October 6, 2010
Statutory Fiduciary Duties, Unocal, and Revlon outside Delaware
I've written on this before (and also here, and here). In the 1980s during the great takeover boom and hollowing out of the industrial heartland, many states adopted amendments to their corporate codes that codified directors' fiduciary duties, so-called "constituency statutes". In general, these provisions made it clear that a director need not "maximize shareholder value." Rather, in complying with their fiduciary obligations, directors may take all sorts of things into consideration - the impact of their decisions on various constituencies, including employees, the community, the environment, the color of the sky, whatever.
When these statutes were first passed, they were heralded as way to protect jobs, etc. Earlier this year, Michigan passed one hoping it would protect local jobs from corporate raiders. Lots of other states have similar constituency statutes. For example, Oregon has one (Sec. 60.357). You can find them all over. In general, these statutes reject Unocal and Revlon as binding on directors of corporations in those jurisdictions.
My problem with these statutes is that they strike me as a bit of a head fake. While they certainly give boards the power they need to protect local communities, etc should they so desire, they don't actually require directors to protect those constituencies. In effect, such statutes, simply give directors another fiduciary lever to pull when negotiating with a potential acquirer.
I've said this before, but you know a board might be very concerned about the impact of a potential acquisition on employees and the community when the bid is $69. At $75, the board's concerns about the impact on the community might start to fall away. Why not move the HQ to Paris? It's so much nicer there than Cambridge. At $85? Employees ... we have employees?!
There's no requirement that a board share the incremental price increase with those stakeholders who will lose out when a transaction is ultimately done. Does anyone really think that a board, having invoked this provision to say no, will then turnaround a cut a check to the local community the day after it accepts an offer to sell? In the end, the price paid goes to shareholders, not to the employees or the community or the environment. To the extent these statutes get sold to legislators as important tools to protect local companies (and jobs and communities) from outside raiders, they are, in that sense, a bit of a scam. These statutes put all the cards into the hands of directors. And that's fine, if that's what you want to do.
Along those lines, I spent the afternoon in the MA Business Litigation Session yesterday with a couple of students. We went to observe motions being argued in the consolidated case against Genzyme. You'll remember that Genzyme and its directors were sued (8 lawsuits!) after they turned down a friendly merger proposal from French Sanofi (this is before Sanofi went hostile).
In their complaints, the plaintiffs made a variety of allegations of the sort you might expect - by not accepting or negotiating the offer from Sanofi that the board violated is fiduciary duties to "maximize shareholder value" [Revlon], etc. Here's the thing, though. Massachusetts has a constituency statute (156D, Sec. 8.30).
Section 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
So, here come the shareholders with the extremely premature claim that Genzyme's directors somehow violated their fiduciary duties to the corporation because they turned down an unsolicited offer from Sanofi. But, Genzyme is a MA corporation and MA is not Delaware. If the directors act in good faith, and then come to the determination that it's in the best interests of the corporation and the city of Cambridge for Genzyme to stay independent, no court in MA will disagree with them. The plaintiff shareholders simply have no case because (so far) the constituency statute is working exactly as intended.
I think this is interesting, because just as labor, community, etc. have no case to prevent a sale notwithstanding the presence of a constituency statute, neither do shareholders have a voice to push one. The directors call the shots. I often wonder, other than directors, what constituency these constituency statutes serve.
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