).
[17] Stephen M. Bainbridge, The Profit Motive: Defending Shareholder Wealth Maximization (2023) 80.
[18] See Companies (Audit, Investigations and Community Enterprise) Act 2004; Community Interest Company Regulations, S.I. 2005 No. 1788 (2005); J S Liptrap, “British Social Enterprise Law” (2021) 21 Journal of Corporate Law Studies 595.
[19] David G. Yosifon, “Opting Out of Shareholder Wealth Maximization: Is the Public Benefit Corporation Trivial?” (2017) 41 Delaware Journal of Corporate Law 461, 507.
This post comes to us from J S Liptrap, a lecturer in legal research at Quinnipiac University School of Law and a research associate in the Center for Business Research at the University of Cambridge’s Judge Business School.