May 03, 2012
Benefit Corporations: Traditional Paradigm
Posted by Haskell Murray

Volumes have been written on corporate purpose governance.  A blog post cannot do justice to even a fraction of the writing in this space.  However, I hope we can agree, as a matter of positive Delaware corporate law (and the law of states that follow Delaware’s lead), that the primary purpose of the traditional corporation is to maximize shareholder wealth.  Some would argue that the guiding principle of corporate governance is shareholder wealth maximization.

In a relatively recent Delaware Court of Chancery case, involving craigslist and its minority shareholder eBay, (cited ad nauseam in social enterprise circles: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)) former-Chancellor Chandler ordered rescission of certain of craiglist’s takeover defenses and stated:

  • Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders. When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value. Under the Unocal standard, however, the directors must act within the range of reasonableness.
  • Having chosen 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.
  • Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors' fiduciary duties under Delaware law.

Too many promoters of benefit corporations gloss over (or ignore) the fact that the eBay case was decided in the narrow takeover defense context and evaluated under the enhanced scrutiny of Unocal.  With most day-to-day decisions, the business judgment rule obviously provides significant cover for directors who wish to do social good in the corporate context.  Under the facts of eBay, however, the benefit corporation could have been useful to the founders of craigslist and could have altered the outcome of the case (if Delaware had a benefit corporation statute). 

To me, the eBay case is Bainbridgian.  (And as a new academic, I find myself becoming more and more Bainbridgian as well).  The case spells out what I am calling the "traditional paradigm" of corporate law.  In eBay, former-Chancellor Chandler appears to recognize the shareholder wealth maximization norm, but also recognizes the strength of the abstention version of the business judgment rule.

Social entrepreneurs do not want to live under the rule of shareholder wealth maximization, even if they will be left alone by courts, in most situations, due to the business judgment rule.

In my next post, I will discuss the new paradigm created by the benefit corporation statutes.

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