As I have noted in prior posts, conflicting political views about ESG-related issues have put corporate executives in the crosshairs, a dilemma that has caused some companies to try to avoid ESG issues altogether – a phenomenon that has been described as “greenhushing.” Among other concerns troubling corporate officials about the entire ESG debate is that some politicians have publicly raised the possibility that the act of taking ESG considerations into account in decision-making could itself constitute a breach of fiduciary duty.
A Disney shareholder has raised that very question concerning the company’s board and its public opposition to the Florida “Don’t Say Gay” legislation. In a very interesting June 27, 2023, opinion in which she denied the shareholder’s books and records request, Delaware Vice Chancellor Lori W. Will examined the interaction between board duties and corporate actions on social issues. Vice Chancellor Will’s opinion should be mandatory reading for anyone attempting to raise fiduciary duty concerns regarding a company’s ESG-related actions. A copy of Vice Chancellor Will’s opinion can be found here.
In February 2022, Florida’s House of Representatives passed House Bill 1557, which prohibits teachers from discussing topics related to sexual orientation and gender identify in kindergarten through third grade. Disney initially took no position on the bill, often referred to as the Don’t Say Gay bill, but facing pressure from employees and creative partners, ultimately came out publicly against the legislation. In retaliation, Florida Governor Ron DeSantis threatened to eliminate a special district from which Disney benefitted. Ultimately, the special district was preserved but DeSantis instead appointed hand selected designees to control the district board and take various actions against Disney.
Shortly after the bill was enacted, a longtime Disney shareholder presented Disney a request, pursuant to Section 220 of the Delaware General Corporation Law, for books and records pertaining to Disney’s public opposition to the bill. As the court later summarized, the shareholder contended that, in directing the company to publicly oppose the bill, Disney’s directors “either put their own beliefs ahead of their obligations to stockholders or flouted the risk of losing rights associated with the special district.”
Counsel for Disney and the shareholder met to discuss the books and records request and Disney provided the shareholder with various board-related documents. The shareholder, contending that Disney was obliged to provide further documents, filed a books and records action against the company in Delaware Chancery Court. Disney moved to dismiss the action.
The June 27 Opinion
In a 36-page opinion dated June 27, 2023, Vice Chancellor Will, following a trial on a documentary record, granted Disney’s motion and directed the entry of judgment in Disney’s favor. Vice Chancellor Will cited three reasons for denying the plaintiff shareholder’s books and records request.
First, Vice Chancellor Will concluded that the purposes the plaintiff articulated in the books and record demand were “pretextual” and “not the plaintiff’s own purposes.” The plaintiff, Vice Chancellor Will concluded, had been “solicited by counsel,” including a “public interest law firm” (the Thomas More Society, “a public interest law firm championing Life Family and Freedom”). The demand itself, Vice Chancellor Will said, was “lawyer-driven.” The Court specifically found that the plaintiff had only “limited and non-substantive involvement in the demand and the litigation.”
Second, Vice Chancellor Will further concluded that the plaintiff did not establish a proper purpose for inspection because he had not sufficiently alleged potential wrongdoing by the board. In reaching this conclusion, Vice Chancellor Will emphasized that the record reflected an actively involved and deliberative board. The record showed that the board had separately considered the company’s position on the legislation in a special board meeting held for that sole purpose and in a regularly scheduled board meeting, and that the company took a public stance, after deliberation, and in response to vocal criticism from the company’s employees and its creative partners. The board’s decision, the court said, did not come “at the expense of stockholders.” Rather it was motivated by an understanding that “a positive relationship with employees and creative partners is crucial to Disney’s success.”
In reviewing these considerations, Vice Chancellor Will said that “corporate speech on external policy matters brings both risks and opportunities.” The board, she said, is “empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).”
Crucially, Vice Chancellor Will also said that “it is not for this court to question rational judgments about how promoting non-stockholder interests – be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture – ultimately promote shareholder value.”
Indeed, she added, “a board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders – such as the workforce that drives a company’s profits — is ‘rationally related’ to building long-term value.” Vice Chancellor Will also found that there is “no indication that the directors suffered from disabling conflicts” or “evidence that the directors were grossly negligent or acted In bad faith.
Finally, Vice Chancellor Will concluded that Disney had already provide the plaintiff with “all necessary and essential documents.”
Public pressure from institutional investors and others for companies to take positions on ESG-related issues and political pressure from certain politicians accusing companies of engaging in “woke” posturing have put corporate executives in a “damned if you do and damned if you don’t” position. The risks company officials face as result include the risk of litigation, as this corporate shareholder’s action proves. There are other examples of this type of litigation. For example, as discussed here, an activist investor plaintiff brought an action against the Starbucks board alleging that the board’s actions in causing the company to adopt a Diversity, Equity, and Inclusion (DEI) policy breached their fiduciary duties.
In this context, Vice Chancellor Will’s opinion provides a refreshing perspective. Her opinion clarifies that it is entirely appropriate for the board to consider non-stockholder interests if they are rationally related to building long-term value. Her emphasis that a board’s judgment, when based on due deliberation and not based on improper factors, should not be second-guessed by a court, is particularly helpful.
To be sure, it was crucial for the board here to be able to demonstrate that it duly considered the appropriate action before the company publicly opposed the bill; that it was motivated by appropriate considerations rationally related to long-term value; and that there was no evidence of self-interest or other improper motivations. In the politically polarized world in which all companies must now act, well-advised boards will take these considerations into account before taking action on issues that could be controversial.
The fact is that politically motivated special interest groups like the one involved here (and in the Starbucks case I mentioned above) clearly intend to use litigation against corporate boards to try to advance the groups’ agendas. Boards must recognize that their actions will be scrutinized and take appropriate precautionary steps to guard against the potential litigation.