Page 26 - Delaware Lawyer - Fall 2022

FEATURE | PEACEFUL COEXISTENCE?
Faith Flugence, Chad Wood and Carla Jones of Potter Anderson & Corroon LLP
Stakeholder Interests and the Delaware Shareholder Primacy Model
Assuming stockholders of Delaware corporations with ESG business objec- tives can make money, to what extent can boards of directors pay attention to non-stockholder “stakeholders” in fulfill- ing those objectives? The Delaware doc- trine of “shareholder primacy” provides that boards must manage the corporation with the long-term objective of maximiz- ing stockholder wealth. However, there is room in the business judgment rule con- text for a board to consider non-stock- holder factors, such as ESG investment goals, provided that stockholder welfare remains the guiding principle.
Former Delaware Supreme Court Chief Justice Leo E. Strine, Jr. succinctly described Delaware law seven years ago, when he opined that “within the limits of their discretion, directors [of Delaware corporations] must make stockholder wel- fare their sole end, and ... other interests may be taken into consideration only as a means of promoting stockholder wel- fare.”13 In his view, the structure of the DGCL, designed to give stockholders sole voting power and the sole right to seek enforcement of the statute and related fi- duciary duties, confirms the rule of share- holder primacy. To the extent that firms
believe ESG-type goals are desirable cor- porate policy, the best way to achieve those goals and to reduce harmful corporate ex- ternalities — meaning social and economic costs — may involve public regulation.
We find few references in the corporate case law to “stakeholders” and virtually none to ESG. What the opinions do re- veal — in a variety of contexts — is a con- sistent emphasis on the requirement that directors operate businesses to maximize stockholder wealth, as stockholders are the residual risk bearers who have provided eq- uity capital to firms in the first place. For example, in the landmark takeover case of Unocal Corp. v. Mesa Petroleum Co.,14 the Delaware Supreme Court stated that cor- porate directors must determine whether a takeover bid is in the best interests of the corporation and its stockholders, although boards may consider “the impact on ‘con- stituencies’ other than shareholders (i.e., creditors, customers, employees and per- haps even the community generally)” in determining whether a particular defensive measure is reasonable in relation to the threat posed by the hostile offer.
Similarly, in Revlon Inc. v. MacAndrews & Forbes Holdings, Inc.,15 the Court con- cluded that, while a corporate board “may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accru-
ing to the stockholders, ... such concern for non-stockholder interests is inappropri- ate when an auction among active bidders is in progress[.]” Indeed, while a number of states enacted so-called “constituency statutes” during the 1980s to give cor- porate boards the express discretion to consider the interests of non-stockholder groups in responding to takeover bids, Delaware never did.16
Outside the takeover context, the man- tra of shareholder primacy has persisted in Delaware. Lenders and other corpo- rate creditors constitute a class of “stake- holders” whose interests are included in ESG assessments. In 2007, the question whether corporate directors owe fiduciary duties to creditors of financially distressed corporations was definitively resolved by the Delaware Supreme Court. In North American Catholic Educational Program- ming Foundation, Inc. v. Gheewalla,17 the Court held that, whether a corporation was actually insolvent or operating in the “zone of insolvency,” creditors lack stand- ing to bring direct claims against directors for breach of fiduciary duty. In the event of actual insolvency, however, creditors replace stockholders as the firm’s residual risk bearers, and they have standing to as- sert derivative claims for fiduciary breach on the company’s behalf.
Contrary to the multi-capital approach
24 DELAWARE LAWYER FALL 2022