Saturday, May 13, 2023
Possibly the easiest theory in corporation law
This week, VC Laster upheld Caremark claims against Facebook’s board in a telephonic ruling. The nub of the allegations was that the board allowed Facebook to violate an FTC consent decree, resulting in a massive $5 billion fine.
The transcript is not yet available so I don’t have the details, but I believe this is the legal theory I blogged about long ago here and here. Namely, in addition to traditional oversight claims, the plaintiffs alleged that this was actually a conflicted controller transaction, in that the company agreed to accept a larger penalty in order to spare Zuckerberg personally. Because the company did not use MFW procedures to cleanse that arrangement, the argument goes, the settlement is subject to entire fairness review. And VC Laster upheld those claims, as well as the more traditional oversight claims.
Edit: I've now seen the transcript, and VC Laster does treat the settlement as an uncleansed-conflict transaction, but he does not invoke Zuckerberg's controlling shareholder status; he just says the approving directors were not disinterested/independent.
So, this is obviously a fascinating new extension of the definition of a conflict transaction – and, to be clear, I don’t think anyone is saying that it’s unreasonable for a company to protect its officers this way; it’s simply that, you know, when the officer is also the controlling shareholder, there’s the possibility the settlement did not have a legitimate business rationale.
But let’s get back to the Caremark thing. We’ve seen a lot of these cases recently, and though many have been dismissed on the pleadings, I think it’s safe to say that ever since Marchand v. Barnhill, more have survived motions to dismiss. My understanding is that Marchand also encouraged so many new Section 220 requests that Chancery is now delegating them to the Masters, because the Chancellor/Vice Chancellors can’t handle the workload.
I am not among those who object to the concept of Caremark on a theoretical basis, so my next comments are intended as descriptive rather than normative, but – I don’t think this situation is sustainable. Not in terms of the administrative burden on Delaware courts, but because Delaware really can’t be in the business of functioning as a backup regulator for the entire United States.
This is something I touch on in my new paper, Every Billionaire is a Policy Failure, which I posted about earlier this week (yes this is me plugging my paper. I’m plugging). Delaware is going to have a legitimacy problem the more it departs from traditional shareholder wealth maximization concerns, and Caremark is not, or at least not entirely, about wealth maximization.
So I rather suspect that the Delaware Supreme Court will be tempted to find a way to cabin it.
Now, it would be difficult for Delaware to suddenly do a volte-face and declare that it does, in fact, charter law breakers after all – Caremark itself is intended to confer legitimacy on the corporate form – but what the courts can do is crack down on these cases procedurally, and one easy way to do that might be to dial back 220 access (even though the Delaware Supreme Court recently liberalized the law here in AmerisourceBergen v. Lebanon County Employees’ Retirement Fund). So I kind of expect to see something along those lines eventually.
Or, you know. Corporations could stop openly breaking the law. That works too.