In a new article,  I examine the history of the Walt Disney Company as a case study of what I perceive to be a gap in the law of fiduciary duties of corporate directors and executives.  Based on publicly available filings and records, public statements of Disney directors and employees, and other sources, I argue that there is credible evidence that the people managing Disney lately have been making decisions that are not in the best interests of the corporation.  By best interests, I mean not just maximizing profits, but also increasing the ability of the corporation to supply, in a profitable manner, the needs of its core customers and thus fulfill its corporate purpose.

The extensive evidence suggests that decisions to radically change the content of Disney’s entertainment products, alter theme park experiences, and intervene directly in a politically charged debate in Florida were made to advance the personal social and political agendas of corporate fiduciaries rather than to serve the corporation’s best interest.  I argue that such decisions correlated to poor box office performance of politically charged entertainment content, a decline in subscribers to Disney+, the loss of a unique political privilege in Florida that will affect one of Disney’s crown jewels – the Walt Disney World Resort – and a decline in share price.  The question is not whether corporate fiduciaries are permitted to have social and political opinions, but whether they should be able to use corporate assets and the corporation’s reputation to favor those opinions to  the corporation’s detriment.

In my article, I also argue that the law of corporate fiduciary duties – and specifically the duty of loyalty – does not squarely address such a conflict of interest.  Courts typically require proof of a direct financial conflict of interest to invoke the rigorous entire fairness standard of the duty of loyalty.  The legal analysis is typically triggered by a transaction between the corporation and the fiduciary or another person in whom the fiduciary has a financial interest.  The Disney story is not a tale of transactions but a tale of a pattern of business decisions that seem directed more to personal ideological agendas then to corporate interests.

There are at least two analogous situations in which we might be skeptical of the motives of fiduciaries who do not have a direct financial interest in a transaction: (1) corporate charitable giving, and (2) change of control transactions.  In the context of charitable contributions, there is no direct financial benefit to a fiduciary approving the contribution.  There is, however, a soft benefit that a charitable priority of the fiduciary receives support from corporate assets.  Courts typically have required that the charitable contribution be reasonable in amount and that there be some articulable benefit to the corporation for making the donation (such as brand recognition, goodwill, or a tax deduction).  Similar concerns may exist in the case of politically motivated business decisions, yet the law on charitable contributions, although analogous, does not provide any meaningful standard to evaluate this scenario.

Likewise, in a control transaction (in which the fiduciary is not directly interested), courts have long recognized that there is a risk that directors deciding to adopt a defensive measure in response to a potential change of control may be tainted by personal concerns.   Decisions to adopt the defensive measure are not initially subject to the presumption of the business judgment rule or the strict “entire fairness” standard.[1]Rather, the court first applies the so-called “Unocal” enhanced scrutiny, which allows directors to survive a challenge to their decision and benefit from the business judgment rule only if they can show that a defensive measure was reasonable in relation to a threat to the corporate enterprise.[2]

Concerns over clouded motivation, like those raised in a takeover context, seem to arise when directors and executives use the corporation for personal political activism. In response, courts could extend the Unocal analysis to contexts involving mixed motivations in which the specter of directors pursuing personal social or political goals at the expense of the corporation is credibly raised. The Unocal test could be modified so that after a shareholder proved a pattern of political activism, the burden of proof would shift to the directors to prove that the political activism (like that apparent in the Disney case study) was rationally related to a business objective. That business objective could be to protect the company against “a threat to an important corporate interest” or to pursue of “a significant  corporate benefit.”[3] In meeting their burden of proof, the directors would have to prove that such a threat or potential benefit was “real and not pretextual” and that the board’s “motivations” were “proper and not selfish or disloyal.”[4]

A case in the Delaware Court of Chancery, eBay Domestic Holdings v. Newmark, applied Unocal to the adoption of a shareholder rights plan as a defensive measure and comes close to the more subtle concerns of conflicted motivation in the Disney case. In that case, the court found a conflict between the personal goals of some directors (who were also shareholders) relating to how Craigslist served a wider community purpose and the pursuit of shareholder-profit maximization. According to the court, two defendant directors viewed Craigslist as “a for-profit concern” that nonetheless  “largely operates its business as a community service. Nearly all classified advertisements are placed on craigslist free of charge. Moreover, craigslist does not sell advertising space on its website to third parties. Nor does craigslist advertise or otherwise market its services. . . ”[5] In contrast, the court described the minority shareholder. eBay. as ”a for-profit concern that operates its business with an eye to maximizing revenues, profits, and market share.”[6] The court applied Unocal enhanced scrutiny to the Craigslist directors’ adoption of a rights plan designed to prevent eBay from obtaining control of Craigslist.

Although applying Unocal scrutiny to a typical defensive measure, the case is different in that the Craigslist directors did not seem motivated by “subtle influences like the prestige and perquisites of board membership, personal relationships with management, or animosity towards a bidder”[7] that are typically present in such cases. Instead, the directors seemed driven by fears that eBay might “fundamentally alter craigslist’s values, culture and business model, including departing from [craigslist’s] public-service mission in favor of increased monetization of craigslist.”[8]  Thus, the conflict the court noted in eBay was similar to the concerns raised by the Disney case in which directors and executives seemed to make business decisions, at least in part, to advance their personal and political agendas rather than solely to support the interests of the corporation and its shareholders.  Perhaps, the analysis in eBay can be a bridge to an expansion of Unocal scrutiny to cases like Disney’s.

ENDNOTES

[1] See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1371 (Del. 1995).

[2] See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985), holding modified by Coster v. UIP Companies, Inc., 300 A.3d 656 (Del. 2023)

[3]  Id. at 954 (internal citations omitted).

[4]  Id.

[5] eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 8 (Del. Ch. 2010).

[6] Id. at 9

[7] Id. at 30.

[8] Id. at 32 (internal citations omitted).

This post comes to us from Professor Brian McCall at the University of Oklahoma College of Law. It is based on his recent article, “Can Corporate Law Wake Up Disney After Biting the Enchanted Apple of Wokeness The Politicization of Disney and Corporate Law’s Weak Response,” forthcoming in The Business, Entrepreneurship, and Tax Law Review and available here.