Tuesday, November 21, 2023

For decades eminent law professors have published articles claiming that Delaware law permits directors to consider the interests of non-stockholder constituencies, even if doing so harms the stockholders in the long term, or, at least, that Delaware law is unclear on whether directors may do so. This is shocking, because the Delaware Supreme Court has clearly settled this issue long ago. In Unocal, the court affirmed “the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation’s stockholders,” and in Revlon the court held that directors may consider the interests of other corporate constituencies only subject to the fundamental limitation that “there are rationally related benefits accruing to the stockholders.” As a result, in Delaware, the rule is that directors must always manage the corporation for the benefit of the stockholders and may consider the interests of other corporate constituencies only instrumentally to that end. In stating this rule, the Delaware Supreme Court was merely repeating fundamental principles that arose at the dawn of modern corporate law in the early nineteenth century when courts of equity, in both America and England, asserted equity jurisdiction over directors and imposed on them fiduciary duties to act for the benefit of their beneficiaries, i.e., the stockholders. Thus, in Dodge v. Woolsey (1855), the U.S. Supreme Court held that directors must manage the corporation to benefit the stockholders, and in Taunton v. Royal Ins. Co. (1864) and Hampson v. Price’s Patent Candle Co. (1876) English courts held that directors may consider the interests of non-stockholder constituencies such as customers or employees only instrumentally as a means to the end of benefiting stockholders. Most remarkably, in Hutton v. W. Cork Ry. Co. (1883), another English court held that, while such instrumental consideration of other constituencies is permissible when the business is a going concern, it becomes impermissible when the company ceases to be a going concern and is winding up its business, thus fully anticipating the Delaware Supreme Court’s holding in Revlon more than a hundred years later. Early corporate law treatises cite these and similar cases and explain the law in accordance with their holdings. Furthermore, long before Unocal and Revlon, the Delaware Court of Chancery accepted the relevant principles as a matter of course in Kelly v. Bell (1969), which cites Hutton, and Theodora Holding Corp. v. Henderson (1970). After Unocal and Revlon, the Delaware Supreme Court repeated and elaborated these principles in Mills Acquisition and Gheewalla, and the Court of Chancery has done likewise in Oak Industries, TW Services, Toys “R” Us, eBay, Trados, Rural Metro, Frederick Hsu and other cases. The Delaware judges who have affirmed these principles in their opinions include Chancellor Marvel, Justice Moore, Chancellor Allen, Justice Holland, former Chief Justice Strine, Chancellor Chandler, Vice Chancellor Laster, Vice Chancellor Slights, and Vice Chancellor Zurn. Leading treatises on Delaware law cite these cases and explain Delaware law accordingly. The law is so clear on these points that any attorney who advised a client that directors of a Delaware corporation are not always required to manage the corporation for the purpose of benefiting the stockholders would undoubtedly commit malpractice. This makes the scholarly articles misstating Delaware law on this fundamental issue entirely incomprehensible.

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