Friday, September 17, 2010

Is the Revlon Duty Creeping into the Business Judgment Rule? (No)

When Chancellor Chandler decided eBay v. Newmark (pdf) (aka “the craigslist case”), the case triggered all kinds of discussions, including the implications of poison pills and analogies to Dodge v. Ford. I remain interested in the Dodge v. Ford angle and the role of philanthropic goals of a corporation.

There are some who see the craigslist case as an adoption of the Sen. Al Franken version of a corporation’s obligations to shareholders: “[I]t is literally malfeasance for a corporation not to do everything it legally can to maximize its profits.” Of course, there are others who disagree. The Franken-like argument seems be that Delaware’s Revlon duty (as explained in Time, Inc. - pdf) of requiring the “board to enhance short-term shareholder value” now applies all the time, not just when the board puts the company up for sale. While that makes for good sound bites, and I suppose it is a plausible interpretation, that’s pretty clearly not what Chancellor Chandler meant.

Instead, the Chancellor stated that craigslist’s majority owners “prove[d] that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future.” Thus, he concluded, “The corporate form in which craigslist operates . . . is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.” As such, corporations clearly can do at least some things that are philanthropic; it’s just that they can’t be “solely” philanthropic – thus the Dodge v. Ford connection.

Okay, but I have a problem with this on two fronts. Regardless of their stated view, craigslist is not a nonprofit, and as I understand it, files and pays taxes like any other (proper, for-profit) corporation. According to a BusinessWeek article, the company has been profitable since 1999. That said, it is also true that the company’s leaders make clear that they are not trying to takeover the world or maximize wealth. I’m not clear that’s a problem any more than it is inherently a problem for a company to decide to grow to fast and fail miserably (I’m looking at you, Krispy Kreme and Boston Market.)

Second, under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. I think Chancellor Chandler concedes as much when he notes that it is at least conceivable that a philanthropic company may be okay when there are no “other stockholders interested in realizing a return on their investment.”

Thus, it seems to me, the next question should be what it means to say there was a stockholder "interested" in realizing a return on their investment. As I noted in an earlier post, eBay knew the kind of company in which they were buying shares (and taking a minority position. craigslist is operating exactly with the same philosophy as they had before eBay bought in to the company. And, in fact, that philosophy is probably why eBay decided to reserve its right to compete.

If that’s the case, why did eBay buy in? I think it’s pretty clear it is not primarily because they had any specific expectation of a return on investment. I think eBay invested as something of a hedge -- they recognized that if craigslist were to monetize itself, it would likely be a huge revenue source and they wanted to ensure eBay was part of that process if (not necessarily when) that were ever to happen. They reserved the right to compete in case eBay figured out a way to monetize a similar product. (And note that it’s not clear they were not getting a return; it’s simply a lower return than some people think that return could be.) As such, it would be improper to allow eBay, simply by virtue of being a shareholder, to require a change in the way in which the craiglist operates.  This is not a bait and switch where craiglist changed the rules of the game (at least with regard to their corporate philosophy) after cashing eBay’s check.

I guess I simply don’t agree with Chancellor Chandler’s assessment that craigslist is operating as a “purely philanthropic” corporation, and I don’t think eBay is being deprived of any expected potential return on investment. Just because craiglist’s majority owners use a lot of pro-philanthropic language, I see a market leader who is seeking to perpetuate that position. At the end of the day, then, craigslist is a “largely” philanthropic entity, and it is exactly the kind of small-but-profitable entity eBay bought a portion of in the first place. And that, to me, is just fine under Delaware law.  At least, it should be.

Corporations, Joshua P. Fershee | Permalink


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