Sustainability in the Boardroom:
Reconsidering Fiduciary Duty under Revlon in the Wake of Public Benefit Corporation Legislation
(8 Va. L. & Bus. Rev. 59-83 (2014))
If you should take the bond of goodwill out of the universe no house or city could stand, nor would even the tillage of the fields abide. – Cicero, Laelius de Amicitia
On July 17, 2013, Delaware Governor Jack Markell signed into law legislation establishing a new type of corporate entity: the public benefit corporation. A benefit corporation, similar to but distinguished from a Certified B Corp, is a voluntary alternative corporate form that focuses on adherence to higher standards of corporate purpose, accountability, and transparency. As states like Delaware adopt public benefit corporation legislation, household names like Ben & Jerry’s, Patagonia, and New Belgium Brewery (the makers of Fat Tire Beer), who have already embraced extralegal Certified B Corp status, now have the opportunity to assume legal public benefit corporation status.
Directors of public benefit corporations pledge to manage the corporation in a way that balances rather than ignores the interests of the company’s primary stakeholders (e.g., employees, shareholders, vendors and suppliers, customers, the community). The new benefit corporation legislation is of particular importance because it redefines the fiduciary duties of directors not only with respect to an ongoing enterprise, but also in the event of a sale or change of control of the company.
For those adopting it, this new legislation upends the century-old legal scheme first enunciated in Dodge v. Ford Motor Co., holding that a business operates primarily for the profit of its shareholders. This theory was subsequently extended and sharpened by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., in the context of a sale or change of control. Following Revlon, at the time of sale, a company’s board is required to pursue and recommend the bid of the highest offer reasonably available without regard for the negative, long-run impacts to the corporation and its primary stakeholders. The board’s sole criterion for its decision is maximizing shareholder value, no matter how unpalatable it may find the outcome. For example, a board would be forced to recommend the offer of the highest bidder even if the bidder advanced a slash-and-burn strategy that would destroy goodwill the company had built over years or even decades. In contrast, under the new benefit corporation legislation a board is not limited to maximizing shareholder wealth; rather, it must consider the additional interests of the public and the other primary stakeholders, and could cognizably reject a high but unsuitable bid.
To appreciate the magnitude of this historical legislation, it is important to realize that what happens in Delaware does not just stay in Delaware. More than one million business entities, from (A)mazon.com, Inc., the giant e-commerce retailer, to (Z)ale Corporation, the jeweler in your local mall, make Delaware their legal home. This includes more than 50% of all publicly-traded companies in the United States and 64% of the Fortune 500. Understanding this, it is no surprise that most states look to Delaware law when interpreting their own local corporate law. As such, the impact of Delaware legislation broadening the infamous shareholder-friendly Revlon duties to include stakeholder-centric considerations is far reaching. While the new legislation does not explicitly speak to or alter the fiduciary obligations of directors to non-benefit corporations, it does point to an emerging trend.
The current framework for fiduciary duties as set out in Revlon was birthed in 1986, in an era when Sun Tzu’s The Art of War served as a capitalist manifesto and the mantra on Wall Street was “Greed is Good.” But Greed is Good gave us a generation of mercenary CEOs eager to euthanize the golden goose to harvest the short-term egg. Such near-sighted decision-making led to the downfall of such high-fliers as Enron, WorldCom, and Global Crossing, and created corporate recklessness so systemic that a broader financial crisis was inevitable…
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