(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

Introduction

On July 17, 2013, Delaware Governor Jack Markell signed into law legislation establishing a new type of corporate entity: the public benefit corporation.[1] A benefit corporation, similar to, but distinguished from a Certified B Corp,[2] is a voluntary alternative corporate form that focuses on adherence to higher standards of corporate purpose, accountability, and transparency.[3]  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) that have already embraced extralegal Certified B Corp status now have the opportunity to assume legal public benefit corporation status.[4]

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, and the community).[5]  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.[6]

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.[7]  This holding was subsequently extended and sharpened by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,[8] in the context of a sale of a business or change of control.[9]  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.[10]  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.[11]  More than 50% of all publicly-traded companies in the United States and 64% of Fortune 500 companies are incorporated in Delaware.[12]   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.[13] 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.[14]

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 when the mantra on Wall Street was "Greed is Good."[15]  But “Greed is Good” gave us a generation of mercenary CEOs eager to euthanize the golden goose to harvest the short-term egg.  Such nearsighted decision-making led to the downfall of such high-fliers as Enron, WorldCom, and Global Crossing, while also creating a movement towards corporate recklessness so systemic that a broader financial crisis was inevitable.

But even in this era of greed, hubris, and desire for power, some companies survived and even thrived.  Among these thriving companies were Costco, Whole Foods, and Southwest Airlines.  These companies cultivated goodwill,[16] adopted sustainable business practices, and focused on creating win-win relationships with all of their stakeholders over the long-term rather than make tradeoffs to maximize short-term gain. [17]  As a result, these companies have been consistently rewarded with higher long-term profits.[18]  In effect, the Delaware benefit corporation legislation is an attempt to align the law with what the leaders of these successful enterprises already know to be true: long-term profit is a reflection of the value an enterprise creates for its stakeholders.  In effect, the new benefit corporation legislation marks a turning point for capitalism: short-term profits versus long-term profitability; the highest bid versus the best bidder; the primacy of the shareholder versus the balancing of the interests of all stakeholders.

A Hypothetical Test Case: Martin Hydraulic Pump Company

To illustrate the divergence between the traditional duties of directors compared to those espoused under the new benefit corporation legislation, consider the application to Martin Hydraulic Pump Company (“Martin Pump”), a fictional enterprise that faces issues and restrictions that are all too common and real.

The story of Martin Pump begins in the garage of Charles and Susan Martin.  The two fictional characters met in college, Charles a mechanical engineering student and Susan an accounting major.  Following graduation, they married and moved to Ohio.  Susan went to work for an accounting firm and Charles worked for a municipal water-treatment facility.  In his spare time Charles tinkered with hydraulic pumps in the couple’s garage.

Recognizing a need for more efficient swimming pool pumps, Charles built an energy-efficient model the couple dubbed the Model 1 to be sold in the residential market.  The Model 1 was an immediate success.  Local pool supply companies ordered as many pumps as the Martins could supply.  Not long after, Susan quit her job at the accounting firm so they could they launch Martin Pump together.  Within three years, Martin Pump was the number one regional seller of swimming pool pumps.  Successive models for the residential market followed with the Model 2 and Model 3 and then later the Model 10 for commercial applications.  Subsequently, Martin Pump constructed state-of-the-art manufacturing facilities in Ohio and Illinois as it built a reputation for manufacturing the highest-quality, most energy-efficient pumps in the industry.  Together, the two facilities employ more than 250 people.  When asked about their success, the Martins point towards their partnership with their vendors and the family-like environment that has been established with their employees who consistently nominate the company as one of the “Best Places to Work” in the annual Employee’s Choice Awards, sponsored by the local chamber of commerce.

To secure the capital needed to grow the business, Martin Pump went public five years ago.  The Martins retained 30% equity in the company while the remaining 70% became publicly traded.  The company is currently headquartered in Ohio and incorporated in Delaware.

This past month, Martin Pump received two unsolicited offers to purchase the company.  The potential purchasers, Omni-Conglomerate Industries, Inc. (“Omni-Con”) and Competitive Pump Supply, Inc. (“Competitive Pump”), both offer to purchase a majority interest in the company in a cash-for-stock transaction resulting in a change of control.  Both companies have offered to purchase 51% of the equity to achieve majority status, leaving behind a large base of minority shareholders including the Martins who intend to retain their 30% interest.

If successful, Omni-Con plans to discontinue manufacturing in Ohio and Illinois, sell off all company assets, including Martin Pump’s name brand, for commercial pumps which foreign manufacturers covet.  Manufacturing of residential pumps will be relocated to India where low-cost generic pumps will be produced.  In addition, Omni-Con plans to replace Susan Martin as CEO with an Omni-Con executive with no experience in the pump industry but specializes in outsourcing.  Martin Pump’s internal financial forecast project that Omni-Con’s actions will generate a value for shareholders of $105 per share but destroy substantially all goodwill aggregated by Martin Pump over the past 20 years.  

Competitive Pump, on the other hand, is a distributor of pumps and sees a merger as an opportunity to vertically integrate the chain of manufacturing and distribution.  They have committed to re-investing in the company to further extend the product lines, and plan to keep Susan Martin as CEO because they value her passion and drive to grow the business.  Internal reports forecast Competitive Pump’s actions will generate a value of $110 per share by substantially increasing goodwill.  Both present their maximum bids to the board.  Omni-Con comes in at $100 per share and Competitive Pump comes in $1 lower at $99 per share.  All other financial terms of the respective sales are equivalent.

A meeting of the board has been convened to evaluate the two offers.  Board members of Martin Pump might reasonably ask (1) what are their duties under current Delaware law; (2) how does the new benefit corporation legislation affect these duties; and (3) how do the board members square their duties during a sale or change of control with their duties as directors of an ongoing enterprise?

Boards of directors regularly face situations like the hypothetical above, forcing them to consider their legal obligations to the primary stakeholders of the business in light of their apparent competing interests of the majority shareholders.  This Article explores these questions and seeks to reconcile the directors obligations with their desire to maximize value for primary stakeholders while acting within the bounds of their fiduciary duties.

The remainder of the Article proceeds in three parts.  Part I presents current fiduciary duties and standards of review used by Delaware courts in the context of a corporate sale or change of control, and analyzes different interpretations and applications of the current Revlon rationales.  Part II introduces the new Delaware public benefit corporation legislation, and explains the effects of benefit corporation legislation on Revlon case law.  Part III provides an outline of a benefit corporation director’s duties in the event of a sale or change of control, as well as presents a proposal that similar duties should be applied to serve as a safe harbor for the directors of a traditional corporation.

I.         Current Delaware Law: Fiduciary Duty and the Standard of Review

A.        General Fiduciary Duties and the Business Judgment Rule

Delaware General Corporation Law § 141(a) mandates that the business and affairs of a Delaware corporation shall be managed under the direction of its board of directors.[19]  It is well established that a corporation’s board of directors, in discharging this statutory mandate, has a fiduciary duty to both (a) act in the best interests of its shareholders, and (b) protect the interests of the corporation.[20]  This fiduciary duty primarily consists of the duty of loyalty,[21] and the duty of care.[22]  Other than in the case of a breach of loyalty or care, the majority of business decisions are otherwise reviewed under the business judgment rule, a rebuttable presumption that presumes the directors of a corporation make business decisions on an informed basis, in good faith, and in the honest belief that any action taken was in the best interests of the company.[23]

Given the latitude extended to board members under the business judgment rule, courts generally defers to a board’s business decisions.[24]  Where the court finds that there was a rational business purpose for a decision, the court is precluded from invalidating the decision, examining the decision’s reasonableness, or substituting its views for those of the board.[25]  This judicial deference protects most decisions made by the board that relate to managing the business of a corporation.

B.        Enhanced Scrutiny Brought on by the Sale Context

There are, however, limited circumstances where the court applies the heightened standard of enhanced scrutiny, preempting the business judgment rule.[26]  Enhanced scrutiny typically applies in the context of a corporate sale under the theory that during a sale there is an “omnipresent specter” that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders.[27]  This Specter Theory was first advanced in Unocal Corp. v. Mesa Petroleum Co.[28]  In Unocal, the court ruled that the application of enhanced scrutiny is appropriate where a board institutes defensive measures against a hostile takeover because takeover attempts raise an opportunity for director self-dealing.[29]  Once the attempt occurs, the actions of the directors must be examined under enhanced scrutiny.[30]

To dispel the specter and return to the protection of the business judgment rule, the directors are required to show good faith, reasonable investigation, and must analyze the nature of the takeover and its effect on the corporation in order to ensure balance.[31]

A further aspect is the element of balance.  If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed.  This entails an analysis by the directors of the nature of the takeover bid and its effect on the corporate enterprise.  Examples of such concerns may include: inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on “constituencies” other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange.[32]

The balancing element in Unocal provides a common law framework for addressing non-shareholder interests.  This language clearly acknowledges that a director has the discretion to consider the interests of primary stakeholders in anti-takeover decisions,[33] which makes it the functional equivalent of a constituency statute.[34]

In the absence of legislative guidance at the time, subsequent case law failed to advance Unocal’s positive step towards stakeholder rights.  Under the business judgment rule, a board can consider stakeholder interests because there is no per se duty to maximize shareholder value in the short-term; rather, discretion is granted to directors to make decisions to best serve the company’s and shareholders’ best interests without regard to a fixed investment horizon.[35]  Even under enhanced scrutiny, Unocal’s balancing prong makes room for considering additional primary stakeholders.[36]  In Revlon, however, the Delaware Supreme Court took an abrupt retreat from stakeholder considerations in advancing the theory of shareholder primacy.[37]

C.        Revlon Rationales—the Control Premium and No Tomorrow Theories

Subsequent to Unocal, the court ruled in Revlon that under a special set of circumstances enhanced scrutiny applied to a refined set of director fiduciary duties.[38]  Duties were shifted away from the best interests of the corporation and its shareholders to the narrow primary objective of maximizing shareholder value in the short-term.[39]  This objective has been refined into an obligation of a board to seek and recommend the transaction offering the highest value reasonably available to the stockholders.[40]  The test for evaluating the reasonableness of the bidder’s offer focuses principally on the ability of the bidder to consummate a transaction.[41]  In all, these considerations must be made in light of the ultimate goal: maximizing shareholder value.[42]  So what set of circumstances invoke Revlon?

The Supreme Court of Delaware has listed at least three situations that lead a company into Revlon territory[43]: (1) “when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company;”[44] (2) “where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company;”[45] or (3) when approval of a transaction results in a “sale or change of control.”[46]  Revlon follows Unocal in applying the enhanced scrutiny standard.  It is applied at any point where it is necessary to require directors to show that their motivations were proper and their actions were reasonable in relation to their legitimate objective.[47]  But Revlon takes the next step in judicial intervention by refocusing the director’s fiduciary duties, making their legitimate objective short-term maximization of shareholder value.[48]  The court has since provided two rationales to support its application of Revlon duties[49]: the Control Premium Theory[50] and the No Tomorrow Theory.[51]

(1)       The Control Premium Theory

The Control Premium Theory states that the purchase of majority status should come at a higher cost than the face value of the shares acquired because it is necessary to pay the minority a premium for selling its voting and control interests.[52]  Following a sale of control, voting power shifts, and the new majority shareholder may unilaterally make material alterations to the nature of the corporation at the expense of the minority.[53]  The sale of control leaves minority shareholders completely disenfranchised.[54]  To safeguard minority shareholders, the court applies Revlon duties.

When a change of control occurs, the control premium comes into play.[55]  For example, in a cash-for-stock transaction, where the result is a clear change of control, Revlon applies.[56]  In contrast, in a stock-for-stock transaction, where the result is a large aggregation of unaffiliated stockholders, and not a majority interest, Revlon duties are not triggered because the remaining shareholders retain a voting interest and control has not shifted.[57]  A caveat exists, however, when sufficient minority safeguards are in place. [58]  Transactional minority safeguards have the same practical effect as if there were no change of control: the minority interests at play are not suddenly left without a vote in the face of a new majority interest.[59]  As such, sufficient minority safeguards also make Revlon duties unnecessary.

This approach is based on the theory that all shareholders will be satisfied through a sale to the highest bidder today.  But not all shareholders are the same.  One shareholder may have different preferences from another.  Some shareholders may have an interest in a longer hold period–perhaps preferring to receive a steady flow dividends.  Moreover, many shareholders invest for reasons other than just the bottom line.  For example, many investors take a socially responsible approach by endorsing companies that share their values or do not invest in industries that they find to be inherently negative.[60]  These investors value a company, in part, based upon the perceived goodwill associated with the company’s products or services.[61]  A control premium can benefit minority shareholders, but it can just as easily undermine complex shareholder interests by oversimplifying them.  The control premium retreats from the stakeholder balance in Unocal, and moreover requires a board to overlook one of its two general fiduciary duties—the duty to protect the corporation as a whole.  As a result, the theory risks impairing the corporation’s goodwill and injuring the interests of minority shareholders.

(2)       The No Tomorrow Theory

Under the No Tomorrow Theory, where a transaction constitutes the end of “all or a substantial part of the stockholder’s investment,” the stockholder is entitled to a short-term maximization of profits because its future investment horizon has been shrunk to the present.[62] Effectively, the theory is that there is no tomorrow for target shareholders because following the sale of control, the shareholders will be forever shut out from the corporation’s future profits.[63]  This rationale, first announced in Smurfit-Stone, is similar to the Control Premium Theory, which focuses on the loss of a future control interest.  Under the No Tomorrow Theory, the focus is on the end of a future profit interest.

Dealing only with shareholders,[64] it is clear that for a complete sale of a company, in a cash-for-stock transaction, there is little room to argue against Revlon duties; maximizing value protects shareholder interests because shareholders have no future interest in the corporation.  But as the transaction’s cash component of consideration decreases and the stock component increases, the stockholder interests that face a no tomorrow reality become fewer and fewer, and the application of Revlon duties becomes less and less.[65]  The uncertain distinctions between ratios of cash and stock boils down to the principle that Revlon duties should not apply where shareholders retain a financial future interest.

There are two issues with applying Revlon by looking at future interests.  First, this approach places courts in the position to decide the intrinsic value of a mixed-consideration merger and the impact it will have on stockholder future interests. [66]  A board is better suited to make this decision.[67]  Second, the No Tomorrow Theory does not address a corporation’s other primary stakeholders.  Instead, it follows the persistent myth claiming that the ultimate purpose of business is to maximize investor profits, visualizing capitalism as a zero-sum game,[68] rather than a positive-sum game where all other players can profit.[69]  “How can the board fulfill its fiduciary obligation to act in the best interests of the stockholders, when it also is obligated to consider the conflicting interests of a variety of other groups?”[70]  To answer this, it is essential to understand first that, economically, consideration of a single stakeholder under the Revlon model can create a net negative economic result,[71] and second, to understand that consideration of multiple stakeholders translates into value for shareholders.[72]  The scope of the No Tomorrow Theory is currently limited to the consideration of future interests of target shareholders; however, following the theory’s key underlying principle, it might naturally be extended to include all shareholders with a future interest.

II.        Public Benefit Corporation Legislation

Delaware recently passed new public benefit corporation legislation.[73]  A public benefit corporation is a for-profit corporation organized with the purpose of “produc[ing] a public benefit”[74] and “operat[ing] in a responsible and sustainable manner.”[75]  A benefit corporation is managed in a manner that simultaneously balances stockholder profit interests, “the best interests of those materially affected by the corporation’s conduct” (primary stakeholders), and “the public benefit identified in [the corporation’s] certificate of incorporation.”[76]  For example, the board of a benefit corporation could not arbitrarily cut jobs to increase the company’s short-term profits without giving some consideration to the effected primary stakeholders (i.e., the employees and the community) as well as whether the decision would affect the company’s public benefit.  To ensure the proper balance of all interests, benefit corporations operate with heightened standards of transparency and accountability.[77]

New benefit corporation legislation raises some important legal questions.  The first question is whether Revlon duties apply to newly established benefit corporations.  Seemingly, benefit corporation legislation completely shields benefit corporation directors from Revlon.  If true, the second question raised is whether application of Revlon to general corporations is altered by new legislative guidance.

For almost a century, capitalism and corporate responsibility centered on creation of profit for shareholders: profit for profit’s sake;[78] however, “[t]he high-tech, globalized capitalism of the 21st century is very different from the postwar version of capitalism that performed so magnificently for the middle classes of the western world.”[79]  Fiduciary duties shaped around maximizing profit have partly been eroded by the wake of the judicial standards like the business judgment rule, but in eBay Domestic Holdings, Inc. v. Newmark, the Delaware Chancery Court went so far as to say, “[d]irectors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors' fiduciary duties under Delaware law.”[80]  Benefit corporations and the states that have passed benefit corporation legislation recognize the progressive trend moving away from historic shareholder-centric values towards a more stakeholder-centric approach with the focus of bringing capitalism from the past into the future.[81]  More specifically, endorsement of benefit corporations by Delaware, in the words of Delaware Governor Jack Markell, is the creation of “a powerful, no cost, market-based solution to the systemic problem of short termism and an innovative approach to using market forces to solve our most challenging problems,”[82] a solution that will affect the entire framework of corporate law.

A.        Key Sections of the Delaware Legislation

Benefit corporation legislation provides the legal framework for corporations to step outside of the restrictions found in shareholder-centric cases like Dodge, Revlon, and eBay.[83]  Boards now have the statutory authority to consider other stakeholder interests in addition to maximization of shareholder value.  This expansion of fiduciary duties is at the heart of what it means to be a benefit corporation.  The following presents a quick overview of the key sections:

The first key section in the Delaware legislation is section 365, Duties of Directors.[84]  This section outlines what interests directors must consider in their business decisions, and the standard by which their decisions will be reviewed.  Delaware consolidates the list of benefit corporation stakeholder interests to three overarching categories[85]: stockholders’ pecuniary interests,[86] the best interests of those materially affected by the corporation’s conduct” (primary stakeholders), [87]  and the “public benefit identified in [the] certificate of incorporation.”[88] Additionally, Delaware adopts the business judgment rule as the standard of review by codifying language from Delaware case law.[89]

The second key section in the Delaware legislation is section 363.[90]  Section 363 creates a strong barrier for companies wanting to reincorporate as a benefit corporation and creates merger protections requiring super-majority votes when the outcome of a merger is a change in benefit corporation status for either company.[91]  While this barrier is restrictive in nature, it also provides a protective function.  It protects benefit corporation status.  This provision makes benefit corporation status less accessible to corporations that might simply want to adopt it because it increases board discretion by insulating its decisions from litigation or increases company value by enhancing perceived goodwill.[92]

The third key section in the Delaware legislation is section 368.[93]  This section states that benefit corporation legislation “shall not affect a statute or rule of law that is applicable to a corporation that is not a public benefit corporation.”[94]  This expressly limits the impact of the legislation, but does not discount the legislative intent associated with passing the legislation.

B.        Application of Delaware Public Benefit Corporation Legislation to Revlon

Delaware benefit corporation legislation disregards Revlon by resetting fiduciary duties and the standard of review.  It protects board of directors of public benefit corporations by making stakeholder consideration mandatory.[95]

First, section 365(a) of the new statute states that “[t]he board of directors shall manage or direct the business and affairs” of the public benefit corporation in a manner that balances stockholder pecuniary interest, stakeholders, and the public benefit.[96]  This reframes the foundational principles of what constitutes a board’s fiduciary duties and completely shifts the view away from shareholder primacy.  Furthermore, this language parallels the language of section 141(a) which grants the board of directors managerial status over the actions of a corporation, including the sale or change of control.[97]  By incorporating similar language from section 141, the legislature directly indicated its intent that the duty of a public benefit corporation board to balance the concerns of all primary stakeholders should always apply, even when the corporation may begin its voyage into Revlon territory.

Second, section 365(b) sets the standard of review for this balancing requirement, inclusive of a sale or change of control, as requiring only that the director’s decision be both informed (duty of care) and disinterested (duty of loyalty) and “not such that no person of ordinary, sound judgment would approve.”[98]  This is the business judgment rule.  This means that even if section 365(a) does not supersede Revlon duties, director decisions will be given judicial deference.  Section 365(a) simply expands what directors are required to consider when exercising their judgment, effectively entitling directors to make business decisions looking at the long-term value to shareholders as well other stakeholders so long as they act on an informed basis, in good faith, and in the honest belief that the action taken is in the best interest of the corporation.

C.        Application of Delaware Public Benefit Corporation Legislation to non-Benefit Corporations

            Although not explicitly applicable to non-benefit corporations, the benefit corporation statute provides legislative guidance for further judicial development of the general application of Revlon.  This is particularly important in an era where terms like “brand equity” point towards the increasing recognition that a company’s value and, therefore, its sustainability as an ongoing enterprise, is inextricably tied to the relationship it has cultivated with its customers, employees, suppliers, and community.[99]  Not surprisingly, the correlation between a company’s orientation towards its stakeholders and its stock price are highly correlated over time.[100]  In contrast, companies that focus exclusively on short-term profits to the detriment of their key stakeholders increase the risk of impairing goodwill and eroding the long-term value of the company.[101]  The best interests of an ongoing enterprise, and in turn its shareholders, therefore hinge upon increasing not only the financial performance but also the corporation’s perceived goodwill.  In adopting benefit corporation legislation, the Delaware legislature recognized these underlying assumptions and, in doing so, the legislature opened the door to change Revlon.

III.      Proposal, Test, and Application

A.        Proposal

Where a company receives two or more offers to sell its equity, the results of which are a sale or change of control, our proposal is twofold:

(1) for directors of a benefit corporation, the new statute supersedes Revlon.  The clear path forward is to recommend the offer that, in its business judgment, provides the highest value for all of the primary stakeholders; and

(2) for directors of non-benefit corporations, the directors may take into account the post-transaction interests of the corporation’s primary stakeholders in addition to the immediate pecuniary interests of the selling majority where there are non-selling shareholders retaining a substantial minority interest.  Of course, if directors may, they also may not, which is an important distinction for investors and/or remaining shareholders who give weight to the creation of value for non-shareholder (e.g. worker, community, or environmental) interests.

Under either scenario, a board may assert the safe harbor of the business judgment rule in relation to its recommendation so long as it considers the decision in the context of (a) preserving the goodwill of the ongoing enterprise as well as (b) the company’s other primary stakeholders. 

B.        Test

To determine whether our proposal applies in the context of a non-benefit corporation, we have designed an easy to follow test that asks three questions:

(1) Will there be one or more equity holders that in the aggregate hold a substantial minority interest that will not be selling their equity on the date of the transaction?[102]

(2) Will, according to the company’s own financial forecast, the proposed offer substantially impair the company’s economic goodwill following the date of the transaction?[103] and,

(3) Will accepting the proposed offer materially harm two or more of the company’s other primary stakeholders?[104]

This test attempts to provide an exception to the rule that conforms to the rationales for Revlon.  Prong 1 simply protects the company from an instance where a shareholder with a single share or de minimis interest in the company attempts to hijack the sale process.  Prong 2 shields the long-term economic value of an ongoing enterprise from short-sighted profiteering at the expense of the residual minority who would be forced to sell at a time when they may not have otherwise realized their investment objectives.  This does not conflict with the No Tomorrow Theory, which is designed to only come into effect as shareholders relinquish their future investment interest.  Rather, it comes into effect when the No Tomorrow Theory would not be applicable, and provides protection for the future investment interests of the residual minority that continued to hold stake in the corporation.  Prong 3 permits directors to retain their traditional role outside of the sale process in which they have the duty to protect both the shareholders and the corporation, inclusive of the discretion to consider the interests of all primary stakeholders.  Exercising this discretion, directors are able to safeguard minority interests as required by the Control Premium Theory.  If the answer to these three questions is “yes,” then the board can assert the same safe harbor provisions of the business judgment rule in relation to their recommendation of a particular offer without violating or offending the Revlon doctrine.

This test provides for great flexibility and is limited in application to the factually specific instances wherein goodwill would be impaired.  These instances would be reviewed on a case-by-case basis anyway.  An example satisfying the first prong would be where 51% of the corporation is acquired, leaving a 49% minority shareholder interest.  An example satisfying the second prong would be where inter-company forecasts indicate that $100 share value today will be worth $120 within the next two years or where the company has been growing historically at a rate of 15% per year and the decision to reduce working capital or capital expenditure would reverse this growth.  An example satisfying the third prong would include a cash out resulting in two or more of the following: the inability of customers to secure a comparable substitute on commercially reasonable terms; the loss of all or substantially all employee jobs; insolvency of critical suppliers to the business; or irreparable harm to the local community following the cessation of operations by its largest employer, tax payer, and public benefactor.

This proposal is not intended to create any additional obligation on a board, but rather to provide a safe harbor for evaluating the offers of competing bidders in the context of a sale or change of control.  In effect, the application of this test provides the board the opportunity to avoid the dilemma of whether to recommend a bid that will effectively destroy the value of an ongoing enterprise or to breach Revlon duties to protect the interests of the corporation and its stakeholders.  It empowers directors to choose not just the highest offer, but the best offer—the offer that maximizes value for both the selling equity holders as well as the remaining stakeholders who will be both responsible for and beneficiaries of the company as an ongoing enterprise following the date of the transaction.

C.        Application to Martin Pump

Reflecting back on the decision faced by the directors of Martin Pump, what are their different options and the outcomes they can expect?  Under current Delaware law, the outcome is all but predestinated.  Under Revlon, the board’s evaluation is limited to maximizing present shareholder value without regard to future shareholder value or any other primary stakeholders.[105]  The board must overlook the harm associated with the dissolution of the company and the impairment of goodwill because control has been traded away and the target shareholders have no tomorrow for their investment.  The board is forced to either to recommend Omni-Con without considering all of the material information or to recommend Competitive Pump and face the threat of personal liability.  The company that Charles and Susan Martin spent decades building with the help of so many who believed in their vision would be dismantled.  

Now assume that Martin Pump, in furtherance of the Martins’ original intention to create an enduring enterprise, recently reincorporated as a benefit corporation.[106]  While current Delaware law does not speak to the matter directly, it is reasonable to conclude that the new Delaware benefit corporation legislation applies in sale or change of control scenarios, mandating that benefit corporation directors balance shareholder profit with the public interest and the interests of other primary stakeholders.  Following this interpretation, Martin Pump’s board of directors must evaluate both offers with consideration of not only maximization of short-term shareholder value, but also the future equitable value of each offer, the overall impact of each offer to the non-shareholder primary stakeholders, and the impact to the public benefit generated by the continued production of Martin Pump’s products.  The board would balance the consequences of accepting Omni-Con’s $1 ($100 per share compared to $99 per share) premium over the offer of Competitive Pump, namely: (a) forecasted loss of $5 per share in future value for the remaining shareholders; (b) the loss of 250 full-time employees; (c) the likelihood of loss of vendors that supply critical components necessary for production; (d) the effect of offshore production on customer perception and, therefore, loyalty, and (e) the economic impact to the community in which the plants operate.  As a benefit corporation, the board must take all of these factors into account, and the net positive impact of this decision is clear.  More likely than not, the board of Martin Pump should recommend the offer from Competitive Pump.

Assume instead that Martin Pump does not decide to become a benefit corporation, and that Delaware courts apply the stated proposal.  First, it is necessary to evaluate whether the proposed transaction meets the criteria to apply our proposal.  In applying the scenario to the first prong, 49% would constitute a substantial minority interest that will not be selling their equity on the date of the transaction, including the Martins who retain 30% of the company’s equity.  In applying the second prong, it is apparent that Martin Pump’s residual shareholders will receive a superior economic benefit in the forecastable future from the Competitive Pump offer ($5 per share higher), and in addition, Omni-Con’s plans to sell off valuable trademark assets, outsource, and terminate key management will likely impair the company’s goodwill and the continuation of the company’s historical growth.  In considering the third prong, it is clear that Omni-Con’s offer will severely impact the company’s other primary stakeholders.  As such, the court would apply the proposal creating an exception to Revlon.  In effect, the directors, like those of a benefit corporation, could assert safe harbor over its recommendation should it recommend the offer from Competitive Pump.

Conclusion

For almost a century, the idea of shareholder primacy first articulated in Dodge v. Ford Motor Co. has gone largely unchallenged.  Rather, the principle of profit maximization at all costs has passed from generation to generation without regard for the actual impact on future generations.  The practical effect of such short-term profiteering is evident in the graveyard of corporations passed whose economic deaths were inevitable.  But to quote Bob Dylan: “The times they are a-changin’.”[107] 

The passage of the benefit corporation legislation provides a safe harbor for directors who seek to uphold their fiduciary obligations to both the shareholders as well as the corporation in all circumstances rather than forfeit them during the process of a sale.  Moreover, it sets the stage for leaders of corporations dedicated to building enterprises of enduring value to realize their vision of creating prosperity, not only for the shareholders, but for all of the lives they touch.  For what is a corporation without the support of its customers, employees, vendors and suppliers, and community?

Our proposal is not to abolish almost a century of refinement in case law articulating fiduciary duties, but envision the next steps in growing fiduciary duty into a more cogent economical, legal, and ethical form.  Like the Delaware’s benefit corporation statute, it is not about advancing an ideology, but a call to action for organizations that do not want to just survive, but thrive in this new era of sustainability.

* * *

[1] Governor Markell Signs Public Benefit Corporation Legislation, State of Delaware: the Official Website of the First State, (July 17, 2013), http://news.delaware.gov/2013/07/17/governor-markell-signs-public-benefit-corporation-legislation/.

[2] “Benefit Corporations and Certified B Corporations are often, and understandably, confused.  Both are sometimes called B Corps.  They share much in common and have a few important differences.  Certified B Corporation is a certification conferred by the nonprofit B Lab.  Benefit corporation is a legal status administered by the state.  Benefit corporations do NOT need to be certified.  Certified B Corporations have been certified as having met a high standard of overall social and environmental performance, and as a result have access to a portfolio of services and support from B Lab that benefit corporations do not.” Passing Legislation, Certified B Corporation, (July 25, 2013), http://www.bcorporation.net/what-are-b-corps/legislation.

[3] Policy Initiatives for Investors, About GIIRS, GIIRS Ratings & Analytics, http://giirs.org/about-giirs/policy-initiatives-for-investors (last visited Aug. 2, 2013).

[4] Open Letter to Business Leaders, Certified B Corporation, http://www.bcorporation.net/open-letter-to-business-leaders (last visited July 25, 2013).  The ranks of Certified B Corps also include such companies as Dansko and Etsy.

[5] “The term ‘stakeholder’ is commonly used to refer to a person, group, or organization that has a direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives and policies. [Primary] stakeholders in a business organization include customers, directors, employees, shareholders, suppliers, the community from which the business draws its resources, etc.” William H. Clark, Jr. & Larry Vranka, The Need and Rationale for the Benefit Corporation: Why it is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public, 5 n.21 (2013), available at http://benefitcorp.net/for-attorneys/benefit-corp-white-paper.

[6] See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986).

[7] Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).

[8] See Revlon, 506 A.2d 173.  This Article draws no distinction between a sale of control and a change of control for doctrinal purposes. 

[9] "Change of Control" of a company refers to: (a) a merger or consolidation of the company in which the stockholders of the company immediately prior to such transaction would own, in the aggregate, less than 50% of the total combined voting power of all classes of capital stock of the surviving entity normally entitled to vote for the election of directors of the surviving entity, or (b) the sale by the company of all or substantially all the company's assets in one transaction or in a series of related transactions. Clifford R. Ennico, Section 8:70 Change of Control Agreement, in Closely Held Corporations: Forms and Checklists § 8:70 (2014).

[10] While this Article argues for broadening of the discretion granted the board of directors in a sale or change of control, it does not seek to overlook or downplay the importance of the board’s duty to its shareholders.

[11] Determining Entity Details for Amazon.com, Inc., State of Delaware: Division of Corporations, http://corp.delaware.gov/ (follow "Search for a Business Entity" hyperlink; then search "Amazon.com, Inc.”; then follow "Search" hyperlink; then follow "Amazon.com, Inc." hyperlink); Determining Entity Details for Zale Corporation, State of Delaware: Division of Corporations, http://corp.delaware.gov/ (follow "Search for a Business Entity" hyperlink; then search "Zale Corporation"; then follow "Search" hyperlink; then follow "Zale Corporation" hyperlink).

[12] Amazon.com, Inc. and Zale Corporation are both incorporated in Delaware and headquartered, respectively, in Seattle, Washington and Irving, Texas.  This list also includes smaller corporations like Plum Organics and New Leaf Paper, two of the first seventeen Delaware B Corporations, headquartered in New York and California, respectively.  See Aman Singh, As Delaware Registers Its First Benefit Corporations, a Conversation With Early Adopters, The CSRwire Talkback (Aug. 1, 2013, 10:11 PM), http://www.csrwire.com/blog/posts/958-as-delaware-registers-its-first-benefit-corporations-a-conversation-with-the-early-adopters?utm_medium=Twitter&utm_campaign=CSR+and+sustainability+news.

[13] See Revlon, 506 A.2d at 182.

[14] See e.g., The Six Principles, Principles for Responsible Investment, (last visited Aug. 1, 2013), http://www.unpri.org/about-pri/the-six-principles/; Corporate Social Responsibility Press Releases, The Corporate Social Responsibility Newsire, (last visited Aug. 1, 2013), http://www.csrwire.com/categories/23-Corporate-Social-Responsibility/press_releases.

[15] A paraphrase of the original quotation: “Greed, for lack of a better word, is good.” The full quote reads: “Greed is right.  Greed works.  Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit.  Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.” Wall Street (20th Century Fox 1987).

[16] Goodwill is “[a] business’s reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase; the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets.” Black’s Law Dictionary, 703 (7th ed. 1999).

[17] Sustainability is defined as “meet[ing] the needs of the present without compromising the ability of future generations to meet their own needs.” World Commission on Environment and Development: Our Common Future 16 (1987) available at http://www.un-documents.net/our-common-future.pdf.

[18] In Firms of Endearment: How World-Class Companies Profit from Passion and Purpose, an analysis of twenty eight companies known for their sense of purpose and stakeholder awareness revealed that these businesses outperformed both the S&P 500 and Good to Great companies (identified by Jim Collins in his best-selling business book). John Mackey & Raj Sisodia, Conscious Capitalism: Liberating the Heroic Spirit of Business 283 (2013) (displaying Firms of Endearment analysis extended from 1996-2011) (chart is recreated).

[19] Del. Code Ann. tit 8, § 141(a) (2000).

[20] See Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281, 1292 (Del. 1998); see also Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).

[21] A director’s duty of loyalty mandates that the best interest of the corporation and its shareholders take precedent over any conflicting interest possessed by the director.  See Guth v. Loft, 5 A.2d 503, 510 (Del. 1939).

[22] “In a merger or sale . . . the director’s duty of care requires a director, before voting on a proposed plan of merger or sale, to inform himself and his fellow directors of all material information that is reasonably available to them.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 368 (Del. 1993) 

[23] Acting on an informed basis, and in good faith, satisfies the duty of care while acting in the best interest of the company satisfies the duty of loyalty.  See Revlon, 506 A.2d at 180.

[24] See MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del. 2003). 

[25] See In re Smurfit-Stone Container Corp. S’holder Litig., No. 6164–VCP, 2011 WL 2028076 at *11 (Del. Ch. May 20, 2011).

[26] Enhanced scrutiny requires judicial examination at the threshold before the protections of the business judgment rule may be conferred.  See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).

[27] Id. at 954.

[28] Id.

[29] Essentially, the specter is omnipresent because the danger of director self-dealing exists, but it does not become a cognizable threat until a takeover attempt occurs.  Id.

[30] Id.

[31] See Revlon, 506 A.2d at 180; see also Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

[32] Unocal, 493 A.2d at 955 (emphasis added).

[33] Edward S. Adams & John H. Matheson, A Statutory Model for Corporate Constituency Concerns, 49 Emory L.J. 1085, 1110 (2000) (acknowledging that Unocal permitted consideration of non-shareholder constituencies in a takeover situation)

[34] Constituency statutes, also known as stakeholder statutes, permit a board of directors to consider an enumerated list of constituent (i.e., primary stakeholder) interests as well as shareholder interests when making business decisions. Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 Tex. L. Rev. 579, 588-89 (1992) (demonstrating that Revlon duties without constituency statutes allow for sub-optimal outcomes in takeover scenarios, possibly resulting in a net economic loss as well as damage to primary stakeholders).

Thirty-three states currently have some version of a constituency statute.  See Ariz. Rev. Stat. Ann. § 10-2702 (2004); Conn. Gen. Stat. § 33-756(d) (2007); Fla. Stat. § 607.0830(3) (2008); Ga. Code Ann. § 14-2-202(b)(5) (West 2003); Haw. Rev. Stat. § 414-221(b) (2008); Idaho Code Ann. § 30-1602 (West 2010); 805 Ill. Comp. Stat. 5/8.85 (2004); Ind. Code § 23-1-35-1(d) (1999); Iowa Code § 490.1108A (1999); Ky. Rev. Stat. Ann. § 271B.12-210(4) (LexisNexis 2006); La. Rev. Stat. Ann. § 12:92(G) (1994); Me. Rev. Stat. Ann. tit. 13-C, §832 (2005); Md. Code Ann., Corps. & Ass’ns § 2-104(b)(9) (West 2008); Mass. Gen. Laws Ann. ch. 156B, § 65 (West 2006); Minn. Stat. § 302A.251(5) (West 2008); Miss. Code Ann. § 79-4-8.30(f) (West 2001); Mo. Rev. Stat. § 351.347(1) (West 2000); Neb. Rev. Stat. § 21-2432(2) (West 2007); Nev. Rev. Stat. Ann. § 78.138(4) (West 2007); N.J. Stat. Ann. § 14A:6-1(2) (West 2003); N.M. Stat. Ann. § 53-11-35(D) (West 2003); N.Y. Bus. Corp. Law § 717(b) (McKinney 2003); N.D. Cent. Code § 10-19.1-50(6) (West 2005); Ohio Rev. Code Ann. § 1701.59(F) (LexisNexis 2004); Or. Rev. Stat. § 60.357(5) (West 2007); 15 Pa. Cons. Stat. Ann. § 1715(a) (West 1995); R.I. Gen. Laws Ann. § 7-5.2-8 (West 1999); S.D. Codified Laws § 47-33-4 (2002); Tenn. Code Ann. § 48-103-204 (West 2008); Vt. Stat. Ann. tit. 11A, § 8.30(a) (West 2008); Va. Code Ann. § 13.1-727.1 (West 2006); Wis. Stat. Ann. § 180.0827 (West 2006); Wyo. Stat. Ann. § 17-16-830(g) (2007).

[35] Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1989).

[36] Unocal, 493 A.2d at 955.

[37] “[A]ll powers granted to a corporation or to the management of a corporation, or to any group within the corporation . . . [are] at all times exercisable only for the ratable benefit of all the shareholders as their interest appears.” Adolph A. Berle & Gardiner C. Means, The Modern Corporation and Private Property 248 (rev. ed. 1968) (stating the theory of shareholder primacy).  See generally Revlon, 506 A.2d at 180.

[38] Revlon, 506 A.2d at 180.

[39] Id.

[40] See Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 44,45 (Del. 1994).

[41] “In assessing the bid and the bidder's responsibility, a board may consider, among various proper factors, the adequacy and terms of the offer; its fairness and feasibility; the proposed or actual financing for the offer, and the consequences of that financing; questions of illegality; the impact of both the bid and the potential acquisition on other constituencies, provided that it bears some reasonable relationship to general shareholder interests; the risk of nonconsumation; the basic stockholder interests at stake; the bidder's identity, prior background and other business venture experiences; and the bidder's business plans for the corporation and their effects on stockholder interests.” Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1282 n.29 (Del. Super. Ct. 1989).

[42] “While the assessment of these factors may be complex, the board's goal is straightforward: Having informed themselves of all material information reasonably available, the directors must decide which alternative is most likely to offer the best value reasonably available to the stockholders.” QVC Network, 637 A.2d at 44-45.

[43] These three situations are extensions of the original idea in Revlon that the inevitable sale of a corporation is fundamentally different from defensive anti-takeover measures.  See Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994).

[44] Time, 571 A.2d at 1150. 

[45] Id.

[46]See Arnold, 650 A.2d at 1290 (quoting QVC Network, 637 A.2d at 42–43, 47.)

[47] See Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786, 810 (Del. Ch. 2007).

[48] Revlon duties are not independent duties, but rather a restatement of the duties of care and loyalty.  See In re Answers Corp. S’holders Litig., No. 6170–VCN, 2012 WL 1253072, at *6 (Del. Ch. Apr. 11, 2012).

[49] Morgan White-Smith, Comment, Revisiting Revlon: Should Judicial Scrutiny of Mergers Depend on the Method of Payment?, 79 U. Chi. L. Rev. 1177, 1178, 1179 (analyzing Revlon rationales in a mixed cash and stock transaction).

[50] See QVC Network, 637 A.2d at 43.

[51] See In re Smurfit-Stone Container Corp. S’holder Litig., 2011 WL 2028076 at *14.

[52] “The acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price.  That price is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power.” QVC Network, 637 A.2d at 43.

[53] Material alterations include, but are not limited to, electing directors, forcing a break-up of the corporation, merging with another company, cashing-out the public stockholders, amending the certificate of incorporation, and consolidating or selling any and all of the corporate assets.  See Del. Code Ann. tit 8, §§ 211, 242, 251-258, 263, 271, 275; see also QVC Network, 637 A.2d at 43.

[54] Following a change of control, the residual minority stockholders have no leverage to regain another control premium.  See QVC Network, 637 A.2d at 43.

[55] Id.

[56] Id. at 46.

[57] Id.

[58] Examples of typical protective measures or minority safeguards are supermajority voting provisions, majority of the minority requirements, etc.

[59] “[T]he Paramount stockholders are entitled to receive, and should receive, a control premium and/or protective devices of significant value.  There being no such protective provisions in the Viacom-Paramount transaction, the Paramount directors had an obligation to take the maximum advantage of the current opportunity to realize for the stockholders the best value reasonably available.” QVC Network Inc., 637 A.2d at 43 (emphasis added) (referencing the absence of devices protecting minority stockholders).

[60] See generally Susan N. Gary, Is it Prudent to be Responsible? The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing, 6 NW J. L. & Soc. Pol’y 106 (2011).

[61] “[T]he socially responsible investment movement, which now represents a sizable portion of market activity, demonstrates that moral considerations outweigh the profit motive for some shareholders.” Andrea M. Matwyshyn, Imagining the Intangible, 34 Del. J. Corp. L. 965, 985 (2009) (proposing long run profit maximization through asset sensitive governance of intangible assets, i.e., managing corporate goodwill).

[62] In re Smurfit-Stone Container Corp. S’holder Litig., 2011 WL 2028076 at *14.

[63] See id. at *10.

[64] Both the Control Premium Theory and the No Tomorrow Theory are derived from Revlon, and, as such, address stockholder interests. A key distinction is that the No Tomorrow Theory, unlike the Control Premium Theory, is forward facing and could potentially address the future interests beyond those of just the stockholders (i.e., it may include the future interests of other primary stakeholders).

[65] While there is no clear tipping point as to when Revlon applies, the Delaware Supreme Court held that a transaction in which 33% of the consideration was offered in cash was not sufficient.  See In re Santa Fe Pac. Corp. S'holder Litig., 669 A.2d 59, 71 (Del. 1995).

[66] See generally Case Comment, Corporate Law—Mergers and Acquisitions—Delaware Court of Chancery Imposes Revlon Duties on Board of Directors in Mixed Cash-Stock Strategic Merger, 125 Harv. L. Rev. 1256, 1256 (2012).

[67] See id. at 1257.

[68] The idea of zero-sum thinking is that if one player wins, another must lose (i.e., for shareholders to gain, other stakeholders must lose).

[69] Positive-sum thinking is the idea that “it is in each stakeholder’s interest for management to take risks that can lead to increasing the size of the pie for everyone[,]” and that one player may gain at no expense or cost to another. R. Edward Freeman, Andrew C. Wicks & Bidhan Parmar, Stakeholder Theory and “The Corporate Objective Revisited,” 15 Org. Science, no. 3, 364, 366 (2004) 

[70] Mitchell, supra note 34, at 631.

[71] See Mitchell, supra note 34, at 608 (providing an example where following Revlon duties to ensure a board refrain from self-dealing resulted in a net loss of $40 million and a $20 million gain for stockholders at the cost of $60 million to note holders).

[72] Supra note 18.

[73] See Governor Markell Signs Public Benefit Corporation Legislation, State of Delaware: the Official Website of the First State, (July 17, 2013), http://news.delaware.gov/2013/07/17/governor-markell-signs-public-benefit-corporation-legislation/.

[74] Delaware defines a public benefit as “a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities, or interests (other than stockholders in their capacities as stockholders).” Del. Code Ann. tit. 8, § 362(b) (2013).

[75] Del. Code Ann. tit. 8, § 362(a) (2013) (emphasis added).

[76] Del. Code Ann. tit. 8, § 365(a) (2013).

[77] A benefit corporation is “required to report on their overall social and environmental performance, giving stockholders important information that, particularly when reported against a third party standard, can mitigate risk and reduce transaction costs.” Governor Jack Markell, A New Kind of Corporation to Harness the Power of Private Enterprise for Public Benefit, Huffington Post, July 22, 2013, available at http://www.huffingtonpost.com/gov-jack-markell/public-benefit-corporation_b_3635752.htm; see e.g., Del. Code Ann. tit. 8, § 366(b) (2013).

[78] See Dodge, 170 N.W. at 684.

[79] Chrystia Freeland, Capitalism, but With a Little Heart, N.Y. Times, July 18, 2013, http://www.nytimes.com/2013/07/19/us/19iht-letter19.html?_r=3&.

[80] eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 35 (Del. Ch. 2010) (noting that while Judge Chandler personally appreciates and admires the defendant’s desire to be of service to communities, current law does not provide an appropriate vehicle for purely philanthropic ends under the company’s current corporate form.).

[81] As of July 17, 2013, Delaware is one of nineteen states and the District of Columbia to pass B Corporation legislation.  These states include Arizona, Arkansas, California, Colorado, Delaware, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Nevada, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia.  See supra note 2.

[82] Governor Jack Markell, A New Kind of Corporation to Harness the Power of Private Enterprise for Public Benefit, Huffington Post, July 22, 2013, available at http://www.huffingtonpost.com/gov-jack-markell/public-benefit-corporation_b_3635752.htm.

[83] See generally Clark & Vranka, supra note 5.

[84] Del. Code Ann. tit. 8, § 365 (2013).

[85] Under § 301(a) of the Model Benefit Corporation Legislation, benefit corporation directors “shall consider the effects of any action or inaction upon: (i) the shareholders of the benefit corporation, (ii) the employees and workforce of the benefit corporation, its subsidiaries and its suppliers, (iii) the interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation, (iv) community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries and its suppliers are located, (v) the local and global environment, (vi) the short-term and long-term interests of the benefit corporation, including any benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation and (vii) the ability of the benefit corporation to accomplish its general benefit purpose and any specific public benefit purpose.” Clark & Vranka, supra note 5, at app. A 11–12. 

[86] It should be noted that in both the Model Benefit Corporation Legislation and Delaware Legislation, shareholders are among the stakeholders whose interests the directors are required to consider; in fact, they are first on both lists, and are the only stakeholder entitled to bring a legal action against the corporation or its directors.  See Del. Code Ann. tit. 8, § 366(b) (2013); Clark & Vranka, supra note 5, at app A, 11.

[87] Del. Code Ann. tit. 8, § 362(a) (2013).

[88] Id. 

[89] See Del. Code Ann. tit. 8, § 365(b) (2013). “A director of a public benefit corporation shall not . . . have any duty to any person on account of any interest of such person in the public benefit or public benefits identified in the certificate of incorporation or on account of any interest materially affected by the corporation’s conduct and, with respect to a decision implicating the balance requirement in subsection (a) of this section, will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.” Id.; c.f. Grobow v. Perot, 539 A.2d 180, 189 (Del. 1988) (holding that a waste determination rebutting the business judgment rule depends on whether what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth the price which the corporation has paid).                                                                                                                         

[90] Del. Code Ann. tit. 8, § 363 (2013).

[91] Id.

[92] See id.

[93] Del. Code Ann. tit. 8, § 368 (2013).

[94] Id.

[95] See id. at § 365.

[96] Id. at § 365(a).

[97] Compare Del. Code Ann. tit. 8 § 141(a) (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors.”) with § 365 (“The board of directors shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation's conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.”). 

[98] Del. Code Ann. tit. 8, § 365(b) (2013) (added emphasis).

[99] The World’s Most Powerful Brands, Forbes (August 30, 2013), http://www.forbes.com/powerful-brands/list/ (demonstrating the value of brand equity) 

[100] Mackey & Sisodia, supra note 18, at 283.

[101] Matwyshyn, supra note 61, at 988.

[102] To determine whether a minority interest is substantial, we propose that the court consider certain non-exclusive factors: percentage of equity retained in aggregate, the percentage retained by single equity holders, and the value of the corporation at the time of transaction.

[103] This prong of this test would be determinable by an internal analysis of the corporation’s goodwill asset value.  The majority of corporations already undergo goodwill impairment tests to determine the true asset value and to forecast future goodwill values; therefore, it is no additional burden on the corporation to provide this information.  We propose that directors make this evaluation and courts review their evaluation under the business judgment rule standard.

[104] We propose that determining what constitutes material harm should be left to the business judgment of directors and that courts review the determination under the corresponding standard.

[105] See QVC Network, 637 A.2d at 44 (“In the sale of control context, the directors must focus on one primary objective—to secure the transaction offering the best value reasonably available for the stockholder—and they must exercise their fiduciary duties to further that end.”).

[106] This is no small task.  Delaware requires ninety percent of outstanding shares to vote for amending the certificate of incorporation.  See Del. Code Ann. tit. 8, § 363(a) (2013).

[107] Bob Dylan, The Times They Are a-Changin (Columbia Records 1964).