Landis Rath & Cobb LLP is a premier boutique law firm concentrating on commercial bankruptcy, corporate restructuring and business litigation. We provide sophisticated legal advice and services to national, international and local clients in and out of federal and state courts. Our proven record of success is backed by a commitment to advocate for our clients' interests with personalized service and expert counsel.

Representative Matters

DBCI: Howard Robertson on Shareholder Primacy in Delaware Corporation Law: Court of Chancery Makes Clear That Delaware Law Assumes ‘Single-Firm Model’

In the June 19, 2024 edition of the Delaware Business Court Insider, LRC Associate Howard Robertson writes on Shareholder Primacy in Delaware Corporation Law: Court of Chancery Makes Clear That Delaware Law Assumes ‘Single-Firm Model’

The Delaware Court of Chancery recently had the opportunity to weigh in on a plaintiff’s unique theory of director and officer fiduciary duties arising out of the stakeholder capitalism model of corporate governance.

Shareholder Primacy in Delaware Corporation Law: Court of Chancery Makes Clear That Delaware Law Assumes ‘Single-Firm Model’

By Howard W. Robertson IV | June 19, 2024

Delaware corporation law has developed based on the fundamental principle that directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders.  Notwithstanding this fundamental principle, economists, business school academics and legal scholars have long considered the proper role of corporations in society.

In the early 20th century, businesspersons and academics began considering more broadly whether corporations have or should have a duty to act as socially responsible citizens to benefit their stakeholders and mitigate harms to the economy and society as a whole.  In response, economist Milton Friedman famously articulated the “shareholder primacy” model to corporate governance when he wrote “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Others counterargued that a corporation has responsibilities to all of its stakeholders and to society as a whole, known otherwise as corporate social responsibility or stakeholder capitalism. Since then, the debate between shareholder primacy and corporate social responsibility/ stakeholder capitalism has continued.

Despite the ongoing debate, corporations largely have adopted Friedman’s shareholder primacy theory of corporate governance. See Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ (noting “Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders.”).

Recently, however, some corporate boards have explored adopting governance principles that favor corporate social responsibility or stakeholder capitalism. In 2019, the Business Roundtable issued a new Statement on the Purpose of a Corporation recognizing a commitment by 181 CEOs “to lead their companies for the benefit of all stakeholders,” not only stockholders. The press release for the new statement notes that it “Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.” It has also been widely reported that issues of Environmental, Social, and Governance (ESG) and Diversity, Equity and Inclusion (DEI), topics that concern all stakeholders, are being considered more prominently by corporate boards. In response, there appears to be a movement by certain investors to refocus corporate boards’ efforts on shareholder primacy and urging boards to reject environmental and social initiatives. See ‘Anti-Woke’ Shareholders Are Going After Corporate Boards, The Wall Street Journal, (June 11, 2024).

The Delaware Court of Chancery recently had the opportunity to weigh in on a plaintiff’s unique theory of director and officer fiduciary duties arising out of the stakeholder capitalism model of corporate governance. In McRitchie v. Zuckerberg, C.A. No. 2022-0890-JTL (Del. Ch. Apr. 30, 2024), the court rejected the notion that corporate officers and directors were in breach of their fiduciary duties by failing to consider the effects of their decisions on the market as a whole and reaffirmed that Delaware law adopts the stockholder primacy model of corporate governance.

Plaintiff James McRitchie sued certain directors and officers of Meta Platforms, Inc. for breach of their fiduciary duties under the novel theory that Meta’s directors and officers must consider the societal and macroeconomic impact of their decisions given the magnitude of the company’s equity stake.  McRitchie’s theory was grounded in the assumption that modern prudent investors diversify their portfolios to lower risk and achieve returns that track overall market performance, a theory known as the Modern Portfolio Theory of investing. McRitchie argued that Meta’s stockholders subscribe to the Modern Portfolio Theory.  As such, he argues, that in order to fulfill their fiduciary duties to Meta’s stockholders, the officers and directors must measure the effect of their decisions on the market generally. He argued that Meta’s directors and officers owe stockholders a duty to consider any negative externalities, meaning societal and macroeconomic impacts of Meta’s activities or policies, because such negative impacts will ultimately harm the diversified investor’s portfolio. McRitchie concluded that by taking actions to only promote the value of the corporation but that arguably harmed society and the economy generally, the directors and officers had breached their fiduciary duties by harming Meta’s stockholders who are diversified investors.

Meta’s officers and directors moved to dismiss the suit for failure to state a claim on which relief can be granted, arguing that Meta’s directors and officers managed Meta for the benefit of Meta’s stockholders, as Delaware law requires. The Delaware Court of Chancery agreed with Meta’s directors and officers and dismissed the suit. In its opinion, the court reaffirmed that directors and officers of a Delaware corporation owe fiduciary duties to the corporation and its stockholders. The court’s decision focuses specifically on interpreting the phrase “its stockholders” under the DGCL and Delaware law. Following a detailed history of the development of Delaware and general corporation law, the court rejected McRitchie’s argument to change Delaware fiduciary law based on purported policies arising out of the Modern Portfolio Theory.  The court held that Delaware directors and officers “owe fiduciary duties to the corporation and its stockholders, meaning the class of stockholders who, in the aggregate, hold the residual claim to the value represented by the specific corporation that issued their shares, where the shares represent investments of presumptively permanent capital in a presumptively perpetual firm.” The decision makes explicit what it asserts was always implicitly understood by the “deep architecture” of Delaware corporate law: that Delaware fiduciary law recognizes a “single-firm model” in which directors and officers owe fiduciary duties to the stockholders of the specific corporation for which the directors and officers serve.

The decision at first glance stands for an otherwise uncontroversial legal axiom that has been consistent over time. The legal significance of the decision is that it is an explicit expression that Delaware operates under the single-firm model.  The opinion also makes clear that the plaintiff’s lawsuit is not the proper vehicle to address perceived economic and social issues or harms arising out of a board’s governance decisions. In quoting former Chief Justice Strine, the court notes that under Delaware law “directors must make stockholder welfare their sole end, and… other interests may be taken into consideration only as a means of promoting stockholder welfare.”

As the court also notes, the single-firm model and Delaware law are not at odds with corporations seeking to maximize value over the long-term, or corporations that consider how a decision affects stakeholders, the economy, or society. The Court recognizes that considering long-term value, stakeholder, society and the economy are likely sound business decisions that will enhance a firm’s value. But those decisions, if made, must be for the purpose of maximizing the value of the corporation for the benefit of its stockholders. Finally, the court also reminds that Delaware law is not so rigid as to prevent privately ordering a corporation’s priorities—whether to benefit diversified investors, other stakeholders, society or the economy—through a corporation’s founding and governing documents.

The McRitchie decision is a helpful reminder of the bedrock principles of fiduciary duty law for Delaware corporations as it provides a clear explanation of a director’s or officer’s legal duties.  Directors and officers (and those advising them) would be well-served by studying this decision particularly as it appears that they will continue to be asked to grapple with competing considerations regarding ESG, DEI policy or other social and economic issues.

Howard W. Robertson IV is an attorney at Landis Rath & Cobb LLP in Wilmington, Delaware, where he concentrates his practice in the areas of Corporate, Commercial and Bankruptcy Litigation. He can be reached via e-mail at robertson@lrclaw.com or phone at 302.467.4426.

Reprinted with permission from the June 19, 2024 issue of the Delaware Business Court Insider. © 2024 ALM Media Properties. Further duplication without permission is prohibited.