Feminist Judgments: Health Law Rewritten [1 ed.] 9781316516768, 9781009025010, 9781009015295

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feminist judgments: corporate law rewritten Corporate law has traditionally assumed that men organize business, men profit from it, and men bring cases in front of male judges when disputes arise. It overlooks or forgets that women are dealmakers, shareholders, stakeholders, and businesspeople too. This lack of inclusivity in corporate law has profound effects on all of society, not only on women’s lives and livelihoods. This volume takes up the challenge to imagine how corporate law might look if we valued not only women and other marginalized groups but also a feminist perspective emphasizing the importance of power dynamics, equity, community, and diversity in corporate law. Prominent lawyers and legal scholars rewrite foundational corporate law cases – and one contract – and provide accompanying commentary that situates each case or contract in context, explains the feminist theories applied, and explores the impact the rewritten case or contract might have had on the development of corporate law, business, and society. Anne M. Choike is Associate Clinical Professor of Law and Director of the Equitable Entrepreneurship & Innovation Law Clinic at Michigan State University College of Law. Usha R. Rodrigues is M. E. Kilpatrick Chair of Corporate Finance and Securities Law and University Professor at the University of Georgia School of Law. Kelli Alces Williams is Matthews & Hawkins Professor of Property and Associate Dean for Research at Florida State University College of Law.

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Feminist Judgments Series Editors Bridget J. Crawford Elisabeth Haub School of Law at Pace University Kathryn M. Stanchi University of Nevada, Las Vegas William S. Boyd School of Law Linda L. Berger University of Nevada, Las Vegas William S. Boyd School of Law

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Advisory Panel for Feminist Judgments Series

Kathryn Abrams, Herma Hill Kay Distinguished Professor of Law, University of California, Berkeley, School of Law Katharine T. Bartlett, A. Kenneth Pye Professor of Law, Duke University School of Law Mary Anne Case, Arnold I. Shure Professor of Law, the University of Chicago Law School April L. Cherry, Professor of Law, Cleveland-Marshall College of Law Margaret E. Johnson, Professor of Law, University of Baltimore School of Law Sonia Katyal, Chancellor’s Professor of Law, University of California, Berkeley, School of Law Nancy Leong, Associate Professor of Law, University of Denver Sturm College of Law Rachel Moran, Distinguished and Chancellor’s Professor of Law, University of California, Irvine School of Law. Angela Onwuachi-Willig, Dean & Ryan Roth Gallo & Ernest J. Gallo Professor of Law, Boston University School of Law. Nancy D. Polikoff, Professor of Law, American University Washington College of Law Daniel B. Rodriguez, Dean and Harold Washington Professor, Northwestern University Pritzker School of Law Susan Deller Ross, Professor of Law, Georgetown University Law Center

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Dean Spade, Associate Professor of Law, Seattle University School of Law Robin L. West, Frederick J. Haas Professor of Law and Philosophy, Georgetown University Law Center Verna L. Williams, Judge Joseph P. Kinneary Professor of Law, University of Cincinnati College of Law

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Feminist Judgments: Corporate Law Rewritten Edited by

ANNE M. CHOIKE Michigan State University College of Law

USHA R. RODRIGUES University of Georgia School of Law

KELLI ALCES WILLIAMS Florida State University

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Shaftesbury Road, Cambridge cb2 8ea, United Kingdom One Liberty Plaza, 20th Floor, New York, ny 10006, USA 477 Williamstown Road, Port Melbourne, vic 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 103 Penang Road, #05–06/07, Visioncrest Commercial, Singapore 238467 Cambridge University Press is part of Cambridge University Press & Assessment, a department of the University of Cambridge. We share the University’s mission to contribute to society through the pursuit of education, learning and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781316516768 doi: 10.1017/9781009025010 © Cambridge University Press & Assessment 2023 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press & Assessment. First published 2023 A catalogue record for this publication is available from the British Library A Cataloging-in-Publication data record for this book is available from the Library of Congress isbn 978-1-316-51676-8 Hardback isbn 978-1-009-01529-5 Paperback Cambridge University Press & Assessment has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

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For Jonathan and Zoë – KAW For GVR and our children – AMC For my parents, and for Nathan, Cara, Anna, and Ethan – URR

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Contents

Advisory Panel for Feminist Judgments: Corporate Law Rewritten Notes on Contributors Acknowledgments About the Cover Art Table of Cases part i introduction and overview 1

Introduction to the Feminist Judgments: Corporate Law Rewritten Project Anne M. Choike, Usha R. Rodrigues, and Kelli Alces Williams

part ii legal personality, identity, and limited liability of corporate entities 2

3

Citizens United v. Federal Election Commission, 558 U.S. 310 (2010) Commentary: Amy Sepinwall Judgment: Carliss Chatman Walkovszky v. Carlton, 223 N.E.2d 6 (N.Y. 1966) Commentary: Janis Sarra and Cheryl Wade Judgment: Poonam Puri and Ankita Gupta

part iii role and purpose of the corporation and corporate combinations in society 4

Dodge v. Ford Motor Company, 170 N.W. 668 (Mich. 1919) Commentary: Jena Martin Judgment: Barnali Choudhury ix

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3

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Merriam v. Demoulas Super Mkts., 985 N.E.2d 388 (Mass. 2013) Commentary: Sunitha Malepati Judgment: Alicia E. Plerhoples

6

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) Commentary: Afra Afsharipour Judgment: Christina Sautter

7

Agreement between Harvey Weinstein and The Weinstein Company Holdings LLC, as of October 20, 2015 Commentary: Alexandra Andhov Contract: Susan Chesler

part iv fiduciary duties in corporate governance

111

128

161

189

8

Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) Commentary: Christine Hurt Judgment: Dalia Tsuk Mitchell

191

9

Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) Commentary: Virginia Harper Ho Judgment: Lua Kamál Yuille

221

10

White v. Panic, 783 A.2d 543 (Del. 2001) Commentary: Kellye Testy Judgment: Sarah Haan

246

11

Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981) Commentary: Faith Stevelman Judgment: Jonathan W. Smith

266

12

In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006) Commentary: Laura Rosenbury Judgment: Hillary Sale

part v closely held businesses and other considerations regarding the composition of boards, management, and owners 13

Ringling Bros-Barnum & Bailey Combined Shows, Inc. v. Ringling, 53 A.2d 441 (Del. 1947) Commentary: Gabriel Rauterberg Judgment: Benjamin Means

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Donahue v. Rodd Electrotype, 328 N.E.2d 505 (Mass. 1975) Commentary: Jessica Kiser Judgment: Cindy Schipani

part vi protecting investors and potential investors in corporations

xi

351

371

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SEC v. W. J. Howey Co. et al., 328 U.S. 293 (1946) Commentary: Kristin Johnson and Carla Reyes Judgment: Theresa Gabaldon

373

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U.S. v. Chestman, 947 F.2d 551 (2d Cir., 1991) Commentary: Donna M. Nagy Judgment: Karen Woody

396

part vii from foundations to future directions 17

The Importance of Incorporating Feminist Perspectives in Corporate Law: Analyzing the Foundations and Future Directions of Feminist and Feminist-Inspired Corporate Law Scholarship Anne M. Choike, Martha Albertson Fineman, and Cheryl Wade

Index

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Advisory Panel for Feminist Judgments: Corporate Law Rewritten

Alina Ball, J.D., LL.M., Professor of Law, University of California, Hastings College of Law Lisa Fairfax, J.D., Presidential Professor of Law; Co-Director of the Institute for Law and Economics, University of Pennsylvania Carey Law School Theresa Gabaldon, J.D., Lyle T. Alverson Professor of Law; Director of Academic Programs and Administration, C-LEAF, George Washington University Law School Joan MacLeod Heminway, J.D., Rick Rose Distinguished Professor of Law and Interim Director of the Institute for Professional Leadership, University of Tennessee College of Law Kristin Johnson, J.D., Asa Griggs Candler Professor of Law, Emory University School of Law Elizabeth Pollman, J.D., Professor of Law; Co-Director of the Institute for Law and Economics, University of Pennsylvania Carey Law School Poonam Puri, LL.B., LL.M., Professor of Law, York University Osgoode Hall Law School Darren Rosenblum, J.D., Full Professor of Law, McGill University Faculty of Law Cindy Schipani, J.D., Merwin H. Waterman Collegiate Professor of Business Administration; Professor of Business Law, University of Michigan Ross School of Business xiii Published online by Cambridge University Press

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Advisory Panel for Feminist Judgments: Corporate Law Rewritten

Kellye Testy, J.D., President and CEO of the Law School Admission Council Cheryl Wade, J.D., Harold F. McNiece Professor of Law, St. John’s University School of Law Cynthia Williams, J.D., Emeritus Professor of Law, York University Osgoode Hall Law School

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Notes on Contributors

Afra Afsharipour is Senior Associate Dean for Academic Affairs and Professor of Law at the University of California, Davis School of Law. She is a researcher in the areas of comparative corporate law and governance, mergers and acquisitions, and transactional law. She was elected to the American Law Institute in 2019 and is a fellow of the American Bar Foundation. Professor Afsharipour received her J.D. from Columbia Law School, where she served as an articles editor for the Columbia Law Review and a submissions editor of the Columbia Journal of Gender and Law. She clerked on the US Court of Appeals for the Eleventh Circuit for the Honorable Rosemary Barkett. She thanks Evelynn Chun and Kerry Sherman for their research assistance. Alexandra Andhov is Associate Professor of Law at the University of Copenhagen Faculty of Law, where she leads the Legal Tech Lab. She was a 2019 Fulbright Research Scholar at Cornell Law School, where she focused on FinTech and Legal Tech innovations. Her main areas of research are corporate law, capital market law, corporate social responsibility, contract law, and technology. Within these areas, she focuses on how technology can help to change corporate and capital markets to become more sustainable, inclusive, and democratic. Dr. Andhov has published articles in numerous European and US law journals and reviews. She received her Doctor of Judicial Science from Central European University in 2015. Dr. Andhov has been Visiting Professor at the University of Torino and Copenhagen Business School. Carliss Chatman is Associate Professor of Law at the Washington and Lee University School of Law. Her primary scholarship interests are in the fields of corporate law, ethics, and civil procedure. Her scholarship is largely influenced by eleven years of legal practice in complex commercial litigation, mass tort litigation, and the representation of small and start-up businesses in the United States and the Kingdom of Saudi Arabia. Her current research is intersectional, with a focus on xv Published online by Cambridge University Press

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issues at the heart of commercial litigation: the interplay of business entities, government, and natural persons. Susan M. Chesler is Clinical Professor of Law at the Arizona State University Sandra Day O’Connor College of Law, where she teaches legal writing and contract drafting. Her research focuses on transactional drafting and applied legal storytelling. She received the 2020 Teresa Godwin Phelps Award for Scholarship in Legal Communication for her article From Clause A to Clause Z: Narrative Transportation and the Transactional Reader, published in the South Carolina Law Review. Professor Chesler received her J.D. from Brooklyn Law School. She dedicates her contribution to this book to her mother, the strongest woman she has ever known. Anne M. Choike is Associate Clinical Professor of Law and Director of the Equitable Entrepreneurship & Innovation Law Clinic at Michigan State University College of Law. She previously served as the Director of the Business and Community Law Clinic and Assistant Clinical Professor at Wayne State University Law School, and Clinical Fellow at the University of Michigan Law School Community and Economic Development Clinic. Her scholarship has addressed corporate governance, local government law, community development law, and tax-exempt organization law. Professor Choike received her J.D. from the University of Michigan Law School and her M.U.P. from the University of Michigan Taubman College of Architecture and Urban Planning. Barnali Choudhury is Professor of Law at Osgoode Hall Law School and the Director of the Nathanson Centre for Transnational Human Rights, Crime, and Security. Her research focuses on the intersection between economic and human rights issues. Previously she was a professor at University College London (UCL) and the Academic Director of the Global Governance Institute at UCL. She remains an Honorary Professor at UCL. She is the author of numerous books, including most recently Corporate Duties to the Public (Cambridge University Press). Prior to joining academia, she practiced international investment arbitration and corporate law. Martha Albertson Fineman is a Robert W. Woodruff Professor at Emory University School of Law, and previously served on the law faculties of the University of Wisconsin, Columbia University, and Cornell University. An internationally recognized law and society scholar, Professor Fineman is a leading authority on critical legal theory and feminist jurisprudence. At Emory, she continues to serve as the founding director of the Feminism and Legal Theory (FLT) Project, which was inaugurated in 1984. Professor Fineman continues to expand feminist jurisprudence with The Vulnerability and the Human Condition Initiative, which emerged from the FLT Project in 2008.

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Theresa Gabaldon is Professor of Law at the George Washington University Law School. Her areas of specialization are corporate and securities law, contract law, and professional responsibility. Her primary research interests are in the field of securities regulation. Before joining the faculty of George Washington University Law School in 1990, Professor Gabaldon was a member of the law faculties of the University of Colorado and the University of Arizona. Before entering academia, she was an associate and then a partner with the law firm Snell & Wilmer in Phoenix. She received her J.D. from Harvard University. Ankita Gupta is a lawyer based in Toronto. She has clerked at the Supreme Court of Canada for Chief Justice Richard Wagner and the Court of Appeal for Ontario for Justices Sarah E. Pepall, David M. Brown and Benjamin Zarnett. Ankita’s research interests include corporate governance, business and human issues and climate accountability. She holds a Bachelor of Business Administration from the University of Toronto, Juris Doctor from Osgoode Hall Law School and a Masters of Law from Harvard Law School. Sarah C. Haan is the Class of 1958 Uncas and Anne McThenia Professor of Law at the Washington and Lee University School of Law. She writes at the intersection of corporate law and democracy on subjects such as corporate governance, corporate political speech, and disclosure. Her scholarship has appeared in the Stanford Law Review, the Yale Law Journal, and other leading journals. Prior to joining academia, she was a lawyer at Davis Polk & Wardwell in New York, and she is a graduate of Yale College and Columbia Law School. She is the wife of a feminist husband, Andy, and the mother of two feminist sons, Nick and Owen. Many thanks are due to Benjamin Richie for research assistance. Professor Haan dedicates her rewritten opinion in White v. Panic to the memory of her mother, Wanda Haan. Virginia Harper Ho is Professor of Law at City University of Hong Kong where she teaches mergers & acquisitions, corporate finance, and company law courses. She is the co-founder and former Director of the Polsinelli Transactional Law Center at the University of Kansas School of Law, where she also served as the Associate Dean for International and Comparative Law Programs. Her research on corporate ESG disclosure, shareholder activism, comparative corporate governance, and China’s green finance reforms has appeared in leading law reviews and numerous edited volumes. She received her J.D. with honors from Harvard Law School. She is grateful for the opportunity to collaborate with her former University of Kansas colleague, Lua Kamál Yuille. Christine Hurt holds the inaugural Alan R. Bromberg Centennial Chair in Corporate, Business, Partnership, and Securities Law. Her teaching and research are focused on securities regulation, business associations, business entity taxation, microfinance, and torts. Professor Hurt joined the SMU Dedman School of Law faculty in 2022 after teaching at Brigham Young University, the University of Illinois,

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Marquette University, and the University of Houston. With Gordon Smith, Prof. Hurt is the lead author of Bromberg & Ribstein on Partnerships. Before entering academia in 1998, Professor Hurt practiced corporate law at Baker Botts, LLP and at Skadden, Arps, Slate, Meagher & Flom LLP. Kristin Johnson is the Asa Griggs Candler Professor of Law and Senior Associate Dean designate at the Emory University School of Law. Her scholarship focuses on systemic risk, risk management, corporate governance, cyber risk regulation, and innovative technologies – including distributed digital ledger and artificial intelligence technologies in financial markets. She is an elected member of the American Law Institute, a fellow of the American Bar Association, and Chair-Elect of the Securities Regulation Section of the Association of American Law Schools (AALS). She previously served as in-house counsel at JP Morgan and as an associate at Simpson, Thacher & Bartlett LLP, and she clerked for a federal court judge. She is a graduate of the University of Michigan Law School and Georgetown University. Jessica Kiser is Associate Professor at Gonzaga University School of Law and Director of the Gonzaga University Wine Institute. Her research focuses on intellectual property law, especially as it relates to emerging technologies, brand development, and contractual relationships. She teaches courses on property, business, and intellectual property law. Before joining academia, she was an associate in the Transactional Intellectual Property group at Kirkland & Ellis LLP. She received her J.D. from Columbia Law School, where she was the managing editor of the Columbia Journal of Law and the Arts and a Harlan Fiske Stone Scholar. Sunitha Malepati is Supervising Attorney and Clinical Teaching Fellow in the Social Enterprise and Non-Profit Clinic at the Georgetown University Law Center. Before moving to Georgetown in 2018, Sunitha was an associate in the Private Investment Funds Group at Squire Patton Boggs (US) LLP, where she focused her practice on advising investors about various alternative investment funds, including private equity, real estate, hedge, and venture capital funds. She also advised on the structuring and formation of various types of funds. Sunitha received her J.D. magna cum laude and Order of the Coif from American University Washington College of Law in 2013. During law school, Sunitha served on the editorial board of the Journal of Gender, Social Policy and the Law and was a student attorney in the Women and the Law Clinic. Prior to attending law school, she was the Chief of Staff at Living Cities, a philanthropic collaborative of foundations and financial institutions focused on developing and investing in initiatives that improve the lives of low-income people and the cities where they live. Jena Martin is a Professor of Law at West Virginia University School of Law. Her research focuses on the intersection of securities regulation and human rights; she also studies how communities view corporate impacts, using that work to analyze new governance and regulatory frameworks. She has written extensively on these

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subjects and presented her research at the United Nations. Before entering academia, she practiced law for ten years, including as senior counsel at the US Securities and Exchange Commission (Enforcement) and as an associate with Ross, Dixon & Bell. She received her J.D. from Howard University in 1997 and her LL.M. in International Law from the University of Texas in 2006. Benjamin Means is Professor of Law and the John T. Campbell Chair in Business and Professional Ethics at the University of South Carolina School of Law. His research focuses on corporate governance and family-owned businesses. He is a member and past Chair of the executive committee for the AALS Section on Agency, Partnership, LLCs, and Unincorporated Business Associations. Before entering academia, he clerked for the Honorable Rosemary S. Pooler of the US Court of Appeals for the Second Circuit and practiced law at Davis Polk & Wardwell LLP and Satterlee Stephens LLP. Dalia Tsuk Mitchell is Professor of Law at the George Washington University School of Law. Her scholarship focuses on legal history. Her book titled Architect of Justice: Felix S. Cohen and the Founding of American Legal Pluralism won the American Historical Association’s Littleton-Griswold Prize. Her journal publications critically examine the development of modern corporate law. She is the author of a casebook, Corporations, and is working on a book exploring the history of corporate law and theory. Professor Mitchell received her LL.B. from Tel Aviv University, her M.Phil from Yale University, and her S.J.D. from Harvard University. Donna M. Nagy is the C. Ben Dutton Professor of Law at the Indiana University Maurer School of Law, where she also previously served as Executive Associate Dean. Her scholarship focuses on securities litigation. She is a member of the American Law Institute and served a three-year term on the National Adjudicatory Council of the Financial Industry Regulatory Authority. Prior to beginning her teaching career in 1994, Professor Nagy was an associate with Debevoise & Plimpton in Washington, DC. She received her B.A. from Vassar College and her J.D. from New York University Law School, where she was an articles editor and was elected to the Order of the Coif. Alicia E. Plerhoples is Professor of Law and Director of the Social Enterprise and Non-Profit Clinic at the Georgetown University Law Center. Her expertise is in social enterprise law, non-profit governance, and corporate ESG strategy. Prior to entering academia, she practiced with DLA Piper and Cooley LLP. Plerhoples received her J.D. from Yale Law School, her M.P.A. from Princeton University’s School of Public and International Affairs, and her A.B. cum laude from Harvard College. Plerhoples thanks Cheyanne Williams (Georgetown Law Class of 2022) and Georgetown reference librarian Itunu Sofidiya for their research assistance with the rewritten opinion in this volume.

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Poonam Puri is a Professor of Law at Osgoode Hall Law School. Her research interests include corporate law, securities law and corporate governance, and she has deep expertise on the role of the board, directors’ duties, shareholder activism and corporate purpose and responsibility. Professor Puri has been recognized with several prestigious awards including the Attorney General of Ontario’s Mundell Medal for excellence in legal writing, the Law Society of Ontario’s Medal for exemplary contributions to the legal profession and the Royal Society of Canada’s Yvan Allaire Medal for excellence and contributions to governance. Professor Puri received her Bachelor of Laws from the University of Toronto and her LL.M. from Harvard Law School. Gabriel Rauterberg is Professor at the University of Michigan Law School, where he teaches contracts, business organizations, and capital market regulation. His research interests include the structure of financial markets, corporate governance, and the empirical study of contracts. He is the co-author of three recent books: The New Stock Market: Law, Economics, and Policy (with Merritt Fox and Larry Glosten), which addresses contemporary equity market structure; Contracts: Law, Theory, and Practice (with Daniel Markovits), a contract casebook; and Corporations in 100 Pages (with Holger Spamann and Scott Hirst), a primer on corporate law. He thanks the co-editors of this volume, especially his beloved wife Anne M. Choike, for their extraordinary efforts to enrich the study of corporate law. He also thanks Benjamin Means and the attendees of the workshop on this book. Carla Reyes is Assistant Professor of Law at Southern Methodist University Dedman School of Law. Her research focuses on the intersection of emerging technology and business law. Professor Reyes currently serves as the research director for the Uniform Law Commission’s Technology Committee, as an expert member of two UNIDROIT working groups related to emerging technology, and as a research associate at the University College London Center for Blockchain Technologies. She was previously an assistant professor and Director of the Center for Law, Technology, and Innovation at Michigan State University College of Law and was Faculty Associate at the Berkman Klein Center for Internet and Society at Harvard University. Professor Reyes earned her J.D. magna cum laude and an LL.M. from Duke University School of Law and an M.P.P. from the Duke University Sanford School of Public Policy. Usha R. Rodrigues serves as the M. E. Kilpatrick Chair of Corporate Finance and Securities Law at the University of Georgia School of Law. She is a University Professor, an honor bestowed on no more than one university faculty member per year. A member of the American Law Institute, she has chaired the Executive Committee of the AALS Business Associations Section. She earned an M.A. in comparative literature the University of Wisconsin and her J.D. from the University of Virginia, where she served as editor-in-chief of the Virginia Law Review. She

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served as a judicial law clerk to the Honorable Thomas L. Ambro of the US Court of Appeals for the Third Circuit. Laura Rosenbury is Dean and the Levin, Mabie, and Levin Professor of Law at the University of Florida Levin College of Law. She is also an affiliate professor at the Center for Women’s Studies and Gender Research at the University of Florida. Her research and teaching focus on feminist legal theory and the law of private relationships, exploring how law and social norms interact in family law, employment discrimination law, and property law. She is co-author of the Feminist Jurisprudence casebook and has published articles in the Yale Law Journal, Michigan Law Review, and University of Pennsylvania Law Review, among others. Dean Rosenbury also teaches courses on negotiation, non-adversarial communication, team building, and leadership for practicing lawyers and other executives. Hillary Sale is Associate Dean for Strategy as well as the Agnes Williams Sesquicentennial Professor of Law and Professor of Management at Georgetown University Law Center. She is an award-winning scholar and teacher and is an expert in corporate governance and leadership. She is a member of the FINRA Board of Governors, where she chairs the Regulatory Policy Committee and serves on the Executive, Nominating and Governance, Compensation, and Regulatory Operations committees. She is also a member of the Advisory Board of Foundation Press and the board of DirectWomen, a nonprofit focused on increasing the presence of women on public company boards. Hillary graduated magna cum laude from Harvard Law School and holds a master’s degree in economics from Boston University, where she also completed her B.A., summa cum laude. For research assistance and comments on the draft, she thanks Hollie Chenault, Claire Creighton, Samantha Glazer, Olivia Brown, and Jing Xu as well as Dean Laura Rosenbury and Professors Anne M. Choike, Lisa Fairfax, Linda Berger, and Poonam Puri. Janis Sarra is Professor of Law at the University of British Columbia Peter A. Allard School of Law and is the founding Director of the National Centre for Business Law. Her research and teaching interests are in the areas of corporate finance, banking law, corporate governance, securities law, contracts, commercial insolvency law, and law and economics. She previously taught at the University of Toronto Faculty of Law and the Ryerson University School of Business. She holds five degrees from the University of Toronto in political science, economics, and law, including her bachelor of laws, master’s degree, LL.M., and doctor of judicial science. Christina Sautter is the Cynthia Felder Fayard Professor of Law, the Byron R. Kantrow Professor of Law, and the Vinson and Elkins Professor of Law at the Louisiana State University Paul M. Hebert Law Center. Her scholarship focuses on mergers and acquisitions – particularly the sale process of public companies – and

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on cutting-edge corporate governance issues. She co-authored Mergers and Acquisitions Law, published by West Academic Publishing. Her research has been published in the Research Handbook on Mergers and Acquisitions and numerous law reviews. Professor Sautter practiced in the Mergers and Acquisitions Group at Shearman & Sterling LLP and clerked for the late Honorable H. Emory Widener Jr. of the US Court of Appeals for the Fourth Circuit. She thanks Marina Speligene for her research assistance. Cindy Schipani is the Merwin H. Waterman Collegiate Professor of Business Administration and Professor of Business Law at the University of Michigan Ross School of Business. She received her J.D. from the University of Chicago School of Law. She has held visiting appointments at law and business schools throughout Europe, Asia, and Australia. Professor Schipani’s primary research interests are in corporate governance, with a focus on the relationships among directors, officers, shareholders, and other stakeholders, as well as pathways for women to obtain positions of organizational leadership. Professor Schipani has published more than forty journal articles and a book and has received numerous awards for her scholarship. Amy Sepinwall is Associate Professor of Legal Studies and Business Ethics at the Wharton School of Business at the University of Pennsylvania. She trained in law and philosophy. Her scholarship focuses on corporate constitutional rights, gender and racial justice, individual and collective responsibility for corporate and financial wrongdoing, and law and religion. Her contribution to this volume benefited from the exceptionally helpful feedback and comments of Usha R. Rodrigues, Anne M. Choike, and the other Feminist Judgments authors. Andrew Spangler provided excellent research assistance, and the Wharton Dean’s Fund provided generous support. Jonathan W. Smith is Assistant Professor of Practice and Director of the Entrepreneurship Clinic at the Washington University in St. Louis School of Law. His teaching and research focus on business associations, entrepreneurship, venture capital, contract theory and design, and clinical legal education. Before joining the faculty at Washington University, Professor Smith practiced corporate law at Fenwick & West LLP and municipal law as an in-house city attorney with the City of Redwood City, CA. He received his J.D. from Stanford University Law School and his Ph.D. in English from the University of Michigan, Ann Arbor. Faith Stevelman is Professor of Law at New York Law School. Her teaching and scholarly interests focus primarily on corporate governance and securities law. Her recent research articles have examined globalization, business, and human rights; financial regulation after the financial crisis of 2008; and globalization and corporate social responsibility. Before joining the New York Law School faculty, Professor Stevelman spent four years as a transactional lawyer in Fried Frank Harris Shriver &

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Jacobson’s New York office. She received her J.D. from New York University School of Law in 1989. Prior to law school, Professor Stevelman was a Ph.D. candidate at Yale studying early modern history – a program she credits with awakening her interest in the connection between economic, legal, and political systems and their impact on the broader culture. Kellye Testy is President and CEO of the Law School Admission Council (LSAC). She was named the nation’s second most influential leader in legal education in 2017. Dean Testy joined LSAC after leading the University of Washington School of Law for eight years as the school’s first woman to serve as dean. Dean Testy also served as a professor and dean of Seattle University’s School of Law and as President of the AALS in 2016. She is a member of the American Law Institute and has served on the Board of Governors of the Society of American Law Teachers and several committees and initiatives of the ABA Section on Legal Education, among many other boards and organizations. Dean Testy is a first-generation college graduate who is proud to have obtained both her undergraduate degree (in journalism) and her law degree from Indiana University in Bloomington, her hometown. Cheryl Wade is Dean Harold F. McNiece Professor of Law at St. John’s University School of Law. Her research focuses on corporate law, securities, education law, the intersection of race and business, and corporate social responsibility. Professor Wade is also a member of the American Law Institute. Prior to joining the faculty at St. John’s Law School, Professor Wade served on the faculty at Hofstra Law School and was Visiting Professor of Law at Washington and Lee School of Law; she also taught “law and race” at the University of New South Wales in Sydney, Australia. Prior to entering academia, Professor Wade was an associate in the corporate department of Paul, Weiss, Rifkind, Wharton & Garrison. She received her J.D. with distinction from the Hofstra University School of Law. Kelli Alces Williams is Matthews and Hawkins Professor of Property and Associate Dean for Research at the Florida State University College of Law. Her scholarship has addressed corporate governance, fiduciary duties, trust, and consumer expectations in sophisticated markets. Professor Williams has been Visiting Professor at the University of Chicago Law School, the George Mason University School of Law, and the University of Iowa College of Law. Professor Williams received her J.D., magna cum laude, from the University of Illinois College of Law. Karen Woody is Associate Professor of Law at the Washington and Lee University School of Law. Her scholarship focuses on financial regulation, securities law, and white-collar crime. Professor Woody previously was a member of the Business Law and Ethics faculty at Indiana University’s Kelley School of Business. She has taught courses at Georgetown University Law Center, George Washington Law School, and American University Washington College of Law. Professor Woody received her LL.M. with distinction in Securities and Financial Regulation from

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Georgetown University Law Center and her J.D. from American University Washington College of Law. Lua Kamál Yuille is an interdisciplinary scholar whose current work engages property theory, business law, heterodox economics, critical pedagogy, and group identity. Professor Yuille’s diverse professional praxis – as a federal law clerk, Latin Americanist socio-economic development lawyer, Wall Street corporate transactional attorney, public school teacher, and pro bono immigration litigation practitioner – provides a strong foundation for her engaged scholarship on a wide range of questions. She holds a dual appointment at Northeastern University in the School of Law and the D’Amore-McKim School of Business and is affiliated with the University of Kansas School of Law.

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Acknowledgments

The authors and editors thank Cambridge University Press for its support of this volume, which is part of the series comprising the larger US Feminist Judgments project. The project began with the publication of Feminist Judgments: Rewritten Opinions of the United States Supreme Court (2016). We also acknowledge our intellectual indebtedness to the women who created the Women’s Court of Canada and the UK Feminist Judgments Project, which inspired the US Feminist Judgments project and other similar initiatives worldwide. We express our gratitude to Kathryn M. Stanchi, Linda L. Berger, and Bridget J. Crawford for their leadership, guidance, and commitment. We are also grateful to the members of our Advisory Panel for their encouragement and expertise, as well as our editors Jackie Grant and Gemma Smith at Cambridge University Press for their assistance. Anne M. Choike is grateful for the support of the University of Michigan Law School, where this project began while she was a Clinical Fellow, and Wayne State University Law School, where she substantially completed her work on this project with Wayne Law’s financial and other support. She also thanks colleagues at Wayne State University Law School, especially Sabrina Balgamwalla, for their insightful comments on Chapters 1 and 17; Lauren Ayoub, Meredith Banks, Hank Ballout, Ki Lee O’Brien, and Jacob Stropes for their research assistance on the rewritten opinions and commentaries; Rebecca Sereno, Shaunté Wilcher, and Ki Lee O’Brien for their research assistance for Chapter 17; Athar Fawaz, Katelyn Maddock, and Jacob Stropes for their research assistance for Chapter 1; the Wayne State University and University of Michigan law libraries for their overall research assistance; and Min Jian Huang, Ryan Doss and Olive Hyman for their overall staff administrative support. Usha R. Rodrigues thanks the University of Georgia School of Law Library for help with the research and Sarah Argodale Burns for her help with editing and support. Kelli Alces Williams thanks Ryan Roy for research assistance and the reference librarians – particularly Elizabeth xxv Published online by Cambridge University Press

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Acknowledgments

Clifford Farrell – at the Florida State University College of Law Research Center for their help with citation checking. She also thanks Dean Erin O’Hara O’Connor for her support of the project and her willingness to host a project conference at FSU before COVID changed those plans. We all thank Sarah Argodale Burns of the University of Georgia School of Law for indexing the volume and Sam Gowen for compiling the volume. Our colleagues, students, friends, and family members also supported our work on this volume. Anne M. Choike is especially grateful to Nicole Appleberry, Lisa Fairfax, Joan MacLeod Heminway, Kellye Testy, and Cheryl Wade for their inspiration and support during this volume’s early stages; Usha R. Rodrigues and Kelli Alces Williams for their dedication to the volume and mentorship; and Gabriel Rauterberg for his unwavering love. Usha R. Rodrigues thanks Anne M. Choike and Kelli Alces Williams for their patience, good humor, and wisdom and Nathan Flath for his support and love. Kelli Alces Williams thanks Usha R. Rodrigues and Anne M. Choike for their tireless work on the volume and Jonathan Lentine Williams for his loving support and patience. We all thank the volume’s contributors for bringing this project to life with their ideas, enthusiasm, engagement, and extensive efforts.

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About the Cover Art

Symbolizing feminist defiance of patriarchal institutions, a fearless girl – Anna, the daughter of one of this volume’s co-editors (Usha R. Rodrigues) – is photographed by Jason Thrasher in front of an office building in Athens, Georgia. She stands in a “power pose” posture popularized by many female and female-identifying people – from Wonder Woman, to Amy Cuddy’s popular TED talk viewed by millions, to Fearless Girl (2017), a bronze statue by Kristen Visbal, an Uruguayan-born American sculptor living and working in Lewes, Delaware. Fearless Girl is particularly relevant to this volume’s topic, as she was commissioned by State Street Global Advisors to encourage corporations to put more women on their boards. When she first appeared on the eve of International Women’s Day in March 2017, Fearless Girl stood facing down Charging Bull (1989), another bronze statue in New York City’s Bowling Green public park, which had been created by the Italian-born American sculptor Arturo Di Modica. Yet, even though Fearless Girl was installed in the same manner as Di Modica had surreptitiously installed Charging Bull – both overnight, both without permission – the sculptor of Charging Bull cried foul. Charging Bull’s sculptor accused the 50-inch high, 250-pound Fearless Girl of infringing his artist rights and undermining the power that he believed the 16-foot long, 3-ton Charging Bull came to symbolize (even though he originally created Charging Bull with a different meaning, to honor the stock market’s resilience after Black Monday in 1987). Following this controversy, the New York Stock Exchange (NYSE) later welcomed Fearless Girl to her permanent location in front of the famous financial institution — ironically, the original location of Charging Bull before the NYSE hauled it away. Fearless Girl remains a popular landmark there (for now), and she is frequently photographed with and adorned by her fans (including sometimes wearing a lace collar similar to those worn by some women justices and judges). As of the date of this volume’s publication, Fearless Girl is hotly contested – not only as a symbol of “fake corporate feminism” (on account of allegations against xxvii Published online by Cambridge University Press

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About the Cover Art

State Street Global Advisors of systematic discrimination against female and Black employees), but also with respect to the rights in the statute itself, its trademark, and beyond. However, fearless female and female-identifying people striking power poses as they challenge institutional oppression are universal and timeless. The composition of this volume’s cover is intentionally distinguished and abstracted from Fearless Girl’s placement in front of the NYSE, in order to represent the farreaching impact that we hope this volume will have in empowering fearlessness in corporate law and corporations worldwide.

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Table of Cases

Anderson v. Abbott (1944) ............................................................. 83, 85 Aronson v. Lewis (1984) ............................................................ 249, 259 Austin v. Michigan Chamber of Commerce (1990) ............................... 46, 48 Bank of United States v. Dandridge (1827) ............................................. 52 Barnes v. Andrews (1924) ................................................................. 274 Beatty v. Guggenheim Expl. Co. (1919) ............................................... 219 Carpenter v. United States (1987) ................................................ 409, 413 Chiarella v. United States (1980) ...................................... 396, 399, 408, 412 Crook v. Crook (1887) .................................................................... 220 Dodge v. Ford Motor Co. (1919) ..................................................... 392–3 Donahue v. Rodd Electrotype Co. (1975)....................................... 116, 123–5 Donoghue v. Stevenson (1932)............................................................ 63 General Films, Inc. v. Sanco General Manufacturing Corp. (1977)............... 274 Globe Woolen Co. v. Utica Gas and Electric Co. (1918) ............................ 214 Graham v. Allis-Chalmers Manufacturing Co. (1963)....................... 249, 263–4 Holmes v. Lerner (1998) ............................................................ 200, 202 In re American Apparel, Inc. Shareholder Deriv. Litig. (2012) ..................... 250 In re Caremark International, Inc. Deriv. Litig. (1996) ...... 168, 249, 264, 276, 279 In re Liberty Tax, Inc. Stockholder Litig. (2019)...................................... 252 In re Wynn Resorts, Ltd. Deriv. Litig. (2019) .......................................... 251 Lochner v. New York (1905) .............................................................. 215 McConnell v. FEC (2003) ......................................................... 46, 48–9 Meinhard v. Salmon (1928).............................................................. 365 Michoud v. Girod (1846) ................................................................. 214 Minton v. Cavaney (1961) ............................................................. 86–7 Mitchell v. Reed (1874).................................................................... 213 Moran v. Household Int’l, Inc. (1985)............................................. 129, 152 Mull v. Colt Co., Inc. (1959) ........................................................... 81–2 Munson v. Syracuse, Geneva & Corning R.R. Co. (1886) .......................... 216 People v. Hotchkiss (1909) ............................................................ 105–6 Reed v. Reed (1971) ........................................................................ 58 Retail Wholesale & Department Store Union Local 338 Retirement Fund v. HewlettPackard Co. (2017)..................................................................... 250 xxix Published online by Cambridge University Press

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Revlon v. MacAndrews & Forbes Holdings, Inc. (1986) ............................. 228 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (1986) ....................... 129 Robinson v. Chase Maintenance Corp. (1959) ......................................... 82 Robinson v. Jewett (1889) ................................................................. 213 Santa Clara County v. Southern Pacific Railroad Co. (1886) ...................... 56 SEC v. Bailey (1941) ................................................................... 378–9 SEC v. Howey (1945) .................................................................. 378–9 SEC v. Yun (2003)........................................................................ 401 State v. Gopher Tire & Rubber Co. (1920) ............................................ 387 Steinway v. Steinway & Sons (1896) ................................................ 105–6 Stone v. Ritter (2006) ..................................................................... 279 Taunton v. Royal Insurance Co. (1864) ............................................. 105–6 Teller v. Clear Service Co. (1958) ........................................................ 83 Thayer v. Leggett (1920)............................................................... 213–14 Trustees of Dartmouth College v. Woodward (1819) ....................... 51, 56–7, 60 United States v. O’Hagan (1997) ................................................. 396, 402 United States v. Reed (1985)............................................................. 410 Unocal Corp. v. Mesa Petroleum Co. (1985).......... 129, 132, 148, 150, 152, 156, 159 WarWdell v. R.R. Co. (1880), 214endt v. Fischer (1926) ............................. 216 Wilkes v. Springside Nursing Home, Inc. (1976) ..................................... 353 Zucker v. Andreessen (2012) .............................................................. 250

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Introduction and Overview

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https://doi.org/10.1017/9781009025010.001 Published online by Cambridge University Press

1 Introduction to the Feminist Judgments: Corporate Law Rewritten Project anne m. choike, usha r. rodrigues, and kelli alces williams

The modern American public corporation is at the center of various forms of inequality in our society. Large corporations employ over half of the American workforce,1 and the majority of those large corporations have settled or lost at least one employment discrimination or sexual harassment claim in the last 21 years.2 They provide the vast majority of products we use and so determine the quality of those products, and they set prices that influence what tools of upward mobility are available to what portions of society. They affect our physical environments through pollution, conservation efforts, and the use of natural resources. Deleterious environmental impacts tend to be concentrated in poorer communities.3 The ubiquity of corporate influence makes corporate law a prime starting point for an intersectional analysis that considers the struggles and injuries corporations impose on underresourced or marginalized populations, including people whose gender expression is non-male,4 people who are members of racial and ethnic minority groups, and people who are working class and poor. 1

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Andrew Lundeen & Kyle Pomerleau, Less than One Percent of Businesses Employ Half of the Private Sector Workforce, Tax Found. (Nov. 26, 2014), https://taxfoundation.org/less-one-per cent-businesses-employ-half-private-sector-workforce/. Philip Mattera, Big Business Bias: Employment Discrimination and Sexual Harassment at Large Corporations, Good Jobs First (Jan. 2019), https://www.goodjobsfirst.org/sites/default/ files/docs/pdfs/BigBusinessBias.pdf. Cheryl Katz, People in Poor Neighborhoods Breathe More Hazardous Particles, Sci. Am. (Nov. 1, 2012), https://www.scientificamerican.com/article/people-poor-neighborhoods-breatemore-hazardous-particles/ (“Tiny particles of air pollution contain more hazardous ingredients in nonwhite and low-income communities than in affluent white ones. . .”). Corporate law has assumed “cisgender man” as a default and “cisgender woman” as implicitly the other. Many feminists have done the same, intentionally or not. This assumption has at times consequently discounted the experience of transgender women and other non-cisgender non-male people across the full gender spectrum, including nonbinary gender. We acknowledge the complex network of identities that exist outside of the cisgender binary. However, given the challenges of concisely describing this reality, throughout this chapter we use

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Introduction

In this introductory chapter, the editors provide an overview of corporate law and of this volume and its relationship to the global and US Feminist Judgments Project. We explain how cases were selected and the parameters provided to authors and commentators. We identify common themes, feminist theories, and methods in the rewritten opinions and the contract in this volume, and we situate this work in the context of larger concerns about gender equality and justice. This chapter concludes by briefly suggesting some reasons for introducing these critical concepts into doctrinal, clinical, and practicum courses, as well as some pedagogical opportunities for doing so.

A. INTRODUCTION

Corporations affect all of us every day, and corporate and securities laws set the terms upon which corporations accept responsibility for the influence they have on society. Corporate law defines the purposes of corporations and thus determines whether – and to what extent – businesses can or must consider the costs their decisions may impose on employees, consumers, communities, and the environment. It also sets the standards by which corporate actors are monitored and it defines who is primarily responsible for corporate activity. Corporate activity affects the domestic and global economies and determines the value of the retirement savings of just about everyone who has them. If we want corporations to behave differently, to be good citizens, to be responsible stewards of retirement savings, then we must look to corporate law for protection and accountability. Corporate and securities laws are the filters through which corporations interact with and affect the global economy and citizens going about their daily lives. The effects that corporations have on global well-being reach into every level of our society. Although corporations are a legal abstraction, and corporate law thus may appear neutral, corporate law decisions implicitly involve issues relating to race, gender, and class, because they involve corporate officers, directors, and shareholders – most of whom are white and male and relatively affluent. Yet, most business actors fail to consider the gendered implications of corporate law and governance. This is likely attributable to the fact that in US culture generally and its corporate culture especially, maleness is the default, the presumed standard by which most things are measured. Very few corporate legal decisions directly address women, people of color, or other disadvantaged groups as parties in interest. Yet those decisions can profoundly affect these groups. A dominant organizing principle of corporate law is the shareholder primacy norm, which requires that corporate managers make decisions primarily for the “woman” and “women” as a metonym or shorthand for the complex network of identies that exist outside of the cisgender male identity that has for so long dominated corporate law and corporate scholarship.

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benefit of shareholders rather than other corporate stakeholders. Hence, “[a] business corporation is organized and carried on primarily for the profit of the stockholders.”5 The shareholder primacy norm itself is all that the law requires and, as applied, that law is capacious enough to allow corporate actors to consider the effects of their decisions on stakeholders like employees, the larger community, and the environment – as long as the ultimate goal of the decision is to enhance shareholder value in some way. This legal requirement of shareholder primacy is a somewhat vexed question on its own terms. The desire for a corporate form that can serve other ends besides shareholders has led to forms of business organization such as the benefit corporation, a for-profit corporation that is required to consider the societal impact of its business. Some scholars, commentators, and businesspeople have transmuted the shareholder primacy norm into a shareholder wealth maximization imperative – that the duty of the corporation is to to maximize shareholder value, even sometimes shortterm shareholder value, to the exclusion of other corporate constituents. The law manifestly does not require maximizing short-term shareholder wealth except in specific limited circumstances.6 Nonetheless, the maximization imperative and its less onerous cousin, the shareholder primacy norm, either encourage or – in strong form – actually force wealthy, mostly white, mostly male corporate officers and directors to focus exclusively on corporate outcomes that largely produce benefits for the few and privileged. Many Americans do not own stock in corporations, even in retirement savings. Yet corporate decisions aimed at maximizing profit affect all of us by determining the health of our economy, the availability of credit, the availability of safe and affordable products, the availability of jobs and a living wage, and the sustainability of a healthy environment. Corporations have long been governed by and for the benefit of a privileged few, to the detriment of women, children, racial minorities, and low-income workers. Corporate law and governance have the capacity to address the reality of the significant role that corporations play in the lives of people beyond the director or shareholder classes. Even when corporate leaders are not white males, they tend to be wealthy, and they may be blind to the many ways in which corporations touch all of our lives. Because of the outsized role that corporations play in society and in the well-being of virtually all of our population, this book and its themes should resonate with anyone interested in justice and prosperity in our society. The purpose of this book is to broaden to corporate law the inquiry begun with the original volume in the US Feminist Judgments Series, Feminist Judgments:

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Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919). See, e.g., Revlon; In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013); LC Capital Master Fund v. James, 990 A.2d 435 (Del. Ch. 2010); Equity-Linked Inv’s v. Adams, 705 A.2d 1040 (Del. Ch. 1997); Katz v. Oak Indus., 508 A.2d 873 (Del. Ch. 1986).

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Rewritten Opinions of the United States Supreme Court (Kathryn M. Stanchi, Linda L. Berger & Bridget J. Crawford eds., 2016). The same inquiry continued with other books in the series, such as Rewritten Tax Opinions (Bridget J. Crawford & Anthony C. Infanti eds., 2017); Reproductive Justice Rewritten (Kimberly M. Mutcherson ed., 2020); Family Law Opinions Rewritten (Rachel Rebouché ed., 2020); Rewritten Employment Discrimination Opinions (Ann C. McGinley & Nicole Buonocore Porter eds., 2020); Rewritten Trusts and Estates Opinions (Carla Spivack, Browne C. Lewis & Deborah S. Gordon eds., 2020); Rewritten Torts Opinions (Lucinda Finley & Martha Chamallas eds., 2020), and Rewritten Property Opinions (Eloisa C. Rodriguez-Dod & Elena Maria Marty-Nelson eds., 2021). Specifically, the task for this volume’s contributors is to engage explicitly with feminist issues – gender, privilege and oppression, and intersectionality, among others – in corporate law decisions, where such issues are relevant but typically overlooked. Most people understand that feminist reasoning has tremendous potential to affect, for example, the law of employment discrimination, sexual harassment, and reproductive rights. On the other hand, the challenge for the contributors to this volume on rewritten corporate law is that the question posed in the inaugural volume of the Feminist Judgments Series – “What would United States Supreme Court opinions look like if key decisions on gender issues were written with a feminist perspective?” – does not apply in a straightforward manner in the corporate law context. Corporate law decisions rarely address directly the kinds of gender equity issues that can be seen in a superficial reading, because women are largely absent from the conflicts those decisions resolve. Because women are not key players in many of the decisions, it is easy to overlook the effect the law will have on women. This volume seeks to remedy that oversight. In this chapter, we offer two organizational perspectives on the opinions and the contract in this volume. One introduces how the authors of the rewritten opinions and contract use feminist legal methods, especially the six “moves” of feminist critical legal analysis developed by feminist scholar Martha Chamallas; the other perspective presents the rewritten texts by corporate law topic. Although we ultimately chose to organize the cases using the latter approach (as we anticipate that a primary use of this text will take place alongside traditional corporate law casebooks in introductory corporate law survey courses), we nonetheless wanted to provide multiple entry points to the volume to make it accessible to readers new to feminism, corporate law, or both areas. B. WHAT IS CORPORATE LAW?

Corporate law governs a certain form of business organization. It establishes legal entities for conducting economic, social, and/or cultural activity, and it provides the

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rules governing the management of those legal entities.7 While the principal focus of corporate law often centers on the investor-owned corporation, other organizational forms are also commonplace and encounter challenges similar to those of investor-owned corporations. Therefore, the terms “corporate law” and “corporation” as used in this introduction encompass not only the body of law governing investor-owned corporations, but also other legal entities (for example, general partnerships; limited partnerships; limited liability companies; trusts; nonprofit corporations; cooperative corporations; most recently, benefit corporations; and even special purpose governments) that share certain fundamental characteristics. These basic characteristics are legal personality (recognizing an entity as a separate person in the eyes of the law) and, relatedly, “entity shielding” (recognizing an entity’s assets as being distinct from those of the entity’s owners and beyond the reach of an owner’s creditors). In addition to sharing the two basic characteristics of investor-owned firms, these other organizational forms often also encounter similar challenges in defining and shaping the relationships among corporate constituencies. In setting forth the rules governing corporations, corporate law has a principal function of mediating relationships among the three categories of corporate constituencies.8 These constituencies can be roughly grouped into (1) the owners of the corporation, if any (shareholders); (2) the managers of the corporation (officers and, if any, directors – who may be the same individuals in a closely held entity, or separate from the owners in a widely held public corporation); and (3) non-manager, non-shareholder constituencies, such as creditors or employees of the corporation. As corporate law has developed, it has primarily focused on the first two groups.9 Beginning in the 1980s, the law and economics movement gained ascendency in the United States. Law and economics offered a radically privatized version of corporate law and corporate governance – which refers to the medley of the principles, rules, and norms that govern relationships among corporate officers, directors, and shareholders. The shareholder primacy norm was thus converted into an imperative to treat the corporation as a “contractual arrangement for maximizing short-term share price in a laissez faire global marketplace,”10 albeit with statutorily defined default rules. From there, a widespread belief developed that “firms must maximize shareholder profits (i.e., get every last bit of profit they can) to the

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See generally Henry Hansmann & Reinier Kraakman, What Is Corporate Law?, in Anatomy of Corporate Law 1–19 (Reinier Kraakman et al. eds., 2004). Id. See generally Dalia Tsuk Mitchell, Corporations without Labor: The Politics of Progressive Corporate Law, 151 U. Pa. L. Rev. 1861 (2003). Kellye Y. Testy, Capitalism and Freedom: For Whom?: Feminist Legal Theory and Progressive Corporate Law, 67 Law & Contemp. Probs. 87, 88 (2004).

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exclusion of any other goal,”11 even goals related to recognizing the various guises of inequality.12 The law and economics movement casts itself as a collection of neutral and selfevident principles governing corporate law, ones rooted in protecting private ordering and the market as much as possible.13 Under its view the goal of corporate law is to enable individuals to engage in private ordering – to get out of the way, in other words, and allow the free functioning of markets to create wealth. By virtue of the neutral veneer of this dominant corporate law movement, discourse about the implications of corporate law and corporate governance for questions of gender, gender identity, race, and class have occurred mostly in scholarly, rather than judicial, writing or transactional drafting. This volume seeks to change that scenario and to model what explicit engagement with issues of concern from a feminist perspective might look like in corporate law. C. WHAT IS A FEMINIST JUDGMENT?

This section explains each chapter, provides an overview of the process for creating the judgments (from the perspectives of both the authors and the volume editors), briefly describes the ways in which a judgment can be feminist, and addresses the goals and rationale for rewriting corporate law decisions. In one case, given the emphasis that corporate law places on private ordering, a private contract is rewritten. For convenience and to honor the idea of a contract as “private law,” we refer to all these different rewritten texts as “opinions.” Each chapter contains a commentary and the rewritten opinion, beginning with the commentary, in which scholars explain the importance of the original opinion and its background. The commentaries also explore how the feminist opinion differs from the original and the impact that the rewritten feminist opinion or contract might have made, had it been made law. Following each commentary is the feminist judgment itself, which may be a majority opinion, concurrence, or dissent – and, in one case, a contract. The rules of the Feminist Judgments Series are simple: the rewritten opinions must work within the same precedent that bound the original decision-makers (whether judges or private parties) at the time of the original opinion. However, the authors of the rewritten opinions bring to decision-making and opinion-writing 11

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Julie A. Nelson, Does Profit-Seeking Rule out Love? Evidence (or Not) from Economics and Law, 35 Wash. U. J.L. & Pol’y 69, 70 (2011). See generally Theresa A. Gabaldon, Like a Fish Needs a Bicycle: Public Corporations and Their Shareholders Symposium: Women and the New Corporate Governance, 65 Md. L. Rev. 538 (2006). Professor Robin West famously interrogated the notions of autonomy and consent underpinning shareholder wealth maximization in Authority, Autonomy, and Choice: The Role of Consent in the Moral and Political Visions of Franz Kafka and Richard Posner, 99 Harv. L. Rev. 384 (1985).

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their feminist perspectives on the facts and the law. One of the underlying claims of this book is that even seemingly objective questions – such as what the purpose of a corporation is, what the duty of care requires, how much loyalty shareholders owe one another, and whether someone is a fiduciary – are affected by judicial experiences, perspectives, and reasoning processes. The book demonstrates that incorporating feminist theories and methods into corporate law cases and contracts can be consistent with judicial and managerial duties and accepted methods of interpretation. Moreover, applications of feminist theories and methods can enrich and deepen the process by which judicial and managerial decisions are made. Our process for choosing corporate law for feminist rewriting was deliberate and thoughtful. We began by putting together a list of cases culled from our own teaching, knowledge, and scholarship. We were interested in cases that rather explicitly implicate gender, such as cases involving female corporate actors, cases that address obligations to treat women with care and respect while conducting corporate business, and a case that addresses the consequences of sexual harassment liability. Although we selected several U.S. Supreme Court or Delaware corporate law cases, we also included cases from other federal and state courts. We were mindful to select cases that are generally taught in most business associations courses as fundamental to the development of various corporate law doctrines. We ultimately selected the fourteen cases and one contract in this volume, and a roster of thirty-three authors to rewrite the cases and comment upon them, with the goal of choosing the most qualified and diverse authors for the book. Throughout the process, we also took into account the input of our advisory board and suggestions from the authors themselves by way of a public call for proposals. Additionally, we identified and invited scholars who possess expertise in specific subject areas and/or represented demographically diverse perspectives as well as a spectrum of seniority and roles within the academy and beyond. Of the thirty-six volume co-editors, contributors, or advisory panelists who participated in our survey regarding the volume’s diversity,  Most (90 percent) identified their gender expression as female, 8.3 percent as male, and 2.8 percent as gender fluid;  Just over a tenth (11.1 percent) identified their sexual orientation as other than heterosexual;  Approximately 20 percent identified as citizens of nations other than the United States of America, with one contributor self-identifying as an immigrant; and  Approximately 20 percent identified as Asian, 20 percent as Black or African, and 3 percent as Indigenous, in addition to a contributor who identified as a member of a biracial, multi-ethnic family. We also invited our volume participants to self-identify with other identities salient to them. Some contributors highlighted their religious identities (a member of a

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Introduction

religious minority and other participants who identified as Evangelical Christian or Catholic). Several mentioned class, identifying as first-generation lawyers (two of whom were also first-generation college graduates) or working class. One contributor self-identified as a person with a disability, and another self-identified as a single mother. With regard to the diversity of academic roles occupied by the volume participants, approximately two-thirds are traditional “podium” or “doctrinal” professors, just over a tenth are business school professors, and a fifth teach experiential legal education as legal writing or clinical faculty members (including a volume coeditor). Two volume participants also hold or have held senior administrative roles within the legal academy as deans. This diversity contributed to a fruitful virtual workshop convened by the volume co-editors, at which the volume contributors engaged with one another during the process of drafting their rewritten judgments and commentaries. The authors’ process for writing the judgments was to explore the history and context of the case or contract; study the law at the time of the original decision; and apply feminist theories, methods, and modes of feminist legal analysis to bring feminist insights to bear and reach a new interpretation of the legal problem presented. The rewritten cases and contract in the volume represent the multitude of ways in which a judgment can be feminist.14 The volume and series editors conceive of feminism as a broad movement, and we welcomed proposals that brought into focus intersectional concerns beyond gender, such as race, class, disability, gender identity, age, sexual orientation, national origin, and immigration status. In recognition of the diversity of feminist theories that exist, as well as the overlaps, divisions, and other interactions among them, we do not emphasize the “affix[ed] definitions to categories of feminisms,” as do some other volumes in the Feminist Judgments Series.15 This is not to say that thinking about the judgments in this volume through the lens of feminism’s “waves” is unhelpful. Indeed, especially where the same legal issue – such as board diversity – is taken up by several volume contributors,16 analyzing the feminist theories employed by this volume’s judgments can reveal otherwise subtle merits and disadvantages of the approach associated with a particular wave. Using board diversity as an example, arguments characteristic of the second-wave relational feminism (also known as cultural feminism) may, on the one hand, resonate with corporate law’s imperative to find a “business case” for the 14

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Feminist legal theory and methodology continue to evolve as feminism evolves. Indeed, some have argued that feminist epistemologies and feminist methodologies are starting to merge into “feminist research.” Andrea Doucet & Natasha Mauthner, Feminist Methodologies and Epistemology, in Handbook of 21st Century Sociology 36, 36–42 (Clifton D. Bryant & Dennis L. Peck eds., 2006). Rachel Rebouché, Introduction, in Feminist Judgments: Family Law Opinions Rewritten (Rachel Rebouché ed., 2020). Infra Chapters 12, 9, 6, and 10 of this volume on Disney, Smith v. Van Gorkom, Revlon, and White v. Panic, respectively.

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inclusion of women on boards.17 On the other hand, a proponent of first-wave liberal feminism’s rights-based approach might argue that such a stance instrumentalizes women in a way that is repugnant to women’s equal right to serve on boards.18 Meanwhile, a third-wave radical (also known as “dominance”) feminist approach sees board diversity as a way to dismantle a patriarchal system that benefits from women’s oppression.19 Yet another theory would build upon the values and techniques of feminism, using gender and identity as the starting point but not the focus, and critique the imbalanced power dynamic in the socially constructed principal–agent relationship.20 For readers interested in engaging more deeply with these feminist and feminisminspired theories as applied to corporate law, the last chapter provides a foundation for doing so. In Chapter 17, “The Importance of Incorporating Feminist Perspectives in Corporate Law: Analyzing the Foundations and Future Directions of Feminist and Feminist-Inspired Corporate Law Scholarship,” Professors Martha Albertson Fineman and Cheryl Wade, together with one of the volume’s co-editors, Professor Anne Choike, address four questions about what feminism can offer corporate law. In particular, Chapter 17 considers what feminism offers to corporate law and policy as a response to inequality and discrimination; as a source of values and as an ethical framework for understanding and enhancing the role and purpose of the corporation; as a critique of corporate power; and as inspiration for an institutional analysis of corporate law. The co-authors of Chapter 17 argue that, by showing how corporate law has sometimes been shaped by the false assumptions, blind spots, and missed opportunities of conventional frameworks, feminist and feminist-inspired analysis offers avenues for corporate law to promote prospects for fuller, freer lives among the persons who control or are affected by corporations. In addition to developing and using feminist theory, feminist scholars also employ techniques of legal analysis that are different from most other forms of legal scholarship. In the remainder of this chapter, we describe the feminist legal methods used most often by the volume contributors: (1) storytelling, (2) contextualizing, (3) deconstruction, and (4) the “feminist reasoning process” or “critical analysis of the law.”21 The fourth method (feminist reasoning process) is a method of legal analysis 17

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Infra Chapters 12, 9, and 6 of this volume on Disney, Smith v. Van Gorkom, and Revlon, respectively. While no chapters in this volume make such an argument, some contributors to this volume have done so in other works. See, e.g., Terry Morehead Dworkin, Aarti Ramaswami & Cindy Schipani, A Half-Century Post-Title VII: Still Seeking Pathways for Women to Organizational Leadership, 23 UCLA Women’s L.J. 29 (2016). Infra Chapter 10 of this volume on White v. Panic. While no cases in the volume made such an argument, some contributors to this volume have examined vulnerability in the employment relationship, which is a type of principal–agent relationship. See generally Vulnerability and the Legal Organization of Work (Martha A. Fineman & Jonathan W. Fineman eds., 2017). Berta Esperanza Hernández-Truyol, Talking Back: From Feminist History and Theory to Feminist Legal Methods and Judgments, in Feminist Judgments: Rewritten Opinions of

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that can be further broken down into six “moves.”22 The six moves of critical feminist legal analysis identified by feminist scholar Professor Martha Chamallas are: (1) recognizing women’s experiences, (2) being aware of intersectionality and complex identities, (3) unearthing implicit bias and male norms, (4) recognizing double binds and dilemmas of difference, (5) reproducing patterns of dominance, and (6) unpacking choice.23 As we situate the rewritten opinions and commentaries within the six moves, we show how they advance a critical feminist legal analysis of corporate law. The feminist methods and six moves provide novel insights into cases and stories at the forefront of corporate law. Understanding the feminist contributions of the rewritten opinions and commentaries in feminist terms is crucial to realizing the theoretical innovations of the volume. Therefore, we focus on the six moves and offer an organization of the rewritten opinions according to these moves to highlight the feminist themes in each case. For ease of organization, we also briefly describe the corresponding commentary together with the rewritten opinion it accompanies, even if the commentary uses feminist legal methods that differ from those used in the rewritten opinion.

1. Storytelling (Narrative), Contextualist, and Deconstructionist Feminist Methods Feminism presents modes of analysis that are particularly sensitive to the lived experiences of individuals and the emotional consequences of law. Individuals live their lives within frameworks provided by law. Personal relationships inform both how individuals interact with the world and how they experience it. A single mother navigating the labor market must also find childcare and provide her children with an education. The law affects every aspect of her life, and her personal circumstances will define her experience of the law and how she abides by or challenges it. Feminist theory evaluates the personal impacts of law as it tries to evaluate the societal impacts of legal rules. Contributions to this volume use some of these more personal feminist methods in evaluating corporate law. In particular, they employ the feminist methods of storytelling, contextualizing, and deconstruction. All legal opinions begin with the facts, stories about the lives of the litigants, how they crossed paths and ended up in conflict with one another, how they hope their conflict will be resolved, and what their conflict tells us about how others may interact in the future. In this volume, our contributors who use the feminist method

22

23

the United States Supreme Court 28, 36–38 (Kathryn M. Stanchi, Linda L. Berger, & Bridget J. Crawford eds., 2016) (these methods draw from Professor Hernandez-Truyol’s identification of feminist legal methods generally). See id. at 38 (Professor Hernandez-Truyol summarizes Professor Martha Chamallas’s six “moves” for feminist “critical analysis of the law”). Martha Chamallas, Introduction to Feminist Legal Theory 4–15 (3rd ed. 2013).

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of storytelling have paid close attention to the narrative elements (i.e., character, events, causation, master plot, normalization, and closure) behind their cases, in some instances emphasizing very different facts than those related in the original opinions. While using narratives can present some challenges,24 the storytelling method attempts to share women’s experiences and preserve their validity.25 It considers the stories and experiences of women and other marginalized people in relation to the actions and motivations of those in power and, in corporate law, the actions and values of the inanimate corporation. Every case is a human story, and feminism requires that we appreciate what brought these people and entities before the court or into the boardroom, what motivates them to transact or litigate, and how they are part of the larger narrative of our law and society. Storytelling is closely tied to the feminist value and method of contextualizing, and it helps to communicate values and raises consciousness about individual experiences of law and the impact of law on society as a whole.26 The second feminist method, contextualization, builds on storytelling by emphasizing the critical importance of understanding how individual stories fit into a larger narrative about how a society decides what its laws will be and what impact those laws will have on the people living under them. Contextualizing finds its roots as a

24

25

26

Doucet & Mauthner, supra note 14, at 40–41 (questioning “how voices of participants are to be heard, with what authority, and in what form?” as well as whether and when the use of others’ narratives is exploitive [internal citation excluded]). See Hernandez-Truyol, supra note 21, at 37; Aaron A. Dhir, Towards a Race and GenderConscious Conception of the Firm: Canadian Corporate Governance, Law and Diversity, 35 Queen’s L.J. 569, 583–84 (2009) (recognizing that narrative is “rarely used in corporate law” and advocating for its use for “consciousness-raising” and for “interpreting the empirical literature on board heterogeneity and organizational performance”). See Theresa A. Gabaldon, Experiencing Limited Liability: On Insularity and Inbreeding in Corporate Law, in Progressive Corporate Law (Lawrence Mitchell ed., 1995). A number of feminist corporate law scholars have used storytelling feminist legal methods. See Theresa A. Gabaldon, The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, 45 Vand. L. Rev. 1387, 1388–89, 1455–56 (1992) (Professor Gabaldon opens and closes with a lemonade stand anecdote explaining her experience and how it relates to the article); see Janis Sarra, The Gender Implications of Corporate Governance Change, 1 Seattle J. Soc. Just. 457, 458–59, 481–82, 497 (2002) (Professor Sarra uses storytelling to draw on her own and her daughter’s experiences of the conflicts between gender equality or feminism and corporate values and to contextualize examples of women’s skills acquired outside of work but creating value when brought within the corporate setting); Miriam A. Cherry, Decentering the Firm: The Limited Liability Company and Low-Wage Immigrant Women Workers, 39 U.C. Davis L. Rev. 787, 787–89 (2006) (opens with a scenario of immigrant workers providing cleaning services, to contextualize the issues they face because they cannot navigate the job market well without an “intermediary;” this anecdote provides a basis for understanding how the limited liability company form may help); but see generally Mae Kuykendall, No Imagination: The Marginal Role of Narrative in Corporate Law, 55 Buff. L. Rev. 537 (2007) (challenging the use of narrative for legal scholarship and business analysis and concluding it is generally not appropriate for corporate law).

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feminist method in relational, or second-wave, feminism.27 Contextualization is essential to addressing the feminist value of avoiding abstracted rules and analyses;28 it is used to “arouse[] empathy and expose[] situational nuances that may permit case-specific accommodations”29 and to connect legal reasoning to particular women’s concerns or values.30 Contextualization is often coupled with storytelling or deconstructionist methods to raise consciousness of women’s experiences or to exemplify how abstract rules or theories function. Understanding the full societal context in which a case or contract arose is vital to a meaningful critique of an opinion. Why did the court favor the party it did? What were the parties’ real interests? How are non-parties affected by the court’s decision or parties’ binding contract? Contextualization of an opinion considers all of those questions and uses the answers to relate the law to the experience of individuals, including the particular women who populate these stories. Finally, the deconstructionist feminist method rejects dualisms and identity categories as being restrictive and essentialist. It would thus “opt for polyvocality, support multidimensionality, embrace hybridity, and insist on the importance of individual identity.”31 Deconstructionist feminist legal methods challenge accepted boundaries between areas of law, such as tort and contract law. The dual nature of corporations as legal “persons” and entities lends itself to analysis by a deconstructionist method. Limited liability also creates a fictional barrier between tort liability and tortfeasor.

2. Feminist Reasoning Process as Feminist Method: The Six “Moves” The feminist reasoning process reveals intrinsic and structural biases in corporate law and how those biases impact the interactions of women with the corporate world. As previously mentioned in this introduction, Professor Martha Chamallas specifically identified six moves for feminist “critical analysis of the law,”32 and the contributors to this volume have used those moves in their rewritten opinions. Most opinions use more than one move, but we introduce each opinion with a single move it uses in particular. As we introduce the moves and the cases that provide 27

28 29 30

31 32

Relational feminism reflects an effort to identify and apply, in legal and other inquiries, a set of values based on the shared experiences of women. Gabaldon, supra note 12. Testy, supra note 10, at 101. Gabaldon, supra note 26, at 1422–23. Hernandez-Truyol, supra note 21, at 37–38 (Professor Hernandez-Truyol cites Professor Katharine Bartlett’s identified feminist legal methods, including “feminist practical reasoning [which] specifically and mindfully incorporates the context of women’s concerns and values into legal reasoning . . . [to] expose[] hidden biases and injustices;” this article includes these methods under the umbrella of contextualization methods, overlapping with the analytical methods discussed below). Hernandez-Truyol, supra note 21, at 29. Id. at 38 (Professor Hernandez-Truyol summarizes Professor Chamallas’ six “moves”).

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examples of their operation, we also list other opinions in the volume that use each technique. Professor Chamallas’s first move acknowledges “the significance of recognizing women’s experience so as to expose the locations where law has effected the subordination or exclusion of women.”33 The move developed from consciousness-raising in second-wave feminism to emphasize the point that the law affects women’s everyday lives – that “the personal was political.”34 The rewritten opinions in the volume that emphasize women’s experiences are White v. Panic, Francis v. United Jersey Bank, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling, and the Agreement between Harvey Weinstein and The Weinstein Company Holdings LLC (“TWC”) as of October 20, 2015 (hereinafter, the “Weinstein Employment Contract”). The Weinstein Employment Contract specifically focuses on women’s experiences by anticipating what those experiences would be if a woman were abused by a corporate executive. In his rewritten majority opinion, Professor Benjamin Means uses the Ringling Bros. case to revisit the perennial debate in contract interpretation between privileging the words of the contract or considering the context in which the contract was framed. The contract in question was between two female members of the Ringling family, who allied together to manage a family business that formerly had been in the hands of male descendants of the founding brothers. In his commentary, Professor Gabriel Rauterberg situates the rewritten opinion in its historical and legal context, illuminating that the law governing shareholder agreements remains fragmented, contested, and dynamic. He also uses the deconstructionist feminist method to interrogate shareholder agreements more broadly, pointing out the incongruent “normative discontinuity between the role of citizens in a democracy and of shareholders in a corporation.” In rewriting White v. Panic, Professor Sarah Haan decides that a board breached its duty to act in good faith when it repeatedly covered up, forgave, and used corporate funds to subsidize the CEO’s sexual harassment and assault of the corporation’s female employees. Essential to her rewritten opinion is recognition of the pain suffered by the victims of CEO Milan Panic’s abuse. In her commentary on the case, Kellye Testy uses the same feminist method to argue that the #MeToo movement, through which millions of women shared their experiences of sexual harassment, assault, and degradation, led to important cultural changes in corporate management, just as decades earlier women were able to receive formal recognition of sexual harassment as an actionable tort by sharing their experiences. The transition between the sharing of women’s experiences through storytelling to legal and cultural change is a victory that feminism has earned in the last few decades. Much

33 34

Id. at 38. Chamallas, supra note 23, at 4.

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work remains to be done, but Professor Haan’s opinion charts a way forward in the law of corporate governance. The Weinstein Employment Contract, authored by Professor Susan Chesler, not only emphasizes women’s experiences but also uses deconstructionist and narrative feminist methods in redrafting the agreement to reduce the immense power that the company grants to Weinstein. Among other revisions, the rewritten contract acknowledges the “open secret” of Weinstein’s sexual predation and reduces Weinstein’s control of TWC by providing TWC the option to terminate him for cause and to repurchase his shares in the event of his “sexual wrongdoing.” It eliminates Weinstein’s protection from financial liability for “sexual wrongdoing,” and requires Weinstein to apologize to survivors of his “sexual wrongdoing.” In her commentary on the rewritten contract, Professor Alexandra Andhov uses the contextual feminist method to describe the power dynamics among Weinstein, the TWC Board, Hollywood, and the political circles within which Weinstein expanded his influence. Professor Andhov further uses a deconstructionist method that breaks down a perceived dichotomy between contracts and judicial opinions by identifying their salient similarities. The second move considers intersectionality, or a regard for all the different identities or experiences that might shape a woman’s understanding of the world around her and her place in it. Intersectionality guards against essentialism, the assumption that all women have the same experience or view of the world by virtue of their womanhood. It sees personal identity and experience as being “shaped by social hierarchies other than gender, including race, ethnicity, class, age, sexual orientation, disability, and immigrant status.”35 In corporate law, an intersectional analysis takes account of how corporations affect society writ large, how corporate action can disadvantage vulnerable groups in different ways, and how the law can force corporations to internalize the costs they impose on those groups. In our volume, the rewritten opinions in Donohue v. Rodd Electrotype, Citizens United v. FEC, and Meinhard v. Salmon in particular engage in extensive intersectional analysis. Professor Cindy Schipani’s majority opinion in Donohue v. Rodd Electrotype has a distinctly intersectional cast. She emphasizes how the plaintiff Euphemia Donohue, a minority shareholder, is marginalized not only because her gender excludes her from the workplace but also by virtue of her socioeconomic status. Professor Schipani deftly uses another female minority shareholder, the daughter of the majority holder, to contrast the disparate treatment that women shareholders from different social classes receive. Using contextualist and deconstructionist legal methods, among others, Professor Jessica Kiser’s commentary situates the importance of the original opinion – a landmark case in the protection of minority shareholders – and explores the rewritten opinion’s contribution to problematizing 35

Id. at 6.

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the line that corporate law traditionally purports to draw between employees, family, and society. In her rewritten majority opinion in Meinhard v. Salmon, Professor Dalia Tsuk Mitchell also employs intersectionality to illuminate the way in which not only shared business interests but also religious, ethnic, and national heritage might have initially united, but eventually distanced, the namesake parties in the case. As explained by Professor Christine Hurt in her commentary on the rewritten version of Meinhard, Professor Mitchell ultimately reaches the same outcome as the original case – retaining its famously soaring language about the loyalty owed by fiduciaries – but grounds her reasoning in ethics of interconnectedness and care. While Professor Mitchell’s rewritten opinion focuses on social identities and relationships such as those created through friendship and investment, Professor Hurt’s commentary emphasizes the implications of Professor Mitchell’s rewritten opinion for women and families. Together, Professors Mitchell and Hurt illustrate that it is possible for a judicial decision to achieve feminist ideals even – and intentionally – without explicitly gendered language. Professor Carliss Chatman likewise writes a majority opinion for Citizens United from an intersectional perspective, questioning whether corporations as legal “persons” should have the same, or greater, rights than marginalized populations who have been denied the full rights and privileges of citizenship in the United States. She problematizes the history behind granting “personhood” to corporations in the first place, including the full array of rights and privileges that white male adult U.S. citizens enjoy, even while denying them to women and other groups. She observes that women, particularly Black women, cannot exercise speech rights to the same extent as corporations, even today. Professor Amy Sepinwall’s commentary contextualizes the rewritten opinion and then challenges it. She argues that even leaving to one side a corporation’s moral personhood, feminist theory’s emphasis on interconnectedness and shared vulnerability justify denying corporations untrammeled speech rights; the risk of their drowning out other speakers is too high. As illustrated by the example of Professor Chatman’s rewritten opinion in Citizens United, intersectional analysis recognizes that “[g]ender always has a race, just like race always has a gender.”36 Like gender, race also socially constructs power. As a result, an intersectional feminism seeks to unearth and address the sources of marginalization and oppression, gender-based or otherwise.37 The co-editors of this volume and series are acutely aware of and attentive to the racialized and 36

37

See Laura Rosenbury, infra Chapter 12 of this volume (citing Kimberlé Crenshaw, Demarginalizing the Intersection of Race and Sex: A Black Feminist Critique of Antidiscrimination Doctrine, Feminist Theory and Antiracist Politics, 1989 U. Chi. Legal F. 139–40, 154, and Angela P. Harris, Race and Essentialism in Feminist Legal Theory, 42 Stan. L. Rev. 581, 604 (1990)). See bell hooks, Feminism Is for Everybody: Passionate Politics viii (2000) (“Feminism is a movement to end sexism, sexist exploitation and oppression.”).

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cisheteronormative dimensions of gender because, unfortunately, attention to these aspects of identity has not always been a strength of feminist analysis. Feminism has often focused on only the experiences of cisgender, heterosexual white women – and as volume co-editors, we sought to avoid perpetuating this exclusionary perspective. In addition to the chapter on Citizens United, other chapters in thisvolume explicitly address race to some extent. Several chapters (including commentaries on White v. Panic and Walkovszky, and the final chapter of this volume addressing the importance of a feminist perspective to corporate law) also explicitly address cisnormativity and/or heteronormativity. We know that widening the range of potential perspectives can make a significant difference, and we recognize that some readers will see that other implicit issues of race, class, ethnicity, sexual orientation, and so on are raised by these or other chapters in the volume. This is true even if some authors did not explicitly address those issues in their contributions. We encourage our readers to adopt methods of inquiry that are designed to identify missing voices and perspectives, particularly those that have been historically oppressed or marginalized. By their doing so, we expect readers will further advance the work begun in this volume. The third move addresses implicit male bias and the ubiquity of male norms and reveals that rules which may appear to be neutral are actually grounded in male bias, to the disadvantage of women.38 Corporate law is almost entirely made up of seemingly neutral rules that come from a culture dominated by men, and feminist corporate law scholars have worked to reveal the harms to women that have resulted from that pervasive bias. Radical feminism, also known as socialist feminism, explores the reasons behind the development of patriarchy and the role it serves in inequality. As applied to corporate law, radical feminism challenges the very characterization or boundaries of corporate law and its distinction from other types of law in theory and practice.39 Radical feminists critique the market-based culture of corporate capitalism and specifically consider the role of gender when examining the inequality of women.40 Radical feminism generally “concentrates on the bureaucratization of the corporation and its effects upon maintaining liberal and capitalist patriarchy”41 and “challenge[s] social values that are based on male domination and the oppression of women.”42

38 39

40

41 42

Chamallas, supra note 23, at 8. Gabaldon, supra note 25, at 15–16 (not explicitly identified as radical or relational feminism); Gabaldon, supra note 23, at 1440, 1440–45 (drawing out how limited liability has developed differently in tort and contract law than as applied to corporate shareholders; challenging the distinction between “business law and organizational law”); Hall, supra note 26, at 42–61. Ronnie Cohen, Feminist Thought and Corporate Law: It’s Time to Find Our Way Up from the Bottom (Line), 2 Am. U. J. Gender & L. 1, 3 (1994); see also Katherine H. Hall, Starting from Silence: The Future of Feminist Analysis of Corporate Law, 7 Corp. & Bus. L.J. 149, 160 (1994). Hall, supra note 40, at 160. Cohen, supra note 40, at 4.

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In this volume, a number of cases use the third move to reveal, criticize, and seek to repair the damage done by implicit bias and male norms. Among them are the opinions in Francis v. United Jersey Bank; Walkovszky v. Carlton; Dodge v. Ford Motor Company; Merriam v. Demoulas Super Markets; White v. Panic; In re Walt Disney Co. Derivative Litigation; Revlon v. MacAndrews & Forbes Holdings, Inc.; Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling; U.S. v. Chestman; Smith v. Van Gorkom; and the rewritten Weinstein Employment Contract. Employing the theory of masculinity contest culture,43 Professor Christina Sautter rewrites Revlon v. MacAndrews & Forbes Holdings, Inc. to expose how the performative rivalry between the male executive officers of Revlon and the company’s wouldbe acquirer influenced the “battle for corporate control.” Professor Sautter’s opinion methodically examines how masculine norms disadvantage women, from failing to consider women as stakeholders of Revlon’s leading cosmetics business to corporate law’s unflinching use of the gendered and racialized term “white knight” to refer to “friendly” acquirers, and beyond. In her commentary on the rewritten Revlon opinion, Professor Afra Afsharipour builds upon Professor Sautter’s critique of implicit male bias to highlight the impact of the gender imbalance among transactional law advisers as well. In her concurring opinion in the Dodge v. Ford case, Professor Barnali Choudhury emphasizes the harm visited on women who may be deprived of important freedom and employment opportunities if they are unable to drive because cars are made unaffordable. In the corresponding commentary, Professor Jena Martin carries the third move further by revealing the pervasiveness of ostensible male norms in the decision, in particular the norm that competition is to be prized above all other virtues in business. Ford made a variety of decisions that would have helped both Ford Motor Company (FMC) and its consumers (in addition to himself ), but the court rebuked his failure to distribute profits to FMC’s shareholders, thereby making cars less accessible to lower classes and wage increases harder to justify under existing corporate law. The rewritten opinion and commentary on the Ford decision highlight the court’s wholehearted embrace of competition and its cost, preventing women and lower income workers from advancing in society. In Merriam v. Demoulas Super Markets, Professor Alicia Plerhoples takes on shareholder primacy, which accepts as a given male norms prioritizing profitmaking and business over personal and interpersonal considerations. Professor Plerhoples holds that laws for the protection of minority shareholders should not be used for self-gain at the expense of corporate stakeholders – notably employees and the customers who live in the community. In her commentary, Sunitha

43

See generally Jennifer Berdahl, Marianne Cooper, Peter Glick, Robert Livingston, & Joan Williams, Work as a Masculinity Contest, 74 J. Soc. Issues 422 (2018).

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Malepati explains the original opinion and the importance and impact of the more stakeholder-centric model the rewritten opinion embodies. In her rewritten Smith v. Van Gorkom majority opinion, Professor Lua Kamál Yuille also assails shareholder primacy. She begins by highlighting the complete absence of women in the case – unsurprising, because at the time, corporate boards and C-suites were overwhelmingly composed of older white men. Professor Yuille critiques this absence of any diversity on the board and ties it to the lack of consideration shown to the interests of employees, senior officers, and community stakeholders. To remedy this failure, she requires that boards consider how their decisions affect the community before they are able to avail themselves of the protection of the business judgment rule. In her commentary, Professor Virginia Harper Ho contextualizes the original landmark opinion and then explores how a faith-centered feminism might ground a more stakeholder-centric vision of corporate law. The fourth move is the acknowledgment of a double bind or Catch-22, “situations in which options are reduced to a very few and all of them expose one to penalty, censure or deprivation.”44 Many working women face double binds as they navigate the pitfalls of corporate culture: whether to report sexual abuse or harassment in the workplace; how to achieve a satisfying work–life balance;45 or how to be feminine and true to themselves, while also asserting themselves powerfully and effectively in a male-dominated work environment.46 Several cases in our volume feature women struggling with the double bind, including Francis v. United Jersey Bank, White v. Panic, Donohue v. Rodd Electrotype, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling, and U.S. v. Chestman, as well as the Weinstein Employment Contract. The plight of Lillian Pritchard in Francis v. United Jersey Bank exemplifies many of the problems studied in the six moves, but perhaps none so much as the double bind. In his rewritten majority opinion in the case, Professor Jonathan Smith uses storytelling and contextualization to explain how Mrs. Pritchard came to be a director of a complex reinsurance business and was expected to rein in her thieving sons, lest she face personal liability for breach of the duty of care she owed to the firm. Mrs. Pritchard was forced to choose between her maternal devotion to her sons and her legal obligations to monitor the corporation. Professor Faith Stevelman highlights in her commentary that the original opinion chastises Mrs. Pritchard for

44

45

46

Chamallas, supra note 23, at 10 (quoting Marilyn Frye, The Politics of Reality: Essays in Feminist Theory 2 (1983)). Darren Rosenblum, Feminizing Capital: A Corporate Imperative, 6 Berkeley Bus. L.J. 55, 85–87, n.178 (2009) (Professor Rosenblum describes how working women “effectively doubl[e] their workload” because they take on market-based responsibilities on top of home responsibilities, and a “vicious cycle” ensues due to the limited work options that women face, which in turn has a negative impact on both household work and work outside the home). Chamallas, supra note 23, at 10.

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essentially being a bad mother – for having raised sons who would embezzle money entrusted to them. Her options, as the court saw it, were to turn her sons in to the authorities or face liability herself for their malfeasance. In his more charitable opinion, Professor Smith finds that although Mrs. Pritchard may have been negligent, her negligence was not the proximate cause of the plaintiffs’ loss and so does not hold her liable for their injuries. The fifth move, reproducing patterns of male dominance, argues that even when it appears that women have made progress toward equality, they are still relegated to subordinate roles relative to men.47 For example, women may succeed in breaking into male-dominated industries, but by and large they find themselves in lowerranking, lower-paying positions than men. In corporate law, even as women earn seats on corporate boards and in executive suites, their contributions are minimized and their judgment is treated as inferior to that of the men with whom they work. In our volume, Francis v. United Jersey Bank; White v. Panic; Revlon v. MacAndrews & Forbes Holdings, Inc.; In re Walt Disney Co. Derivative Litigation; Dodge v. Ford; Walkovszky v. Carlton; and SEC v. Howey provide examples of the problems revealed by the fifth move. Professor Hillary Sale’s rewritten opinion in In re Walt Disney Co. Derivative Litigation exemplifies the fifth move, by showing how Disney’s male “imperial” chief executive officer and its nearly all-male board marginalized the lone female director, an African American industry outsider, as well as the only two directors who were men of color. In her commentary on the rewritten Disney opinion, Professor Laura Rosenbury contextualizes Sale’s approach by comparing its relational reasoning to similar insights of feminist scholars in other legal fields at the time and by situating the facts giving rise to the Disney litigation in light of the company’s and broader economy’s then-prosperity. In the rewritten Walkovsky v. Carlton dissenting opinion, Professor Poonam Puri and Ankita Gupta note the progress that tort victims in New York had made in securing liability for negligent drivers. Yet, when Walkovsky was hit by a cab operated by a corporation owned by Carlton, Carlton and his fellow shareholders were able to avoid responsibility by hiding behind limited liability. In their commentary, Professors Janis Serra and Cheryl Wade note that the Walkovsky case is about vulnerability and that it shows how limited liability allows those who benefit from capital production, usually males, to profit at the direct expense of and detriment to tort victims, often women and children. No matter the advances in tort liability, wealthy and powerful people are able to use the law to avoid responsibility, while those who depend upon them can avoid neither responsibility for their own negligence nor the full expense of injuries visited upon them.

47

Id., at 11.

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Professor Chamallas’s sixth move unpacks women’s choices.48 This move argues that society blames women for their subordinate position within it by claiming that their subordinate status is the result of individual choices.49 The sixth move discovers, however, that in order to evaluate and understand a choice that a person has made, one must also understand the alternatives that were available to them and the constraints under which the choice was made.50 The double bind is closely related to unpacking choice: a double bind allows only a Catch-22. In our volume, SEC v. Howey, Francis v. United Jersey Bank, Walkovszky v. Carlton, and Dodge v. Ford involve legal doctrines that shape or limit women’s choices and so continue the subjugation of women, even if women appear to be able to choose to participate or opt out. In her rewritten concurring opinion, Professor Theresa Gabaldon reveals how SEC v. Howey, which gave us the well-known test for whether an investment contract is a security, favors traditional investment interests and limits the protections available to a variety of investors. She shows how the test favors investors’ passivity, which discourages investors from being responsible for the consequences of their financial decisions. In their commentary, Professors Carla Reyes and Kristin Johnson extend Professor Gabaldon’s reasoning to cryptocurrencies and show how the old Howey test is poorly suited to rein in toxic “bro culture.” Professor Karen Woody, writing for the majority in her rewritten U.S. v. Chestman opinion, acknowledges the choices faced by the “[o]ft overlooked . . . central figure of this case, Susan Loeb,” whose husband’s stockbroker was the named defendant. As explained by Professor Donna Nagy in her commentary on the rewritten Chestman opinion, Professor Woody places Susan’s choice to disclose sensitive information to her husband Keith in the context of the fundamental nature of marital relationships: Susan’s choice to trust her husband was not – and should not be – an individual choice or a rebuttable presumption, but rather a fundamental feature of marriage as “definitionally a relationship of trust and confidence.” Professor Nagy’s richly contextualist commentary provides a strong foundation for understanding not only the doctrinal coherence of Professor Woody’s rewritten opinion but also its courage in augmenting spousal duties of trust and confidence,51 despite the continuing decline in marriage rates amid the emergence of thirdwave feminism. Regardless of the feminist approach taken, this volume shows how feminist analysis can transform a seemingly traditional area such as corporate law. It does so by highlighting the importance and influence of perspective, background, and preconceptions on the reading and interpretation of the governing corporate law. 48 49 50 51

Id., at 12–13. Id. Id. For a definition of duties of trust or confidence in misappropriation insider trading cases, see 17 CFR § 240.10b5–2(b)(3) (2021).

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Despite the posture of some theories – particularly those focused on law and economics, which approach corporate law as a neutral system for recognizing, allocating, and protecting competing claims to the ownership, control, and purpose of the corporation – corporate law is far from neutral. This volume demonstrates how feminist reasoning and methods could have changed the development of corporate law as it stands today by applying feminist theories and methods to foundational corporate law opinions. The ultimate goal of this volume is to reenvision corporate law as it is practiced and interpreted today, using feminist methods and feminist legal theory to do so. In the process, the volume also raises the profile of women in business as investors, managers, workers, and other stakeholders, and as leaders. It strives to counteract the marginalization of women in business, especially in law casebooks, finance textbooks, and the study of business generally. D. ORGANIZATION OF THE VOLUME

The fourteen cases and one contract in this volume address a wide range of doctrinal areas covered in law courses on business associations. A majority (eight cases and one contract) broadly concern the question of what duties are owed to a corporation’s constituents – including not only its shareholders but also society at large – and engage with core concepts in corporate law, including the business judgment rule, shareholder primacy, the fiduciary duties of care and loyalty, the duty of good faith, and changes in corporate control. The remaining seven cases address piercing the corporate veil, corporate personhood, control and fiduciary duty in the context of closely held corporations, the definition of a security, and insider trading. All of the corporate law rewritten in this volume interrogates the balance of power struck between the firm and those with whom the firm transacts. The rewritten law therefore affects a wide range of legal issues that implicate justice and equality, including economic and racial justice, free speech and participatory democracy, worker rights, sexual harassment, and friendships and marital relationships. In addition to the iconic cases within the corporate law canon (such as Meinhard v. Salmon, Smith v. Van Gorkom, and Revlon), this volume also includes less familiar cases and even one contract to illustrate the interests of women and to highlight issues of power more directly than do most traditional corporate law cases. To that end, the volume also includes a case and a contract involving sexual wrongdoing by corporate fiduciaries (White v. Panic and the Weinstein Employment Contract) and a case centering the interests of an organization’s workers (Merriam v. Demoulas Super Mkts), to name just a few examples. Unlike in the original volume in the US Feminist Judgments Series, only two of the cases in this volume are U.S. Supreme Court opinions; because corporate law is primarily state law, the remainder are cases or contracts decided under state law. The laws of one state in particular, Delaware, are especially well represented in this

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volume, with five cases and one contract – reflecting the fact that Delaware is the jurisdiction of choice for many of the most powerful corporations today.52 Delaware’s dominance in corporate law may be surprising to readers unversed in the field. Despite attempts by other states to apply their own corporate law, this dominance persists as a function of Delaware’s active efforts to ensure its continued primacy through the internal affairs doctrine, which provides that the laws of the state where a corporation is organized govern the corporation. The internal affairs doctrine thus sets up a market, allowing states to compete for incorporations, and Delaware’s dominance is the product of decades of deliberate state policy to attract corporations.53 The state’s constitution requires a supermajority to amend any aspect of its corporate law, and the legislature is advised by a consultative group made up of plaintiffs and defense attorneys as well as transactional attorneys. Equally importantly, a specialized Court of Chancery hears most business disputes, resolving them with attention to speed and a deep understanding of corporate law. The result is that, as to corporate law matters involving Delaware corporations, no matter in which state they reside, Delaware law rules. Of the fourteen cases selected for inclusion in this volume, ten are re-imagined majority opinions, one is a concurring opinion, and three are dissenting opinions. In addition, we describe the rewritten contract as a dissent because it is framed as a letter from TWC’s general counsel to Weinstein proposing different rules of private law that diverge from the originally drafted contract (which is analogous to a “majority opinion,” as the originally drafted contract remains the legally binding version ultimately executed between the parties). Rather than organizing the cases by the type of opinion (i.e., majority, concurrence, dissent), or chronologically, or by jurisdiction, however, we organize them by corporate law topic and categorize them into five different themes, which are described below.

1. Legal Personality, Identity, and Limited Liability of Corporate Entities A foundational principle in corporate law is that corporations are entities that possess separate legal interests and a legal identity separate and distinct from their owners’.54 A corporation can own property, enter contracts, and sue and be sued in its own name as a legal entity, apart from the rights, responsibilities, and interests of its owners and managers. A related concept, limited liability, provides that creditors of 52

53

54

The rewritten Delaware Supreme Court opinions follow that court’s unique style of using footnotes rather than in-line citations. Not only do corporations and other business entities organized in Delaware pay annual franchise fees to the state, but the Delaware bar also benefits tremendously from the concomitant costs of corporate litigation. See generally Jonathan Macey, Delaware: Home of the World’s Most Expensive Raincoat, 33 Hofstra L. Rev. 1131 (2005). Brief for Corporate Law Scholars as Amici Curiae Supporting Respondents, Masterpiece Cakeshop, Ltd. v. Colo. C.R. Comm’n, 138 S.Ct. 1719 (2018) (No. 16-111).

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corporations may look only to the corporate assets – not to the assets belonging to corporate owners or managers – for recovery. Limited liability has been criticized from a feminist perspective for several reasons. First, it presents a false dichotomy between corporate entities and the individuals who comprise them. Second, feminist scholars have questioned the wisdom of absolving shareholders of the risks associated with their investments, particularly noting the inequity of allowing wealthy investors to increase their wealth while consciously externalizing the risk of injury onto third parties.55 Some feminist scholars have proposed addressing such criticisms through increased dissemination of information to investors, greater investor participation in decision-making, and heightened “care” standards for legal responsibility.56 These and other issues are taken up in the cases organized within Part II of this volume: Citizens United v. Federal Election Commission and Walkovszky v. Carlton, as well as commentary on each.

2. Role and Purpose of the Corporation and Corporate Combinations in Society As it has been traditionally understood in corporate law, the term “ownership” means the right to receive the corporation’s net earnings as well as the right to control the corporation.57 Corporate law has conventionally conferred both of these rights upon a corporation’s shareholders, but feminist scholars challenge this narrow conception of ownership.58 The “shareholder wealth maximization” norm is particularly susceptible to reinterpretation from a feminist lens when considering corporate combinations, corporate forms that compel accountability to an organization’s stakeholders at large, and business leaders’ voluntary commitments to corporate social responsibility. Many of the themes advanced by the corporate social responsibility movement relate to feminist priorities: concern for marginalized groups, representation for overlooked populations, and prioritizing the health and physical and emotional well-being of citizens and communities above profit. These and other issues are taken up in the cases presented Part III of this volume: Dodge v. Ford, Merriam v. Demoulas Super Mkts, Revlon, and the Weinstein Employment Contract, as well as commentary on each.

3. Board Composition and Fiduciary Duties in Corporate Governance An issue at the very core of corporate law, corporate governance has been one of the main areas that feminist corporate law scholars have sought to address, and from 55 56 57 58

See generally See generally See generally See generally

infra Chapter 17. infra Chapter 17. Henry Hansmann, The Ownership of Enterprise (1996). infra Chapter 17.

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multiple angles.59 The overwhelming majority of corporate officers and directors are white and male. Feminist corporate law scholars are concerned with the lack of diversity on corporate boards, at top management levels, and among owners.60 Although officers and directors owe fiduciary duties to the corporation to exercise their power over it for its benefit, the generous business judgment rule gives them wide latitude in deciding how to operate the firm. That deference to a relatively homogenous group of leaders has reinforced the dominance of male bias and norms in corporate law. One feminist corporate law critique focuses on the limitations of the substantive content of existing fiduciary duty law and suggests that feminist values of care and connection can improve deficiencies therein.61 Many feminist corporate law scholars are also concerned with corporate responsibility and whether corporate fiduciary duties are owed only to shareholder-owners. The rewritten opinions in Part IV of the volume – Meinhard v. Salmon, Smith v. Van Gorkom, White v. Panic, Francis v. United Jersey Bank, and In re Disney, together with commentary on each – build upon feminist corporate law scholars’ work in reconsidering fiduciary duties.

4. Closely Held Businesses Special considerations arise in organizations that are owned and operated by families or close friends. These are especially fruitful settings in which to demonstrate the ways in which a feminist perspective blurs the lines between personal lives and business, and how the emotional consequences of interpersonal relationships can seriously affect corporate law outcomes. The consequences of personal relationships are brought to bear in close corporations, and sometimes even in public corporations, in ways not found in other areas of business law. Feminist theory can be sensitive to familial and interpersonal interests, beyond profit maximization, and can examine the power dynamics of personal relationships that can have serious consequences for the financial well-being of the less powerful (often women). The rewritten opinions in Part V – Ringling Brothers and Donohue v. Rodd Electrotype, and commentary on each – build upon work previously done on this topic by scholars concerned with the patriarchal assumptions that have historically accompanied the family unit.

59 60

61

See generally infra Chapter 17. Rosenblum, supra note 45 (analysis based on Norway’s Corporate Board Quota to include women on corporate boards); Testy, supra note 10, at 454–55 (commenting on Professor Sarra’s article The Gender Implications of Corporate Governance Change, supra note 26); Richard Brooks, Incorporating Race, 106 Colum. L. Rev. 2023 (2006); Dhir, supra note 25. Testy, supra note 10, at 98, 106; Sarra, supra note 26, at 488; Gabaldon, supra note 25, at 16–26; Kellye Y. Testy, Adding Value(s) to Corporate Law: An Agenda for Reform Symposium: Business Law Education: Corporate Social Responsibility, 34 Ga. L. Rev. 1025, 1039–42 (1999).

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5. Protecting Investors and Potential Investors in Corporations Another area that feminist corporate legal scholars have scrutinized is laws protecting investors and potential investors in corporations, along with the normative assumptions that federal securities laws make in defining the contours of those relationships under various circumstances. This section focuses on those securities laws that directly address families and unwary parties. For example, in the application of Rule 10b5–2, liability is premised upon familial and confidential personal relationships. As another example, the required registration of investment contracts serves as a catch-all to protect potential investors from losing everything to scams. The rewritten opinions in Part VI of the volume – SEC v. Howey and U.S. v. Chestman, and commentary on each – build upon the work of feminist corporate legal scholars in scrutinizing laws that protect investors and potential investors in corporations.62

E. FEMINIST CORPORATE LAW PEDAGOGY AND PRACTICE

1. The Value of a Feminist Perspective in Corporate Law Curricula and Practice63 Money matters. Money is among the most potent levers of power, and that power manifests itself mostly through corporations. Yet corporations and the corporate law that governs them have historically been the province of men. A feminist perspective in corporate law is important because, after Citizens United and Burwell v. Hobby Lobby, the notion of corporate personhood is firmly established in law. Because corporations are persons, we need to consider all aspects of their personhood. It makes sense to ask in what ways the factors that make up an individual’s identity, as constructed by our social structures and systems, apply to define and describe the identity of the corporate person. In doing so, it becomes clear that assigning a race to a corporation is not new or peculiar: “[C]ourts have declared that corporations can and do possess racial identities ‘as a matter of law.’”64 Descriptions of “black businesses,” “Hispanic businesses,” and “Asian American businesses” are not uncommon. Professor Cheryl Wades writes that “[c]orporate persons belong to socially constructed racial groups in ways that are similar to the assignation of race to flesh and blood persons.”65 But we rarely think of corporate entities in a way that is explicitly gendered. We can do so in this volume. 62 63 64 65

See generally infra Chapter 17. Thank you to Professor Cheryl Wade for her contributions to this section of the chapter. Brooks, supra note 60, at 2025 (internal citations omitted). See Cheryl L. Wade, Effective Compliance with Antidiscrimination Law: Corporate Personhood, Purpose and Social Responsibility, 74 Wash. & Lee L. Rev. 1187 (2017).

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Corporate law leaves much to be desired from a feminist perspective. Despite a rich narrative context for corporate law opinions, discussions about the background of the opinions rarely deal with gender issues in any direct or explicit way. Consider, for example, two books that provide factual, legal, and theoretical context for important and iconic corporate law decisions.66 Scholars who contributed essays to these volumes said nothing about the relevance of feminism and the status of women in the business setting. The few cases included in these volumes that involved women as parties were about small closely held – rather than public – companies.67 In subtle and implicit ways, the cases reveal something important about the role of women in the business setting: the women in the cases in those volumes participated in corporate life only because they inherited interests in closely held businesses from their husbands or fathers. Business associations casebooks are also silent with respect to gender issues in the business setting. Many of the cases involve corporate boards that are all male, and the parties in almost all of the cases in corporate law texts are male. In addition, Students are given no context for this homogeneity, no evidence demonstrating the benefits of diversity, and are essentially invited to conclude that white male supremacy is simply the natural order of American business and society. At the very least there is a manifest failure of the primary business law text authors to voice any objection to the continued over-representation of white males in the boardroom.68

Most business associations texts “implicitly accommodate the [idea] . . . that white male domination is not just acceptable but natural and unworthy of critique or analysis.”69 And because casebooks and other texts are silent on gender issues, those issues are not addressed or discussed in law and business classes. Each year, students graduate to become lawyers and business leaders, mistakenly believing that corporate law is not gendered and that gender issues and feminism are irrelevant to corporate law. It is not surprising that casebooks and readers about corporate law cases contain no discourse about gender and feminism; the cases themselves are silent on these issues. The relevance of corporate law to gender is implicit, and the lack of explicit discussion speaks to the marginalization of women and their lack of access to the tools of capitalism.

66

67 68

69

The books are The Iconic Cases in Corporate Law (Jonathan R. Macey ed., 2008) and Corporate Law Stories (J. Mark Ramseyer ed., 2009). Id. andré douglas pond cummings, Steven A. Ramirez, & Cheryl Lyn Wade, Toward a Critical Corporate Law Pedagogy and Scholarship, 92 Wash. U. L. Rev. 397, 415 (2014). Id.

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A feminist perspective in corporate law could address these gaps. Yet, in law schools across the United States, the study of feminist jurisprudence is typically relegated to the occasional specialized upper-division seminars or sometimes marginally incorporated into select doctrinal courses – but rarely, if ever, in an introductory corporate law course. As a result, very few students encounter feminist perspectives during their legal training in general, and it is even rarer for a student interested in business law to do so. The net effect of this reality is that once students become active professionals in a world dominated by corporations and the externalities they impose, they lack an understanding and appreciation of feminist viewpoints and ideas. They enter the legal profession unaware of the power dynamics – with respect to gender and other identities – among their clients, counterparties, and even lawyers themselves and, subsequently, they engage in legal practice or decision-making without knowledge of foundational feminist concerns (such as the social construction of gender and issues of privilege and oppression, intersectionality, inequality, bias, and discrimination). This lack of awareness continues the cycle of forcing society to endure the consequences of a corporate law that fails to consider the interests not only of underrepresented corporate constituents such as women, but also of all corporate constituents, in light of their fundamentally vulnerable human nature – to all of our detriment. 2. Pedagogical, Professional, and Practice Opportunities for Teaching and Applying Feminist Perspectives in Corporate Law and Beyond There are numerous possibilities for incorporating feminist perspectives into not only doctrinal and experiential courses in the law school curriculum but also business school courses as well as undergraduate and graduate courses in women’s and gender studies. In addition, law school graduates – whether in-house, in private practice, in public interest, or in board directorships – confront many untapped opportunities for applying a feminist perspective in corporate law practice and the corporate world more broadly. In the interest of brevity, we discuss only a small selection of these opportunities. Within the law school curriculum, large doctrinal courses such as those on business associations and sex equality provide the opportunity to present a significant number of students with exposure to feminist perspectives as applied to organizations. This volume is designed to accompany the typical topics that a business associations course might cover in its introduction to corporate law. An instructor might choose to assign some or all of the rewritten opinions and commentaries in the volume to be read alongside the original opinions. In-class or out-of-class exercises applying the assigned materials could ask students to work independently or in groups to identify and analyze the ways in which the volume’s contributors chose to approach the facts, legal standards, issues, and reasoning in comparison or

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contrast to those of the original opinions.70 Law students could also assess how various feminist theories or methods might interpret the elements of an opinion in order to develop their analytical legal skills in evaluating opinions from different perspectives.71 The volume could also complement themes in a sex equality text, such as work, family, sexual subordination, and sexual harassment,72 extending the issues addressed in those areas to new and relevant applications among corporate constituents. Studying this volume in a sex equality course would offer law students the opportunity to examine legal standards not only within corporate law but more broadly across a breadth of legal subspecialities – such as employment law, family law, and criminal law. Doing so also allows sex equality instructors to ask law students to consider how legal standards differ when sex equality issues are raised in these different fields and whether there is anything special about corporate law that warrants the protection of corporate constituents such as directors, managers, and shareholders. The use of this volume in upper-level courses within the law curriculum, such as seminars and experiential offerings, can challenge law students to apply the rewritten opinions in new factual circumstances and to construct their own feminist arguments in adversarial or transactional legal writing assignments. Corporate law seminars focusing on boards of directors, corporate compliance and risk management, and private equity could encourage law students to consider perspectives raised by this volume’s contributions in any required reflection or term papers. Instructors of judicial externship courses, in which students draft or assist in drafting judicial opinions, could assign the rewritten opinions and commentaries within this volume as examples of feminist judging. Transactional drafting courses could include assignments to revise the original Weinstein Employment Contract and/or the related TWC Code of Conduct and Ethics using alternative feminist theories and methods to those employed in this volume’s rewritten Weinstein Employment Contract; such exercises would demonstrate the multiplicity of feminist approaches and outcomes possible. A transactional drafting course could also assign the rewritten Ringling Brothers or Merriam v. Demoulas Super Mkts. opinions and commentaries, then ask law students to draft a mock corporation’s articles of incorporation or shareholder agreement, respectively, applying the feminist approaches described in these contributions. The real world offers a plethora of possibilities for law school students practicing in transactional clinics, as well as fully licensed lawyers in private practice, in-house, in public interest, or in board directorships, to apply the insights of this volume. 70

71 72

Thank you to Professor Roseanna Sommers for this idea, inspired by how she uses Feminist Judgments: Rewritten Tort Opinions (Martha Chamallas & Lucinda M. Finley eds., 2020) in her teaching at the University of Michigan Law School. See supra notes 15–19 and accompanying text. Catherine MacKinnon, Sex Equality (3d ed. 2016).

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Transactional law clinics and law firm libraries might place this volume on reserve for their attorneys to use as a reference in serving their clients’ legal needs. For example, both student attorneys and fully licensed attorneys might benefit from considering the reasoning of the rewritten In re Disney opinion in recommending that an organization’s board diversify its composition, or the compassion of the rewritten Francis v. United Jersey Bank opinion when advising an organization’s directors faced with dismissing an underperforming executive who is experiencing challenging personal circumstances. Beyond transactional clinics, affirmative public interest advocacy courses73 and practicing public interest lawyers could reference the volume’s contributions as models and inspirations for innovative structural and systemic legal solutions. More generally, there is a strong emphasis within clinic courses, and increasingly in private industry, on dealing with and advocating for clients of different backgrounds in ways that are sensitive to intersecting issues of gender, race, poverty, disability, and sexuality – as addressed in this volume. This volume also has value beyond the law curriculum, whether in business school courses or undergraduate and graduate women’s and gender studies courses. Business programs often require at least one business law survey course, in which this volume could be assigned as a required or recommended resource. Business schools are also known for their use of the case method, discussing real-life situations that business executives have faced, and business students could grapple with how the legal standards and reasoning in this volume might have affected such business decisions. Many business schools offer courses on impact investing or classes about social entrepreneurship as a concentration of their M.B.A. programs, and these business subdisciplines share feminism’s concerns with diversity, equity, inclusion, access, and other issues.74 The insights in this volume would strengthen the curricula of those programs as students learn to grapple with the complexities posed by social responsibility and the role of gender in corporate governance and corporate business. At the metaphorical other end of campus, the volume is also valuable in a range of other non-professional graduate and undergraduate programs, including economics, political science, women’s and gender studies, and diversity studies, as it provides different frameworks for analysis and for developing cultural competencies. In particular, instructors teaching women’s and gender studies courses at the

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See, e.g., Detroit Litigation Advocacy Workshop at the University of Michigan Law School and San Francisco Affirmative Litigation Project at Yale Law School. Several universities offer a Masters of Science or a Ph.D. with a focus on impact investing and social entrepreneurship. In all, twenty-two universities offer undergraduate degrees or certificate programs in social entrepreneurship, one university offers a Ph.D. in social entrepreneurship, and twenty-three schools offer master’s degrees in social entrepreneurship. Fifty M.B.A. programs offer concentrations or specializations in social entrepreneurship. Undergraduate and graduate degrees in finance are ubiquitous.

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undergraduate and graduate student level could use select contributions from this volume to supplement materials in both introductory survey courses and specific disciplinary specialty courses – such as women and work, antisocial behavior in organizations, discrimination in organizations, or gender and diversity in organizations.75 F. CONCLUSION

Although scholars have started the conversation about feminist corporate law and have even proposed some solutions, these applications have remained primarily theoretical. Yet, as this volume demonstrates, feminist corporate law can inspire thinking that can convert corporate law statutes, cases, agreements, and organizational policies and programs into real, impactful strategies. With the Business Roundtable’s recent headline-making statement embracing stakeholder responsibility,76 as well as the #MeToo and #TimesUp movements heightening the cultural relevance of feminism, the plausibility of this impact is likelier now than ever before.

75 76

See, e.g., courses taught in University of Michigan’s Women and Gender Studies Department. See Statement on the Purpose of a Corporation, Bus. Roundtable (Aug. 19, 2019), https:// opportunity.businessroundtable.org/wp-content/uploads/2019/08/BRT-Statement-onthePurpose-of-a-Corporation-with-Signatures.pdf; Business Roundtable Redefines the Purpose of a Corporation to Promote “An Economy that Serves All Americans,” Bus. Roundtable (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-cor poration-to-promote-an-economy-that-serves-all-americans.

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part ii

Legal Personality, Identity, and Limited Liability of Corporate Entities

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2 Commentary on Citizens United v. Federal Election Commission amy sepinwall

INTRODUCTION

Citizens United v. FEC was the unexpected blockbuster decision of the Supreme Court’s 2009 term.1 The case had originally presented a narrow, as-applied challenge to a well established Federal Election Commission rule2 that prohibited corporations from spending their own money on political advertisements.3 But the Court took it upon itself to overturn the rule itself, holding that corporations should enjoy the same rights as individuals to spend unlimited amounts of money on political speech.4 The decision unleashed an impressive storm of scholarly critique5 and public outcry6 – and rightly so: the decision threatened to enable corporations to drown out the voices of individual citizens.7 1 2

3 4

5

6 7

See 558 U.S. 310 (2010). For the claim that the Court could have decided the case on far narrower grounds, see, for example, Richard L. Hasen, Citizens United and the Illusion of Coherence, 109 Mich. L. Rev. 581, 593 (2011), and Jeffrey Toobin, Money Unlimited: How Chief Justice John Roberts Orchestrated the Citizens United Decision, New Yorker (May 12, 2012), https://www .newyorker.com/magazine/2012/05/21/money-unlimited. See 2 U.S.C. §441b (2000 ed.); 11 C.F.R § 100.29(a)(2) (2010). 558 U.S. at 365–66. Importantly, Citizens United left untouched the ban on corporate campaign contributions. See, e.g., Fed. Election Comm’n, Who Can and Can’t Contribute, https://www .fec.gov/help-candidates-and-committees/candidate-taking-receipts/who-can-and-cant-contrib ute/ (last visited Feb. 2, 2021). What follows is a tiny and haphazardly gathered sample of the scholarship critical of the case: Deborah Hellman, Money Talks But It Isn’t Speech, 95 Minn. L. Rev. 953 (2011); Gwendolyn Gordon, Who Speaks the Culture of the Corporation?, 6 Mich. Bus. & Entrepren. L. Rev. 1 (2016); Margaret M. Blair and Elizabeth Pollman, The Derivative Nature of Corporate Constitutional Rights, 56 Wm. & Mary L. Rev. 1673 (2015); Charlotte Garden, Citizens, United and Citizens United: The Future of Labor Speech Rights, 53 Wm. & Mary L. Rev. 1 (2011–12); Carliss Chatman, The Corporate Personhood Two-Step, 18 Nev. L.J. 811 (2018). See, e.g., Justin Levitt, Confronting the Impact of Citizens United, 29 Yale L. & Pol’y Rev. 217 (2010). See, e.g., Ciara Torres-Spelliscy, Does “We the People” Include Corporations?, 43 ABA Hum. Rts Mag. (2018), https://www.americanbar.org/groups/crsj/publications/human_rights_maga zine_home/we-the-people/we-the-people-corporations/.

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It is important to see the case as implicating not only the rights of political speech but also the role of women in politics. Citizens United was not originally about corporate money; it was about Hillary Clinton, the first woman to stand a real chance to become president. More specifically, the case was originally about Hillary: The Movie – a long-form political advertisement offering a scathing critique of Clinton, often in sexist terms.8 Citizens United was the corporation that had produced and would pay to distribute the movie. To evade the existing ban on corporate political expenditures, it insisted that Hillary was a “documentary,” relying on a long-standing legal distinction between “news” or “issue speech” on the one hand and “political ads” on the other.9 Corporations are permitted to fund the former but, prior to Citizens United, not the latter.10 The Federal District Court for the District of Columbia had no problem seeing through Hillary’s billing as a documentary: the film was a ninety-minute infomercial, devoid of the hallmarks of journalistic objectivity, offering instead a relentless polemic challenging Clinton’s fitness for office.11 More than that, it was sexist.12 Ironically, however, so was the real news coverage of Clinton’s political career and campaign. Clinton was subjected to virtually every gender-based double-bind a woman could face: “She [was] at once too ‘emotional’ and too ‘cold,’ both ‘ruthless’ and ‘weak,’ a ‘harpy’ whose grandchild is simultaneously a dangerous distraction and a political prop.”13 Worst of all, she was too “ambitious” – a charge The Onion 8 9

10 11

12

13

See infra notes 13–14 and accompanying text. The distinction was framed in the district court as that between “issue speech” and “express advocacy.” Citizens United v. Fed. Election Comm’n, 530 F. Supp. 2d 274, 278–79 (D.D.C. 2008), as amended (Jan. 16, 2008); see also 2 U.S.C. §441b (2000 ed.). I replace that terminology here for the sake of clarity. I question the supposed distinction between “news” and “express advocacy” below; see infra text accompanying notes 15–17. See 530 F.Supp.2d at 279. 530 F.Supp.2d at 279. The district court opinion includes twelve quotes from the film condemning Clinton – a mere “selection.” Id. at 279 n.12. While the court does not appear to have been attuned to the sexism in the attacks against Clinton, it is notable that so many of the excerpts cited in the decision leverage her sex or sexist tropes. Clinton is lambasted for her “drive for power” – so much so that she would “put up with [Bill Clinton’s] open philandering”; “Hillary Clinton . . . is a person, a woman, a politician of the left”; “we must never forget the fundamental danger that this woman [poses] to every value that we hold dear.” Id. at 279 n.12. Sexism also pervaded some of the advertisements that would have been used to promote the film. Here is one, entitled “Pants,” that the district court transcribed in its entirety: “[Image(s) of Senator Clinton on screen] ‘First, a kind word about Hillary Clinton: [Ann Coulter Speaking & Visual] She looks good in a pant suit.’ ‘Now, a movie about everything else.’ [Film Title Card] [Visual Only] Hillary: The Movie. . .” 530 F. Supp. 2d at 276 n.3. Scott Bixby, 7 Sexist Attacks Hillary Clinton Faced in 2008 – and How She Can Combat Them in 2016, Mic.com (Apr. 12, 2015), https://www.mic.com/articles/114400/7-sexist-attacks-hillaryclinton-faced-in-2008-and-how-she-can-combat-them-in-2016; cf. Ryan Chichiere, Hardball Analyst: Clinton “Too Cold” and “Too Elitist,” Media Matters (Jan. 26, 2007, 4:58 PM), https://www.mediamatters.org/msnbc/hardball-analyst-clinton-too-cold-and-too-elitist; Alana Goodman, The Hillary Papers, Wash. Free Beacon (Feb. 9, 2014, 9:58 PM), https:// freebeacon.com/politics/the-hillary-papers/; Emily Friedman, Can Clinton’s Emotions Get

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lampooned by noting that indeed ambition aptly characterized the aspiration to “do what no woman before her has [yet] done.”14 Empirical work verified that it was not only pundits but also newscasters who subjected Clinton (and Sarah Palin, the nominee for Vice President on the Republican ticket) to treatment they did not inflict on male candidates for office.15 It would be far-fetched to claim that sexism produced Citizens United. The libertarian and pro-market commitments underpinning the decision were likely strong enough to have made irrelevant the sex of the candidate pilloried in the film. Nonetheless, a feminist sensibility might well have produced a different outcome, as Chatman’s rewritten opinion reveals.

FEMINIST JUDGMENT

In Citizens United, the Supreme Court held that corporations – whether for-profit or nonprofit – enjoy the same rights as individuals to spend unlimited amounts of money on independent political speech.16 Professor Chatman, writing as Justice Chatman, by contrast, reaches a far more satisfying result. She refuses to extend individuals’ prerogatives to speak on matters of political importance to the corporation, and in so doing she maintains the ban on corporate political expenditures. Chatman arrives at this outcome through a rich historical review of the corporation’s legal status. She advances impassioned arguments that pit the contingently granted rights of corporations (which she rightly decries as unwarrantedly grand) against the natural rights of real humans, especially women and minorities (to which, she rightly notes, the law continues to give woefully short shrift).

14

15

16

the Best of Her?, ABC News (Apr. 13, 2009, 6:32 PM), https://abcnews.go.com/Politics/ Vote2008/story?id=4097786; Andrew J. Bacevich, How America Conducts Foreign Policy, Salon (Apr. 12, 2014, 4:15 PM), https://www.salon.com/2011/04/12/barack_obama_iraq_ yemen_libya_wars/; Jay Newton-Small, The Pros and Cons of “President Grandma,” Time (Sept. 29, 2014, 2:54 PM), https://time.com/3445666/hillary-clinton-bill-chelsea-charlotte/; Kyle Smith, An Open Letter to Chelsea Clinton’s Unborn Child, N.Y. Post (Apr. 22, 2014, 10:21 AM), https://nypost.com/2014/04/22/an-open-letter-to-chelsea-clintons-fetus/. See also Alexandra Petri, How Hillary Clinton Can Get That “Presidential Look,” N.Y. Times (Sept. 8, 2016, 6:44 PM). Gerald Collins, Hillary Clinton Is Too Ambitious to Be the First Female President, Onion, May 24, 2006, 2:22 PM, https://www.theonion.com/hillary-clinton-is-too-ambitious-to-be-the-firstfemale-1819584287. For analysis of Clinton coverage, see Joseph E. Uscinski and Lilly J. Goren, What’s in a Name? Coverage of Senator Hillary Clinton during the 2008 Democratic Primary, 64 Polit. R.Q. 884 (2011). For analysis of coverage of both Clinton and Palin, see Diana B. Carlin & Kelly L. Winfrey, Have You Come a Long Way, Baby? Hillary Clinton, Sarah Palin, and Sexism in 2008 Campaign Coverage, 60 Comm. Stud. 326 (2009). The Court’s decision rested on two rationales. First, speaker identity was immaterial under the First Amendment: individuals should enjoy the same free speech protections whether they speak in their individual voices or through the corporate form. Second, because listeners have a right to hear as much speech as might be on offer, there too the state could not justify treating corporate speakers differently from individual speakers. See 558 U.S. at 365 and 354.

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Chatman offers three reasons for denying corporations political speech rights. The first and most developed reason is that corporations are artificial: they are creatures of the state, which is itself our creation, and so the state may, on our behalf, bestow or deny corporate rights, as we please. Second, it is perverse that corporations should enjoy more power than individual persons, especially marginalized individual persons. Third, corporations have the resources to drown out individual persons; all the more reason, then, to worry about their eclipsing humans’ prerogatives. The first of these arguments is ontological (i.e., predicated on the kind of entity the corporation is) and the latter two are fairness-based. It is crucial to note that the fairness-based arguments logically depend on the success of the ontological argument. In Sub-section 1, I aim to establish that this is so. I then suggest, in Sub-section 2, that we have reason to question Chatman’s ontological argument. Together, Sub-sections 1 and 2 seek to establish that Chatman’s revised holding depends on a contestable conception of corporate personhood. Sub-section 3 argues further that even if Chatman’s conception of corporate personhood is correct, it might still be of no avail, since Citizens United turned as much on listeners’ rights as speakers’, and listeners might have rights to hear corporate speech even if the corporation had no right to speak grounded in its own status. In sum, there could be two ways to uphold Citizens United notwithstanding Chatman’s arguments. I am nonetheless convinced that Chatman reaches the right result and that feminist theory can vindicate that result, although perhaps not in quite the ways Chatman wields it. I conclude by gesturing in Sub-section 4 to an alternative feminist ground for reversing Citizens United. At the outset, it is useful to be clear about underlying assumptions and terminology. I assume that humans enjoy a natural or pre-legal status that law must recognize. In other words, humans are “moral persons.” It is an open question whether anyone or anything other than humans – such as chimpanzees or robots – possesses enough moral worth to warrant the kind of legal recognition humans enjoy.17 In particular, are corporations of sufficient moral worth such that denying 17

It is not clear whether Chatman believes that the question is unresolved. She writes, “The logical definition of person includes any human being possessing a physical body, without concern for age, gender, race, or nationality.” See infra at text accompanying note 33. She could take the question to be open if her use of “includes” were meant to convey that some non-humans might also be persons. But she would likely have to offer further argumentation if she were instead to maintain that only human beings possessing a physical body count as persons. For one thing, that position might well ground a charge of “speciesism.” See Peter Singer, All Animals Are Equal, 5 Phil. Exchange Art. 6 (1974). For another, Chatman’s place in the dialectic does not permit her to exclude corporations from the class of persons by stipulation, for determining whether corporations are persons (for these purposes: deciding whether they ought to enjoy political speech rights) is precisely what the Court in Citizens United is being asked to do. I note finally that the claim that corporations cannot be persons, because they are not human and only humans are persons, would contradict Supreme Court jurisprudence that takes corporate personhood to be a well-settled fact. See, e.g., Santa Clara County v. S. Pac. R.R., 118 U.S. 394, 396 (1886) (stating it is clear that corporations are entitled

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them core legal rights would render the law morally assailable? In particular, do corporations have a moral status that compels recognition of rights to political speech and political participation? These are the questions at the core of Chatman’s rewritten opinion.

1. CHATMAN’S FAIRNESS-BASED ARGUMENTS SUCCEED ONLY IF THE CORPORATION IS NOT A MORAL PERSON

Chatman believes that because corporations – unlike humans – are artificial, they do not enjoy moral worth on their own. Before interrogating Chatman’s arguments in support of that belief, this section seeks to show how crucial the belief is for her fairness-based arguments, by seeing whether her fairness-based arguments could survive if indeed corporations were moral persons. Suppose that, contrary to Chatman’s position, corporations do have a moral status that commands protection under law through recognition of some corporate rights.18 How then would her fairness-based arguments fare? Call the first of these arguments the argument from perversity. This argument contends that, throughout the nation’s history, the law has routinely recognized corporate rights even while it has routinely ignored or denied the rights of various groups, to their resulting systematic disadvantage.19 Thus, as Chatman forcefully writes, “Citizens United is asking for complete inclusion in the political imagination of this country – a recognition that has yet to be achieved by natural persons.” The implication seems to be that it is unfair for the corporation to enjoy this status while historically oppressed groups do not. Reformulated under the supposition that corporations are moral persons, this argument would imply something like the following: “We ought not to grant corporations equal recognition under the law unless and until we grant equal recognition to Native Americans, African Americans, women, and other marginalized persons.” But one could imagine a similar claim being made by African Americans, women, and other marginalized persons if we were contemplating a change in law that would redress its abject failure to recognize the equal standing of

18

19

to equal protection); Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 881 n.9 (1985) (applying equal protection to a corporation based on the “well established” view that corporations are persons under the Fourteenth Amendment). This is not a supposition I would endorse, but it is worth entertaining to gain clarity about the structure of Chatman’s overall argument. For an argument that corporations should be recognized as persons under the law, and held to the same moral standards as individual persons, see Kent Greenfield, Corporations Are People Too: (And They Should Act Like It) (2018). But cf. Adam Winkler, We the Corporations: How American Businesses Won Their Civil Rights (2018) (offering a more complex picture, according to which corporations sometimes piggybacked on individual civil rights gains but at other times pioneered civil rights – from which individuals could then gain).

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Native Americans. The complaint would then be, “we ought not to grant Native Americans equal recognition under the law unless and until we grant equal recognition to African Americans, women, and other marginalized persons.” And so on and so forth for each of the historically oppressed groups. In any of these forms, the complaint is pernicious – and not only because it would pit identity groups against one another when the fight for equality might demand solidarity. It is pernicious too because it mandates a kind of leveling down: no one should have their equality recognized or restored until all do. We can imagine a white man, keen to retain his privilege, adopting just that position in a conscious bid for “preservation through transformation.”20 Indeed, we need not imagine it: the last-minute addition of “sex” to Title VII arose for just this rhetorical reason. Representative Howard Smith, vehemently opposed to ending discrimination, figured that he could defeat the bill if he made plain the (alleged) slippery slope on which he saw Congress embarking. To that end, he proposed adding “sex” to the categories of discrimination that Title VII prohibited.21 He conjectured that if his colleagues were to recognize that protecting African Americans from discrimination would entail extending that protection to women too, then surely they would rethink protecting any marginalized person. His conjecture was incorrect, and his gambit had the felicitous effect of enshrining rights against discrimination on the basis of race and sex. But this happy ending should not obscure the insidious suspicion at the root of his plan: that his colleagues would decline to recognize the equality of one historically oppressed group if doing so entailed that they would have to recognize the equality of all the others. Had his suspicion been correct, every historically disadvantaged group would have been consigned to its disadvantaged position until there existed the political will to lift them all. The larger point is this: if corporations are moral persons – if they enjoy a moral status that requires recognition under law – then it is no more legitimate to claim that they ought to be denied that recognition until African Americans, women, and others receive it than it is to claim that Native Americans ought to be denied proper recognition under the law until African Americans, women, and others receive it. Put differently, one can use the comparative status of corporations and historically disadvantaged humans to legitimate effect only if corporations are not moral persons. It is in this way, then, that the argument from perversity succeeds only if the argument against corporate moral personhood does too.

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Reva B. Siegel, “The Rule of Love”: Wife Beating as Prerogative and Privacy, 105 Yale L.J. 2117, 2178–87 (1996). Jo Freeman recounts this episode in How “Sex” Got into Title VII: Persistent Opportunism as a Maker of Public Policy, in We Will Be Heard: Women’s Struggles for Political Power in the United States 171 (2008), adding that the proposal prompted several hours of humorous debate on what came to be known as “ladies’ day in the House.”

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Chatman’s second fairness-based argument, which I call the drowning-out argument, similarly depends on her argument against corporate moral personhood. Chatman notes that, given the legal provisions that allow a corporation to accumulate wealth more readily than most individuals can, allowing corporations to spend unlimited amounts of money on political speech threatens to enable corporate voices to drown out individual voices. The threat is real.22 But corporations are not alone in undermining individual voices by wielding massive amounts of money that favorable treatment under the law has allowed them to accumulate. Individuals who benefited from President Trump’s tax cuts or the abolition of the inheritance tax have, as a result of these legal changes, accumulated more wealth than they would have had otherwise – and they posses, on average, more wealth than most other individuals.23 If these wealthier individuals use enough of this extra money to pay for political speech, their state-created wealth advantage would allow them to buy enough speech to drown out the rest of us. And yet, if moral persons have a right to spend unlimited amounts of money on political speech,24 then the fact that their exercise of this right silences the rest of us is of no moment. What it means to have a right is to be free to do something – no matter the negative consequences to others of one’s doing it. Hence, we can distinguish between corporate and individual political spending only if corporations do not enjoy the right that individuals enjoy to spend

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For example, in 2016, corporate political spending outstripped union political spending by about 50 percent, with 90 percent of that spending supporting Republican candidates. Karl Evers-Hillstrom, et al. More Money, Less Transparency: A Decade under Citizens United, Opensecrets.org (Jan. 14, 2020), https://www.opensecrets.org/news/reports/a-decade-undercitizens-united. The disparity was even more striking in 2020, when business interests spent $5,628,035,415 in the 2020 election, compared with $211,580,284 spent by labor interests – a startling 26-fold difference. Ctr. for Responsive Pol., Business-Labor-Ideology Split in PAC & Individual Donations to Candidates, Parties, Super PACs and Outside Spending Groups, Opensecrets.org, https://www.opensecrets.org/elections-overview/business-labor-ideologysplit (last visited Feb. 2, 2021). The disparity appears to have impacted election outcomes: in states with strong corporations and weak unions, Republicans gained 12 percent of seats in the legislature after Citizens United. Nour Abdul-Razzak et al., How Citizens United Gave Republicans a Bonanza of Seats in U.S. State Legislatures, Wash. Post (Feb. 24, 2017). Since 1979, the top 1 percent of household income has grown by 229 percent as compared to only 46 percent for the bottom 90 percent in the same period. See, e.g., Elise Gould, Decades of Rising Economic Inequality in the U.S.: Testimony before U.S. House of Representatives Ways and Means Committee, Econ. Pol’y Inst., Mar. 27, 2019. President Trump’s tax cuts exacerbated this inequality, with the top 1 percent wealthiest Americans receiving “an average tax cut of $50,000 in 2020, over 75 times more than the tax cut for the bottom 80%, which [ ] average [d] $645.” Americans for Tax Fairness, Chartbook: Trump-GOP Tax Cuts Failing Workers & The Economy (Sept. 2020), https://americansfortaxfairness.org/wp-content/uploads/ChartbookTrump-GOP-Tax-Cuts-Fail-Workers-The-Economy-Rev-9-25-20.pdf. To be clear, I do not at all endorse the idea that there is a right to spend unlimited amounts of money on political speech. To the contrary, I subscribe to a right of equal political participation, which can likely be achieved only if the government institutes spending restrictions. For more on this topic, see Eric Orts & Amy Sepinwall, Collective Goods and the Court: A Theory of Constitutional Commodification, 97 Wash. U. L. Rev. 637, 654–71 (2020).

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unlimited amounts of money on political speech. Again, we could make that distinction only if corporations were not moral persons. In sum, then, both of Chatman’s fairness-based arguments turn on her contention that corporations are not moral persons. It is time now to assess that argument directly.

2. CHATMAN’S ARGUMENTS AGAINST CORPORATE MORAL PERSONHOOD

Chatman’s account of the difference in moral status between humans and corporations is subtle and creative. The linchpin for her is that humans create corporations; as such, humans are like deities, and corporations are mere artifacts of our divine-like will. Less metaphorically, persons – whom Chatman has already defined as human beings25 – “are not creatures of the state, but . . . are instead the creators of the state. Because humans create the state, the state must respect humans’ rights; however, “[i]n contrast, states do have the power to eliminate a business organization’s existence because [business organizations] are creatures of the state, with rights that are not recognized until the state acknowledges the formation documents, or until they engage in actions the state has deemed to meet the threshold for recognition as a business form.” The state thus determines when a corporation comes into existence and also when it deserves to die. What should we infer about a corporation’s moral status as a result? As I read her, Chatman believes that the corporation’s genesis as the state’s creature entails that the corporation has no independent moral status. It is for this reason that she contends that the state has the prerogative to decide which, if any, legal rights the corporation may possess. The corporation lives at the mercy of the state. It is just in this sense that Chatman conceives of the corporation as a “concession.” But surely not every entity that owes its existence to the state’s recognition is therefore consigned to the mercy of the state. To see this, imagine a time when individuals come to acquire highly sophisticated robots or other artificial intelligences (AI). In Kazuo Ishiguro’s Klara and the Sun, for example, teenagers in a not-too-distant future routinely receive “AFs” (artificial friends).26 The AFs, who function as playmates and confidantes, are more intelligent than their human counterparts. Now imagine that the state requires that each AF owner register their AF with the state, in a formalization ritual similar to procuring a birth certificate. That these AFs are human creations, and that they come into legal existence only by

25 26

See infra note 30. Kazuo Ishiguro, Klara and the Sun (2021).

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dint of the state, would say nothing about what rights of theirs the state ought to recognize. Instead, one would think that the rights they should enjoy would turn on the capacities they have – for example, just how intelligent are they? Of course, one could say that the capacities they possess are themselves the product of what the state has permitted. Similarly, Chatman would say that whether, for example, a non-profit advocacy organization has free-speech rights depends on whether the state has chartered the non-profit for the sake of having it speak. But if the AF already had the capacities for belief, judgment, autonomy, and so on that ground an adult human’s free speech rights, we would not think the state had any business withholding the free speech rights of the AF, even though the AF would enjoy legal recognition only if the state had bestowed it. In short, legal recognition must take account of the moral status of the entities or beings that seek it. If an entity or being already possesses some moral worth by virtue of its capacities, then the state has no business deciding its legal rights simply because that entity or being enjoys no legal existence prior to the state’s bestowing it. And it is an open question whether the corporation possesses capacities that would ground this moral worth – a question for metaphysicians, not judges or lawmakers.27

3. CORPORATE MORAL PERSONHOOD MIGHT IN FACT BE IRRELEVANT

We have just seen that the state could not deny the corporation political speech rights unless the corporation were not a moral person. But that is not the only condition necessary to justify the state’s denying corporations political speech rights. Even non-persons sometimes enjoy rights, where those rights serve the interests of moral persons. For example, if the corporation can generate meaningful speech on matters of public importance, then that capacity alone might justify the state’s recognition of the corporation’s speech rights – just as the state recognizes other rights (e.g., the right of a journalist not to disclose her sources) for the sake not of the right-holder but instead some third party whose interests are thereby served (e.g., the reading public).28 Indeed, this line of thought was at least part of the rationale for recognizing corporate political speech rights in Citizens United. In silencing corporations, the Court reasoned, the law “deprived” the electorate “of information, knowledge, and opinion vital to its function.”29 In short, there are two reasons that Citizens United cannot be decided on the basis of the corporation’s legal status. First, legal status depends on moral status, and the 27

28 29

See Amy J. Sepinwall, Citizens United and the Ineluctable Question of Corporate Citizenship, 44 Conn. L. Rev. 575, 580 (2012). See Joseph Raz, On the Nature of Rights, 93 Mind 194, 206–07 (1984). Citizens United v. FEC, 558 U.S. at 354.

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moral status of the corporation is – and likely stands to remain – hotly contested. Second, even if it turned out that the corporation lacked the moral status that would make it a rights-bearing entity itself, listeners’ rights to free speech might warrant recognizing the free speech rights of corporations anyway.

4. THE RELEVANCE OF FEMINISM IN UNDERMINING CITIZENS UNITED

With all that said, Chatman is right to think that the egalitarian concerns of feminists and racial justice theorists would not have yielded the existing Citizens United outcome, but instead the one that Chatman reaches – that corporations should not enjoy rights to spend unlimited amounts of money on political speech. But that may be not so much because of the kind of entities that corporations are; it may instead be because no one – whether an individual or a group – should be permitted to spend unlimited amounts of money on political speech. We can see the whole campaign finance regime as one that enshrines values characteristic of a masculine experience of the world: that regime pits speakers against one another and thereby sustains individualism, atomism, and conflict.30 By contrast, a feminist approach to the world promotes care31 and cooperation32 – values that far better fit the project of democratic self-governance, which is collective at its core. More specifically, a feminist approach of the kind contemplated here would yield campaign finance laws that would far better guarantee an equal opportunity for each citizen to be heard on matters of political importance. Equalizing opportunities to be heard would in turn entail that we promote the speech of those who have for too long been silenced; and, indeed, it would likely require that we limit the amount of speech (and so the amount of money) that those who already dominate our discourse can offer. Because many corporations benefit from unique wealthaccumulation mechanisms as well as enhanced access to an audience, this feminist-inflected regime would have special reason to limit corporate political speech. Or, to put it differently, this feminist-inflected regime would never have produced Citizens United.

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31 32

For the view that masculinism conceives of the world in atomistic and adversarial terms, see, for example, Carol Gilligan, In a Different Voice: Psychological Theory and Women’s Development (1982); Nancy Chodorow, The Reproduction of Mothering (1978). For the view that contemporary campaign finance law enshrines individualism and atomism and assumes conflict, see Orts & Sepinwall, supra note 24, at 654–68. See, e.g., Gilligan, infra note 47. See, e.g., Lawrence A. Blum, Gilligan and Kohlberg: Implications for Moral Theory, 98 Ethics 472 (1988); Nel Noddings, Caring: A Relational Approach to Ethics and Moral Education (2d ed. 2013).

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Citizens United v. Federal Election Commission, 558 U.S. 310 (2010) justice carliss chatman delivered the opinion of the court

The 1789 version of the Constitution explicitly protected slavery and failed to guarantee full equality, making it a liberating document for only some natural persons See U.S. Const. (1789). Notably, during our nation’s infancy, the personhood of corporations was not subjected to such restrictions. Instead, Chief Justice John Marshall recognized the personhood of corporations – at a time when people of African descent were enslaved, women were under the dominion of their husbands and fathers through the doctrine of coverture, and Native Americans were subjected to the principles that govern the conquered. Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 636 (1819) (regarding corporate personhood); William Blackstone, Commentaries on the Laws of England (1769) (regarding coverture); Johnson v. M’Intosh, 21 U.S. (8 Wheat.) 543 (1823) (holding that the discovery power grants sovereignty over native lands, thus Native Americans cannot convey property). As a result, America, the nation based in that document, has a matrix of domination that affects all women but in different ways depending on their race, class, sexuality, and marital status. See Plessy v. Ferguson, 163 U.S. 527 (1896); Muller v. Oregon, 208 U.S. 412, 422 (1908); Radice v. New York, 264 U.S. 292 (1924); West Coast Hotel Co. v. Parish, 300 U.S. 379 (1937). The corporation is a tool of this matrix of oppression, which utilizes structures of power – including racism, patriarchy, heterosexism, and classism – to create a system of oppression. See Reed v. Reed, 404 U.S. 71 (1971); see also, e.g., Anna Julia Cooper, A Voice from the South 134 (1892); Pauli Murray & Mary O. Eastwood, Jane Crow and the Law: Sex Discrimination and Title VII, 34 Geo. Wash. L. Rev. 232, 237 (1965); Patricia Hill Collins, Black Feminist Thought 1990 (describing a “matrix of domination” structured along multiple axes including race, class, and gender, on multiple levels); Dorothy Roberts, Killing the Black Body: Race, Reproduction, and the Meaning of Liberty (1999). Following the Civil War, a trio of constitutional amendments purported to remedy the constitutional disparities for African American men, all men born on America’s shores, and all those allowed to become naturalized citizens. However, the Fourteenth Amendment, which guarantees personhood rights to all human beings and the privilege of citizenship to all born in American territories, without regard for race or gender, does not ensure equality. See U.S. Const. amend. XIV; Miner v. Happersett, 88 U.S. 162 (1874) (noting that the privileges and immunities clause does not give women the right to vote); Civil Rights Cases, 109 U.S. 3 (1883)

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(holding that the private sphere is protected from Congressional enforcement of the Fourteenth Amendment). Instead, equality has happened incrementally, with white women receiving the right to vote through the Nineteenth Amendment in 1920 and Black people not fully obtaining the franchise until the Civil Rights Act. See U.S. Const. amend. XIX; Civil Rights Act of 1964, Pub.L. 88-352, 78 Stat. 241 (1964). It is in the shadows of this unfortunate history that Citizens United asks this Court to limit Congress’s ability to regulate the political participation of corporations. In attempting to equalize citizenship, in recognition of efforts that began in earnest most recently during the Civil Rights Movement, Congress has addressed what we know to be one of the most powerful tools in our democracy: the ability to influence the electorate. See McConnell v. FEC, 540 U.S. 93, 203 (2003); see also United States v. Automobile Workers, 352 U.S. 567, 571 (1957). To give personhood and citizenship to natural persons – including women, people of color, and other marginalized groups – requires balancing, and in many ways restructuring, the matrix of domination. Federal law prohibits corporations and unions from using their general treasury funds to make independent expenditures for speech defined as an “electioneering communication” or for speech expressly advocating the election or defeat of a candidate. 2 U.S.C. § 441b. These limits on electioneering communications were upheld in McConnell, 540 U.S. at 203–09, which relied on Austin v. Michigan Chamber of Commerce, 492 U.S. 652, 110 S.Ct, 1391, 108 L.Ed.2d 652 (1990), a decision that held that political speech may be banned based on the speaker’s corporate identity. The nature of a corporation enables it to exert undue influence on a process that it is incapable of otherwise participating in, due to its lack of a corporeal form and resulting lack of citizenship. It is thus not an infringement of corporate rights to limit political spending. It is instead the protection of First Amendment rights of all natural persons and the voting rights of citizens. Corporations are artificial persons, created through an agreement between individuals and the state. Corporations do not exist without state authority. All business entities are artificial persons, but corporations in particular are designed to separate ownership and control, stand alone, and – because of state concessions – operate as a real entity, with the rights and responsibilities necessary to maintain this existence. The First Amendment is intended to be a limit on the state’s authority over the natural persons who form the state, but it is not intended to extend equal rights to artificial persons. The amendments are designed to protect us from our creation, the state. The state, in turn, designs laws that create and regulate the engines of commerce, including corporations. As such, the state may restrict corporations in ways that are not acceptable limitations on natural persons. Because corporations are also stand-alone, real entities, separate from the people who create them and operate them, restricting corporate political speech does not infringe on the constitutional or human rights of any natural persons, who still maintain their ability to engage in political speech. We continue to uphold McConnell and Austin, finding that there is a compelling interest in limiting corporate speech and that the restrictions are

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narrowly tailored to achieve that interest. As applied to corporate spending on elections, § 441b is not an unconstitutional limitation on expression. Further, corporate spending may be regulated through disclosure and disclaimer requirements.

I

In January 2008, Citizens United released a film entitled Hillary: The Movie (hereinafter “Hillary”). The film is a ninety-minute documentary about thenSenator Hillary Clinton, who was a candidate in the Democratic Party’s 2008 presidential primary elections. In the film, Senator Clinton is mentioned by name. Hillary features mostly critical interviews with political commentators and other persons and the movie was released in theaters and on DVD. Citizens United wanted to increase distribution by making it available through video-on-demand (VOD), which allows cable subscribers to select programming from a menu and watch the program at any time. In December 2007, a cable company offered, for a payment of $1.2 million, to make Hillary available on a VOD channel called Elections ’08 to viewers, free of charge. Citizens United is a nonprofit corporation and as such is covered by the Bipartisan Campaign Reform Act of 2002 (BCRA), a federal law that prohibits corporations and unions from using general treasury funds to make direct contributions to candidates or independent expenditures that expressly advocate the election or defeat of a candidate, through any form of media, in connection with certain qualified federal elections. 2 U.S.C. § 441b (2000 ed.). BCRA § 203 amended § 441b to prohibit any “electioneering communication,” defined as “any broadcast, cable, or satellite communication” that “refers to a clearly identified candidate for Federal office” and is made within thirty days of a primary election or sixty days of a general election. 2 U.S.C. §§ 441b(b)(2), 434(f )(3)(A) (2006 ed.). The Federal Election Commission’s (FEC) regulations further define an electioneering communication as a communication that is “publicly distributed.” 11 CFR § 100.29(a)(2) (2009). The regulations further state that, “[i]n the case of a candidate for nomination for President . . . publicly distributed” means that the communication “[c]an be received by 50,000 or more persons in a State where a primary election . . . is being held within 30 days.” § 100.29(b)(3)(ii)(A). Citizens United has an annual budget of about $12 million. Most of its funds are from donations by individuals, but, in addition, it accepts a small portion of its funds from for-profit corporations. To implement the proposal, Citizens United was prepared to pay for the VOD; and to promote the film, it produced two ten-second ads and one thirty-second advertisement. Each advertisement includes a short statement about Senator Clinton, followed by the name of the movie and the movie’s website address. Citizens United desired to promote the VOD offering by

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running advertisements on broadcast and cable television and intended to make Hillary available through VOD within thirty days of the 2008 primary elections. Fearing that the film and ads would be covered by § 441b’s ban on corporatefunded independent expenditures, subjecting the corporation to civil and criminal penalties under § 437g, Citizens United sought declaratory and injunctive relief against the FEC, arguing (1) that §411b is unconstitutional as applied to Hillary and (2) that BCRA’s disclaimer and disclosure requirements, BCRA §§ 201 and 311, 116 Stat. 88, 105, are unconstitutional as applied to Hillary and to the three ads for the movie. A three-judge court later convened to hear the cause. The resulting judgment gives rise to this appeal. The District Court denied Citizens United’s motion for a preliminary injunction, 530 F.Supp.2d 274 (D.D.C. 2008) (per curiam), and then granted the FEC’s motion for summary judgment, App. 261a–62a. See id., at 261a (“Based on the reasoning of our prior opinion, we find that the [FEC] is entitled to judgment as a matter of law. See Citizen[s] United v. FEC, 530 F.Supp.2d 274 (D.D.C. 2008) (denying Citizens United’s request for a preliminary injunction)”). The court held that § 441b was facially constitutional under McConnell v. Federal Election Comm’n, 540 U.S. 93, 203–09, 124 S.Ct. 619, 157 L.Ed.2d 491 (2003), and that § 441b was constitutional as applied to Hillary because it was “susceptible of no other interpretation than to inform the electorate that Senator Clinton is unfit for office, that the United States would be a dangerous place in a President Hillary Clinton world, and that viewers should vote against her.” 530 F.Supp.2d, at 279. The court also rejected Citizens United’s challenge to BCRA’s disclaimer and disclosure requirements. It noted that “the Supreme Court has written approvingly of disclosure provisions triggered by political speech even though the speech itself was constitutionally protected under the First Amendment.” Id. at 281. We noted probable jurisdiction. 555 U.S. 1028, 128 S.Ct. 1471, 170 L.Ed.2d 294 (2008). The case was reargued in this Court after the Court asked the parties to file supplemental briefs addressing whether we should overrule either or both Austin and the part of McConnell that addresses the facial validity of 2 U.S.C. § 441b. See 557 U.S. 932, 128 S.Ct. 1732, 170 L.Ed.2d 511 (2009). II

Hillary and the related advertisements are the functional equivalent of electioneering communications, as defined by the BCRA, which bars Citizens United from using general treasury funds for the expenditures, which expressly advocate for the defeat of Senator Hillary Clinton as a candidate for the 2008 Democratic Party nomination. 2 U.S.C. § 441b (2000 ed.). The test for the application of the BCRA is an objective one, under which a court should find that a communication is the functional equivalent of express advocacy only if it is susceptible of no reasonable interpretation other than as an appeal to vote for or against a specific candidate. FECA of 1971, § 316, 2 U.S.C.A. § 441b. Hillary is a feature-length negative

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advertisement that urges viewers to vote against the candidate; in light of its historical footage, interviews with persons critical of the candidate, and the voiceover narration, the film would be understood by most viewers as presenting an extended criticism of Hillary Clinton’s character and her fitness for the office of the presidency. FECA of 1971, § 316, 2 U.S.C.A. § 441b. Section 441b makes it a felony for all corporations to expressly advocate for the election or defeat of candidates or to broadcast electioneering communications within thirty days of a primary election and sixty days of a general election. The BCRA does not completely prevent corporations and unions from participating in the election process. A corporation or union may establish political action committees, commonly known as PACs, in a “separate segregated fund” for these purposes. See McConnell, 540 U.S., at 330–33, 124 S.Ct. 619 (opinion of Kennedy, J.). 2 U.S.C. § 441b(b)(2). The moneys received by the segregated fund are limited to donations from stockholders and employees of the corporation or, in the case of unions, members of the union. Through this allowance, Congress strikes a balance. PACs enable corporations and unions to participate in the political process within the statutory limitations and disclosures. This is in addition to the rights each individual has to contribute to campaigns and influence the electoral process. Laws that burden political speech are subject to strict scrutiny, requiring the government to prove that the restriction “furthers a compelling interest and is narrowly tailored to achieve that interest.” Buckley v. Valeo, 424 U.S. 1 (1976). We find that the interest in promoting free and fair elections, limiting the excessive influence of wealthy individuals, and generally protecting the sanctity of elections are all compelling interests. Congress is concerned with undue external influences, such as from foreign actors. Corporations are not natural persons and not citizens and are thus within the category of persons who Congress may rightfully restrict from political speech. See First Nat’l Bank of Bos. V. Bellotti, 435 U.S. 765, 774, 777–78 (1978); see also, e.g., Ins. Co. v. New Orleans, 13 F. Cas. 67, 68 (C.C.D. La. 1870 (No. 7,052) (establishing that only natural persons can be born or naturalized, and only natural persons can be deprived of life or liberty, so it is clear that artificial persons are excluded from the provisions of the first two clauses). While these limitations on corporations found in the FECA are restrictions on political speech, they do not violate the First Amendment because the Constitution is written for human beings, not artificial entities. To give corporations rights, a fiction must be created to imprint human characteristics onto the corporation. Corporate rights are a fact-based inquiry that will always require courts to engage in a fact-intensive, case-by-case analysis because of the nature of corporate personhood. To determine First Amendment rights, and whether any given statute or regulation is unconstitutional as applied to a particular corporation or type of corporation, we must examine how the corporation is founded and how the corporation operates. We cannot presume that a corporation has

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personhood and rights in any situation, especially when the rights-based question is based on corporeal activities and rights that are reserved for special classes of natural persons. The right to vote – reserved for citizens, a particular class of natural persons who have reached the age of majority and are not subject to other allowable restrictions on voting – is a right that artificial persons cannot obtain. Congress and the Constitution make it clear in many contexts that some rights are human rights, not personhood rights. Voting is one of those contexts. See Quaker City Cab Co. v. Pennsylvania, 277 U.S. 389, 400 (1928); Reynolds v. Sims, 377 U.S. 533, 555 (1964) (“Undeniably the Constitution of the United States protects the right of all qualified citizens to vote, in state as well as federal elections”); Black v. McGuffage, 209 F. Supp. 2d 889, 900 (N.D. Ill. 2002) (“Further, the Supreme Court has on more than one occasion recognized that the right to vote is one of those rights that is preservative of other basic civil and political rights.”); see also, e.g., UN Charter Preamble, art 1, para 3, art 8, art 13, para 1, art 55 & art 76; Universal Declaration of Human Rights Preamble, art 2 and art 16, para. 1 (although not binding on the United States, these provisions describe the parameters of human rights). To define the corporate person and other artificial persons, it is helpful to consider how we define natural persons. The logical definition of “person” includes any human being possessing a physical body, without concern for age, gender, race, or nationality.1 How to classify natural persons for legal purposes is in many ways as logical as how to define them. States categorize people by age, mental capacity, and other constitutionally acceptable legal classifications. See, e.g., Jimenez v. Weinberger, 417 U.S. 504 (1974) (“[T]he equal protection clause is violated by discriminatory laws relating to the status of birth where classification is justified by no legitimate state interest”). When states classify persons, however, they are working with entities that are not creatures of the state but are instead the creators of the state. See Dodge v. Woolsey, 59 U.S. (18 How.) 331, 375 (1855). As such, the state does not have the power to eliminate a human being’s existence, and the state cannot improperly restrict certain rights deemed to be fundamental. Id. at 375 (“Individuals are not the creatures of the State, but constitute it. They come into society with rights, which cannot be invaded without injustice.”). In contrast, states do have the power to eliminate a business organization’s existence, because corporations are creatures of the state, with rights that are not recognized until either the state acknowledges the formation documents or the organization engages in actions the state has deemed to meet the threshold for recognition as a business form. Id. Businesses are governed by the terms of formation documents and the mandatory terms contained in statutes. See, e.g., Del. Code Ann. tit. 8, § 102 (2009). Because of the state’s role in a company’s recognition and 1

See Person, Oxford Living Dictionary, https:/en.oxforddictionaries.com/definition/person [https://perma.cc/5PMF-XZM5] (last visited Apr. 21, 2018) (defining “person” as “[a] human being regarded as an individual”).

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formation, all formal business entities are hybridized artificial entities. Once formed, every entity – from the limited partnership to the corporation – operates in the world limited by how the state has defined it. Each entity also gives its founders, investors, and managers varying degrees of control and varying degrees of liability; these factors determine whether the entity is a complete stand-alone entity or is intended to be an aggregate of the people who make up the entity. The rights that corporations hold are incidental to this status. Corporations also have rights defined by statutes. Because corporations are not naturally occurring, we analyze corporate constitutional rights within the parameters of how the corporation is defined and how the corporation operates. The Supreme Court first directly addressed the nature of the corporation in Trustees of Dartmouth College v. Woodward, 17 U.S. at 636 (artificial entity/concession theory); see also Bank of the U.S. v. Deveaux, 9 U.S. (5 Cranch) 61, 86–88, 91 (1809) (aggregate theory); Bank of the U.S. v. Dandridge, 25 U.S. (12 Wheat.) 64, 91–92 (1827) (real entity theory). Chief Justice John Marshall states: A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created.

Dartmouth College, 17 U.S. (4 Wheat.) at 636. Dartmouth College shows that, at least initially, corporations were not persons and not entitled to all the rights of natural persons. Corporate rights are merely the natural result of what is granted to the corporation during the chartering process. Id. (“Among other things, [a corporation] possesses the capacity . . . of acting by the collected vote or will of its component members, and of suing and being sued in all things touching its corporate rights and duties.”); Hale v. Henkel, 201 U.S. 43, 74 (1906) (“[T]he corporation is a creature of the state. . . presumed to be incorporated for the benefit of the public”). The corporation in Dartmouth College is the subordinate of the government, which can grant it the right to exist, take it away, alter it, and regulate it. See Terre Haute & I.R. Co. v. Indiana, 194 U.S. 579, 584 (1904); Hancock Mut. Life Ins. Co. v. Warren, 181 U.S. 73, 76 (1901) (“A corporation is the creature of the law, and none of its powers are original. They are precisely what the incorporating act has made them, and can only be exerted in the manner which that act authorizes.”). The corporation exists at the pleasure of the state, and states have the authority to regulate corporations should they choose to do so. Dartmouth College, 17 U.S. (4 Wheat.) at 636. While the Dartmouth College Court does not view corporations as distinctly separate persons and does not view rights as derivative of a corporation’s constituent natural persons’ rights, it does acknowledge the existence of corporate rights. Dartmouth College, 17 U.S. (4 Wheat.) at 636 (artificial entity/concession theory);

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see also Dandridge, 25 U.S. (12 Wheat.) at 91–92 (real entity theory); Deveaux, 9 U.S. (5 Cranch) at 86–88, 91 (aggregate theory). The Court notes that corporations can own and sell property or sue and be sued. Dartmouth College, 17 U.S. (4 Wheat.) at 636; Dandridge, 25 U.S. (12 Wheat.) at 91–92 (1827); Deveaux, 9 U.S. (5 Cranch) at 91(1809). These rights are merely the result of what is granted during the chartering process; the corporation does not enter the state with rights, but the state cannot deny the rights that accompany state-sanctioned activities. Head & Armory v. Providence Ins. Co., 6 U.S. (2 Cranch) 127, 167 (1804) (Marshall, J.)). Corporations are also stand-alone entities, operating separately and distinctly from the people who own and operate them. As such, when considering corporate rights, we should not consider the rights of the persons who make up the corporation, particularly when considering rights reserved for human beings. To do so is both a conflation of the various business entities as well as a false equivalency between corporations and natural persons, which is outside of the scope of how the state defines the corporation. As a result, corporate personhood and constitutional rights derived solely from the rights of the people who make up the corporation are outside of the scope of what the corporate founders intended when choosing the corporate form. Chief Justice Marshall also spoke to the real nature of the corporation, highlighting how the corporation can embody several theories in the mind of a person at once, depending on the context. He first formulated the real entity theory in the dissent of Bank of United States v. Dandridge, 25 U.S. at 91–92 (Marshall, C.J., dissenting). Marshall argued that the corporation is “one entire impersonal entity, distinct from the individuals who compose it,” which will always distinguish its transactions from those of its members. Id. Corporations are also real persons with real rights; all the state can do is recognize or refuse to recognize a corporation’s existence, but once existence is recognized, the state cannot deny relevant constitutional protections. A corporation is a separate entity controlled by managers, but it is not the sum of its owners. Corporations hold property in their own names; enter into contracts that bind only the corporation, in their own names; and engage in other activities indicative of stand-alone natural persons. Thus, after formation, the corporation is an entity unto itself, untethered from its founders, shareholders, and management. The people associated with the corporation are agents, investors, or lenders; they do not define the corporation. This real existence is subject to state control as defined at formation and is entitled to rights. There are situations in which some corporations, based on the nature and purpose of formation and how they operate after formation, are entitled to rights that are traditionally reserved for natural persons. Examples include First Amendment freedom of religion for corporations with a clear religious purpose and Fifth and Fourteenth Amendment due process rights. Bellotti, 435 U.S. at 774, 778 n.14 (First Amendment); Hale, 201 U.S. at 76 (Fourth Amendment); Mo. Pac. Ry. Co. v. Nebraska, 164 U.S. 403, 410 (1896) (Fifth Amendment); Santa Clara

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v. S. Pac. R.R. Co., 118 U.S. 394, 396 (1886) (Fourteenth Amendment). To determine when these rights belong to corporations and when a restriction – as applied to the corporation – is unconstitutional, we must look to how the corporation defines itself and operates and relates to third parties. Corporate rights, unlike human rights, and corporate personhood, unlike natural personhood, are not foregone conclusions. Forming a corporation is a deliberate and purposeful exercise of the corporate founders’ rights and should operate as an acceptance of the terms presented by the state – including any implied limitations on the corporation’s exercise of purely human rights. See Del. Code Ann. tit. 8, § 101 (2009). When a corporation is formed, what the people choose – and what the state provides – is an entity that is wholly separate from their individual identities. See, e.g., Del. Code Ann. tit. 8, §§ 391(j), 501 (2009) (noting Delaware corporations exempt from franchise taxation due to status, including those exempt under 28 U.S.C. §501). When states recognize these entities, they must balance a desire to promote business with the interests of the state and rights of third parties who interact with the artificial business entities. In response to this unique and man-made situation, states weigh the protection of unassociated individuals who interact with the corporation against the rights embodied in the corporation’s very existence. Viewing the corporation as a person is necessary for many laws and regulations to have their intended effect, and typically it is the state or federal legislatures that decide when corporate personhood is necessary. Legislators draft state and federal statutes to include the corporation in the definition of a person, without regard to how such classifications impact the constitutional definition or rights of the corporation; instead, they make a conscientious decision that a statute should apply equally to artificial persons. See, e.g., 26 U.S.C. § 7701(a)(1) (2008) (“Person: The term ‘person’ shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.”); U.C.C. § 1-201(b)(27) (“‘Person’ means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.”). The statutes acknowledge that some human activity must be given equal protection, regardless of the nature of the person engaging in the activity. Id. Many statutes also make a distinction between a human actor, a citizen actor, and an artificial entity actor. See Ins. Co., 13 F. Cas. at 68 (interpreting parts of the Fourteenth Amendment to apply only to human beings: “Only natural persons can be born or naturalized; only natural persons can be deprived of life or liberty; so that it is clear that artificial persons are excluded from the provisions of the first two clauses.”); see also Nw. Nat’l Life Ins. Co v. Riggs, 203 U.S. 243, 255 (1906); Bank of Augusta v. Earle, 38 U.S. 519, 586 (1839) (establishing that only natural persons may avail themselves of the privilege against self-incrimination and citizen status for purposes of privileges and immunities protection). These distinctions, properly

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created by state and federal legislators, are justified by the Constitution and fit within theories of corporate personhood. When courts provide corporations with these same rights as defined by statute, they are interpreting the intention of the drafters of the statute. It is not the job of this Court, or any court, to give corporations rights that states, legislatures, and even the corporate founders did not intend as indicated by the language of statutes, the formation documents that indicate which concessions to state law the founders intend, and other contracts promulgated by the corporation that govern its relationship with its investors and third parties. The corporation is both a real entity and a creature of the state. As such, we must give proper deference to the role of the state by considering both the state’s role in formation and the corporation’s stand-alone status. Its real personhood existence is limited by the realities of the corporate form as defined by state law. When analyzing how restrictions may be applied to corporations, we must look to which protections are incidental to a corporation’s very existence and ensure that the right is necessary to protect the corporation itself, not the people who make up the corporation. See Transcript of Oral Argument, at 33, Citizens United, 588 U.S. 310 (No. 08-205) (statement of Sotomayor, J.). Voting and the expression of opinions and positions during elections are not incidental to corporate existence. Furthermore, a limitation on the corporation’s right to contribute to campaigns or promote a particular position does not infringe on any human rights, as the people who make up the corporation are free to participate in elections based on their status. The Constitution is written for human beings, not entities. As stated earlier, to give corporations rights, a fiction must be created to imprint human characteristics onto the corporation. We can say legally that the corporation is two things, an artificial entity and a real entity, and those two things require courts to examine and weigh evidence case by case to decide rights. There are no inalienable corporate rights; therefore, a rights determination for one corporation is merely persuasive authority for a determination of rights for another.

III

When determining whether a right exists for the corporation, this Court must also consider what additional responsibilities accompany rights. All rights come with responsibilities, but it is difficult to assign responsibility to a shareholder, officer, or director when a corporation exercises freedom of speech or freedom of religion. It is equally difficult to ensure free and fair elections when individuals are allowed to hide behind the corporate form through the use of the requested independent expenditure rights. In a capitalist, free market economy, nothing is free – not even freedom of speech. The First Amendment limits state interference, but it does not provide protection from the operation of free markets and freedom of contract, in

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which private actors can exercise their freedom to respond to an exercise of free speech in any way they see fit. Shareholders, directors, and officers are all protected from various levels of responsibility by the existence of the corporation and the contracts between the corporation and its agents and owners. This protection, through the liability shield, also enables these persons to be anonymized and blameless for corporate speech. The liability shield serves as a veil, preventing market forces from addressing the individuals who aggregate to form and control the various systems that encompass a corporation. When individuals form a corporation, they give up the power to control the corporation through their ownership interests, but they also give up the responsibilities that accompany that control. There are no shareholder duties through the rights they exercise in the aggregate. As such, there should be no freedom based on the rights of the individuals who are masked by a liability shield. This Court has recognized the importance of speech in our democracy, particularly the role of speech in helping citizens make informed choices among candidates for office. See Buckley, supra, at 14–15, 96 S.Ct. 612 (“In a republic where the people are sovereign, the ability of the citizenry to make informed choices among candidates for office is essential”). The First Amendment “‘has its fullest and most urgent application’ to speech uttered during a campaign for political office.” Eu v. San Francisco County Democratic Central Comm’n, 489 U.S. 214, 223, 109 S.Ct. 1013, 103 L.Ed.2d 271 (1989) (quoting Monitor Patriot Co. v. Roy, 401 U.S. 265, 272, 91 S.Ct. 621, 28 L.Ed.2d 35 (1971)); see Buckley, supra, at 14, 96 S.Ct. 612 (“Discussion of public issues and debate on the qualifications of candidates are integral to the operation of the system of government established by our Constitution”). While it is important to maintain these rights for citizens, Congress and this Court are under no obligation to preserve the same speech rights for artificial persons. To disregard the differences between speakers in our democracy, particularly those between natural persons and artificial persons, is to embody the artificial person with superior powers and rights – without any of the responsibilities that burden the natural citizen. Once a corporation is formed, there are no individuals or citizens to protect, as the individuals who form the corporation retain their individual freedom of speech and the accompanying obligations of that speech, outside of the corporation. Citizens United is asking for complete inclusion in the political imagination of this country – a recognition that has yet to be achieved by all natural persons and even by all citizens. See Richardson v. Ramirez, 418 U.S. 24, 54-56 (1974) (holding that the disenfranchisement of felons does not violate the Equal Protection Clause). The misplaced extension of rights to corporations, based on the rights they inherit from the human beings who make up the corporation, means that historically, corporations have rights superior to many classes of human beings. While it is imperative that this Court allow Congress to remedy the violation of constitutional rights that occurs when classes of persons are singled out for different treatment

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under the law based solely on their identity, corporations are not within the class of persons subjected to disparate treatment under the law as written or as applied. See, e.g., Hernandez v. Texas, 347 U.S. 475, 478 (1954) (explaining when a violation of Fourteenth Amendment rights has occurred). Although this court acknowledged a corporation’s right to Fourteenth Amendment protection as early as 1886 in Santa Clara, 118 U.S. at 396, women have historically faced legally sanctioned obstacles due to systemic failure to recognize women as “persons” entitled to Fourteenth Amendment due process and equal protection. Brief for Appellant, Reed v. Reed, 404 U.S. 71 (1971) No. 70-4, 1971 WL 133596 at *10; Miner, 88 U.S. at 162 (deciding privileges and immunities clause does not give women the right to vote); In re Lockwood, 154 U.S. 116 (1894) (denying women the right to practice law); Bradwell v. Illinois, 83 U.S. (16 Wall.) 130 (1872); Quong Wing v. Kirkendall, 233 U.S. 69, 63 (1912) (allowing discrimination in granting occupational licenses to women). Women, African Americans, Asian Americans, Native Americans, and non-citizens did not have the freedom to contract; engage in commerce; own property; and for some, be recognized as a person, which was granted to corporations nearly 200 years ago by John Marshall in Dartmouth College. See Plessy v. Ferguson, 163 U.S. 537 (1896) (instituting the separate but equal doctrine); M’Intosh, 21 U.S. at 543 (1823) (discussing the property rights of native Americans). Instead, rights for these persons have been granted incrementally through constitutional amendments and legislation. See, e.g., U.S. Const. amend. XIV; U.S. Const. amend. XIX; Civil Rights Act of 1964, 78 Stat. 253 (1964), 42 U.S.C. § 2000e (1964). Citizenship under the Fourteenth Amendment is the first threshold one must meet to vote, as guaranteed by the Fifteenth Amendment. Those rights have a gendered and racist history: the status of the offspring of enslaved mothers and white fathers was deemed to be enslaved and ineligible for citizenship, and the offspring of white women born out of wedlock were denied citizenship, inheritance, and other rights that were otherwise the obligation of a married father. See Naturalization Act of 1790, 1 Stat. 103 (1709) (restricting immigration to free white persons); Hudgins v. Wrights, 11 Va. (1 Hen. & M.) 134, 137 (1806); Guyer v. Smith, 22 Md. 239 (1864) (denying the foreign-born children of a Black father and white mother citizenship because foreign-born illegitimate children were considered non-citizens); Dred Scott v. Sanford, 60 U.S. 393 (1857); Daniel v. Guy, 19 Ark. 121, 131–32 (1857) (noting that the application of the one-drop rule follows the maternal line. To be free, one had to be born of a free woman); Act of Feb. 10, 1855, Ch. 71 § 2, 10 Stat. 604 (stating that the legal existence of the woman is suspended during marriage, such that a foreign white woman who marries an American man is an American) . In fact, one of the first laws of this nation, passed in what is now Virginia in 1662, declared that children born to enslaved mothers were also enslaved. 2 The Statutes at Large; Being a Collection of All the Laws of Virginia from the First Session of the Legislature 170 (William Waller Hening ed., 1823) (“WHEREAS some doubts have arrisen [sic] whether children got by any

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Englishman upon a negro woman should be slave or ffree [sic], Be it therefore enacted and declared by this present grand assembly, that all children borne in this country shalbe [sic] held bond or free only according to the condition of the mother. . .”). These efforts were designed to protect and legitimize the morality of white men, who were not punished with the obligation to support but were instead rewarded – during slavery – with additional capital. As a nation, the country is not forced to give equality to their illegitimate offspring. Many of these notions persist today. Following the end of slavery, the application of the Fourteenth Amendment is based in nativist notions and stereotypes about the respective role of parents and the superiority of white people. Page Act of 1875, Sect. 14, 18 Stat. 477, March 3, 1875, Pub. L. 43-141 (prohibiting entry of Chinese women); Dow v. United States, 226 F. 145 (4th Cir. 1915) (classifying some Asian people, including Syrians, as white persons free to immigrate to the United States); See 8 U.S.C. §§ 1401(g), 2409(a) (to secure citizenship for non-marital foreign-born children born after November 14, 1968, a father must provide proof of paternity and proof of financial support before age 18); Nationalization Act of 1940, Ch. 876 §§ 201-205, 54 stat. 1137, 1138-40 (establishes citizenship, immigration, and naturalization rules); 8 U.S.C. § 1409 (c) (mother of non-marital foreign-born child need only be in the United States for one year at any point in her life); Nguyen v. INS, 533 U.S. 53, 56–57 (2001) (espousing a biological justification for disparate immigration and naturalization policies). Citizenship status continues to flow from the mother to this day, such that the child of an unwed male soldier and a woman abroad is not considered American under the law. If status and citizenship are defined by the condition of the mother, then who is the mother of the corporation? While the fiction is that the corporation is a nameless, faceless, raceless, and genderless artificial person, it is clear, based on who had the power to form the Dartmouth College corporation, that it is most certainly male and assuredly a white male citizen. A child of an enslaved woman was born a slave. A child of an unwed white woman who is an American citizen is an American citizen, but traditionally does not inherit the social status of their father. Yet, a corporation is always a person and, if Citizens United prevails, will be capable of exercising a tool of citizenship without restriction based on its status. We would continue the tradition of deeming the corporation to be the blameless and irresponsible offspring of the white male citizen, with the superior rights afforded that identity. This gendered, nativist, racialized citizenship is imposed on a voting rights framework that, to this day, expands access to voting by marginalized groups only by protective measures. See Lopez v. Monterey County, 519 U.S. 9, 20–21 (1996) (enforcing the preclearance requirement found in §5 of the Voting Rights Act). As we operate in this system, it is important to acknowledge what we would be saying if we were to give Citizens United its desired outcome. In a capitalist society, spending is a form of speech, as citizens may promote their desired candidates by making campaign donations, or they may express disdain for a

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company’s decisions by withholding their dollars. There are multiple interlocking systems of oppression that impact women’s lives and social status, and by extension, limit their ability to speak. Before this Court’s landmark holding in Reed v. Reed, the lack of Fourteenth Amendment protection denied women the right to occupational and professional licenses, the right to a minimum wage, and the right to generally participate in the economy outside of the control of their husbands and fathers and free from state-sanctioned gender-based distinctions. See The Slaughter-House Cases, 83 U.S. (16 Wall.) 36 (1873) (demonstrating that there was no protection to practice trade, privileges and immunities do not apply the Bill of Rights to the states, and equal protection only applies to race); Bradwell v. Illinois, 83 U.S. (16 Wall.) 130 (1873) (holding that women may be excluded from the practice of law because inclusion is not a privilege of citizenship); Civil Rights Cases, 109 U.S. 3 (1883) (finding that the private sphere is protected from congressional enforcement of the Fourteenth Amendment); Adkins v. Children’s Hospital, 261 U.S. 525, 553 (1923), overruled by West Coast Hotel v. Parrish, 300 U.S. 379, 400 (1937) (holding that there is no right to a minimum wage); Goesaert v. Cleary, 335 U.S. 464, 466 (1948) (finding that women may not work as bartenders unless the bar is owned by their husband or father). In these decisions, the mere possibility of motherhood was weaponized to exclude women from full and equal participation in the workforce. See, e.g., Muller v. Oregon, 208 U.S. 412, 422 (1908) (upholding a maximum hour law for women). This situation limited a woman’s ability to engage with the free markets, and by extension, to voice an opinion on the political system through spending. For women who exist at the intersections and identify with a race or class of persons who are limited based on these identities, gender compounds this inequality, making their legal personhood incongruous with their humanity. As Pauli Murray proclaimed, “it is exceedingly difficult to determine whether a Negro woman is being discriminated against because of race or sex.” Murray & Eastwood, supra, at 243. This Court has previously acknowledged the need to provide protection for discreet and insular minorities who are unable to protect themselves through the political process. United States v. Carolene Products Co., 304 U.S. 144, 152 n.4 (1938). Congress’s adoption of the BCRA merely continues to advance this goal through an acknowledgment of the influence that spending has on the matrix of oppression and the role of the corporation in that matrix. Citizens also speak through voting. Yet there is no clearer example of the disparate nature of personhood than the evolution of voting rights. White women did not receive the right to vote until the passage of the Nineteenth Amendment in 1920. Black women, although technically included in the Nineteenth Amendment, did not fully realize this right until 1964. Native Americans were not granted full U.S. citizenship until 1924, but it took nearly forty years for all fifty states to allow Native Americans to vote. See Indian Citizenship Act of 1924, Pub. L. 68-175, 43 Stat. 253 (1924) (The Act was necessary because the “subject to jurisdiction” clause of the Fourteenth Amendment was found to exclude Native Americans. It granted

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citizenship but left voting rights to the states. Utah was the final state to grant voting rights in 1962.); Elk v. Wilkins, 112 U.S. 94 (1884) (A Native American born a citizen of a tribal nation was not born an American citizen and did not become one by voluntarily leaving his tribe). Until Title VII’s inclusion of sex in the Civil Rights Act, women were not afforded Fourteenth Amendment protection. Reed, 404 U.S. at 71; Murray & Eastwood, supra, at 232. Yet throughout the periods of all these struggles for equality, the corporation remained a dominant and pervasive force, with repeated clear declarations of its personhood status. A corporation, however, is not a citizen, can never be a citizen per the Fourteenth Amendment, and should never be granted rights incidental to citizenship. See Bellotti, 435 U.S. 765, 777–78 (1978) (demonstrating that the proper question is whether the activity falls within what the Constitution intended to protect). A corporation is not born, and it lacks the physical body contemplated by the Fourteenth Amendment. It cannot vote, it cannot physically be imprisoned, and it cannot physically exercise religion through worship or reflection. A corporation may only be punished by infringements on its rights to exist, to contract, or to do business within a jurisdiction. Corporate consequences are not impositions on a physical body and are thus not impositions on rights incidental to citizenship. When a person is held liable for corporate actions, such liability is based on their individual role in the activity and not on the actions taken by the corporation itself. For this reason, corporate rights should be limited to what the state grants and what a corporation can do independent of its human agents. Otherwise, the corporation stands as a tool to echo the voice of the dominant. While it cannot vote and cannot be a citizen, the voice of the corporation – heard through commerce and its impact on the market – is louder than the voice of many citizens, especially the historically marginalized. This point combined with the nature of the corporation gives the state a compelling reason to restrict corporate political activity. The BCRA does not infringe upon Citizens United’s constitutional rights, nor does it restrict the rights of individuals. Instead, individuals who form the corporation can still voice their opinions through voting if they are citizens and through donations if they are not. While a corporation may rightly be viewed as an association of individuals, it is an association of individuals who affirmatively choose the corporation. It is a business structure divorced from their person for purposes of profits, liability, and management. By availing themselves of the benefits of the legal entity, these individuals are affirmatively choosing to give up individuality to create a new and separate corporate person. Notably, the individuals have a choice: to speak to influence elections as individuals or through an entity – a choice that has historically been denied to marginalized groups. Through property ownership and contracting, which were rights denied to women and people of color for decades, some individuals have the ability to anonymously amplify their speech. Although we have made great strides, these rights are not fully realized by everyone today. This history is pervasive and is not remedied by one generation of reforms. Here, the past

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is a prologue, as it impacts the way we operate and engage with the law, and it defines the rights of persons, implicitly and explicitly. Yet equally pervasive is the dominance of the corporation, as the corporation’s economic rights are and always have been fully realized by this Court. Restrictions on corporate speech do not chill or limit the speech of the people who make up the corporation. A corporation has no human rights – no religion, no race, no gender, no sexuality, no disability, no body to wrongfully imprison, and no right to exist at all if the state revises the agreement or the corporation fails to comply with the terms of its agreement with the state. Because the corporation lacks a physical body, it does not need the same protections as the people who make up the corporation, and it certainly should not have rights that are superior to human beings’. Instead, this noncorporeal status allows limits to the corporation’s ability to use privilege and status to magnify and amplify their voice. Removing these limits is not necessary to protect First Amendment speech rights, but doing so may violate attempts to provide Fourteenth Amendment equal protection. By passing the BCRA, Congress has overcome, or attempted to overcome, a legacy of inequality that originated with the first version of the Constitution, was reinforced in Dartmouth College, and persists today. IV

Because the language of the Constitution is focused on persons and citizens, in order to extend rights to corporations, the Court must define them as such through the legal fiction of corporate personhood. To make this logical leap, we must analogize corporate scenarios to human scenarios, but we should not allow this analogy to persist when doing so contradicts the very nature of corporate law. We should also give consideration to the personhood of the corporation as it compares to that of many natural persons when deciding whether any corporate restriction, as applied, is unconstitutional. The Constitution is always designed to protect human beings first, even when it is protecting the actions of the corporation, and even when it is only protecting a chosen few natural persons. Corporate personhood is a concession and a compromise. Our precedent, as far back as Chief Justice John Marshall in Dartmouth College, makes it clear that a state can redefine its creation – the corporation. Dartmouth College, 17 U.S. at 636. This is because when deciding corporate constitutional rights, we are deciding the rights of an artificial entity that would not exist without state power, but whose rights, both intentional and incidental, must be acknowledged once formed. We cannot divorce an analysis of corporate constitutional rights from an analysis of the legal status of corporations. States have made judgments about the nuances of the corporate form; creating the corporation; and defining the rights and responsibilities of incorporators, shareholders, directors, and officers. See CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 94 (1987) (The Court has made numerous proclamations regarding constitutional rights over

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the years; it is clear that “the corporation . . . owes its existence and attributes to state law.”). In exchange for the benefits of a corporation, the humans who choose to unite in the corporate form create an entity completely separate from themselves. The entity created through this collaboration of the state and the natural person creates a new legal fiction embodied with its own rights, limitations, and responsibilities. We must interpret what the state intends, and states intend for corporations to be separate persons and for the rights of individuals to be maintained separately from those entities. We cannot divorce our nation’s history from this analysis – particularly the generations-long battle for citizenship and voting rights fought by women, Black people, indigenous persons, the children of unmarried American men born abroad to non-American mothers, and countless other groups excluded from the original text of our Constitution and its early amendments. The stories of some are suppressed in favor of the stories of the majority. This inequality is baked into our constitutional history. The Reconstruction Amendments, constitutional advancements in women’s rights, and favorable legislation address these inequalities, but they do not destroy the matrix of oppression. Thus, Congress properly acknowledged that some effort must be made to amplify these voices and tell these stories. These compelling interests are thwarted should we choose to grant Citizens United, and other corporations, full access to the political process. The corporation is a real entity, and, like a natural person, it is not born with all rights. The corporation differs from the natural person in that it will never become a full citizen of an appropriate age to avail itself of all constitutional rights, and it differs from certain natural persons as it has never been systemically denied acknowledgment of its form or its rights. The corporation is limited by what the state intended to create and the realities of how the corporation operates. States and Congress may define through statutes which rights they intend only for human beings and which they intend for all persons, both natural and artificial. Denying humanity to the corporation is not comparable to the historical denial of personhood and citizenship to natural persons for misogynist, racist, and xenophobic reasons. Corporate personhood analysis cannot end at formation. To fully analyze corporate rights, we must properly acknowledge what the corporation is after it is formed and engage in a fact-based analysis of what the corporation is intended to be. The issue of corporate personhood cannot be resolved by simply declaring “corporations are people” or “corporations can never be people,” because both statements are true. The corporation is a legal person in various respects, but it is not equal to a human being. Corporations are uniquely positioned socially and economically. A corporation is not a human, not a manifestation of a document, and not a state actor. For these reasons, we hold that there is a compelling interest in limiting corporate speech, the restrictions are narrowly tailored to achieve that interest, and, as applied to corporate spending on elections, § 441b is not an unconstitutional limitation on expression.

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3 Commentary on Walkovszky v. Carlton janis sarra and cheryl wade

INTRODUCTION

Walkovszky v. Carlton1 is one of the quintessential judgments that help young lawyers to understand corporations as separate legal personalities and the implications that limited liability has for recovery for tort harms. In Walkovszky v. Carlton, a taxi owned by the defendant Seon Cab Corporation (“Seon”) hit and severely injured a pedestrian, John Walkovszky, in Manhattan. The insurance held by Seon was woefully inadequate and could not cover Walkovszky’s medical bills and loss of income. Walkovszky sought compensation from the primary organizer and shareholder of Seon and related companies; however, given the concept of limited liability for corporate shareholders under corporate law, Walkovszky was unsuccessful. The original judgment leaves the reader with a number of unanswered questions about the legal relationship between affiliated corporations, tort liability, and the public interest in a fair and balanced legal system. The rewritten feminist judgment reveals a nuanced and thoughtful approach to the intersection of limited liability’s protection for shareholders and the imposition of corporate externalities where the cost of harm to passengers and pedestrians caused by the negligence of taxi drivers are borne by the individuals harmed, rather than by taxi companies or their principals. The rewritten judgment embeds feminist values of fairness and equity, distinguishing consensual commercial contracts from tort harms and analyzing whether women are more vulnerable to tort injuries than men are because they have less financial capacity to deal with corporate harms. The analysis aligns with feminist vulnerability theory, discussed below, as articulated by Martha Fineman.2 The facts that led to the Walkovszky case unfolded in the mid-1960s, but they still resonate today. Car ownership in Manhattan is expensive and inconvenient, and 1 2

Walkovszky v. Carlton, 18 N.Y.2d 414 (N.Y. 1966). Martha Albertson Fineman, The Vulnerable Subject: Anchoring Equality in the Human Condition, 20 Yale J.L. & Feminism 1 (2008).

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many who live, work, and play there rely heavily on the taxi industry. In this respect, urban societies need taxi businesses, and corporate law allows for organizational structures that encourage business owners to provide these invaluable services. At the same time, the delivery of taxi services under corporate structures arguably creates a reasonable expectation that this privately owned public service should protect both taxi passengers (customers) and individuals who may be harmed through the provision of that service. However, society has accepted the idea of protection from personal liability for investors in taxi companies because taxi services are needed. Tort law provides the mechanism to hold companies liable for injuries caused by their wrongful acts. The landmark tort law judgment Donoghue v. Stevenson3 established general principles for compensation for harms caused. The U.K. House of Lords held that the manufacturer owed a duty of care to Ms. Donoghue, who fell ill from drinking ginger beer with a dead snail in the bottle. The duty of care was breached because it was reasonably foreseeable that failure to ensure the product’s safety would lead to harm. One hundred years later, tort law applies the same principles: the court still considers whether, objectively, the person causing the harm knew or ought reasonably to have foreseen that their actions would cause harm.4 In this case, the interplay between tort law and corporate law hindered Walkovszky’s attempt to recover damages for his debilitating injuries. Tort law, aimed at deterring negligence that causes harm to person and property, collided with corporate law, aimed at facilitating commerce. It is at the uncomfortable intersection of these two legal frameworks that pedestrians like Walkovszky face significant hurdles in holding parties that harm them accountable. They need to be compensated for serious injury that prevents them from taking care of themselves medically, economically, or both. This problem raises the question of whether the needs of the collective (i.e., the delivery of taxi service in a large city) outweigh the needs of the individual to receive appropriate compensation for the physical, psychological, and financial harms caused by being hit by a taxi. But is this very framing of the question still too quick to define what the collective interest is? Is there not a collective interest in protecting customers and pedestrians from the negligence of taxi drivers? Is the collective interest defined as offering the needed goods and services that businesses provide, or is it a more multilayered collective interest in delivering these services in a manner that protects a broader set of interests? Corporate law concepts of limited liability and the notion of corporate personhood that is separate from corporate investors make it possible for business owners to serve the collective as it is more narrowly defined. Without corporate law, Walkovszky would likely have been compensated for his crippling injuries had the defendant shareholder William Carlton’s personal assets or personal insurance been 3 4

Donoghue v. Stevenson [1932] UKHL 100. See, e.g., Schoenhalz v. Ins. Corp. of British Columbia, 2017 BCCA 289 (Can. BC).

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sufficient to cover the costs. Equally, without corporate law, Manhattan might not have enough taxi companies, creating a policy justification for forcing the injured pedestrian to bear their own losses rather than holding accountable the taxi company’s shareholders who enjoy the profits of a successful business. Professor Poonam Puri and Ankita Gupta, writing as Justices Puri and Gupta, reach a result that is diametrically opposed to the original decision.

ORIGINAL OPINION

Carlton was the shareholder and “organizer” of ten corporations, each of which had two taxi cabs registered in its name, including Seon, the company owning the taxi that injured Walkovszky.5 Walkovszky sought to hold all the companies responsible, as the fragmented corporate structure meant that there were few assets in Seon. Although seemingly independent of one another, the ten corporations essentially operated as a single entity with regard to financing, supplies, repairs, employees, and garaging.6 Walkovszky sought to impose enterprise liability so that the assets of corporate group so would be available to compensate him for his injuries, given that Seon’s insurance coverage was woefully inadequate and its assets were severely limited. The plaintiff also sought to hold Carlton – as shareholder and organizer of the related entities – personally liable for harms caused to him, alleging the multiple entities’ corporate structure constituted an unlawful attempt “to defraud members of the general public” who might be injured by the cabs.7 The majority of the Court of Appeals of the State of New York acknowledged that there may be circumstances in which the court will disregard the corporate form and “pierce the corporate veil” where necessary to prevent fraud or to achieve equity, citing International Aircraft Trading Co. v. Manufacturers Trust Co.8 However, the court found that it is one thing to assert that a corporation is a fragment of a larger corporate group that actually conducts the business and quite another to claim that the corporation is a “dummy” for its individual shareholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends.9 It held that Walkovszky had no cause of action as he had not established that Carlton was conducting business in his individual capacity, and the fact that the fleet ownership had been deliberately split up among many corporations did not ease the plaintiff’s burden. The court held that the corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle that struck the 5 6 7 8

9

Walkovszky v. Carlton, 18 N.Y.2d at 416. Id. at 416. Id. at 416. Id. at 417 (citing International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292 (1948)). Id. at 418.

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plaintiff, were insufficient to assure him the recovery sought.10 It concluded that the complaint fell short of adequately stating a cause of action against the defendant, Carlton, in his individual capacity.11 Walkovszky tested the limits of a corporation’s protection against shareholders’ personal liability by seeking to invoke the equitable doctrine of piercing the corporate veil or disregarding the corporation’s formation in order to reach the personal assets of its shareholders. Seon’s corporate veil remained intact because piercing it would have required that Walkovszky establish that Carlton committed fraud and was using Seon to conduct Carlton’s personal business. The fact that Seon’s assets and insurance were not sufficient to compensate Walkovszky for the harm he suffered was not enough to pierce Seon’s corporate veil. In operating his taxi business, Carlton did exactly what corporate law contemplated. He protected his personal assets from tort creditors like Walkovszky. Carlton observed the requisite corporate formalities, such as keeping his personal assets separate from Seon’s, and he committed no fraud. FEMINIST JUDGMENT

Veil piercing is an equitable doctrine that requires a corporation’s creditors to show that a decision to keep the firm’s protective veil in place would sanction fraud or promote injustice: “Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, ‘pierce the corporate veil’, whenever necessary ‘to prevent fraud or to achieve equity.’”12 In the original opinion, the court concluded that there was no fraud sanctioned or injustice promoted by protecting Carlton from personal liability. Puri and Gupta, however, distinguish between a firm’s contract creditors and its tort creditors. They describe contract creditors as those who have engaged in “consensual interactions” with a corporation, in which creditors and companies have bargained for externalization of risk as between the company and its creditors. Contract creditors can investigate, inquire about, and determine the foreseeable risks of interacting or contracting with the corporation. But the interactions of tort creditors with the corporation are non-consensual. Tort creditors have not bargained with the company and they have no capacity to bargain with it. Puri and Gupta note that tort victims – such as the pedestrian in this case – cannot reasonably foresee the risks of being hit by the taxi, the effects of harmful business activity, or the extent of harms that they risk suffering. Protecting business owners like Carlton from personal liability when they have profited from commercial activity that harms tort victims in non-consensual interactions is, according to Puri and Gupta, unjust. Because failing to pierce the corporate veil for tort creditors like Walkovszky would promote injustice, Puri and Gupta do not allow Carlton to profit 10 11 12

Id. at 419. Id. at 420. Id. at 417.

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from his taxi business while imposing the costs of the business, the negative externalities, on tort victims like Walkovszky. Puri and Gupta helpfully commence their analysis by describing the context in which taxi businesses are structured in New York and the statutory framework for licensing and insurance. They set out the tremendous losses – medical, physical, emotional, and financial – that are associated with related harms annually. They describe the longstanding public policy issue of evolving statutory attempts to limit taxi-related injuries to pedestrians through insurance coverage. They then situate their analysis in an understanding of the scope and underlying policy rationale for the doctrine of separate legal personality and limited liability. They ultimately conclude that there are two bases under which it is appropriate to draw aside the corporate veil: equity and inadequate capitalization. Puri and Gupta cite authority to find that the taxi industry is vested with a public interest. They conclude that setting up multiple corporations that have the same shareholders, directors, and officers, all centrally supervised and sharing employees, facilities, and operations, “constitutes a misuse of the corporate structure to defeat clear legislative policy” and imposes costs of harms from conducting “business on society members who do not have the ability to limit their risk and protect themselves.” This aspect of the Walkovszky facts would establish the theory of enterprise liability. Puri and Gupta find that such externalization is inequitable and may provide grounds to draw aside the corporate veil on an equitable basis. As an alternative and standalone basis, Puri and Gupta conclude that inadequate capitalization can provide grounding to draw aside the corporate veil and deny shareholders the defense of limited liability, by setting aside the separate legal personality of the company. It is for the plaintiff to establish that the corporations were intentionally undercapitalized at their creation, and that throughout their existence they continued to be devoid of sufficient assets proportionate with the capitalization needs of a taxi business and its corresponding risks of loss. The Walkovszky opinion, like all opinions, is a narrative that tells a story about us all – women, men, people of color, lesbian, gay, white, non-binary, and two-spirited individuals. It is a universal story about vulnerability that invites an “approach [that] has the potential to move us beyond the stifling confines of current discriminationbased models toward a more substantive vision of equality.”13 Martha Fineman, critical legal theorist and feminist jurisprudence scholar, explains her feminist vulnerability theory as a “post-identity” approach that aims to achieve a more equitable social order.14 Vulnerability theory looks beyond the components of individual identity, such as gender, and focuses on the vulnerability of all humanity

13

14

Infra note 22. See also Martha C. Nussbaum, Women and Human Development, The Capabilities Approach (2000.). Id. at 1.

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as a foundation for the creation of law and social policy.15 Fineman suggests that we avoid the negative connotations that typically attach to the notion of vulnerability and instead embrace “the term ‘vulnerable’ for its potential in describing a universal, inevitable, enduring aspect of the human condition that must be at the heart of our concept of social and state responsibility.”16 In the Walkovszky case, vulnerability theory would elucidate the need for corporate social responsibility, because when providing goods and services and creating shareholder wealth, corporations make us all vulnerable to the costs they impose on others. The inevitability and universality of human vulnerability is especially evident when individuals like Carlton provide (much needed) taxi services in crowded localities. Pedestrians are not only physically vulnerable as potential accident victims, but they also become financially vulnerable when injured by incorporated firms that operate without the capital needed to compensate them when victimized by negligent drivers. When courts allow the corporate veil to remain unpierced, they provide shareholders the protection of limited liability and leave pedestrians like Walkovszky in physical and financial ruin. In a case like Walkovszky, the failure to pierce the corporate veil is especially unjust in light of the fact that Carlton’s taxi business was profitable. Carlton and the other shareholders legally withdrew profits from Seon, the corporation whose driver injured Walkovszky, and left Seon without enough capital to compensate him. The Walkovszky case is a story of the vulnerability of pedestrians like Mr. Walkovszky who are severely injured by corporate activity. Some aspects of feminist legal methodology would extinguish the artificial boundaries that separate shareholders from the corporations in which they invest in order to impose personal responsibility on owners when firms impact the lives of individuals outside the corporation.17 This radical departure from one of the most fundamental tenets of corporate law could only be justified by adopting a feminist approach, such as socialist feminism, which “has thoroughly condemned the corporation itself for lacking ethical standards.”18 Consistent with this condemnation is “the conclusion that an organization conceived by feminists would not feature limited liability” because it “is about imposing risks that someone else must bear”19 and involves “attempts to personally profit while consciously risking injury to third parties.”20 Of course, feminists understand the impracticality of the abolition of limited liability as a construct. Theresa Gabaldon commented that, “[a]t a minimum, the practical feminist will recognize that eliminating limited liability . . . is roughly as 15 16 17

18 19 20

Id. Id. at 8. See Theresa A. Gabaldon, The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, 45 Vand. L. Rev. 1387, 1418 (1992). Id. at 1427. Id. at 1429. Id. at 1430.

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probable as the selection of a female Pope.”21 She further noted that, “absent worldwide adoption of unlimited liability, the threat of capital flight would seem to preclude serious political consideration of such a move in any discrete jurisdiction, be it a state or the nation.”22 The undesirability and impracticality of eradicating limited liability reveal the wisdom of Puri and Gupta in taking a less forceful approach and leaving in place the notion of limited liability for contract creditors or consensual interactors. The justices pierce the veil for tort creditors, which lines up nicely with Fineman’s vulnerability thesis.23 Different approaches for tort and contract creditors correspond to differences in vulnerability. The universal and inevitable nature of human vulnerability is not salient when we analyze the relationship between contracting parties. As we explain above, the potential for the breach of a contract can be addressed before the contract is signed. Obviously, the level of potential vulnerability is dramatically greater for tort creditors who do not choose to interact with the corporation that harms them and have little ability to protect themselves from the negligence of corporate employees and agents. These differences in the extent of the vulnerability of tort creditors compared to contract creditors justify piercing the corporate veil for individuals harmed by a firm’s negligence, if shareholders and their principals have failed to operate in a way that respects the existence of the corporation as an entity that is separate from its investors. The decision of Puri and Gupta to leave the corporate veil unpierced when contract creditors or consensual interactors sue the firm is extremely wise and analytically sound. In comparing the extent of the vulnerability of tort creditors to contract creditors, Puri and Gupta address the injustice of imposing costs on members of the community, specifically tort victims, so that shareholders can profit. But perhaps it is not appropriate to pierce the corporate veil for all tort creditors. Under vulnerability theory, the mission of achieving an equitable social order requires attention to the potential vulnerability of corporate persons, not just flesh-and-blood individuals. Seon, the corporation whose driver injured Walkovszky, was profitable and therefore less vulnerable than a firm that is not profitable. What if Carlton’s firm Seon was unsuccessful and unprofitable even though Carlton poured capital into it? Concern for the potential vulnerability of corporations that are unprofitable even though they are adequately capitalized by shareholders is an imperative. It may be equitable, from a tort victim’s perspective, to pierce the corporate veil of a profitable but thinly capitalized firm when its profit-seeking injures the victim, but unfair to pierce the veil of firms that are inadequately capitalized because of the firm’s unprofitability – perhaps due to an economic downturn or a global pandemic. Arguably, it is not fair to pierce the veil of a corporation whose shareholders receive no return on their 21 22 23

Id. at 1447. Id. Fineman, supra note 2.

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investment in the corporation. But when a firm is profitable but undercapitalized – because, for example, profits have been distributed (through dividends) to shareholders – then fairness dictates piercing the corporate veil for tort creditors under Puri and Gupta’s analysis. Shareholders who invest in undercapitalized but profitable firms should not enjoy limited liability when the companies in which they invest harm individuals or property. Feminists look to values – such as equality, freedom, and justice – that are the foundational underpinnings of the law.24 Walkovszky, a case about piercing the corporate veil, asks whether failing to apply the equitable approach of piercing would promote injustice. The justices posit the problem created when the corporate structure creates externalities: In our view, any form of business organization that misuses the corporate structure to attempt to undermine and defeat clear and consistent legislative policy, and that inequitably externalizes the cost of doing business on society members who do not have the ability to limit their risk and protect themselves, may provide grounding to pierce the veil on an equitable basis.

Here, Puri and Gupta rely on notions of justice by holding that Seon’s veil may be pierced. They adeptly engage with ideas that lie beyond the law’s parameters to fashion a holding – and reasoning that supports their holding – in order to assess the nature of the injustice of allowing corporate shareholders to enhance profits at the expense of tort creditors who will bear the loss of corporate activity if the veil remains in place. They cogently observe: “[h]owever, for non-consensual interactions and stakeholders with little or no bargaining power, such as tort victims, who cannot necessarily foresee the full effects of harmful business activity, absorb the costs of corporate activity, or bargain with corporations, this avoidance of responsibility and externalization of risk poses an inequitable burden.” One can argue, however, that the inadequate capitalization of unprofitable (and therefore more vulnerable) firms is analytically different from profitable corporations that are not adequately capitalized because the profits have been distributed to shareholders. Puri and Gupta pierce Seon’s corporate veil to achieve an equitable result for Walkovszky. Their reasoning allows Walkovszky to reach Carlton’s personal assets. As they acknowledge, the justices could, but do not, use enterprise liability theory to reach the assets of the other nine corporations owned by Carlton. The law does not intend the liability shield to create corporate forms that shelter assets from liability by dividing the assets among entities that are beyond the reach of claimants unless the separate personhood of each corporation is maintained. Enterprise liability theory suggests that separate entities can be held jointly liable for conduct resulting from 24

Ruth Fletcher, Feminist Legal Theory, in An Introduction to Law and Social Theory (Reza Banaker & Max Travers eds., 2002).

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participation in a shared enterprise, particularly where the risks of harm are foreseeable.25 In this case, the observation of corporate formalities would have required separate financing, supplies, repairs, employees, and garaging for each of the ten companies. These formalities were not observed in this case and enterprise liability may have allowed Walkovszky to reach the assets of the other nine companies. The approach of drawing aside the corporate veil among the ten taxi companies would not have helped Walkovszky, however, if the other nine companies were also undercapitalized, and it would not have been necessary if Carlton’s personal assets were sufficient to cover Walkovszky’s damages. Moreover, this opinion was limited to the question of whether Walkovszky’s complaint against Carlton failed to state a cause of action.26 The potential liability of the other nine companies was not relevant to this procedural issue. The original opinion’s inclusion of facts about the ten companies operating as a single business entity was superfluous because there was no need to employ enterprise liability. Piercing in this case achieves the kind of equitable or just result for which feminism advocates. It is possible, however, that in some instances when a corporate veil is pierced, individual shareholders will not have sufficient assets to compensate severely injured individuals like Walkovszky. When piercing cannot protect vulnerable individuals from the cost of the negative externalities imposed on them, the only solution may be for state legislatures to require incorporated firms to carry liability insurance in an amount that is commensurate with the company’s profitability. This approach would mean that profitable firms would be relatively likely to have liability insurance that will be sufficient to compensate victims when they are seriously injured. Looking forward, innovative forms of urban transportation services in the “sharing economy” are likely to raise new questions of tort liability. Taxi companies are a highly regulated industry, but modern ride-sharing services such as Uber face little regulation. When an individual service provider, like an Uber or Lyft driver commits a tort, the victim may be under-compensated if that individual provider alone is liable.27 Such services blur lines of responsibility and accountability. Uber claims that it is not a transportation service; rather, it is a platform that connects passengers and drivers, calling the drivers “independent contractors” or “partners.”28 Companies such as Uber are engaged in for-profit services, as indicated in their marketing, and they keep a significant share of payments made for transportation services – but claim no corporate responsibility for pedestrian accidents.29 The 25

26 27

28 29

Naomi Sheiner, DES and a Proposed Theory of Enterprise Liability, 46 Fordham L. Rev. 963, 974 (1978). Walkovszky v. Carlton, 18 N.Y.2d 414, 417 (N.Y. 1966). Agnieszka McPeak, Sharing Tort Liability in the New Sharing Economy, 49 Conn. L. Rev. 183 (2015). McPeak acknowledges, however, that as a general principle, limitations of liability through the use of business forms areare permitted. Id. at 201. Id. at 183. Id.

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challenge is whether pre-existing tort principles are adequate to allow courts to apply vicarious liability to create fairness in how remedies are awarded for harms caused by sharing-economy transportation services.30 Agnieszka McPeak has observed that courts may need to examine the intent of the parties, their control of the businesses, and whether profits are shared among them, with the legal relationship ultimately determining whether liability attaches to modern corporate structures in transportation services. Puri and Gupta’s finding of liability on the basis of both equity and inadequate capitalization may open up new possibilities for developing tort law remedies for the new sharing economy and the continually evolving structure of urban transportation service delivery. Justices Puri and Gupta observe: Others, such as tort victims, who suffer physical injury from a corporation’s activities, may not have the ability to protect themselves and absorb the costs arising from corporate activity. In our view, the attempt to do corporate business without providing a sufficient basis of financial responsibility to societal stakeholders is inequitable and an abuse of the privileges of limited liability and corporate separate personality.

New forms of transportation sharing such as Uber and Lyft can advance social goals. They may make transportation easily accessible to many urban residents who cannot afford to own a car; they may reduce the number of cars in congested cities and thus the amount of carbon emissions, at a time when climate risks are increasingly a concern. Some states, including California, have enacted legislation for drivers in these ride-sharing services, such as a requirement to advise a participating driver that their personal automobile insurance policy will not provide coverage because they are using the vehicle in connection with a transportation network company’s onlineenabled platform.31 However, there is little discussion of how passengers and pedestrians are protected from the corporate structures discussed above. These concerns do not even begin to consider Uber’s longer term business plan, which is to rely on fully autonomous vehicles to transform the economics of rideordering by eliminating its greatest capital expenditure – the drivers.32 As states move to legalize these technological developments, they are not yet conceptualizing new protections for potential tort victims. In keeping with Fineman’s vulnerability framework, it may be timely to enhance the notion of a common law duty of care not to harm others in the pursuit of economic activities, extending that duty of care to entities that are separate legal personalities but are engaged in a common profit-making endeavor. Doing so would draw aside the corporate veil without the 30 31 32

Id. Cal. Pub. Util. Code § 5432(a). Alison Griswold, Uber’s Self-Driving Cars Are Already Getting into Scrapes on the Streets of Pittsburgh, Quartz (Oct. 4, 2016), http://qz.com/798092/a-self-driving-ubercar-went-the-wrongway-on-a-one-way-street-in-pittsburgh/.

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tort victim having to establish fraud or thin capitalization. The decision for entities to cooperate in the delivering of transportation services would be sufficient to create a joint duty of care that includes an equitable apportioning of cost-sharing where harm is caused in the delivery of the services. Judges with feminist perspectives could open up the dimensions of tort law as it interacts with corporate law, particularly at a time when transportation services and technologies are rapidly evolving to address urban congestion and climate impacts.

Walkovszky v. Carlton, 18 N.Y.2d 414 (N.Y. 1966) justices poonam puri and ankita gupta, dissenting Motor vehicle accidents are a serious concern across the United States. Between July 1963 and June 1964, almost four million people were injured in motor vehicle incidents, of whom approximately 1.6 million sustained disabling injuries. Robert E. Keeton & Jeffrey O’Connell, Basic Protection for the Traffic Victim: A Blueprint for Reforming Automobile Insurance 11–12 (1965). In 1964, motor vehicle incident deaths in the United States surpassed 47,000. Id. at 11. Unfortunately, these deaths and injuries continue to happen every year and are part of the detrimental impact of the popularization of motor vehicles and the evolution of American society. According to the National Safety Council, in 1963, motor vehicle accidents caused wage losses of $2.0 billion, property damage of $2.6 billion, medical expenses of $450 million, and insurance overhead costs of $2.7 billion, an all-time high of $7.7 billion. Id. at 12. As the number of motor vehicles on our roads increases, this problem will only get worse. Moreover, the effect on our courts has been crushing for victims of motor vehicle incidents. Crowded court dockets, lengthy trials, and costly legal fees are compounded by the difficulties of proving negligence in the first place, defending against legal bars to financial recovery, and measuring damages. These issues often leave victims of motor vehicle accidents with a right to, but without access to, timely and meaningful remedies. Id. at 13–71. This case involves an all-too-commonplace motor vehicle accident. John Walkovszky was struck and injured by a taxicab while waiting to cross a street in Manhattan. As a result of the accident, he suffered severe and permanent injuries, spent months in a hospital, and was unable to work at his usual occupation. In an effort to recover damages for his grave injuries and the substantial financial expenses incurred, Mr. Walkovszky brought an action against the taxicab driver, the corporation that owned the taxicab, its nine sister corporations, and the three common

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shareholders of all ten corporations, of which William Carlton is the only named shareholder. As the taxicab that struck Mr. Walkovszky only held the minimum liability insurance required by law, grossly inadequate to compensate him for his serious losses, Mr. Walkovszky seeks to pierce the corporate veil of the defendant corporations as among sister corporations to access the assets of the sister corporations and the personal assets of the three shareholders. He alleges that the corporate structure of ten individually registered and inadequately capitalized corporations constitutes an unlawful attempt to defraud the general public – who could, like him, be injured by the operation of the taxicabs. Mr. Carlton moved to dismiss Mr. Walkovszky’s action on the basis that it failed to state a cause of action against him. He was unsuccessful at the Appellate Division of the Supreme Court and now appeals. We affirm the Appellate Division for the reasons that follow. I

John Walkovszky was struck and injured by a taxicab owned by defendant Seon Cab Corp. and operated by the defendant Baldo Marchese, while standing to cross the street from the north side of East 86th Street to the south side, in Manhattan, New York City, on November 10, 1962, at approximately 1:30 AM. As a result of being struck by the taxicab, Mr. Walkovszky suffered severe and permanent injuries, including several fractures of his pelvis, a brain contusion, and a probable right temporal skull fracture. Additionally, as a result of the accident, Mr. Walkovszky spent months confined to a hospital and was not able to work at his usual occupation for more than five months. Seon Cab Corp. is one of ten subsidiary corporations owned and operated by the same group of three shareholders. Of the three shareholders, the only named shareholder defendant is William Carlton. All ten corporations have the same principal place of business; the same directors, officers, and shareholders; shared and interchangeable employees; intermingled and interchangeable receipts, disbursements, assets and properties; centrally purchased supplies, automobile parts, oil, gas, and tires; and a centrally shared garage. Additionally, each taxicab corporation has only two taxicabs registered in its name, each of which holds the minimum liability insurance required by the New York Vehicle and Traffic Law, namely $10,000, and judgment-proof taxi medallions to operate the taxicabs in New York. As the taxicab that struck Mr. Walkovszky only holds the minimum liability insurance of $10,000 to compensate individuals who are injured by the vehicle’s operation, Mr. Walkovszky brought this lawsuit to recover damages beyond the minimum insurance coverage from Seon Cab Corp., its nine sister corporations, and the corporations’ shareholders, including Mr. Carlton. Mr. Walkovszky seeks to pierce the corporate veil of the defendant corporations as among sister corporations

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to access the assets of all of the sister corporations and the personal assets of the three shareholders. He seeks to do so on the basis that Seon Cab Corp.’s corporate structure of ten individually registered, inadequately capitalized corporations constitutes an unlawful attempt to “defraud members of the general public, who might be injured by virtue of the operations of these [taxicabs].” Complaint Read in Support of Motion at para. 20, Walkovszky v. Carlton, 18 N.Y.2d. 414 (1966) (No. 414-426). II

This appeal arises from a motion by Mr. Carlton to dismiss Mr. Walkovszky’s action against him pursuant to r. 3211(a)(7) of the New York Consolidated Laws, Civil Practice Law and Rules on the basis that it fails to state a cause of action against him. Mr. Carlton was successful at the Supreme Court of the State of New York, but that decision was overturned by the Appellate Division of the Supreme Court of the State of New York. The majority of the Appellate Division of the Supreme Court held that Mr. Walkovszky’s complaint sufficiently alleged that the ten corporations’ business operations were, in reality, a single enterprise operated by a single entity, and that the acts of any of the corporations were committed by Mr. Carlton as an agent for the corporations and its other shareholders. Justice Rabin dissented. He held that Mr. Walkovszky’s complaint did not state a cause of action against Mr. Carlton; rather, it alleged that the creation of the corporations and use of the corporations constituted a fraud on the public. According to him, there was no basis for piercing the corporate veil to impose personal liability on the individual defendants, including Mr. Carlton, because no fraud or deception was practiced at any time upon Mr. Walkovszky by any of the individual defendants. Mr. Carlton appeals. For the reasons that follow, we affirm the decision below. III

We begin by situating our analysis in an understanding of the corporate characteristics of limited liability and separate personality. We then discuss the remedy of veil piercing. It is important to note that this appeal deals only with the issue of whether Mr. Walkovszky’s complaint states a cause of action against Mr. Carlton, not against the other shareholders of Seon Cab Corp. or its nine sister corporations. And in this case, there are two legal grounds to pierce the corporate veil to hold Mr. Carlton personally liable: equity and inadequate capitalization. We discuss each in turn. With respect to equity, we explain how the misuse of the corporate structure to undermine clear legislative policy and to externalize the cost of doing business on vulnerable members of society, who do not have the ability to protect themselves, can provide equitable grounding to pierce the corporate veil. With respect to

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inadequate capitalization, we similarly discuss why it can serve as a basis to pierce the corporate veil. Mr. Walkovszky’s complaint pleads sufficient facts to pierce the corporate veil on these two bases. In our conclusion, we briefly remark on the function and use of motions to dismiss actions. THE PRIVILEGES OF LIMITED LIABILITY AND CORPORATE SEPARATE PERSONALITY

Limited liability of shareholders is one of the core structural characteristics of the corporation and one of the many privileges granted by the state to the shareholders of a corporation. It restricts the amount of capital that shareholders stand to lose when they invest in a corporation. No more capital than that invested in the corporation can be lost in the case of bankruptcy of the company, for payment of other debts, or for obligations of the business. Corporate separate personality is another core structural characteristic of the corporation. A corporation is deemed to have a legal personality that is separate and independent from the personality of its directors, officers, or shareholders. As a result, absent a deliberate act, a corporation has perpetual succession, can hold proprietary interests and enter into contracts in its own name, and may sue and be sued in its own name. From an economic and social perspective, the characteristics of limited liability and corporate separate personality may offer a number of advantages by, for example, playing a role in stimulating entrepreneurship and investment. However, both characteristics can also give rise to serious concerns about risk-taking, responsibility, and accountability. In simple terms, a corporation can undertake undue operational risks, and shareholders are incentivized to encourage such behavior. If the risk pays off, shareholders stand to gain profits. If the risk does not pay off, shareholders’ losses are limited to their investment in the corporation, and society has to bear the brunt of the corporation’s risky operations and the harm it has caused. In our view, this avoidance of responsibility and the externalization of risk that results from limited liability and separate legal personality may be acceptable in the case of consensual interactions, such as with most sophisticated financial creditors, who can refuse to transact with the corporation or take steps to limit their risk through contractual terms. However, for non-consensual interactions and stakeholders with little or no bargaining power, such as tort victims – who cannot necessarily foresee the full effects of harmful business activity, absorb the costs of corporate activity, or bargain with corporations – this avoidance of responsibility and externalization of risk poses an inequitable burden. Most sophisticated financial creditors, for example, are not economically dependent on any one debtor client. They have the ability to walk away from a transaction with a potential corporate client if the corporation’s activities are unacceptably risky.

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Most sophisticated financial creditors who decide to transact with any debtor client also have the power to insist on safeguards, such as increased compensation, prepayment, personal guarantees, or other security, to account for a corporation’s risky activities. Not all stakeholders who interact with a corporation have the ability to walk away from the transaction or negotiate for added protections. In the case of tort victims, the problem is twofold. Tort victims cannot necessarily foresee the effects of harmful business activity or foresee the type of harm, manner of harm, or extent of harm they are at risk of experiencing. As such, they cannot bargain with the corporation for protection or take preventative measures to protect themselves other than taking usual caution. Even if tort victims can foresee the harm, they may not be able to take preventative steps to mitigate or eliminate the risk or negotiate successfully with the corporation for appropriate protective measures, given the unequal bargaining power between them and the corporation. Different stakeholders are positioned differently and must be individually considered. It is against this reality that we must consider the concepts of limited liability and corporate separate personality, and whether these characteristics should act as a complete bar for all stakeholders to recover damages from a corporation for the full extent of the harm suffered resulting from that corporation’s activities. Moreover, the effect of this avoidance of responsibility is borne disproportionately by women. In 1961, President John F. Kennedy established the President’s Commission on the Status of Women (“PCSW”). It was charged with evaluating and making recommendations to improve labor legislation in the United States as it affected women. In 1963, the PCSW released its report, American Women, which documented extensive discrimination against women. It found: (1) that the number of women unprotected by minimum wage legislation is particularly high, and indeed, that the median wage of women employed on a full-time, year-round basis does not provide a sufficient wage to maintain a standard of health and decency; (2) that a double pay scale for men and women is pervasive, and women with similar experience are consistently earning less than men for the same kind of work; (3) that there is little legislation to protect women wage earners during and after the periods of childbirth, and no provision of maternity benefits; (4) that workers’ compensation laws are seriously deficient in coverage with respect to women, with inadequate protection for a large number of women; and (5) that a large percentage of women are heavily concentrated in industries that have not been organized or continue to be poorly organized, with no trade unions to help them attain certain essential protections. As it stands, many of these problems persist today. Unfortunately, the reality is that even among the stakeholder group of “tort victims,” not all tort victims suffer alike. The costs that female tort victims and their families suffer, or tort victims with female caregivers incur, are likely to be disproportionately high. On balance, women simply do not have the same financial ability as men to cover the physical harms caused by corporate conduct.

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THE REMEDY OF PIERCING THE CORPORATE VEIL

One remedy for tort victims and other stakeholders in appropriate cases is piercing the corporate veil. “Piercing the corporate veil” is the setting aside of a corporation’s characteristics of limited liability and separate corporate personality to impose liability on the corporation’s shareholders. Importantly, piercing the corporate veil and disregarding the separate legal existence of a corporation do not destroy its separate existence for all purposes but only for the very limited purpose of granting relief in certain circumstances. In our view, on the facts of this case, there are two potential bases on which the corporate veil may be pierced to hold Mr. Carlton personally liable: equity and inadequate capitalization.1

Achieving Equity Courts will pierce the corporate veil when necessary “to prevent fraud or achieve equity.” Int’l Aircraft Trading Co. v. Mfrs. Tr. Co., 297 N.Y. 285, 292 (1948); Halsted v. Globe Ind. Co., 258 N.Y. 176, 179 (1932); Jenkins v. Moyse, 254 N.Y. 319, 324 (1930); Quaid v. Ratkowsky, 183 App. Div. 428, aff’d. 224 N.Y. 624 (1918); Bartle v. Home Owners Coop., 309 N.Y. 103, 106–07 (1955). As explained below, the State of New York has long been concerned with ensuring the financial responsibility of those who own and operate motor vehicles and recompensing innocent victims of negligently caused motor vehicle accidents. Indeed, the New York legislature’s intention in enacting minimum liability coverage for all owners of motor vehicles and other financial responsibility provisions in the Vehicle and Traffic Law arose from a concern “over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted.” §310. It determined “as a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them.” §310. In our view, setting up multiple corporations with the same shareholders, directors, and officers; centrally supervised and interchangeably used employees; 1

As an aside, we note that this appeal solely concerns the issue of Mr. Carlton’s personal liability for the injuries and loss occasioned on Mr. Walkovszky as a result of the motor vehicle accident he was involved in with Seon Cab Corp., a corporation jointly owned by Mr. Carlton and two other shareholders. As we have not been asked to determine whether the corporate veil may be as we are not asked to determine whether the corporate veil may be pierced to hold Seon Cab Corp.’s nine sister corporations liable for Mr. Walkovszky’s damages, we respectfully decline to do so. In this case and others, it may be that enterprise liability ultimately provides a basis to pierce the corporate veil to hold a corporation’s sister corporations liable to address the unavoidable and inequitable burden that risky corporate activity can place on tort victims and other vulnerable stakeholders. However, as the appeal before us does not raise this issue, we decline to make a determination in this regard.

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intermingled disbursements, assets, and properties; centrally purchased supplies and garaged taxicabs; and centrally managed and controlled operations constitutes a misuse of the corporate structure to defeat clear legislative policy. It externalizes the cost of doing business on members of society who do not have the ability to limit their risk and protect themselves. And, these facts, if established at trial, provide the basis for piercing the corporate veil on an equitable basis to hold Mr. Carlton personally liable. If Mr. Walkovszky is successful at trial, we recognize that this equitable piercing of the corporate veil to hold Mr. Carlton personally liable could be regarded as a novel form of enterprise liability. Traditionally, enterprise liability is seen as a justification to pierce the corporate veil between a corporation and its sister corporations on the basis that the corporations are part of one shared economic enterprise. However, in this case, equitable considerations could effectively permit a trial judge to look at the entire economic organization of Seon Cab Corp. as a whole – including its nine sister corporations – in order to determine whether the corporate structure has been misused to defeat clear legislative policy. If the trial judge were to find misuse, then the court could equitably pierce the corporate veil, and in doing so, would essentially find that Mr. Carlton – as an individual shareholder – was a part of the shared economic enterprise of Seon Cab Corp. and is thus personally liable for Seon Cab Corp.’s liabilities. Policy of the State of New York Redress for tort victims has long been a legislative priority in New York. In the 1920s, as the acceptance and use of motor vehicles increased, deaths and injuries resulting from motor vehicle accidents also increased. New York and other states became concerned with removing financially irresponsible and dangerous motorists from the road and compensating innocent victims of negligently caused motor vehicle accidents. In response to this concern, New York’s legislature enacted the first version of its financial responsibility laws in 1929 (the “1929 Act”). In it, a motorist’s license and registration could be suspended for a host of offenses, including reckless driving, unlicensed operation of a motor vehicle, failing to satisfy an outstanding monetary judgment, etcetera, but once the motorist supplied proof of their ability to respond to damages in the future, the suspension was revoked. One of the primary problems of the 1929 Act was that it created a “first accident free pass” system, because it only required motorists to submit proof of their ability to respond to “damages in the future” upon conviction of certain enumerated offenses. By setting a bar of conviction or unsatisfied judgment as a requirement for license or motor vehicle registration suspension and as a prerequisite to financial responsibility, the 1929 Act created a double disadvantage for the first tort victim, placing the entire burden on them to successfully litigate the offense of the accident. First, the first tort victim had no place to recover compensation for their own personal injuries. Second, that tort victim was expected to expend personal resources and

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effort to try to provide for the recovery of future victims, disregarding whether the first victim even had the physical, psychological, or financial wherewithal to pursue a lawsuit after having been injured in a motor vehicle accident. Ironically, the onus of the motorist’s financial responsibility was placed on the injured party, who was already a victim of the motorist’s negligence and lack of financial responsibility. In 1941, New York’s legislature, still concerned about financial responsibility of motorists and recovery for injured tort victims, enacted the next substantial amendment to its financial responsibility laws (the “1941 Act”). In it, after a motorist’s license was suspended for any of the aforementioned offenses, the suspension would stay in effect until the motorist furnished security for damages arising out of the accident and submitted proof of their ability to respond to damages in the future. Although the 1941 Act did not completely address the burdens placed on the first tort victim by the first accident free pass system, the security for damages requirement recompensed the first injured tort victim for their own personal injuries, something the 1929 Act did not provide. As a result, the 1941 Act tightened the financial responsibility obligations on motorists and provided a means of financial recovery for all victims of motor vehicle accidents. In 1956, the New York legislature again substantially amended its financial responsibility laws (the “1956 Act”). In it, a motor vehicle was prohibited from being registered in the state unless the registration application was accompanied by proof of financial security, in the form of a certificate of insurance, a financial security bond, a financial security deposit, or qualification as a self-insurer. If the insurance was subsequently cancelled or other declared financial security was otherwise unavailable, an owner was required to immediately surrender their registration certification and license plates. A failure to do so could result in a thirty-day revocation of the vehicle’s registration, a period during which no other vehicle could be registered in the owner’s name. This compulsory financial security requirement eliminated the first accident free pass problem that had plagued the 1929 Act and the 1941 Act and now required that motorists be fully responsible from the very first accident they caused. Moreover, the 1956 Act imposed severe civil and criminal penalties where an owner operated or permitted the operation of a motor vehicle without financial security in effect. In such a case, the owner’s license and vehicle registration would be revoked for one year and the owner would be guilty of a misdemeanor. If a nonowner operated a motor vehicle with knowledge that the vehicle was uninsured, their license or non-resident driving privileges would also be revoked for one year and they would also be guilty of a misdemeanor. In addition, where a motor vehicle accident occurred that resulted in bodily injury, death, or a certain level of property damage, the license and registration of the owner, operator, or both would be suspended. Neither of them would be permitted to obtain a new license or registration until any outstanding judgment had been satisfied, a release had been obtained from all injured parties, no cause of

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action had been commenced by the injured party within one year from the accident’s date, or an outstanding judgment was being paid in installments as permitted by the law. This requirement provided for greater recovery for the first tort victim. Although New York’s legislature has made further amendments to the 1956 Act and its laws over the last decade to provide for greater financial responsibility of motorists and to recompense victims of negligently caused motor vehicle accidents, the 1956 Act was reenacted in substantially unchanged form as Article 6 of the New York Vehicle and Traffic Law as it is today. Its declaration of purpose in §310 provides that New York’s legislature continues to remain “concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted” and “determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them.” Equitable Considerations In our view, any form of business organization that misuses the corporate structure to attempt to undermine or defeat clear and consistent legislative policy and that inequitably externalizes the cost of doing business on society members who do not have the ability to limit their risk and protect themselves may provide grounding to pierce the veil on an equitable basis. As discussed above, since the acceptance and use of motor vehicles increased across the United States, New York’s legislature has been concerned with removing financially irresponsible and dangerous motorists from the road and compensating those injured by motor vehicle accidents. The legislature sought to shift the rising financial toll of motor vehicle accidents from injured victims and broader society to those who operate, maintain, and own motor vehicles. Not only are motorists relatively likely to have the economic resources to respond to liability arising from motor vehicle accidents, but also, as a normative matter, if motorists can enjoy the benefits from operating, maintaining, and owning a motor vehicle, they ought to bear its burdens as well – including the cost to the public in terms of medical care and support and the loss to the community of the productive and creative abilities of injured victims. New York’s legislature enacted the 1929 Act, 1941 Act, and 1956 Act with clear provisions reflecting this very intent, and present provisions of the Vehicle and Traffic Law also show that the legislature intended that victims of negligently caused motor vehicle accidents have a financially responsible owner or operator to respond “for the [personal] injury and financial loss inflicted upon them” (emphasis added). A corporation is one form of business organization. Entirely a creature of statute, it is based on shifting the risk of business activity from shareholders to other stakeholders and to society more broadly. Although incorporation requires the

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business to satisfy certain procedural formalities – such as applying for incorporation, filing annual reports, and holding annual shareholder meetings – for most enterprises the advantages of incorporation far outweigh its disadvantages, particularly the privileges of limited liability and separate corporate personality. Together, both of these privileges insulate a corporation’s shareholders from liability for the corporation’s activities. However, limited liability and separate corporate personality are not absolute bars from liability. As we have explained above, the corporate veil can and ought to be pierced where equity demands it. In our view, the use of the corporate structure not only to obtain the benefits of incorporation but, within that same process, also to defeat and operate contrary to clear legislative policy – as stated in §310 of the Vehicle and Traffic Law as compensating victims of negligently caused motor vehicle accidents – by shifting the financial toll of a motor vehicle accident to innocent victims, is one such equitable circumstance. Mr. Carlton argues that because Seon Cab Corp obtained the minimum amount of insurance of $10,000 required of a corporation or person engaged in the business of transporting persons for hire, the corporate veil should not be pierced to hold him personally liable. Mr. Carlton further argues that if Mr. Walkovszky has a concern with the minimum amount of casualty insurance required of taxicab corporations as set by New York’s legislature, Mr. Walkovszky’s proper remedy is to seek not judicial relief but legislative change. We reject these arguments for two reasons. First, in requiring minimum liability insurance of $10,000, New York’s legislature intended to provide a small fund for recovery against people and corporations engaged in the business of transporting persons for hire. It is a minimum, not a statutory maximum. Between July 1963 and June 1964, almost four million people were injured in motor vehicle accidents, and in 1964 alone, 47,000 people lost their lives to motor vehicle accidents. Keeton & O’Connell, supra, at 11–12. In 1963, one out of every twenty registered vehicles was involved in a motor vehicle accident. Id. Given the recognition of the significant suffering and loss and financial toll of motor vehicle accidents, in our view, New York’s legislature could not have intended to shield individuals who use and organize corporations to create a business organization that is specifically structured to avoid responsibility to the public in light of its clear desire to ensure innocent victims of such accidents were recompensed for the injury and loss inflicted upon them. Although the liability insurance requirement of $10,000 serves as a minimum, it is by no means an absolute bar to further liability. Moreover, courts have refused to allow the corporate fiction to be used as a tool for injustice, and the same considerations apply to the case at bar. In Mull v. Colt Co., Inc., 31 F.R.D. 154 (S.D.N.Y. 1959), the plaintiff sustained serious injuries when he was pinned between the rear of his car and the front of a taxicab. His right leg had to be amputated, his left leg was badly shattered, he spent 209 days in the hospital, underwent approximately twenty surgeries, and was unable to work after the accident. The defendant driver was driving a taxicab registered in the name of a defendant corporation that held the minimum insurance for taxicabs fixed at

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$5,000 under the 1929 Act. Similar to the case before us, the assets of the defendant driver were miniscule, and the only assets of the defendant corporation were the minimum insurance and two registered taxicabs. Given that the assets of the motorists and corporation were entirely insufficient, the plaintiff joined a large group of individual taxicab companies and their shareholders as defendants in his action.2 He sought to pierce the corporate veil of the defendant corporation to access the assets of the other defendant corporations and the shareholders who allegedly dominated and controlled 100 individual taxicab corporations – with two taxicabs registered in each corporate name, each carrying the minimum amount of insurance. All of the defendants brought motions to dismiss the plaintiff’s complaint. The court refused those motions. In the court’s view, multiple shell corporations, designed to exploit the minimum statutory insurance requirements, clearly perverted legislative intent, because the purpose of the underlying enactment of compulsory insurance for taxicabs was to protect the riding public and provide means of recovery for those who suffered from the negligent operation of taxicabs. It was never intended to “provide a shield for the evasion of public responsibility through the ingenious employment of the corporate fiction.” Moreover, the court held that as a general rule, a corporation will be looked upon as a separate legal entity, but “when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons,” and the corporate veil can be pierced to access the personal assets of controlling shareholders and other defendant corporations as appropriate. The court noted that the sanctity of separate corporate personality is only upheld insofar as the entity is consonant with the underlying policies that give it life. This is grounded in the fact that corporate separate personality is a privilege granted by the legislature whereby an artificial person is created by compliance with various procedures prescribed by the state. Where, however, the “statutory privilege of doing business in the corporate form is employed as a cloak for the evasion of obligations, as a mask behind which to do injustice, or invoked to subvert equity, the separate personality of the corporation will be disregarded.” On the facts of the case, the court applied this rule of equity and justice to find that it was justified to go behind the corporate separate personality to the individual members and other defendant corporations and refused the motion to dismiss the plaintiff’s complaint. In a similar case, Robinson v. Chase Maintenance Corp., 190 N.Y.S.2d 773 (Sup. Ct. 1959), the court also refused a defendant’s motion to dismiss an action for injuries resulting from the negligent operation of a taxicab in part. The court held 2

The plaintiff also joined the manufacturer of the taxicab and the automobile dealer as defendants in his action, seeking to hold them liable on the theories of negligence and breach of warranty.

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that the corporate separate personality of a corporation could be sacrificed at times “when the sacrifice is essential to the end that some accepted public policy may be defended or upheld,” because only then “can we overcome a perversion of the privilege to do business in the corporate form.” Additionally, in Teller v. Clear Service Co., 173 N.Y.S.2d 183 (Sup. Ct. 1958), the court held that although a shareholder is not ordinarily liable for the debts and liabilities of a corporation, nor does ownership of shares in a corporation ordinarily create a relationship of principal and agent; that principle is not applicable where “stock ownership has been resorted to, not for the purpose of participating in the affairs of a corporation in the normal and usual manner, but for the purpose . . . of controlling a subsidiary company so that it may be used as a mere agency or instrumentality of the owning company or companies,” or “where dominion is so complete, interference so obtrusive that by general rules of agency the parent will be a principal and the subsidiary an agent.” Similar determinations have been made in In re First National Bank of Arthur, Ill., 23 F. Supp. 255, 257 (E.D. Ill. 1938); Boyle v. Judy Cab Corp. et al., 203 N.Y.S.2d 309 (1960) (order modified with regard to other matters 12 A.D.2d 797 (N.Y. 2d. Dept. 1961)); P. S. & A. Realties v. Lodge Gate Forest, 205 Misc. 245 (N.Y. Sup. Ct. 1954); Luckenbach S. S. Co. v. Grace & Co., 276 F. 676 (4th Circ.), cert. denied 254 U.S. 644 (1920); Majestic Factors Corp. v. Latino, 184 N.Y.S.2d 658 (1959); Minifie v. Rowley, 202 Pac. 673 (1921); Park Terrace, Inc. v. Phoenix Indemnity Company, 91 S.E.2d 584 (N.C. 1956); and Dixie Coal Mining & Mfg. Company v. Williams, 128 So. 799 (Ala. 1930). Courts have not permitted the privileges of limited liability and separate corporate personality to act as a bar to liability. Equitable considerations and considerations of justice have led courts to pierce the corporate veil where the circumstances require it. Second, in response to Mr. Carlton’s argument with respect to legislative interference, we defer wholly to the response of the Supreme Court of the United States in Anderson v. Abbott, 321 U.S. 349 (1944) (emphasis added), where Justice Douglas, writing for the Court, held: In the field in which we are presently concerned, judicial power hardly oversteps the bounds when it refuses to lend its aid to a promotional project which would circumvent or undermine a legislative policy. To deny it that function would be to make it impotent in situations where historically it has made some of its most notable contributions. If the judicial power is helpless to protect a legislative program from schemes for easy avoidance, then indeed it has become a handy implement of high finance. Judicial interference to cripple or defeat a legislative policy is one thing; judicial interference with the plans of those whose corporate or other devices would circumvent that policy is quite another. Once the purpose or effect of the scheme is clear, once the legislative policy is plain, we would indeed forsake a great tradition to say we were helpless to fashion the instruments for appropriate relief.

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Contrary to Mr. Carlton’s argument, given the clear legislative policy underlying the Vehicle and Traffic Law of recompensing victims of negligently caused motor vehicles accidents, a failure of this Court to intervene in the circumstances of this case would constitute undermining legislative policy. This Court is not a “handy implement of high finance.” Id. at 366. Application In the present case, the relevant facts as pleaded are as follows: (1) The twenty taxicabs owned by Seon Cab Corp. and its nine sister corporations were “organized, managed, dominated and controlled as the alter egos and creatures of the defendants William Carlton, John Doe and Richard Roe,” who were the “the stockholders, directors, and officers” of all the corporate defendants; (2) All of the employees, including the one who was driving the taxicab that injured Mr. Walkovszky, “were employees of all the defendants,” including Mr. Carlton; (3) All these employees “were assigned interchangeably” to the ten corporations “by the defendants” and were centrally supervised; (4) “[T]he receipts, disbursements, assets and properties of the said corporations were interchanged and intermingled by the defendants as their own;” (5) The corporations purchased all supplies centrally and were garaged centrally; (6) “[A]ll other operations and properties of all the said corporations were operated, controlled, managed” by the individual shareholder defendants, including Mr. Carlton as one; (7) All ten corporations borrowed funds that were personally endorsed by the individual shareholder defendants; and (8) None of the ten corporations were supplied with sufficient capital “to enable them to conduct the business and operation for which they were created.” In our view, should Mr. Walkovszky be able to establish the veracity of these and related facts at trial, Mr. Carlton can be found to have been misusing the corporate structure to defeat the purpose of the legislative policy underlying the Vehicle and Traffic Law. Such a corporate structure unacceptably and inequitably externalizes the cost of business on society, an objective New York’s legislature clearly sought to avoid, and there exists an equitable basis to pierce the corporate veil and hold Mr. Carlton personally liable for Mr. Walkovszky’s personal injury and financial losses resulting from the accident occasioned upon him.

Inadequate Capitalization Legal Principles Additionally, and in the alternative, on a standalone basis, inadequate capitalization can provide sufficient grounding to pierce the corporate veil. In its simplest form, undercapitalization can be defined as the situation where the capital contributions from shareholders are completely deficient, compared to the risks that the corporation undertakes during its operations.

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Undercapitalization raises many of the same policy concerns raised by the concept of limited liability discussed above. It provides an unfair advantage to corporate shareholders at the expense of other stakeholders and society. The risks a corporation takes are externalized onto and borne by the public, while shareholders reap the rewards and are insulated from the losses arising from corporate activity. As discussed above, different stakeholders are in different positions. Some stakeholders – such as sophisticated creditors – may have the ability and means to protect themselves through contract law, for example. Others, such as tort victims, who suffer physical injury from a corporation’s activities, may not have the ability to protect themselves and absorb the costs arising from corporate activity. We are of the view that the attempt to do corporate business without providing a sufficient basis of financial responsibility to societal stakeholders is inequitable and an abuse of the privileges of limited liability and corporate separate personality. And “[c]ourts will not tolerate an arrangement whereby the privilege to do business in the corporate form is secured, while at the same time the public is deprived of the security upon which the franchise to do business depends.” Maurice Dix, Adequate Risk Capital: The Consideration of the Benefits of Separate Incorporation, 53 Nw. U. L. Rev. 478, 488 (1958–59). Indeed, both courts and academic literature have recognized the rule that inadequate capitalization can serve as a basis for piercing the corporate veil. As Professor Henry Winthrop Ballantine in Ballantine on Corporations (Callaghan & Co. rev. ed. 1946) (emphasis added) explains: If a corporation is organized and carries on business without substantial capital in a way that the corporation is likely to have no sufficient assets available to meet its debt, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of law that shareholders should in good faith put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.

In Anderson, the Supreme Court endorsed the same principle. In Anderson, the defendant shareholders had organized a holding company and, in return for shares of the holding company, the defendant shareholders transferred the shares they held in various national banks to the holding company. The holding company did not have sufficient assets to meet the federal statutory double liability requirements. Although the Court found that the holding company was organized in good faith and not a sham formed for the means of avoiding the double liability requirement, the Court still pierced the corporate veil of the holding company and held all the shareholders individually responsible for the corporate obligations mandated by statute. Notably, Justice Douglas, writing for the majority, recognized that although https://doi.org/10.1017/9781009025010.005 Published online by Cambridge University Press

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limited liability is the rule and not the exception, the limited liability of a corporation can be set aside “when the sacrifice is so essential to the end that some accepted public policy may be defended or upheld.” Anderson at 358 (quoting Berkey v. Third Ave. Ry. Co., 244 N.Y. 84 (N.Y. 1926)). An obvious inadequacy of capital, measured according to the nature and magnitude of the corporate undertaking, can be an important factor in cases denying shareholders the defense of limited liability, even in the absence of a legislative policy that undercapitalization would defeat. However, undercapitalization is even more important in cases where interposition of a corporation is being used to defeat legislative policy. In the case of Anderson, undercapitalization became even more important, as the statutory double liability requirements would have been defeated if “impecunious bank-stock holding companies are allowed to be interposed as nonconductors of liability.” Id. at 363. Similarly, in Minton v. Cavaney, 56 Cal.2d 576 (1961), the court held that the equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will; when they hold themselves out as being personally liable for the debts of the corporation; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs (emphasis added, internal citations omitted).

In that case, the Court found that it was undisputed that there was no attempt to provide adequate capitalization, because the corporation that operated the swimming pools had never had any substantial assets and its capital was “trifling compared with the business to be done and the risks of loss.” Id. at 580. Moreover, it was clear that the defendant shareholder was the equitable owner of the corporation; he was the corporation’s director, secretary, and treasurer, and there was evidence that he was to receive one-third of the shares to be issued. In many other cases, inadequate capitalization has been cited as an important factor in denying shareholders the defense of limited liability and in setting aside the separate corporate personality of the corporation. See, e.g., Luckenbach at 681; Oriental Investment Co. v. Barclay, 25 Tex. Civ. App. 543, 559 (1901); Weisser v. Mursam Shoe Corp., 127 F.2d 344. (1942), Pepper v. Litton, 308 U.S. 295, 310 (1939); Albert Richards Co. v. Mayfair, Inc., 287 Mass. 280, 288 (1934). As a result, where the capital provided by a corporation is “illusory or trifling compared with the business to be done and the risks of loss,” this is a ground for denying the limited liability privilege of the corporate structure. Application In the case before us, the relevant facts are as follows: (1) None of the ten corporations were “supplied with sufficient capital, at the creation, so as to enable them to conduct the business and operations for which they were created”; and (2) During

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the course of their existence, all of the “assets of this [taxicab] fleet have been milked out of the corporate web” by the individual shareholder defendants, for the purpose of not making them “responsive to a judgment obtained by any member of the general public who is injured by the negligent operation of these [taxicabs].” Aff. of Lawrence Lauer Read in Opposition to Motion at 3, Walkovszky v. Carlton, 18 N.Y.2d. 414 (1966) (No. 414-426). If the plaintiff is able to establish that the defendant corporations were intentionally undercapitalized at their creation – that is, they did not have adequate assets compared with the business to be done and the risks of loss initially undertaken by the corporation – and that the defendant corporations continued to be devoid of sufficient assets throughout their existence – that is, they did not have sufficient assets proportionate with the business they were doing and the corresponding risks of loss – then that provides a basis to pierce the corporate veil and hold the corporation’s shareholders responsible for the corporation’s actions. Applied to this case, Mr. Walkovszky pleaded that the defendant corporations lacked sufficient assets at their creation and throughout their existence and, as recognized in Cavaney, the individual shareholder defendants personally endorsed the funds that the corporations borrowed. In our view, should Mr. Walkovszky be able to establish the veracity of these facts at trial, these allegations provide the basis to pierce the corporate veil and hold Mr. Carlton personally liable for Mr. Walkovszky’s injuries and losses, for failing to supply the defendant corporations with sufficient capital “compared with the business to be done and the risks of loss.” IV

For the reasons above, we would dismiss Mr. Carlton’s appeal and affirm the judgment of the majority of the Appellate Division of the Supreme Court. Mr. Walkovszky’s complaint is valid against the individual defendant Mr. Carlton. As pleaded, if the facts are established at trial, the corporate veil may be pierced to hold Mr. Carlton personally liable for the injuries and loss occasioned on Mr. Walkovszky as a result of the motor vehicle accident he was involved in, on the basis of equity and inadequate capitalization. We make one final observation. This appeal relates to a motion to dismiss an action on the basis that it fails to state a cause of action. It is important to note that although motions to dismiss are an important procedural tool to put an end to clearly unmeritorious actions to preserve judicial resources, for plaintiffs they can significantly increase the costs of litigation and discourage the resolution of meritorious claims. On such a motion, the court is only concerned with the pleadings before it. In assessing whether the allegations, taken as true, spell out a valid cause of action against the defendant(s), the court must read the pleading as a whole, favorably and liberally, “with a view to substantial justice,” deducing whatever can be implied from the pleading by fair and reasonable intendment. Condon

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v. Associated Hosp. Serv., 287 N.Y. 411, 414 (1942); Kober v. Kober, 16 N.Y.2d 191, 193–94 (1965). Courts must not forget these rules of construction and impose a higher burden of proof on plaintiffs. The ultimate success of the plaintiff in proving their action is not at issue before the court. If, upon any aspect of the facts, the plaintiff is entitled to recovery, then the defendant’s motion must be denied. In our view, considering these canons of construction, it simply cannot be said that Mr. Walkovszky does not plead any cause of action. Mr. Carlton’s motion must be denied.

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p a r t i ii

Role and Purpose of the Corporation and Corporate Combinations in Society

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4 Commentary on Dodge v. Ford Motor Company jena martin

In corporate law, few cases have elicited as much sustained debate and controversy as Dodge v. Ford. —Michael J. Vargas1

INTRODUCTION

The Dodge brothers and Henry Ford are not your typical little-known litigants. The businesses that were the subject of the Dodge v. Ford2 litigation still thrive today, over a hundred years later.3 In fact, even within the business community, both Henry Ford and the Dodge brothers could well be considered “rock stars.” Their lives have spawned countless biographies, documentaries, and – in the case of Henry Ford – even a musical number on Broadway.4 In short, Henry Ford was among the pinnacle of the elite. And yet, Ford portrayed himself as an everyman who wanted to be part of the people. In fact, it was this portrayal of himself as a worker engaged in service to the people that likely influenced the court’s decision in Dodge v. Ford. How do we square these two narratives? And what are the implications of these narratives for corporate jurisprudence? The battle over the purpose of the corporation is, in many ways, the battle over which of these narratives should dominate. 1

2 3

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Michael J. Vargas, Dodge v. Ford Motor Co. at 100: The Enduring Legacy of Corporate Law’s Most Controversial Case, 75 Bus. Law. 2103, 2103 (2020). Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919). Ford Motor Company’s annual revenue for 2019 was over $155 billion. While the Dodge brand still exists, it is now owned by Chrysler, which bought the Dodge brand in 1928. The Editors of Encyclopaedia Britannica, Horace E. Dodge and John F. Dodge, Britannica (Feb. 8, 2019), https://www.britannica.com/biography/Horace-E-Dodge-and-John-F-Dodge. The musical Ragtime, set during the dawn of the twentieth century, features Henry Ford as a major character and includes a song bearing his name. See, e.g., Ragtime–Henry Ford, YouTube (Jan. 23, 2012), https://www.youtube.com/watch?v=840DM5UkrVI.

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If one accepts the framework of the corporation as solely a profit-making machine that simply exists to create wealth for shareholders, then the Michigan Supreme Court’s decision in the Dodge v. Ford case was correct. On the other hand, if the narrative that Ford promoted is accepted – that the purpose of business is to perform a service and that profit is merely the by-product of that service5 – then the Supreme Court’s decision was incorrect, and a whole canon of corporate jurisprudence should be rewritten. In this volume, Professor Barnali Choudhury, writing as Justice Choudhury in dissent, offers a third approach: bridging the two narratives by looking at them through a complementary rather than a competing lens. By reframing the issue away from dueling purposes to synergistic ones, Choudhury masterfully repositions the iconic corporate law case from a socially empowered position. However, in order to truly understand the power of Choudhury’s dissent, and the potential had it been adopted, we need to begin with the world in which this case came to life. Welcome to Dearborn, Michigan, at the dawn of the twentieth century.

BACKGROUND

The Ford Motor Company (FMC), incorporated in 1903, was not Henry Ford’s first business venture. Nor was it even his first role in forming a for-profit company. In his quest to industrialize the horseless carriage, Ford had formed two prior businesses and had used investor money to capitalize on his experiments with the automobile.6 From the beginning, Ford’s relationships with his investors were fraught with conflict. Part of that stemmed from a difference in philosophies regarding the best way to earn money. Over the years, Ford had been vocal regarding his disdain for those who made money from investing – which he dismissed as “more or less respectable graft.”7 But part of the conflict was undoubtedly personal. It seems clear that Ford had a very specific idea regarding what he wanted to do with his cars and his business and often bristled at those who presumed to know what was better for his company.8 To Ford, the Dodge brothers were perhaps in a different class than the prototypical investors. The business relationship between the two began within the supply chain: The Dodge brothers acted as one of Ford’s vendors. It was only when Ford

5

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In his autobiography, Ford makes his position on the intersection of profit and service explicit, stating, “The producer depends for his prosperity, upon serving the people. He may get by for a while serving himself, but if he does, it will be purely accidental, and when the people wake up to the fact that they are not being served, the end of that producer is in sight.” Henry Ford, My Life and Work 21 (1922). M. Todd Henderson, The Story of Dodge v. Ford Motor Company: Everything Old Is New Again, in Corporate Law Stories 38 (J. Mark Ramseyer ed., 2009). Ford, supra note 5, at 10–11. Ironically, given the epic litigation that ensued, Ford also stated in his autobiography that he welcomed competition (just perhaps not from his former business investors). Ford, supra note 5, at 36.

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could no longer afford to pay them for the materials they produced that they agreed to accept a stake in FMC instead. However, despite its previous failures, there is no doubt that, by the time of the litigation with the Dodge brothers, FMC9 was an unequivocal economic success.10 The annual dividends averaged around $2 million a year in early twentieth-century money – an amount that would equal over $57 million in today’s dollars.11 As for John and Horace Dodge, their initial decision to accept shares in lieu of cash proved to be a lucrative one. In 1917, the Dodge brothers had a 10 percent stake in the company12 (meaning they were receiving approximately $5 million a year in today’s currency from their investment), enough to fund a competing automobile business, (one that they had created in 1913) . Originally, the brothers each had a seat on the FMC board;13 however, they resigned their positions when they opened their competing venture, leaving them as only shareholders.14 So, when Ford decided to take the actions that led to the litigation – namely, creating an industrial park in River Rouge, Michigan, and foregoing the issuance of dividends to investors – the Dodge brothers were not in a position to use their votes as directors to prevent Ford from acting. We may never know Ford’s true motivations for his actions. While many have guessed at why he did what he did,15 and Ford himself offered a rather self-serving account behind his actions,16 his true motives remain unclear. What is undisputed is that, despite Ford’s rhetoric, both he and the Dodge brothers were members of the elite. To make plain, they were (to use the parlance of a more recent social movement) part of the 1 percent.17 And that undoubtedly shaped the perspective 9

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11 12 13 14

15 16 17

The Power of Relationships Fuels Historic Ford Motor Company’s IPO, Goldman Sachs, 2103https://www.goldmansachs.com/our-firm/history/moments/1956-ford-ipo.html#:~:text=The %20Power%20of%20Relationships%20Fuels%20Historic%20Ford%20Motor%20Company’s% 20IPO,-Theme%3A%20Clients&text=Goldman%20Sachs%20leads%20the%20Ford,date%20in %20the%20United%20States. The FMC was not a public corporation at the time; it went public in the 1950s. At the time of litigation, Ford owned 58 percent of the company and the Dodge brothers owned 10 percent, with the remaining 32 percent being distributed among a handful of investors. According to the court opinion, as of July 31, 1916, the company had $52 million cash on hand. Id. at 465. Inflation Calculator, Dave Manuel, https://www.davemanuel.com/inflation-calculator.php. Dodge v. Ford Motor Co., 204 Mich. 459, 467 (1919). Id. at 463. The five members of the board of directors at the time of the litigation were Henry Ford, David H. Gray, Horace H. Rackham, F. L. Klingensmith, and James Couzens. The corporate officers were Henry Ford, President; F. L. Klingensmith, Treasurer; and Edsel B. Ford, Secretary (Henry Ford’s son and later the president of FMC). Id. at 467. Henderson, supra note 6. Ford, supra note 5. As one website notes: Born in 1863, the founder of the hugely profitable Ford Motor Company revolutionised vehicle manufacturing and brought the car to the mass market, selling millions of vehicles during his lifetime. By the 1940s, Ford had risen to become the wealthiest person [on] the planet. At the time of his death in 1947, the automotive pioneer’s net worth was reportedly around $200 billion (£162bn) in 2018 dollars.

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of the Michigan Supreme Court, whose jurists, if not economically in the same sphere as Ford, undoubtedly perceived themselves as part of the intellectual elite and perhaps, as such, gatekeepers for that social class.18 Original Opinion The Dodge brothers filed their complaint in 1916. They had two specific claims. First, they alleged that Ford, as the dominant shareholder – and the domineering member of the board19 – had stopped issuing special dividends to shareholders and publicly declared that he would no longer do so. Second, the Dodges opposed FMC’s proposed creation of the River Rouge plant, which, they contended, would create a stranglehold on competition for low-priced cars.20 While both of these claims today would be unilaterally dismissed under the business judgment rule, Ford’s rhetoric – particularly his uneasiness with the profitability of the company – seemed to give the court pause. As the Dodge brothers alleged in their complaint, Ford’s primary motivation for his decisions seemed to stem more from his calculation of the societal benefits than from business profitability perspective. For instance, Ford publicly declared that “[m]y ambition . . . is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business.”21

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The Richest Person in the World Every Decade from 1820 to 2020, LoveMoney, https://www .lovemoney.com/gallerylist/74533/richest-person-every-decade-1820-2020. This wealth stood in stark contrast to the average weekly salary of the American worker at the time, $30 ($460 in today’s wages). Both Dodge brothers died in 1920 after contracting pneumonia; perhaps if they had lived on, their wealth would have rivalled Ford’s. History.com Editors, Dodge Co-Founder Dies, Hist. (Jan. 13, 2020), https://www.history.com/this-day-in-history/dodge-co-founder-dies. One of the central tenets among critical legal theorists is the view that, despite how jurisprudence is taught in law school (or handled in practice), judicial court opinions are not simply objective, value-neutral frameworks. Instead, they represent the sum total of experiences, biases, and prejudices among the judges who issue those opinions. It is worth noting, however, that Ford contended that he was not in fact a dominating member of the board. According to his answer to the Dodge brothers’ complaint, he “denies that he forced upon the board of directors his policy of reducing the price of such cars by eighty dollars per car and says that the action of the board was unanimous thereon after careful consideration.” Dodge, 204 Mich. 459 (1919) at 676. Id. at 474. Specifically, according to the opinion, the Dodges’ complaint stated: That there are many other corporations engaged in the business of manufacturing cars in competition with the only car manufactured by the Ford Motor Company, to wit, the class recognized in the trade as “low-priced cars.” . . . That if [he] is permitted to continue the policy . . . of increasing production, reducing the price of cars, and increasing the capital investments . . . the necessary result will be the destruction of competition on the sale of the class of cars manufactured by such corporation and the creation of a complete monopoly in the manufacture and sale of such cars.

21

Dodge, 204 Mich. 459 at 468.

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Indeed, rather than distancing himself from that stance (taken prior to the start of the litigation), Ford embraced it during the trial. During his testimony, Ford noted that he believed that a little profit was acceptable, but that “awful profits” were not something he wanted.22 As such, while the development of the manufacturing facility could clearly be tied to a business purpose, on its face, the decision to deny profits (through the issuance of dividends) to the company’s shareholders was more attenuated. This distance from profit-making, coupled with Ford’s rhetoric on the issue, was enough to provide the court with the cover it needed to maintain the status quo for such companies – by penalizing anyone who wanted to disperse power away from the elite. The two parts of the board’s decision became the two parts of the court’s decision. The expansion plan, which was explicitly justified under a corporate profit maximization structure, is the aspect of FMC’s decision that the court upheld. In contrast, Ford’s decision to withhold dividends – explicitly referenced by the court within the context of Ford’s testimony to keep costs low and help the larger community afford to buy cars – was overturned as not enough of a profit-centered motive. To that end, while the court at least nominally engaged in an analysis of what would now be considered the business judgment rule (BJR)23 – or at least employed the BJR rhetoric, the societal benefits conferred by FMC’s decisions to the community at large seem, in retrospect, to have been a bridge too far for the justices. Specifically, the court’s role as gatekeeper for the elite seemed plain in their reprimand of Henry Ford: The record, and especially the testimony of Mr. Ford, convinces that he has to some extent the attitude towards shareholders of one who has dispensed and distributed to them large gains and that they should be content to take what he chooses to give. His testimony creates the impression, also, that he thinks the Ford Motor Company has made too much money, has had too large profits, and that, although large profits might be still earned, a sharing of them with the public, by reducing the price of the output of the company, ought to be undertaken. We have no doubt that certain sentiments, philanthropic and altruistic, creditable to Mr. Ford, had large influence in determining the policy to be pursued by the Ford Motor Company.24

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Henderson, supra note 6, at 61–62. At the most basic level, the BJR is a canon of corporate law that recognizes that judges are not business experts and therefore should defer to most decisions made by corporate directors regarding corporate affairs, rather than engaging in Monday-morning quarterbacking. In Delaware (generally held to be the bastion of corporate jurisprudence), the BJR doctrine is discussed as a process-oriented doctrine. In sum, so long as a board of directors follows a wellinformed process (and no other violations of fiduciary duties exist), courts will not question the substance of the decision. Dodge, 204 Mich. 459 at 506.

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Seen within this framework, the court’s oft-quoted language, which has become a foundational pillar in corporate jurisprudence, takes on a whole new light. The quote – “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end”25 – can be seen through the lens of preserving wealth and wealth maximization. This lens transforms it from a simple statement regarding the purpose of a corporation to an emphatic, if implicit, stand against the potential shift of power that Ford’s narrative could have created; to wit, away from the shareholders and managers of corporations (white, male property owners) to employees and customers (working class and marginalized groups).

FEMINIST JUDGMENT

In contrast, Choudhury’s opinion reflects her support for using corporate governance to promote public policies for everyone. Specifically, her dissenting opinion – while written as though the year were 1919 – represents the cutting edge of critical feminist thought. At times, Choudhury’s discussion of the impact of the court’s ruling from a feminist perspective is explicit. For instance, she notes that Ford’s strategy of providing low-priced automobiles could benefit women, in particular, by becoming a “powerful conduit for increasing women’s independence.” In other instances, the author adheres to a pillar of critical feminist scholarship, namely, the intersectional approach of analyzing claims of oppression through multiple lenses, not merely a gendered one.26 Critical feminist theory often considers the roles of wealth, class, and power as well as race and gender.27 As such, integrating the discourse of other marginalized communities into traditional gender narratives28 has been an effective way of expanding views of social justice beyond the siloed approach of simply looking at one particular aspect of oppression. For instance, in her work examining class and feminist thought, Michelle Sidler explicitly referenced the work of those

25 26

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Id. at 507. See, e.g., Nicholas F. Stump, Following New Lights: Critical Legal Research Strategies as a Spark for Law Reform in Appalachia, 23 Am. U. J. Gender Soc. Pol’y & L. 573, 646–48 (2014) (arguing from an intersectional ecofeminist standpoint that a gender lens alone is insufficient, as a broader analysis is required, implicating a holistic critique of the dominant ecological political economy). Id. All the Women Are White, All the Blacks Are Men, but Some of Us Are Brave (Gloria Hull ed., 1982) (an anthology of intersectional stories along race and gender lines); Bonnie Thornton Dill & Maria Kohlman, Intersectionality: A Transformative Paradigm in Feminist Theory and Social Justice, in Handbook of Feminist Research: Theory and Praxis 2 (Sharlene Nagy Hesse-Biber ed., 2014).

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commentators who tied the high unemployment rate of the 1990s to the “profits above all else” mantra that undergirds most corporate structures.29 Although the naming of intersectionality did not take hold until the 1980s,30 the roots of an intersectional approach were alive and well even at the time of the Dodge v. Ford decision.31 Early advocates in this regard included Sojourner Truth, Maria Stewart, and Anna Julia Cooper.32 According to scholars Thornton Dill and Kohlman, “what distinguished this early work on Black women was that it argued forcefully and passionately that the lives of African American women could not be understood through a unidimensional analysis focusing exclusively on either race or gender.”33 Moreover, while much of the earlier advocacy explicitly focused on the issues of race and gender, it did so with a precocious understanding of how these two concepts weave into the issue of class and oppression. As Teresa Amott and Julie Matthaei wrote: The essentially economic nature of early racial-ethnic oppression in the United States makes it difficult to isolate whether peoples of color were subordinated in the U.S. economy because of their race-ethnicity or their economic class . . . While it is impossible, in our minds, to determine which came first in these instances – race-ethnicity or class – it is clear that they were intertwined and inseparable.34

Examining Choudhury’s dissent from this intersectional approach demonstrates the many ways in which increasing the economic and social development of consumers (i.e., by providing them with inexpensive cars) would lower barriers to the workforce and job access – and could be viewed as a threat by the elite from all corners. For instance, Choudhury discusses the disproportionate impact that using public

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Michelle Sidler, Living in McJobdom: Third Wave Feminism and Class Inequity, in Third Wave Agenda: Being Feminist, Doing Feminism 30 (Leslie Heywood & Jennifer Drake eds., 1997) (discussing the “motivating force behind the world-wide employment crisis – multinational corporations guided by the ‘profit motive’.”) See, e.g., Paula Giddings, When and Where I Enter: The Impact of Black Women on Race and Sex in America (1984) (discussing the early black female pioneers and their impact on social justice movements). bell hooks, Feminist Theory (1984) (critiquing the lack of intersectionality in contemporaneous feminist thought). For an example of discussions of intersectionality within legal scholarship, see Kimberlé Crenshaw’s seminal article, Mapping the Margins: Intersectionality, Identity Politics, and Violence against Women of Color, 43 Stan. L. Rev. 1241 (1991) (an analysis of race and gender within the context of domestic violence against women of color). This article in turn builds on an earlier piece by Crenshaw, Demarginalizing the Intersection of Race and Sex: A Black Feminist Critique of Antidiscrimination Doctrine, Feminist Theory and Antiracist Policies, 1989 U. Chi. Legal F. 139 (1989). Thornton Dill & Kohlman, supra note 28, at 3. Id. Id. Teresa Amott & Julie Matthaei, Race, Gender and Work: A Multi-Cultural Economic History of Women in the United States 19 (1991).

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transportation has on Black women. As she notes: “It is even more difficult for Black women in the South, who not only have to endure segregated public transport options, but who also are often harassed and treated poorly by white bus drivers and passengers.” Choudhury’s intersectional approach provides an example of Amott and Matthaei’s feminist framework in action. In addition, Choudhury’s dissenting opinion is undergirded both with an understanding of the profit-emphasis motif that the court uses to justify its opinion and with a communitarian lens that is at the heart of critical feminist thought. This theoretical approach comes to life when she notes: “In addition to increasing revenues for the corporation, the Ford policy has also worked to make the business more resilient. This is beneficial both to shareholders and corporate parties alike, and is also beneficial to the firm as a whole.” Later she reiterates this communitarian refrain when she notes: It is in shareholders’ long-term interest that the Ford Motor Company be able to withstand adversity rather than collapse at the first sign of market problems. . . . In addition to preserving long-term shareholders’ interests and the interests of the corporation as a going concern, business resilience also protects the interests of other corporate parties. Suppliers, creditors, and employees, among other corporate parties, benefit from firm stability given their dependence on the firm. In particular, employees who, unlike suppliers and creditors, do not have sufficient bargaining power to be able to protect their own interests through contracts or insurance benefit enormously from business resilience, as they are less likely to lose their jobs during periods of corporate adversity.

In short, Choudhury’s opinion refuses to accept the shareholder v. stakeholder framework as a zero-sum game, instead positing that a profitable corporation can still serve its community. Choudhury’s critical feminist approach becomes clear early in her dissent. She begins by pointing to parts of Ford’s testimony that were largely overlooked by the majority.35 Specifically, Choudhury challenges the implicit “societal benefit only” mindset that is reflected in the court’s opinion. She does so by pointing out that, in fact, Ford’s answer in the litigation provides a corporate purpose for its refusal to relinquish dividends: to wit, preserving a cash reserve to forestall bankruptcy in case of an unforeseen event. Choudhury’s highlighting of this issue foreshadows the practices of some of today’s most successful corporations.36 Most significantly, Choudhury points to case law that establishes an obligation of a board of directors to act in the best interests of the corporation. Choudhury firmly 35

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Parts of the testimony are reproduced in David Lanier Lewis, The Public Image of Henry Ford: An American Folk Hero and His Company 100–01 (1976). For instance, Apple is notorious for withholding dividends from its shareholders and, instead, accumulating massive cash reserves. Moreover, given the effect that the COVID-19 pandemic has had on businesses around the world, her discussion of Ford’s answer in this context seems prescient.

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takes issue with what she views as the three main points of the majority opinion: (1) the purpose of a corporation is to maximize profits; (2) this is the only aim of a corporation; and (3) to behave any differently would be to disadvantage (or menace) the corporation’s stockholders. As Choudhury notes, this approach takes a “very narrow view of the corporation.” In her dissent, Choudhury disagrees with that narrow framing and instead argues that FMC’s decision can benefit both the surrounding community and promote “the very survival” of the corporation.

WHAT IF?

Just like the rhetoric used in her dissent, Choudhury’s own scholarship on feminism and corporate theory disputes the conventional wisdom that corporations are simply a means to obtaining and retaining wealth and power. Choudhury’s discussion, in her dissent, of the ability of corporations to benefit society fits within critical feminist literature and serves as a clarion call for what could have happened if her perspective had been adopted by the court. For instance, in her 2014 article Aligning Corporate and Community Interests: From Abominable to Symbiotic,37 Choudhury notes that in the typical corporatecommunity framework, corporations fail “to align their interests with that of the community.” However, according to Choudhury, [T]here are a small but growing number of corporations that have adopted a contrary view. These corporations contend that corporate and community interests are not distinct but can, in some cases, be united. Corporations adopting this approach cite several advantages to this approach, including increased public trust in the company, development of local talent, easier recruitment of new employees, and sustainability of their investments. At the same time, communities in which this approach has been adopted view the investments in their community as sustainable and responsive to their interests.38

This idea of aligning a corporation’s and a community’s interests has, according to Choudhury, been taken up in corporations around the world.39 But also, in a particularly ironic example, she presents the case of Cascade Engineering. Welcome to Grand Rapids, Michigan, at the dawn of the twenty-first century. Cascade Engineering, according to its website, specializes in “large part plastic injection molding.”40 The company was founded in 1973 and is a closely held

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Barnali Choudhury, Aligning Corporate and Community Interests: From Abominable to Symbiotic, 2014 B.Y.U. L. Rev. 257 (2014). Id. at 260. Id. at 291. What We Do, Cascade, https://www.cascadeng.com/what-we-do.

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corporation41 that is primarily family-owned.42 According to its website, “the Cascade family of Companies [is] a group unified by our purpose and shared belief. Separately, these nine companies bring us into new worlds and ways of thinking. Together, they represent a unified purpose and a mission to make the world better by the day.”43 Specifically, the company focuses on the “triple bottom line” approach, in which a business’s success is measured from the standpoints of “people, planet, profit” to great effect. As one commentator notes, “[i]n just one generation, Cascade Engineering has achieved considerable business success, while also striving to make a positive impact on society and the environment.”44 In many ways, Cascade Engineering is Justice Choudhury’s vision of the future come to life. For instance, in her dissent, she favorably cites both Ford’s and his opponent’s “sense of communitarian values” – which, she also notes, pervades other jurisprudence from that era. Similarly, in Choudhury’s assessment of Cascade Engineering she notes that “the success of the program [comes from] working with the community.” Choudhury’s use of Cascade as an example of what happens when community interests complement corporate interests and identity is particularly apt. According to Choudhury, Cascade was approached by local government in Michigan to “participate in a newly formed welfare-to-work program.”45 The programs aimed to expedite the transition for individuals from public assistance to paid employment.46 As such, it provided a mechanism to improve the lives of individuals while benefiting the larger community and helping the corporation in its profitoriented goals. In that sense, the parallels between Cascade’s approach and Henry Ford’s professed business model are striking. For instance, Choudhury notes that “Cascade considers the program a success as it is able to retain on average 97.4 percent of the ninety candidates it recruits each year.”47 Similarly, commentators have noted that part of what likely motivated Henry Ford’s decisions regarding his workforce was to generate similarly high employee retention rates.48 In addition, to the extent that Cascade’s program has led to favorable news coverage, it seems likely that increased 41

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Company Profile: Cascade, Bloomberg, https://www.bloomberg.com/profile/company/ 4474627Z:US. Cascade Engineering Seeks Lasting Impact, Auto. News Mag. (June 6, 2016), https://www .autonews.com/article/20160606/OEM01/306069978/cascade-engineering-seeks-lasting-impact. What We Do: Business Units, Cascade, https://www.cascadeng.com/business-units. Among the units in the family of companies is Cascade Engineering Automotive Americas, which manufactures components for the auto industry. What We Do: Markets & Products, Cascade, https://www.cascadeng.com/automotive-products. Barbara Spector, Cascading Force for Good, 29 Fam. Bus. Mag. 42 (2018), https://www .familybusinessmagazine.com/cascading-force-good. Choudhury, supra note 40, at 294. Id. Id. Henderson, supra note 6.

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loyalty and goodwill on the part of the larger community would follow. Likewise, Ford’s rhetoric regarding his motivation in not securing profits at all costs undoubtedly led to increased community support and the “extreme brand loyalty” that continues today.49 In many ways, Cascade’s story is an appropriate bookend to the Dodge v. Ford case and the call to action embodied in Choudhury’s dissent. Many of the practices of Cascade resemble the actions taken or discussed by Henry Ford more than a hundred years before. It is particularly apropos that Cascade and Ford are both Michigan companies within the automotive industry. But let us not stop with Cascade. Imagine, for a minute, if the same approach had been taken not just by one relatively small closely held corporation but by corporations of every shape and size. If Choudhury’s dissent had become reality, the potential from a social justice perspective could have been almost limitless – not only for traditional corporate law but also for alternative frameworks that have since been developed in response. For instance, the rise of corporate benefit statutes has been seen as a direct refutation to the profit-maximization strategy that predominates American jurisprudence.50 If Justice Choudhury’s dissent had been given the force of law, we might not have encountered the concerns about business and human rights that we do today.51 These alternative frameworks show that, if other courts outside of Michigan had adopted the idea that paying employees above market rates “is an integral aspect of ensuring that a corporation maintains its relationship with society,” current views of the BJR would likely have been broadened to include not just the shareholder profit maximization model but also models that benefit society. Society as a whole would undoubtedly have benefited.

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Evan Riley, Ford: A History of Extreme Brand Loyalty and Owner Pride, Auto Influence (Aug. 2, 2020), https://www.autoinfluence.com/ford-a-history-of-extreme-brand-loyalty-andowner-pride/. For a discussion of benefit statutes within this context, see Joan MacLeod Hemingway, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations, 40 Seattle L. Rev. 611, 618 (2017) (stating “most modern statutory corporate law provisions outside the benefit corporation context typically allow a corporation to be organized for any lawful purpose . . . for-profit corporations, including social enterprises organized as corporations, usually take advantage of the full breadth of the permitted purposes for which a corporation can be organized and operated under the applicable state law. Benefit corporation statutes are designed to change that norm.”) The business and human rights framework has gained prominence only since about 2011, after the United Nations Human Rights Council unanimously adopted the Guiding Principles on Business and Human Rights. Since then, the field has exploded. At its heart, the business and human rights framework would shift the paradigm of pure corporate profit to one that would refocus corporate impacts on both the individual and the larger community. For an overall examination of the field, see The Business and Human Rights Landscape: Moving Forward, Looking Back (Karen Bravo & Jena Martin eds., 2013). For a discussion of the framework on corporate decision-making, see Jena Martin, Business and Human Rights: What’s the Board Got to Do with It?, 2013 Ill. L. Rev. 960 (2013).

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Dodge et al. v. Ford Motor Co. et al., 204 Mich. 459 (1919) justice barnali choudhury, dissenting

The essence of this case focuses on whether minority shareholders can challenge the authority of the board to make business decisions. In this regard, I agree with Chief Justice Ostrander, writing for the majority, that “judges are not business experts.” As non-business experts, the Court should not substitute its opinion for the direction taken – or in this case, proposed – by the board of directors. Rather, its role should be limited to reviewing the legal propriety of the board’s business decisions. I would envision that the majority of the Court is in agreement with me up until this point. However, where we differ is in determining the appropriate legal standard for review of the board’s business decisions. I

In November 1916, the Dodge brothers initiated a complaint against the FMC challenging some of the decisions made by Ford’s board of directors. Both Dodge brothers had previously been members of Ford’s board of directors. However, they had resigned from the board in 1913 to begin a rival motor company, the Dodge Motor Company. At the time of the complaint, the Dodge Motor Company was not able to sell nearly as many cars as the FMC, which was producing approximately one in every three cars sold in America. The Dodge brothers thus determined, according to their complaint, that to ensure competition in the sale of cars, the powers of Henry Ford would need to be constrained. Their efforts to constrain Mr. Ford’s powers rested on two related grounds. First, the plaintiffs – finding that the FMC had accumulated a substantial cash surplus from its success in selling cars – demanded that the company distribute to stockholders “at least 75 per cent of the accumulated cash surplus.” Relatedly, they also required the company to establish a dividend policy to “distribute all of the earnings of the company except such as may be reasonably required for emergency purposes in the conduct of the business.” Second, they demanded that the FMC be enjoined from constructing a new manufacturing plant and otherwise expanding its business. The two claims were related in that limits on the dividends were needed to fund the expansion of the business. More specifically, the complaint argued that Mr. Ford forced the board to reduce the price of cars; that his expansion of the business was, in light of “increased labor and material cost[s],” “reckless in the extreme” and jeopardized the interest of stockholders. In addition, by “increasing production, reducing the price of cars,

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and increasing the capital investments” in the business, Mr. Ford was also destroying competition in the sale of cars and creating a monopoly. The FMC’s answer to the complaint denied most of the allegations, noting specifically that the board approved the reduction of the price of the cars and the expansion plans. The answer further stipulated that the expansion plans and car-price-reduction policies were adopted for “the permanent good of the company,” and continual attempts to decrease the price of cars benefited both the prosperity of stockholders and the company. In regard to the limited dividend policy, the answer clarified that Mr. Ford had a long-standing preference for maintaining large cash balances. As the answer noted, exercising caution in the distribution of dividends ensures that: [S]hould [there] be a sudden falling off of business or collapse of business . . . it would require great sums of money to carry on the business of the company, and [a limited dividend policy] is to be well fortified against emergencies. [Henry Ford] is opposed to any policy which would necessitate the discharge of large numbers of employees in case there should be a sudden depression of business if there be any way to avoid it, and . . . believes that [a limited dividend policy] . . . ultimately [is in the] best financial interests of the company and its stockholders.

The Circuit Court ruled in favor of the Dodge brothers but ordered a hearing. This provided a further occasion for Mr. Ford to elaborate on his “philosophy” as to how the FMC should be run. At the hearing, when asked by counsel what the purpose of the FMC is, Mr. Ford responded: To do as much as possible for everybody concerned, to make money and use it, give employment, and send out the car where the people can use it . . . and incidentally to make money.

Counsel queried him further, confirming that the Ford policy was “to employ a great army of men at high wages, to reduce the selling price of your car so that a lot of people can buy it at a cheap price, and give everybody a car that wants one.” Mr. Ford’s response was: “If you give all that, the money will fall into your hands; you can’t get out of it.” II

As the majority of this Court has already noted, the law we are to apply as to whether boards of directors are obliged to distribute all of the earnings of the company as dividends is not in dispute. Boards of directors have the discretion to declare dividends, a discretion that lies solely with the board and not the stockholders. See Hunter v. Roberts, Throp & Co., 47 N.W. 131, 134 (Mich. 1890); William W. Cook, Cook on Corporations § 545 (7th ed. 1913). The board of directors’ power to use the earnings of the corporation is absolute, and such earnings can be used for whatever is – in the board’s judgment – necessary or prudent, including “to meet contingencies, both present and prospective.” Park v. Grant Locomotive Works,

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3 A. 162, 621 (N.J. Ch. 1885). The Court will only interfere in the board’s discretion if it fails to exercise that discretion in good faith and for honest ends or otherwise abuses its discretion, such as by engaging in fraud or willful neglect of duty. There is no evidence that the FMC’s board of directors limited the amount of distributed dividends in 1916 in bad faith or for a dishonest end. Certainly, the Court was not presented with any evidence that Mr. Ford or any member of the board of directors had engaged in fraud or that the excess earnings would otherwise be diverted to the personal interests of Mr. Ford or a board member. Rather, as Mr. Ford openly admitted, the purpose of limiting the dividend payouts was to reinvest the business’s profits back into the business “to spread the benefits of this industrial system to the greatest possible number” and help his employees “build up their lives.” As a result, the Court’s review of the board’s discretion to declare dividends is limited to the grounds that the FMC neglected its duty. The duty of the board of directors is well established in law. Directors have a duty to act in the best interests of the corporation. See Hoyle v. Plattsburgh & M.R. Co., 54 N.Y. 314, 328 (N.Y. 1873); Victor Morawetz, Morawetz on Corporations §516 (2d ed. 1886); Intercontinental Rubber Co. v. Bos. & M.R.R., 245 F. 122, 122, 126 (D. Mass. 1917); In re Castle Braid Co., 145 F. 224, 231(S.D.N.Y. 1906). Yet what does it mean to act in the best interests of the corporation? For the majority of this Court, the best interests of the corporation are synonymous with the profit-making interests of the stockholders. The majority claims “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.” While the majority does not provide authority for these statements, what is clear is that this Court is advocating three main points. First, a director’s duties to the corporation focus primarily on generating profit for stockholders. Second, profit generation is the only aim of a corporation. Finally, profit generation must be a corporation’s primary purpose, because to do otherwise would “menace” shareholders’ interests. III

The interpretation of the meaning of the best interests of the corporation in light of only the profit-centric interests of shareholders takes a very narrow view of the corporation. The sustainability of a corporation – indeed its very survival – will depend on a wide range of parties, all of whom have an interest in the success of the corporation. These interested parties will naturally include shareholders, but they will also include employees, creditors, suppliers, customers, and society at large. Mr. Ford’s attention to these other parties, beyond shareholders, is thus not a humanitarian motive, as was alleged. Rather, it should be viewed as a condition of the business’s license to operate granted by society. That view recognizes the

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interdependent relationship between business and society and tries to ensure that such a relationship remains symbiotic rather than exploitative. With America’s exit from the war, we are entering an era that can only be described as progressive. Industrialization has certainly given rise to large businesses that are improving our lives in many ways. Yet at the same time, society has been concerned with the increasing concentrated economic power of big business. To some extent, these concerns have been addressed through the passage of the Sherman Antitrust Act of 1890 and the Clayton Act of 1914, but businesses should continually be mindful of the importance of their need to align with the interests of society. Mr. Ford’s vision for the FMC “to do as much as possible for everybody concerned” seems to align with what we as a society should expect from business in this progressive era. Indeed, Ford is not alone in his views of businesses operating with a sense of communitarian values. Appellants’ counsel has cited a number of cases, which were referred to by the majority of this Court but seemingly ignored, that accept the notion that it is within the lawful powers of the board of directors to conduct the affairs of their business in line with communitarian values. For instance, in Steinway v. Steinway & Sons, 40 N.Y. Supp. 718 (Sup. Ct. 1896), the plaintiff shareholder alleged that some of the acts of Steinway & Son’s board of directors were ultra vires. For example, the corporation constructed houses for their employees and established a church, a school, a free library, and a free bath, all for employee usage. It also regulated streets and constructed sewers and the supply of water around the employee housing area. Id. at 46. The Court found that Steinway & Son’s provision of the “physical, intellectual and spiritual wants of their employees” was not ultra vires. It even commended the corporation’s acts, noting that a policy such as this, “intelligently and liberally executed,” would likely “insure the continued and faithful services of a skilled and contented body” of employees. Moreover, in Taunton v. Royal Ins. Co., 2 Hem. & Miller 135 (K.B. 1864), also referred to by the appellants, directors of an insurance company decided to pay for injuries caused by a gunpower explosion, despite the insured’s policy exempting coverage for such injuries. In dismissing a suit brought by a shareholder challenging the act, the court approved the payments on the grounds that they were “conducive to the welfare of the society and a legitimate mode of promoting the objects” of the business. Id. at 141–42. Similarly, in People v. Hotchkiss, 120 N.Y.S. 649 (App. Div. 1909), a life-insurance corporation’s plan to purchase land to establish a hospital for the care and treatment of its tuberculosis-affected employees was approved by the Court. The Court noted: The duties of the employer to the employee have been enlarged in recent years and are not merely that of the purchaser of the employee’s time and service for money. The enlightened spirit of the age, based upon the experience of the past, has thrown upon the employer other duties which involve a proper regard for the comfort, health, safety and well-being of the employee. A corporation may not only pay to its employee the actual wage agreed upon, but may extend to him the

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same humane and rational treatment which individuals practice under like circumstances. Id. at 153.

The Hotchkiss Court was clear that these types of corporate acts should not be viewed as “gratuity or charity.” Instead, they should be seen as an “inducement for the employee to enter the employment and serve faithfully for the wage agreed upon.” The Court further noted “[t]he considerate employer who treats his employees well is thus able to secure better service and upon more satisfactory terms than the unwilling, illiberal employer.” Id. at 153. The majority of this Court has sought to distinguish this line of cases from the present one, on the grounds that the former represents “incidental humanitarian expenditure,” while the latter represents “a purpose and plan to benefit mankind at the expense of others.” With great respect, this Court mischaracterizes the line of cases as well as the acts of the FMC. None of the corporate acts considered here are “humanitarian” in nature. Instead, they are directed at promoting the best interests of the corporation beyond just shareholders. For some of these corporations, such as those in Steinway and Hotchkiss, corporate acts have focused on promoting the interests of corporate employees. Conversely, other corporations, such as in Taunton, have sought to focus on promoting the interests of their customers. Mr. Ford’s actions in furthering both the interests of employees and customers is thus simply a combination of approaches already approved by the courts.

IV

Since this Court has tacitly approved the line of cases permitting corporations to further interests apart from shareholder interests, and the FMC has engaged in acts that mimic the approach of these corporations, the majority of this Court must be distinguishing the acts of the FMC in some other way. This is likely because Mr. Ford has suggested that the FMC’s money-making purpose is incidental to its aim of doing “as much as possible for everybody concerned.” The Court has interpreted this statement as meaning that the FMC operates its company by subordinating the interests of the shareholders to the interests of others. However, as previously stated, the majority of this Court was not able to cite any authority suggesting that the interests of shareholders should be paramount. Rather, the law stipulates that the board should be promoting the best interests of the corporation – and nowhere does it conflate the interests of the shareholders with the only interests of the corporation. For that reason, if Mr. Ford’s aim in having his company do “as much as possible for everybody concerned” includes shareholder interests along with the interests of other corporate parties, he would be fulfilling his duty to further the best interests of the corporation.

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Without a doubt, the FMC is furthering the profit-centric interests of shareholders and the corporation. When this lawsuit was filed, the FMC reported $60 million in profit. It has subsequently gone on to report profits of almost $30 million in each of the last two years of this lawsuit. Indeed, it is possible that Mr. Ford’s policy has been one of the direct factors in the FMC’s success. As he testified, by employing his approach to business, the money has simply “fallen” into the company’s hands. In other words, not making shareholder interests the company’s sole priority has been highly beneficial to shareholder interests. In part, this may be because the Ford policy has been beneficial to the corporation (and shareholders) by helping to increase its revenue, reduce its costs, and make the company more resilient. Interestingly, while each of these effects of the Ford policy has improved the company’s bottom line and its economic stability, it has also worked to further the interests of other corporate parties as well. For instance, in continuing to reduce the price of cars, the Ford policy has made Ford cars accessible to a wide range of customers. This has enticed a much wider segment of the market to purchase Ford cars, and it is not surprising that one out of every three cars purchased by customers is a Ford. The price-reduction strategy has benefited the FMC’s revenue generation, but it has also benefited customers by making an increasingly valuable necessity to modern life more widely accessible. In the last couple of years, automobiles have transformed the daily lives of citizens. They enable individuals to travel more easily, more frequently, and to more places and are equally as useful for business as for leisure. They are also a powerful conduit for increasing women’s independence. Before the invention of automobiles, women’s freedom of movement was particularly constrained as a result of social convention and the limitations of public transportation. Even now, public transportation is crowded and filled with men, raising issues of indecency for “good” women. Some men also object to having white women ride alongside Black men on public transport. It is even more difficult for Black women in the South, who not only have to endure segregated public transport options, but who also are often harassed and treated poorly by white bus drivers and passengers. The introduction of the automobile has therefore become an avenue for freedom for all people, but particularly women. Women can now move safely, surely, and with control. This has enabled them to be more liberated – at least in the car. Alongside the growing recognition of women’s right to vote, the accessibility of the automobile is therefore propelling increased equality for women. The Ford policy of making automobiles cheaper and more widely accessible to all individuals, including women, is therefore – apart from generating revenue for the firm – working toward helping individuals, particularly women, obtain independence and equality. The policy is therefore beneficial both for the corporation’s financial interests and for its customer interests.

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In addition to increasing revenues for the corporation, the Ford policy has also worked to make the business more resilient. This is beneficial both to shareholders and corporate parties alike and is also beneficial to the firm as a whole. With threats to the market, like the global war we have just experienced and potential downturns originating from recessions and depressions threatening economic stability, the Ford policy to limit dividends, in an effort to fortify the business against emergencies and business downturns, seems prudent. A strategy for business resilience ensures that the corporation will continue to operate as a going concern. It is in shareholders’ long-term interest that the FMC should be able to withstand adversity rather than collapsing at the first sign of market problems. Moreover, if the FMC believes a limited dividend policy is needed to meet this aim, then judges – as non-business experts – should be loath to interfere, particularly where strong evidence confirms the capability of the company’s corporate managers. In addition to preserving long-term shareholders’ interests and the interests of the corporation as a going concern, business resilience also protects the interests of other corporate parties. Suppliers, creditors, and employees, among other corporate parties, benefit from firm stability, given their dependence on the firm. In particular, employees – who, unlike suppliers and creditors, do not have sufficient bargaining power to be able to protect their own interests through contracts or insurance – benefit enormously from business resilience, as they are less likely to lose their jobs during periods of corporate adversity. Moreover, although periods of adversity tend to disadvantage all employees, they do not disadvantage them equally. Rather, it is the lower-paid, part-time, or casualized employees who are often terminated first, and those jobs tend to be held by the already more vulnerable segments of the population, such as women or Black workers. Protecting business resilience therefore may be important not only for the protection of employees’ interests generally but particularly for the protection of female or Black employees. Ford’s policy of limiting dividends as part of a strategy to build business resilience appears to benefit shareholders, the long-term interests of the corporation, as well as a number of corporate parties. Nevertheless, it is clear from the complaint that has instigated this case that one set of parties may be disadvantaged by this approach, namely short-term shareholders – such as the Dodge brothers. If short-term shareholders are interested in a quick return on their investment, then limiting dividends would not accord with their interests. However, the FMC is being built as an enduring corporation, one that will long exceed Mr. Ford’s life and the lives of future generations. In such a corporation, shareholders should expect that profits will be reinvested and efforts will be made to ensure that the corporation endures, such that they cannot necessarily expect a quick return on their investment. In such a scenario, it seems judicious to prioritize the interests of long-term shareholders over short-term ones.

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I also observe, perhaps cynically, that the Dodge brothers have recently launched a competitor business to the FMC and that the dividend payment they are demanding from Ford would be very useful in further capitalizing their own firm. This supports the notion that they are more interested in a short-term return on their investment rather than the long-term viability of the FMC. While shareholders can hold short-term interests, they do not have a cause of action if the board acts to promote the firm’s long-term interests. VI

Ford’s labor policy also benefits shareholders and other corporate constituents. As Mr. Ford testified, the policy is to pay men “high wages,” thought to be about $5 a day. This, however, is far from a humanitarian act but rather one that directly benefits the shareholders by reducing labor costs. Prior to the introduction of the high wages, the FMC suffered from a high rate of employee turnover and absenteeism, as were other manufacturing firms. Because manufacturing workers are not skilled, they need to be trained to perform the specific skill for their position on the assembly line. Not surprisingly, both employee turnover and high rates of absenteeism slowed the production and increased the labor costs. A high-wage policy is a reasonable approach to addressing turnover and absenteeism. Higher wages can also promote a sense of community and loyalty to the firm. All of these factors would work to reduce labor costs, which would be a boon to the shareholders and the firm’s profit-centric interests. Far from being humanitarian in nature, the Ford policy addressed profit interests head on. The policy also had a powerful impact on employees. We are living in an era in which industrial improvements have improved society considerably, but the benefits of this progress are not necessarily being shared equally. While some of us profit from progress, others continue to struggle, relegated to employment under poor working conditions and with low wages. This has made subsistence very difficult for countless individuals, including new immigrants and Black individuals. Increasing wages, as the Ford policy does, therefore materially benefits historically underpaid workers. The Ford policy on wages has, in addition, had an impact on familial wealth. Because of the historically low pay for workers, family subsistence has often relied on wages from every member of the family. Women and children have had to work to make up for the low wages paid to men, and they have been paid even less than men and subjected to even more demeaning conditions. Moreover, the need for women and children to have to obtain employment at lower wages than men tends to depress wages for all individuals by driving down the market price of labor. A higher wage for Ford workers thus ensures that other members of the family need not enter the workforce and provides a higher standard of living for the entire family.

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In short, Ford’s policy has been a boon to workers by providing them, their families, and possibly their extended families with material benefits, a higher standard of living, and a shielding of other family members from work – in particular, children, whose time can be better served in school rather than at work. Ford’s policy has also been beneficial regardless of individual characteristics. Thus, immigrants, Black persons, and family men have been eligible for the higher wage. For a while, women were excluded from these higher wages, but the policy has recently changed, and unmarried women are now able to share in Ford’s higherwage program as well. Nevertheless, married women continue to be excluded, as they are not entitled to employment at the FMC. This is a noteworthy misstep in Ford’s otherwise promising policy. As recent war efforts have shown, married women can make powerful contributions to the workplace, and excluding them from employment means that the FMC is not able to capitalize on the contributions of almost 50 percent of the population. This means that the FMC is failing to access the entire talent pool, and accordingly, is not benefiting from employing the most prized employees. This is a loss not only to the company but also to its (and its shareholders’) profit-centric interests. VII

In summary, I find that a director’s duties are to promote the best interests of the corporation. These interests should include the interests of shareholders but are not confined only to these interests. Rather, the interests of the corporation include shareholder interests along with the interests of other corporate constituents, including employees, creditors, suppliers, and customers. Directors are not required to maximize profits, nor is there a need for directors to have a singular focus on profit generation. Instead, directors should be focused on maximizing the economic value of the firm and ensuring that it will continue as a going concern in the long term. In doing so, it will naturally need to consider the interests of other corporate parties besides just shareholders. Judges are not business experts, and so directors retain full discretion in how to achieve that outcome. Only where directors abuse their discretion, for instance by committing fraud or engaging in acts of self-interest, should courts interfere. Since the FMC did not abuse the interests of the plaintiffs, I would rule in favor of the defendants.

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5 Commentary on Merriam v. Demoulas Super Mkts. sunitha malepati

BACKGROUND

The dispute in Merriam1 centered on minority shareholders’ right to sell their stock in a closely held corporation when the sale would cause the corporation to lose its favorable Subchapter S tax status. However, Merriam is just one chapter of the decades-long feud between two sides of the Demoulas family, owners of the New England-based grocery chain Demoulas Super Markets, Inc. (“DSM”), operating as Market Basket. The supermarket industry has long been known for low margins; high fixed costs; low-paying jobs with no benefits and inconsistent hours; high employee turnover, resulting in unstocked shelves and long checkout lines; and poor customer service.2 Market Basket competed with national chains such as Walmart and Whole Foods as well as regional chains such as Shaw’s (owned by privately held Albertsons), Stop & Shop (wholly owned subsidiary of publicly traded Dutch company, Ahold NV), and Hannaford (owned by Delhaize USA, a wholly owned subsidiary of the publicly traded Belgium company Delhaize Group).3 At the time of Merriam, Market Basket was the fastest growing retailer in eastern Massachusetts; it had 25,000 nonunionized employees, seventy-two stores, $4.6 billion in revenue, and more than 15 million square feet of real estate.4 The majority of its customers were low- or moderate-income families. Market Basket distinguished itself from other New England supermarkets not only by keeping its prices low and its stores clean, but also by paying generous wages5 and benefits to its employees and donating to a wide array of organizations in the communities where its stores were located. In 2013, 1 2

3 4 5

Merriam v. Demoulas Super Markets, Inc., 464 Mass. 721 (2013). Zeynep Ton, Thomas Kochan, & Cate Reavis, We Are Market Basket, MIT Sloan Sch. Mgmt. 2 (Mar. 23, 2015). Id. Id. at 4. Id. at 3.

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Consumer Reports rated it the sixth best supermarket out of fifty-five in the United States,6 and it was valued at about $4.2 billion.7 At the center of the Demoulas family business drama were two warring cousins with diametrically opposing visions of how to manage Market Basket. One faction of the family was headed by Arthur T. Demoulas, the charismatic CEO of Market Basket, who earned cult-like loyalty from his employees and customers. Arthur T.’s management philosophy centered on three key principles consistent with stakeholder governance theory: (1) take care of Market Basket’s employees and customers; (2) offer low prices with a low cost structure; and (3) operate with no debt.8 At the helm of the other faction was Arthur T.’s cousin, Arthur S. Demoulas, who viewed Arthur T.’s pro-worker and pro-consumer approach as cutting into the family’s profits. Arthur S. and his sisters opposed Arthur T.’s management practices and accused him of spending too much of the shareholders’ money on capital costs and the company’s employee profit-sharing plan. In 2010, the Arthur S. faction revolted against Arthur T.’s embrace of stakeholder governance and wanted to cash out their 36-percent minority stake in the company. When the DSM board, which was controlled by the Arthur T. faction, refused to buy the minority’s stake in DSM, the minority shareholders sued, seeking a declaration that they could sell their shares to a third party. Arthur T. and the majority shareholders sought to block the sale to a third-party entity by counterclaiming that such a sale would destroy DSM’s favorable Subchapter S tax status and would constitute a breach of the minority shareholders’ fiduciary duties to the other shareholders. Arthur S.’s side argued that their contractual right to sell company stock was not restricted by their fiduciary duties.

ORIGINAL OPINION

The Massachusetts Supreme Judicial Court sided with Arthur S. and issued a declaratory judgment in favor of the minority shareholders by holding that when shareholder conduct “falls entirely within the scope of” articulated contract rights, fiduciary duties do not restrict shareholders’ exercise of their contract rights.9 The court stated that the minority shareholders could not be held liable on a breach of fiduciary duty theory because they followed the procedure explicitly set forth in DSM’s articles of organization (the “articles”).10 The court put the onus on DSM to protect its Subchapter S status. DSM could have either purchased the minority shareholders’ shares pursuant to the buyback provision in the articles or 6 7

8

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Id. at 7. Galen Moore, The Demoulas Battle: What’s at Stake?, Bos. Bus. J. (Oct. 4, 2013, 8:10 AM), https://www.bizjournals.com/boston/news/2013/10/04/demoulas-net-worth.html. Ton, Kochan, & Reavis, supra note 2, at 4. Note that the Plerhoples Opinion relies on the same source for its facts. Merriam v. Demoulas Super Markets, Inc., 464 Mass. 721, 727 (2013). Id. at 728.

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outlined different stock transfer restrictions in the articles that protected its Subchapter S status.11 FEMINIST JUDGMENT

In her rewritten feminist opinion, Professor Alicia Plerhoples, writing as Justice Plerhoples, reaches a different conclusion than the original Merriam opinion. She holds against Arthur S. and the minority shareholders by applying a feminist ethic-of-care lens and embracing a feminist-informed stakeholder theory of corporate governance. In doing so, she prioritizes feminist values of responsibility, participation, and cooperation and views the corporation through a feminist corporate governance model that recognizes both the fiduciary/nonfiduciary and contractual/non-contractual relationships that are core to the entity. Her feminist opinion reflects her view that corporate ownership comes with social obligations and social responsibility. Ultimately, communitarian values guide her interpretation and application of corporate law. A feminist ethic of care considers the needs of all members of the community as equally important, rather than the shareholders’ interests as paramount.12 It also focuses on relationships – rather than on individual rights and duties, which are prominent in discourses of power and are influenced by the masculinist perspective.13 Predominant corporate practices prioritize profit maximization and competition over the feminist values of social responsibility and fairness. A feminist conception of corporate governance encompasses the qualities of caring for and nurturing of both internal and external constituencies of the corporation.14 Plerhoples’s opinion embraces such a conception and applies feminist values in pursuit of the feminist goal of achieving a socially optimal allocation of economic rights. She finds that minority shareholders cannot disregard their fiduciary duties of good faith and loyalty, in order to satisfy their individual financial interests, at the expense of less powerful corporate stakeholders – such as employees, suppliers, customers, and communities. Plerhoples thus prioritizes a stakeholder governance model grounded in feminist values over corporate law practices and principles that perpetuate patriarchal values and power relations, such as shareholder primacy, divisions between management and labor, and the separation of shareholders’ selfinterested contractual rights from fiduciary duties and accountability. 11 12

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Id. Barbara Ann White, Feminist Foundations for the Law of Business: One Law and Economics Scholar’s Survey and (Re)View, 10 UCLA Women’s L.J. 39, 48 (1999); Cheri A. Budzynski, Can a Feminist Approach to Corporate Social Responsibility Break Down the Barriers of the Shareholder Primacy Doctrine, 38 U. Tol. L. Rev. 435 (2006). Silke Machold, Pervaiz K. Ahmed, & Stuart S. Farquhar, Corporate Governance and Ethics: A Feminist Perspective, 81 J. Bus. Ethics 665 (2008). Ronnie Cohen, Feminist Thought and Corporate Law: It’s Time to Find Our Way Up from the Bottom (Line), 2 Am. U. J. Gender, Soc. Pol’y & L. 1, 24 (1994).

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Stakeholder Governance and Welfare Capitalism A feminist-informed stakeholder theory conceives of the corporation as a community of interests.15 Among that community of interests, a feminist ethic of care stipulates that the corporation may not harm the least advantaged stakeholders.16 Ethical caring develops from a sense of obligation and acceptance of responsibility. In her rewriting of Merriam, Plerhoples challenges the shareholder primacy hierarchy, which fails to consider the wider array of stakeholder needs and community impact.17 She dispels the image of the minority shareholders in Merriam as oppressed, vulnerable, and in need of protection from an authoritative majority.18 She does not focus on the minority’s financial interests. Instead, she shows concern for the impact the minority shareholders’ actions will have on the least advantaged stakeholders: Market Basket’s employees, its customers, and the low-income communities in which Market Basket stores are located. Market Basket provided its communities with convenient access to nutritious and culturally acceptable food at affordable prices, which profoundly impacts food security at the household level. Food insecurity and hunger in the United States (and across the globe) clearly have gendered dimensions.19 Food insecurity is unevenly distributed, and women are especially vulnerable.20 By considering the impact the minority’s actions would have on the community’s access to affordable food, Plerhoples implicitly frames food security as a feminist issue. In her analysis of the majority’s counterclaims, Plerhoples applies the legitimate business purpose test21 by focusing on the business purpose behind the majority’s decision to reject the minority shareholders’ offer to sell their shares to DSM. DSM would have to take on considerable debt or private equity to buy the minority’s shares, jeopardizing the entire stakeholder model on which Market Basket’s least advantaged stakeholders rely. Importantly though, she also examines the minority’s 15

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Terry O’Neill, The Patriarchal Meaning of Contract: Feminist Reflections on the Corporate Governance Debate, in 2 Perspectives on Company Law 36 (Fiona M. Patfield ed., 1997); Machold, Ahmed, & Farquhar, supra note 13, at 673 (referring to such governance model as a web of relationships). Machold, Ahmed, & Farquhar, supra note 13, at 668. She notes that the “Demoulas family is not the only stakeholder relying on the success of this enterprise. Thousands of DSM employees and customers as well as the communities in which DSM is located are also depending on Market Basket stores to remain open, to continue providing quality and affordable groceries, and to continue to employing community members.” She states that from 2003 to 20–13, shareholders received $500 million in dividends. Social and economic circumstances make women vulnerable to food insecurity. See Mikki Kendall, Hood Feminism: Notes from the Women That a Movement Forgot 31–46 (2020). Female single-parent homes had inadequate access to food at almost double the rate of male single-parent homes (28.7 percent versus 15.4 percent in 2019). See Food Security Status of U.S. Households in 2019, USDA Econ. Res. Serv., https://www.ers.usda.gov/topics/food-nutritionassistance/food-security-in-the-us/key-statistics-graphics (last updated Sept. 9, 2020). Merola v. Exergen Corp., 38 Mass. App. Ct. 462, 466–67 (1995).

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interests and concludes that DSM could not have acted in any alternative manner that would have been less harmful to them. In holding against the minority shareholders, Plerhoples determines that the majority acted to achieve a bona fide corporate objective to care for its external stakeholders. Feminist ethics argues that the practice of care ultimately has to lead to greater empowerment and fulfillment for all stakeholders.22 In the wording of her opinion, Plerhoples shows reverence for welfare capitalism and the labor practices that prevailed at Market Basket.23 However, such corporate practices and programs do not mitigate the essential patriarchal and hierarchical control upon which Market Basket’s structure depends. Market Basket’s employees were non-unionized, and they did not have any real bargaining power within the corporate structure.24 The benevolent corporation was largely a product of the culture fostered by a billionaire CEO through his voluntary employee-friendly practices. Arthur T.’s welfare capitalist approach could be viewed through a Marxian critique of capitalism – that Arthur T. was merely pacifying his workers and increasing employee productivity in order to boost his monetary returns. His approach could be characterized as self-interested, individualistic, and competitive – all values that are antithetical to feminist ethics but are consistent with the defining features of patriarchal capitalism.25 Truly incorporating the practice of care in the governance model would require equitable and holistic stakeholder participation.26

Contractual Obligations and Fiduciary Duties Closely held corporations have a small number of shareholders who are typically actively involved in the corporation’s management and operations. Given this distinct relationship between ownership and management in closely held 22 23

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Machold, Ahmed, & Farquhar, supra note 13, at 671. Early 20th-century welfare capitalism started with companies offering their employees amenities like company cafeterias and gyms and eventually included employee benefits such as pensions, health insurance, and profit-sharing plans. These practices declined with the unionization of US industry between the 1930s and the 1950s, and such benefits were subject to bargain through the unions. Alejandro Reuss, The Meaning of Market Basket, Dollars & Sense (Sept./Oct. 2014), www.dollarsandsense.org/archives/2014/0914reuss.html (citing Sanford M. Jacoby, Modern Manors: Welfare Capitalism Since the New Deal (1997)). In 2012, one year before Merriam was decided, the “Fight for $15” labor movement started, drawing in low-wage workers from all over the United States to advocate for a higher federal minimum wage. Wendi C. Thomas, How New York’s “Fight for $15” Launched a Nationwide Movement, Am. Prospect (Jan. 2016), https://prospect.org/economy/new-york-s-fight-15launched-nationwide-movement/. Cohen, supra note 14, at 27 (summarizing radical feminism’s view of the corporation as serving the needs of a capitalistic patriarchy, which emphasizes efficiency, discipline, and control). Id. (noting that Kathleen Lahey and Sarah Salter have suggested collective and cooperative organizations, alternative families, and feminist communities as sources of feminist organizational values).

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corporations, Massachusetts courts have found that closely held corporations are more similar to partnerships than to traditional corporations.27 This finding is important, because the substance of a fiduciary’s obligation varies with the nature of the relationship. Traditionally, shareholders in corporations do not owe one another fiduciary duties. However, under Massachusetts law, all shareholders of closely held corporations have heightened fiduciary duties to treat each other with the utmost good faith and loyalty.28 The case that articulated this fiduciary approach to the duties of shareholders in closely held Massachusetts corporations was Donahue v. Rodd Electrotype Company.29 In Donahue, the Massachusetts Supreme Judicial Court found that shareholders “may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.”30 Plerhoples quotes this phrase throughout her opinion when admonishing the actions of the minority shareholders. While the Donahue court was particularly concerned with minority shareholders being vulnerable to oppression by majority shareholders,31 it noted that these heightened fiduciary duties apply to all shareholders. The court stated that its holding would apply to minority stockholders as well, because the minority may “do equal damage through unscrupulous and improper ‘sharp dealings’ with an unsuspecting majority.”32 The duties of fiduciaries are contrasted with the obligations of parties to a contract. The former require a subordination of the fiduciary’s self-interest, while the latter permit a contracting party to act in their own self-interest, constrained only by the terms of the contract. The implied covenant of good faith and fair dealing that is common to all contracts obligates the parties only to refrain from doing anything that “will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”33 This tension between fiduciary duties and contractual rights is at the center of Merriam. 27

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Donahue v. Rodd Electrotype Corp., 367 Mass. 578, 587 (1975) (noting that as in a partnership, the success of a closely held corporation is dependent on the stockholders having a relationship that is built on “trust, confidence and absolute loyalty”). Id. But see, e.g., Blaustein v. Lord Baltimore Cap. Corp., 84 A.3d 954 (Del. 2014); Nixon v. Blackwell, 626 A.2d 1366, 1381 (Del. 1993) (showing how Delaware, on the other hand, does not recognize that a shareholder has any common law fiduciary duties to other shareholders in a closely held corporation, unless specified by agreement or in the corporation’s governing documents). 367 Mass. 578 (1975). Donahue, 367 Mass. at 593. Majority shareholders could potentially prevent the minority from receiving any financial benefits of ownership in the corporation by, for example, restricting the payout of dividends, declining to repurchase stock, paying themselves excessive compensation, and denying minority shareholders employment by the corporation. Minority shareholders have no potential for escape from such actions, because unlike a publicly traded corporation, there is no market for their shares. Donahue, 367 Mass. at 593 (citations omitted). Drucker v. Roland Wm. Jutras Assocs., Inc., 370 Mass. 383, 384 (1976).

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In reaching its decision in Merriam, the Massachusetts Supreme Judicial Court effectively limited the scope of a breach of fiduciary duty claim when the challenged conduct is expressly permitted by a provision contained in the corporation’s governing documents. In other words, the obligations of the shareholders in a closely held corporation are superseded by contract law even if such contractual rights are in conflict with common law fiduciary duties owed by the shareholders to one another and to the entity. Merriam effectively encourages shareholders to freely limit their fiduciary duties by entering into a shareholder agreement or specifying in the corporation’s governing documents “rights, protections, and procedures that define the scope of their fiduciary duty in foreseeable situations.”34 A traditional law and economics perspective on corporate law defines the relationship between shareholders as contractual. However, as Professors Shannon Kathleen O’Byrne and Cindy A. Schipani note, this approach fails to take into account the “importance of connection between shareholders in the closely held corporation and makes little of social norms that are built on the values of cooperation and trust.”35 An important element of the feminist theory of obligations is the development of a less formalized set of rules and the rejection of generalized legal rules,36 because a seemingly neutral principle of contract interpretation can still reflect masculine norms. One relevant example in this context is the parol evidence rule. The interpretation of contracts is governed by the parol evidence rule, which prohibits the use of external evidence to supplement or contradict the terms of a contract.37 As Professor Hila Keren states, “both the rule’s aspiration to disconnection (of text from its context) and its determination to prevent messy life from entering the courtroom better fit a worldview associated with masculinity.”38 In the case of DSM, DSM’s shareholders unanimously elected to adopt Subchapter S tax status in 1986, well before the disagreement giving rise to Merriam occurred, but the stock transfer restrictions did not protect the corporation’s tax status. In the original Merriam decision, the court solely relied on the terms of the contract to evidence the parties’ understanding. However, in a close corporation such as DSM that is run by a small number of family members, the parties’ entire business bargain might not be completely set forth in the corporation’s 34 35

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Merriam v. Demoulas Super Markets, Inc., 464 Mass. 721, 726 (2013). Shannon Kathleen O’Byrne & Cindy A. Schipani, Feminism(s), Progressive Corporate Law, and the Corporate Oppression Remedy: Seeking Fairness and Justice, 19 Geo. J. Gender & L. 61, 99 (2017). Patricia A. Tidwell & Peter Linzer, The Flesh-Colored Band Aid – Contracts, Feminism Dialogue, and Norms, 28 Hous. L. Rev. 791, 803 (1991) (stating that “[m]aking up rules, playing by rules, ensuring that rules are changed only by those in power and for their benefit, are favored male games”). Hila Keren, Feminism and Contract Law, in Research Handbook on Feminist Jurisprudence 415 (Robin West & Cynthia G. Bowman eds., 2019) (noting that the origins of the parol evidence rule stem from Elizabethan England, where and when women did not have access to the legal language of written contracts). Id. at 416.

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charter or even in a separate shareholders’ agreement. A family’s agreements are built on trust and often are not formalized in the terms of a contract. Even when families formalize their bargain in a written agreement, their participation in the business may be contingent on principles and understandings that are not mentioned in such agreement. Nevertheless, given the parol evidence rule, such understandings that were not written into the final contract are treated as if they never existed. As a result, the parol evidence rule serves to harm those who have relatively less control or bargaining power over the finalized contract. In her rewriting of Merriam, Plerhoples adopts a feminist, context-based interpretation of contracts and rejects the excessively formalist textualism approach used by the original Merriam court. She finds that by limiting its reading to the four corners of the contract, the lower court’s “narrow analysis fails to respond to the series of events leading up to and including the present dispute.” The words in the contract alone do not evidence the parties’ entire understanding, and context matters. Professor Plerhoples determines the shareholders’ reasonable expectations from inferences gleaned from the parties’ conduct and understandings, which allows for a more authentic contract interpretation. Finally, at the core of the rewriting of Merriam is the notion that technical compliance with the corporate articles of organization does not preempt the minority shareholders’ fiduciary duties. In other words, the duty of utmost good faith and loyalty is imposed equally among shareholders, regardless of stock ownership percentages and in addition to the parties’ contractual obligations to abide by the terms of the organizational documents of the corporation.39 Most often, courts are concerned with the majority’s exercise of corporate powers in ways that are detrimental to the corporate interest or deprive the minority of its financial interests in the corporation, but Plerhoples’ rewriting of Merriam holds true to the principle that a minority shareholder “should be bound by no different standard.”40 Parties in a fiduciary relationship “must be subjectively and scrupulously fair to the vulnerable party – the one to whom the fiduciary owes the affirmative duty of undivided loyalty.”41 Feminist theory requires limitations on shareholders’ ability to undermine their fiduciary duties through contractual arrangements.42 Typically, 39

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A.W. Chesterton Co. v. Chesterton, 128 F.3d. 1, 8 (1st Cir. 1997) (stating that “If the strict Donahue fiduciary obligations did not restrict otherwise legitimate actions, they would add nothing to a shareholders’ legal duty . . . [A shareholder of a close corporation] cannot defend a breach of fiduciary duty claim on the basis that he has not violated the Articles of Organization.”). Smith v. Atl. Properties, Inc., 12 Mass. App. Ct. 201, 208 n.9 (1981) (quoting J. A. C. Hetherington, The Minority’s Duty of Loyalty in Close Corporations, 1972 Duke L.J. 921, 946 (1972)). Charles E. Rounds Jr., The Common Law Is Not Just About Contracts: How Legal Education Has Been Short-Changing Feminism, 43 U. Rich. L. Rev. 1185, 1212 (2009). Kellye Y. Testy, Adding Value(s) to Corporate Law: An Agenda for Reform, 34 Ga. L. Rev. 1025 (2000); Kellye Y. Testy, Capitalism and Freedom: For Whom?: Feminist Legal Theory and Progressive Corporate Law, 67 Law & Contemp. Probs. 87, 106 (2004).

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fiduciaries manage or have control over very substantial property interests of others. As a consequence, their discretionary decisions have the power to inflict great harm on others while simultaneously promoting their own economic interests. Contractual remedies are not sufficient to make up for these costs.43 In analyzing contractual remedies, Professor Keren appropriately observes that “unlike medications, contractual remedies are not truly aimed at healing in the sense of keeping the contract alive. Rather, most remedies (with the narrow exception of specific performance) are end-of-life tools, attempting to heal contractual injuries while accepting the death of the contract and the relationship it entailed.”44 On the other hand, equitable remedies for a breach of fiduciary duty are attentive to feminist values of connection, context, and fairness. By not allowing the minority shareholders to shirk their fiduciary duties because of their individual contractual rights, Plerhoples embraces feminist norms of cooperation, compromise, and the maximization of shared interests, which are particularly critical to the success of closely held corporations. From the days of its founding in 1917 and continuing as the business was passed down through generations of the Demoulas family, DSM was governed and operated pursuant to a stakeholder model.45 The push by the Arthur S. faction to adopt a shareholder primacy approach would have undermined the entire model that made DSM so successful over its one hundred years in operation. After the original Merriam case was decided, the minority shareholders did not sell their shares to a third party; instead they gained control of the Market Basket Board. The new board suspended Arthur T.’s authority and distributed a shareholder dividend of $300 million, about 60 percent of the company’s cash reserves.46 Arthur T. fought the distribution and six months later moved to reduce the prices of all Market Basket’s items by 4 percent, at an estimated cost of $170 million to Market Basket.47 The board then fired Arthur T. and two senior executives, leading to an unprecedented non-union employee mass walkout and customer boycott, which made national news and lasted for six weeks, until Arthur T. was reinstated as Market Basket’s CEO.48 Ultimately, in a sharp departure from Market Basket’s low-debt approach,

43

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Alison Grey Anderson, Conflicts of Interests: Efficiency, Fairness and Corporate Structure, 25 UCLA L. Rev. 738 (1978) (stating that “the relative costs which [fiduciaries’] cheating may impose on those whose property they manage are frequently much greater than the relative costs that can be imposed without detection or remedy in simpler contractual exchanges”). Keren, supra note 37, at 417. For example, during the Depression, the largely immigrant customer base was allowed to purchase food on credit so that families could afford food. Market Basket Through the Decades, Market Basket, https://www.shopmarketbasket.com/rockingham-park-and-market-basketthrough-the-decades (last visited Apr. 14, 2021). Ton, Kochan, & Reavis, supra note 2, at 13. Id. Id. at 13–14.

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Arthur T. bought out his rival relatives by taking on more than $1 billion in debt from private equity and other lenders. Had the original Merriam court applied Plerhoples’ feminist principles, DSM could have avoided the harm that resulted to the employees, customers, and communities following the six-week employee walkout and customer boycott. Arthur T. would not have had to take on more than a billion dollars in debt from private equity and lenders, which fundamentally changed the character of the corporation and his management approach – which had been so critical to Market Basket’s stakeholder approach.

Merriam v. Demoulas Super Mkts., 985 N.E.2d 388 (Mass. 2013) justice alicia e. plerhoples delivered the opinion of the court I

Demoulas Super Markets, Inc. (DSM) is a closely held Massachusetts corporation whose shareholders’ dealings with each other and with the corporation have spawned decades of litigation, resulting in four earlier decisions of this Court. See Demoulas v. Demoulas, 432 Mass. 43, 732 N.E.2d 875 (2000); Demoulas v. Demoulas, 428 Mass. 555, 703 N.E.2d 1149 (1998); Demoulas v. Demoulas Super Mkts., Inc., 428 Mass. 543, 703 N.E.2d 1141 (1998); Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 677 N.E.2d 159 (1997). In short, this is a family at war, fighting over two visions of what the family business should be: one managed to maximize the profits of its family of shareholders or one managed to create value for all of its stakeholders – a group that includes not only the Demoulas family as shareholders but also DSM’s employees and customers. In the present case, several minority “Class A” shareholders (sellers), whose offer to sell their shares to DSM was rejected, brought an action in the Superior Court seeking, inter alia, a declaration that, consistent with DSM’s articles of organization, the sellers would be “at liberty to dispose of [their shares] in any manner [they] may see fit.” DSM filed counterclaims seeking declarations that the sellers cannot, consistent with their fiduciary duties to DSM and their fellow shareholders, sell their shares to any buyer who would imperil DSM’s status as a Subchapter S corporation for tax purposes (S corporation), and that the sellers are obligated to reoffer their shares to the corporation before selling them to a third party on more favorable terms. On cross motions for judgment on the pleadings, a Superior Court judge declared that the sellers are not bound by fiduciary duty with respect to the disposition of their

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shares, pursuant to the provisions of Article 5 of the articles of organization (Article 5). The judge also declared that, under the terms of Article 5, the sellers need not reoffer their shares to DSM before offering them to a third party on more favorable terms than those arrived at by arbitrators designated in accordance with Article 5. The judge found that plaintiffs “were not bound by fiduciary duties” to their fellow shareholders when they disposed of their shares, because the articles of incorporation, a contract among shareholders, superseded such duties. We disagree. On the grounds below, we reverse the prior judgment. II

DSM may be a family business, but it is no “mom and pop” shop. DSM is worth $4 billion, employs thousands of workers across its approximately seventy Market Basket grocery stores, and provides low- and middle-income customers with “quality food at low prices.” Market Basket, https://www.shopmarketbasket.com/timeline. Greek immigrants Athanasios “Arthur” and Efrosine Demoulas started what is now known as Market Basket as a small food store in Lowell, Massachusetts, in 1917. At the time, Lowell was as ethnically diverse as it is today and was home to Greek, Irish, and Italian immigrants. During the Depression, the largely immigrant customer base was allowed to purchase food on credit so that families could afford food. Id. In the 1950s, “the store developed a reputation for quality food products at low prices” and adopted the motto “More For Your Dollar.” Id. In 1963, then controlled by Telemachus (Mike) and George, but run by Mike, DSM established an employee profit-sharing plan “where associates could directly benefit in the earnings they helped to create.” Id. Mike and George, like their parents and many industrialists of the early twentieth century, were “welfare capitalists.” See Sanford M. Jacoby, Modern Manors: Welfare Capitalism Since the New Deal (1998) (arguing that historically, Americans have relied on their employers more than on the government or unions for economic security). Mike ran the business using two management strategies: (1) financing growth using profits instead of debt and (2) maintaining employee performance, satisfaction, and loyalty to the company through a generous profit-sharing plan. George died in 1971 and Mike died in 2003, leaving the family business to their children. One of the named defendants – Mike’s son, Arthur T. – became president and CEO in 2008 and runs the supermarket chain using the same management strategies as his father. DSM has been highly profitable. DSM now has 25,000 employees, seventyone stores, and a revenue of $4.6 billion. It is the fastest growing retailer in eastern Massachusetts, operating with no debt. Moreover, many Market Basket stores are located in low-income communities and thus provide quality groceries in what would otherwise be food deserts. Arthur T. instituted a four-percent instant rebate for customers this year, citing rising income inequality and customers’ need for savings over the short-term interests of shareholders. Market Basket stores provide

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well-paying part-time jobs in the communities where they are located. DSM also has a profit-sharing plan for its employees, worth approximately $600 million. The plaintiffs (Diana Merriam, Fotene Demoulas, and Arthur S. Demoulas) are minority shareholders who disagree with Arthur T.’s management strategies and want liquidity. They opposed reimbursing $46 million to the employee profitsharing plan in 2008 due to investment losses, and they opposed a multimilliondollar bonus that Arthur T. paid out to employees in 2009. It is undisputed that the plaintiffs prefer management strategies that prioritize profit distributions to shareholders rather than stakeholders. Unable to achieve board oversight of Arthur T. or a shift in management strategy toward shareholder-profit maximization, in June 2010, pursuant to Article 5, the sellers notified DSM of their offer to sell the 36 percent of DSM shares they hold and named one of two arbitrators to determine the value of DSM’s stock. At that point, pursuant to the terms of Article 5, DSM had thirty days within which to accept or reject the offer. DSM chose to reject the offer and, according to the provisions of Article 5, named a second arbitrator, while at the same time asserting that it had not waived its right to contest the validity of the sellers’ notice. At that point, the sellers filed a complaint for declaratory relief in the Superior Court, seeking a declaration that their notice was valid and that if DSM’s directors declined to purchase their shares at the value reported by the arbitrators, the sellers would be free to dispose of the shares “in any manner [they] may see fit.” DSM filed counterclaims contending that the sellers were nonetheless bound by their fiduciary obligations to DSM and could not dispose of their shares in a manner that would impair DSM’s favorable S-corporation tax status. See 26 U.S.C. §§ 1361, 1362 (2006) (Subchapter S). DSM maintained that DSM’s shareholders unanimously elected in 1986 to adopt Subchapter S tax status under provisions of the Internal Revenue Code. DSM claimed that, because the corporation would lose this favorable tax status if any of its shares were transferred to a corporate entity, the sellers were constrained by their fiduciary duty to DSM from freely selling their stock. DSM’s counterclaims sought declarations that: (1) a sale by the sellers to an entity that would defeat DSM’s S-corporation tax status would constitute a breach of their fiduciary duty to DSM and to their fellow shareholders and (2) if DSM did not purchase the shares, the sellers could not sell to a third party at a price less than the value reported by the arbitrators without first offering to sell the shares to DSM at the lower price. The parties filed cross motions for judgment on the pleadings. In January of 2011, while the cross motions were under advisement, DSM filed a “notice of mootness” concerning many of the pending claims. DSM stated that the arbitration process set forth in Article 5, which was the subject of the initial dispute, had concluded, but that the claims regarding the corporation’s Subchapter S status and the sellers’ fiduciary duty remained for the court’s consideration. The sellers did not oppose DSM’s notice as to their claims against DSM, but they reserved the right to pursue their claims against the individual defendants.

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The judge dismissed the claims against the individual defendants and issued a memorandum of decision and a declaration on the sellers’ obligations under Article 5 and on their fiduciary duty regarding the Subchapter S issue. The judge declared: 1. The plaintiffs are not bound by fiduciary duties with respect to their disposition of their shares in accordance with Article 5, even if the consequence of such disposition is that it causes DSM to lose its Subchapter S status. However, the plaintiffs must exercise their Article 5 rights in a manner that comports with the implied covenant of good faith and fair dealing. 2. Article 5 does not require the plaintiffs to re-offer their shares to DSM before selling them to third parties on terms more favorable than those set by the designated arbitrators.

DSM appealed, and we granted the sellers’ application for direct appellate review.

III

The purpose of declaratory judgment is to “remove, and to afford relief from, uncertainty and insecurity” before an impending controversy reaches the point of breach and litigation. Mass. Gen. Laws ch. 231A, § 9 (1945). See Sch. Comm. of Cambridge v. Superintendent of Schs. of Cambridge, 320 Mass. 516, 518, 70 N.E.2d 298 (1946). A court may rule on a motion for judgment on the pleadings seeking declarations of the parties’ rights if the answer admits all material allegations in the complaint, such that there are no material issues of fact remaining to be determined. See Reporters’ Notes to Rule 12, Mass. Ann. Laws Court Rules, Rules of Civil Procedure, at 192 (LexisNexis 2012–13); Citibank, N.A. v. Morgan Stanley & Co. Int’l, PLC, 724 F. Supp. 2d 407, 414 (S.D.N.Y. 2010), aff’d, 482 Fed. Appx. 662 (2d Cir. 2012). We review de novo a judge’s order allowing a motion for judgment on the pleadings under Mass. R. Civ. P. 12I, 365 Mass. 754 (1974). Wheatley v. Massachusetts Insurers Insolvency Fund, 456 Mass. 594, 600, 925 N.E.2d 9 (2010).

A Under Massachusetts law, both majority and minority shareholders of a closely held corporation owe each other fiduciary duties, namely the duty of “utmost good faith and loyalty,” which are substantially the same as partners owe to one another. Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 586–87, 328 N.E.2d 505, 512 (1975). The parties do not dispute that they are a close corporation. This Court defined close corporations in Donahue v. Rodd Electrotype Co. as being typified by: “(1) a small number of shareholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction, and operations of the corporation.” Id. at 586. As this Court laid bare in Donahue:

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The close corporation is often little more than an ‘incorporated’ or ‘chartered’ partnership. The shareholders ‘clothe’ their partnership ‘with the benefits peculiar to a corporation, limited liability, perpetuity and the like.’ Just as in a partnership, the relationship among the shareholders must be one of trust, confidence and absolute loyalty if the enterprise is to succeed . . . . All participants rely on the fidelity and abilities of those shareholders who hold office. Disloyalty and self-seeking conduct on the part of any shareholder will engender bickering, corporate stalemates, and, perhaps, efforts to achieve dissolution.

Donahue, 367 Mass. at 586–87 (citing the Matter of Surchin v. Approved Bus. Mach. Co. Inc. 55 Misc. 2d (N.Y.) 888, 889 (Sup. Ct. 1967). Moreover, in family partnerships, this Court has held that familial relationships should give “rise to a particularly scrupulous fidelity in serving the interests of all of the stockholders” and put the shareholders in a “special position of family trust.” Samia v. Central Oil Co. of Worcester, 339 Mass. 101, 158 N.E.2d 469 (1959) (cited in Donahue, 367 Mass. at 595). In the present case, the Demoulas family – plaintiff and defendant shareholders alike – owe each other the fiduciary duties of the “utmost good faith and loyalty.” O’Brien v. Pearson, 449 Mass. 377, 383, 868 N.E.2d. 118 (2007), quoting Donahue, 367 Mass. at 593. They have inherited a family business which, if it is to succeed, requires the Demoulas family to remain loyal to each other and to put aside their own “avarice, expediency, or self-interest” to do what is in the best interest of all shareholders and the corporation. Donahue, 367 Mass. at 593. We agree with the Donahue Court that “stockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard.” Id. at 592–93. The Demoulas family is not the only stakeholder relying on the success of this enterprise. Thousands of DSM employees and customers, as well as the communities in which DSM is located, also depend on Market Basket stores to remain open, to continue providing quality and affordable groceries, and to continue employing community members with sufficient wages and healthcare benefits to sustain their families. Many elderly community members who live on fixed incomes rely on Market Basket’s affordable grocery prices. Unlike its competitors, DSM does not rely on debt to finance its expansions. DSM instead pays its shareholders, pays its employees – and pays them well to encourage employee loyalty, which in turn drives customer satisfaction – and reinvests its profits into its business. Avoiding debt allows DSM to be run the “family” way, free from the financial demands of outside lenders or equity interests. DSM’s business model works as a delicate balance between shareholders, employees, and community members. This Court has been protective of oppressed and vulnerable minority shareholders due to the possibility of “freezeouts.” As stated in Donahue:

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An authoritative study of such ‘freeze-outs’ enumerates some of the possibilities: ‘The squeezers (those who employ the freeze-out techniques) may refuse to declare dividends; they may drain off the corporation’s earnings in the form of exorbitant salaries and bonuses to the majority shareholder-officers and perhaps to their relatives, or in the form of high rent by the corporation for property leased from majority shareholders . . . .’ In particular, the power of the board of directors, controlled by the majority, to declare or withhold dividends and to deny the minority employment is easily converted to a device to disadvantage minority stockholder. ... Thus, when these types of ‘freeze-outs’ are attempted by the majority stockholders, the minority stockholders, cut off from all corporation-related revenues, must either suffer their losses or seek a buyer for their shares. Many minority stockholders will be unwilling or unable to wait for an alteration in majority policy (citation omitted). The stockholder may have anticipated that his salary from his position with the corporation would be his livelihood. Thus, he cannot afford to wait passively. He must liquidate his investment in the close corporation in order to reinvest the funds in income-producing enterprises. ... . . . This is the capstone of the majority plan. Majority ‘freeze-out’ schemes which withhold dividends are designed to compel the minority to relinquish stock at inadequate prices (citations omitted). When the minority stockholder agrees to sell out at less than fair value, the majority has won.

Donahue, 367 Mass. at 588–92. In the present case, however, the defendants are not oppressed minority shareholders. The plaintiffs have not excluded the defendants from dividend income. Between 2003 and 2013, shareholders – all members of the Demoulas family, including (i) Arthur T.’s side of the family (Arthur T., Fotene Demoulas and Diana Demoulas); (ii) Arthur S.’s side of the family (Arthur S., Frances Demoulas, Glorianne Demoulas, and Caren Demoulas); and (iii) Rafaele Demoulas Evans and her daughter Vanessa – received $500 million in after-tax distributions.1 Five hundred million dollars is no small sum given DSM’s annual profits. In 2012, DSM earned a profit of $217 million on $4 billion in revenue. Although profit is distributed to shareholders, some profit is reinvested in Market Basket as it expands operations to new localities. This reinvestment allows Market Basket to grow without taking on debt, which is a fixed cost that can burden a company in a low-margin industry like the grocery business. Furthermore, the majority shareholders have not lavished themselves with exorbitant salaries or bonuses, or engaged in conflicts of interests for financial gain. The plaintiffs have no cause of action to sue for breach of fiduciary duty on these facts. The business judgment rule would deny the plaintiffs

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Members of the Demoulas family own various revocable trusts that own DSM shares.

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relief. But the plaintiffs insist on seeking to be viewed by this Court as oppressed minority shareholders. This Court calls into question the assertion that the plaintiffs are oppressed minority shareholders. The plaintiffs together constitute 37 percent of DSM’s ownership and defendants together constitute 44 percent of DSM’s ownership. The constitution of the plaintiffs’ allegiances during the decades-long family feud has shifted with each lawsuit, making it inaccurate to describe the plaintiffs as minority shareholders, because some minority shareholders shift their alignment to the majority shareholders when it serves their personal interests. Rafaele Demoulas Evans, widow of Arthur S.’s brother Evan, is one such shareholder who has switched her allegiances from minority to majority and vice versa. This Court, however, will not demonize Rafaele Demoulas Evans as some local media and social media sources have done. Some people have unabashedly used anti-woman tropes to accuse Ms. Evans of playing the provocateur by switching allegiances between Arthur S. and Arthur T. in pursuit of more money from her late husband’s family business. See, e.g., Steve Bailey, Demoulas Redux, Bos. Globe, June 23, 2004. Indeed, after her husband’s death, Ms. Evans aligned herself with her fatherin-law George’s side of the family and Arthur S. After Arthur S. attempted to gain control of her daughter’s trust, Ms. Evans aligned herself with Arthur T. instead. More recently, and for the purposes of this lawsuit, Ms. Evans has aligned her shareholder votes with Arthur S., illustrating that women and men are equally motivated to protect their fortunes and their family. Ms. Evans need not be painted as a scapegoat for a family at odds with itself. This Court is concerned with both tyranny of the majority and with fairness, illustrated by shareholders’ actions of good faith and their loyalty to the close corporation. If the plaintiffs did not have to abide by the stock transfer restrictions in Article 5, they would have unfettered discretion to threaten their fellow shareholders with the sale of their shares to destroy its S-corporation status, knowing that the corporation does not have the cash on hand to buy back their shares. DSM would have to take on considerable debt or private equity to buy the plaintiffs’ shares to satisfy the plaintiffs’ preference that DSM be operated in the name of their own “avarice, expediency, or self-interest.” This Court will not equip minority shareholders with the tools to shirk their fiduciary duties of good faith and loyalty to the corporation and gain disproportional control over DSM through the threat of loss of its S-corporation status. In contrast, the defendant majority shareholders appear to act not in the name of “avarice, expediency, or self-interest” but in DSM’s best interest, in light of the company’s well established business model, which generates profit for its shareholders – not despite but rather because of its consideration of less powerful constituencies, namely workers and customers. Although Massachusetts law allows the fiduciary duties of shareholders in a closely held corporation to be altered by contract, the implied contractual covenant of good faith and fair dealing applies equally to majority and minority shareholders who are party to the contract. The https://doi.org/10.1017/9781009025010.008 Published online by Cambridge University Press

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plaintiffs did not act in good faith when seeking to sell their shares to destroy DSM’s tax status as an S corporation. The plaintiffs knew that DSM did not have the cash to purchase their shares and would have to take on considerable debt to complete the purchase, causing DSM to cut its operating costs, its jobs, and its employee profitsharing plan, as well as raising grocery prices for its largely low- and middleincome customers. DSM would be vulnerable to takeover by private equity firms seeking to maximize DSM’s profits rather than to provide living wage jobs and quality food at affordable prices to low- and middle-income customers. The plaintiffs, having inherited rather than earned their wealth from the family business, sought liquidity and personal financial gain. They failed to act in the best interests of all shareholders, including the defendants, whose familial legacy and reputation is deeply rooted in the success of DSM as measured by employee and customer satisfaction and loyalty – not merely by profits. We agree with the defendants’ counterclaims that the plaintiffs failed to adhere to their fiduciary duties of “utmost good faith and loyalty” to their fellow shareholders and to the corporation. B The plaintiffs argue that good faith compliance with the terms of the agreement entered into by the shareholders satisfies their fiduciary duty and that a claim for breach of fiduciary duty only arises where the agreement does not entirely govern the shareholders’ actions. We disagree. The presence of a contract will not always supplant a shareholder’s fiduciary duty. We have allowed a party to proceed with a claim for breach of fiduciary duty in situations where a contract did not entirely govern the parties’ rights and duties. See King v. Driscoll, 418 Mass. 576, 586, 638 N.E.2d 488 (1994), S.C., 424 Mass. 1, 673 N.E.2d 859 (1996) (holding that although mandatory stock buyback upon termination was within scope of contract, a campaign to undermine a stockholder-employee and ensure the stockholder-employee’s termination to trigger buyback was not). The Massachusetts Superior Court looked only to the four corners of the contract between shareholders who have engaged in corporate infighting almost immediately upon inheriting shares in DSM from their parents. The Superior Court’s narrow analysis fails to respond to the series of events leading up to, and including, the present dispute in which the plaintiffs exhibited a disregard for the corporate enterprise, placing their own “avarice, expediency, or self-interest” above their legal duty of loyalty to the corporation and their fellow shareholders. See Driscoll at 586. DSM is nearing its one hundredth year of operation and it has been a successful family enterprise that has held onto its long-term values of providing quality food at low prices. This Court wishes to see DSM continue to thrive, for the benefit of all its stakeholders. The judgment of the Superior Court is reversed. It is so ordered. https://doi.org/10.1017/9781009025010.008 Published online by Cambridge University Press

6 Commentary on Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. afra afsharipour

BACKGROUND

The Delaware Supreme Court’s landmark 1986 decision in Revlon, Inc. v. MacAndrews & Forbes Holdings1 is one of the most influential decisions affecting the law and practice of mergers and acquisitions (M&A).2 Beyond M&A, Revlon’s influence looms large over corporate law, with the pronouncements of the Delaware Supreme Court laying the foundation for arguments that shareholder primacy is dictated by corporate law and norms. Revlon arose during the 1980s, a period often characterized as the decade of greed, in which the rich became richer and inequality ballooned.3 The M&A landscape of the 1980s was dominated by hostile takeovers – described as “Wild West shootouts”4 starring male corporate raiders armed with high-risk junk bonds.5 At the time, few women held leadership roles in corporate America; women accounted for only around 3 percent of public company board members in the Fortune 1000 companies,6 and only two women appeared as CEOs on Fortune’s list of the top 500 companies.7 The hostile takeovers of the 1980s led to political and legal battles across the country. Many states, worried about the impact of Wall Street-fueled takeovers on 1 2 3

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Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). See, e.g., Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009). See Sylvia Nasser, The 1980’s: A Very Good Time for the Very Rich, N.Y. Times, Mar. 5, 1992, at A1. Charles V. Bagli, It’s the Era of the Civilized Hostile Takeover, N.Y. Times, Mar. 19, 1997, at D1. Margaret Isa, Where, Oh Where, Have All the Corporate Raiders Gone?, N.Y. Times, June 30, 1996, at F10. See Idalene F. Kesner, Directors’ Characteristics and Committee Membership: An Investigation of Type, Occupation, Tenure, and Gender, 31 Acad. Mgmt. J. 66, 70, 73 (1988). See Historical List of Women CEOs of the Fortune Lists: 1972–2020, Catalyst (2020), https:// www.catalyst.org/wp-content/uploads/2019/06/Catalyst_Women_Fortune_CEOs_1972-2020_ Historical_List_5.28.2020.pdf.

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their local constituents, enacted anti-takeover legislation that would allow directors to consider “the best interests of the corporation, consider the effects of any action upon employees, upon suppliers and customers of the corporation and upon communities in which offices or other establishments of the corporation are located, and all other pertinent factors.”8 For Delaware, the leading state in framing U.S. corporate law, hostile takeovers led to fierce litigation in its courts as both buyers and sellers began to use advanced takeover strategies and defenses. This scenario raised new questions for Delaware corporate law. The Revlon decision arose as the Delaware Supreme Court began to develop its enhanced scrutiny framework for reviewing challenges to takeover defenses. The enhanced scrutiny framework has been described as an “intermediate” standard of review whereby the court, rather than deferring to the business judgment of directors, first examines the motivation of the directors to determine whether their decisions were influenced by factors other than the best interests of the corporation and its stockholders; second, the court examines whether the decisions adopted by the board were reasonable.9 In 1985, in what has been referred to as a “watershed” year,10 the Delaware Supreme Court formally created the enhanced scrutiny intermediate standard of review in the iconic Unocal decision.11 The court applied the new standard in Moran12 and extended the new standard to the sale of a corporation in Revlon.13 Over the next decade, Delaware’s enhanced scrutiny jurisprudence – and its guidance to managers about how to behave – blossomed as the Delaware Supreme Court and the Delaware Court of Chancery applied the precedents from the watershed year to diverse fact patterns in M&A dealmaking.14 Within corporate law scholarship, the Revlon court’s approach to fiduciary duties and the ensuing Revlon standard have been heavily debated.15 While scholars have tried to reconcile the contours of Revlon’s enhanced scrutiny framework, the Delaware Supreme Court has reiterated that Revlon did not impose conduct obligations on directors,16 and a series of Court of Chancery decisions have

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Roberta S. Karmel, Duty to the Target: Is an Attorney’s Duty to the Corporation A Paradigm for Directors?, 39 Hastings L.J. 677, 695 (1988); see also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (stating that in analyzing the nature of a threat to the corporate enterprise, directors may consider “the impact on ‘constituencies’ other than shareholders (i.e. creditors, customers, employees, and perhaps even the community generally)”). See Afra Afsharipour & J. Travis Laster, Enhanced Scrutiny on the Buy-Side, 53 Ga. L. Rev. 443, 458–60 (2019). See E. Norman Veasey, Counseling Directors in the New Corporate Culture, 59 Bus. Law. 1447, 1447 (2004). Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985). Revlon, 506 A.2d at 173. For an analysis of the development of this framework, see Afsharipour & Laster, supra note 9, at 463–69. For an overview of these debates, see Franklin A. Gevurtz & Christina M. Sautter, Mergers and Acquisitions Law 276–98 (2019). See, e.g., Lyondell Chem. Co., 970 A.2d at 242.

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explained that Revlon operates as a form of reasonableness review.17 The Delaware Supreme Court has similarly described Revlon in the same terms.18 In this view of “reasonableness,” as in M&A more generally, women’s voices have been externally muted or excluded altogether. The court in Revlon and the many cases and scholarly examinations of the Revlon doctrine ignore a basic fact about how we view and assess reasonable conduct by corporate fiduciaries in M&A transactions: namely, this view is shaped by, and has long been assessed through, the conduct of men. Furthermore, while the original Revlon opinion recognizes how corporate actors may be incentivized to put their own interests at the forefront of decision-making, it makes little effort to address this issue outside of shareholder primacy. In the rewritten feminist judgment, Professor Christina M. Sautter, writing as Justice Sautter, upholds the findings of the Delaware Supreme Court in Revlon, but her analysis is nevertheless feminist at its core. Using a narrative style, Sautter’s rich recounting of the facts and the backgrounds of the main players in the case reveals the extent to which ego, fierce competition, aggression, and self-interest played a significant role in the “battle for corporate control of Revlon.”19 In doing so, she explicitly rejects the “gendered” language of the original opinion. Sautter’s opinion evokes relational feminist theory in addressing the actual context of board independence and board decision-making in Revlon.20 With respect to corporate law and board duties, feminist scholars have challenged shareholder primacy, arguing that boards should consider other constituents.21 Rather than adhere to the short-term shareholder wealth maximization model vigorously espoused in the original opinion, the rewritten opinion reconsiders value from the perspective of enterprise value. An embrace of enterprise value inevitably involves consideration of the long-term health of the company – not just that of the shareholders – and of the impact on stakeholders of any transaction.

ORIGINAL OPINION

The Revlon case involved the hostile acquisition of Revlon, a leader in the cosmetics industry, by Pantry Pride. While Revlon was both well known and firmly established in the cosmetics industry, Revlon’s long-serving CEO, Michel C. Bergerac, had 17

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See, e.g., In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 595–96 (Del. Ch. 2010); In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 192 (Del. Ch. 2007); In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000 (Del. Ch. 2005). See RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015). Revlon, 506 A.2d at 175. See Ann C. Scales, The Emergence of Feminist Jurisprudence: An Essay, 95 Yale L. J. 1373 (1986). See Kellye Y. Testy, Capitalism and Freedom – For Whom?: Feminist Legal Theory and Progressive Corporate Law, 67 Law & Contemp. Probs. 87, 98 (2004).

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diversified the company’s business into the healthcare field.22 Wall Street generally praised Bergerac’s diversification strategy, but Bergerac was criticized in the years immediately prior to the takeover for failing to strengthen the cosmetics operations. By the mid-1980s, Revlon’s “market share in cosmetics categories [such] as lipstick, nail enamel and eye products [had] tumbled,” making the company an attractive acquisition target for Pantry Pride.23 The battle over Revlon involved strong personalities, with Bergerac and Pantry Pride’s CEO, Ron Perelman, playing lead roles. Perelman had initially approached Bergerac with a proposal for a friendly acquisition of Revlon, but his repeated “overtures were rebuffed, perhaps in part based on Mr. Bergerac’s strong personal antipathy to Mr. Perelman.”24 To thwart Pantry Pride’s bid, the Revlon Board authorized a series of defensive measures, including a repurchase of up to 5 million of its 30 million outstanding shares through a note-purchase rights plan (i.e., a poison pill, a buy-back, and an exchange offer to purchase up to 10 million shares of its common stock with notes and preferred stock), thus increasing Revlon’s debt by hundreds of millions.25 Nevertheless, Perelman increased his bid for Revlon several times using “junk-bond” financing.26 The original opinion somewhat plays down the vitriol between the two CEOs. But throughout the takeover battle, the two executives exchanged heated words in the press. In an August 1985 interview, Bergerac said that he met with Pantry Pride officials three times to discuss the proposal, and “the indication was that they were trying to buy the company cheap and bust it up.”27 Bergerac referred to Perelman as a “bust-up artist” who would “sell anything [he] could sell.”28 In another interview, Bergerac accused Perelman of “offer[ing] pieces of Revlon without authorization.”29 Perelman took offense at Bergerac’s characterization, stating “[w]e are not liquidators” and instead describing himself as “a builder” who had “maximized the inherent value of the companies we purchased.”30 Perelman also called Revlon’s poison pill “a blatant attempt to deny its shareholders their right to decide for themselves whether or not to take advantage of our cash tender offer.”31 22 23 24 25 26 27

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Robert J. Cole, High Stakes Drama at Revlon, N.Y. Times, Nov. 11, 1985, at D1. Richard W. Stevenson, Bergerac Quits Revlon Posts, N.Y. Times, Nov. 6, 1985, at D4. Revlon, 506 A.2d at 176. Id. at 177. Id. at 180–81. Hank Gilman & Daniel Hertzberg, Pantry Pride Announces a Hostile Offer for Revlon, which Moves to Block Bid, Wall St. J., Aug. 20, 1985, at 3. Id. In addition, according to one of Perelman’s attorneys, Bergerac’s distaste for Perelman was also tainted by antisemitism. See John Weir Close, The Lucky Sperm Club: Jews, M&A and the Unlocking of Corporate America, PBS News Hour (Jan. 2, 2014), https://www.pbs.org/news hour/nation/the-lucky-sperm-club-jews-ma-and-the-unlocking-of-corporate-america. Robert J. Cole, Pantry Bid Is Opposed by Revlon, N.Y. Times, Aug. 20, 1985, at D1. Steven E. Prokesch, Pantry Pride Chairman Hunts Biggest Prey Yet, N.Y. Times, Aug. 28, 1985, at D1. Gilman & Hertzberg, supra note 27.

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Unable to make Perelman back down, Revlon then turned to another buyer, convincing Forstmann Little to enter the fray. Teddy Forstmann, the head of Forstmann Little, considered himself a “self-made man,” although he had not started at the bottom.32 In reality, Forstmann came from a wealthy business family. By the end of his life, Julius Forstmann Sr., Teddy Forstmann’s grandfather, had been one of the richest people in the country.33 Although the family’s fortunes eventually waned, Teddy Forstmann had nonetheless attended the prestigious institutions of Andover, Yale, and Columbia, and he moved among the most elite circles in America.34 Forstmann was not just a well-connected dealmaker but was also known as a Wall Street maverick who wrote critical op-ed pieces in leading newspapers, with junk bonds being one of his most criticized topics.35 The Revlon Board offered several incentives to Forstmann to buy out the company, including a crown jewel lock-up option,36 a no-shop provision with a break-up fee,37 a redemption of the rights,38 and a waiver of the note covenants. Pantry Pride responded with a suit in the Delaware Chancery Court, challenging the validity of the Revlon Board’s defensive tactics and its final deal with Forstmann. In rather cursory fashion, the Delaware Supreme Court blessed the initial defensive measures, applying the enhanced scrutiny framework of its recent Unocal opinion.39 While early in the opinion the court wrote that director independence “must first be satisfied,” the Supreme Court neither questioned nor probed the selfinterest or independence of the Revlon Board in installing these initial defenses, even though many members of Revlon’s board had long served on the board and worked closely with Bergerac. Instead, the court assumed director independence

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John D. Williams, Forstmann Little Is Making a Name in the Leveraged-Buyout Business, Wall St. J., Mar. 7, 1984, § 2, at 33. Rich Cohen, The Ghost in the Gulfstream, Vanity Fair (Jan. 11, 2013), https://www.vanityfair .com/news/2013/02/memoirs-teddy-forstmann-billionaire-ghostwriters. Id. Adam Lashinsky, How Teddy Forstmann Lost His Groove, Fortune Mag. (July 26, 2004), https://money.cnn.com/magazines/fortune/fortune_archive/2004/07/26/377149/index.htm. A crown jewel lock-up provides an option to the buyer to purchase certain assets that potential third-party bidders would most covet about the target company and which is exercisable (or becomes worth exercising) if the target terminates the merger agreement for a competing offer. A no-shop provision is a covenant in an acquisition agreement that restricts the target company from soliciting competing bids, providing information to competing bidders, and encouraging or negotiating a competing transaction. A break-up fee is a cash payment from the target to the buyer if the target company terminates the acquisition agreement for any of the reasons specified in the agreement. No-shops and break-up fees are common deal protection devices used by buyers to ensure that a proposed M&A transaction closes as planned. “Redemption of the rights” refers to the exercise of a stockholder rights plan that protects against acquisition of greater than 10–20 percent of a company’s shares (and caps accumulations that already exceed that threshold), without prior board approval. Revlon, 506 A.2d at 180–81.

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and held that Pantry Pride’s “grossly inadequate” offer was a sufficient threat from which the board would need to protect Revlon shareholders.40 In applying enhanced scrutiny to the Revlon Board’s deal with Forstmann, the court rejected the board’s justifications. As the court famously stated, in agreeing to sell Revlon to Forstmann, “[t]he directors’ role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”41 The court noted that the Revlon Board favored the offer from Forstmann, who was referred to as a “white knight,” because of the board’s self-interest in resolving a potential lawsuit against them by the noteholders.42 In its opinion, the Delaware Supreme Court came down on the side of shareholder primacy in takeovers, stating that in sale scenarios, directors “are charged with the duty of selling the company at the highest price attainable for the stockholders’ benefit.”43 The court’s analysis went even further, claiming that “while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders.”44 Indeed, the Revlon opinion has become the bedrock of arguments in favor of shareholder primacy. As construed by the former chief justice of the Delaware Supreme Court: The understanding in Delaware is that Revlon could not have been more clear that directors of a for-profit corporation must at all times pursue the best interests of the corporation’s stockholders . . . Non-stockholder constituencies and interests can be considered, but only instrumentally, in other words, when giving consideration to them can be justified as benefitting the stockholders.45

Delaware espouses adherence to shareholder primacy, although to what extent is certainly arguable. However, scholars have long criticized shareholder primacy for creating incentives for directors and management to ignore the interests of other constituencies.46

FEMINIST JUDGMENT

Several important themes emerge in the rewritten opinion of Sautter, and these themes have continued to plague corporate law since the days of Revlon. 40 41 42 43 44 45

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Id. at 181. Id. at 182. Id. at 182, 183. Id. at 184 n.16. Id. at 176. Leo E. Strine Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 771 (2015). See, e.g., Testy, supra note 21.

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A. The Performance of Masculinity Scholars have long warned of the risks that management bias poses for M&A transactions.47 Many studies support the claim that biases such as overconfidence and ego gratification are important drivers for M&A deals.48 The Delaware courts, despite their deep appreciation for how bias can play a role in decision-making by executives,49 have largely glossed over the gendered aspect of management and board bias.50 And scholars have noted that “[i]mplicit and explicit in the American law of corporations are such values as competition, hierarchy, [and] aggression,” and that corporate law excludes “values that are more associated with the feminine gender.”51 As Sautter’s rewritten opinion reveals, ego and the performance of masculinity were at the center of the battle over Revlon.52 Using a narrative style, Sautter’s detailed recounting of the facts and the backgrounds of the main players in Revlon illustrates the extent to which a variety of masculine traits – fierce competition, aggression, and the performance of power moves – played a significant role in the interactions between the management of Revlon and Pantry Pride.53 In a rich portrait of Revlon CEO Bergerac, who was a big-game hunter, Sautter emphasizes Bergerac’s outsized compensation and the “masculine safari design” of his Revlon office. Bergerac – the hunter – resisted Perelman’s audacious attempt to “take away [Revlon] at bargain-basement prices.”54 Sautter’s opinion also highlights how the performance of masculinity – including authoritarianism, paternalism, and informalism – tainted the interactions between Bergerac and Perelman, the relationship between Bergerac and the Revlon Board, and the negotiations between Revlon and Forstmann Little.

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For an overview of this literature, see Afra Afsharipour, Bias, Identity and M&A, 2020 Wis. L. Rev. 471, 477–80 (2020). See generally Adam Steinbach et al., Peering into the Executive Mind: Expanding Our Understanding of the Motives for Acquisitions, in Advances in Mergers & Acquisitions 145, 147 (Sydney Finkelstein & Cary L. Cooper eds., 2016). See, e.g., Dollar Thrifty, 14 A.3d at 597 (stating that “there is the danger that top corporate managers will resist a sale that might cost them their managerial posts, or prefer a sale to one industry rival rather than another for reasons having more to do with personal ego than with what is best for stockholders”). See Afsharipour, supra note 47, at 487–88. Ronnie Cohen, Feminist Thought and Corporate Law: It’s Time to Find Our Way Up from the Bottom (Line), 2 Am. U. J. Gender & L. 1, 11 (1994). For an overview of masculinity contest cultures in the corporate world, see Jennifer L. Berdahl et al., Work as a Masculinity Contest, 74 J. Soc. Issues 422 (2018); cf. Close, supra note 28 (describing religious identity dynamics as central to the battle over Revlon). For how these masculine traits promote rule-breaking cultures that exclude women and promote unethical conduct, see generally Naomi Cahn, June Carbone, & Nancy Levit, Women, Rule-Breaking, and the Triple Bind, 87 Geo. Wash. L. Rev. 1105 (2019). Steven E. Prokesch, Bergerac’s Sudden Reversal, N.Y. Times, Oct. 5, 1985, § 1, at 31.

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The performance of masculinity is the norm in M&A practice, and it reinforces the power of men in the field of M&A. The hyper-aggressive masculine norms of takeover contests in the 1980s set the tone for M&A practice: takeovers are seen as winner-take-all battles between powerful men.55 Advisors devise myriad tools through which these battles can be won, and directors feel that these tools are a “must” to avoid losing the battle. The performance of masculinity also impacts the language of M&A practice and doctrine. The language of war, power, and domination often permeates both the popular press narrative of hostile takeovers and the narratives given in Delaware opinions. For example, the Delaware Supreme Court readily adopted the characterization of Forstmann as the “white knight.” As feminist scholars have recognized, such gendered language and attitudes translate into disadvantages for women.56 Unlike the original opinion, Justice Sautter decidedly rejects the term “white knight” and with it the idea that Revlon is a “distressed princess” in need of saving.57 More importantly, her feminist opinion recognizes that these gendered words often demean and exclude women.58 The gendered image of a white knight invokes the stereotype of a powerful man being the typical player in M&A dealmaking.59

B. Continued Domination by Men in Corporate Governance and M&A Women have long been shut out of corporate governance, especially in M&A transactions, and the battle over Revlon was no different.60 Even a business whose primary customers are women did not see a need to involve women in its decisionmaking. Instead, the takeover of Revlon was shaped by powerful men; women and their interests were treated as mere objects. As Sautter’s opinion demonstrates, not only were women not represented as decision-makers, but Revlon’s CEO expressed

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See Steven M. Davidoff Solomon, Gods at War 6–10 (2009). See Deborah L. Rhode, Perspectives on Professional Women, 40 Stan. L. Rev. 1163, 1187–90 (1988). The term “white knight” has also been criticized for perpetuating racist attitudes, and the term has been used by some white supremacist groups to self-identify. See Gina Marchetti, Romance and the “Yellow Peril”: Race, Sex, and Discursive Strategies in Hollywood Fiction 114 (1993); Cord J. Whitaker, The Secret Power of White Supremacy – and How Anti-Racists Can Take It Back, Politico (Oct. 29, 2020). See Anne Pauwels, Women Changing Language 87 (1998). See Kellye Y. Testy, From Governess to Governance: Advancing Gender Equity in Corporate Leadership, 87 Geo. Wash. L. Rev. 1095, 1102 (2019). For more on language as a vehicle for promoting sexist stereotypes, see generally Pat K. Chew & Lauren K. Kelley-Chew, Subtly Sexist Language, 16 Colum. J. Gender & L. 643 (2007). See Diane Frankle, Jennifer Muller, & Eric Talley, Fixing the Dearth of Women in M&A, Daily J. (Sept. 22, 2014), https://www.law.berkeley.edu/files/bclbe/Women_in_M_and_A% 281%29.pdf; Lizzy McLellan, M&A’s Missing Women, Law.com: Recorder (Mar. 27, 2017, 12:00 AM), https://www.law.com/therecorder/almID/1202781815609/MAs-Missing-Women/.

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a condescending view of women as people who “tend to be a little depressed” when life gets “rough” and need cosmetics to “feel good.” Sautter’s opinion thus highlights that even in Revlon, a leading cosmetics company, women’s roles were limited. The Revlon Board had one woman as a director, the infamous Aileen Mehle.61 According to news accounts, Mehle was brought onto the Revlon Board to “represent the women’s point of view;” she was described by the former Revlon CEO as “erudite and ‘au courant’ in her feminine taste,” characteristics that Revlon believed would be “helpful” to its “feminine business.”62 Yet, there is no indication in any of the filings before the Delaware courts of her having played a significant role in the battle over Revlon. The remaining members of the Revlon Board, as well as the executives of Revlon, Pantry Pride, and Forstmann Little, were all men. Justice Sautter raises the question of whether a lack of diversity on the Revlon Board affected the board’s decision-making and its acquiescence to Bergerac. While the study of board composition, and specifically women on boards, was only emerging in the 1980s,63 a rich body of literature has since raised important questions about whether gender diversity in the boardroom might improve decision-making and tamp down the biases of management.64 Mehle, however, appears to have been the only woman not only in the boardroom but also among the senior management of Revlon. Scholars long have warned of the dangers of tokenism on corporate boards.65 As the lone woman, Mehle may not have been able to significantly influence the company’s decision-making.66 61

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Mehle was a nationally syndicated gossip columnist whose columns were a regular feature in leading newspapers for decades. See Sam Roberts, Aileen Mehle, Gossip’s Grand Dame Known as “Suzy,” Dies at 98, N.Y. Times (Nov. 11, 2016), https://www.nytimes.com/2016/11/12/business/ media/suzy-knickerbocker-died-aileen-mehle.html. Clare M. Reckert, Woman on Board of Cosmetics Maker, N.Y. Times, May 5, 1972, at 57. See Dan R. Dalton & Catherine M. Dalton, Women and Corporate Boards of Directors: The Promise of Increased, and Substantive, Participation in the Post Sarbanes-Oxley Era, 53 Bus. Horizons 257, 258 (2010). See Darren Rosenblum, When Does Sex Diversity on Boards Benefit Firms?, 20 U. Pa. J. Bus. L. 429, 458–60 (2017). See, e.g., Rosabeth Moss Kanter, Some Effects of Proportions on Group Life: Skewed Sex Ratios and Responses to Token Women, 82 Am. J. Soc. 965, 966 (1977) (arguing for critical mass theory and the need for boards to have at least 35 percent of directors be women to introduce new perspectives and increase corporate performance). For a discussion of the literature on the dangers of tokenism on corporate boards, see Deborah L. Rhode & Amanda K. Packel, Diversity on Corporate Boards: How Much Difference Does Difference Make?, 39 Del. J. Corp. L. 377, 408–11 (2014); Joan Macleod Heminway & Sarah White, Wanted: Female Corporate Directors, 29 Pace L. Rev. 249, 257–64 (2009). For a discussion on the importance of critical mass, see Vicki W. Kramer, Alison M. Konrad, & Sumru Erkut, Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance 8–9 (Wellesley Ctrs. for Women, Working Paper No. 11, 2006); but see Lissa Lamkin Broome, John M. Conley, & Kimberly D. Krawiec, Does Critical Mass Matter? Views from the Boardroom, 34 Seattle U. L. Rev. 1049 (2011) (finding more limited support for critical mass theory).

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The attempted takeover of Revlon also reflects the long-standing lack of gender parity among the attorneys and other advisors involved in M&A.67 Like the board and executives of Revlon, the elite law firms and investment banks advising on all sides of the attempted takeover of Revlon were dominated by men.68 The lack of women’s voices in M&A has inevitably impacted dealmaking and deal advising. As the Revlon saga illustrates, M&A transactions can be plagued by shortcomings in decision-making. A growing body of literature indicates that diversity, including gender diversity, among leading decision-makers may improve M&A outcomes.69 The litigation in the Revlon case was similarly dominated by men, with every single attorney listed as representing the parties before the Delaware Supreme Court being male. For decades, the lack of women on the boards, in the executive teams, and as advisors in M&A deals was paralleled by the Delaware Court’s lack of women jurists. Until very recently, women were absent as judges and lawyers in the Delaware courts.70 Both the Delaware Chancery Court and the Delaware Supreme Court have had few women jurists.71 Experts argue that the lack of female justices on both of these courts is closely related to the disparities between men and women in law firms.72 More than two decades after women began to constitute a significant proportion of lawyers, women’s leadership in law firms continues to lag,73 leading to “a lack of opportunities for [women to apply and serve as judges].”74

C. Director Independence One of the challenges that courts have faced in enhanced scrutiny cases, including Revlon, is the extent to which they should defer to the board’s decisions, especially the decisions of independent directors. Unlike the original Delaware Supreme Court opinion, Sautter’s opinion provides rich biographical detail on the leading

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See generally Afra Afsharipour, Women and M&A, 12 U.C. Irvine L. Rev. 359 (2022). See Close, supra note 28. See Afsharipour, supra note 67, at 399–405. Claire M. DeMatteis, Women and the Delaware Bar and Bench: It Takes Generations, 14 Del. L. Rev. 125, 128 (2014); Judicial Officers, Del. Cts., https://courts.delaware.gov/chancery/ judges.aspx (last visited Dec. 23, 2020). Judicial Officers, Del. Cts., https://courts.delaware.gov/chancery/judges.aspx (last visited Dec. 23, 2020); Historical List of Delaware Supreme Court Justices, Del. Cts., https://courts .delaware.gov/supreme/history/justicespast.aspx (last visited Dec. 23, 2020). DeMatteis, supra note 70, at 133–34. According to statistics provided by the American Bar Association, only 22.7 percent of partners are women, only 19 percent of equity partners are women, and only 22 percent of managing partners in the 200 largest law firms are women. Am. Bar. Ass’n, A Current Glance at Women in the Law (Apr. 2019), https://aemdev.americanbar.org/content/dam/aba/administrative/ women/current_glance_2019.pdf. DeMatteis, supra note 70, at 134.

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players in the Revlon case, supporting a nuanced analysis of director independence that is steeped in relational feminism. While the original opinion failed to analyze the independence or composition of the Revlon Board, Sautter’s opinion calls into question the independence of a board of men (and one woman) who had long served with each other and who moved in overlapping social circles. As she notes, the Delaware courts had already recognized that there are “structural biases” and “unseen socialization processes” in corporate boards.75 Sautter’s rewritten opinion highlights the club-like world of corporate governance, in which so-called independent directors provide long-term service on boards. Sautter recognizes that such long-term service “inevitably builds relationships, friendships, and a degree of loyalty among board members as well as between the board and officers.” She also recognizes that the board may have favored Forstmann because he was well known to both Bergerac and the board and moved in the same social circles. For decades, corporate governance has valorized director independence. Yet, as Sautter’s opinion reveals, independent directors have ultimately done too little to curb the self-interested actions of management in takeovers. Especially in the face of powerful CEOs such as Bergerac, boards often “rubber stamp” the CEO’s decisions.

D. Whose Interests Should the Board Protect? The original Revlon opinion squarely sides with shareholder primacy. Scholars have long criticized shareholder primacy for creating incentives for directors and management to ignore the interests of other constituencies, including employees and customers.76 Furthermore, some feminist scholars have argued that the focus on shareholder wealth maximization exacerbates masculinity contests in firms and enhances “win-at-all-cost mentalities.”77 Motivated by the masculinity contest culture literature, Sautter emphasizes the board’s obligation to maximize Revlon’s value more generally, rejecting the original opinion’s focus on short-term shareholder wealth maximization. In Sautter’s feminist rewrite of Revlon, determining value requires boards to “take a broader view and consider the potential impact of each bid, including goodwill and longer-term plans for the company.” Not only does Sautter reconceptualize value but, in line with both progressive and feminist theories, her rewritten opinion also considers the board’s responsibilities to Revlon’s stakeholders more generally.78 Despite being a leading cosmetics company, Revlon never allowed the interests of women – a key constituency of the 75 76 77 78

Aronson v. Lewis, 473 A.2d 805, 815 n.8 (Del. 1984). See, e.g., Testy, supra note 21. Cahn, Carbone, & Levit, supra note 53, at 1109. See Testy, supra note 21, at 92, 98.

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core business – to play a role in the takeover contest. Sautter’s opinion recognizes that the deal Revlon struck with Forstmann Little could negatively impact Revlon’s employees and its core cosmetics business. Moreover, unlike the original opinion, Sautter recognizes the contractual protections available to noteholders that distinguish them from other stakeholders who lack any such protection, such as employees, suppliers, and customers. Nevertheless, Sautter’s ultimate resolution is the same as that in the original opinion: to block the deal Revlon struck with Forstmann Little. However, she bases that resolution in the board’s lack of independence and in its decision to favor a bidder who had plans that would create long-term harms to the company’s core business. IMPACT OF THE REWRITTEN JUDGMENT

Sautter’s feminist rewriting of Revlon offers a novel perspective on how the Delaware Supreme Court could have approached this case. Sautter’s opinion highlights how the failure to include women and feminist voices impacts the manner in which M&A is conducted and how that conduct is assessed by Delaware courts. Although arriving at the same conclusion as the original, the rewritten opinion contextualizes the people and actions involved in Revlon and approaches its ultimate findings using a feminist lens, which appreciates the complex relational factors that may have influenced the board’s decision-making. In many ways, the Revlon decision demonstrates a lost opportunity to deepen our examination of board diversity, independence, and board fiduciary responsibility. Sautter does not squander this opportunity.

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173 (Del. 1986) justice christina m. sautter delivered the opinion of the court This case involves an intense battle for control of Revlon, Inc., arguably the world’s most well-known cosmetics company. More specifically, Revlon adopted various defensive measures after Pantry Pride, Inc. presented a hostile takeover attempt. Revlon also sought out a favored buyer, Forstmann Little & Co., with which it entered into a merger agreement – while failing to consider Pantry Pride’s offers. Pantry Pride sought and received a preliminary injunction in the Court of Chancery, and we granted this expedited interlocutory appeal to consider the validity of defensive measures in a change-of-control transaction. This is an issue of first impression for this Court.

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This opinion proceeds in five parts. Part I describes the complex facts of this takeover battle. Part II reviews relevant law governing fiduciary duty and hostile takeovers. Moreover, this Part differentiates between independence and disinterestedness and develops an enhanced framework for determining the former. In this Part, we also find that the business judgment rule protects the poison pill adopted by Revlon and that Revlon’s exchange offer was reasonable, and we address, for the first time, situations where a board’s duty to protect the corporate bastion may shift to an obligation to maximize value. In Part III, we address the validity of the defensive devices – a lock-up option, a no-shop provision, and a cancellation fee – that Revlon adopted in its agreement with Forstmann Little. More specifically, we find that the Revlon Board utilized these defensive measures to favor Forstmann over Pantry Pride, during a time when the Board should have been acting to maximize value during a sale of control. In Part IV, we explain that Pantry Pride has met its burden to obtain a preliminary injunction. Finally, in Part V, we summarize our overall findings. I

Ironically, despite being known for traditionally feminine products, Revlon’s fourteen-member Board of Directors consists almost entirely of men, having only one female member, Aileen Mehle. At the helm of this predominantly male board is Michel C. Bergerac, who has served as Revlon’s Chair and CEO since 1975, being the hand-picked successor to the company’s founder, Charles Revson. Of the fourteen Revlon directors, six, including Bergerac, hold senior management positions: Sander P. Alexander, Senior Vice President and Chief Financial Officer; Jay I. Bennett, Senior Vice President, personnel and industrial relations; Irving J. Bottner, Senior Vice President; Samuel Simmons, Senior Vice President and General Counsel; and Paul P. Woolard, Senior Executive Vice President. Presently, the six “inside” directors have ninety-one years of cumulative experience as Revlon Board members, with individual terms ranging from nine years to twentynine years. Despite Revlon being known as a cosmetics company with women as its target consumers, no women hold senior management positions. Revlon’s eight “outside” directors include two significant stockholders and four other members who are, or have been, associated with entities that have done business with Revlon. Hence, there are questions as to whether the outside directors are truly independent in the way that term has been traditionally defined. The eight non-management members have seventy-nine years of combined experience on the Revlon Board; four of them whom have served since at least the 1970s: Simon Aldewereld, former partner of Lazard Frères, Revlon’s longtime investment banker, and a nine-year member of the Board; Jacob Burns, a nineteen-year member of the Board; Simon Rifkind, a twenty-nine-year member of the Board; and Mehle, the sole female director and a thirteen-year member of the Board. When Mehle joined

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the Board in 1972, Revson specifically stated that she had been “selected to represent the women’s point of view.” Clare M. Reckert, Woman on Board of Cosmetics Maker, N.Y. Times, May 5, 1972, at 57. Revson went on to explain, “She is erudite and ‘au courant’ in her fine feminine taste. We’re in the feminine business in a great measure and her contribution to our activities should be helpful.” Id. It is no surprise that Revson chose Mehle, a successful syndicated society-gossip columnist, to be on the Revlon Board. Mehle and Revson were quite close, with Mehle often being a guest on Revson’s yacht during the 1960s and 1970s. The remaining outside directors were the only members of the entire Board elected in the 1980s: Lewis Glucksman, John Loudon, Ian R. Wilson, and Ezra K. Zilkha. The French-born, multilingual, big-game-hunter Bergerac received a bachelor’s degree and master’s degree in economics from the University of Paris and an M.B.A from the University of California, Los Angeles, on a Fulbright scholarship. Before Revson picked him to lead Revlon, Bergerac headed up the European operations of International Telephone & Telegraph, better known as ITT, perhaps the world’s largest conglomerate. Upon joining Revlon, Bergerac received an extraordinary bonus of $1.5 million. Cosmetics: Kiss and Sell, Time (Dec. 11, 1978). This unprecedented bonus was especially appropriate for a man of excesses like Bergerac. Bergerac’s Revlon offices in the prestigious General Motors building overlooking Central Park are decorated in a masculine African-chic motif, featuring walls adorned with Big Five hunting trophies, carpets made of skins, and murals of African game. Id. Bergerac’s love of big-game hunting even extends to his 747 jet, which is outfitted with a hunting-gun rack. See Robert J. Cole, High-Stakes Drama at Revlon, N.Y. Times, Nov. 11, 1985, at D1. The masculine safari design is not likely what one would expect when thinking of the headquarters for a leading cosmetics company. Bergerac’s overtly masculine nature extends beyond the design of his office and into his attitude toward women. He appears to believe that women cannot be feminists and still enjoy traditionally feminine products. For example, he has stated: “You hear that women want to ‘do their own thing,’ but there are still women around the world who are romantic, women who like a lot of nice fluffy or lacy things.”Cosmetics: Kiss and Sell, Time (Dec. 11, 1978). He has further said that “[w]hen things get rough, women tend to be a little depressed, and somewhere along the line it is nice to go get some cosmetics and feel good.” Id. With these thoughts, one may not be surprised to learn that Bergerac has shifted Revlon’s focus away from cosmetics. Under Bergerac’s management, Revlon continued an expansion begun by Revson into healthcare companies, a few of which take center stage in this battle. During his time as CEO, Bergerac oversaw the acquisition of eleven healthcare companies – in areas ranging from vision care to laboratory testing to pharmaceuticals. Although the company as a whole is financially healthy, the beauty division of Revlon – since 1981 – has seen its profits decline by 60 percent to $81 million, and sales have

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declined over 13 percent to $1.1 billion. Moreover, since the mid-1970s, Revlon’s share of department-store cosmetics sales has declined from 20 percent to just 10 percent. These declines are largely a result of Bergerac’s focus on healthcare product expansion and his unwillingness to invest in product development and departmentstore promotions. Hence, although Revlon may be best known for cosmetics, the cosmetics division has largely taken a backseat to healthcare products, at least in the eyes of management. It was against this backdrop that the second major protagonist in our story, Ronald Perelman, entered the scene and the battle for control of Revlon commenced. Born and raised in the Philadelphia area, the cigar-smoking Perelman could not be more different from Bergerac. Perelman is the Chair of the Board of Directors and the CEO of a Fort Lauderdale, Florida-based publicly traded supermarket chain called Pantry Pride. A graduate of the University of Pennsylvania Wharton School, he got his start working in his father’s metal fabricating business. At the age of thirty-five, he struck out on his own and, with the help of family money purchased a 40 percent stake in Cohen-Hatfield Industries, a publicly traded company. Cohen-Hatfield then purchased MacAndrews & Forbes Company. Funded with money raised by Drexel Burnham, Perelman bought out the other shareholders and transformed MacAndrews & Forbes into a holding company. In June 1985, MacAndrews & Forbes purchased approximately 38 percent of Pantry Pride’s stock. Perelman leveraged Pantry Pride, sold most of its stores, and then used it as another acquisition vehicle. Perelman was on the hunt for possible acquisition candidates when he heard that Revlon may be available. More specifically, Perelman heard that Bergerac had been considering taking Revlon private, in a deal in which Bergerac would have an ownership stake and also continue to run Revlon. Thus, in the middle of June in 1985, Perelman arranged a meeting with Bergerac through Perelman’s attorney – Joseph Flom of Skadden, Arps, Slate, Meagher & Flom – and Simon H. Rifkind, who was both a Revlon director and a MacAndrews & Forbes director.1 Perelman and Bergerac met at Bergerac’s Manhattan townhouse to discuss the possibility of a friendly acquisition of Revlon by Pantry Pride. But Perelman’s suggestion of a price ranging between $40 and $50 per share met firm opposition by Bergerac, who considered those figures to be considerably below Revlon’s intrinsic value. It likely did not help matters that Perelman, who Bergerac considered an upstart, began discussions by announcing to Bergerac that he was going to make him a rich man. Moreover, Bergerac took offense, quite openly, at the attempted takeover of Revlon by a supermarket chain called Pantry Pride. In fact, “even before [Pantry Pride’s] first bid became known,” Perelman

1

Later, when it became clear that Perelman was moving forward with a hostile offer, Rifkind resigned from the MacAndrews & Forbes board but remained on the Revlon Board.

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claims that Bergerac told him that he “would never permit, under any circumstances, Pantry Pride to acquire Revlon.” Perelman Aff. } 3. Although Bergerac’s dismissal of the figures terminated further discussion, the pair arranged to have dinner the following week to resume deliberation. In what would become the first of many attempts to resist Perelman’s subsequent overtures, Bergerac cancelled dinner at the last minute. After learning of Perelman’s intentions, the Revlon Board, likely fueled at least in part by Bergerac’s strong aversion to Perelman, wasted no time in examining devices to dissuade hostile takeover attempts. At the meeting of the directors on July 23, Revlon’s general counsel – who also serves on the Revlon Board – pitched a Rights Plan that would serve to protect shareholders from unfair takeover bids. No affirmative action, however, was taken at the time. On August 14, convinced that a friendly acquisition was no longer on the table, Perelman sought and received authorization from Pantry Pride’s board to acquire Revlon either through negotiation at $42–$43 per share or by making a hostile tender offer at $45 per share. Perelman presented this offer to Bergerac at the office of Revlon’s regular outside counsel and in the company of Flom and Rifkind, which, to Bergerac’s surprise, did not deter Perelman’s hostile move in the least. Nevertheless, Bergerac dismissed the prices as grossly inadequate and conditioned subsequent discussion with Pantry Pride on the signing of a standstill agreement, prohibiting Pantry Pride from acquiring Revlon unless first approved by the Revlon Board. The following week, on Monday, August 19, the Revlon Board called a special meeting to consider the imminent threat of Pantry Pride’s hostile bid. Lazard Frères & Company, Revlon’s longtime investment banker, echoed Bergerac’s objection to the $45 price tag and offered data to prove its deficiency. Afterwards, Felix Rohatyn and William Loomis of Lazard explained Pantry Pride’s financial strategy for acquiring Revlon – through the offering of “junk bonds” by Drexel Burnham – whereby Revlon’s assets would secure the bonds and would later be sold to pay the debts incurred. Although junk-bond financing has become a popular financing strategy in recent years, many consider the technique to be poor form. Perelman’s mere willingness to partake on the hostile side of deals necessarily deemed him disreputable. Still, Pantry Pride could expect to retain a significant profit from such a transaction; returns were estimated to range between $60 and $70 per share. Perelman’s elaborate financing scheme, however, did little to conceal his end goal: obtaining the cosmetics and fragrance division for a bargain price. Bergerac confessed that he would not stand idly by while “bust-up artists” attempted “to take away [Revlon] at bargain-basement prices.” Pl.’s Reply Br. Supp. Mot. Prelim. Inj. 16 (quoting Steven E. Prokesch, Bergerac’s Sudden Reversal, N.Y. Times, Oct. 5, 1985, at Ex. B). To frustrate Pantry Pride’s efforts, special counsel for Revlon, Martin Lipton, recommended two defensive measures: First, that Revlon repurchase up to five

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million of its thirty million outstanding shares of common stock; and second, that the company adopt a Notes Purchase Rights Plan (effectively a “poison pill”). The Rights Plan authorized each shareholder to receive one note-purchase right (“right”) for each share of common stock and entitled the holder to exchange each share for a $65 principal Revlon Note at 12 percent interest. The rights would become effective when a bidder acquired beneficial ownership of at least 20 percent of Revlon’s shares, unless the bidder acquired all of Revlon’s shares for cash at $65 or more per share. In addition, the rights would not be available to the acquirer, and the Revlon Board could redeem the rights for 10 cents each at any time prior to an acquisition of 20 percent or more. Lipton explained that, in effect, the Rights Plan would compel potential raiders to negotiate with the Board directly rather than forcing a merger by acquiring a significant stake through shareholders, since no shareholder would tender for less than what Revlon would be offering them – namely, $65. The Revlon Board unanimously approved both defensive measures. Pantry Pride made its first hostile move on August 23 with a cash tender offer for any and all of Revlon’s shares at $47.50 per common share and $26.67 per preferred share. The offer was conditioned on Pantry Pride’s ability to obtain the $650 million necessary to finance the purchase as well as the renunciation of the Rights Plan, either judicially or by Revlon’s will. Three days later, on August 26, the Revlon Board met and agreed to advise stockholders to reject Pantry Pride’s offer as being inadequate. Given the large arbitrage holdings of the stock, however, Lipton feared that Pantry Pride would be able to acquire the shares at $47.50 unless the Board took further defensive measures. The Board spent the remainder of the meeting examining an exchange offer posed by management. On August 29, the Board authorized Revlon to repurchase up to 10 million of its common shares. As payment for each share, Revlon issued a Senior Subordinated Note (“Note”), with face value of $47.50, bearing 11.75 percent interest, and onetenth of a share of preferred stock with a value of $10, totaling a value of $57.50. The Notes would increase Revlon’s debt by $475 million and reduce shareholder equity, resulting in a decrease in the value of the shares not tendered in the exchange. The Notes contained covenants that limited Revlon’s ability to incur additional debt, sell assets, or pay dividends, unless such actions were approved by Revlon’s Independent Directors. Independent Directors was defined as “the non-management members of Revlon’s current board, and elected successors whom they had nominated.” Rifkind Aff. Opp’n to Pl.’s Mot. Prelim. Inj. } 26. By September 13, Revlon had accepted the full 10 million shares on a pro rata basis, tendered by approximately 87 percent of Revlon’s shareholders. Pantry Pride responded by terminating its initial offer and announcing a new tender offer three days later. Pantry Pride’s new offer stood at $42 per share, conditioned only upon receiving at least 90 percent of Revlon’s outstanding stock and accompanying rights. Pantry Pride did, however, indicate that it would consider buying less than 90 percent of the stock at an increased price if Revlon withdrew the Rights Plan. While on

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its face inferior to their initial proposal, Lazard described Pantry Pride’s new bid as essentially equal to their $47.50 proposal, in view of the completed offer. This prompted the Revlon Board to reject Pantry Pride’s offer at the September 24 meeting and to authorize management to undertake negotiations with other parties. Undeterred, Pantry Pride continued to make cash bids for the company. On September 27, in a letter to Bergerac, Pantry Pride offered $50 cash per share, subject to Revlon’s repayment of the rights and waiving of the Note covenants. In an October 1 letter, Pantry Pride raised its bid to $53 cash per share, conditioned on the Revlon Board’s immediate approval. Neither of Perelman’s letters, which had plainly evidenced Pantry Pride’s willingness to negotiate, received a response. On September 20, without waiting on approval from the Board to contact other potential buyers, Lazard requested that Theodore “Teddy” Forstmann’s firm, Forstmann Little, consider evaluating Revlon as a possible candidate for a leveraged buyout (“LBO”). Forstmann Little, however, was not in the market for a risky venture and conditioned any further discussion on the understanding that it would receive compensation “sufficient to make it worthwhile to engage in the process of analyzing the company, structuring a transaction, and committing its resources and reputation.” Forstmann Little Appellants’ Opening Br. 9. A proposal by Adler & Shaykin, another LBO firm, to buy Revlon’s cosmetics and fragrance division for approximately $900 million soothed Forstmann Little’s concerns. While Forstmann Little’s proposal was contingent on Adler & Shaykin’s purchase, Adler & Shaykin was proposing a purchase directly from Revlon and thus would not be conditioned on Forstmann Little’s deal. Therefore, an LBO of the remainder of Revlon at a price superior to Perelman’s seemed promising. On Thursday, October 3, the Revlon Board met to consider responses to Pantry Pride’s $53 cash per share offer. The Board unanimously approved an LBO with Forstmann Little, pursuant to which Revlon shareholders would receive $56 cash per share. Revlon management would have the ability to purchase an equity interest using proceeds from their golden parachutes. As part of the transaction, Forstmann agreed to assume the $475 million debt that Revlon had incurred in issuing the Notes. Revlon agreed to redeem the Rights Plan and also waive the Note covenants for Forstmann and for any bidder who was offering to pay more than $56 per share. To help finance the deal, immediately after the merger, Forstmann Little intended to sell Revlon’s Norcliff Thayer and Reheis divisions to American Home Products for $335 million. In addition, before the merger, Revlon would still be compelled to sell its cosmetics and fragrance division to Adler & Shaykin. Within a week of the announcement of the merger, and thus the waiving of the Notes covenants, the market value of the Notes had dropped significantly, from $100 to $87 – a decline of about $60 million below par. Responses from “irate” noteholders prompted Revlon Board members to believe that they had a “moral obligation” to restore the value of the Notes. Rifkind Aff. Opp’n to Pl.’s Mot. Prelim. Inj. } 42.

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Perelman countered with a new proposal on October 7, raising Pantry Pride’s bid to $56.25 per share, subject to the nullification of the rights, a waiving of the Notes covenants, and the election of three Pantry Pride directors to the Revlon Board. On October 9, representatives of Pantry Pride, Forstmann Little, and Revlon met to negotiate the fate of Revlon. Unbeknown to Perelman, Forstmann Little had been made privy to certain Revlon financial data and thus would not be negotiating on equal terms. At this meeting, Perelman claims, Arthur Liman – counsel to Revlon – proposed that Pantry Pride should acquire control of Revlon if, deprived of all nonpublic financial information, Pantry Pride would agree to sell Revlon’s Vision Care and National Health Laboratories segments to Forstmann Little for $530 million. Per Liman’s proposal, if Pantry Pride found the price to be inadequate after reviewing the 1985 results for those segments, it would be forced to abandon the deal and collect the $25 million break-up fee that had previously been offered to Forstmann Little. Unwilling to sell Revlon’s assets for a cheap price, Pantry Pride rejected the proposal. While no arrangement to divide Revlon between the two parties was secured at the meeting, Perelman announced that Pantry Pride was prepared to counter every Forstmann Little offer by $0.25. In light of the economic risks perceived and recent statements made by Pantry Pride, Forstmann Little told Lazard – Revlon’s investment banker – that it was reluctant to make a further offer. Accordingly, an opportunity to confer with Lazard and Revlon’s special counsel was arranged for that Friday. The next day, on October 12, armed with new information, Forstmann Little raised its bid to $57.25 per share offer, based on several conditions. First, refusing to be used as a stalking horse by Perelman, Forstmann Little demanded a lock-up option to purchase Revlon’s “crown jewel” Vision Care and National Health Lab divisions for $525 million – some $100 million to $175 million below the value ascribed by Lazard – if another bidder acquired 40 percent of Revlon’s shares. Revlon would also be required to accept a no-shop provision as well as, akin to the October 3 agreement, be required to remove the rights and Notes covenants. There would be a $25 million cancellation fee to be paid in escrow and released to Forstmann Little if the new agreement fell through or if another acquirer got more than 19.9 percent of Revlon’s stock. Finally, Revlon management would not participate in the merger as investors. In return, Forstmann Little agreed to support the par value of Revlon’s 11.75 percent Notes, which had faltered in the market, by exchanging the outstanding Notes with new ones at a higher interest rate. Forstmann Little demanded immediate acceptance of its offer; failure to do so would result in its withdrawal. The Board unanimously approved Forstmann Little’s offer, finding it superior to Pantry Pride’s offer in three regards: it was for a higher price, it protected the noteholders, and its financing was firmly in place. Regrettably, the reasons provided by the Board did little to conceal their desire to have Forstmann Little in the picture at all costs. First, although Forstmann Little’s offer represented $100 million in additional value to Revlon’s shareholders and noteholders, no director asked

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whether Pantry Pride, the very entity Revlon recognized would top every bid, had been instructed to submit its best bid for their consideration at that meeting. Nor did any director ask whether Pantry Pride ought to be invited to the meeting to submit its final bid. Perhaps because the directors were firmly opposed to the idea of Pantry Pride acquiring Revlon, they refused to entertain opportunities to develop Pantry Pride’s proposal. The Revlon Board claims that Forstmann Little’s financing was firmly in place. It is true that Forstmann Little’s offer was $1 more than Pantry Pride’s $56.25 bid. However, we must consider the nature of these offers. Forstmann Little’s deal required shareholder approval, which could easily take months to obtain. Pantry Pride’s offer was an immediate tender offer. As such, Perelman is correct that in considering the two offers, one must consider the time value of money when considering Forstmann Little’s offer. Further, at this time, about $400 million of Forstmann Little’s financing was still subject to two investment banks using their “best efforts” to organize a syndicate to provide the balance. Although Pantry Pride’s entire financing was not firmly committed at this point either, it did indicate that its investment banker, Drexel Burnham, was highly confident of its ability to raise the balance of $350 million by October 18. On October 14, Pantry Pride amended its August 22 complaint (which sought injunctive relief from the Rights Plan), challenging the lock-up, cancellation fee, and the exercise of the rights and Notes covenants. Pantry Pride additionally sought a temporary restraining order to prevent Revlon from placing any assets in escrow or transferring them to Forstmann Little. Moreover, Pantry Pride raised its bid on October 22, with a cash offer of $58 per share conditioned upon nullification of the rights, waiving the covenants, and an injunction of the Forstmann lock-up. The Chancery Court granted a preliminary injunction enjoining the lock-up and cancellation fee. Revlon and the Revlon Board have appealed. II

To obtain a preliminary injunction, a plaintiff must show both a reasonable probability of ultimate success on the merits and an irreparable injury if the court fails to issue the requested injunction. Gimbel v. Signal Companies, Inc., 316 A.2d 599, 602 (Del. Ch. 1974). Furthermore, the court must consider the element of balance and be satisfied that the “plaintiff’s need for such protection [must] outweigh any harm that the court can reasonably expect to befall the defendants if the injunction were granted.” Id. at 603. Today, we find that the Chancery Court acted properly in finding that Perelman and Pantry Pride met this standard. A We turn first to the Board’s fiduciary duties in this case. Mergers and acquisitions (M&A) and corporate governance have been experiencing a transformation in

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recent years. Most public company boards have had numerous long term members, and boards have acted simply as a rubber stamp on the CEO’s decisions and have not been expected to take an active role in corporate management. In addition, high-yield debt has become a popular financing mechanism and LBOs have emerged as a popular deal form. Moreover, until relatively recently, hostile transactions were practically unheard of and were considered uncouth. For obvious reasons, corporate boards do not hold hostile bidders in high regard; however, hostile transactions have become a more common part of today’s M&A landscape. It is against this quickly evolving landscape that we confront the complex maneuvers of this case. Although in the past, the norm was typically for boards to generally take a backseat to the CEO’s management, Delaware law provides that boards have the ultimate responsibility for managing the corporation. Del. Code Ann. Tit. 8 § 141(a). In exercising this responsibility, boards are expected to comply with their duties of loyalty and care to the corporation and its shareholders. These duties apply not only to decisions made in the ordinary course of business but also to extraordinary decisions, such as entering into an agreement to sell the company. As this Court recently made clear, the business judgment rule is the baseline standard applicable to all board actions, including a board’s decision to enter into a merger agreement, and arises out of the board’s management responsibility. Smith v. Van Gorkom, 488 A.2d 858, 872–73 (Del. 1985). When the business judgment rule applies, there is “a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Even in circumstances where there are no allegations of self-dealing, the board is under an obligation to make an informed decision. Van Gorkom, 488 A.2d at 873. When the board is confronted with a hostile acquisition, however, there is an “omnipresent specter that a board may be acting primarily in its own interests.” Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985). As such, a board’s actions in response to a hostile acquisition are subject to an enhanced scrutiny review before it may receive the benefit of the business judgment rule. More specifically, we very recently held in Unocal that a board must bear the burden of “show[ing] that [it] had reasonable grounds for believing that a danger to corporate policy and effectiveness existed” due to the threat. Id. at 955. We further stated that, in assessing the threat to the corporation, the board may consider the “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.” Id. But to be clear, the consideration of non-shareholder constituencies is not unique to hostile transactions. Even when the board is not presented with a hostile threat

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and is simply exercising its business judgment in the ordinary course of business, it should always consider non-shareholder constituencies. Considering constituencies such as employees, local communities, and the like is simply good for the business and, in turn, shareholders. See, e.g., Shlensky v. Wrigley, 237 N.E.2d 776, 780 (Ill. App. 1968) (wherein the court held that a baseball team could consider the longterm effects of installing stadium lights on the surrounding neighborhood and the possible effects of neighborhood deterioration on the team value). Once the danger is established, the board bears the burden of proving that the defense is “reasonable in relation to the threat posed.” Id. We further recognized that the board can satisfy its burdens by showing that it has engaged in a “good faith and reasonable investigation.” Id. (internal citations omitted) (quoting Cheff v. Mathes, 199 A.2d 548, 555 (Del. 1964)). In addition, “such proof is materially enhanced” when the approval is made by a “board comprised of a majority of outside independent directors.” Unocal, 493 A.2d at 955. Once the board establishes both a threat and the proportionality of the defense, the burden shifts to the plaintiff to show a breach of fiduciary duties. Moran v. Household Int’l, Inc., 500 A.2d 1346, 1356 (1985). B A primary inquiry in any business decision is whether a board of directors is independent and disinterested. This Court and the Chancery Court have often referred to independence and disinterestedness as intertwined concepts. See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (referring generally to independent disinterested directors). In this case, we should place emphasis on the distinction between these two concepts as well as on the nature of the decisions at issue. Traditionally, independence has focused on the stock ownership of board members and whether board members are also otherwise employed by the company. Furthermore, we have found that a lack of independence exists in situations in which directors of one company also serve as officers, directors, or employees of other companies within a corporate family. See Sinclair Oil Corp. v. Levien, 280 A.2d 717, 719 (Del. 1971). Conversely, interestedness implies a breach of the duty of loyalty and becomes relevant when, among other situations, self-dealing is at issue. We have recently explained that “[d]irectorial interest exists whenever divided loyalties are present, or a director either has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not equally shared by the stockholders.” Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984). Self-dealing and financial interests are not at issue in this case. The one director, Rifkind, who served on both the Revlon Board and the MacAndrews & Forbes Board resigned from the latter board once it became apparent that Pantry Pride was going to make a hostile offer. The record is devoid of any evidence that any board members would receive a personal financial interest that is not shared by other

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shareholders. This case is unique in that, as we articulated in Unocal, we are concerned with the “omnipresent specter that a board may be acting primarily in its own interests.” Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985) (emphasis added). Therefore, the real inquiry here is whether the Board is acting out of its “own interests” to perpetuate themselves or their friends in office. We harbor doubt as to whether the Revlon Board is interested in maintaining the status quo both from a managerial perspective and a social perspective, causing the Board to lack independence. The Chancery Court also “harbor[ed] doubt” regarding the independent nature of the Revlon Board. As previously noted, of the fourteen directors, six hold senior management positions, making them non-independent insiders. Of the remaining eight directors – who are theoretically “outside” directors because they do not hold management positions – there are two significant stockholders and four individuals who have been or remain connected to entities that have done business with Revlon. Significant stock ownership in this case does not call into question a board member’s independence or disinterestedness. In fact, we recognized this very fact in a situation involving the use of company funds to purchase shares of the same company. In that case, we stated, “[t]he mere fact that some of the other directors were substantial shareholders does not create a personal pecuniary interest in the decisions made by the board of directors, since all shareholders would presumably share the benefit flowing to the substantial shareholder.” Cheff v. Mathes, 199 A.2d 548, 554 (Del. 1964). Hence, holding significant blocks of stock in this case does not necessarily compromise a director’s independence. The same cannot necessarily be said for those directors who are associated with entities in business dealings with Revlon. Those individuals are potentially biased and thus not independent, as they have an interest in a business that could be impacted directly by a merger. This situation renders such directors potentially incapable of making an unbiased, independent decision on the merits of a merger, because they have a dog in the fight. In determining independence, we should consider factors beyond maintaining a managerial position. For example, we have previously recognized that there are “structural biases” and “unseen socialization processes” in corporate boards. Aronson, 473 A.2d at n.8. In the context of determining whether board members were independent and disinterested for purposes of demand futility in a derivative action, we have not taken these biases into account due to the difficulty of establishing such predispositions at that point in a Rule 23.1 complaint. Id. However, in a merger context such as the one we find here, we cannot ignore the specific biases a board may encounter in fighting off a hostile bidder or choosing among potential buyers. The problem is in identifying and determining whether such biases exist to the extent that they would cause directors to be prejudiced. Of course, we must be cognizant of human nature and that it is only natural that individuals tend to act in a way that best serves their own interests and the interests of

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their family and friends. Moreover, we are not ignorant of the fact that most board members become board members because of their networks and that those networks tend to have overlapping social circles. These overlapping social circles and friendships do not necessarily in themselves make board members non-independent. However, one must go beyond what is on the surface to determine whether the relationship would bias the board member. Moreover, the lack of diversity of the Revlon Board may have played a role, at least subconsciously, in the decision-making. The Board consists almost entirely of men, ranging in age from forty-nine to eighty-three years. The lone woman director, Mehle, obviously moves in the same social circles as her male cohorts and was nominated to serve on the Board due to her friendship with Revson. In the words of Revson, Mehle was specifically chosen to “represent the women’s point of view” due to her femininity. Although it is not directly an issue in this case, we are alarmed that in choosing Mehle to fill a board seat, Revson thus emphasized Mehle’s femininity rather than her qualifications. Would Mehle have been chosen if she did not possess stereotypical feminine characteristics? We also question how one woman on a fourteen-member board would have any impact on a male-dominated board’s decision-making. Although the sheer presence of one woman has the potential to change the tone and dynamics of a conversation, it would most likely prove insufficient to affect the outcome of a decision-making process, which would require a more robust gender balance. In any event, based on the facts before this Court, Mehle does not appear to have played any specific role in this transaction. Moreover, we are unable to determine the nature of the relationships among the Revlon Board members and between the Revlon Board and key members of management such as Bergerac. As we have previously described, what is clear is that the overwhelming majority of the Board consists of individuals who have served on it for many years. For example, both Rifkind and Bottner have served for an astounding twenty-nine years each, Woolard has served for twenty-four years, Burns has served for nineteen years, and Mehle has served for thirteen years. Moreover, Bergerac and Bennett have each served for eleven years, and Aldewereld and Simmons have served for nine years. Long-term board members bring a great amount of institutional knowledge to the table, which can be quite beneficial. However, long-term board service together inevitably builds relationships, friendships, and a degree of loyalty among board members as well as between the board and officers. A number of the Revlon directors served as directors under Revson and, foreseeably, these directors have a degree of loyalty to his hand-picked successor, Bergerac. The remainder of the Board was elected after Bergerac succeeded Revson. These “newer” members also may have a certain degree of loyalty to Bergerac and consequentially may defer to him. This is even more foreseeable when one considers the traditional role of directors generally in years past, in simply acting as a rubber stamp on the CEO’s decisions. Of course, to determine whether this is truly the case is difficult if not

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impossible, but we are not blind to the fact that these relationships may exist and may affect directors’ decision-making, either consciously or subconsciously. In the instant case, we do not need to delve into the granular details of these interpersonal relationships and how they may have affected the Board’s actions. Instead, the combination of long-term board service, directors holding managerial positions or holding interests in companies in business deals with Revlon, and the lack of diverse voices in the mix leads us to conclude that a majority of the Revlon Board is potentially biased in its decision-making and, accordingly, not independent in this case. C Having distinguished between the concepts of disinterestedness and independence, we now turn to the defensive mechanisms that the Board adopted in an attempt to ward off Pantry Pride’s offer. The first defensive mechanism at issue is the poison pill. As we very recently held, a board has every right to adopt a poison pill as part of its intrinsic management powers under 8 Del. C. § 141(a). Moran, 500 A.2d at 1353 (1985). Because the Revlon Board adopted the poison pill in response to Pantry Pride’s impending hostile tender offer, the question becomes whether the Board has satisfied its obligations under Unocal. Namely, the issues relate to the identification of a threat and the reasonableness of the pill in relation to the threat posed. Although we do not believe that the Revlon Board is independent, which would have materially enhanced its decision to adopt defensive mechanisms pursuant to Unocal, we are of the opinion that the Board satisfied its burden to prove there was a threat. Namely, the Board was faced with an impending hostile tender offer by Pantry Pride of $45 a share, which the Board deemed to be far below Revlon’s intrinsic value. Moreover, Perelman was a relative newcomer to the takeover scene, so he did not have an established track record, and – as Lazard advised – Pantry Pride was already highly leveraged. The threat was compounded by Pantry Pride’s likely utilization of junk-bond financing and a plan to break up the company postclosing. Accordingly, the Board acted in good faith and upon a reasonable investigation in determining that a threat to corporate policy and effectiveness existed. In addition, the poison pill was reasonable in relation to the threat posed. It did not completely prevent shareholders from receiving offers and was redeemable by the Revlon Board. In fact, the pill actually helped to impel Pantry Pride to raise its bids all the way to $58 per share. Accordingly, the Revlon Board’s adoption of the pill falls well within the parameters we envisioned in both Unocal and Moran and is protected by the business judgment rule. D The second defensive mechanism at issue is the exchange offer for 10 million of Revlon’s own shares. Like the poison pill, the exchange offer is subject to the Unocal

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enhanced scrutiny standard as it was implemented in response to the threat of a hostile takeover. More specifically, the Board authorized the exchange offer after Pantry Pride launched its hostile tender offer of $47.50 per common share. The Board determined that the $47.50 offer was inadequate and did not reflect Revlon’s value. In addition, based on Lipton’s advice, the Revlon Board was concerned that Pantry Pride may successfully acquire the shares at $47.50 because of the large arbitrage holdings of stock. As such, the Board acted in good faith and on a reasonable basis in determining that the hostile offer posed a threat to corporate policy and effectiveness. Under the exchange offer, shareholders had the choice of whether to participate and receive Notes in exchange for their shares. As is customary, the Notes contained traditional covenants restricting Revlon’s ability to incur additional debt, sell assets, or pay dividends unless such actions were approved by Revlon’s Independent Directors. “Independent Directors” was defined to include non-management directors and their successors. However, as we alluded to above, we question whether this definition truly captures whether these individuals would have been able to exercise their judgment in a non-biased fashion. As such, we also question whether the covenants could be effectively waived. However, our concern is overcome by the voluntary nature of exchange offer and by the fact that the shareholders were aware of Board members’ managerial positions, their stock ownership, and their related party transactions. We find that the Board’s adoption of the exchange offer was reasonable in relation to the threat posed and within the Board’s powers. E Our opinion of this saga changes on September 27, when Pantry Pride offered $50 cash per share and then subsequently raised its bid to $53 cash per share on October 1. At this point, Pantry Pride was in the “$50 range” that Bergerac had previously indicated Revlon was worth. Neither of those offers received a response from the Board. Instead, the Board sought out Forstmann and, on October 3, unanimously approved an LBO with Forstmann. In doing so, the Board provided Forstmann with information regarding Revlon that it refused to provide to Pantry Pride. We question whether this would have occurred had the Board not been dominated by a masculinity contest culture. Bergerac had earlier stated that Revlon was worth somewhere in the $50 range. But we suspect that he and the Board would not entertain Pantry Pride’s offer regardless, as doing so could be viewed as showing a weakness and “losing” to Pantry Pride. This was particularly the case after Bergerac unequivocally stated that he would never permit Pantry Pride to acquire Revlon “under any circumstances.” Perelman Aff. } 3. Allowing Pantry Pride to now acquire Revlon would be losing the battle, in Bergerac’s view. The Chancery Court and the appellee brief classify Forstmann as a “white knight.” Indeed, this term has become popular in mainstream hostile takeover

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vernacular and is a take-off from children’s stories, where a knight in shining armor comes running in on horseback to “save” the helpless, distressed princess trapped in a tower. Revlon no more needs “saving” than the princess in those tales. The notion that neither the princess nor Revlon could help themselves is simply not true. Classifying the princess as helpless simply due to her gender is no more accurate than classifying Revlon as helpless. Indeed, Revlon was far from helpless, as it has exhibited through the defensive measures it has taken. Moreover, we take issue with Forstmann embracing the role of a savior and using his position to attempt to purchase Revlon at a discount. This is not a child’s fairy tale; it is big business. This Court disagrees with both the term “white knight” and with the idea that a successful business like Revlon would need “saving.” Moreover, the term has racial connotations, with white being associated with “decency and purity” while black is associated with “evil and disgrace.” Douglas Longshore & Robert Beilin, Interracial Behavior in the Prisoner’s Dilemma: The Effect of Color Connotations, 11 J. Black Stud. 105, 105 (1980) (listing “white knight” as an example of words associated with “decency and purity”). Although we understand that the term “white knight” is commonly used by M&A practitioners, we are of the opinion that the Chancery Court’s adoption of the term is particularly harmful, as it perpetuates a misogynistic and racist narrative and incorrectly relays a message that the term is acceptable. What is clear to us is that Forstmann Little was the favored bidder for a number of reasons, including the fact that Forstmann Little simply was not Pantry Pride, to whom Bergerac vowed never to sell. Namely, unlike Perelman, Teddy Forstmann and his firm were known to Bergerac and the Board, and it appears that they were in the same social circles. In addition, management would have an equity stake in Forstmann Little’s initial deal and at least Bergerac would likely continue in an executive capacity. These factors again cause us to question Bergerac and the other Board members’ interest in the Forstmann Little transaction and their lack of interest in the Pantry Pride offer. Finally, Forstmann Little agreed to assume the debt that Revlon had incurred in issuing the Notes. It is also clear to us that once Pantry Pride raised its bids into the “$50 range” and Revlon sought out Forstmann, Revlon was thus inevitably going to be sold and broken up post-closing. The only question at that point was to whom Revlon would be sold. As the lower court stated, when the Board chose to enter into an agreement with Forstmann Little, it knew “it was not merging with an operating company but with a firm which specialized in leveraged buyouts . . . [which] did not have a long term ‘home and family’ relationship in mind.” MacAndrews & Forbes v. Revlon, Inc., 501 A.2d 1239, 1248 (Del. Ch. 1985). In fact, just to do the transaction with Forstmann Little, Revlon agreed to sell its cosmetics and fragrance division to Adler & Shaykin. The Board also was well aware that Forstmann Little would further break up Revlon after the purchase was complete. This was not only far from what Mr. Revson had envisioned for his beloved company but, more importantly, it would also have

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potentially detrimental impacts on Revlon’s non-constituency shareholders, such as its employees, their families, and the local communities in which these employees lived. To be sure, any sale of a company has these potential ripple effects, but to favor Forstmann Little over Pantry Pride on this basis is insincere. Like Forstmann Little, Pantry Pride also did not have a “long term ‘home and family’ relationship in mind.” But, unlike Forstmann Little (and the Revlon Board), Perelman and Pantry Pride intended to keep and operate Revlon’s core cosmetics business, the very business that has made Revlon a household name worldwide. As such, at this point in time, there was a fundamental shift in the Board’s duties. The Board was no longer protecting the corporate enterprise against a break up. Indeed, under both the Forstmann Little- and Pantry Pride-proposed deals, Revlon was going to be broken up. Instead, the Board’s obligation was to maximize the value at which Revlon would be sold. Although this obligates the Board to take reasonable steps to extract the highest bids from all potential bidders, value includes more than just a focus on the highest bid. For example, maximizing value includes such factors as goodwill and longer-term plans for the company. In this case, the fact that Pantry Pride plans to keep the very business that has made Revlon a household name is pertinent, and it reveals the potential for value maximization. As such, the Board acted improperly in refusing to provide Pantry Pride with the same information it provided to Forstmann Little. III

This brings us to the lock-up option, the no-shop provision, and the cancellation fee contained in the October 12 agreement with Forstmann Little. The potential chilling effects of these defensive mechanisms must be considered in light of the Board’s altered duties at this point. As previously noted, the Board was no longer fending off a hostile bidder bent on breaking up the company. Indeed, Revlon was going to be broken up either way. As such, we must consider whether these devices aided or impeded in maximizing the value that shareholders would receive. We are of the opinion that these devices fall into the latter category. In adopting these devices, the Board argued that it was protecting noteholder interests. As we previously made clear, boards may consider non-shareholder constituencies’ interests in exercising its business judgment and in adopting protective mechanisms in response to hostile threats. However, the Board erred here in prioritizing these noteholders, who are unrepresentative of non-shareholder constituencies in general. Unlike shareholders (and, indeed, some other constituencies), noteholders are protected in contract. Moreover, the shareholders who exchanged their shares for Notes did so willingly. They did so knowing the terms of the Note covenants, and they did so knowing about the Board’s lack of independence. This characterization may be far less apt for other non-shareholder constituencies, who may not have the same degree of information, sophistication, or

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contractualization of their relationship with the company as did these noteholders. The Board did not have a “moral obligation” to the noteholders simply because the latter hold Revlon debt – which debt we note was created by the Board as a way of warding off Perelman. In addition, although creative, the Board’s argument that the noteholders are former stockholders and that some noteholders are also still stockholders falls flat. Noteholders and stockholders are two different categories of investors and are owed different duties. We will not revise corporate law to create a new set of fiduciary duties for noteholders who were formerly or are concurrently stockholders. Furthermore, we are dismayed that the Board would create notes, engage in an exchange offer, and then argue that the noteholders’ rights should be put before the shareholders’ rights. This is disingenuous, reeks of self-interest, and demonstrates a lack of respect for corporate law. We will not permit the standard we set forth in Unocal to be manipulated in such a way. Therefore, although there are no arguments before us now regarding nonnoteholder, non-shareholder constituencies, we want to nonetheless seize this opportunity to clarify that our refusal to consider the noteholders’ interests in this case is not intended to be dismissive of all non-shareholder constituencies’ interests in the context of change-of-control transactions. The first defensive device we must consider is the lock-up option that gave Forstmann Little the right to purchase Revlon’s “crown jewel” Vision Care and National Health Lab divisions at the discounted rate of $525 million, if another bidder acquired 40 percent of Revlon shares. Lock-up options like this one are not per se illegal. They have been used and upheld as reasonable recently in another Delaware case. See Thompson v. Enstar Corp., 509 A.2d 578, 583 (Del. Ch. 1984). The promise of a lock-up option can draw otherwise hesitant bidders into an auction or other bidding process. If bidders are told in advance that the bidder with the highest bid will be rewarded with a lock-up option, that can certainly aid in extracting bidders’ highest bids. Consequently, the value being received for the company would be maximized. The problem, however, in this case is that the Board did not utilize the lock-up option in that manner. In fact, it was just the opposite here. The Board was so bent on not doing a deal with Pantry Pride and trying to serve its own interests, it backed itself into a corner. Forstmann Little was able to take advantage of its position and require the lock-up option (and other devices) as a prerequisite to moving forward with a deal. The lock-up option here shut down bidding and, if not enjoined, could have prevented shareholders from receiving higher value for their shares. The Board had already brought Forstmann in on a preferred basis. It was improper for the Board to agree to a lock-up and not offer the same incentive to Pantry Pride. Like lock-up options, no-shop provisions are not per se illegal. The no-shop contained in Section 6.1I of the amended merger agreement prevents Revlon from actively soliciting or encouraging third-party offers. It also prevents Revlon from participating in negotiations with third parties regarding an offer, from furnishing

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information to third parties, and from otherwise facilitating or encouraging thirdparty offers. In essence, by agreeing to this provision, the Revlon Board prematurely bound Revlon to Forstmann Little and prevented itself from being able to consider any other offers. It effectively shut down communications with Pantry Pride at the exact time it knew that Pantry Pride would continue to bid incrementally higher. Moreover, the no-shop provision requires Revlon to provide Forstmann Little with any other offers, including the identity of the person making the offer, the offer’s terms, and any other information Forstmann Little might request. If the nosolicitation and no-negotiations portions were not significant enough, this requirement to provide information to Forstmann Little further gives Forstmann Little a leg up. Like the lock-up option in this case, the Board used the no-shop provision as a way of favoring Forstmann Little to the exclusion of Pantry Pride (and any other third parties who might be interested in jumping into the bidding war). Although the Board had authorized negotiations with other parties, it effectively foreclosed those negotiations by agreeing to the no-shop provision. As with the lockup option, the Board invoked the no-shop as a way of favoring Forstmann Little at the very time it should have been working to determine who would be willing to submit the offer representing the most value for shareholders. Instead, the Board tied its hands and as such breached its fiduciary duties to Revlon and its shareholders. Finally, the cancellation fee, also known as a termination fee, had similar effects as the lock-up option and the no-shop provision. The fee was placed in escrow and would be released to Forstmann Little if the agreement was terminated or if another acquirer obtained more than 19.9 percent of Revlon’s shares. So, for example, if Pantry Pride succeeds in acquiring a substantial stake (more than 19.9 percent of Revlon shares) in Revlon via its tender offer, the fee will become payable. Similarly, if Revlon terminates its agreement with Forstmann Little to enter into an agreement with Pantry Pride, the termination fee will become payable. In such a scenario, although Revlon would pay the fee out of the escrowed funds, Pantry Pride would ultimately bear the fee as the acquirer of Revlon. Hence, in calculating the amount it is willing to pay for Revlon, Pantry Pride (or any other third parties) must take the fee into consideration and value Revlon more than the Forstmann Little offer does, plus the fee. Consequently, the fee made doing a deal with Revlon more expensive. However, the fee represents money that would go to Forstmann, not to the shareholders. Accordingly, by being so intent on winning this battle against Pantry Pride at any cost, the Board is actually taking value away from the shareholders. Like with the other devices, the Board clearly used the cancellation fee as way of favoring Forstmann. We agree with the Chancery Court’s decision to enjoin the fee and find that it was not an abuse of discretion. Moreover, in considering the lock-up option, the no-shop, and the cancellation fee together, the Board was erecting every barrier possible to avoid being purchased by Pantry Pride. The Board was so blinded by its dislike of Perelman and Pantry Pride and its intent to “win” on its own terms and seemingly at any cost that it placed

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its own interests before the interests of the company and its shareholders. By agreeing to these devices, the Board is affirmatively taking money out of the shareholders’ pockets and instead attempting to give those funds to Forstmann. We find this action particularly harmful because Forstmann has every intention of breaking up Revlon. In fact, the deal with Forstmann Little requires Revlon to sell off the cosmetics division, which is the very essence of the company. By favoring a bidder who may potentially harm the company in the long term for no reason other than their own pride, the Board is breaching its fiduciary duties. IV

Based on the foregoing, we are of the opinion that Perelman and Pantry Pride have met the burden of showing a reasonable probability of ultimate success on the merits. As the Chancery Court determined, if it did not grant the preliminary injunction, Pantry Pride would not have the ability to bid for Revlon. Moreover, the shareholders and the market should have the opportunity to weigh both Pantry Pride’s and Forstmann Little’s bids. Cutting off the bidding process at this point could result in a loss to the shareholders. This case involves exceedingly complex transactions and maneuvers by both Pantry Pride and Forstmann Little. In addition, the Revlon Board has erected significant barriers to Pantry Pride’s ability to obtain a meaningful legal remedy. Thus, we are satisfied that Pantry Pride’s need for protection outweighs any harm to the defendants. V

This complex case of first impression contains a number of subsidiary holdings, which will likely have far-reaching effects on M&A jurisprudence and dealmaking well into the future. We first take this opportunity to distinguish between director independence and disinterestedness. The latter, disinterestedness, considers whether there is a breach of the duty of loyalty and becomes relevant, in among other situations, when self-dealing is at issue. The former, independence, traditionally focuses on board members’ stock ownership and other positions held by board members within the corporation. The relevant question in this case is whether the Board members were acting out of their “own interests” to perpetuate themselves or their friends in office and, accordingly, were unable to exercise independent decision-making. The combination of long-term board service, directors holding managerial positions, holding interests in companies in business deals with Revlon, and the lack of diverse voices being heard leads us to conclude that the Board was likely biased in its decision-making process, acting out of its “own interests” to perpetuate board members or their friends in office, and thus not independent. We then address the Board’s adoption of a poison pill and exchange offer to ward off Pantry Pride’s hostile tender offer. We note that a board has the right to

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implement a poison pill as part of its innate management powers so long as that board carries its burden under Unocal. Namely, it must show a threat to corporate policy and effectiveness stemming from a third-party offer and that the defensive mechanisms adopted in response are reasonable in relation to the threat posed. We do not believe the Revlon Board was independent; indeed, independence would have strengthened the Board’s argument in the question of whether its adoption of defensive mechanisms was reasonable. However, we find that the Board properly satisfied its burden of proving that there was a threat to corporate policy and effectiveness stemming from Pantry Pride’s offer. Moreover, we find that the poison pill was reasonable, as it did not completely foreclose shareholders from receiving offers and was redeemable by the Revlon Board. Furthermore, the pill actually drove Pantry Pride to raise its bids to $58 per share. Accordingly, the business judgment rule protects the Board’s adoption of the pill. In addition to the poison pill, the exchange offer for 10 million of Revlon’s shares was reasonable in relation to the threat at issue and was within the Board’s powers. At the time of the adoption, the Board determined that Pantry Pride’s $47.50 offer was inadequate and did not reflect Revlon’s value. Moreover, the exchange offer was voluntary in nature, with shareholders having the choice whether to exchange their stock for Notes or to remain only as stockholders. Accordingly, the Board’s adoption of the exchange offer fell within the protection of the business judgment rule. As bidding between Pantry Pride and Forstmann Little progressed in this case, it became clear that Revlon was going to be sold and that the only question was to whom. At that point, the Board’s duty changed from protecting Revlon as a corporate entity to maximizing value at a sale of control. Although value maximization requires that the Board take reasonable steps to extract the highest bids from all potential bidders, value includes more than just a focus on the highest bid. In determining value, boards should take a broader view and consider the potential impact of each bid, including goodwill and longer-term plans for the company. In this case, the fact that Pantry Pride planned to keep the very business that has made Revlon a household name is pertinent, and it reveals the potential for value maximization. As such, we found that the Board breached its fiduciary duties in shutting out Pantry Pride and not considering Pantry Pride’s bids. In shutting out Pantry Pride, the Board adopted a lock-up option, a no-shop provision, and a cancellation fee. Although each of these devices is not per se illegal, the Board used them in a manner that hindered value maximization. By granting these devices, the Board treated Forstmann Little on a preferred basis. These actions are particularly detrimental to Revlon’s shareholders, as Forstmann clearly has the intention of breaking up Revlon. This is evident not only from his plans for the company but also from the fact that the Board is required to sell the very core of the company, the cosmetics division, prior to the Forstmann Little deal closing. In short, the Board was pulling every possible trick out of its hat because it was determined to

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follow through on Bergerac’s statement that Revlon would never be sold to Pantry Pride. The Board breached its fiduciary duties by putting its own pride above the interest of its shareholders. AFFIRMED. It is so ordered.

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7 Commentary on Agreement between Harvey Weinstein and The Weinstein Company Holdings LLC, as of October 20, 2015 alexandra andhov

INTRODUCTION

This commentary addresses the Employment Agreement between Harvey Weinstein and The Weinstein Company Holdings LLC (“TWC” or “the Company”), dated October 20, 2015 (the “Agreement”).1 In 2015, Weinstein was the co-chair and CEO of TWC, and the Agreement offered revised terms and conditions of his continued employment with TWC. The Agreement was signed by Weinstein both on behalf of TWC and for himself. This commentary provides context for, and critical analysis of, the Agreement, as well as the rewritten feminist agreement drafted by Professor Susan Chesler, writing as TWC’s General Counsel (the “Rewritten Agreement”). This commentary briefly reviews some of the contractual provisions that sustained Weinstein’s behavior and analyzes Chesler’s proposed changes to those provisions and others, after first providing context for the power dynamics among Weinstein, the TWC Board, Hollywood figures, and the political circles within which Weinstein expanded his influence.2 The commentary concludes with an assessment of the potential impact of Chesler’s Rewritten Agreement. BACKGROUND

The Agreement is but one of several ways in which Weinstein obtained and maintained his power over TWC, Hollywood, and even politics. In order to understand how Weinstein obtained and maintained this power and continued his sexual 1

2

Exhibit B (Employment Agreement by and between Weinstein and TWC, dated Oct. 20, 2015) to First Amended Class Action Complaint, Geiss et al. v. The Weinstein Company Holdings LLC et al., 2018 WL 7916226, para. 428 n.139 (S.D.N.Y.) See generally Shawn Tully, How a Handful of Billionaires Kept Their Friend Harvey Weinstein in Power, Fortune (Nov. 19, 2017), https://fortune.com/2017/11/19/weinstein-scandal-boardbattles/.

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predation unfettered for so long, it is critical that we first understand TWC’s governance, capital structure, deals, and growth, including the Agreement, in the broader context of his career in film and his political activity. The timeline3 shown below sets forth that background and additionally provides some of the cultural backdrop that is relevant to our discussion.

1979–2005

1995–2016

2005

3

The predecessor to TWC, Miramax Films (“Miramax”), was founded in 1979 by Weinstein and his brother Bob (the “Weinstein Brothers”). In the years following its founding, Miramax produced many films notable in Western popular culture, including Shakespeare in Love (1998). At the 71st Academy Awards ceremony organized by the Academy of Motion Picture Arts and Sciences (the “Academy”), Shakespeare in Love upset Saving Private Ryan, produced by Stephen Spielberg’s DreamWorks Pictures. The win was credited to Weinstein’s aggressive campaigning, for which he became notorious. Weinstein himself also won Best Picture as a producer of Shakespeare in Love. The Walt Disney Company purchased Miramax in 1993, and in 2005 the Weinstein Brothers departed Miramax due to personality and management conflicts with Disney’s then-Chief Executive Officer, Michael Eisner. At the start of then-President Bill Clinton’s re-election campaign in 1995, Weinstein made his first contribution to the Clinton family. Weinstein expanded his influence in the 2000s by financially supporting other prominent Democratic politicians and the Democratic legislative agenda. During the same period, he also continued to build close ties with the Clintons, culminating with his $1.4 million donation to Hillary Clinton’s 2016 campaign as the Democratic Party’s presidential candidate. Goldman Sachs helped to raise capital for TWC, and TWC was founded with $950 million in capitalization. Half of the equity was held by the Weinstein brothers equally, in “W” shares, and the remaining half was held by a syndicate of investors (including Goldman Sachs) represented by the “A” shares. The W shares were represented by three directors on TWC’s board: the Weinstein brothers and Richard Koenigsberg. From 2005 until his resignation in October 2017, Koenigsberg held the third seat representing the W shares. The A shares were represented by an additional three directors, and three more “independent” directors on the board were usually handpicked by Weinstein. Weinstein’s first five-year employment contract (the “2005 Agreement”), the original predecessor to the Agreement, mandated that all future employment contracts must include “equal or better terms” and provided for termination on only two grounds: (1) a conviction for a felony involving “moral turpitude” or (2) for a major misuse of TWC funds (although Weinstein was granted a “cure period“ in which to

Anne Choike, Embedded Corporations (Working Paper, 2021) (internal citations omitted).

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2009

2010–11

2014

February 2015

March 26, 2015

2015

September 2, 2015

September 4, 2015

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refund the money). As a private transaction, the 2005 Agreement remains unavailable publicly. The New York Times and other media reported on TWC’s struggles, including litigation over the distribution of Project Runway, a popular American reality television series that focused on fashion design and was coproduced by Miramax and TWC, among others. The Project Runway litigation settled for an undisclosed sum. TWC hired financial advisers whose job was to help troubled organizations restructure. TWC exchanged debt for a large portion of its equity and received a bridge loan estimated at $75 million from the hedge fund of Weinstein’s friend, Dirk Ziff. Weinstein’s employment contract expired at the end of 2010 and was renewed on the same favorable terms as the 2005 contract, despite TWC’s struggles. The King’s Speech was released and distributed by TWC in 2010; in 2011, the film was nominated for twelve Academy Awards (the most among all films that year) and won four, including Best Picture. A TWC executive revealed to one of TWC’s A-share directors, Lance Maerov, that Weinstein was misusing funds for personal purposes. Maerov, together with another A share director, Tarak Ben Ammar, launched a “proxy contest” for the third A share seat. They lost when Ziff was named to the seat and was installed as the third A share director, effective in 2015. Weinstein refunded $6.86 million for use of TWC’s credit facility and $75,000 for dresses he purchased from the fashion brand Marchesa, which was co-founded and led by his wife, Georgina Chapman. Weinstein also agreed to provide a $700,000 payment to TWC as compensation for the time and services that TWC employees spent on his personal projects. Ambra Battilana Gutierrez was among the first of more than 100 actresses or models who would report rape, sexual assault, or harassment by Weinstein. She alleged to New York City police that Weinstein had groped her during a meeting in his office. Jeff Sackman, the other member of the compensation committee in addition to Maerov, resigned amidst acrimonious negotiations over the renewal of Weinstein’s employment contract, leaving only Maerov on the committee. Ben Ammar and Maerov pushed the shareholders not to extend Weinstein’s employment contract and to amend the TWC bylaws to reduce the power Weinstein had by virtue of holding the “W shares. Ben Ammar and Maerov lost on both issues. TWC adopted, at the urging of Maerov and Ben Ammar – and over Weinstein’s objections – a basic Code of Conduct and Ethics, which applied to all TWC senior officers and board members. Weinstein failed in lobbying for a personal exception from the Code of Conduct. Attorney Rodgin Cohen issued a four-sentence letter stating TWC did not have liability resulting from any information in Weinstein’s personnel file. The letter was written as a compromise after Weinstein’s lawyer, David Boies, rebuffed the TWC board’s requests to review Weinstein’s personnel file following the surfacing of the Gutierrez allegations.

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October 2015

October 21, 2015

2016

2017

October 5, 2017

October 8, 2017

October 14, 2017

October 15, 2017

October 17, 2017 2018

A deal to purchase TWC’s TV unit for $950 million fell through. Maerov, Ben Ammar, and other TWC directors suspected that the Gutierrez scandal was the cause. TWC’s board voted to again renew Weinstein’s employment contract, and the Agreement was executed. The Agreement’s term of renewal was three years, starting on January 1, 2016, until December 31, 2018. President Barack Obama’s daughter, Malia, interned with TWC. Democratic Party presidential candidate Hillary Clinton lost to the Republican Party presidential candidate Donald Trump, despite The Washington Post having published a 2005 video of Trump having a lewd conversation about “grabbing [women] by the pussy.” TWC’s board considered splitting TWC into two separate companies operated by the Weinstein Brothers to address their longstanding acrimonious relationship. The effect of the brothers having veto power over one another’s expenses meant that neither one was able to rein in the other. The New York Times published a report detailing the extensive allegations of abuse and harassment against Weinstein. Subsequently, TWC’s board called an emergency meeting regarding the revelation of Weinstein’s sexual wrongdoing. During the meeting, director Paul Tudor Jones (a Weinstein board appointee) expressed concern over tripping a material default on TWC’s debt by firing Weinstein. Over the weekend following the publication of the New York Times article, four TWC directors, all chosen by Weinstein, quit the board. TWC’s board, including Bob Weinstein, officially fired Weinstein after more than a hundred women came forward. The only director who refused to sign the press release granting Bob Weinstein control of the company was Jones. Weinstein was expelled from the Academy. As of October 2017, Miramax and TWC had produced or distributed films that were nominated for 341 Academy awards and won 81. These awards were considered a key part of the source of Weinstein’s power in Hollywood. Prompted by the allegations against Weinstein, actress Alyssa Milano used the phrase “me too” in a Twitter post about sexual harassment and assault. (She was unaware that Tarana Burke had first used the phrase “Me Too” in 2006 to promote awareness of sexual abuse of women of color.) The #MeToo hashtag went viral. Weinstein resigned from TWC’s board, still retaining an ownership stake. The New York state prosecutor filed suit against TWC. TWC filed for bankruptcy and was ultimately bought in bankruptcy proceedings. Ivona Smith, a company consultant, joined the board as its only woman. The Agreement was published in a class action lawsuit against TWC after plaintiffs successfully argued that it was relevant for the purpose of trying to establish knowledge and awareness of the TWC board and subsequent vicarious liability for Weinstein’s actions. The same year, Brett Kavanaugh became an Associate Justice of the United States Supreme Court after high-profile and contentious confirmation hearings, in which he was accused by Christine Blasey Ford of sexually assaulting her while they were both in high school.

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ORIGINAL AGREEMENT

The Agreement represented one of the contractual tools through which Weinstein maintained his control over TWC and its board. The summary below focuses on the sections that were revised in the Rewritten Agreement: Reporting and Oversight, Indemnification, Code of Conduct, and Termination for Cause. Each provision’s discussion also includes a brief statement of the default corporate law at the time that would have operated in the absence of the provision. While the Agreement was governed by New York law,4 TWC itself was a Delaware limited liability company, and therefore Delaware law generally provided the default law governing the relationship between Weinstein and TWC.

Reporting and Oversight Under Delaware law, limited liability companies such as TWC are “creatures of contract,”5 and they can – and often do – entirely disclaim the fiduciary duty of care in the limited liability company agreement, limiting fiduciary duties to those expressly outlined in the agreement.6 The default fiduciary duty of care provided by statute would require a board to exercise reasonable oversight of the company. Under corporate law, boards of directors are required to monitor operations and implement an information and reporting system to comply with the duty of care.7 In the case of TWC, the Agreement stipulated that the employees should report to Bob Weinstein, whereas the Weinstein Brothers should report solely and directly to the Board – the same board on which the Weinstein Brothers served as co-chairs and that supervised the actions and inactions of Weinstein, himself a CEO. This structure reinforced Weinstein’s unchecked power.

Indemnification Delaware law provides for mandatory indemnification of a director or officer who defends a corporate action.8 However, directors and officers are only indemnified if they are “threatened to be made a party to any threatened, pending or completed 4

5

6 7

8

Oct. 20, 2015 Employment Agreement of Harvey Weinstein (as cited in Geiss et al. v. The Weinstein Company Holdings LLC et al., 2018 WL 7916226, para. 428 n.139 (S.D.N.Y.)). TravelCenters of Am., LLC v. Brog, No. CIV.A. 3516-CC, 2008 WL 1746987, at *1 (Del. Ch. 2008). Del. Code Ann. tit. 6, § 18-1101(c) (West). See generally In re Caremark Int’l, Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996). Exceptions to the Caremark rule may include a provision in the certificate of incorporation “eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty” as well as other specific liability waivers. Del. Code Ann. tit. 8, § 102(b)(7) (West). See Del. Code Ann. tit. 8, § 145(a) (West 2020).

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action . . . whether civil, criminal, administrative or investigative . . . by reason of the fact that the person is or was a director, officer, employee or agent of the corporation. . . .”9 This indemnification is “against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement” and in connection with the action where the person “acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation” (emphasis added). In the case of TWC, the seventh section of the Agreement afforded an extremely broad indemnification for Weinstein,10 while it simultaneously stipulated that Weinstein “shall be entitled to a presumption that [he] acted in good faith.”11 There were two concerning elements in the indemnification clause. The first was its breadth, as it covered “expenses, including attorney’s fees . . . , judgments, fines, and any amount paid or to be paid in any settlement, and all cost of any nature” (emphasis added). The second was the presumption of Weinstein’s good faith and actions in the best interest of the TWC. Under that clause, a presumption of good faith, along with the obligation to front the attorney’s fees, attached automatically. The right of corporate officers and directors to obtain reimbursement for expenses incurred in connection with a lawsuit arising out of services as a director is of obvious importance to the attraction and retention of competent professionals.12 While Delaware law provides for mandatory indemnification of a director or officer who defends a corporate action,13 no reimbursement should be unlimited, and no action should be considered uncritically. Indemnification rules should include clear boundaries and strict safeguards to balance warranted indemnification for activities that arise out of one’s role for the benefit of an organization versus unjustified indemnification for one’s private misconduct.14

Code of Conduct Codes of conduct are non-charter, non-bylaw corporate documents that are intended to regulate the behavior of corporate agents – especially the principal executive and financial officers – by promoting ethical and honest conduct,

9 10 11 12

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Id. See Section 7 of Harvey Weinstein’s 2015 Employment Contract. Id. See Fidelity Fed. Sav. & Loan Ass’n v. Felicetii, 830 F. Supp. 262, 266 (E.D. Pa. 1993) (the decision states that the purpose of indemnification agreements is to encourage capable individuals to serve as corporate directors, while securing that expenses incurred by them in upholding their honesty and integrity as directors.). See Del. Code Ann. tit. 8, § 145(a) (West 2020). See Sokola v. Weinstein, No. 20-CV-0925 (LJL), 2020 WL 3605578, 68 Bankr. Ct. Dec. 246 (S.D.N.Y. 2020), where no indemnification was granted, as the indemnification claim was based on activities outside Robert Weinstein’s role with TWC or its affiliated entities.

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compliance, transparency, and accountability.15 Delaware law does not explicitly require that companies adopt a code of conduct, but the Sarbanes-Oxley Act of 2002, New York Stock Exchange, and NASDAQ Stock Market exchange listing rules all set forth requirements regarding codes of conduct for publicly traded companies.16 Although private companies like TWC are not bound by such rules, codes of conduct are nonetheless considered an important element of a robust compliance program.17 As described in the timeline above, TWC adopted a Code of Conduct and Ethics18 over the objection of Weinstein in September 2015 and included an “incredibly unusual” reference to the Code of Conduct in the Agreement.19 According to some of TWC’s directors, the Code of Conduct and Ethics was adopted to rein in Weinstein after other attempts to do so – such as changes to TWC’s broader governance structure – had failed.20 The Code of Conduct and Ethics, and not the Agreement, ultimately provided authority to the TWC Board to officially terminate Weinstein following the public disclosure of his sexual predation.21 In the Agreement, the section titled “Code of Conduct” stipulated that if Weinstein was “sued for sexual harassment or other ‘misconduct’” that resulted in a settlement or judgment against TWC, he was to reimburse TWC in full and then pay liquidated damages of “$250,000 for the first such instance, $500,000 for the second such instance, $750,000 for the third such instance, and $1,000,000 for each additional instance.” In other words, as long as Weinstein paid the stipulated amount, the payment might be considered to constitute a “cure” for his misconduct, and the Board would not take any further action against him. Based on those contractual terms, the Company allowed misconduct, assault, or rape, for a “reimbursement” fee. The reimbursement was to be made to the Company, which ultimately was owned by Weinstein. Despite this interpretation, some may see the clause as an “escalator clause,” in which for each wrong decision, the price is increased; thus, it might be expected to discourage misconduct.

15 16 17

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Cathy Hwang & Yaron Nili, Shadow Governance, 108 Calif. L. Rev. 1097, 1114 (2020). Id. Geoffrey P. Miller, The Compliance Function: An Overview, NYU Law and Economics Research Paper No. 14-36, at 12 (Nov. 18, 2014). See Exhibit B (Code of Conduct, attachment to October 20, 2017 Response from TWC Counsel to Harvey Weinstein / Inspection Demand on TWC) to Complaint, Harvey Weinstein v. The Weinstein Company Holdings LLC, No. 18-10601-MFW (Del. Ch. 2018). Richard Morgan, Harvey Weinstein’s Contract Gave Him Outs for Harassment Claims, N.Y. Post (June 6, 2018), https://nypost.com/2018/06/06/harvey-weinsteins-contract-gave-him-outsfor-harassment-claims/ (“An entertainment executive described Weinstein’s contract as ‘incredibly unusual. It’s unusual,’ he said, ‘because companies don’t usually hire people where you have to clarify these things.’”). Tully, supra note 2. Tully, supra note 2 (“Under the old contract, we couldn’t fire him until he was convicted of sexual assault,” says [TWC director] Ben Ammar.”).

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Regretfully, the provision failed to deter misconduct and instead stipulated the price for abuse.22 The Code of Conduct section offered Weinstein “a way out of almost any harassment claim.”23 The contractual provision allowed Weinstein to engage in sexual misconduct with impunity as long as such behavior did not cause serious harm to the company. The provisions were unique for an employment contract and arguably reflected the Board’s knowledge of Weinstein’s activities. Stephen Bainbridge has argued that a board presented with red flags has a duty to investigate under the Caremark theory; the Board of TWC seems to have been aware of red flags given the content of Weinstein’s employment agreement.24 The provision ignored, in its entirety, feminist ethics and the “ethic of care.”25 Feminist ethics is a broad area of study with various themes, such as power, morality, and gender; it also amplifies the method through which ethics is conducted.26 Feminist ethics combines normative and applied ethics, envisioning what ought to be, while recognizing actual social practices.27 The Code of Conduct provisions placed a price tag on the value of women’s sexual abuse, their experience. The clause itself was simply immoral. Although the escalator clause might have seemed rigorous, in reality, even when Weinstein would pay the reimbursement, part of the money would come back to him because he was one of the owners of TWC. Disregarding the specifics of the CEO’s behavior, TWC itself fully disregarded the victims harmed by Weinstein’s misconduct. Instead of introducing specific processes through which they would acknowledge and possibly mitigate or restore the victim’s dignity, TWC provided a contractual clause allowing sexual misconduct with impunity. Kathleen Lahey and Sarah Salter describe such corporate structures as “masculist,”28 arguing that they disempower individuals by separating victims and abusers from one another and from themselves. Thus, as long as Weinstein was able to eliminate possible serious harm for the company by signing various nondisclosure agreements (NDAs) with the victims and/or excluding them from the company or the movie business in its entirety, the contractual provision would protect him and would not allow for any further TWC response. 22

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Morgan, supra note 19 (quoting an employment lawyer who specializes in sexual harassment claims, who said “[i]t gave him a way to be the bad guy, pay a monetary penalty, and carry on like the Energizer Bunny.”). Id. See Stephen M. Bainbridge, CEO Private Lives in the Present Dystopia, Professor Bainbridge (May 9, 2018, 10:50 AM), https://www.professorbainbridge.com/professorbainbrid gecom/2018/05/ceo-private-lives-in-the-present-dystopia.html. The ethics of care theory is most closely associated with the work by Carol Gilligan. See Carol Gilligan, In a Different Voice: Psychological Theory and Women’s Development (1982). See generally Hilde Lindemann, What is Feminist Ethics?, in An Invitation to Feminist Ethics (2019). Id. at 17–18. See Kathleen A. Lahey & Sarah W. Salter, Corporate Law in Legal Theory and Legal Scholarship: From Classicism to Feminism, 23 Osgoode Hall L.J. 543, 543, 553–57 (1985).

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Termination for Cause In the absence of a contract specifying duration, an employment relationship is terminable at the will of either party.29 In executive employment agreements such as the Agreement, termination provisions are generally some of the most heavily negotiated provisions – and have become only more so in the wake of the #MeToo movement.30 In particular, cause for termination matters more than it used to. Before #MeToo, employers generally attempted to settle and terminate the executive’s employment without cause if an executive engaged in inappropriate conduct, whereas today, employers seriously contemplate terminating for cause if they discover that the executive engaged in inappropriate conduct.31 Because the Agreement specified a three-year term for Weinstein’s employment, it was not terminable at will, and Section 14 of the Agreement stipulated some of the available bases to terminate Weinstein for cause. The provision stipulated that it was an option upon resolution by the Board to terminate the Agreement at any time for cause.32 The provision detailed procedures for for-cause termination, including a notification in writing within a reasonable time after the Board acquired knowledge of facts giving rise to the right to terminate Weinstein’s employment.33 The Board was obligated to specify, in reasonable detail, the facts supporting that determination, while providing Weinstein with the possibility of curing the particular action or omission within thirty days following the receipt of such notice, in order for the Agreement to be terminated for cause. The option of “cure” offered a possibility to limit or eliminate the “serious harm to the Company.” The use of an NDA served that purpose.34 The termination for cause – both its material and procedural parts – provided a favorable termination provision, which restrained the ability of the Board to take meaningfully punitive action against the executive.35 It is significant to emphasize

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Valentzas v. Colgate-Palmolive Co., Inc., 109 N.J. 189, 190, 536 A.2d 237 (1988). See also Gonzalez v. State Operated Sch. Dist. of Newark, 784 A.2d 101 (N.J. Super. Ct. App. Div. 2001) (employer may fire an employee for good reason, bad reason, or no reason at all under the employment-at-will doctrine). O’Tool v. Genmar Holdings, Inc., 387 F.3d 1188 (10th Cir. 2004) (same); Scott v. Sears, Roebuck and Co., 395 F. Supp. 2d 961 (D.Or. 2005) (an employer may fire an at-will employee at any time and for any reason, unless doing so violates a contractual, statutory, or constitutional requirement). Negotiating and Drafting an Executive Employment Agreement, Practical Law Practice Note 2 504–5403. Id. See Section 14 of Harvey Weinstein’s 2015 Employment Contract. Id. Weinstein used NDAs to silence women whom he sexually harassed. See, e.g., Jodi Kantor & Megan Twohey, Harvey Weinstein Paid Off Sexual Harassment Accusers for Decades, N.Y. Times (Oct. 5, 2017). See Rachel Arnow-Richman, Of Power and Process: Handling Harassers in an At-Will World, 128 Yale L. J. F. 85, 92 (2018) (stating that executives “often negotiate job-security rights that

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that in the event of an indictment or a violation of the Code, the Board needed to obtain a vote of at least one of the co-chairmen.36 The two co-chairmen of TWC at the time were Bob Weinstein and Harvey Weinstein – thus allowing a possible perpetrator to block his own termination.

REWRITTEN AGREEMENT

In her rewrite of Weinstein’s employment agreement, Chesler, writing as the general counsel for TWC, redrafted several key definitions and provisions of the Agreement through a feminist lens to target the offensive and appalling behavior of Weinstein. Before proceeding to the substance of this commentary on the Rewritten Agreement, it is important to first address the unique nature of, and challenges posed by, the Rewritten Agreement (also warranting the lengthier commentary than others in this volume). Unlike the rewritten judgments in the Feminist Judgments series to date, the Rewritten Agreement is not a rewritten judicial opinion but rather a rewritten contract. Rather than rewriting the entire Agreement, which might be analogous to one of the rewritten majority opinions in the series, Chesler chose to rewrite only certain definitions and provisions of the Agreement. Her choice to do so was motivated by a desire to highlight specific changes in the Agreement, rather than taking up every material and non-material term; as such, the Rewritten Agreement could be analogized to one of the rewritten judgments in the series that takes the form of a dissent. This is because changing only some of the Agreement’s provisions, without addressing all of the material issues (such as compensation and term), would not result in a valid contract (the equivalent of a binding majority opinion). Non-binding proposed changes to the execution version of the Agreement can thus be understood as a kind of “dissent” from the final, binding version of the Agreement ultimately executed. Unlike a judicial opinion, the Agreement is private law, and as such Chesler did not have access to all relevant documents, including TWC’s governing documents (such as its Limited Liability Company Agreement) and employment agreements between Weinstein and TWC prior to the Agreement, which restricted the terms of future agreements. This means that Chesler did not have comprehensive access to the relevant precedent that might have applied to her Rewritten Agreement. In addition, the nature of private ordering confronted Chesler with conceptual choices not faced by other contributors to the Feminist Judgment series: whether or not to treat public law and private law precedent with the same regard when interpreting the Feminist Judgments series guidelines requiring adherence to precedent. Chesler

36

constrain employers’ ability to terminate or discipline them even in situations involving alleged sexual harassment”). Id.

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could choose to treat private law differently in her ability to overturn restrictive precedent. She ultimately did so when she elected in the Rewritten Agreement to terminate the portion of the 2005 Agreement that mandated that all future employment contracts must include “equal or better terms,” which otherwise would have limited her ability to propose the following changes to the Agreement. Background The Rewritten Agreement incorporates a background section at its beginning, offering a form of preamble to the contract.37 In this background, TWC acknowledges its influence, and that of its executives, on cultural norms and respect for women within and beyond TWC, and stipulates that the company is committed to creating and ensuring a safe workplace and working relationships for all of its employees, free from any sexual wrongdoing. The Rewritten Agreement emphasizes the movie and TV portrayal of women intending to bring TWC to the center of the necessary change for the societal position and working conditions of women. Despite the undisputed veracity of such a statement, its contractual relevance or even its relevance for an employment agreement might be challenged. Importantly, TWC admits its knowledge about the existing claims and stipulates Weinstein’s accountability for his actions, which is an important move to acknowledge the past behavior and knowledge of the historical oppression of women and TWC’s desire to address these issues through the Rewritten Agreement. A background or preamble has incremental importance for legal text. The historical relevance of preambles goes back to early constitutions.38 Regarding legislative materials, preambles provide a source of advice about the meaning, application, and implementation of the regulations that they accompany.39 Although courts have stipulated that a preamble represents a part of the contractual undertaking,40 the importance of preambles and recitals in contracts remains uncertain. Thus, in connection with the Rewritten Agreement, the included statements represent the agreed-upon facts, based on which the Rewritten Agreement has been concluded.41 However, contrary facts may be proven. Looking at the Background 37

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Both these terms encompass the introductory statements at the beginning of a document. For the purposes of this chapter, the term “Preamble” is used. One of the first discussions concerned the legal value of the preamble of the Declaration of 1789. See Justin O. Frosini, Constitutional Preambles at a Crossroads between Politics and Law 65 (2012). See generally Kevin M. Stack, Preambles as Guidance, 84 Geo. Wash. L. Rev. 1252 (2016). See generally Properties Inv. Grp. Of Mid-Am. v. Applied Commc’ns, Inc., 242 Neb. 464, 495 N.W.2d 483, 489-90 (1993); Brookens v. Peabody Coal Co., 11 III.2d 322, 143 N.E.2d 25, 27 (1957) (stating that recitals have no effect where they conflict with terms set forth in the body of an agreement). Restatement (Second), Contracts §218 cmt. b (Am. Law Inst. 1981). Under the Restatement Second, the preamble, if stating a fact in an integrated agreement, is evidence of that fact and its weight depends on the circumstance.

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section of the Rewritten Agreement from the feminist viewpoint, we note that it offers a purpose or an intent of an agreement, besides the specific contractual provisions.42 Providing narratives and contextualizing disputes and relationships are key features of feminist methods, as these methods allow us to better understand the language and the purpose of the contract within the context of the entire situation. The narrative that the Background presents provides a starting point for interpretation of the Rewritten Agreement, while positioning the agreement in the context of relationships with the board and other stakeholders, including employees. A close review of the Rewritten Agreement indicates that the first three paragraphs show the intent to create a work environment free of sexual wrongdoing, and a desire for Weinstein – as CEO and the Co-Chair of the Board – to undertake an active role in establishing such an environment. The paragraphs indicate a “tone from the top.”43 The “tone from the top” is understood as the company board and management setting up values and principles that should serve as a model for the rest of the company.44 The CEO and the Board play an important role in setting the tone, influencing and overseeing culture, and ensuring that the right governance framework and controls are in place. However, one of the principal ways the board sets the tone is through the selection of a CEO whose values align with the company’s. In the Rewritten Agreement, the Board’s “tone from the top” – its commitment to a safe work environment – contradicts its continued selection of Weinstein, a known sexual predator, as CEO. A consistent tone from the top builds on a solid governance foundation with an efficient control framework and with the execution of consequence management. The consequence management, which drives accountability by linking rewards and consequences to individual performance, is of great relevance in light of feminist legal theories. Rape, stalking, and other sexual wrongdoings are all underenforced crimes, and women have suffered the consequences of that underenforcement.45 Thus, the consequences of sexual wrongdoing need to be explicit and consistently enforced from the top down. Sexual Wrongdoing: Definition The Rewritten Agreement includes a definition of “sexual wrongdoing.” The original Agreement referred only to “misconduct” in the Covenants section, and it 42

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Id. As a result, it may be held “that the integrated agreement is not binding” or “that it has a different effect” had the preamble been true. Id. “In the absence of estoppel, the true facts have the same operation as if stated in the writing.” Id. See, e.g., Henrik Henriksson & Elaine Weidman Grunewald, How to Earn Trust, in Sustainability Leadership (2020); Kai D. Bussmann & Anja Niemeczek, Compliance through Company Culture and Values: An International Study Based on the Example of Corruption Prevention, 157 J. Bus. Ethics 797 (2019). See, e.g., Margaret M. Blair & Lynn A. Stout, Director Accountability and the Mediating Role of the Corporate Board, 79 Wash. U. L.Q. 403, 411–14 (2001). See Allegra M. McLeod, Regulating Sexual Harm: Strangers, Intimates, and Social Institutional Reform, 102 Calif. L. Rev. 1553, 1600–05 (2014).

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did not define offending behavior. Including a definition of “sexual wrongdoing”46 allows the drafters to build on the term and use it consistently throughout the Rewritten Agreement,47 while providing the contractual parties with one frame of reference. The aspirational dimension of feminist legal theory requires a commitment to the ideals of both liberalism and legalism, with the latter understood (according to some definitions) not only as a vocabulary or propensity toward rule governance but also as a set of ideals, a way of viewing the world, and a way of embracing the institutional past. Feminist theories often deconstruct and reconstruct existing structures and values as well as the legal principles that govern our society. Rethinking the basic definitions through a female experience, and thus redesigning the existing boundaries between legal and illegal, is essential for dismantling the existing legal definitions and principles. It was only in 1975 that Lin Farley formulated one of the earliest definitions of “sexual harassment.”48 Similarly, Chesler develops a broad definition of “Sexual Wrongdoing” that covers on one hand “[s]exually explicit statements, and other unprofessional and inappropriate conduct” and on the other stipulates the need for “credible evidence to support the allegation,” aiming to balance the breadth of the clause with limiting its applicability at the same time. This naturally can raise a question of the ultimate effect of this definition.

Reporting and Oversight In Section 3 of the Agreement, Chesler adds a responsibility, namely, the responsibility not to engage in any conduct that can be considered sexual wrongdoing, and to create a safe workplace, where Weinstein is required to report any incident, claim, or knowledge of sexual wrongdoing. In conventional law theory, contract law enables – and ought to enable – people to exercise their will freely in pursuit of their own ends.49 Contracts are at the core of the conceptions of autonomy and sociality in various theories. In contract law, autonomy is a central norm that encapsulates ideas of freedom, voluntariness, and 46

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According to the Rewritten Agreement, “Sexual Wrongdoing” means non-consensual sex or other forms of unwanted sexualized behavior, including but not limited to sexual assault, sexual harassment, verbal or physical advances, sexually explicit statements, and other unprofessional and inappropriate conduct. Sexual wrongdoing is not limited to behavior at the physical workplace itself but also includes behavior that occurs while working off-site, traveling for business, or at TWC-sponsored events. Sexual wrongdoing does not include any unfounded claim for which there is no credible evidence to support the allegation. See generally A. C. L. Davies, Terms Inserted into the Contract of Employment by Legislation, in The Contract of Employment (Mark Freedland ed., 2016). See Lin Farley, Sexual Shakedown: The Sexual Harassment of Women on the Job 20 (1978). See Morris R. Cohen, The Basis of Contract, 46 Harv. L. Rev. 553, 575 (1933); see generally Charles Fried, Contract as a Promise: A Theory of Contractual Obligation (2015) (summarizing contract theories).

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self-interest. When signing the Rewritten Agreement, Weinstein would be communicating to the Board and all of TWC’s employees a particular message – his intention to alter his relationship with the employees of TWC and any other individuals doing business with TWC. From the perspective of a consent-based contractual theory, such communication is critical because it enables parties to a transaction, as well as third parties, to identify “rightful boundaries” and “accurately ascertain what constitutes rightful conduct and what constitutes a commitment on which they can rely.”50 By incorporating the reference to “working relationship,” Chesler directly reflects on the feminist perspective and builds on feminist relational contract theory, by seeing contracts not just as the execution of autonomy but also a building element of society – a relationship that, in this case, aims to build a longterm change in its CEO’s behavior.51

Indemnification Chesler has modified the Agreement’s extremely broad Indemnification section by maintaining a brief general indemnification provision (subsection (a)) but limiting TWC’s obligation to indemnify Weinstein for any claims, legal proceedings, or potential claims and the expenses incurred by him for sexual wrongdoings (subsection (b)). In subsection (c), Chesler adds a provision that stipulates that it is Weinstein who has to indemnify TWC for any claim, liability, loss, cost, or expense incurred by TWC for Weinstein’s sexual wrongdoing, asserting that the indemnification is to apply to past, present, and future claims or potential claims. Although this provision aims to introduce a clear message and broad application, the enforceability of such a provision may be challenged, rendering Weinstein’s obligations – or even the entire indemnification provision – unenforceable. The right of corporate officers and directors to obtain reimbursement for expenses incurred in connection with a lawsuit arising out of services as a director is of obvious importance to the attraction and retention of competent professionals.52 Although reimbursement should, in theory, be unlimited, and no action should be considered uncritically, the right balance needs to be maintained. One could argue that the current provision introduces inequality into the relationship between TWC and Weinstein, where TWC is not required to indemnify or hold Weinstein harmless for any claims connected to sexual wrongdoing, irrespective of whether 50

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See Randy E. Barnett, Contract Is Not Promise; Contract Is Consent, in Philosophical Foundations of Contract Law 51 (Gregory Klass et al. eds., 2014). See Sharon Thompson, Feminist Relational Contract Theory: A New Model for Family Property Agreements, 45 J.L. & Soc’y 617, 619 (2018). See Fidelity Fed. Sav. & Loan Ass’n v. Felicetii, 830 F. Supp. 262, 265 (E.D. Pa. 1993) (“the purpose of indemnification agreements is to encourage capable individuals to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve”).

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those claims turn out to be founded or unfounded, thus fully disregarding the principle in dubio pro reo. This provision inhibits Weinstein’s individual agency and his ability to be indemnified for unfounded claims, and as such defies the feminist perspective.53 In the indemnification section, there should be clear lines and strict safeguards that can balance the necessary tasks and restrict executives’ private misconduct. An alternative provision could stipulate procedural standards or an additional vote by a majority of disinterested directors or a special legal counsel. A clear and enforceable procedure would possibly be a more equitable solution. Investigation In the Rewritten Agreement, Chesler supplements the Code of Conduct with a new provision outlining an investigation, should there be any complaint, information, or knowledge of suspected sexual wrongdoing. On one hand, the original Code of Conduct section offered Weinstein a way out of almost any harassment claim; its wording allowed Weinstein to misbehave as long as he paid a monetary penalty. After any such instances, it was business as usual. The contractual provision as such allowed Weinstein to engage in “sexual misconduct with impunity,” as long as such behavior did not cause “serious harm” to the company. These provisions in an employment contract were unique and reflected the Board’s knowledge of Weinstein’s activities. TWC’s board knew of Weinstein’s misconduct in the past – and knew, therefore, that he was likely to continue to engage in sexual harassment and other misconduct. On the other hand, willful violation of the Code of Conduct, if determined by a vote of a majority of the Board, represented grounds for termination. To strengthen the Code of Conduct, Chesler introduces an independent corporate investigation. The provision explicitly stipulates Weinstein’s obligation to participate and cooperate in an investigation. This approach is consistent with the feminist view that responsibility should replace passivity.54 In case of a breach of the provision, the Board has the necessary cause for termination of the Agreement at its sole discretion and by a majority vote. The Rewritten Agreement deletes the requirement for a vote of at least one of the co-chairs. Although new investigation provisions apply a relatively transparent process and stipulate a cooperation obligation, in the event of continuous non-collaboration and delay, the only option for the Board is termination. Often, this is too extreme a decision, which could generate a more negative outcome, thus rendering this contractual tool ineffective. Boards need to introduce a more pragmatic approach 53

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See L. A. Buckley, Relational Theory and Choice of Rhetoric in the Supreme Court of Canada, 29 Can. J. Fam. L. 251, 258 (2015); Buckley states that from a feminist perspective, it is important to employ relational theory in a way that does not inhibit individual agency. See Theresa A. Gabaldon, The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, 45 Vand. L. Rev. 1387, 1431 (1992).

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and foresee the practical limitations. Thus, contractual provisions that would incentivize cooperation should be introduced. These could include a suspension from the position, with or without pay, and withholding of bonuses up to daily penalties for non-compliance with the investigation procedure. Additionally, a recurring internal review of the corporation, its internal procedures, and its structures could be stipulated as an obligation of a Board. Such a practice is not common yet. Nonetheless, it might be of great value for the Board and the CEO to show their active monitoring of the corporation. Feminist theory teaches us to acknowledge the various sources of inequality. Inequality is especially evident in the field of corporate law, which is “masculine” in its embodiment of values like “competition, hierarchy, aggression, and strict classifications of roles.”55 In order to combat various inequalities within an organization, a corporation needs to regularly examine the experience of women and other marginalized groups, explore the values of women, and assess existing corporate and social structures in terms of their arguable congruence with women’s experiences and values.56 Gabaldon states that “[t]his type of analysis does not presuppose that the experiences . . . of all or most women are significantly different” from others’, “but the very real possibility that a difference exists dictates the approach.”57 Thus, the Board should initiate independent investigations and reviews, carried out by professionals who are aware of marginalized groups’ realities. Such activity would represent an important start for creating a space to hear women’s experiences. However, additional corporate governance documents should stipulate the effects of such investigation, not only for Weinstein but also for the entire organization. Possibly, regular internal reviews could also be introduced.

Termination for Cause Chesler fully alters Paragraph 14, “Termination for Cause,” to eliminate Weinstein’s ability to cure any breaches, participate in the decision regarding his termination, and enable TWC to repurchase Weinstein’s shares in the company. Feminism values paying attention to context,58 and these changes emerge from the environment in which a decision to terminate Weinstein for cause would take place. Attention to context can provide important critical insights. TWC is a company that was formed by the Weinstein brothers, and their legacy represents its 55

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See Ronnie Cohen, Feminist Thought and Corporate Law: It’s Time to Find Our Way Up from the Bottom (Line), 2 Am. U. J. Gender & L. 1, 11 (1994). See Theresa A. Gabaldon, Like a Fish Needs a Bicycle: Public Corporations and Their Shareholders, 65 Md. L. Rev. 538, 543–46 (2006). Id. at 544. See Kellye Y. Testy, Capitalism and Freedom – For Whom?: Feminist Legal Theory and Progressive Corporate Law, 67 Law & Contemp. Probs. 87, 101–04 (2004) (describing the relevance of context for feminist legal theory).

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cornerstone. Irrespective of their personal relationship, their economic interests have been intertwined. Neither of them can or shall maintain omnipresent veto power over Weinstein’s termination. The Board must be provided a possibility to make a termination decision impartially and for the benefit of the corporation and its stakeholders. Even the presence of either of the Weinstein brothers could represent a detriment to the process and to the Board itself. Chesler addresses this issue when she proposes that the Rewritten Agreement is executed on behalf of TWC by its General Counsel, rather than by Bob and Harvey Weinstein as the original Agreement provides.

IMPACT OF THE REWRITTEN AGREEMENT

The disturbing revelations in the Weinstein scandal, along with the allegations of sexual misconduct and harassment against many other prominent executives, have raised calls for “real change” to address sexual harassment.59 There have been various proposals on how to tackle the challenge. Some scholars call for the general invalidation of non-disclosure agreements, which silence the victims and limit the transparency and public awareness regarding a persistent sexual offender.60 Others see the solution in allowing shareholder actions against corporate fiduciaries for breaching their fiduciary duty and violating federal securities law when they fail to address sexual harassment in a corporation.61 Undoubtedly, various regulatory and legal tools may offer the necessary protection to employees, contractors, and other vulnerable parties.62 Yet, corporations need to address widespread misconduct through tools of their own. The Rewritten Agreement shows us some approaches to specifically undertake that challenging task. It indicates how boards could redesign procedural architecture that protects their stakeholders while establishing clear policies, definitions of sexual harassment, and causes for dismissal to secure the rights of the parties involved. The Rewritten Agreement introduced the investigation, which needs to be further strengthened to secure a shift in the Board’s power dynamic. Feminist legal theory is an example of normative jurisprudence.63 Chesler’s Rewritten Agreement makes a normative argument about how executives should be held responsible for their treatment of their employees and business associates. 59 60

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See Vicki Schultz, Reconceptualizing Sexual Harassment, Again, 128 Yale L.J.F. 22, 24 (2018). See Vasundhara Prasad, If Anyone Is Listening, #MeToo: Breaking the Culture of Silence Around Sexual Abuse through Regulating Non-Disclosure Agreements and Secret Settlements, 59 B.C. L. Rev. 2507, 2538 (2018); Ian Ayres, Targeting Repeat Offender NDAs, 71 Stan. L. Rev. Online 76, 79 (2018). See Daniel Hemel & Dorothy S. Lund, Sexual Harassment and Corporate Law, 118 Colum. L. Rev. 1583, 1628–29 (2018). See Edward Lee, Can Copyright Law Protect People from Sexual Harassment?, 69 Emory L. J. 607, 613–14 (2020). See generally Robin West, Normative Jurisprudence: An Introduction (2011).

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Carefully drafted contractual provisions give parties the power to improve the balance of rights, obligations, and liability to achieve a more just society. A contract is a legal tool that addresses one relationship at a time. However, a contract between a corporation and a CEO and other executives has a much greater consequence. As demonstrated by the Rewritten Agreement, a contract can transform the relationship across an entire organization, provide the voice for other stakeholders, and foster a culture that respects women’s dignity.

Agreement between Harvey Weinstein and The Weinstein Company Holdings LLC, as of October 20, 2015 susan m. chesler, esq., general counsel The Weinstein Company Holdings LLC 375 Greenwich Street New York, New York 10013

Mr. Harvey Weinstein c/o Arnie Hermann

Citrin, Cooperman 529 Fifth Avenue New York, NY 10017

Dear Harvey: Attached please find the changes requested by The Weinstein Company Holdings LLC (“TWC”) to the proposed execution version of your employment agreement dated October 20, 2015 (“Agreement”) between TWC and you, for your signature. Rather than executing the agreement on behalf of TWC yourself as set forth in the proposed execution version, TWC instead requests that the Agreement be executed by myself as General Counsel on behalf of TWC. While the proposed execution version sets forth the full terms and conditions of your continued employment with TWC, the purpose of this letter is to highlight the key changes that TWC requests to the proposed execution version and to revoke any provision in your first employment agreement with TWC that was granted in 2005 (the “2005 Agreement”) and that mandates that all subsequent employment agreements incorporate at least “equal or better terms.” Unless otherwise provided here, all of the terms of the proposed execution version and 2005 Agreement remain in effect unless they have been replaced, supplemented, or otherwise rendered null and void by the below provisions.

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1. TWC proposes the following Background Section be added to provide information regarding both parties’ intent behind the terms of the proposed execution version of the Agreement.

BACKGROUND

TWC is a multimedia film and television production and distribution studio that is committed to ensuring that the organization, its employees, and others associated with it do not violate applicable rules, regulations, or norms. TWC recognizes that its executive employees, including you, set the tone for the culture of the organization. TWC recognizes its stature as a leading Hollywood studio with significant worldwide influence on the film and television industries as well as on broader cultural norms. TWC also recognizes the unequal power dynamics within the film and television industries, in particular the power that studio executives possess. TWC also recognizes that the film and television industries consistently undervalue women through their portrayal of women using gendered stereotypes, heteronormativity, and overemphasis of female characters’ physical appearance. Such considerations, among others, necessarily animate this Agreement. Therefore, TWC wishes to highlight, among other provisions in this Agreement, those that pertain to creating and ensuring both a safe workplace and working relationships for all of its employees, free from sexual harassment, sexual assault, and any form of sexual misconduct (referred to as Sexual Wrongdoing, defined below). It is the responsibility of every TWC employee and Board member, in particular yourself in light of your role as President, Chief Executive Officer, and Co-Chair of the Board of Directors of TWC, to work in a manner that prevents Sexual Wrongdoing. TWC is also committed to conducting prompt and impartial investigations of any claims or suspected violations of its policy against Sexual Wrongdoing. TWC will not tolerate any retaliation against any person who in good faith reports, provides information about, or participates in any investigation about suspected Sexual Wrongdoing. To that end, this Agreement provides that you will not engage in Sexual Wrongdoing, that you will report any incidents or knowledge about suspected Sexual Wrongdoing by other TWC employees, and that you will fully cooperate in all investigations by TWC into suspected Sexual Wrongdoing. In spite of its knowledge about currently existing claims of Sexual Wrongdoing against you, TWC believes that it can create and ensure a safe workplace free from Sexual Wrongdoing in the future, and it also can take concrete steps now to fairly treat prior complainants. To that end, the parties intend that you release all existing claimants from any non-disclosure or confidentiality agreement to the extent it has prevented the claimants from being able to come forward and tell their stories. You also agree that you will issue formal

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apologies to all complainants and will reimburse them for any expenses incurred as a result of such claims. The parties have agreed that if you fail to abide by any of the terms relating to Sexual Wrongdoing in this Agreement, TWC may terminate your employment for Cause (defined below). If so terminated, you may also be required to make monetary payments to TWC, and TWC will have the option to repurchase your shares in TWC pursuant to the terms contained in this Agreement. To further clarify your commitment to eliminating any Sexual Wrongdoing in the workplace, you also intend to indemnify TWC in the event there are any claims made against you relating to Sexual Wrongdoing. You have committed to obtaining TWC’s approval before entering into any future settlements of claims of Sexual Wrongdoing, and both you and TWC intend that any such settlements will not include any non-disclosure or confidentiality provisions. As part of their commitment to fair and open resolution of any claims relating to Sexual Wrongdoing, the parties also intend that if TWC has any disputes with you relating to claims or potential claims of Sexual Wrongdoing, such claims will be heard in state or federal court and will not be subject to an arbitration requirement. The parties understand that this Agreement contains all of the terms and conditions relating to your employment at TWC, and that any provision of the 2005 Agreement that mandates that all subsequent employment agreements incorporate at least “equal or better terms” will be terminated and rendered null and void by the provisions of this Agreement after December 31, 2015. The terms of the 2005 Agreement that are not altered in any way by this Agreement will remain in effect. 2. TWC proposes the following language be added to Paragraph 2, “Duties/Responsibilities/Reporting,” to include your obligations to ensure a workplace at TWC free of Sexual Wrongdoing. c. Additional Responsibilities. You shall not engage in any conduct that can be considered Sexual Wrongdoing. “Sexual Wrongdoing” means non-consensual sex or other forms of unwanted sexualized behavior, including but not limited to sexual assault, sexual harassment, verbal or physical advances, sexually explicit statements, and other unprofessional and inappropriate conduct. Sexual Wrongdoing is not limited to behavior at the physical workplace itself but also includes behavior that occurs while working off-site, at TWC-sponsored events, or traveling for business. Sexual Wrongdoing does not include any unfounded claims for which there is no credible evidence to support the allegation. In addition, as President, CEO, and Co-Chair of the Board of Directors of TWC, you shall have the responsibility of creating and ensuring that all employees of TWC, and any other individuals doing business with TWC, have a safe workplace and

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working relationships with any person acting on behalf of TWC, free from Sexual Wrongdoing. If you engage in any act of Sexual Wrongdoing or become aware of any incident of Sexual Wrongdoing, claim of Sexual Wrongdoing, or knowledge about suspected Sexual Wrongdoing, you must report such information to both TWC’s Director of Human Resources and TWC’s Board of Directors no later than 24 hours after each act of Sexual Wrongdoing or your receipt of such information. 3. TWC proposes that Paragraph 7, “Indemnification,” specifically address claims of Sexual Wrongdoing against you. It provides that TWC will not indemnify you for any claims of Sexual Wrongdoing. However, you will indemnify TWC and pay damages for any costs borne by TWC for claims against you relating to Sexual Wrongdoing. TWC proposes that Paragraph 7 state as follows: 7. INDEMNIFICATION.

(a) General. TWC must indemnify and hold you harmless from any claim, liability, loss, cost, or expense incurred by you that arises out of or relates to your status as President, Chief Executive Officer, and Co-Chair of the Board of Directors of TWC under the Agreement. (b) Sexual Wrongdoing. Notwithstanding the language contained above in Paragraph 7(a), TWC is not required to indemnify or hold you harmless from any claim, liability, loss, cost, or expense incurred by you that arises out of or relates to claims, potential claims, or legal proceedings against you for Sexual Wrongdoing. This applies to past, present, and future claims, as well as potential claims of this nature. For clarification, you are not entitled to be indemnified or held harmless by TWC for any amounts you are required to pay to reimburse TWC under this Agreement, including but not limited to under this Paragraph 7 and Paragraph 11. I Indemnification by You. In addition, you must indemnify and hold TWC harmless from any claim, liability, loss, cost, or expense incurred by TWC that arises out of or relates to claims, potential claims, or legal proceedings against you for Sexual Wrongdoing. This applies to past, present, and future claims or potential claims of that nature. This indemnification obligation is in addition to any and all obligations owed by you under Paragraph 11(h). (c) Liquidated Damages. The parties acknowledge that in addition to being indemnified and held harmless for all costs incurred by TWC as a result of claims or potential claims against you for Sexual Wrongdoing, such misconduct can cause significant damage to

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TWC that is difficult or impossible to measure. Accordingly, in addition to the indemnification set forth in subparagraph I above, you must pay TWC liquidated damages in the amount of $1,000,000 no later than 30 days after each claim, potential claim, or legal proceeding is made against you or TWC arising out of or relating to your alleged Sexual Wrongdoing. 4. TWC proposes that Paragraph 11 “Covenants” subsection H “Settlements” should specifically address both past and potential future claims against you for Sexual Wrongdoing. It details all of the steps that you must take relating to any settlement you may have already entered into, either personally or on behalf of TWC, which was related to claims of Sexual Wrongdoing by you. It also sets out what steps you are required to take if you become aware of any claims of Sexual Wrongdoing against you after the date of execution of this Agreement. TWC proposes that Paragraph 11 “Covenants” subsection h “Settlements” states as follows: H. SETTLEMENTS.

(i) General. Prior to entering into any settlement of any pending or threatened litigation that can result in a liability to TWC of $250,000 or more, you must receive prior written approval of a majority of the Board, excluding yourself. After submitting your request for approval, you must not contact any member of the Board throughout the process of their deliberation. You also must provide written notification to the Board no later than 24 hours after you become aware that any of TWC’s executives or employees are in discussions to enter into any such settlement. You must also provide written notification to the Board no later than 30 days after entering into any settlement of any pending or threatened litigation that may result in a liability to TWC of less than $250,000. (ii) Prior Settlements arising out of or relating to Sexual Wrongdoing. Notwithstanding the language contained above in Paragraph 11(h), with regard to any settlement entered into by you (personally or on behalf of TWC) prior to the date of this Agreement, which arose out of or was related to claims of Sexual Wrongdoing against you, you shall do all of the following no later than 48 hours after executing this Agreement: 1) you shall notify the Board in writing of all such settlements; 2) you shall release any such claimant from any non-disclosure or confidentiality agreement and permit complainants to publicly disclose any information relating to their claims; 3) you shall issue a formal written apology to each such complainant, acknowledging

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your wrongdoing and fault, and the apology will be provided to each complainant through her or his attorney of record, if available, or if not then to the complainant directly; 4) using your personal funds, you shall reimburse each such complainant for all costs incurred as a result of any legal proceeding relating to these claims, including but not limited to attorney’s fees, court costs, and other related expenses; and 5) using your personal funds, you shall reimburse TWC for any costs incurred or to be incurred by TWC arising out of or relating to such settlements, including but not limited to settlement payments, attorney’s fees, court costs, staff costs, and other related expenses. (iii) Future Settlements arising out of or relating to Sexual Wrongdoing. Notwithstanding the language contained above in Paragraph 11(h), after the date of execution of this Agreement, if you become aware or gain any knowledge of any claims, potential claims, or legal proceedings against you that arise out of or relate to claims of Sexual Wrongdoing, you must do all of the following: 1) you must provide written notification to the Board no later than 24 hours after you become aware of any such claim, potential claim, or legal proceeding; 2) you must receive prior written approval by a majority of the Board, excluding yourself, before entering into any settlement arising out of or relating to any such claim, potential claim, or legal proceeding; 3) you must agree not to request or require that any such claimants or potential claimants execute any non-disclosure or confidentiality agreement prohibiting them from publicly disclosing any information relating to their claims or potential claims; 4) you must agree to issue a formal written apology to each such complainant acknowledging your wrongdoing and fault, and the apology will be provided to each complainant through her or his attorney of record if available, or if not then to the complainant directly; 5) you must agree to personally reimburse each such complainant for any costs incurred in connection with such claims or legal proceedings, including but not limited to attorney’s fees, court costs, and other related expenses; and 6) you must agree to personally reimburse TWC for any costs that it may incur arising out of or relating to such claims or legal proceedings, including but not limited to settlement payments, attorney’s fees, court costs, staff costs, and other related expenses. 5. TWC proposes that Paragraph 11 “Covenants” subsection j “Investigations” be included to supplement the Agreement to specifically set out the obligations of both TWC and you in the event that any complaint of Sexual Wrongdoing is made or either of us becomes aware of suspected Sexual Wrongdoing. To the extent that the Code of Conduct and this Agreement are in conflict, this Agreement

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applies. TWC proposes that Paragraph 11 “Covenants” subsection j “Investigations” states as follows: J. INVESTIGATIONS.

(i) TWC’s Duties. Upon receipt of any complaint, information, or knowledge of suspected Sexual Wrongdoing, TWC must immediately undertake a prompt, impartial, and thorough investigation conducted by qualified personnel, preserving confidentiality to the extent possible. TWC must retain outside counsel no later than 24 hours after receipt of such complaint, information, or knowledge to lead the investigation. TWC must take any reasonable steps necessary to ensure that all persons involved, including complainants, witnesses, and alleged perpetrators, are accorded due process to protect their rights to a fair and impartial investigation. TWC must also take any reasonable steps necessary to protect anyone who in good faith reports, provides information, or assists in any investigation about suspected Sexual Wrongdoing from any retaliation or Adverse Action, including but not limited to taking disciplinary action against TWC’s employees or Board members. (ii) Your Duties. If requested by TWC’s Board of Directors, TWC’s Director of Human Resources, or outside counsel retained by TWC, you must fully cooperate with and participate in any investigation of suspected Sexual Wrongdoing, including investigations of suspected Sexual Wrongdoing against yourself or other TWC employees or Board members. You must not retaliate or take any Adverse Action against anyone who in good faith reports, provides information, or assists in any investigation about suspected Sexual Wrongdoing. Retaliation may result in immediate investigation and disciplinary action, including but not limited to termination for Cause. (iii) Definition. Adverse Action means any steps that would negatively affect the targeted individual, including but not limited to termination, demotion, or any action that could discourage an employee from coming forward to make or support a claim of suspected Sexual Wrongdoing. Adverse Action need not be directly job-related or occur in the workplace and includes threats of physical violence outside of work hours. 6. TWC proposes that the following subsection k “Non-Disparagement” be added to Paragraph 11 “Covenants” to include a duty on your behalf not to disparage any TWC employee or Board member. It also addresses how you must handle any requests made by TWC’s current or former employees for a job reference or confirmation of

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employment. TWC proposes that Paragraph 11 “Covenants” subsection k “Non-Disparagement” states as follows: k. Non-Disparagement. In addition to duties set forth in Paragraph 11 subsection 1 above, you shall not make or issue, or procure any other person or entity to make or issue, any statement, representation, or communication of any kind that may directly or indirectly disparage any TWC employee or Board member, their family, or reputation. If any current or former employee requests a job reference or confirmation of employment, you must forward such request to TWC’s Director of Human Resources. Notwithstanding the foregoing, you are not precluded from making truthful statements or disclosures that are required by applicable law, regulation, or legal process. 7. TWC proposes that Paragraph 14 “Termination for Cause” specify that if your employment is terminated for violating any of your duties relating to Sexual Wrongdoing, TWC is not required to provide you with advance notice or the opportunity to cure your breach. TWC will also have the right to repurchase any of your shares in TWC and may terminate you, for any of the stated reasons, by a decision of a majority of the Board members, exclusive of yourself. TWC proposes that Paragraph 14 “Termination for Cause” states as follows: 14. Termination for Cause. TWC may, at its sole discretion and by a vote of a majority of the members of the Board exclusive of yourself, terminate the Agreement at any time for “Cause.” In that case, TWC will have no further obligation to pay the unearned Base Salary or provide unvested benefits under the Agreement. a. Definition. “Cause “ means any one or more of the following: (i) a breach by you of your duties under Paragraphs 2(a), 2(b), 3, 7(c), 7(d), and 11(a)–(g) of the Agreement; (ii) a breach by you of your duties relating to Sexual Wrongdoing under Paragraphs 2(c) and 11(h)–(j) of the Agreement; (iii) a willful failure or refusal by you to follow the reasonable and lawful instructions of the Board regarding any matter for which the approval of the Board is required under Section 7.06 of the LLC Agreement, or knowingly taking any action without first obtaining Board approval required under Section 7.06 of the LLC Agreement; (iv) if you are charged with, indicted for (or the equivalent), convicted of, or plead guilty or nolo contendere to a felony or any crime involving fraud, dishonesty, or moral turpitude under local, state, or federal laws.

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b. Notice and Timing. To terminate for Cause under subsections (i) and (iii) of the definition of Cause above, TWC must provide written notice to you specifying in reasonable detail the facts supporting such termination. If, according to a decision by a majority of the Board exclusive of yourself, the particular action or omission supporting the termination is capable of being cured, then TWC must provide you with 14 days to cure the particular action or commission. If the particular action is not capable of being cured, or if you do not cure it to the satisfaction of the Board, then your termination will be effective 30 days after the notice was sent. To terminate for Cause under subsection (ii) or (iv) of the definition of Cause above, TWC must provide written notice to you that your employment is terminated, effective immediately. 1. c. Repurchase of Shares. If TWC terminates you for Cause under subsection (ii) or (iv) of the definition of Cause above, TWC (or its designated agent) may, at its sole discretion, repurchase any or all of your shares in TWC. If it exercises its right under this section, TWC must pay you the lower of either the fair market value of such shares on the date of termination or the original cost of such shares. TWC may exercise this right up to 90 days after the date of termination. 2. 8. TWC proposes that Paragraph 25 “Arbitration of Disputes” eliminate the arbitration requirement for any claims that TWC may have against you relating to claims of Sexual Wrongdoing. TWC proposes that Paragraph 25 “Arbitration of Disputes” include the following language: Notwithstanding the language contained above in Paragraph 25, the arbitration requirement does not apply to any disputes arising out of or related to Sexual Wrongdoing by you. For clarification, TWC is not required to bring any controversies or claims it may have against you that arise out of or relate to claims or potential claims of Sexual Wrongdoing to a Mediator. For all such controversies and claims, the Parties agree to exclusive personal jurisdiction and venue in the state and federal courts of the United States located in the State of New York. In addition, if there are any legal proceedings arising out of or relating to such controversies and claims, the non-prevailing party must reimburse the prevailing party for all of the costs incurred, including but not limited to attorney’s fees, staff time, court costs, and all other related expenses. https://doi.org/10.1017/9781009025010.010 Published online by Cambridge University Press

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9. TWC proposes that the following Paragraph 29 “Termination of 2005 Agreement’s Mandate of Equal or Better Terms” clarify that this Agreement and any future agreement’s terms and conditions relating to your continued employment with TWC is no longer subject to the mandate of the 2005 Agreement requiring “equal or better terms” to the 2005 Agreement: 29. Termination of 2005 Agreement’s Mandate of Equal or Better Terms. Upon the effective date of this Agreement, the provision contained in the 2005 Agreement mandating that all subsequent employment agreements incorporate at least “equal or better terms” will be terminated and be of no further force and effect. 10. TWC proposes that the following Paragraph 30 “Representation on Authority of Signatory” provide me with written authority to execute this Agreement on behalf of TWC: 30. Representation on Authority of Signatory. TWC represents and warrants that Susan M. Chesler, General Counsel of TWC, is duly authorized and has the legal capacity to execute this Agreement on behalf of TWC. We look forward to receipt of your executed Agreement and to your continued employment with TWC. Sincerely, THE WEINSTEIN COMPANY HOLDINGS LLC /s/__Susan M. Chesler______________ By: Susan M. Chesler, Esq. Title: General Counsel, The Weinstein Company Holdings LLC Date: 10/20/2015

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par t iv

Fiduciary Duties in Corporate Governance

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8 Commentary on Meinhard v. Salmon christine hurt

BACKGROUND

A contract is at the heart of Meinhard v. Salmon,1 but the case is about more than a simple contract. Over the past one hundred years, courts have quoted this case in countless cases in which a fiduciary has an obligation to another that extends beyond what Chief Judge (and later in his career, Associate Justice of the United States Supreme Court) Benjamin Cardozo called “the morals of the marketplace.” Walter J. Salomon signed a lease in 1902 to manage a piece of property at the corner of Fifth Avenue and 42nd Street in New York, New York. While he signed such lease on behalf of himself alone, he separately signed an agreement about the leased property with Morton H. Meinhard. In 1922, Salomon – who by then had changed his name to “Salmon” – signed a different contract to develop even more of that city block, for a lease amount that was eight times as much as the original lease. Again, Salmon signed on behalf of himself alone, but this time did not include Meinhard in the new project by means of a separate agreement with him or otherwise. Meinhard would have little recourse under a strict contract law analysis; the original lease was expiring and it did not obligate the parties to continue working together. Partnership law, however, applies in circumstances such as these, in which a broader business relationship is formed beyond a single contract. Since 1914, the uniform partnership acts have defined a partnership as a relationship in which two or more persons agree to co-own a business for profit.2 These partnerships may be joint ventures, in which parties agree to work together on a 1 2

164 N.E. 545 (N.Y. 1928). UPA (1914), § 6(1) (“A partnership is an association of two or more persons to carry on as coowners a business for profit.”); UPA (1997, as amended 2013), § 202(a) (“Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”). The UPA had been adopted by New York in 1919, as noted in Meinhard v. Salmon. N.Y. Cons. P’ship L., § 10 (1925).

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specific undertaking, or partnerships joined for broader purposes.3 Every state provides in its general partnership statute that, even without a written partnership agreement, partnership law will protect those who enter into an agreement to coown “a business,” as opposed to entering into a static contract.4 The New York Court of Appeals had ample support to determine that Salmon and Meinhard had formed a joint venture in 1902 and that, at the time Salmon excluded Meinhard from the 1922 project, Salmon owed Meinhard the duties of a fiduciary, “subject to fiduciary duties akin to those of partners.”5 The 1920s – in which Meinhard and Salmon lived and worked – were heady and exciting times in the United States, at least until they weren’t, and a brief description of the social forces at play seems necessary to understand the factual story behind the legal opinion. To those of us not alive at the time, the closest comparison would be to the 1990s, when emerging technologies spawned new types of business industries, firms, and investors. “Coolidge Prosperity” came to describe a decade of increasing household wealth, consumption, and education6 during Calvin Coolidge’s six years in office. The early decades of the twentieth century brought us the modern corporation, large and growing larger by waves of mergers facilitated by statutes that allowed mergers and acquisitions with the consent of a bare majority of shareholders.7 Ordinary Americans became equity investors in unknown corporations, with strangers for managers.8 Just as Americans became more comfortable buying 3

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See Growblox Sciences, Inc. v. GCM Admin. Servs., LLC, 2016 WL 1275050 (S.D.N.Y. Mar. 31, 2016) (stating under New York law that a joint venture is “virtually identical” to a partnership and is a general partnership for a limited purpose); Scholastic, Inc. v. Harris, 259 F.3d 73, 84 (2d Cir. 2001). See generally Christine Hurt, Startup Partnerships, 61 B.C. L. Rev. 2487 (2020). Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). The dissent reminds the audience that “the referee” found that the two men had not created a partnership. Id. at 551. Cardozo does not reverse the finding of the referee, but he arrives at the same conclusion by calling the relationship a joint venture between “coadventurers,” even citing New York partnership law. Id. at 549. In practice, modern courts treat joint ventures similarly, if not identically, to partnerships. See, e.g., Jacobs v. Locatelli, 213 Cal. Rptr.3d 514, 523 n.10 (Cal. App. 2017) (noting “there are only three elements to show the existence of a joint venture, which are similar to a general partnership: (1) joint interest in a common business; (2) with an understanding to share profits and losses; and (3) a right to joint control”). Frederick Lewis Allen, Only Yesterday: An Informal History of the 1920s 141 (1931) (First Perennial Classics ed., 2000) (estimating that by 1929, there were two automobiles for every three families in the United States). See Nelson Ferebee Taylor, Evolution of Corporate Combination Law: Policy and Constitutional Questions, 76 N.C. L. Rev. 687 (1998) (tracing the historical development from the nineteenth century to the twentieth century of state merger statutes: from allowing mergers only between corporations in the same state and same business to those that are interstate and any business; and from requiring the unanimous consent of shareholders to a two-third consent to majority). Amy Deen Westbrook & David A. Westbrook, Unicorns, Guardians, and the Concentration of the United States Equity Markets, 96 Neb. L. Rev. 688, 702 (2018) (noting how the widespread use of the telephone in the 1920s allowed “investors from across the nation to participate in the financial markets.”).

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consumer goods on installments, they were also becoming more comfortable investing in the stock market on margin.9 Though the ability to participate in the capital markets brought upward mobility, it also brought disaster at the hands of unscrupulous, opportunistic, or merely incompetent managers. In response, the United States sought to tax the largest corporations;10 Adolf Berle and Gardiner Means undertook to describe and conceptualize the separation of ownership and control in the business firm;11 and Congress appointed a committee to investigate Wall Street abuses, culminating in legislation and the creation of the Securities and Exchange Commission.12 The 1920s were a time of great social and economic disruption, but also of temporary peace and prosperity. Great scientific progress was giving the country mass-produced automobiles and aircraft that could cross oceans. Capital markets were growing and providing opportunities for working-class households to participate in economic growth. As Coolidge Prosperity reigned, however, the United States was struggling with making the “melting pot” ideal a reality. Though Louisa Gerry could own the Bristol Hotel because of the passage of the Married Women’s Property Act in New York, fifty years prior, and women were increasingly participating in the capital markets,13 women would not be allowed to vote in New York until 1917.14 The Nineteenth Amendment to the U.S. Constitution would be passed in 1920;15 however, the absence of a positive right to 9

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Allen, supra note 6, at 272 (reporting that around one million U.S. individuals held stock on margin in 1929). Ajay K. Mehrotra, American Economic Development, Managerial Corporate Capitalism, and the Institutional Foundations of the Modern Income Tax, 73 Law & Contemp. Probs. 25, 41–43 (2010) (connecting the institution of a corporate-level tax with the “merger movement” of 1895–1904 that created large monopolistic firms with huge market power). Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1932); see also Andrew Smith et al., Berle & Means’s The Modern Corporation and Private Property: The Military Roots of a Stakeholder Model of Corporate Governance, 42 Seattle U. L. Rev. 535, 545–46 (2019) (reasoning that Berle & Means’ foundational work was begun in 1927 and was a reaction not to the Great Depression, but to the industrialization and widespread share ownership that preceded it). See generally Michael A. Perino, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance (2010); see also Michael A. Perino, Ferdinand Pecora: The Hellhound of Wall Street, 21 Experience 15 (2011) (reporting that following the conclusion of Pecora’s investigation into Wall Street practices, newly inaugurated Franklin D. Roosevelt signed a flurry of financial industry legislation, including the Securities Act of 1933 and legislation creating the SEC). Christine Sgarlata Chung, From Lily Bart to the Boom Boom Room: How Wall Street’s Social and Cultural Response to Women has Shaped Securities Regulation, 33 Harv. J.L. & Gender 175, 193–94 (2010); see also Sarah Haan, Corporate Governance and the Feminization of Capital, 74 Stan. L. Rev. (forthcoming 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3740608. Haan’s research also inspired Dalia Tsuk Mitchell to avoid using the term “passive investment” in light of its gendered connotations that Haan illuminates in her article. See Elaine Weiss, The Woman’s Hour: The Great Fight to Win the Vote 42 (2018) (noting that passage of voting rights for women failed in New York in 1915, but succeeded in 1917). U.S. Const. amend. XIX.

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vote allowed the groundbreaking, but hard-fought, amendment to be “not initially applied in a way that radically altered the position of women in the United States.”16 Just as nonwhite citizens were not universally and practically enfranchised until the passage of the Civil Rights Act of 1964, female voters – particularly black female voters – were often limited by discrimination under the law.17 The years between the world wars were also a time of growing anti-Semitism in the United States,18 reflecting growing animosity and hatred toward various racial, ethnic, and religious groups19 and foreign influences, particularly suspected “Bolshevik” influences.20 New immigration quotas did not expressly limit the number of Jewish immigrants, but the quotas reflected a preference for Northern European countries – not the countries from which Jewish immigrants had left when moving to the United States in great numbers prior to World War I.21 Though colleges and universities were increasingly admitting applicants of color and female applicants, many Ivy League institutions had informal quotas limiting the number of Jewish admittees.22 In the legal profession, the largest and most profitable law firms were composed of almost exclusively white Protestant men. As one scholar describes, New York lawyers were in one of three camps: constitutional lawyers, corporate lawyers, and collection lawyers – with “Cromwells and Cravaths” at the top and “Hebrews” at the bottom.23 Meinhard, who was described in the original Meinhard opinion as a “woolen merchant,” was more accurately a “factor” (someone who provides financing to businesses by purchasing their accounts receivable at a discount) for wool merchants: in essence, he was a collector who loaned wool merchants money.

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See Saru M. Matambanadzo, Embodying Vulnerability: A Feminist Theory of the Person, 20 Duke J. Gender L. & Pol’y 45, 50 (2012). See Weiss, supra note 14, at 328 (detailing the continuing struggles of nonwhite voters to vote after passage of the Nineteenth Amendment, noting “[w]ith rare exceptions, white suffragists, satisfied that they finally possessed the vote, ignored the plight of their black sisters for almost the next half century.”). Kirsten Fermaglich, Too Long, Too Foreign . . . Too Jewish: Jews, Name Changing, and Family Mobility in New York City, 1917–42, 34 J. Am. Ethnic Hist. 34, 39 (2015) (“Beloved public figures like Henry Ford and Father Charles Coughlin openly castigated Jews as monopolists, parasites, and radicals.”). See Allen, supra note 6, at 54 (detailing an “ugly flare-up of feeling” toward black Americans, Jews, and Roman Catholics). See id. at 48–50 (detailing the “Palmer Raids” conducted under oversight of Attorney General A. Mitchell Palmer, designed to root out suspected communists in the U.S. who might be planning a violent overthrow of the government, ushering in the “Red Scare”). See Rachel Silber, Eugenics, Family & Immigration Law in the 1920’s, 11 Geo. Immigr. L.J. 859, 883–84 (1997) (discussing the Immigration Act of 1924, which restricted immigration from each country to 2 percent of the population in the U.S. from that country in 1890, preferencing “old immigration” from Northern and Western European countries over “new immigration” from Eastern and Southern Europe and reflecting eugenic sentiment among many politicians). See Fermaglich, supra note 18, at 39. See Jerold S. Auerbach, From Rags to Robes: The Legal Profession, Social Mobility and the American Jewish Experience, 66 Am. Jewish Hist. Q. 249, 251 (1976).

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One fact that hints at the fraught business climate in this regard is that Salmon changed the spelling of his last name during this time from “Salomon,” perhaps indicating an experience with being discriminated against based on a Jewish surname.24 This practice was not entirely uncommon,25 particularly among the professional classes.26 Though the named players in the case Meinhard v. Salmon are all Jewish (Meinhard, Salmon, and Cardozo), anti-Semitism was growing in the United States during the period of the lease and subsequent litigation. Though Cardozo would be nominated and unanimously confirmed to the U.S. Supreme Court in 1932, President Herbert Hoover was hesitant to add a second Jewish member to the Court.27 Justice Louis Brandeis, who had been nominated in 1916, was confirmed against strong opposition, which was at least in part motivated by anti-Semitism.28 With that background, this commentary takes a fresh look at the original and rewritten opinions addressing Meinhard’s claim that Salmon was required to invite him to participate in the second lease. Though the opinions characterize the relationship as a joint venture, “akin” to but not exactly a partnership, I draw parallels between this case and the numerous cases decided every year in which a court finds a partnership under similar facts.

ORIGINAL OPINION

For those who teach or practice in partnership law, Meinhard v. Salmon is foundational, even though the court, led by Cardozo, did not explicitly find that our “coadventurers” were in a partnership. The majority opinion admitted that the parties were not in a “general partnership” but were instead in a “joint venture,” and proceeded nonetheless to analyze the relationship as governed by the laws of 24

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See Robert B. Thompson, The Story of Meinhard v. Salmon, in Corporate Law Stories 108 n.16 (J. Mark Ramseyer ed., 2009) (noting that though the various historical documents, including the 1902 lease and a New York Times article, spelled his last name as “Solomon” [sic], by this litigation, he changed his name to “Salmon”). This changing of the spelling did have the effect of anglicizing Walter Salmon’s name, as reflected in one scholar’s assumption that Salmon was Episcopalian with English roots. See Geoffrey P. Miller, Meinhard v. Salmon, in The Iconic Cases in Corporate Law 18 (Jonathan Macey ed., 2008). However, Professor Miller does point out that Salmon’s third wife, whom he married in 1919, remarried in the Episcopalian Church. See id. at n.55.. In addition, research in the New York Times archives reveals that his son with his first wife, who died in childbirth in 1906, went to St. George’s School and married Miss Virginia Peters in St. John’s Church in Washington, D.C. See Miss Virginia Peters Chooses Bridal Party, N.Y Times, Nov. 28, 1930, at S22. See Fermaglich, supra note 18, at 38 (reporting that in 1932, 65 percent of petitions for name changes in New York City were changes from “Jewish-sounding” surnames, and the next largest group, Italian surnames, constituted only 11 percent of petitions). See Auerbach, supra note 23, at 255. See Paul Horwitz, Religious Tests in the Mirror: The Constitutional Law and Constitutional Etiquette of Religion in Judicial Nominations, 15 Wm. & Mary Bill Rts. J. 75, 80 (2006). See Linda Sheryl Greene, A Tale of Two Justices: Brandeis, Marshall, and Federal Court Judicial Diversity, 2017 Wis. L. Rev. 401, 406 (2017).

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partnerships.29 Because of this conclusion, the original opinion did not describe the relationship between Salmon and Meinhard. To a legal reader, the two men were business associates, if that, from two different worlds: a real estate developer and a “woolen merchant.” Decades of professors and students have wondered how these two men met and why Salmon needed Meinhard for the first project at all. The original opinion told a brief story of Salmon having the opportunity to enter a lease for the Bristol Hotel and obtaining additional investment from Meinhard.30 Salmon was the active manager, and Meinhard shared in the profits.31 As the lease was about to expire, Salmon again received an opportunity, but this time the opportunity was to develop a city block in midtown Manhattan.32 Salmon did not ask Meinhard if they should continue their relationship to take on this new project, and so Meinhard asked the court to intervene.33 Cardozo affirmed that the lower court rightfully did so in favor of Meinhard. Along the way, Cardozo gave us the quintessential statement about the duties that fiduciaries owe to one another: Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions (Wendt v. Fischer, 243 N.Y. 439, 444). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.34

Though Cardozo described Meinhard as a mere “woolen merchant,” in contrast to a developer of real property in the most fashionable part of New York City, he used fiduciary law to protect Meinhard’s interest and expectation as a co-adventurer and not merely as a party to a contract. Cardozo’s broad language has stood as the benchmark for fiduciaries for almost a century; however, in depriving the reader of the facts regarding the relationships among all the parties, partnership law is made the poorer.

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Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928) (“The result was a joint venture with terms embodied in a writing.”). Id. at 545–46. Id. at 546. Id. Id. Id.

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FEMINIST JUDGMENT

In her rewritten majority opinion, Professor Dalia Tsuk Mitchell, writing as Chief Judge Mitchell, focuses on two questions: first, the nature of the relationship between Salmon and Meinhard (and the nature of business ventures more broadly); and second, the duties that those who manage business ventures owe their investors and potentially others within the enterprise. Although she reaches the same result as the original opinion, and also retains its much-quoted language about the “punctilio of an honor” that partners owe one another, she does so while using vulnerability theory35 and the feminist method of widening the lens36 to include a broader view of history, context, and persons affected by the legal outcome. The combination of historical perspective and a vulnerability-informed approach provides new insight into how the Meinhard opinion might have been reasoned differently from a feminist perspective. Mitchell introduces us to the real relationship between Salmon and Meinhard. They were not just accidental business associates, friends, roommates, and tennis partners. They went to the same synagogue and had similar backgrounds, coming from immigrant families. Though by the end of their joint venture they had drifted apart, their story is no different than most implied partnership stories of the twentyfirst century. Two individuals with a close relationship, whether romantic, familial, or platonic, decide to go into business together.37 When the relationship fails, opportunism steps in. According to vulnerability theory, legal rules should be created and analyzed with a broad notion of the individual in mind, with a realization that the individual is not always acting freely, rationally, with full information, as an adult, and in the presence of other choices.38 Because of the human condition, individuals under the law are vulnerable to a wide array of universal harms and situations that make optimal rational actions not always possible.39 According to another application of

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Martha Fineman, The Vulnerable Subject: Anchoring Equality in the Human Condition, 20 Yale J. L. & Feminism (2008). See Kathryn M. Stanchi, Linda L. Berger, & Bridget Crawford, Introduction to the U.S. Feminist Judgment Project, in Feminist Judgments: Rewritten Opinions of the United States Supreme Court 17 (2016) (describing “widening the lens” as a feminist method) (internal citations omitted). See generally Hurt, supra note 4, at 2487. Fineman, supra note 35, at 9–12. For example, a law and economics analysis of corporate law assumes that actors act rationally in freely entering into contracts with full information and respond to incentives to maximize personal gain. Scholars have criticized this model by arguing that behavioral economics contributes to the conversation by realizing that actors are motivated by other interests. See Margaret M. Blair & Lynn A. Stout, Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law, 149 U. Pa. L. Rev. 1735, 1738 (“We contend that people often trust, and often behave trustworthily, to a far greater degree than can possibly be explained by legal or market incentives. Although this picture of internalized trust conflicts with the neoclassical portrait of

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vulnerability theory, “[l]egal disputes in a variety of areas can be understood as determinations about who counts and how we should take account of them.”40 Certainly the determination of who is a partner or joint venturer and what duties are owed to partners can be viewed through this lens. Fiduciary law theorizes that in a fiduciary relationship, individuals are exposing their contributions and wherewithal to risks and uncertainties and are in a poor position, compared to the fiduciary, to protect against those risks and uncertainties.41 Applied correctly, fiduciary law should protect the dependent. In a general partnership, partners risk personal liability as well as loss of capital due to the actions of others with management rights over the business. Fiduciary law is what partners rely on to protect them from opportunism and self-dealing. Mitchell analyzes the relationship between Meinhard and Salmon by drawing on the early twentieth-century realists’ critique of the public/private distinction, and by focusing on power and vulnerability, rather than shame and guilt, to determine the scope of Salmon’s duties. Though Meinhard and Salmon are private actors, Mitchell quotes Roscoe Pound in exhorting us to not “exaggerate[] private right at the expense of public right.” Though fiduciary law is often used in commercial situations in which private actors have entered into contracts, the core of fiduciary law is that one person has discretion or power over the assets and affairs of another. Mitchell focuses on the “recognition that when individuals cede control over certain aspects of their lives to others, those surrendering control become dependent upon, and are relatively powerless to affect, the conduct of those to whom control was surrendered.” Mitchell recognizes that fiduciary law, not contractual freedom and individual autonomy, protects the public. The original opinion all but erased the women involved from the relationship and the story, but Mitchell restores them. Although the original opinion states that Louisa M. Gerry in 1902 owned the Bristol Hotel that is at the center of the dispute in Meinhard v. Salmon,42 Mitchell goes a step further and juxtaposes Louisa Gerry’s social standing and pedigree with those of Meinhard and Salmon. Louisa came from a patrician New York family, the Livingstons. Her grandfather was involved in the drafting of the Declaration of Independence, and her aunt married a grandson of Alexander Hamilton. Louisa married Elbridge T. Gerry, grandson of Vice President Elbridge Gerry, to whom we owe the (mispronounced) word “gerrymandering.” As Mitchell reveals, the opportunity to enter this world was both enticing and intimidating to Salmon, but his friend Meinhard gave him the capital and support that he needed to accept.

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homo economicus as a hyperrational, purely self-interested actor, it is supported not only by casual observation but by an overwhelming amount of empirical evidence.”). See Matambanadzo, supra note 16, at 45. D. Gordon Smith, The Critical Resource Theory of Fiduciary Duty, 55 Vand. L. Rev. 1399, 1404 (2002). Meinhard v. Salmon, 164 N.E. 545, 550 (N.Y. 1928).

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Louisa Gerry passed away in 1920, and her ownership interest passed to her husband, Elbridge, who led negotiations with Salmon. Had Louisa survived to negotiate herself, would the ending have been different? Perhaps she understood that Salmon was part of a joint venture and would have handled things differently, but she also may have assumed that Salmon was working alone. Mitchell also names and considers Meinhard’s wife, Carrie, to whom he transferred his joint venture interest. Cardozo acknowledged Carrie in his original opinion when he analyzed whether the partnership was dissolved when Meinhard transferred the partnership interest to his wife for tax purposes. However, Cardozo otherwise missed an opportunity to highlight her shadowed role in the partnership between her husband and Salmon, via the implicit interdependence of the “public” marketplace on the “private” institution of the family.43 The feminist judgment by Mitchell, on the other hand, highlights that the outcome of this dispute affects not just the contract parties but families as well. This important point is illustrated by the aftermath of Meinhard: because of the Great Depression that followed not long after Meinhard won, the venture was not successful at the time of Meinhard’s death, and the debts from the joint venture exceeded Meinhard’s estate, such that the widowed Carrie and others had to reach a compromise with the will executors about what they would receive under his will after such debts. In the end, Carrie received $62,000 of the $100,000 she was supposed to receive annually under Meinhard’s will and referred to Meinhard v. Salmon as a “pyrrhic victory.”44 This turn of events is an affirmation of the vulnerability theory upon which Mitchell relies in her feminist judgment, as winning the case could not ultimately eliminate Carrie’s vulnerability to economic crises.

IMPACT OF THE FEMINIST JUDGMENT

One hundred years after Meinhard v. Salmon, friends, relatives, and romantic partners continue to agree to be in business together – and then must turn to the courts to restore their rights and expectations after the relationship sours. The law of partnership, applied to relationships that are characterized either as joint venturers or not, continues to be the backstop against opportunism when informal understandings break down between individuals participating in joint ownership of an ongoing enterprise. Mitchell’s opinion, focusing instead on the interconnectedness of human experiences and the complexity of business relations, challenges the dominant vision of markets and the marginalization of certain groups it entails. In referencing the realities of power and vulnerability in business enterprises, 43

44

See generally Martha Albertson Fineman, Vulnerability and Inevitable Inequality, 4 Oslo L. Rev. 133, 149 (2017). Carrie Meinhard, Across My Path, Recollections of an Old New Yorker 58, 157 (1950).

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Mitchell’s rewritten judgment would ensure a more inclusive and equitable market society. Though Mitchell’s holding gives Meinhard the same relief granted by Cardozo in the original opinion, the legacy of Meinhard v. Salmon would have been even more influential because of Mitchell’s reasoning and context. Under Cardozo’s paradigm, business relationships are binary: marketplace participants owe one another “the morals of the marketplace,” or almost nothing; partners owe one another “a punctilio of an honor most sensitive,” or almost everything. To paraphrase Cardozo, the morals of the marketplace are too harsh to protect those who join their capital and expectations with another in a business venture.45 Those who agree to co-own a business without incorporating in a different entity will owe one another the finest duty. However, once there is a dispute, the courts may have to assess whether what the parties did and said provides evidence that they agreed to be in business together and share profits and losses. Cardozo therefore changed the determinative inquiry to the definitional question of whether a relationship is a partnership or a mere contractual relationship. These fact-dependent cases involve complicated relationships between siblings, parents and adult children, spouses, friends, and romantic partners. Because the outcome will be all or nothing depending on whether a relationship is a partnership or a mere contractual relationship, the question becomes weighted in favor of not finding a partnership. However, Cardozo did not give us the facts that should lead a court to that definition, resulting in uncertainty and a tendency to look away from the most dependent purported partners, including but not limited to women. Instead, Cardozo almost entirely erased the details of Salmon and Meinhard’s friendship, with the exception of hinting at it when he referenced “comradeship” and acknowledged the possibility of a falling out between Meinhard and Salmon.46 It is particularly notable that he did so despite having a factual record that provided context on Meinhard and Salmon’s friendship.47 Future litigants do not have facts to rely upon that point toward partnership or away from partnership. Cardozo could have laid a foundation for personal interconnectedness to point toward a business relationship, as another court later did in a detail-rich opinion determining whether two individuals with a personal relationship formed a partnership. In Holmes v. Lerner,48 the court found for the plaintiff – Patricia Holmes, who argued that she and Sandy Lerner had co-founded the 45 46

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Meinhard v. Salmon, 164 N.E. at 545. Id. at 547–48 (“There might seem to be something grasping in [Meinhard’s] insistence upon something more. Such recriminations are not unusual when coadventurers fall out.”). See Thompson, supra note 24, at 110, n.16 (citing “a brief in the case [that] described [Walter and Morton] as being on ‘terms of social intimacy. They were warm and personal friends. In 1901 and 1902 they met each other three or four times a week, frequently dining together. In summer of 1902, and off and on during previous summers, they roomed together.’ ”) (internal citations omitted). 88 Cal.Rptr.2d 130 (1999).

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cosmetics business Urban Decay – after extensively detailing their personal and professional relationship in the opinion. Though Lerner attempted to characterize Holmes’ participation as gratuitous help from a friend, the court acknowledged that even though the two were friends, they also created a partnership.49 In the absence of such a contextually supported decision, courts are more likely today to see the existence of a noncommercial relationship as evidence that individuals were not business partners, particularly if they were romantic partners. Though there is nothing inherently inconsistent when two individuals are both personally close and business partners, a court might reason that a wife might keep the books and do other tasks for the husband’s business because she was being a helpful wife, not because she and her husband agreed to co-own the business.50 Evidence of an emotional impetus seems to preempt any business intent. To Cardozo, Salmon and Meinhard are clearly business partners because that is their only connection to one another, or at least the only connection worth mentioning. However, this false presentation robs courts of precedent for recognizing that a close relationship may be evidence of a partnership, not evidence against the partnership. Ultimately, the obscuring of the relationship in this case – and others like it – hurts women and other dependent persons in these informal partnership disputes, because they may be very likely to be in informal business relationships with relatives, friends, or romantic partners and not just with business acquaintances or strangers.51 In Cardozo’s opinion, he gave Salmon two options: a constructive trust on the lease Salmon signed or a constructive trust of just less than 50 percent of the shares of the corporation Salmon formed to own the lease.52 In Mitchell’s opinion, she declares the same remedy. For Meinhard, a constructive trust on the lease would have meant that until Salmon awarded title of the lease to Meinhard, he would have held profits in trust for him.53 Likewise, a constructive trust on just less than 50 percent of the corporate shares would have meant that until Salmon transferred those shares to Meinhard, he would have held corporate profits in trust for him. In these cases, Meinhard would not be forced into a co-managing relationship with 49

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See Opening Brief of Appellants Sandra Lerner and David Soward, 1998 WL 34188944, at 8 (Cal. Ct. App. Dec. 15, 1998). Benjamin Means, The Contractual Foundation of Family-Business Law, 75 Ohio St. L.J. 675, 693 (2014) (“No bright-line test will do, however, as the sharing of control, profits, and losses that define a business partnership also describe a marriage, and a spouse’s involvement in a business might not fit neatly into either category.”). See Christine Hurt & D. Gordon Smith, Bromberg & Ribstein on Partnership § 2.09 (3d. ed. 2019). Meinhard v. Salmon, 164 N.E. 545, 549 (N.Y. 1928). See Restatement (Third) of Restitution § 55: (1) If a defendant is unjustly enriched by the acquisition of title to identifiable property at the expense of the claimant or in violation of the claimant’s rights, the defendant may be declared a constructive trustee, for the benefit of the claimant, of the property in question and its traceable product. (2) The obligation of a constructive trustee is to surrender the constructive trust property to the claimant, on such conditions as the court may direct.

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Salmon. Meinhard could maintain the corporate shares with the more limited rights of a shareholder, or presumably could freely transfer the shares to someone else; likewise, he could maintain his interest in the lease as an investor (as before) or transfer his participation. One defining characteristic of partnership law is the “pick-your-partner” rule.54 Partners may not transfer their full partnership interest without consent, and creditors may not assume the full rights of defaulting partners. Partners always have the power to withdraw from a partnership and also have recourse to judicial dissolution. Because partners have liability for one another’s actions and all partners have a default right to co-manage, the ability to choose with whom one is a partner is essential to the form. No judge in this case could force the parties to recreate their joint venture or even a new partnership. In Holmes v. Lerner, though a partnership had been formed early in the history of the venture, the breaching partner had taken the assets of the partnership and placed them in a limited liability company.55 The remedy, therefore, was monetary damages, not the re-creation of the partnership.56 Forcing litigants to return to a dysfunctional relationship would not be useful or equitable and might lead to more opportunism and harm. For all its faults, Meinhard v. Salmon remains a hallmark of an equitable ideal: those in particular types of relationships, in which one party has control over the assets of another or over their collective assets, should manage those assets with a degree of “undivided loyalty.” Understanding the context and the hidden background of the case gives even greater texture to this fiduciary law standard.

Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928) chief judge dalia tsuk mitchell delivered the opinion of the court This case is about friendship and business, dependency, and betrayal. It is about our rapidly changing society and our growing economic and financial markets. It is about the culture we share and the values we embrace; about the ties that bind us and the trust that strengthens our bonds. It is about who we are and who we would like to become.

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See Daniel S. Kleinberger, The Plight of the Bare Naked Assignee, 42 Suffolk L. Rev. 590 (2009) (“Partnership is a voluntary association, resting on a contract (express or implied) to coown a business. That contract co-exists with, and the business depends on, a relationship of trust and confidence among the co-owners who choose to co-associate.” 88 Cal.Rptr.2d 130, 132 (1999). Id. at 136.

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Section I begins by telling the story of two men, the litigants before this Court, their cultural background and aspirations, their friendship, and the joint venture they formed, one being an active manager and the other an investor. The story ends – and this litigation begins – when the manager chooses to forsake friendship for the exclusive pursuit of profit. Section II describes the legal questions we address and our conclusions. It also sets the foundation for our legal analysis by drawing a distinction between contracts for the sale of goods and agreements, such as the one before us, for the formation of a business venture. Section III builds on this foundation to place the litigation in the broader context of business and market developments since the Civil War, especially the expansion of investment in securities and the correlated separation of ownership from control in business enterprises. We discuss law’s role in addressing these developments in the remaining sections. Section IV explores the strict common-law trusteeship duties that have limited, and must continue to constrain, the power of those in control of productive property. Section V examines the relations of power and dependency that characterize investments in securities, demonstrating why those who control businesses should not be permitted to use contractual provisions to limit their trusteeship or fiduciary duties toward investors. Section VI rejects the idea that disclosure of conflicts of interest could satisfy the fiduciary duties of those in control of business enterprises. Section VII offers broader justifications for imposing trust, encouraging cooperation, and fostering an ethic of interconnectedness and care in our economic and financial markets. The remedy we provide in this litigation, which we discuss in Section VIII, is intended to further the ends discussed in the previous sections. We acknowledge at the outset that our decision does not offer bright line rules and thus does not provide the certainty and predictability that some might consider essential to the success of our economic system. We believe the flexible standards and guidelines we adopt are more appropriate in cases such as the one before us, as they acknowledge the dynamic and changing nature of business relationships, help ground such relationships in an ethic of interconnectedness and care, and foster cooperation, solidarity, and trust among those involved in business ventures.

I

Walter J. Salomon and Morton H. Meinhard were friends. They attended Temple Emanu-El, the first reform synagogue in New York City, and were members of the same tennis club; they dined together in the city three to four times a week, sometimes with other friends; for a few summers, they sublet an apartment (“roomed”) together. Meinhard Test. }} 672–76, 732–36. Salomon was an up-andcoming real estate developer and Meinhard was a merchant. Two thirty-something single Jewish men, both hoped to climb New York City’s financial and social ladders. For both, a successful business was a means of overcoming discrimination

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based on religion and culture and assimilating into a rapidly changing American society.1 In the winter of 1902, during one of their dinners at Delmonico’s café on Fifth Avenue and 44th Street, Salomon described a new and very profitable opportunity that came his way, namely turning The Bristol Hotel at the Northwest corner of Fifth Avenue and 42nd Street – a few blocks away from where they were dining – into an office building. Meinhard Test. At }} 677, 682–83. The Hotel, one of New York City’s landmarks, had opened in 1875 as a family hotel to cater to the needs of the City’s wealthiest.2 Almost three decades later, the owners wanted to transform the building into a combination of offices and stores to maximize its worth in what had become a prime business location – the intersection of New York City’s two famous streets, home to hotels, office buildings, retail stores, and residential buildings. Not far from the Hotel, the new Grand Central Terminal was being built, with plans to move the railway tracks underground and connect the station to the subway system. The owner of The Bristol Hotel at that time was Louisa M. Gerry (née Livingston), a wealthy New Yorker and a descendant, on her father’s side, of Robert R. Livingston, who had helped to prepare the Declaration of Independence and administered the presidential oath of office to George Washington.3 On her mother’s side, Louisa was a descendant of Morgan Lewis, a jurist, a governor of New York, and the second son of Francis Lewis, a signer of the Declaration.4 Louisa was married to Commodore Elbridge T. Gerry, a descendant of Elbridge Gerry, another signer of the Declaration, a governor of Massachusetts, and vice president to James Madison.5

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Prejudice against Jews remains unfortunately prevalent in certain circles in our city, and in 1907, Salomon was the indirect cause of litigation involving such prejudice. An individual, George H. Abbott, leased an apartment at the Hotel Renaissance. Having had a change of plans, he sought to sublet the apartment to Salomon only to be told that “the arrangement could not be made because the owner of the hotel, D.H. King, Jr. would not take Jews as tenants.” As Abbott could not find another tenant, the apartment remained vacant “and the suit for rental followed.” Justice Wauhope Lynn of the Municipal Court, labeling the owner’s attitude “obnoxious,” held, as we hope any court would, that the hotel “should have been satisfied with [Abbott’s] prospective tenant, Salomon,” and directed judgment accordingly. Can’t Bar Tenant Because of Creed, N.Y. Times, Nov. 21, 1907, at 16. Life in the Hotel Bristol, N.Y. Times, Sept. 25, 1878, at 8 (labeling the hotel a “first class family hotel.”). Mrs. Elbridge T. Gerry Dies: Senator’s Mother Was Member of Two of America’s Oldest Families, N.Y. Times, Mar. 27, 1920, at 13. New York’s Four Signers, N.Y. Times, Aug. 1, 1926, at E4; Elbridge T. Gerry Dies in 90th Year, N.Y. Times, Feb. 19, 1927, at 15. Louisa’s maternal grandfather, Garrit Storm, bought the land on which The Bristol Hotel now stood in 1845; at the time, it was deemed worthless. Garrit Storm, a Narrative (1847), available at http://www.portals-to-the-past.com/ garritstormanarrative.html. Mrs. Elbridge T. Gerry Dies, supra note 3.

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This was an opportunity of a lifetime, promising Salomon both financial and social success. The son of a Jewish immigrant from Germany,6 he would enter a lease with a member of one of the most culturally and politically prominent families in the city. Yet, Salomon – perhaps because he was already leasing other buildings, including one he planned to remodel at the Northwest corner of Sixth Avenue and 42nd Street7 – was concerned that the undertaking was “too large” and “the responsibility . . . too great.” Meinhard Test. }} 686. So, in the spirit of friendship, Meinhard, also of an immigrant background,8 offered “to share the responsibility with him,” encouraging Salomon not only to enter the lease on The Bristol Hotel but also to invest money in developing the building into a “first class up to date office building” that would withstand competition from other buildings in the neighborhood. Id. at } 686, 714, 764. They “shook hands on it and went over and played [their] game of tennis.” Id. at }} 683–85. Twenty years later, Meinhard remained enthusiastic about their adventure. Id. at } 784. Having agreed to be joined together, Salomon and Meinhard met for lunch at The Lotus Club the following day to discuss the terms of their adventure. They decided that they would equally bear the expenses and losses, but that Salomon, because he was to supervise the renovations, would receive 60 percent of the profit for the first five years, while Meinhard would be entitled to only 40 percent. After five years (later extended to six years), they would each equally share in the expenses, losses, and profits derived from the office building.9 Meinhard Test. }} 688–94. Confident in his friend’s financial assistance, on April 10, 1902, Salomon, who by then had received $5,000 from Meinhard (Id. at }} 956–74), entered a lease on The Bristol Hotel with Louisa M. Gerry, who was represented by Elbridge T. Gerry, her husband and attorney. The lease commenced on May 1, 1902, for a period of twenty years, and for the first three years, Rudolph G. Salomon, Walter Salomon’s father, guaranteed Walter’s performance. Exhibit A. Salomon planned to “remodel the building, converting the lower floors into stores and the upper ones into offices and lofts,”10 and entered a separate agreement with Gerry to that effect. Shortly after signing the lease, Salomon asked Meinhard to memorialize in writing their agreement regarding expenses, losses, and profits, should either of them die. Meinhard Test. }} 822–23. Excited about their new venture and trusting 6

7

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Salomon’s father, Rudolph G. Salomon, was born in Luneburg, Hanover, Germany. Obituary, N.Y. Tribune, Jan. 29, 1907, at 14. In the Real Estate Field: Official Records Show Business of Unprecedented Volume, N.Y. Times, Apr. 6, 1902, at 19. Meinhard’s father, Henry Meinhard, was born in Bavaria, Germany. Obituary, N.Y. Times, Dec. 17, 1906, at 11. In an amendment dated February 23, 1905, the time during which Meinhard “was to receive forty percent of the profits was extended for one year more, after which the profits were to be divided equally.” Referee’s Report, Findings of Fact, } 6. In the Real Estate Field: Interesting Deals on Middle and Upper Fifth Avenue – Hotel Bristol Leased – Other Business, N.Y. Times, Apr. 18, 1902, at 14.

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his friend, Meinhard signed the Memorandum of Agreement (“Memorandum”) that Salomon’s attorney had drafted, giving it only a cursory reading. Id. at }} 821–22. The Memorandum, dated May 19, 1902, ensured that Salomon would have “full power to manage, lease, underlet and operate the said premises . . . just as if this agreement had not been made and executed.” Exhibit B. Salomon’s “full power” included the power to request that Meinhard “pay one-half of any sum” required to fulfill the lease obligations. Id. It was also understood that, in the event that Salomon died before the termination of the Memorandum, “no disposition shall be made of the lease” without first consulting Meinhard, who would have the right of first refusal regarding any such disposition. Id. Salomon and Meinhard sublet an apartment together in the summer of 1902, during which the alterations of The Bristol Hotel were taking place, and naturally they often discussed these alterations. Meinhard Test. }} 673, 707–08. In 1906, both men married into prominent Jewish families: Morton Meinhard married Carrie Wormser, the daughter of a successful merchant,11 and Walter Salomon married Elsie May, whose father was the President of Temple Emanu-El and head of a large banking house.12 Rev. Dr. Joseph Silverman of Temple Emanu-El officiated at both weddings, and Salomon was an usher at Meinhard’s.13 A few years later, however, Salomon and Meinhard were no longer in contact. Their only connection remained their joint adventure, which – after initial losses – became rather profitable; on an investment of $40,000, each had ultimately made a profit in excess of $500,000. But this connection, too, was about to be severed. Details about their estrangement are scant. Their business relationship was initially marred by disagreement about the expenses associated with managing the Bristol building and who was responsible for them, but by 1908 they appeared to resolve these matters.14 Deeper differences – those grounded in conflicting visions of community, friendship, and business – can be gleaned from the evidence and from their life stories. While Meinhard seems to appreciate the sense of connection and interdependence that relationships, including business relations, offer, Salomon appears to have embraced the increasingly dominant idea that business is impersonal and solely a means of financial success.15 11 12

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Miss Wormser Attacks Burglar in Her Room, N.Y. Times, Feb. 8, 1906, at 16. A Brilliant Jewish Wedding: Marriage of Mr. Lewis May, of the Temple Emanu-El, and Miss Emita Wolf, N.Y. Times, Mar. 26, 1880, at 8. Weddings of a Day: Meinhard-Wormser, N.Y. Times, May 1, 1906, at 9; A Day’s Wedding: Salomon-May, N.Y. Times, Sept. 4, 1906, at 9. Meinhard v. Salmon, 223 A.D. 663 (N.Y. 1928). Once the quarrel was resolved, Salmon agreed “‘to devote such time and attention as may be necessary for furthering our joint interests in the building,’” and “stated that ‘this agreement shall bind both of us for the remainder of our ownership of the lease of the said premises.’” Id. at 666 (emphasis in original). As Salmon noted with respect to the joint venture, “I was thirty years old or thereabouts and I wanted to limit the amount of business I was – business risks I was taking, and while I myself thought that it was not a good thing for me to take anybody in on an interest in the profits, still I thought well, well, I said, ‘I will probably make it up some other time on some other

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For one thing, in the years following the formation of their venture, Meinhard not only developed Morton H. Meinhard & Co., a business he had formed in 1898, into a major textile factoring and commission business,16 he also became known for his commitment to Jewish charities.17 In 1914, he founded the Henry Meinhard Memorial Neighborhood House, a settlement house and a tribute to his father.18 It was located on the upper East side in a predominantly Jewish neighborhood and offered different programs for children and young people.19 Salomon, in turn, experienced successive personal losses: Elsie May died in 1907,20 shortly after giving birth to Walter J. Salomon Jr., and Salomon’s second wife, Lois May (Elsie’s younger sister) died in 1916; she had given birth in 1910 to their daughter Lois.21 Despite these losses, Salomon was able to create a real estate empire, leasing and improving several buildings in midtown Manhattan. Moving in new social and economic circles, Salomon developed a penchant for horse breeding and racing, ultimately establishing Mereworth Farm near Lexington, Kentucky, so he could breed Thoroughbreds.22 By 1919, twice a widower, Salomon changed the spelling of his last name to Salmon and married Elizabeth J. Davy, of a prominent Episcopalian family. The wedding announcement noted that the bride “was the granddaughter of the late Justice John M. Davy of the Court of Appeals of New York” and the groom was “a prominent real estate man [who] was recently elected President of the New Symphony Orchestra.”23 The following year, they welcomed a son, Burton. Salmon’s assimilation into the higher echelons of American society appeared complete. We can only speculate as to whether this transformation affected what happened next between the two men. On January 25, 1922, three months before the original lease was to expire, Midpoint Realty Co., Inc., a corporation owned and managed by Salmon,24 entered

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19 20 21 22

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transactions and keep my mind a little clearer’ and that what was in my mind when I went into the transaction with Mr. Meinhard.” Salmon Test. } 1627. In 1919, the American Association of Woolen and Worsted Manufacturers appointed Meinhard its representative on the Board of Governors of the Mutual Adjustment Bureau of the Cloth and Garment Trade. Cloths, Women’s Wear, vol. 18, iss. 70, Mar. 26, 1919, at 8. Have Plan to Unite all Jewish Charity, N.Y. Times, June 24, 1916, at 11. Meinhard Memorial House, N.Y. Times, Jan. 29, 1914, at 8; Morton H. Meinhard Testimonial Dinner Speakers Announced, Women’s Wear Daily, vol. 36, iss. 101, Apr. 30, 1928, at 8. Id. Obituary, N.Y. Times, June 30, 1907, at 7. Obituary, N.Y. Times, Mar. 2, 1916, at 11. See, e.g., Notables of Society Attend Horse Show, N.Y. Times, Nov. 17, 1920, at 20; Careful is Beaten after Seven Victories, N.Y. Times, June 17, 1920, at 13; Walter J. Salmon’s Stable Wintering at Belmont Park, Washington Post, Dec. 30, 1921, at 12; Science to Aid Fast Steppers, Washington Post, July 22, 1928 (“Mereworth Farms, near Lexington, Ky., owned by Walter J. Salmon, prominent breeder, of New York”). Salmon-Davy Wedding Today, N.Y. Times, Apr. 26, 1919, at 15. As the Referee found, “all of the capital stock of said Midpoint Realty Co., Inc. was and still is owned by the defendant Salmon. Said Salmon has at all of said times nominated and dominates the Board of Directors and officers thereof, and is in full and complete control of

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a new lease with Elbridge T. Gerry, now owner of the property; Louisa had passed away in 1920.25 The new lease, like the old lease, initially extended for a twenty-year term “commencing on the first day of May 1922 and ending on the thirtieth day of April 1942.” It covered “street numbers 500, 502, 504 and 506 Fifth Avenue, and Number 1, 3, 5, 7 and 9 West Forty-second Street,” an area that included the Bristol building. Exhibit C. The new Grand Central Terminal had been completed in 1913, and the new lease covered some of the most highly valued properties in New York City. The rental amount, which under the original lease had been only $55,000, was fixed at $350,000–$400,000 for the first three years and $475,000 for the remainder of the term. Id. Salmon agreed to tear down the Bristol building and build a much higher building on the larger parcel, and the lease could extend for three additional periods of twenty years, through the end of the twentieth century. Id. Salmon, the wealthy real estate developer and investor, no longer needed Meinhard’s friendship or financial support. Convinced, perhaps, that he alone – through his time and labor – had made the enterprise a success, and that Meinhard – who had given money but neither time nor labor – had already been richly paid, Salmon never told Meinhard about the new lease. Meinhard learned about it when he saw a notice of the accomplished fact in a newspaper. Complaint }12.26 Feeling hurt and betrayed, Meinhard made demand on Salmon that the lease be held in trust as an asset of the venture, making offer upon the trial to share the personal obligations incidental to the guaranty. Former Supreme Court Justice Abel E. Blackmar, acting as referee, limited Meinhard’s interest in the new lease to 25 percent. The limitation was on the theory that the plaintiff’s equity was to be restricted to one-half of so much of the value of the lease as was contributed or represented by the occupation of the Bristol site. Upon cross-appeals to the Appellate Division, Meinhard’s equitable interest was increased to include one-half of the whole lease. 223 App. Div. 663, 674 (1928). Salmon appeals that judgment.

II

Two interrelated questions are before us: the nature of Salmon’s and Meinhard’s relationship, and the duties their relationship entails. To Salmon’s mind, a twentyyear term business relationship was created by the Memorandum. When the

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said Midpoint Realty, Co., Inc.” Referee’s Report, Findings of Fact, } 16. For purposes of this decision, we consider Midpoint Realty Co., Inc. as Salmon’s alter ego and deem the new lease as signed by Salmon. Mrs. Elbridge T. Gerry Dies, supra note 3. Elbridge died in 1927, and the lease was bestowed to his estate. Elbridge T. Gerry Dies in 90th Year, supra note 4. See also Fifth Avenue Deal: Elbridge T. Gerry Leases 42nd Corner for Long Term, Jan. 27, 1922, at 32.

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Memorandum reached its expiration date, the relationship terminated and neither party owed anything to the other. The new lease was a new venture, different in duration and expanded in space, to which Meinhard had no claim. To Meinhard, this was a friendship turned business venture – an investment. Like marriage, their business relationship, if not their friendship, was meant to last. Each was to pay half the moneys required to reconstruct, alter, manage, and operate the property, and Salmon was to manage and operate it. After the initial six years, they shared equally in the expenses and profits. If Salmon died before the end of the lease he signed with Gerry, Meinhard would have a right of first refusal to continue the adventure. In his dissenting opinion, Judge Andrews holds that the Memorandum was a contract with “a limited object” and “a limited time.” Any duties Salmon might have owed Meinhard ended when the contract terminated. We strongly disagree. Our view of the Memorandum and its scope cannot be limited to general propositions about the common law of contracts. A contract forming a joint adventure is very different from a contract for the discrete exchange of goods and services. The latter is limited in scope and time, whereas the former expands beyond the exchange of vows to create a new and dynamic business being with existence and purpose of its own. Recognizing that the agreement between the parties formed a new business being reveals the Memorandum to be a contract for equity investment, with Meinhard, the investor, dependent on the actions of Salmon, the manager of the joint venture. Meinhard’s dependency must inform this Court’s interpretation of the Memorandum and the duties we assign to Salmon. As our decision explains, because the Memorandum is a contract for equity investment, because of Meinhard’s dependency upon Salmon’s actions (and more broadly, the dependency of individual investors in our rapidly changing markets), and because it is this Court’s strong belief that if we are to ensure a more equal and just society, our markets must be grounded in an ethic of care and obligations, we conclude that the new lease was an expected extension of the original lease. Salmon, by not disclosing the new opportunity to Meinhard and offering to share it, violated the fiduciary duties associated with his position of power as a managing coadventurer. Meinhard is therefore entitled to a share in the new lease, commensurate with the share he had in the original one.

III

Almost five decades ago, Justice Holmes, then a Massachusetts lawyer (appointed to the Massachusetts Supreme Judicial Court shortly thereafter), powerfully stated: The life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed and unconscious, even the prejudices which judges share . . . have had a good deal more to do than the syllogism in determining the rules by which [we]

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should be governed. The law embodies the story of the nation’s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics.

Oliver Wendell Holmes, Jr., the common law 1 (1881). The past half a century has witnessed a dramatic development of business ventures. Rapid industrialization and urbanization, consumer demand, a rising number of skilled and unskilled workers, and an expanding pool of capital have engendered massive growth in the scale of business enterprises and the scale of our markets. Impersonal interactions have replaced the traditional, more intimate relationships that are common among smaller and more cohesive communities. To enable our laws to stay in touch with this reality, we must adjust our “principles and doctrines to the human conditions they are to govern rather than to assumed first principles”; we must put “the human factor in the central place and relegat[e] logic to its true position as an instrument.” Roscoe Pound, Mechanical Jurisprudence, 8 Colum. L. Rev. 605, 609–10 (1908). We must understand the Memorandum in the context of our changing economy and society as well as our developing notions of policy and justice. The Memorandum that formed the business venture in this case was a contract for financing, similar to common stock. Salmon actively managed the building; Meinhard was an equity investor. He put his capital in the enterprise in the hope of earning profit, but without any guarantee of returns. Once invested, he had no control over the uses Salmon would make of the money. The questions before us are: What legal protections attach to Meinhard’s hopes and expectations? What legal protections attach to equity investments? What is, more broadly, law’s role in addressing vulnerability in business ventures and similar interdependent relationships? For a large part of our history, ownership of private property has been the foundation of our republic. We assumed that responsible citizenship depended on ownership of productive property, not on idle money. “The enjoyment of the fruits of labor through private property” was deemed to contribute “to higher living standards, progress, family life and happiness.” William Z. Ripley, Main Street and Wall Street 131–33 (1st ed. 1927). Even after the growth of corporations and the gradual abolition of property requirements for suffrage began to transform our understanding of proprietorship and citizenship, financial speculation remained anathema to our republican values. The financing of the railroads introduced public security financing of industry and helped to change public opinion, although, until the 1880s, there was no important class of small individual or institutional investors in securities. Beginning in the merger wave of the 1880s, however, rapid industrial and business growth increased the demand for capital. Seeking to maximize their own profits, entrepreneurs found ways to convince the American public to invest in their

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enterprises, first in railroad bonds and industrial preferred stock, and then, by the second decade of our century, in common stock. Gradually, investment in securities became associated with modern citizenship and the American democratic ideal. Low-wage employees, women, and recent immigrants were all welcomed into and included within a new nation of investors. Today, ownership of productive property is improbable for many people. Large enterprises own factories and industrial plants, while corporate-owned chain stores are replacing the small corner stores of decades past. “It is possible for a man of means to own privately his . . . house . . . his clothing and his personal effects . . .. But his funds put out to economic uses almost of necessity find their way . . . into the capital structure of corporations.” Adolf A. Berle, Jr., Studies in the Law of Corporations Finance 26 (1928). “Absentee ownership has come to be the main and immediate controlling interest in the life of civilised men.” Thorstein Veblen, Absentee Ownership and Business Enterprise in Recent Times 3 (1923). Equity investment is described as well-suited to those without the time, the knowledge, or the ability to manage a business. Employees have found an investment in their employer’s business a way to capture the profits to which they contribute. Many women, who after the Civil War were gradually allowed to control their own property but continued to have limited employment opportunities, have found investment in stock to be a means of receiving regular income and supporting their families. In 1917, Morton Meinhard transferred to his wife, Carrie, all his “right, title and interest in and to” the joint adventure, to ensure that the income was hers. Salmon did not object to this transfer and, indeed, made his payments thereafter directly to Carrie Meinhard. Carrie, acting in concert with her husband, reassigned the rights back to Morton before this action was begun.27 While this question is not before us, it is worth noting that, even if individual investors seek to play an active role in business ventures, recent changes to state corporation laws have helped to wear away investors’ ability to affect their corporations’ affairs.28 Indeed, despite a growing number of equity investors, and perhaps due to concerns about the influx of new investors, the control of our markets 27

28

A straightforward gift to a spouse is a common way to shift family income for tax purposes. By transferring the income-producing property to a spouse with no other income, a couple can ensure that the income produced by the property is taxed in a lower bracket. The transfers between Morton and Carrie Meinhard were thus for tax planning and do not affect this Court’s assessment of the appropriate relationship between Meinhard and Salmon. These changes include the erosion of the ultra vires doctrine, the reintroduction of the idea that the board’s power is original and undelegated, and the elimination of the shareholders’ right to remove directors at will, all of which have helped minimize shareholder control. So too did changing voting rules. Proxy voting has become the norm, and states have adopted statutes allowing a simple majority of the shareholders to approve the sale of corporate assets, abolishing the nineteenth-century rule of unanimity. The newly legalized holding company has further undermined shareholders’ power, allowing one corporation to control the majority of stock of many direct and indirect subsidiaries through pyramiding. Limitations on the voting rights of

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remains concentrated in the hands of a few wealthy entrepreneurs and their investment bankers. Just a decade ago, the report of the Pujo (Banking and Currency) Committee confirmed the existence of a money trust, consisting of a small number of financiers sitting on multiple corporate boards, who controlled the economy, to the detriment of working- and middle-class individual investors. More recently, Professor ripley noted that shareholders in publicly held corporations had become powerless. ripley, supra, at 78–99. Those in control have often frowned upon the demands of equity investors, whether the latter sought more active engagement with the enterprise or simply better treatment. While employers continue to view with disdain their workers’ demands for better wages and hours, bankers, brokers, managers, and large investors have characterized ordinary individual investors as greedy speculators, who are worthy of contributing to but unworthy of managing or reaping the benefits of our country’s rapidly developing business wealth. Salmon’s rebuke at Meinhard’s request to his share in the new lease is similar. Faced with an extremely profitable lease and no longer in need of Meinhard’s financial assistance, Salmon, perhaps also keen on shedding cultural and social bonds of which Meinhard was a reminder, has forgotten Meinhard’s affection of youth, his joining in the adventure into the wilderness, into a land that was not sown.29 For the reasons elaborated below, this Court will not permit such dismissal.

IV

The ability of those in control of business ventures to appropriate profits to themselves is widely known. Shortly before he was appointed to the United States Supreme Court, Justice Brandeis pointedly remarked that while “[t]he goose that lays golden eggs has been considered a most valuable possession . . . even more profitable is the privilege of taking the golden eggs laid by somebody else’s goose.” Louis D. Brandeis, Other People’s Money and How the Bankers Use

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certain classes of shareholders, including non-voting stock and conditional voting stock, are also common. See Jeremiah 2:2 “Go, and cry in the ears of Jerusalem, saying, Thus saith Jehovah, I remember for thee the kindness of thy youth, the love of thine espousals; how thou wentest after me in the wilderness, in a land that was not sown.” We do not know why Salmon changed his name. Perhaps it enabled him to marry Elizabeth Davy; perhaps, like other Jewish Americans, he was hoping to evade antisemitism and discrimination, common obstacles to social and economic success; perhaps he desired a new cultural identity. We do not pass judgment on Salmon’s decision; whatever his reasons might have been, Salmon is entitled to privacy and our compassion. We are concerned, however, with the impact Salmon’s action might have had on his view of Meinhard’s role in their business venture. Too often, individual advancement comes at the expense of solidarity, interconnectedness, and trust. As we elaborate below, our decision aims to ensure that these values inform the business decisions of those who, like Salmon, hold power over others.

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It 17–18 (1914). More recently, Professor Berle cautioned that “[p]ower without responsibility is, philosophically, a perilous matter.” Berle, supra, at 42. As judges, we must “weigh[] considerations of social advantage” when deciding cases. Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev . 457, 467 (1897). Courts of equity have long limited the power of those in control of business adventures by enforcing “the great principle that a trustee shall not profit by his trust nor even place himself in a position where his private interest may collide with his fiduciary duty.” Benjamin N. Cardozo, The Growth of the Law 96 (1924). In so doing, the courts “have raised the level of business honor[] and kept awake a conscience that might otherwise have slumbered.” Id. Underlying the courts’ approach is a recognition that when individuals cede control over certain aspects of their lives to others, those surrendering control become dependent upon, and are relatively powerless to affect, the conduct of those to whom control was surrendered. Fiduciary duties allow individuals like Meinhard to trust others with the management of their personal business by requiring the fiduciary, here Salmon, to act in the beneficiary’s interest and by providing legal redress to the beneficiary when the fiduciary fails to do so. Trustees have fiduciary obligations to the beneficiaries of trusts, as do agents to principals, lawyers to clients, and directors and officers to the corporation and its shareholders. Pertinent to the case before us, it has long been held that “[t]he relation of partners with each other is one of trust and confidence.” Mitchell v. Reed, 61 N.Y. 123, 126 (1874). Accordingly, “[n]either partner can, in the business and affairs of the firm, clandestinely stipulate for a private advantage to himself . . . Every advantage which he can obtain in the business of the firm must enure to the benefit of the firm.” Id. For example, “when one partner obtains the renewal of a partnership lease secretly, in his own name, he will be held a trustee for the firm, in the renewed lease,” even if “the new lease is upon different terms from the old one, or for a larger rent, or that the lessor would not have leased to the firm.” Id. at 127, 129. This is so because “the law recognizes the renewal of a lease as a reasonable expectancy of the tenants in possession, and in many cases protects this expectancy as a thing of value.” Id. at 129. That Salmon and Meinhard did not formally agree to form a partnership does not absolve Salmon from his duties with respect to the lease. As we have previously held, “[t]hose who are in possession of lands under a lease have an interest therein beyond the subsisting term usually called the tenant’s right of renewal.” Robinson v. Jewett, 116 N.Y. 40, 51 (1889). Between a tenant and a landlord, this interest is not “a right or estate, but is merely a hope or expectation”; therefore, without a contract, a renewal could not be compelled. Id. “But, as between third persons, the law recognizes this interest as a valuable property right, and the renewal as a reasonable expectancy of the tenants in possession.” Id. Accordingly, “he who holds a lease in trust for another may not deprive the latter of this interest by taking a renewal or a new lease in his own name.” Thayer v. Leggett, 229 N.Y. 152, 156 (1920). In fact, our courts have

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consistently held that “no one who is in possession of a lease or a particular interest in a lease which is affected with any sort of equity for third persons can renew the same for his own use only, but such renewal must be considered a graft upon the old stock.” Id. at 157. In addition, that the new lease was not strictly a renewal does not exempt Salmon from his duties. The rule regarding a renewal of a lease reflects broader ideals to which our courts of equity have held those entrusted with other people’s money: “The general rule stands upon our great moral obligation to refrain from placing ourselves in relations which ordinarily excite a conflict between self-interest and integrity.” Michoud v. Girod, 45 U.S. 503, 555 (1846). Because our courts have recognized “the probability in many cases, and the danger in all cases, that the dictates of self-interest will exercise a predominant influence, and supersede that of duty,” id., fiduciaries have traditionally been prohibited from receiving benefits out of their fiduciary relationship with their business. This strict rule did not change even after the growth of large publicly held corporations, characterized as they are by the separation of ownership from control. In 1880, Justice Field held that corporate directors and anyone who “stands in a fiduciary relation” to others “and are clothed with power to act for them . . . are not permitted to occupy a position which will conflict with the interest of parties they represent and are bound to protect.” Wardell v. R.R. Co., 103 U.S. 651, 658 (1880). The rule is simple: fiduciaries cannot “enter into or authorize contracts on behalf of those for whom they are appointed to act, and then personally participate in the benefits.” Id. More recently, in Globe Woolen Co. v. Utica Gas and Electric Co., 224 N.Y. 483 (1918), we held directors to “the duty of constant and unqualified fidelity.” There, a director sitting on the boards of two corporations, who refrained from voting on transactions involving both corporations, did not meet the standard. Rather, the common director had an affirmative obligation to disclose the unfair advantage to the disadvantaged corporation. As we held: One does not divest oneself so readily of one’s duties as trustee . . . “[T]he great rule of law” which holds a trustee to the duty of constant and unqualified fidelity, is not a thing of forms and phrases. A dominating influence may be exerted in other ways than by a vote. A beneficiary, about to plunge into a ruinous course of dealing, may be betrayed by silence as well as by the spoken word. The trustee is free to stand aloof, while others act, if all is equitable and fair. He cannot rid himself of the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the surface, or lurking beneath the surface, but visible to his practised eye . . . [T]he constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust, but rather to protest and renounce if through the blindness of those who treat with him he gains what is unfair.

Id. at 489, 492 (internal citations omitted).

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This strict rule – the sole interest rule derived from trust law – is grounded in an appreciation of the trust relationship between directors and their corporations. Courts have recognized the need to ensure that investors could trust that those who managed their money would not place themselves in a conflict-of-interest situation. In addition, courts have expressed an understanding of the nature of human relations; directors could not be expected to scrutinize a contract with another board member. The rule applied to all situations where potential conflict existed, be it contracts between a director and the corporation, dealings between corporations with interlocking directorates (even when only a minority of the board members were in common), or dealings between parent and subsidiary corporations. We are now witnessing calls to move away from this strict rule of prohibition toward more flexible rules. To accommodate the needs of business and managers, courts are urged to allow directors to engage in transactions and situations that have thus far been prohibited as violations of their duty of loyalty. Corporations are drafting provisions into their charters that allow directors to receive an authorization ex ante for such transactions, or to show ex post that a transaction tainted with a conflict of interest is fair to the corporation and its shareholders. While the case before us does not involve a director of a corporation, the question is similar – should Salmon be allowed to rely on the initial term of the Memorandum to limit his fiduciary duties toward Meinhard? Should we, more broadly, allow managers of joint business adventures to determine and limit the scope of their fiduciary obligations in contract? As we explain in the following sections, given the power relationships typical of business ventures, and the values we believe fiduciary obligations should foster, our answer is a resounding no. V

“[T]he juristic philosophy of the common law is at bottom the philosophy of pragmatism. Its truth is relative, not absolute.” Benjamin N. Cardozo, The Nature of the Judicial Process 102 (1921) [hereinafter Cardozo, Judicial Process]. Enforcing a contract or limiting its scope is not merely a reflection of the parties’ agreement but also of the court’s “notions . . . as to policy, welfare, justice, right and wrong, such notions often being inarticulate and subconscious.” Arthur L. Corbin, Offer and Acceptance, and Some of the Resulting Legal Relations, 26 Yale L.J. 169, 206 (1917). In recent years, the ideals of freedom of contracts and free markets have come to mean the freedom of strong individuals and groups to dominate weak ones, with their coercive power being reinforced by state agencies. But, as Justice Holmes pointed out in his powerful dissent in Lochner v. New York, 198 U.S. 45, 75 (1905), most of us do not accept the evolutionary social and economic theories of Herbert Spencer. To achieve a just society and equitable access to productive property, we must carefully understand the contracts we are

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interpreting in the context in which they emerged. In the case before us, we must view business relations, even if formed in a contract, as more than simple contractual transactions. The agreement between Meinhard and Salmon memorialized a mutual understanding and in so doing created something new, a business adventure, in which Meinhard and Salmon played discrete roles – the former being an investor, the latter a managing co-adventurer. Like any other business, the joint adventure had the purpose of arranging and governing property. The original lease became an asset of the joint adventure, with Salmon holding the power to use the parties’ shared funds to alter and manage the building. Neither party could have anticipated what the future might bring, but the Memorandum cemented their understanding that, whatever happened, they would share the expenses, losses, and profits of their joint adventure. For each, the venture had its phases of fair weather and of foul. They were in it jointly, for better or for worse. By virtue of the Memorandum, Salmon was no longer acting in his personal capacity when managing the Bristol building. He was acting as a managing coadventurer. He alone had the power to alter the building, develop it, sublet its units, and make any other decision related to the business. He alone had the power to fulfill or destroy Meinhard’s dreams. Meinhard surrendered control of his savings and entrusted them in Salmon’s hands. Salmon became powerful, and Meinhard became dependent. Relations characterized by dynamics of power and dependency require the imposition of strict fiduciary duties. As Professor Berle writes with respect to minority shareholders in publicly held corporations, “with neither power nor information, the stockholder becomes merely the beneficiary – cestui – of the corporate management. Deprive him of any right by way of fiduciary relation, and the business . . . becomes too hazardous to continue.” Berle, supra, at 180. It is indeed the duty of the judge in such cases to “impose a duty to act in accordance with the highest standards” which those “of the most delicate conscience and the nicest sense of honor” impose upon themselves. Cardozo, Judicial Process, supra, at 109. Salmon’s position was one of trust, his role one of service. He was to manage the building as trustee for the joint adventure. His duties as trustee should have guided all his actions, including those associated with the extension of the original lease into a new one. When a trustee is involved, the law “does not stop to inquire whether the contract or the transaction was fair or unfair.” Munson v. Syracuse, Geneva & Corning R.R. Co., 103 N.Y. 58, 74 (1886). A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this, there has developed a tradition that is unbending and inveterate. “[U]ncompromising rigidity” has been the attitude of courts of equity when petitioned to undermine “the rule of undivided loyalty” by the “disintegrating erosion” of particular exceptions. Wendt v. Fischer, 243 N.Y. 439, 444 (1926). Only thus has the level of conduct for fiduciaries

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been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this Court. Fiduciary duties are embedded in our traditions and vision for our society, in our collective conscience, in our social aspirations. Given the risks associated with equity investment, given that Meinhard entrusted all his savings with Salmon and became dependent upon Salmon’s actions, Salmon cannot rely on the initial term of the Memorandum to limit his fiduciary duties to Meinhard. Rather, we must read the Memorandum to include an implicit expectation that any extension of the lease on the Bristol building, of the original business, would also extend the relationship between these two co-adventurers. Meinhard could have terminated his investment; he could take his dreams and hopes elsewhere. But Salmon did not have the power to force Meinhard out. At least as long as Salmon remained in his position of power and control, his duties toward Meinhard were akin to the duties of a trustee. He could not, in a contract, limit such duties. So long as Meinhard wanted to remain invested, Salmon as managing co-adventurer owed him a service of good faith, care, and finest loyalty.30 That Salmon did not act in actual fraud, dishonesty, or unfairness is not relevant to the analysis of his fiduciary duties. Our focus and concern rest with Meinhard – the dependent. To ensure that ordinary men and women can share in the wealth produced by the new corporate system, the legal system must protect their interests from potential abuse by those in control. The courts must ensure that they can safely invest in our securities markets. If we don’t, greed and egotistical pursuit of selfinterest will control our markets and our society. VI

In recent years, as a common exception to the strict rule against conflict-of-interest transactions, trustees, while not allowed to deal with themselves in connection to the trust property, were permitted to deal directly with the beneficiary, provided that they fully disclosed their interest and did not take unfair advantage for themselves. Such an exception is not only inapplicable in this case but also threatens to erode the rule of undivided loyalty that is required of fiduciaries. Disclosure and publicity of corporate accounts can help the states and the federal government in their fight against monopoly and manipulative tactics by those in control. Appropriate disclosure can also help individuals in making their investment decisions. It is not, however, a substitute for the duties owed by those in control of business toward their investors; it is not an alternative to the duty of utmost good faith and loyalty. Just as 30

We do not suggest that business relationships such as the one before us could never end. Each situation is different. Our conclusion is limited to ensuring that those holding power over others in a business venture cannot simply use contracts to limit their fiduciary obligations, and that the values we believe ground fiduciary duties continue to inform the development of the law.

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Salmon cannot, in a contract, limit his fiduciary duties, he also cannot fulfil his fiduciary duties toward Meinhard simply by disclosing his conflict. More is required of a fiduciary. Imagine, for one, what would have happened had Salmon disclosed the opportunity to Meinhard without also offering him a share in the new lease, commensurate with his share in the original one. Most likely, a bitter competition between the two for Gerry’s bestowal would have ensued. Such a competition would have been detrimental not only to both Meinhard and Salmon but also to their joint adventure. Our definition of fiduciary obligations should not encourage destructive competition. Notably, cooperation is often more critical than the pursuit of self-interest for the success of business. The growth of the large publicly held corporation in recent decades has plainly demonstrated the benefit of cooperation between entrepreneurs so as to avoid ruinous competition. Changes to state corporate law recognized this reality by allowing different forms of mergers and acquisitions that had formerly been barred by a variety of legal rules. See, e.g., N.J. Laws, Ch. 269 (1889), 1889 N.J. Laws 414; Act of March 9, 1899, Ch. 273 (1899), 21 Del. Laws 445. Long-term relationships such as joint adventures, in particular, depend on the ability of the parties to cooperate, to be flexible, to adjust, and to work together. Our decisions should thus aim to ensure that joint adventurers elevate the values of connection and interdependence over autonomy and self-interest. Cooperation, not competition, should be the guiding rule for our markets.31 Accordingly, Salmon had a duty to disclose and to offer a share in the new lease to Meinhard.

VII

There are some decisions “not large indeed, and yet not so small as to be negligible, where a decision one way or the other, will count for the future, will advance or retard, sometimes much, sometimes little, the development of the law.” Cardozo, Judicial Process, supra, at 165. “These are the cases where the creative element in the judicial process finds its opportunity and power.” Id. We must remember that “[t]he final cause of law is the welfare of society,” and we must “within the limits of [our] power of innovation . . . maintain a relation between law and morals, between the precepts of jurisprudence and those of reason and good conscience.” Id. at 66, 133–34. “Ethical considerations can no more be excluded from the administration of justice which is the end and purpose of all civil laws than one can exclude the vital air from his room and live.” Id. at 66 (quoting from John Forrest Dillon, Laws and Jurisprudence of England and America 18 (1895)). 31

At times, cooperation might not be possible between those involved in a business venture. Such relationships must, of course, end, and the court must provide appropriate remedies, commensurate with the parties’ fiduciary obligations. This is not the case before us. Nothing in the record suggests that Salmon and Meinhard could not continue as joint venturers.

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In the end, we must recall that business adventures, large and small, do not emerge out of distanced, legalistic, and calculated decision-making but rather from relationships. Meinhard and Salmon’s joint adventure, like many business ventures, was not the result of an arms-length transaction between competing individuals engaged in strategic behavior, carefully delineating their rights in writing. Rather, Salmon and Meinhard were friends; they discussed the project as friends, and Meinhard gave money to Salmon before any agreement was signed. As friends, we would expect them to show compassion and understanding, to communicate, to listen and cooperate, to care. Our expectations should not change simply because their friendship led them to join in a business adventure. One of the most serious “defects in our American administration of justice” is the “over-individualism in our doctrines and rules, an over-individualist conception of justice.” Roscoe Pound, Law in Books and Law in Action, 44 Am. L. Rev. 12, 26 (1910). Such an individualist conception of justice “exaggerates private right at the expense of public right.” Roscoe Pound, Liberty of Contract, 18 Yale L.J. 454, 457 (1909). If we want our economic and political markets to serve all members of our society in a responsible and just manner, if we are to avoid creating barriers on the path of the have-nots for the benefit of those who have, we must recognize that we are all embedded within and dependent for support upon a variety of social and economic, as well as political and familial, structures and relationships. We must acknowledge our interdependence and our inherent vulnerability, and we must foster understanding and compassion. Specifically, as our society is rapidly changing, our markets shaping, and businesses developing, it is paramount that we ground business relationships in an ethic of interconnectedness and care, and that we ensure that a sense of obligation toward others helps to shape business decisions. “The promotion of social solidarity is an end it is peculiarly incumbent upon the law to promote.” Harold J. Laski, Basis of Vicarious Liability, 26 Yale L.J. 105, 121 (1916–17). Against the ideals of autonomy and the pursuit of individual ends that are rapidly conquering our markets and society, we must ensure that our decisions enforce mutual reciprocal obligations, so as to encourage the pursuit of collective ends that enforce communal bonds, solidarity, and welfare. Business ventures – ranging from the one before us to large publicly held corporations – are not nexuses of contractual arrangements but are rather labyrinths of stakeholder groups, developing through cooperation, compassion, connection, and commitment. We must realize that solidarity and mutual trust are the foundations of a successful business. Fiduciary obligations are the legal means of upholding these values. VIII

“A constructive trust is the formula through which the conscience of equity finds expression.” Beatty v. Guggenheim Expl. Co., 225 N.Y. 380, 386 (1919). If an officer,

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partner, co-adventurer, or anyone in a position of trust renews a lease in their own name, or for their own benefit, a constructive trust will be imposed and “the rule that the renewal shall enure to the benefit of the cestui que trust . . . enforced.” Crook v. Crook, 20 Abb. N. Cas. 249, 251 (N.Y. Com. Pl. 1887). This is so “even in cases where it is apparent that the lessor would not have renewed the lease to the cestui que trust, nor for his benefit.” Id. Here, a constructive trust should attach to the lease that is in the name of Midpoint Realty Co., or, if Salmon so prefers, to half the shares he owned in the Company minus one, so as to ensure his continued control and management of the joint adventure. Judgment accordingly.

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9 Commentary on Smith v. Van Gorkom virginia harper ho

Smith v. Van Gorkom1 is one of the most iconic and most criticized decisions to have shaped the law of corporate fiduciary duty. Yet women’s voices are nowhere to be found in the record of the previously unheralded merger of Trans Union Corporation, nor are they found in the resulting shareholder class action litigation that ultimately reached the Delaware Supreme Court. In addition, the original decision was seen as raising the bar for the duty of care required of corporate directors, but there is no evidence that either the defendants or the court believed that the duty of care required directors to consider how the proposed transaction might affect anyone other than the Trans Union shareholders. This commentary and the rewritten feminist judgment that follows articulate a higher duty of care for director and officer decision making that would amplify diverse interests, perspectives, and voices. This standard reflects an intersectional feminism that centers racial, class, and gender dimensions and also aligns with the spiritual and religious identities and faith commitments of many women. These internal vectors of identity, while often overlooked, are perhaps the most powerful in grounding a coherent and robust understanding of due care as well as the ethical, relational, and procedural demands of corporate fiduciary duty.

BACKGROUND

Jerome Van Gorkom was a World War II veteran and a lawyer, accountant, and philanthropist. He served variously as the longtime comptroller, director, and chief executive officer (CEO) of the Trans Union Corporation.2 At the time of the transaction that led to the case that bears his name, Trans Union was a diversified 1 2

488 A.2d 858 (Del. 1985). Van Gorkom was no longer serving as Trans Union’s chief executive officer at the time of the transaction that gave rise to the case.

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publicly traded company whose core business was in railcar leasing. The company was also (and remains) one of the largest credit agencies in the United States. The Trans Union board was composed of Van Gorkom and nine other directors, whose backgrounds largely matched his. This is perhaps not surprising, since the other men on the Trans Union board moved in the same business and social circles and had been handpicked by Van Gorkom himself. That the Trans Union board was entirely male and white is also unsurprising given the lack of diversity among corporate board candidates and directors at the time. In the mid-1980s when Van Gorkom was decided, few women or minorities served as directors on corporate boards,3 and female executives were rare.4 The impetus for the Trans Union merger was that the company generated substantial cash flows but had difficulty generating enough taxable income to use its increasingly large tax credits.5 When it became clear in July 1980 that these unused tax credits would persist and that Congress was unwilling to change the tax code to solve the problem, Van Gorkom began to explore various strategies to utilize the tax credits. At first, Trans Union’s chief financial officer (CFO), Donald Romans, proposed what was then a novel solution: a leveraged buyout by management. Because leveraged buyouts involve the target company taking on debt to finance the transaction, Romans and the president and chief operating officer of Trans Union began to work out a price per share that would be attractive to Trans Union’s shareholders but not require the company to take on too much debt. The result was a range of $50–$60 per share, at a time when Trans Union’s stock was trading at around $38 per share. However, Van Gorkom was concerned about management’s potential conflicts of interest in a management buyout, and so he began instead to consider selling Trans Union to another company that could take advantage of the valuable tax credits. Nonetheless, Van Gorkom fixed upon a $55 purchase price as the basis of a possible sale, and in September 1980, he approached Jay A. Pritzker, a social

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Felice N. Schwartz, Invisible Resource: Women for Boards, 58 Harv. Bus. Rev. 6 (1980) (reporting that “[d]espite the increased appearance of women on corporate boards . . ., only 1.8 percent of the directors of the top 1,300 boards are women”); see also Diana Bilimoria, Building the Business Case for Women Corporate Directors, in Women on Corporate Boards of Directors: International Challenges and Opportunities 25, 26 (Ronald J. Burke & Mary C. Mattis eds., 2000) (reporting that in 1994, the total number of individual women holding board seats was only around 300); Gerald E. Fryxell & Linda D. Lerner, Contrasting Corporate Profiles: Women and Minority Representation in Top Management Positions, 8 J. Bus. Ethics 341, 342 (1989) (reporting that less than 2 percent of directorships in the early 1980s were held by minorities). Catherine M. Daily et al., A Decade of Corporate Women: Some Progress in the Boardroom, None in the Executive Suite, 20 Strat. Mgmt. J. 93, 96 (1999). Trans Union had substantial depreciation deductions associated with its assets that reduced its taxable income, while at the same time accumulating investment tax credits (ITCs) that it could not use. Van Gorkom, 488 A.2d 858, 864 (Del. 1985). Trans Union had attempted to lobby Congress to make the ITCs refundable in cash and to discontinue the accelerated depreciation, but as of August 1980, these efforts appeared unlikely to prevail. Id. at 864–65.

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acquaintance who was the co-founder of the Hyatt Hotel chain and a wealthy Chicago attorney and businessman, to propose an acquisition at the $55 price. He apparently did so without consulting the other directors or senior management or any internal or external advisors. On a Monday, two days after their initial meeting, Van Gorkom and Pritzker had a series of private meetings with Trans Union’s CEO and its controller to discuss a possible cash-out merger. Shortly thereafter, Pritzker set a three-day deadline for the Trans Union board to approve his offer, and so, on Friday of the same week, Van Gorkom called a meeting of the company’s management for that Saturday, to be followed by a special meeting of the company’s board of directors. He advised no one other than the CEO and the company’s controller of the purpose of the meetings. At the Saturday meeting, management expressed strong opposition to the timing of the transaction and the proposed price. They were also concerned that better offers might be discouraged by Pritzker’s proposed terms. Because of Pritzker’s tight deadline, the board of directors meeting involved no review of any written documentation, nor did the board have the benefit of external valuation experts or a fairness opinion supporting the $55 price. Instead, the board heard a twenty-minute oral presentation by Van Gorkom about his meetings with Pritzker and the proposed deal terms, with comments from the CFO and the president about the price range and the need to act quickly. Outside counsel also advised that a fairness opinion was not required and that the directors might be sued if they failed to approve the deal. After considering the proposal for two hours, the board approved it, conditioned on several changes that would have allowed the board to consider competing offers. Without reading the document, Van Gorkom signed the merger agreement – which did not in fact implement these changes – at a social event for the Chicago Lyric Opera. When the deal was announced, a mass revolt of Trans Union’s senior management followed. In order to keep key officers from leaving the company, the board approved – and Van Gorkom signed – new amendments on the company’s behalf, again without reviewing them. As a result, neither Van Gorkom nor the board realized that the new amendments in fact constrained the board’s ability to accept competing offers. Ultimately, only two other potential buyers for Trans Union emerged over the next few months, and their overtures were scuttled by Van Gorkom without being considered by the board. On February 10, 1981, a majority of the shareholders approved Trans Union’s merger into an affiliate of the Marmon Group, Inc., a holding company owned by Jay and Robert Pritzker. By this time, plaintiff shareholders had already brought a class action in the Delaware Court of Chancery to rescind the cash-out merger or, alternatively, to seek damages for the directors’ breach of duty.6 The issue before the Chancery Court was whether the decision of Van Gorkom and the other Trans Union directors to approve the merger was the product of an informed business 6

Smith v. Pritzker, No. 6342, 1982 WL 8774 (Del. Ch. July 6, 1982).

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judgment. Following trial, the Delaware Chancery Court found in favor of the defendants, and the plaintiffs appealed to the Delaware Supreme Court.

ORIGINAL OPINION

In the original opinion, Justice Horsey, writing for the majority of the Delaware Supreme Court sitting en banc, concluded that gross negligence is the appropriate standard of care in assessing whether corporate directors are entitled to the protection of the business judgment rule presumption that they “acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.”7 The majority opinion emphasized that the duty of care requires corporate boards “to act in an informed and deliberate manner” in deciding whether to approve a merger.8 Although the plaintiffs had alleged no fraud, bad faith, or self-dealing, the Delaware Supreme Court found that the Trans Union board was grossly negligent in failing to inform themselves of the “intrinsic” value of the company and Van Gorkom’s role in establishing the $55 per share price. The court also found that the board was grossly negligent in rushing to approve the transaction without reasonable deliberation and without any review of the deal documents and core terms. In addition, it concluded that because the board failed to properly inform the shareholders about these same issues, the shareholders’ vote was ineffective to cure the board’s failure to exercise an informed business judgment. For these reasons, the majority held that the board’s approval of the merger was not shielded by the business judgment rule and that the other Trans Union directors were personally liable for breaching their duty of care. In line with the shareholder-centric focus of Delaware fiduciary duty cases both then and now, the original opinion focuses almost entirely on how the Trans Union directors failed to inform themselves regarding the $55 deal price and on the rushed nature of the process by which the board initially approved the merger terms.9 Nowhere does the opinion address the board’s failure to take seriously the strong concerns of its internal stakeholders, including senior management and employees; nor does it consider how the homogeneity of the board may have prevented it from engaging in an appropriately deliberative process. Like the Trans Union board itself, the original opinion fails to consider whether Van Gorkom’s lack of transparency about his control over the negotiations and the 7 8 9

Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Smith v. Van Gorkom, 488 A.2d 858, 873 (1985). The fiduciary obligation of fairness at the time of Van Gorkom included the fairness of the merger price. However, while Van Gorkom was still pending, the Delaware Supreme Court decided Weinberger v. UOP, the seminal case on the “entire fairness” standard of review for contested board decisions. See Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983) (establishing the importance of both “fair process” and “fair price”).

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limited possibility of better offers was ethical; nor does it consider how questions of business ethics and corporate responsibility are ignored in a process that prevents deliberation and where the board’s composition itself encourages group-think. A narrow focus – by both the court and the board – on economic value for shareholders, therefore, may have deprived the court of an opportunity to consider whether the duty of care requires consideration of these questions. A brief word is necessary here about the aftermath of the original opinion. Although the Trans Union merger was not the result of a hostile takeover, the case came in the midst of the “takeover wave” of the 1980s,10 when corporate raiders and leveraged buyouts were in the headlines and merger activity was at an all-time high. Prior to Van Gorkom, no directors had ever been found liable for a breach of the duty of care. As a result, the case “stunned and dismayed” the corporate bar by imposing liability on experienced and sophisticated directors where there were no allegations of improper motive or conflicts of interest.11 Most academic commentary concluded that the case was wrongly decided for imposing liability on an “expert” board acting in good faith, with some labeling it “one of the worst decisions in corporate law.”12 The Delaware legislature felt compelled to intervene, adopting Section 102(b)(7) of the Delaware General Corporation Law, which allows corporations to provide in their charters for the exculpation of directors for breaches of the duty of care. Soon, exculpatory clauses were universally adopted, effectively neutralizing any potential liability for the duty of care for corporate directors.13

FEMINIST JUDGMENT

In the rewritten opinion, Professor Lua Yuille, writing as Justice Yuille for the majority, reaches the same conclusion as the original judgment, holding that the decision of the Trans Union board to approve the cash-out merger was a breach of the duty of care and should not be shielded by the business judgment rule. Like the original judgment, her opinion acknowledges the justifications for business judgment rule deference. She also reaffirms prior case law establishing that the duty of care requires directors to act on an informed basis and to fairly inform shareholders in advance of a shareholder vote. However, her reasoning redefines and expands the standard of conduct that the duty of care requires. In the process, she adopts a wider analytical lens that takes account of the relational context of the Trans Union board’s process. Her approach 10 11

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Andrei Shleifer & Robert W. Vishny, The Takeover Wave of the 1980s, 249 Sci. 745 (1990). Jonathan B. Macey & Geoffrey P. Miller, Trans Union Reconsidered, 98 Yale L.J. 127, 127 (1988). See also Lynn A. Stout, In Praise of Procedure: An Economic and Behavioral Defense of Smith v. Van Gorkom and the Business Judgment Rule, 96 Nw. U. L. Rev. 675, 691 (2002). Daniel Fischel, The Business Judgment Rule and the Trans Union Case, 40 Bus. Law. 1437, 1455 (1987). Del. Code Ann. tit. 8, § 102(b)(7) (1983).

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illustrates how feminist perspectives, particularly those rooted in ethical and religious commitments, might foster better board decision-making and the exercise of due care. In contrast to the priorities exemplified by the Trans Union board, which reflect masculine emphases on power and control, a feminist perspective centers more purposefully on the broader impacts that corporate decisions have on parties who are not at the table.14 It is also more willing to consider the potential tradeoffs between people and profit.15 Accordingly, Yuille’s judgment critiques the board’s implicit commitment to a vision of shareholder primacy that ignores the interests of stakeholders and how they will be impacted by the transaction. This view contrasts sharply with the narrow focus of the original opinion on shareholders’ economic interests and the extent to which the board and the shareholders were informed as to the deal price. To be sure, the shareholder orientation of state corporate law’s procedural rules and even a shareholder primacy view of corporate purpose and fiduciary duty are not irreconcilable with the more explicit stewardship or stakeholder-oriented standard of care that Yuille’s rewritten opinion adopts.16 However, her opinion articulates an expanded duty of care that would require directors to identify and consider the interests of constituencies whose race, class, and gender may differ from their own. This aspect of Yuille’s opinion shows how a faith-centered feminism can ground and amplify a stakeholder-orientation in corporate law. Indeed, many faith traditions affirm the equality of all people and a personal moral obligation of due care toward the silent “others.”17 A director or officer whose identity is shaped by such principles would exercise them first of all by intentionally becoming aware – or in the language of the duty of care, “informed” – about those whom corporate decisions will impact. Pritzker, Van Gorkom, and perhaps other members of the Trans Union board appear to have been men of principle whose faith traditions share these values.18 14

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See, e.g., Janis Sarra, The Gender Implications of Corporate Governance Change, 1 Seattle J. Soc. Just. 457 (2002) (challenging the value neutrality of the shareholder wealth maximization norm and gendered notions of efficiency). See also Ronnie Cohen, Feminist Thought and Corporate Law: It’s Time to Find Our Way Up from the Bottom (Line), 2 Am. U. J. Gender & L. 1, 21–32 (1994) (discussing how different feminisms challenge shareholder primacy, as well as corporate theory and doctrine). See generally Sarra, supra note 14; Cohen, supra note 14. See generally Virginia Harper Ho, “Enlightened Shareholder Value”: Corporate Governance Beyond the Shareholder-Stakeholder Divide, 36 J. Corp. L. 59 (2010). For example, nearly all world religions espouse some version of the “Golden Rule” – that we should treat others as we would want to be treated. In the gospels, for example, Jesus calls His followers to “do to others as you would want them to do to you” and to serve the powerless and the “least of these.” Matthew 25:40–45. For variations of the Golden Rule in Judaism, Islam, Buddhism, Hinduism, and other world religions, with extended commentary, see generally The Golden Rule (Jacob Neusner & Bruce D. Chilton eds., 2008). Van Gorkom was a Catholic who served during his career as a trustee for the University of Notre Dame and was a strong supporter of Catholic charities. He also saw his professional work as a way to relieve poverty and suffering. Terry Wilson, Jerome W. Van Gorkom; Revived

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However, Van Gorkom at least did not appear to consider how these values should motivate his responsibility toward corporate stakeholders, as the feminist judgment notes. For judges, a feminism that is coherent with these essential principles will not generally evidence itself in explicit reference to particular religious or moral values or authorities where such matters are not directly before the court. Here, too, Yuille does not explicitly mention her own moral values or religious faith, yet her Baha’i faith, together with other aspects of her identity, informed her approach to the rewritten judgment. Accordingly, several elements of the opinion illustrate the intersectional nature of faith-based feminism and show how spiritual or religious understandings align with and can motivate feminist perspectives on the duty of care. Of course, the precise contours of a faith-centered feminism, like other aspects of identity, will differ across individuals, as the rich literatures on the intersections of feminism, theology, and religion attest.19 Yuille’s opinion offers an example of a feminism that is consonant with Baha’i and Judeo-Christian theology, as well as other traditions, which affirm the equal and inherent worth of all human beings, the need to fight injustice in all its forms, and the equal value of the contributions of women and men to all human institutions.20 In addition, faith-centered feminism from many traditions would share with other feminisms a relational focus, an elevation of the interests and voices of the marginalized, and a condemnation of the abuse of power – whether corporate, gender-based, race-based, or otherwise.21 Many religious traditions also affirm each individual’s ultimate accountability to God or other supernatural powers for the process by which decisions are made and the consequences of one’s actions, and therefore recognize a moral obligation to

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Schools’ Finances, Chi. Trib. (Mar. 19, 1998), https://www.chicagotribune.com/news/ct-xpm1998-03-19-9803190161-story.html. Pritzker was Jewish and the son of Ukrainian immigrants. Jay Pritzker, Pioneer of the Modern Hotel Chain, Died on January 23rd, Aged 76, Economist (Jan. 28, 1999). See also Smith v. Van Gorkom, 488 A.2d 848 (Del. 1985), U. Penn. L. Sch., https://www.law.upenn.edu/live/news/6989-smith-v-van-gorkom-488-a2d-848-del-1985 (last visited Apr. 26, 2021); Smith v. Van Gorkom: A. Gilchrist Sparks III Interview, YouTube (May 1, 2017), https://www.youtube.com/watch?v=-raywPzJQ9Y&t=5s (including an oral history from the counsel to Trans Union). See generally Sally N. MacNichol & Mary E. Walsh, Feminist Theology & Spirituality: An Annotated Bibliography, 21 Women’s Stud. Q. 177 (1993); The Cambridge Companion to Feminist Theology (Susan F. Parsons ed., 2002); Rosi Braidotti, In Spite of the Times: The Postsecular Turn in Feminism, 25 Theory, Culture & Soc’y 1 (2008); The Oxford Handbook of Feminist Theology (Mary M. Fulkerson & Sheila Briggs eds., 2012). These specific traditions are mentioned here because Professor Yuille is Baha’i and I write as a Christian, and our respective faiths motivate the feminist critiques that we present here. See, e.g., Francis Martin, The Feminist Question: Feminist Theology in the Light of Christian Tradition (1994); Darrow L. Miller & Stan Guthrie, Nurturing the Nations: Reclaiming the Dignity of Women in Building Healthy Cultures (2009). Feminist critiques of corporate law also emphasize these values. See, e.g., Cohen, supra note 14, at 11.

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consider the interests of others.22 While ignoring how faith commitments (even secular ones) shape personal identity and values impoverishes feminism, a feminism that acknowledges these dimensions of human experience and that is grounded in these principles offers a firm foundation for the robust duty of care Yuille’s feminist judgment endorses. This is not to disregard the ways in which religious traditions, institutions, or doctrines have been used or abused throughout history to suppress women’s voices. However, feminist scholars now recognize that identification with a faith or faith community is central to identity for many women and that feminism should engage with and be informed by ethical, moral, and religious perspectives.23 IMPLICATIONS OF THE FEMINIST JUDGMENT

Had it been adopted, Yuille’s feminist judgment might have informed the Delaware Supreme Court’s opinion a few years later in Revlon v. MacAndrews & Forbes Holdings, Inc.,24 which has been seen as a high-water mark for shareholder primacy. It would have also laid a foundation for the court’s later affirmation of the board’s discretion to consider stakeholder interests in Paramount Communications, Inc. v. Time, Inc.25 This altered scenario may have alleviated the need for the constituency statutes that were widely adopted by state legislatures in response to the 1980s takeover wave, which clarified that corporate directors are in fact permitted26 to take account of stakeholder interests when considering proposed mergers and acquisitions. At the same time, it is uncertain whether the potential impact of the rewritten opinion would have been limited by the adoption of Section 102(b)(7) exculpatory provisions, unless the Delaware legislature were also willing to embrace this feminist perspective. Taking a more optimistic view, one might wonder how different Delaware law would look today if stakeholder interests had been centered in the law in the wake of Van Gorkom. 22

23

24 25 26

Many women recognize that they are accountable, in the boardroom and otherwise, to follow principles of human behavior that are not self-defined or socially determined but are established by God (or gods or the “power” behind the universe). From this perspective, culture may interpret or explain ultimate reality but does not create it. This understanding is clearest in the monotheistic faiths – Judaism, Christianity, and Islam – which attest that the same God who established the laws of nature has ultimate authority to define right and wrong and therefore to judge human conduct. Notions of karma, the path to enlightenment, and animistic appeasement of spirits or ancestors are also premised on the ultimate accountability of humans to a universal order that they do not establish for themselves. See, e.g., Braidotti, supra note 19; see also Helen Hunt, Faith and Feminism: A Holy Alliance (2004); Sarah Bessey, Jesus Feminist: An Invitation to Revisit the Bible’s View of Women (2013); Katherine Marshall, Aha Moments: Feminism and Faith, Huff. Post (Dec. 6, 2017), https://www.huffpost.com/entry/aha-moments-feminism-and_b_5858806. 506 A.2d 173 (1986). 571 A.2d 1140 (Del. 1989). These statutes are generally permissive, not mandatory. See, e.g., Conn. Gen. Stat. Ann. § 33313 (2018); Ind. Code § 23-l-35-l(d) (1989).

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A second core contribution of Yuille’s opinion is its emphasis on the relational and social context in which decisions are made. Indeed, the opinion itself reflects core feminist commitments to the value of narrative. Rather than focusing on the pace of the Trans Union board’s process, Yuille’s presentation of the relevant facts and her analysis both stress the relational power dynamics between Van Gorkom and the other directors, his hierarchical decision-making style, and the monolithic nature of the board itself as factors that constrained the directors’ ability to give due consideration to diverse perspectives. This relational lens allows her to identify the substantive implications of board processes that are not sufficiently deliberative and informed by diverse perspectives and interests. While she merely speculates about how greater diversity within the board itself might have led to a more informed process,27 her revised judgment raises the question of whether the decision-making process of corporate boards that lack female voices and perspectives is inherently deficient – a question that is salient to modern debates on the rationales for board diversity or mandatory gender quotas. Of course, board diversity has social value regardless of whether it can be shown empirically to drive financial performance or whether it achieves other instrumental goals.28 Including women and other minorities on corporate boards legitimizes those boards as representative of the broad constituencies they serve.29 Board diversity also empowers women to shape the norms that govern modern corporations and gives them voices in corporate decision-making.30 However, affirming the inherent value of women as women also compels us to ask what unique contributions women may bring to corporate decision-making. A number of studies have established that female directors possess certain attributes that distinguish them from their male counterparts and can improve the quality of board decision-making – such as a stronger ethical focus; greater risk aversion; willingness to act independently of male counterparts; better risk monitoring; and a more collaborative, less autocratic leadership style.31 Some empirical studies have 27

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Because Yuille concludes that the expanded stakeholder-oriented duty has been breached, she does not go further to consider whether the Van Gorkom board’s decision making process may have been in other respects grossly negligent, nor does she apply or reject Aronson’s gross negligence liability standard. 473 A.2d 805, 812 (1984). Yaron Nili, Beyond the Numbers: Substantive Gender Diversity in Boardrooms, 94 Ind. L.J. 145, 158–59 (2019) (citing authorities for this position). See generally Lynne L. Dallas, The Relational Board: Three Theories of Corporate Boards of Directors, 22 J. Corp. L. 12 (1996). See Sarra, supra note 14, at 478–81. See Rebecca J. Hannagan & Christopher W. Larimer, Does Gender Composition Affect Group Decision Outcomes? Evidence from a Laboratory Experiment, 32 Polit. Behav. 51 (2010) (finding that group outcomes vary with gender composition due to differences in male and female processing strategies); Renée B. Adams & Patricia Funk. Beyond the Glass Ceiling: Does Gender Matter? 58 Mgmt Sci 219 (2012; Joan MacLeod Heminway, Twenty Years of Feminism: Women in the Crowd of Corporate Directors: Following, Walking Alone, and Meaningfully Contributing, 21 Wm. & Mary J. Women & L. 59, 78–84 (2014); Sandeep Gopalan &

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also found that higher female representation on corporate boards is positively correlated with stronger compliance with ethical principles and with improved financial performance.32 Critically for an analysis of Van Gorkom, several studies have also shown that including women on the board tends to produce a more deliberative and risk-sensitive process that considers multiple stakeholders’ interests and is more likely to reach fair outcomes.33 Even critics of Van Gorkom have noted that one of its positive policy implications is that it would tend to discourage rush offers and promote increased deliberation.34 Corporate boards and board practice might look very different today if the rewritten judgment had inspired today’s boarddiversity movement decades earlier. Finally, while all directors bring their own ethical commitment – or lack of it – to bear on the decisions they make, the empirical evidence of women’s holistic and deliberative approach to decision-making suggests that female directors may be less apt than males to compartmentalize religious and ethical dimensions of identity, and that including female voices on corporate boards may help to ensure that such critical issues are raised. Indeed, the homogeneity of the Trans Union board may have contributed to the fact that the “other-oriented” values that Van Gorkom and the Trans Union Board members espoused are invisible in the record of the board’s process. However, even if the composition of the Trans Union board had remained unchanged, Yuille’s opinion would underscore the board’s obligation to ensure that diverse voices and diverse perspectives had an opportunity to be heard. Because the doctrine of the duty of care has been shaped by the contexts in which it evolved, it is not neutral regarding gender, class, or race; nor is it morally or ethically neutral. The original judgment correctly held corporate directors accountable for the quality of the decision-making process. However, Yuille’s feminist judgment that follows would have strengthened the duty of care’s practical force as a source of corporate accountability and as a guide to an inclusive, morally grounded, and “other”-centered duty of care.

32 33

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Katherine Watson, An Agency Theoretical Approach to Corporate Board Diversity, 52 San Diego L. Rev. 1, 10 (2015). On how male and female leadership styles differ, see Asha N. Gipson et al., Women and Leadership: Selection, Development, Leadership Style & Performance, 20 J. Appl. Behav. Sci. 32, 44–46 (2017) (citing relevant studies). Whether female directors are able to exert a positive influence can depend on board dynamics. See Helena Isidro & Márcia Sobral, The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance, 132 J. Bus. Ethics 1 (2014) (citing studies in social psychology). See Nili, supra note 28, at 160–64 (citing authorities). Chris Bart & Gregory McQueen, Why Women Make Better Directors, 8 Int’l J. Bus. Governance & Ethics 93, 93–99 (2013). See Macey & Miller, supra note 11, at 141 (noting that increased deliberation by the Trans Union board would have created the possibility of a competitive takeover auction that could have increased value).

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Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) justice lua kama´l yuille delivered the opinion of the court As we have articulated it, the business judgment rule is not about the substance of the decisions taken by corporate officers and directors. Like our counterparts in jurisdictions across the country, we have been – and continue to be – extremely reluctant to substitute our a posteriori judgment, refined with the benefit of hindsight and vigorous litigation, for that of the calculated risks of a body designated as the steward to manage and guide the business and affairs of a corporation. Instead, the business judgment rule is about process. We do not, except in extraordinary circumstances, ask whether the board made a sound decision and certainly not whether it made what we deign to declare the “right” decision. We are acutely concerned with the quality of the board’s decision-making procedures, that is, how it made the decision. If the board makes decisions the right way, then we will not disturb them. The process we contemplate when we afford a board the deference and protection of the business judgment rule, however, is replete with substance. If it has not heretofore been clear, these substantive process demands constitute a rigorous standard commensurate with the “legislative grace” by which corporations exist and boards are delegated authority. See Zapata Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981) (making it clear that “[c]orporations, existing because of legislative grace, possess authority as granted by the legislature”). In September 1980, the board of directors of Trans Union Corporation approved a $55 per share cash-out merger. The process by which the Trans Union Corporation Board took this action fell well below the bar set by our rigorous standard. We hold, therefore, that neither the board’s impugned merger approval decision nor its subsequent curative measures are protected by the business judgment rule. I

The parties would have us believe that this case turns on the complicated pecuniary and social facts they recite.1 We disagree. Our decision turns on what is absent from the parties’ exhaustive elaboration of a deal made over just a few days and approved in just a few hours. A By 1980, when the events that precipitated the present dispute transpired, Trans Union was a diversified public holding company. Union Tank Car Company, Trans 1

These facts are, essentially, uncontroverted. However, the parties’ construction of those facts is, unsurprisingly, hotly contested.

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Union’s railcar operations subsidiary, was by far the core of its business, earnings, and revenues. However, the company had a wide range of business lines: finance leasing, wastewater treatment equipment, chartering of ocean vessels, international marketing and transportation, consumer credit reporting, information services, electronic instrumentation and systems, real estate, the manufacture and distribution of fasteners and forged products, sulfur processing and handling, liquefied petroleum gas storage, and so on. By all accounts, business was good. Business was so good, in fact, that Trans Union’s annual cash flow amounted to hundreds of millions of dollars. Management described the company as a “cash cow” and an “engine of cash.” As the company boasted in its 1979 annual report, “[t]he cash flow generation of the leasing business [was] so substantial that even with constant heavy reinvestment in leased assets, the Company [could] still maintain a dividend policy which, in terms of growth and predictability, rank[ed] with the top segment of American industry.” In July 1980, management projected to the board of directors an annual income growth of about 20 percent. With steady growth and the ability to pay consistently generous dividends, Trans Union appeared to have found the holy grail of business. However, the company faced what management described as a “nagging” problem: Trans Union had too little taxable income, which prevented it from taking advantage of attractive federal tax benefits.2 Management was convinced that Trans Union’s tax predicament had caused the market to consistently undervalue the worth of the company, artificially depressing the price of its stock.3 In July 1980, management outlined for the board a generally optimistic five-year forecast of Trans Union’s business prospects. These 1980–85 predictions and projections, however, demonstrated that the taxable income-tax credit quandary would only worsen. The report also highlighted three possible responses to ameliorate the company’s tax position. Trans Union could begin a significant stock repurchase program. The company could substantially increase its already generous dividends. Or it could complete a major acquisition. Although the board and management considered the acquisition strategy, which would have been an intensified version of the company’s longstanding response to its tax problem, it did not pursue any of the 2

3

Like other capital-intensive companies, Trans Union Corporation’s railcar leasing business generated substantial depreciation deductions, which significantly reduced its taxable income. However, the railcar business also generated substantial investment tax credits, which granted a dollar-for-dollar reduction in a company’s tax liability. Without taxable income, however, Trans Union could not use those credits. Moreover, although it could apply unused credits to different tax years, they expired after five years, and Trans Union would “lose” the value of any credit it had not used. Through August 1980, Trans Union’s CEO and chairman, Jerome Van Gorkom, had lobbied Congress to change the tax laws. His efforts were unsuccessful, and he became convinced that pending federal legislation would only further exacerbate the problem. Trans Union’s stock traded at prices ranging from $24.25 to $39.50 per share over the five-year period immediately preceding the instant dispute.

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proposed solutions. Instead, at a senior management meeting on August 27, 1980, an alternative strategy was introduced: sell Trans Union Corporation to a company with a large amount of taxable income that could take advantage of the tax benefits.

B Notwithstanding its pecuniary catalyst, social dynamics are the crux of this case. Jerome Van Gorkom was an eminently qualified Chicago businessman. Among other prominent roles, he served as chairman of the Chicago School Finance Authority, vice-chairman of the Securities Investor Protection Corporation, trustee of the University of Notre Dame and Loyola University, council member of the University of Chicago Graduate School of Business, and chairman of the Chicago Lyric Opera Association. After becoming a partner of Arthur Andersen, in 1956 he joined what was then Union Tank Car Company as an officer and director. He rose through the executive ranks until, in 1963, he became the company’s president.4 With Van Gorkom at the helm, Union Tank Car Company continued its evolution into Trans Union Corporation, a steadily growing and diversifying holding company. Van Gorkom took a typically hierarchical and authoritarian approach to heading the company and its board of directors. He delegated operational decision-making to senior management, but his monitoring and oversight practice were strict and robust. “[T]he business reports at Trans Union,” one director testified, “were far more detailed than any director normally has.” This approach was framed as a feature of Van Gorkom’s managerial prowess in Trans Union’s 1979 annual report: While operational decisions are made in a decentralized fashion as close to the action as possible, financial information is gathered, reported and treated just as it would be if all decisions were made at corporate headquarters. The fact that we are in a number of businesses does not preclude tight controls for committing our resources and measuring performance. In fact, decentralization may necessitate tighter controls . . .. The result is a marriage of flexibility and financial control that keeps upper levels of management informed without hampering lower level decision making.

By 1980, Van Gorkom had carefully assembled a constellation of nine other men,5 each of whom was his subordinate or his friend and several who were also counted among Chicago’s business and social elite. Approaching mandatory retirement age, 4

5

As the company evolved, Van Gorkom’s title changed, though his role did not. In 1978, he assumed the titles “chief executive officer” and “chairman of the board of directors.” In the same executive realignment, Van Gorkom forwarded Bruce Chelberg as president, a designation that tapped Chelberg as Van Gorkom’s successor. Only two of the board’s ten directors (W. Allen Wallis, who was elected in 1962, and William B. Browder, who was elected in 1954) had not been selected by Van Gorkom.

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Van Gorkom had also selected his “designated successor,” a move he explained to shareholders was necessary to respond to Trans Union’s transformation into a complex holding company and which underscored his command-and-control managerial approach. The inside directors were Bonser, O’Boyle, Browder, Chelberg, and Van Gorkom; this group included Van Gorkom’s successor, and it had a long tenure with the company. Including Van Gorkom, who had by that time served as the head of the company for seventeen years, the five insiders had been employed by Trans Union some 116 years, serving a combined sixty-eight years as directors. The outsiders – Wallis, Johnson, Lanterman, Morgan, and Reneker – were similarly tenured, experienced, and professionally networked. Of the five, four were CEOs of other major Chicago corporations (on whose boards fellow Trans Union directors also served), with seventy-eight years of combined CEO experience among them. The lone outside director who was not a corporate CEO was an experienced and respected economist, who had served as the dean of the University of Chicago Graduate School of Business and as the president, chancellor, and CEO of another major research university. These directors had served a collective fifty-three years on Trans Union’s board, and they served together on the board of other Chicago companies as well. Even a cursory examination of the profiles of the directors is persuasive of their qualification, competence, and accomplishment. The directors were highly educated. They were well respected. And they were affiliated with a long list of major companies and institutions as officers, directors, or trustees: Amsted Industries, Illinois Central Gulf Railroad, Midas Muffler Company, IC Industries, International Harvester Company, Illinois Bell Telephone Co., Kemper Insurance, Midwest Stock Exchange, United States Gypsum, Swift & Company, Bausch & Lomb, Eastman Kodak, Metropolitan Life Insurance, Standard Oil Company, the Chicago Tribune, McMillian Company, the Museum of Science and Industry in Chicago, and so on. Management also wholly lacked diversity. Even their resumes were markedly homogenous. Despite holding a range of executive positions, for example, half of the directors (including Van Gorkom) were trained as lawyers. Several officers and directors (including Van Gorkom) were certified public accountants. Almost all of the board had extensive experience in the rail industry. Notably, however, even though for nearly thirty years Trans Union had been an increasingly diversified holding company engaged in a constant program of corporate acquisitions across a range of industries, no executive or director boasted any special expertise in finance or investment banking. Van Gorkom’s team reflected Van Gorkom himself. They were all men. They were all white. They had the same training. They had the same jobs. They had the same interests. The directors further socialized together in civic, charitable, and professional organizations. They shared common memberships in area social clubs.

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They served together in leadership and advisory roles for established Chicago institutions. Van Gorkom’s careful curation, and the close relationships among board members that resulted therefrom, had tangible results. With only one exception, they approved every proposal Van Gorkom presented as head of the company.

C Against this backdrop, and convinced that the imminent passage of more unfavorable tax legislation would exacerbate the tax credit issue, Van Gorkom concluded that the need for a permanent solution to the company’s tax problem had become immediate. In late August and early September of 1980, he met with senior management to brainstorm alternatives. The conversations were tentative and preliminary. Based on a “very brief bit of work,” Trans Union’s CFO, Donald Romans, suggested a management-sponsored leveraged buyout (LBO) as a “possible strategic alternative” to Trans Union’s thenprevailing triage of its tax issue through acquisitions.6 Although they did not determine a price for the company, Romans and the company’s president, Bruce Chelberg, produced a “very first and rough cut” of the cash flow needed to service the debt they estimated would be incurred in an LBO. Within those parameters, they ran the numbers on two hypothetical share prices; their “figures indicated that $50 would be very easy to do but $60 would be very difficult.” Van Gorkom vetoed Romans’ management LBO idea, concerned that such a deal would present conflicts of interest for management. However, the idea prompted Van Gorkom to think seriously about another idea flown at those meetings, selling Trans Union, specifically to a company with a large taxable income to take advantage of Trans Union’s tax credits. To elaborate this idea, Van Gorkom secretly instructed the company’s controller to calculate the feasibility of an LBO at a price per share of $55. Van Gorkom provided no reasoned basis for selecting $55 as the price per share, except that he (as a shareholder) was willing to sell his shares at that price. Indeed, through the ensuing planning and negotiations, Van Gorkom saw himself as the paradigmatic Trans Union stakeholder, so he used his own reactions as the primary barometer for his decisions and recommendations. Van Gorkom took the results of the controller’s analyses and, without the knowledge or authorization of Trans Union’s board, conceived of a deal for the sale of the 6

The term “leveraged buyout” (LBO) describes the acquisition of a company financed with a substantial portion of debt. If Trans Union’s management were to have acquired the company using this strategy, the assets of the company itself would have served as the collateral for the debt acquired through the transaction. Although this finance strategy may have been more familiar to an officer with substantial experience in investment banking, Romans got the idea from an article he read about Houdaille Industries, which was taken private by its management in May 1979 in an LBO led by Kohlberg, Kravis, Roberts & Co. (KKR).

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company to Jay Pritzker – a friend, business associate, and corporate takeover specialist. Van Gorkom furtively reached out to Pritzker to arrange a meeting at the latter’s home, explaining, “I knew I could trust his discretion . . . he is even more sensitive to secrecy than I am. We both agreed it wouldn’t do either of us any good if it were known we were talking.” On Saturday, September 13, 1980, Van Gorkom made his pitch: “I can, I think, show how you can pay a substantial premium over the present stock price and pay off most of the loan in the first five years . . . . If you could pay $55 for this Company, here is a way in which I think it can be financed.” After the two friends bandied about the idea briefly, Van Gorkom left Pritzker to consider the proposal on his own. On Monday, September 15, 1980, Pritzker indicated that he was willing to move forward, asking for more information on the company. Over the next two days, their conversations continued. Although he did not inform the board of these ongoing discussions, Van Gorkom included the company’s president, its controller, and a financial consultant. The deal structure was finalized on Thursday, September 18, and Pritzker’s attorney hastily drew up merger documents, which were delivered the next day. At Pritzker’s insistence,7 Trans Union would have only until Sunday evening to accept Pritzker’s offer. So, on Friday afternoon, Van Gorkom arranged a Saturday morning meeting with senior management and called a special meeting of the board of directors to follow immediately thereafter. The Saturday morning senior management meeting did not go well. The officers reacted negatively to Van Gorkom’s description of the Pritzker offer. Romans, the CFO, raised a number of substantive and procedural objections. Citing further analysis indicating that the LBO price range for Trans Union shares was between $55 and $65 per share,8 he objected to the price as being “too low in relation to what he could derive for the company in a cash sale, particularly one which enabled us to realize the values of certain subsidiaries and independent entities.” Romans was also concerned about the timing of the transaction, calling it a “lock up” that constituted “an agreed merger as opposed to an offer.” The only officers who supported the proposal were the company’s president and controller, who had shadowed Van Gorkom during his secret discussions with Pritzker. Notwithstanding the negative managerial reaction, Van Gorkom proceeded immediately with the scheduled meeting of the board of directors, which all but one director attended. The special meeting of the board of directors lasted about two hours. It opened with a twenty-minute presentation by Van Gorkom that described the core details of the proposed transaction as follows: 7

8

Pritzker testified that he demanded the very short decision window to protect the deal from unauthorized leaks that might “adversely affect uninformed stockholders of the to be acquired company. . .[and] adversely affect the likelihood of successful negotiations.” Romans reported that he had completed a second, more careful study of the LBO idea. Van Gorkom never reviewed that study and did not make it available to members of the board.

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A. GL Corporation, an affiliate of Pritzker-controlled Marmon Group, would pay $55 in cash for all outstanding shares of Trans Union stock. Upon completion of that purchase, Trans Union would be merged into New T. Company, a wholly owned subsidiary of Marmon Group formed to implement the merger. B. For ninety days, Trans Union could receive competing offers, but it could not actively solicit them or disclose non-public information about the company to bidders. C. The transaction would be subject to a financing contingency that, if timely met or waived, entitled GL Corporation (or its designee) to acquire one million newly issued shares of Trans Union at $38 per share.9 D. The offer would expire Sunday, September 21. Van Gorkom explained to his board that the ninety-day auction would mean that the “free market w[ould] have an opportunity to judge whether $55 [wa]s a fair price.” He argued that the “real decision” was whether to “let the stockholders decide it” – which, he said, “is all you are being asked to decide today.” The board also heard from James Brennan, the outside attorney whom Van Gorkom had retained the previous morning to advise Trans Union on the legal aspects of the merger. The directors subsequently testified that Brennan explained the terms of the merger agreement, advised the board that they could be sued if they failed to accept the offer, and opined that, as a matter of law, the board was not required to obtain a fairness opinion or outside valuation of the company before it could act on the Pritzker offer. Romans, the CFO, also spoke to the board.10 In opining that the $55 per share figure was “in the range of a fair price” but “at the beginning of the range,” Romans disclosed that he had not been involved in the discussions with Pritzker and had known nothing about Van Gorkom’s plan until that morning. Therefore, he explained, his numbers were “not the same thing as saying that I have a valuation of the company at X dollars.” Although the directors were “surprised” that Van Gorkom had orchestrated an undertaking of the magnitude of a sale of the company without consulting them in any way, they approved the merger at the conclusion of the special meeting. That evening, Van Gorkom hosted a gala at the Trans Union building in Chicago to celebrate the opening of the Lyric Opera’s season. During the event, he and Pritzker

9

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Although significantly below the merger price, $38 was seventy-five cents above the closing price of Trans Union shares as of Friday, September 19. In addition to Trans Union’s CFO, its controller (Carl Peterson) and general counsel (William B. Moore) also attended the special meeting of the board.

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executed the merger agreement. No member of Trans Union’s board of directors had read it. On Monday, September 22, 1980, Trans Union announced that it had entered into a “definitive” merger agreement with an affiliate of the Marmon Group, Inc. In the ensuing week, senior management’s dissatisfaction with the pending transaction spread. They lodged a range of complaints. Romans led a group of executives who pressed pursuing the management LBO idea at $60 per share. A larger group of executives were concerned about the personal impact of the merger, as it was feared that the salaries, benefits, and other working conditions at Trans Union were significantly better than what could be expected as part of the Marmon Group. Many managers were concerned about losing their jobs, and others – prominently Jack Kruizegna, the indispensable president of Trans Union’s most important subsidiary, Union Tank Car Company – were deeply offended that they had not been consulted or considered in the decision-making process. Within a few days, Van Gorkom learned that, unless the merger was cancelled, about fifteen key managers planned to resign en masse. Van Gorkom did not consult with the board of directors in response to the dissident management issue. Instead, he approached Pritzker, who suggested the September 20 merger agreement be amended to contemplate a longer bid process. With this plan to strengthen support for the sale price in hand, Van Gorkom met with the disaffected executives. He apologized for excluding them from the deal process but declined to engage most of their concerns. Van Gorkom would testify that he was “really stunned” to hear his executives claim that the company had obligations to its employees and its customers as well as its shareholders. Van Gorkom disclaimed any such responsibility – “[w]ell, we don’t agree with that” – to focus on Pritzker’s more robust bid plan, extracting promises from key personnel to remain with the new company for at least six months following the consummation of any merger. Although he was alerted to what he described as shockingly different perspectives than his own, Van Gorkom continued to use himself as the primary metric of the transaction. The board of directors approved the revised bid process after another special meeting on October 8. During the very brief meeting, Van Gorkom informed the board that executive discontent was his primary motivation for seeking the amendments. Without exploring the varied bases for executive dissidence, the board approved the response. Van Gorkom executed the amendments on October 10.11 Again, no member of Trans Union’s board of directors read them. Following the October special meeting, Trans Union retained its investment banking firm, Salomon Brothers, to do “whatever possible to see if there is a superior 11

The executed amendments permitted Trans Union to actively seek competing bids and extended the time for that process. However, they also added constraints, which had not been discussed by the board, that made accepting a competing bid impracticable.

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bid in the marketplace over a bid that is on the table for Trans Union.” From a list of over 150 potentially suitable merger partners, four companies (General Electric Credit Corporation, Borg-Warner, Bendix, and Genstar Ltd.) considered bidding, and only one showed sustained interest. Although General Electric shared a draft indicating it might offer up to $60.00 per share, no actual bid ever materialized. While Salomon Brothers searched for a bidder, Romans continued pursuing his LBO idea, which would have both secured a higher price per share for shareholders and rendered moot any management concerns about the perceived austerity of Marmon Group. On December 2, 1980, a management group led by Kohlbert Kravis Robertson & Co. (KKR) made an offer for Trans Union on “substantially the same” terms as Pritzker’s but at $60.00 per share. Van Gorkom reacted very negatively, and KKR withdrew the offer three hours later. The offer was never considered by the board of directors.

D On December 19, 1980, shareholders commenced the instant litigation against the defendant members of Trans Union’s board,12 the newly formed merger subsidiary (New T. Co.), and the owners of Marmon Group (Jay A. Pritzker and Robert A. Pritzker),13 alleging that the board had breached its fiduciary duties in approving the merger.14 When the board of directors convened for its regular meeting on January 26, 1981, it conducted a “total review from beginning to end of every aspect of the whole transaction and all relevant developments,” including the pending litigation. At the conclusion of this third meeting, which lasted nearly four hours, the board voted to recommend to shareholders that they approve the merger and resolved to distribute a supplement to its outstanding merger proxy statement, providing extensive additional disclosure to the company’s shareholders. The shareholders of Trans Union approved the Pritzker merger proposal on February 10, 1981. Of the outstanding shares, 69.9 percent were voted in favor of the merger; 7.25 percent were voted against the merger; and 22.85 percent were not voted.15 12

13

14

15

All ten members of the board of directors – Bruce S. Chelberg, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan, Thomas P. O’Boyle, W. Allen Wallis, Robert W. Reneker, Sidney H. Bonser, William D. Browder, and J.W. Van Gorkom – were named in the original lawsuit. Following trial, the parties agreed to the dismissal, with prejudice, of the Pritzkers as parties to this matter. Originally, Alden Smith sought to enjoin the merger. The trial court denied Smith’s motion for preliminary injunction on February 3, 1981. Thereafter, John W. Gosselin was permitted to intervene as an additional plaintiff. Smith and Gosselin were certified as representing a class consisting of all persons (except defendants) who held shares of Trans Union common stock on all relevant dates. At the time of the merger,

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Following consummation of the merger, the plaintiffs amended their complaint to request rescission of the merger and, in the alternative, monetary damages. After trial in the Court of Chancery, the Chancellor granted judgment for the defendant directors, based on two principal findings: (1) The board of directors acted in an informed manner so as to be entitled to the protection of the business judgment rule in approving the cashout merger. (2) The shareholder vote approving the merger should not be set aside, because the shareholders had been “fairly informed” by the board of directors before voting thereon. We conclude that both these findings “are clearly wrong and the doing of justice requires their overturn.” Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972).

II

It should, by this time, be unequivocal that “[t]he bedrock of the General Corporation Law of the State of Delaware is the rule that the business and affairs of a corporation are managed by and under the direction of its board.” Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984); 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, except as may be otherwise provided in this chapter or in its certificate of incorporation.”). As we have made abundantly clear from sixty years of pronouncements on the matter, this principle “clothe[s] the directors of a corporation with exceptionally large powers,” Bodell v. Gen. Gas & Elec. Corp., 140 A. 264, 267 (Del. 1927), which creates substantial room for discretion. We do not lightly disturb that discretion. “Generally speaking, [we do not ask] whether [] a transaction is good or bad, enlightened or ill advised, selfish or generous – these considerations are beside the point.” Singer v. Magnavox Co., 380 A.2d 969, 973 (Del. 1977). Moreover, we are convinced that courts are ill-suited to evaluate the type of corporate decision-making – involving careful and holistic balancing of complex and, potentially competing, interests – contemplated by Delaware law. The board rule principle, however, does not give directors unfettered carte blanche: “Human nature being what it is, the law, in its wisdom, does not presume that directors will be competent judges of the fair treatment of their company where fairness must be at their own personal expense.” Gottlieb v. Heyden Chem. Corp., 90 A.2d 660, 663 (Del. 1952). Logic, reason, and justice further demand that the power vested in management be disciplined and shaped by controls designed to advance Smith owned 54,000 shares of Trans Union stock, Gosselin owned 23,600 shares, and members of Gosselin’s family owned 20,000 shares.

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the goals that power serves. Thus, “[a]lthough directors are given wide latitude in making business judgments, they are bound to act out of fidelity and honesty in their roles as fiduciaries.” Michelson v. Duncan, 407 A.2d 211, 217 (Del. 1979). We have long recognized that the fiduciary relationship contemplated in the corporate context imposes “stern demands.” Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). As the Court of Appeals of New York explained and we have found persuasive, Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate.

See Guth, 5 A.2d at 515 (citing Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928)). By accepting the power the General Corporation Law delegates to them, corporate directors also bind themselves to “something stricter than the morals of the marketplace” with respect to non-equity corporate stakeholders. Corporations, we emphasize, are creatures of statute: “The objects for which a corporation is created are universally such as the government wishes to promote. They are deemed beneficial to the country; and this benefit constitutes the consideration, and in most cases, the sole consideration of the grant.” Trustees of Dartmouth College v. Woodward, 17 U.S. 518, 637 (1819). The bargain struck by the government in recognizing the corporation is not, however, empty. It cannot be. It would not be within the power of the government to make any such bargain. Thus, we are bound to construe the obligations of the corporation and its directors so that the government purposes they serve are, in fact, served. To reap the benefits presented by the corporation, directors must be held responsible for their exercise of managerial power. The business judgment rule operates as a judicial balance of the power and responsibility of the board of directors. On the one hand, it serves to protect and promote the full and free exercise of the managerial power granted to directors. On the other, it is only effective if the board has so clearly discharged its responsibilities so as to resist facial impugnment. Although courts in this jurisdiction have pronounced various formulations of the rule,16 this basic character and function has been constant. Stated simply, the business judgment rule is an evidentiary presumption that “in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Procedurally, “the objector must bear the burden of persuasion to show the impropriety of the transaction.” Schreiber v. Pennzoil Co., 419 A.2d 952, 956 (Del. 16

We first invoked the concept in the early 1900s, but we are led to understand that the business judgment rule’s origins as a common law principle of corporate governance date back more than 150 years. See S. Samuel Arsht, The Business Judgment Rule Revisited, 8 Hofstra L. Rev. 93 (1979).

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Ch. 1980). However, to invoke the business judgment rule’s protection, directors must have first fulfilled their duties. Courts in this state have identified a range of (facially) suspicious conduct: “fraud or gross overreaching,” Sinclair Oil Corp. v. Levien, 280 A.2d 717, 722 (Del. 1971); “gross and palpable overreaching,” Getty Oil Co. v. Skelly Oil Co., 267 A.2d 883, 887 (Del. 1970); “bad faith . . . or a gross abuse of discretion,” Warshaw v. Calhoun, 221 A.2d 487, 492–93 (Del. 1966); “fraud or gross abuse of discretion,” Moskowitz v. Bantrell, 190 A.2d 749, 750 (Del. 1963); “fraud, misconduct or abuse of discretion,” Kors v. Carey, 158 A.2d 136, 140 (Del. Ch. 1960); and “reckless indifference to or a deliberate disregard of the stockholders,” Allaun v. Consol. Oil Co., 147 A. 257, 261 (Del. Ch. 1929). In the ever-more complex corporate climate, it is neither possible nor desirable to set forth a precise rubric with which to determine whether the board of directors abused their discretion. Here, however, where there is no indication that the directors were subjectively compromised, the relevant inquiry is whether the directors satisfied their “duty to inform themselves, prior to making a business decision, of all material information reasonably available to them,” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), and then brought that information “to bear with specificity” on the impugned transaction. Kaplan v. Centex Corp., 284 A.2d 119, 124 (Del. Ch. 1971). III

Now that the functioning of the law applicable here has been clarified, that the Court of Chancery erred – as a matter of fact and law – becomes certain. The Chancellor proceeded as though the only material information concerning the merger was the best available price, and the only relevant constituency was the shareholders. While we understand this mistake, it is nonetheless a mistake. It may, perhaps, be regarded as unfortunate that the board of directors did not somewhere in the record before us evince facts to even suggest that it had – if, indeed, it did – considered the interests of all its stakeholders. In faithful commitment to our principled disinclination to second-guess how the board elects to exercise its discretion, we have scoured the record to no avail. What is in the record is clear. Van Gorkom, Trans Union’s longtime CEO and chairman, proposed and negotiated a merger between the company and Marmon Group, guided by only his own intuitions, beliefs, proclivities, and experience. The board of directors was neither designed nor inclined to exercise any business judgment rightly so-called. Instead, it approved the transaction after a twenty-minute presentation at a two-hour special board meeting, called with less than a day’s notice and held on a Saturday afternoon. By his own account, Van Gorkom dismissed the concerns of non-equity corporate stakeholders, officers and other senior managers, and was surprised and distressed by the suggestion that their non-equity interests should matter. Van Gorkom considered himself to be the model Trans Union shareholder. The record further

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suggests that Van Gorkom considered himself (highly educated, white, male, civically active, industrial manager) as the standard more generally, surrounding himself and his business with people who mirrored his own interests and identity. Firmly and consciously in a silo, Van Gorkom was, therefore, responsive exclusively to the considerations he himself valued. He testified that he thought almost solely of price per share.17 The other directors so closely resembled Van Gorkom in their educational, professional, and social profiles as to amount to an identity function. Van Gorkom might as well have presented the merger proposal to himself. The board’s obligation to inform itself of all material information reasonably available to it cannot be satisfied by substituting the preferences of one person, especially not those of the head of the company, for the diverse interests of the corporate stakeholders. We recognize that Trans Union’s shareholders were afforded the opportunity to evaluate the merger for themselves, voting decisively to approve it. It has been our practice to treat such shareholder ratification as curing defects in the actions of the board of directors. See 2 Fletcher Cyc. Corp. § 429. “In our view, . . . the entire atmosphere is freshened and a new set of rules invoked where formal approval has been given by a majority of independent, fully informed stockholders.” Gottlieb v. Heyden Chem. Corp., 33 Del. Ch. 177, 91 A.2d 57 (1952). Ratification, this means, is an effective cure to directorial decision-making only if the shareholders have been given the same information about the diverse interests of corporate stakeholders that directors are required to gather and consider. The record indicates that, even if the board had been aware of the varied perspectives of its shareholders, officers, and senior management, it did not bring that information to bear with specificity on the merger transaction. But for the compounding errors that accompanied it, we might conclude that this deficiency was de minimis. However, the board’s failure to pay heed to voiced shareholder, officer, and senior management interests is better than the level of consideration given to other – non-equity – stakeholders. In fact, the record is wholly silent as to any other constituent of Trans Union. Who are these people? What are their roles and relationships to the company? Where are they situated? What did they think about the merger? How did it impact them? There is no trace of them. Our search of the record reveals a single, carbon-copied profile: all of the players in this dispute, all of the voices brought to the table, all of the interests deemed cognizable appear to be wealthy, white, and male. It would strain all reason to suggest that this single profile actually reflects Trans Union’s non-equity stakeholders, who include, inter alia, all of its employees, irrespective of their positions.

17

Although the plaintiffs’ original complaint cited share price as its predominate source of dissatisfaction, as discovery revealed the procedural deficiencies in the process, the plaintiffs turned their focus there.

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We have never before addressed this issue in the corporate context. This is a glaring omission. Under our prevailing approach, which is blind to the identity of corporate actors, law “not only reflects a society in which men rule women; it rules in a male way.” Catherine MacKinnon, Feminism, Marxism, Method, and the State: Toward Feminist Jurisprudence, 8 Signs: J. Women in Culture & Soc’y 635 (1983). The same patterns are reflected when we are blind to race or class. This is wholly inconsistent with the reason for which we understand the corporation to exist. The legislature decided to create the corporate form to benefit society. Trustees of Dartmouth College v. Woodward, 17 U.S. 518, 637 (1819). Whatever those benefits are, they must inure to society generally, not merely to one faction thereof. This is a narrow evolution of our understanding of the General Corporation Law. It is not our intention to amend by judicial fiat that carefully considered statute. Rather, we now appreciate that the procedural discipline we heretofore imposed on corporations via the business judgment rule harbored unintended disutilities. Henceforth, to avail itself of the protection of the business judgment rule, the board of directors must consider the impacts on and concerns of its nonequity stakeholders. The record is, likewise, wholly silent as to how the proposed merger was expected to impact the broader communities of which Trans Union and its stakeholders formed a part. The robust notion of directorial responsibility contemplated by our clarifications of the application of the business judgment rule admonishes boards to, at a minimum, apprise themselves (and, where applicable, their shareholders) of the effect of corporate actions on the communities in which they are embedded and that they impact. Nonetheless, we do not impose an obligation to balance community impacts with primary stakeholder interests. The General Corporation Law submits to the discretion of the board whether, and to what extent, to pursue otherwise lawful activity that may harm or anger the community. This is a legislative choice that is not within our purview to disturb. However, the directors of a corporation cannot be held to have acted on an informed basis, nor to have fairly informed the shareholders, without first considering in good faith how corporate decisions affect the community. We cannot help but wonder what legitimating impact a meaningfully diverse board of directors may have had on Trans Union’s decision-making procedures in the instant matter. We cannot help but wonder what similar legitimation may have flowed from the board’s good-faith compilation of and reflection on the concerns and interests of Trans Union’s varied stakeholders. Whatever may have been the curative power of robust stakeholder due diligence, it was not realized here. We hold that directors will be shielded from liability by the business judgment rule only when they make decisions in a manner adequate to give a full hearing to the range of equity and non-equity stakeholder and community concerns and interests. In advancing the company’s merger, Trans Union’s board of directors did not even approximate this standard.

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IV

Therefore, we reverse and direct that judgment be entered in favor of the plaintiffs and against the defendant directors for the fair value of the plaintiffs’ interest in Trans Union, taking “into account all relevant factors.”18 Del. Code Ann. Tit. 8, § 262(h). REVERSED and REMANDED for proceedings consistent herewith. It is so ordered.

18

The parties stipulate that the plaintiff class consists of 10,537 shareholders (of 12,844), which owned 12,734,404 of the 13,357,758 outstanding Trans Union shares.

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10 Commentary on White v. Panic kellye testy

BACKGROUND

Litigation over sexual harassment in the workplace increased significantly during the 1980s and 1990s, after this age-old harm to women was first recognized as a form of sex discrimination in the late 1970s.1 Although the harm of sexual harassment is largely committed inside of and through the corporate form, there was very little overlap with corporate and securities law as the law of sexual harassment developed. White v. Panic,2 decided in 2001, was an early attempt to use shareholder derivative litigation to address how a board (mis)handled multiple sexual harassment lawsuits against the company’s CEO. The early timing of the case, together with its colorful facts and Delaware status, brought it significant attention from academics, litigants, and jurists. The case arose in the context of significant shareholder unrest on multiple fronts against the controversial CEO of ICN Pharmaceuticals, Inc. (“ICN”), Milan Panic. Panic had founded ICN in his garage in 1960 after defecting to the United States while serving as a member of his native Yugoslavia’s Olympic team. ICN was an early developer of antiviral drugs, and its Ribavirin, developed in the 1970s, remains an important treatment for hepatitis C, influenza, and other viruses. Amid the 2020 pandemic, Ribavirin was tested for its efficacy in treating COVID-19.3

1

2 3

See, for example, Reva Siegel, Directions in Sexual Harassment Law (2004), which provides a helpful history and overview, and Catharine A. MacKinnon, Sexual Harassment of Working Women (1979), whose groundbreaking work has been the driving force in conceptualizing the harms of sexual harassment and providing a legal framework for appropriate remedies. White v. Panic, 793 A.2d 356 (Del. Ch. 2000), aff’d 783 A.2d 543 (Del. 2001). See Song Tong et al., Ribavirin Therapy for Severe COVID-19: A Retrospective Cohort Study, 56 Int’l J. Antimicrob. Agents 106114 (2020), https://www.ncbi.nlm.nih.gov/pmc/articles/ PMC7377772/.

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In 2002, Panic once defended himself against angry shareholders by claiming that “it was not easy to bring an anti-viral drug to market.4” This is true enough, although Panic himself was not always known for truthful statements. Although ICN garnered business success under Panic’s leadership, he and the company were often in conflict with shareholders and regulators. The Securities and Exchange Commission began to focus on Panic and ICN in the late 1970s due to concerns over false financial filings, and those concerns accelerated in the early 1990s when Panic falsely claimed that Ribavirin was a cure for AIDS. The controversy over Panic’s leadership accelerated markedly throughout the 1990s in both common and uncommon ways. Not only did Panic lead ICN to acquire a 75 percent share of Yugoslavia’s major pharmaceutical manufacturer, Galinika, in what was one of the earliest direct investments by a Western firm after the fall of communism, he also shortly thereafter became the country’s prime minister. Panic ran for president and lost to Europe’s “most dangerous man,” Slobodan Milosevic,5 in a fraudulent election. Shortly thereafter, Panic was ousted as prime minister.6 Those political activities and Panic’s loss of power negatively affected ICN’s valuation and roiled shareholders. One stockbroker shareholder who personally lost his $2 million investment in ICN was especially aggrieved that ICN had paid Panic more than $600,000 in salary during the time he was serving as prime minister, with a $5-million bonus despite ICN’s lackluster financial performance. Panic and ICN were also increasingly under scrutiny by regulators, including a grand jury investigation into whether a multi-million-dollar stock sale by Panic was the product of inside information that he failed to disclose.7 ORIGINAL OPINION

During the same period, and into the 1990s, numerous sexual harassment lawsuits were leveled against ICN, resulting in millions being paid out in settlements. ICN and Panic were both dismissive of these lawsuits, with the general counsel publicly opining in a 1998 U.S. News & World Report article entitled “Sex and the CEO” that “courts are being abused by these silly cases.”8 For his part, Panic claimed that the female employees’ “complaints are bullshit. They loved me.”9 The same U.S. News article, however, prompted another shareholder, White, to enter the litigation game, launching the derivative action that ultimately resulted in 4 5

6

7 8 9

https://www.encyclopedia.com/books/politics-and-business-magazines/icn-pharmaceuticals-inc. Ian Traynor, Slobodan Milosevic: Ruthless Manipulator of Serbian Nationalism Who Became the Most Dangerous Man in Europe, Guardian (Mar. 12, 2006, 7:09 PM), https://www .theguardian.com/news/2006/mar/13/guardianobituaries.warcrimes [https://perma.cc/FP3B-UU7B]. Simon Avery, ICN Founder to Step Down from Helm, Associated Press News (June 12, 2002), https://apnews.com/article/3e5aa22348b93a8ad049f4b681d62c1d [https://perma.cc/Z8QC-3BJL]. Id. Miriam Horn, Sex and the CEO, U.S. News & World Rep. (July 6, 1998). Id.

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the White v. Panic opinion by the Delaware Supreme Court. The complaint relied largely on the facts alleged in the U.S. News story to assert that the board members had breached their fiduciary duties by failing to curb Panic’s alleged sexual harassment and by using corporate funds to resolve the lawsuits. Alleged wrongful acts included director-approved settlement of eight sexual misconduct lawsuits costing over $3.5 million; implementation of a new, sealed arbitration policy designed to conceal complaints; and guarantee of a bank loan to Panic to fund his multimillion-dollar settlement of a personal paternity lawsuit involving an employee. A director acknowledged on record that there was a “problem,” specifically describing it as being that the CEO “can’t keep it in his pants.”10 Nonetheless, the Delaware Chancery Court dismissed the plaintiff’s claims and the Delaware Supreme Court affirmed, on the grounds that White failed to plead particularized facts sufficient to overcome the legal presumption that the directors’ decisions were a good-faith exercise of their business judgment. The court reasoned that the board’s decision to approve and pay the settlements were business decisions within the discretion of the board. The court also noted that the board had “broad discretion” to set executive compensation and sanction misconduct. The court also refused to allow the plaintiff leave to amend the complaint, blaming the plaintiff for insufficient pre-filing investigation (failing to inspect books and records), and also declining to create a new exception to demand requirements in the context of underlying conduct by corporate actors that is particularly egregious.11

FEMINIST JUDGMENT

Professor Sarah Haan, writing as Justice Haan, has rewritten the White v. Panic opinion to conclude that the allegations do raise a reasonable doubt that the board exercised valid business judgment in addressing the allegations of sexual misconduct by CEO Panic. In a carefully drawn opinion, Haan acknowledges the broad presumption of good faith that corporate law accords to board action, including a decision to settle one or more lawsuits related to an act of alleged misconduct by a corporate officer. She finds the presumption weakened, however, when “an extensive pattern of sexual misconduct is alleged, accompanied by a sequence of board decisions that go from defensible to increasingly indefensible.” That presumption is further weakened, according to Haan, when the futility of first bringing the matter to the board’s attention is at issue in the context of an all-male board – a board that is accused of violating its fiduciary duties through actions and omissions directly related to sex discrimination against women.

10

11

One of the company’s directors, Norman Barker, was quoted in the Complaint as having made this statement about the CEO. See White v. Panic, 793 A.2d 356 (Del. Ch. 2000), aff’d 783 A.2d 543 (Del. 2001). 793 A.2d at 364–66.

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Reviewing the board’s decisions “holistically in light of the board’s accumulating knowledge,” Haan reverses the Chancery Court and excuses pre-suit demand on the board. She holds that the pleadings create a reasonable doubt that the board’s actions were the product of a valid exercise of business judgment, when those actions show that despite having “knowledge of a serious, ongoing problem that potentially violates state and federal law, and that harms its own employees,” the board turned a “blind eye to that wrongdoing.” Haan’s opinion rests on the second prong of the well-established test under Aronson v. Lewis12 for excusing demand in shareholder derivative litigation. This test requires facts sufficient to reverse the business judgment rule’s strong presumption that the board’s acts are in the best interest of the corporation. Haan does not reach the first (alternative) prong of the Aronson test – that is, whether the complaint contains particularized factual allegations raising a reasonable doubt that “the directors are disinterested and independent,” because that avenue for excusing demand was not challenged by White on appeal. While Panic had not admitted to the sexual harassment acts of which he was accused, Haan found at this early stage of litigation that White pled ample facts showing that the board was well aware of Panic’s sexual misconduct as early as 1992, and it took insufficient action to address the misconduct properly. The mounting volume of sexual misconduct allegations against Panic was fundamental to Haan’s decision; she notes that by the time the board “approved the company’s eighth settlement of a lawsuit charging Panic with sexual harassment, ICN’s board should have realized the seriousness of the potential problem and its need to take action.” By looking at the sum total of the board’s accumulating knowledge, Haan’s opinion distinguishes a line of failure-to-monitor cases, such as Allis-Chalmers13 and Caremark,14 in which the court has shown reluctance – in the absence of actual or constructive knowledge of wrongdoing on the part of an officer – to withdraw the business judgment rule’s insulation. The plaintiff’s argument was not that the board should have anticipated and prevented this risk. Hindsight may indeed always be 20/20, but this was not the dog’s first bite. For Haan, the facts support reasonable inferences that not only did the board know that multiple women were asserting sexual misconduct against Panic, including acts that could constitute a crime, it also approved multiple settlements for millions of dollars; it rewarded the CEO rather than disciplined him; and it acknowledged that the CEO had a “problem,” yet failed to take any other steps that may have positively addressed the climate of sex discrimination within ICN. While White v. Panic was decided almost two decades ago, it was not until recently that the corporate and securities bars began to pay more attention to the risks of shareholder litigation in this context. What changed? The #MeToo movement happened. Erupting in October 2017, after Harvey Weinstein’s 12 13 14

473 A.2d 805, 814 (Del. 1984). Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del. 1963). In re Caremark Int’l, Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).

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decades-long sexual misconduct came to light, this movement has had – and continues to have – significant impact not only on employment law but on corporate law as well. Encouraging victims to break their silence, the movement has brought heightened visibility to the harms of sexual harassment and its prevalence, including among many high-profile victims and perpetrators. In this climate of heightened visibility, and given the increasing impact on corporate affairs that stems from that visibility – including on market valuation – the board’s handling of sexual harassment claims, especially when directed at a CEO or other senior officer, are placed into sharper relief. Prior to the #MeToo movement, no court had held, as Haan would have, that a board has the requisite knowledge to make demand futile – unless a corporate officer had admitted to the wrongdoing. There were also very few cases even engaging the issue. In the sixteen years between White and #MeToo, only two cases stand out, both from 2012. One was the derivative and securities litigation that arose after the departure of Hewlett-Packard (HP) Company’s CEO, Mark Hurd, in the wake of sexual harassment allegations by an independent contractor and an internal investigation that revealed several misrepresentations by Mr. Hurd. In Zucker v. Andreessen,15 the plaintiff alleged that HP’s directors breached their duty of care in awarding Mr. Hurd a huge severance package and in failing to develop an effective CEO succession plan. The court dismissed the complaint for plaintiffs’ failure to plead that demand would have been futile as well as the failure to plead that the severance agreement was not the product of a valid exercise of business judgment, because in the court’s view the agreement was not irrational on its face, in light of Mr. Hurd’s purportedly successful stewardship of the company. Separately, investors unsuccessfully sought to use federal securities law to assert that statements in HP’s ethics code were false and misleading for failing to disclose Mr. Hurd’s misconduct.16 The Ninth Circuit affirmed dismissal of the complaint for failure to plead a misrepresentation or omission of material fact, finding that HP’s ethics code contained only aspirational statements that did not state or suggest that all executives were in compliance therewith.17 A federal court in California relied on White to dismiss a derivative complaint on similar facts. Two individual shareholders filed suit against the board of directors of American Apparel, Inc. for breaching its fiduciary duties.18 The complaint charged that the directors failed to prevent the sexually hostile and discriminatory workplace led by its Chairman and CEO, Dov Charney, which had spurred multiple complaints to the Equal Employment Opportunity Commission (EEOC).19 The plaintiffs’ complaint alleged that Charney had worn nothing but thong underwear in the 15 16

17 18 19

No. 6014-VCP, 2012 WL 2366448 (Del. Ch. 2012). Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017). Id. at 1278. In re American Apparel, Inc. S’holder Deriv. Litig., 2012 WL 9506072 (C.D. Cal. July 31, 2012). Id. at *28.

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office, had permitted managers’ quid-pro-quo sexual relationships with junior employees, had invited a female employee to masturbate with him, had run business meetings at his home while nearly naked, and had requested that the company “hire young women with whom he could have sex, Asians preferred.”20 Although the court found that the plaintiffs’ allegations supported an inference that the board knew or should have known there was possible cause for concern, it relied on White to hold that the board did not have knowledge of actual problems and thus did not act in bad faith.21 The #MeToo movement, which accelerated in 2017,22 has spawned additional derivative and securities class actions directed at how boards have handled sexual harassment issues, and the results of those cases are in stark contrast to American Apparel. Indeed, they are far more in line with the approach Haan takes in rewriting White. Much like White v. Panic, these derivative lawsuits generally allege that the defendants had actual knowledge of, or were willfully blind to, the sexual misconduct; and that, once aware, they misused corporate assets and adopted a “circle the wagons” mentality that was designed to conceal the misconduct. The securities lawsuits, on the other hand, typically allege that the company and its executives lied affirmatively or by omission regarding the company’s and executives’ adherence to published ethical standards and corporate values surrounding integrity. One example is the derivative litigation filed against Wynn Resorts following a January 2018 Wall Street Journal report that multiple women had accused the company’s founder, Steve Wynn, of sexually harassing or assaulting them.23 The Nevada court upheld the plaintiffs’ complaint, holding that a pre-suit demand on Wynn Resorts’ board would have been futile.24 The court found it was reasonable to infer that the board knew about Wynn’s serial sexual misconduct, based on numerous factors, including the magnitude of his conduct (hundreds of instances over decades), the numerous complaints filed with the EEOC, and the board’s involvement in a lawsuit relating to Wynn’s $7.5-million settlement with an employee who claimed that Wynn raped her.25 The court found that the board’s failure to act in the face of credible and corroborated reports was knowing and intentional. Hence, the board faced a substantial likelihood of liability and would not be disinterested in considering a demand.26 20 21 22

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Id. at 5. Id. at *29–30. See History & Inception, me too. Movement, https://metoomvmt.org/get-to-know-us/historyinception (last accessed Oct. 26, 2021). Alexandra Berzon, Chris Kirkham, Elizabeth Bernstein & Kate O’Keeffe, Dozens of People Recount Pattern of Sexual Misconduct by Las Vegas Mogul Steve Wynn, Wall St. J. (Jan. 27, 2018). In re Wynn, Dkt. No. BL-117. Id. at 6. Id. at 5. The case was ultimately settled in the largest derivative settlement in Nevada’s history and one of the largest nationally. For a history of the case, see Wynn Resorts, Ltd. Derivative Litigation, Cohen Milstein, https://www.cohenmilstein.com/case-study/wynn-resorts-ltdderivative-litigation (last accessed Oct. 26, 2021).

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Additional cases have resulted in large settlements or are in progress. In a similar derivative action against Twenty-First Century Fox, Inc., the litigants reached a $90million settlement stemming from the sexual harassment scandal involving founder and former CEO Roger Ailes and anchor Bill O’Reilly.27 A derivative suit in the Delaware Chancery Court by shareholders of tax preparer Liberty Tax, Inc.28 against the company’s former CEO alleged that he refused to give up control of the board after being terminated as CEO in September 2017, following credible evidence of wrongdoing, including sexual misconduct. Both derivative and federal securities fraud litigation was launched against Signet Jewelers Limited based on the company’s alleged failure to disclose sexual harassment allegations against executives and breaches of fiduciary duty related to the board’s handling of the sexual harassment allegations.29 In a recent high-profile and high-settlement case, Google parent Alphabet agreed to establish a $310-million diversity, equity, and inclusion fund as part of the settlement of the consolidated derivative litigation relating to the company’s alleged mishandling of sexual harassment allegations against Andy Rubin and two other executives. The alleged mishandling included paying Rubin $99 million in severance.30 The company also agreed to adopt extensive reforms to its employment policies and to implement a number of governance reform measures as part of the settlement. The results in these cases are not the only way in which corporate law is changing in the wake of #MeToo. There is also far more focus on advancing women in leadership and on boards, both in settlement terms – as in the Google and Fox cases – and more proactively to reduce the risk of sexual harassment occurring, by improving the company’s climate for women. Connections between gender equity and profitability are being made, including a 2018 McKinsey study finding that companies in the top quartile for gender representation were more likely to outperform fourth-quartile companies by a margin of

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See the parties’ stipulation of settlement at City of Monroe Employees’ Retirement System, Verified Derivative Complaint, Bernstein Litowitz Berger & Grossman LLP, https://static .blbglaw.com/docs/2017-11-20%20%28EFILED%29%20Verified%20Derivative%20Complaint .pdf. In re Liberty Tax, Inc. S’holder Litig., Consol. C.A. No. 2017-0883-AGB (Del. Ch. 2019). See Joshua Jamerson, Signet Jewelers, Following Sexual Harassment Claims, Will Hire Independent Consultant to Review Policies, Wall St. J. (Mar. 9, 2017, 2:26 PM), https://www .wsj.com/articles/signet-jewelers-following-sexual-harassment-claims-will-hire-independent-con sultant-to-review-policies-1489087589. Stipulation of Settlement, In re Alphabet Inc. S’holder Deriv. Litig., No. 19CV-341522 (Cal. Super. Ct. 2020), https://www.cohenmilstein.com/sites/default/files/Alphabet%20Stipulation% 20of%20Settlement%20-%20Executed_0.pdf [https://perma.cc/3QG8-U223]; see also Daisuke Wakabayashi, Alphabet Settles Shareholder Suits Over Sexual Harassment Claims, N.Y. Times, Sept. 25, 2020, https://www.nytimes.com/2020/09/25/technology/google-sexual-harass ment-lawsuit-settlement.html.

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33 percent.31 Institutional investors and advisors controlling trillions of dollars are advocating for gender diversity in corporate leadership, including the Human Capital Management Coalition, the Sustainability Accounting Standards Board, State Street (when it unveiled its “Fearless Girl” statue on Wall Street), Glass Lewis, the California State Teachers Retirement System, and others. These campaigns influenced California’s 2018 law requiring Californiaheadquartered public companies to have one to three women on their boards, depending on the board’s size.32 Furthermore, recognizing the substantial costs and prevalence of sexual harassment claims, merger agreements now may include “Weinstein clauses” or “#MeToo reps,” which require a target company to represent that it has no actual knowledge of sexual accusations made against officers over a certain period. Some require an escrow fund for acquirers to claim against if issues arise.33 Might these needed changes have been accelerated if Haan’s opinion had been issued in 2010? Absolutely. That is not to say that the visibility that has come from #MeToo was not vital; indeed, the #MeToo movement has made it likely that more women will give voice to the sex discrimination they suffer in the workplace and that those wrongs will be taken seriously. But Haan’s approach would have helped to advance the understanding of sexual harassment as a corporate governance matter as well as an employment and women’s rights matter. What is so important about her approach is that she resists the artificial “social matter” versus “business matter” divide, which in far too many contexts has relegated issues related to women as falling outside of the corporation, and similarly has often coded those issues as being one and the same with issues of sex and gender. Put differently, Haan’s approach puts management and oversight of the risks of sexual harassment on par with managing other common risks to the corporate enterprise, making it the business of the board rather than none of the board’s business.

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Vivian Hunt, Lareina Yee, Sara Prince & Sundiatu Dixon-Fyle, Delivering through Diversity, McKinsey & Co. (Jan. 18, 2018), https://www.mckinsey.com/business-functions/organization/ our-insights/delivering-through-diversity# [https://perma.cc/C5G8-E2A6]. See Hum. Cap. Mgmt. Coal., http://uawtrust.org/hcmc (last visited Dec. 18, 2020); The SASB Materiality Map, Sustainability Acct. Standards Bd., http://www.sasb.org/materiality/sasbmateriality-map (last visited Dec. 18, 2020); State Street Global Advisors’ Guidance on Enhancing Gender Diversity on Boards, State St. Glob. Advisors (2019), https://www.ssga .com/investment-topics/environmental-social-governance/guidance-on-enhancing-gender-diver sity-on-boards.pdf; 2018 Proxy Season Preview – United States, Glass Lewis (2018), http://www .glasslewis.com/wp-content/uploads/2018/03/2018-Proxy-Season-Preview-US.pdf [https://perma .cc/WHZ6-GXWX]; S.B. 826, 2018 Leg., 14th Sess. (Cal. 2018), https://leginfo.legislature.ca .gov/faces/billTextClient.xhtml?bill_id=201720180SB826 [https://perma.cc/UD3Z-M3LB]; Irina Ivanova, Nearly 100 California Companies Have No Women on Their Board of Directors, CBS News (Oct. 1, 2018, 5:12 PM), https://www.cbsnews.com/news/nearly-100-cali fornia-companies-have-no-women-on-board-of-directors/. Nabila Ahmed, Wall Street Is Adding a New ‘Weinstein Clause’ Before Making Deals, Bloomberg (Aug. 1, 2018, 11:29 AM), https://www.bloomberg.com/news/articles/2018-08-01/weinstein-clause-creeps-into-deals-as-wary-buyers-seek-cover.

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Moreover, she also resists the “look the other way” approach to sexual misconduct (both harassment and abuse) that has caused incalculable harm to individuals and enterprises. “Corporate governance” ought to be a verb, requiring active monitoring and reasonable actions in the face of common (and certainly known) risks, not a shield to hide one’s eyes. Given the vast resources that corporations control and the enormous influence of work on the lived experiences of people, workplace discrimination on the basis of sex and race should be non-negotiable arenas for a board’s active work, not only for corporate compliance with law but also for leadership toward equity and inclusion. Relatedly, Haan’s opinion also provides an important platform for the continued development of a feminist approach to corporate law. Some potential avenues for exploration include further refinement of the business judgment rule in the context of challenges to board oversight of workplace discrimination. The harms of discrimination (e.g., race, gender, disability, and more) for multiple corporate stakeholders, as well as to the long-term interest of the corporation, are well known. Unlike complex business decisions where reasonable minds might differ on goals, strategies, and tactics (e.g., which business lines to develop), there is no compelling reason to protect leadership discretion with respect to discriminatory acts. Because the business judgment rule is a rebuttable presumption that directors acted in conformance with their duties, plaintiffs should be deemed to have offered sufficient facts to rebut that protection when the facts, taken in the light most favorable to plaintiff, could show that officers or directors either failed to prevent and/or perpetuated legally settled forms of workplace discrimination. Haan’s opinion further provides a platform for exploring the requirement that a board member be “disinterested and independent.” Given developing understandings about structural inequality and the myriad ways in which group identity influences our understanding and navigation of people’s lived experiences, can we still assume that an all-male or all-white (or all-anything) board today is entitled to a presumption of independence? We are trained to look for conflicts in loyalties to other business interests, but what about loyalties to other interests and identities? This line of argument does not require reliance on individual essential identity; rather, it recognizes that neutral rules cannot adequately protect women or minoritized groups in contexts dominated by unrepresentative power. Likewise, Haan’s opinion provides a second opportunity to interrogate the myth of neutrality. So much of corporate litigation falls on the sword of difficult or allegedly “neutral” pleading requirements. These rules present a barrier to filing when steep information asymmetries exist, especially in cases where concealment is part of the wrong being alleged; the rules are also prone to insulating those with power from scrutiny. In the corporate context, where leadership roles of officers and directors remain overwhelmingly filled by men, those rules will perpetuate the subordination of women by corporate actions and inactions.

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Additional fertile ground for the development of feminist analysis of corporate law is suggested by Haan’s method, which pays great respect to the facts and the context of the controversy, instead of taking a more abstract focus only on rules and processes. The most important voice in conceptualizing and advancing remedies for the harms of sexual harassment has been Catherine MacKinnon, who wrote, “[b]ehind all law is someone’s story; someone whose blood, if you read closely, leaks through the lines. Text does not beget text; life does. The question – a question of politics and history and therefore law – is whose experience grounds what law.”34 Haan’s opinion looks closely for the blood leaking through the lines. She emphasizes the harms to Panic’s targets, both as women and as employees, and the board’s duty to care about such harms. Indeed, we need far more exploration of the harms to women as perpetuated in and through the corporate form. For example, what becomes of the harassers – versus what becomes of the victims? Panic surely enjoyed success, despite having the “problem” the board recognized. In 2020, he listed a Newport Beach home for sale for $20 million, which he had bought in 1986 for less than a quarter of that price.35 He is extolled in multiple books and videos, including a recent book by a fellow ICN executive that calls Panic the “ultimate risk taker” and claims that while critics challenged him, “called him a rogue, and even tried to unseat him in proxy fights[,] that he seemed to always prevail, and his companies grew bigger and more valuable along the way.”36 Despite the fact that the #MeToo movement brought forth some famous and successful women willing to speak out about sexual harassment, I doubt whether most victims of sexual harassment in the workplace possess $20-million houses or have books written about their lives. A feminist approach to corporate law will continue to parse the impact of corporate laws, policies, and behaviors on women, also probing how those aspects differ among and between women based on critical factors including race, ethnicity, gender expression and identity, sexuality, and class. Interestingly, MacKinnon has her own connection to White v. Panic that transcends the law of sexual harassment and suggests yet more feminist analysis that deserves attention. She served as co-counsel in a groundbreaking prosecution of sexual assault as a war crime, against Radovan Karadzic, in connection with the genocide in Bosnia-Herzegovina. That prosecution formed the framework for later actions, including against Slobodan Milosevic, Mr. Panic’s nemesis in the former 34

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Catharine A. MacKinnon, Crimes of War, Crimes of Peace, 4 UCLA Women’s L.J. 59 (1993), https://escholarship.org/content/qt5435b1mj/qt5435b1mj.pdf [https://perma.cc/JN5P-DRM6]. Sandara Barrera, Ex Yugoslavian PM Milan Panic Lists Newport Beach Home for 230 Million, Orange Cty. Reg. (Mar. 23, 2020, 10:59 AM), https://www.ocregister.com/2020/03/23/ex-yugo slavian-pm-milan-panic-lists-newport-beach-home-for-20-million/. Mark Taylor, Warrior CEO: The Remarkable Journey of Milan Panic and ICN Pharmaceuticals (2019). For a video extolling his many accomplishments, see MP Biomedicals, Introduction to Milan Panic, YouTube (May 15, 2015), https://www.youtube .com/watch?v=D8Mtm94IPsA (prepared prior to speech at Peking University in 2009).

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Yugoslavia. Part of Professor MacKinnon’s argument in this line of cases is that women experience the atrocities of war in ways unique to women. She has always reminded us that feminist method must pay relentless attention to the harms that women experience specifically as women. Haan’s opinion in this promising feminist tradition opens avenues for further research into the unique harms that women experience in and through the corporate form, as well as the complex relationship of those harms to wider issues of sex-based violence against women in society.

White v. Panic, 783 A.2d 543 (Del. 2001) justice sarah c. haan delivered the opinion of the court 1 In this appeal, we consider whether to dismiss a shareholder derivative lawsuit for failure to make pre-suit demand on the board of directors. The lawsuit alleges that the directors of ICN Pharmaceuticals, Inc. (“ICN”) violated their fiduciary duties through a “sustained and systematic failure” to put an end to a years-long pattern of workplace sexual harassment and assault by the company’s male CEO and Board Chair against its female employees.2 In particular, the lawsuit alleges that the directors approved the settlements of eight prior sexual misconduct lawsuits that cost the company millions of dollars; implemented a new, sealed arbitration policy to keep a lid on employee complaints; and used corporate funds to guarantee a bank loan to the CEO/Board Chair to fund his multi-million-dollar settlement of a personal paternity lawsuit involving a former employee. The complaint alleges that the directors never sanctioned the CEO/Board Chair for any workplace conduct, nor required him to reimburse the company for any expenditures made necessary by his alleged serial misconduct. These alleged acts by the board subjected the corporation to potential civil liability, expense, loss of good will, and negative publicity; they also contributed to discriminatory workplace practices that harmed employees, reduced morale and productivity, increased labor costs, and subordinated and demeaned women – a vital segment of the corporation’s talent pool. If the allegations of sexual misconduct at the heart of this case are true, the CEO/Board Chair and perhaps the corporation itself violated state and federal law. The Chancery Court held that demand was not excused because the complaint did not present sufficient particularized factual allegations to create a reasonable 1

2

Editors’ Note: Unlike other courts, the Delaware Supreme Courts uses footnotes for its citations. In keeping with that form, this opinion also uses footnotes rather than inline citations. Compl. } 1.

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doubt that the director defendants were disinterested and independent, or that their conduct was protected by the business judgment rule. The use of corporate funds to settle one or more lawsuits related to an act of alleged misconduct by a corporate officer would not generally constitute bad faith by a corporate board. Indeed, a presumption of good faith normally attaches to such decisions. However, where – as here – an extensive pattern of sexual misconduct is alleged, accompanied by a sequence of board decisions that range from defensible to increasingly indefensible, the presumption of good faith is weakened. In an extreme circumstance like the one alleged in the complaint, a board’s decisions, viewed holistically and in light of the board’s accumulating knowledge, may constitute bad faith. Once a board has knowledge of a serious ongoing problem that potentially violates state and federal law and harms the company’s own employees, the board fails to exercise valid business judgment by recklessly or knowingly turning a blind eye to that wrongdoing. Accordingly, we reverse the judgment of the Court of Chancery dismissing the complaint with prejudice. We find demand excused here, because plaintiff has presented sufficient particularized factual allegations to create a reasonable doubt that the actions of ICN’s board were entitled to the protection of the business judgment rule.3

I

The shareholder-plaintiff, Andrew White, learned about extensive allegations of workplace sexual wrongdoing by Milan Panic, who was the founder, CEO, and Board Chair of ICN, when U.S. News & World Report published a cover story exposing those allegations on July 6, 1998. White proceeded to bring a derivative lawsuit in the Court of Chancery, based mainly on facts reported in the U.S. News article. He named the individual directors on the ICN Board as defendants and ICN as a nominal defendant. The following summarizes the facts alleged in the derivative complaint. ICN is a pharmaceutical company with 17,000 employees, the great majority of whom are women.4 However, women were essentially excluded from ICN’s management; at the time of the events described in the complaint, the company had no women on its board of directors, no women officers, and “few high-level women at all.”5 Female employees of ICN have brought “multiple claims” in lawsuits and have filed discrimination charges with California’s Department of Fair Employment and Housing, involving allegations of sexual harassment against Panic and ICN. ICN has disclosed publicly that it has paid at least $3,500,000 to settle eight harassment 3 4 5

See Aronson v. Lewis, 473 A.2d 805, 808 (1984). According to the complaint, 12,000 of ICN’s 17,000 employees were women. Compl. } 17.

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suits against Panic. Four women have filed suits against ICN, alleging that Panic “repeatedly propositioned or groped them and rewarded or punished female employees based on whether they complied or complained.”6 The complaint alleges that Panic settled a paternity lawsuit with a former employee, but does not allege that Panic has ever been found liable for sexual harassment or sexual assault.7 ICN officials knew about Panic’s alleged misconduct as early as 1992, and director Norman Barker has stated, “the problem with Panic is he can’t keep it in his pants.”8 Notwithstanding this knowledge, the complaint alleges, ICN’s board failed to supervise Panic or stop his abusive conduct. Instead, the board took steps to protect Panic by using corporate funds to settle the suits against Panic and ICN and by implementing policies designed, at least in part, to minimize exposure of Panic’s alleged wrongdoing. In addition, ICN’s board has failed to remain informed about, or to implement, effective policies to prevent sexual harassment or to implement appropriate controls to ensure its compliance with state and federal law. ICN’s board implemented a policy requiring employees to submit all grievances to sealed arbitration. The complaint alleges that Panic and other directors have conceded in deposition testimony that the board has never “talked to or reprimanded” Panic regarding his alleged misconduct, and that roughly three months before U.S. News published its devastating cover story about Panic, ICN’s board awarded him a $1.8 million bonus.9 The board has also not required that Panic reimburse ICN for the corporate funds expended in defending and settling the suits based on his alleged misconduct. To the contrary, the plaintiff alleges that the board approved a short-term loan from ICN to Panic so that he could pay a settlement of more than $3,500,000 in a paternity suit involving a former employee. With the approval of the board, ICN then guaranteed a loan from a third-party bank to Panic (as a replacement for the short-term loan) and deposited $3,600,000 from the corporate treasury as collateral for the loan. In return, Panic pledged 150,000 stock options with an exercise price of $15.17 per share. The complaint alleges that “Panic has boasted that he pays only a fraction of the interest” on the loan.10 The plaintiff argues that demand is futile because all directors “are guilty of a sustained, systematic and deliberate failure to exercise any oversight” over Panic, and that the directors’ acts constitute bad faith and waste.11 Panic and the board moved to dismiss the complaint under Chancery Rule 23.1 on the ground that the plaintiff did not file a demand on the board before proceeding with his derivative suit and did not show that demand was excused as futile. The 6 7 8 9 10 11

Compl. } 12 (quoting U.S. News & World Report). Compl. } 18. Compl. } 16. Compl. } 12. Compl. } 18. Compl. } 23(a), (e).

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Court of Chancery held that demand was not excused in this case because the particularized factual allegations in the complaint do not raise a reasonable doubt that the board was disinterested or that the board’s actions were the product of valid business judgment. The court therefore granted the defendants’ motion to dismiss the complaint with prejudice. The plaintiff now appeals the Court of Chancery’s dismissal with prejudice of his complaint. This Court must “decide de novo whether the complaint was properly dismissed for failure to set forth particularized facts to support the plaintiff[’s] claim that demand is excused.”12

II

The plaintiff has initiated a derivative action without making a pre-suit demand on the board. Rule 23.1 requires that the complaint must allege with particularity the reasons that demand is excused.13 To satisfy this requirement, the plaintiff “must overcome the powerful presumptions of the business judgment rule,”14 by alleging sufficient particularized facts to support an inference that the board is “incapable of exercising its power and authority to pursue the derivative claims directly.”15 In Aronson v. Lewis, we held that a demand on the board is excused only if the complaint contains particularized factual allegations raising a reasonable doubt that either: (1) “the directors are disinterested and independent” or (2) “the challenged transaction was otherwise the product of a valid exercise of business judgment.”16 In this appeal, the first prong of Aronson is not at issue, because the plaintiff has not challenged the Court of Chancery’s conclusion that a majority of the ICN directors were disinterested and independent. As a result, we must determine whether the well-pleaded allegations in the complaint create a reasonable doubt that the board’s decisions were “the product of a valid exercise of business judgment.”17 The plaintiff alleges a “sustained, systemic and deliberate failure” by ICN’s board “to exercise any oversight over” the CEO/Board Chair and argues that demand is excused because this failure constituted a “reckless and bad faith breach of their fiduciary duties to ICN.”18 The plaintiff alleges, in essence, that by failing to “institute adequate systems of internal control and supervision to prevent sexual harassment,” the board facilitated a years-long scheme of sexual misconduct at the expense of employees, the corporation, and its shareholders and in violation of state 12 13 14 15 16 17 18

Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). Del. Ch. Ct. R. 23.1. Rales v. Balsband, 634 A.2d 927, 933 (Del. 1993). Levine v. Smith, 591 A.2d 194, 205 (Del. 1991) (emphasis in original). 473 A.2d 805, 814 (Del. 1984). Aronson, 473 A.2d, at 814. Compl. } 23(a).

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and federal law. The plaintiff further alleges that the director defendants were personally beholden to Panic for his having selected them for board service and that the board was controlled and dominated by him. Thus, the plaintiff asserts, the director defendants could not exercise independent, objective judgment in determining whether to pursue this action against Panic and themselves. III

Title VII of the Civil Rights Act of 1964 makes sex-based discrimination “an unlawful employment practice.”19 Since the 1970s, federal courts have recognized that sexual harassment constitutes sex discrimination within the meaning of Title VII.20 The EEOC guidelines, in place since 1980, explain that: Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when (1) submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s employment, (2) submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual, or (3) such conduct has the purpose or effect of unreasonably interfering with an individual’s work performance or creating an intimidating, hostile, or offensive working environment.21

Workplace complaints of sexual harassment have risen by more than 50 percent since the start of the 1990s. This trend suggests that sexual harassment is endemic in American businesses and that its harms are widespread.22 Federal law recognizes that a corporation may be strictly liable for sexual harassment by a corporate officer or supervisor “hold[ing] a sufficiently high position ‘in the management hierarchy of the company for his actions to be imputed automatically to the employer.’”23 The allegations in this case concern acts by the company’s founder, CEO, and Board Chair; if proven true, they might trigger strict liability for ICN under this doctrine. Some acts that constitute workplace sexual harassment, including groping and rape, are serious crimes. It is important to note that the complaint in this case alleges facts that include groping of employees by the CEO/Board Chair. 19 20

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42 U.S.C. §2000e-2(a). See, e.g., Barnes v. Costle, 561 F.2d 983, 993–95 (D.C. Cir. 1977); see also Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986). Final Amendment to Guidelines on Discrimination Because of Sex, 45 Fed. Reg. 74,676, 74,677 (Nov. 10, 1980) (codified at 29 C.F.R. §16044.11(a) (2017)). See Rosa Ehrenreich, Dignity and Discrimination: Toward a Pluralistic Understanding of Workplace Harassment, 88 Geo. L.J. 1, 3 (1999); see also Id. at 4 (“workplace harassment occurs in patterned ways and has historically operated to exclude women, in particular, from equal access to social, political, and economic power”). Faragher v. City of Boca Raton, 524 U.S. 775, 789–90 (1998) (quoting Torres v. Pisano, 116 F.3d 625, 634–35 (2d Cir. 1997)).

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IV

The plaintiff identifies a series of board decisions that, he argues, were not “the product of a valid exercise of business judgment.”24 Rather than treat each decision in isolation, we choose to view them holistically, as a series of related decisions that reflected the board’s accumulating knowledge about allegations against Panic and as points along a sequence of red flags about misconduct and potential crimes occurring within the corporation. That is, common sense teaches that a board’s decision about how to treat first-time allegations against a CEO/Board Chair for sexual misconduct is materially – and legally – different from the board’s decision about how to treat the eighth such allegation. The board’s knowledge must also be evaluated in light of the sequence of allegations and accumulating facts.

V

Under longstanding Delaware law, a board’s business decisions are entitled to a presumption of good faith.25 We pause here to discuss some limitations on that presumption.26 At all times addressed by this lawsuit, ICN’s board of directors was exclusively male; the company had zero women directors. We might reasonably question why it makes sense to extend a presumption of good faith to the decisions of an all-male board that was allegedly an important part of systemic unlawful sex discrimination against women at the company. To be sure, the plaintiff’s allegations have not yet been proven. But this is not the stage of the litigation in which well-pleaded allegations are proved. At this stage, in corporate law, burdens and presumptions do important work. A presumption of good faith at the demand-futility stage will tend to insulate from judicial scrutiny any “boys’ club” breach of duty, in which one member of the club engages in wrongdoing and the club (i.e., the board) dips into the corporate treasury to cover up the wrongdoing and to give the wrongdoer a bonus. The subordination of women gives men a competitive advantage in any workplace, including men who serve in the elite ranks of board leadership. Therefore, if the allegations in the complaint are true, each of ICN’s director defendants may be viewed as personally benefiting from a discriminatory firm culture. For the same reason that board composition might strengthen the presumption of good faith in

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Aronson, 473 A.2d 805, 814. See, e.g., Warshaw v. Calhoun, 221 A.2d 487, 493 (Del. 1966) (“The acts of directors are presumptively acts taken in good faith and inspired for the best interests of the corporation.”). Facts can strengthen or weaken a presumption. See, e.g., Ison v. E.I. DuPont de Nemours & Co., Inc., 729 A.2d 832, 835 (Del. 1999) (discussing the strength of a presumption in favor of a foreign national’s choice of forum).

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some cases, such as when independent directors are involved,27 we find that the allmale composition of a board weakens the presumption of good faith in this narrow circumstance: Where a derivative plaintiff alleges demand futility, and the gravamen of the complaint is that the all-male board violated its fiduciary duties through acts constituting systemic discrimination against women. Finding a weakened presumption of good faith in this small subset of cases is consistent with fiduciary principles and recognizes the long history of women’s systemic subordination in the workplace. In this case, the presumption of good faith is weakened for another reason. The complaint alleges that ICN’s board made a sequence of decisions related to an ongoing pattern of troubling allegations against the company’s CEO/Board Chair. Although the allegations were made by different individuals and involved different factual circumstances, they all described the same type of conduct – sexual predation – by the same person. While ICN’s board may have had reason to credit Panic at the beginning of the sequence of its responses, by the time it approved the company’s eighth settlement of a lawsuit charging Panic with sexual harassment, the ICN Board should have realized the seriousness of the potential problem and its need to take action. No board of directors should view each of its decisions as standing apart from earlier related decisions. When the decisions of ICN’s board are viewed holistically, in light of the accumulated red flags, it makes little sense to extend to the ICN Board the same presumption of good faith for later decisions as for the board’s early decisions. At some point between the first sworn complaint of sexual harassment or assault and the eighth sworn complaint, the ICN Board loses its presumption of good faith. The board merely continued to do nothing to investigate or fix what was clearly becoming a serious problem. The plaintiff’s complaint alleges that Panic has testified that “he did not recall ever being talked to” about the allegations.28 We find that the presumption of good faith is thus weakened on the unique facts of this case.

VII

The complaint successfully alleges that ICN’s board was well aware of the allegations against Panic. It not only dates the board’s knowledge back to 1992 but chronicles an ongoing sequence of board decisions that were prompted, again and again, by a need for the board to keep taking action to cover for Panic. Remarkably, the complaint quotes ICN director Norman Barker as saying, “the problem with Panic is he can’t keep it in his pants.” A reasonable inference arising from this quote is that Barker believed there was a present-tense “problem” – that is, an ongoing, unresolved problem – involving Panic’s sexual conduct. Barker’s comment not only 27 28

See Kahn v. MSB Bancorp, Inc., 1998 WL 409355 at *3 (Del. Ch. 1998). Compl. } 16.

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supports the reasonable inference that Barker had sufficient knowledge about Panic’s behavior to perceive an ongoing “problem,” but also underscores how the board’s inaction to address the “problem” was a considered failure. Just how much of a “problem” for ICN was Panic’s allegedly illegal activity? The validity of the board’s business judgment regarding these matters turns, at least in part, on the seriousness of the problem they posed for the corporation. For this reason, we must consider the situation that a Delaware corporation finds itself in when its founder, CEO, and Board Chair is accused – by a series of employees – of a pattern of workplace sexual predation and harassment. First, it bears repeating that “[u]nwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature” can constitute violations of state and federal laws, including the federal Civil Rights Act, when they unreasonably interfere with an employee’s work performance or create an intimidating, hostile, or offensive work environment.29 In addition, unwanted physical contact, such as “groping,” is a crime under state law. Thus, the alleged conduct at the heart of this case must be recognized as unlawful and possibly criminal conduct. However, unlike previous cases in which Delaware courts have considered board decision making about an employee’s wrongdoing, the victims of the alleged wrongdoing here – the people whom the allegedly violated civil and criminal laws were designed to protect – were the corporation’s own workers. This situation only heightened the board’s responsibility to take considered action. The effect of a culture of sexual harassment and discrimination on the corporation itself is significant. A long-time pattern of serious sexual misconduct by an actor at the top of the corporate hierarchy is not a mere inconvenience or a cost of doing business. Workplace sexual harassment of the type alleged in this lawsuit, namely a long-running pattern of abuse involving multiple victims, possible criminal wrongdoing, and a system of rewards and punishments for victims that is hardwired into the corporation’s own command structure, has serious consequences. It reduces the corporation’s talent pool, lowers its productivity, increases its legal costs, and harms its reputation; it reduces the corporation’s goodwill and increases its cost of capital; and it disrupts and impairs the firm’s ethical culture, which can have farreaching effects. Several decades ago, in Graham v. Allis-Chalmers Mfg. Co., the Delaware Supreme Court evaluated the conduct of the board of a corporation charged with violating federal anti-trust laws.30 We stated that, “absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.”31 Unlike the

29

30 31

Final Amendment to Guidelines on Discrimination Because of Sex, 45 Fed. Reg. 74,676, 74,677 (Nov. 10, 1980) (codified at 29 C.F.R. §16044.11(a) (2017)). 188 A.2d 125 (1963). Id. at 130.

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present case, in Allis-Chalmers, there were no allegations that the corporation’s directors knew about the employee conduct that was alleged to have violated federal law. In a recent case in the Chancery Court, a shareholder brought a derivative lawsuit against the board of directors of Caremark International, Inc., alleging violations of the board’s duty of care.32 Caremark had become the focus of a four-year federal investigation and was ultimately charged with several felonies for allegedly violating the federal Anti-Referral Payments Law, which prohibits certain bribe-like payments by a company to increase its business. In an opinion approving a settlement of the suit, Chancellor Allen revisited Allis-Chalmers and asserted that the case stands for “the proposition that, absent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the company’s behalf.” 33 This case is different from Allis-Chalmers and Caremark. It is not about a board that failed to put into place a monitoring and reporting system and thus committed an “unconsidered failure to act.” Here, the plaintiff alleges bad faith. It is the plaintiff’s theory that ICN Board considered Panic’s sexual misconduct and declined to stop it; that the board knew or recklessly disregarded the fact that Panic’s inability to “keep it in his pants” opened the corporation up to civil and criminal liability, like the violations of law in Allis-Chalmers and Caremark; and that the board knew or recklessly disregarded the possibility that Panic was seriously harming the company’s own workers and ethical culture. It is not necessary for the board to have known that Panic actually engaged in the acts he was accused of, although the statement by Barker, the director, suggests just this level of knowledge. Nor is the desire to foreclose strike suits or to avoid the costs of protracted litigation sufficient to justify the board’s actions here. The victims of Panic’s actions were the corporation’s own employees, whose continued protection under the law was vital to the corporation’s success. We therefore conclude that, under the heightened pleading standards of Rule 23.1, the particularized allegations in the complaint support the plaintiff’s theory that the board knew (or proceeded in the face of an unjustifiable risk) that Panic had engaged in serious, unlawful acts; refused to take action to protect ICN and its workforce from the consequences of that misconduct; and instead took steps to perpetuate the harm. Finally, we note that our interpretation of Delaware corporate law here is consistent with other parts of Delaware law that outlaw the abuse of and discrimination against women.34 Corporate law doctrines must not be interpreted in ways that

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In re Caremark Int’l, Inc., Derivative Litig., 698 A.2d 959 (Del. Ch. 1996). Id. at 969. See, e.g., Del. Const. Art. XV, § 10 (Lexis 2000); 19 Del. C. § 711 (Lexis 2000); 25 Del. C. § 5116 (Lexis 2000).

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promote and normalize the subordination of women. We decline to turn important corporate law doctrines, such as the business judgment rule, into a justification for the perpetuation of serious harms. VIII

Because we find that the board’s decisions do not reflect the valid exercise of business judgment, we do not reach the plaintiff’s contention that the board’s expenditures of money to assist Panic constituted waste. We conclude that the particularized facts on the face of the complaint, collectively, are legally sufficient to create a reasonable doubt that the board’s decisions were the product of a valid exercise of business judgment. Accordingly, the Court of Chancery improperly dismissed the plaintiff’s complaint for failure to show that demand was excused under the second prong of Aronson. IX

For the reasons set forth above, we reverse the judgment of the Court of Chancery dismissing the plaintiff’s derivative complaint with prejudice. The facts alleged in the complaint create a reasonable doubt that the decisions of the ICN Board of Directors were the product of valid business judgment. Because this is true, it would have been futile for plaintiffs to make pre-suit demand on the board to investigate its own potentially invalid business judgment. Demand is excused.

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11 Commentary on Francis v. United Jersey Bank faith stevelman

INTRODUCTION

The original Francis v. United Jersey Bank opinions1 are shocking and confusing. For example, the courts describe an abbreviated cash flow statement as being selfevidently clear, but it was not. More broadly, the sole female and least culpable of the four directors of Pritchard & Baird (P&B) is the only one sued for fiduciary breach. We wonder, “why not the men?” – but a satisfactory answer never emerges. What is clear, upon reflection, is that the original opinions are flawed in their interpretation of legal precedent, in their blindness to evidentiary deficits, and in their disregard for plaintiffs having the burden of persuasion. Francis also contains some disturbing language.2 Finally, inclusion of the Supreme Court’s Francis opinion in leading casebooks has meant that the most salient female protagonist in the Corporations course has served as the exemplar of director incompetence – a sinister message, indeed.3 Professor Jonathan Smith, writing as Justice Smith, gets much right in his rewritten Francis opinion. For example, by refusing to expand the law of causation beyond reasonable limits, Smith finds Lillian Pritchard non-liable.4 Nevertheless, he affirms that Lillian was ignorant about and disinterested in P&B’s finances and business

1

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They encompass one trial court and two appellate decisions. See 392 A.2d 1233 (1978); 407 A.2d 1253 (1979); 432 A.2d 814 (1981). This essay is part of a larger project by the author discussing Francis v. United Jersey, posted on the Social Science Research Network (SSRN). For example, invoking a putrid metaphor, the Supreme Court opinion states: “They spawned their fraud on the backwater of her neglect.” A foreseeable question is whether Francis should be dropped from casebooks. The best strategy would be to assign portions of the original, Smith’s rewrite, and this Commentary for analysis and discussion. For concision, I refer to the rewritten Francis opinion by reference to its author’s name, but my comments are directed exclusively to his text.

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affairs.5 In contrast, I reject this conclusion as ill-supported by relevant testimony or evidence.6 I approach the Francis evidentiary record with heightened skepticism, moreover, because concluding that Lillian was ignorant and passive precisely mirrors sexist stereotypes regarding women’s incompetence in finance and business that were pervasive in that era. These biases were intensified where, like Lillan, the women were wives and mothers. Smith demonstrates good judgment in his realistic assessment of lack of causation, and other features of his opinion are sound and thoughtful. But feminism’s attentiveness to the underestimation of women’s knowledge and to injustices arising from the erasure of female voice (as relevant to Lillian being unavailable to testify7) are relevant to evaluating her case. Hence, I would have liked Smith’s rewritten opinion more deeply to have explored the gap between Lillian’s presumed ignorance and proven fact. Precise scrutiny of Lillian’s stature on P&B’s board was especially warranted because of the legal framework Smith employs to review her appeal. That is, the governing statute admonished that directors’ performances should be evaluated based on their particular “circumstances and position.”8

FOUNDATIONS

Lillian’s Circumstances and Position at P&B Pritchard & Baird had a family-only board from 1964 onward. Until the death of Charles Pritchard Sr. (hereinafter “Senior”) in December 1973, the board was composed of him, his wife Lillian, and their adult sons Charles Jr. and William.9 After Senior’s death, it was just the latter three. Since the disputed advances occurred from 1970 to 1975, Senior was a director during the first three years they were paid to Charles and William. After 1968, Charles and William served as president and vice president, respectively. P&B’s governance structure was highly patriarchal. For example, at his death, Senior bequeathed Lillian only a portion of his shares (72/120), so that she would own merely 48 percent (of the 150 shares outstanding). This meant Lillian never

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Professor Smith and I were in dialogue through the writing process. The volume editors chose to forward my near-final draft to him, for him to effectuate revisions at his discretion. Smith and I confine our understanding of the trial record to facts and evidence mentioned by Judge Stanton in his opinion. Lillian died after the suit was initiated, but before trial. Her daughter, who was the executor of her estate, oversaw her defense. N.J.S.A. 14A:16-14 dictated that corporate directors are required to “discharge their duties . . . with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.” For clarity’s sake, the elder Charles is referred to hereinafter as “Senior” and the younger as “Charles.”

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obtained dispositive voting power.10 With only one of three board seats, and a minority block of stock, Lillian could not have reacted to the advances by voting her sons off the board. Nor could she have blocked the advances at the board level or ousted Charles and William from their executive positions. Unfortunately, analysis of the limits of Lillian’s corporate legal power was omitted from the Francis opinions. P&B’s patriarchal governance structure is also manifest in the fact that although Lillian and Senior had a daughter, Lillian Overcash, she was afforded no stock ownership, no executive office, and no directorship at P&B. Her male siblings possessed all three forms of wealth and power, in contrast. Lillian was not compensated for her board service. This is an extraordinary irony given that the gravamen of the case is the excessive compensation received by Charles and William. Lillian’s lack of compensation is not discussed in the opinions, but can be surmised from the facts therein. They state that Lillian received $33,000 in her lifetime from P&B. Leaving aside the fiduciary breach judgment, the courts recouped this sum from her estate as a fraudulent conveyance (conversion, on appeal). Hence, they concluded that it was not compensation paid to Lillian. Even as they adjudged Lillian negligent, the courts ignored features of P&B’s patriarchal governance that undermined her power as a director. For example, Lillian was the only director who was not also an executive at P&B. In corporate law parlance, this made her an “outside” director. As such, a lesser standard of informedness should have applied in adjudicating her duty of care. As part-timers at their firms, outside directors are not held to as rigorous a standard of knowledge about their companies as are “inside” directors.11 Does this defense-friendly standard explain why the courts exaggerated Lillian’s ignorance, finding she knew “not the slightest thing” about P&B?12 Attentiveness to Lillian’s status as an outside director was also warranted by the subjective approach to directors’ duties endorsed in the statute. Piecing together the facts pertaining to Lillian’s position and circumstances at P&B, as pertinent to her authority and responsibility for the advances, we see that she was (i) the only outside director; (ii) an uncompensated director; (iii) merely one of a group of directors; (iv) the only woman on the board in an openly sexist era; (v) the only director not a professional businessperson; (vi) unfree to resign and walk away because the other directors were her husband and sons; and (vii) not even a stockholder for most of the years in question. Instead of carefully examining these facts regarding Lillian’s circumstances and position at P&B, the courts rashly resolved she was liable for “doing and knowing nothing” when the advances occurred.

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Merely four more shares would have changed that. For an account of how outside directors were enabled to learn little in-depth information about their companies, see Jeffrey N. Gordon, The Rise of Outside Directors in the United States, 59 Stan L. Rev. 1465 (2010). This totalizing rhetoric is what first shocked me when I read the case thirty years ago.

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The Larger Litigation Arc Charles and William, the most culpable actors on P&B’s board, were excused from the trial “in favor of their bankruptcy proceedings.” This confounds understanding.13 The Francis plaintiffs were P&B bankruptcy trustees, hence expertly aware that bankruptcy proceedings apportion assets in an estate but cannot enlarge them. (That is why the bankruptcy trustees filed the lawsuit that becomes Francis.) By the trial, the scope of the sons’ wealth was notorious. The media reported that Charles and William owned Wyoming cattle ranches, a New York restaurant, a reinsurance business other than P&B, part of a medical malpractice company, an insurance holding company, and valuable securities other than their P&B stock. Senior’s absence as a fiduciary defendant in Francis is even more peculiar. He was already in the fraudulent conveyance portion of the case because of some relatively small payments he had received. Senior could have faced claims under the duties of loyalty, care, and candor, as discussed below. The pending criminal charges against Charles and William are not mentioned in the trial opinion. But its tenor reveals Judge Stanton was enraged against the men. The indictment, alleging embezzlement and fraud by Charles and William, had issued in 1977, the year before the Francis trial. The charges and pre-trial proceedings, as well as the firm’s bankruptcy proceedings, were covered in detail by the New Jersey press.14 Stanton described the claim against Lillian as part of a “much larger picture of chicanery and fraud.” Treating the men as proven criminals, he described the advances as thinly veiled larceny. Having excused the sons from the case, Stanton redirected his anger toward their mother. After excoriating her laziness and ignorance, he entered a $10 million judgment against her estate.15 Francis transpired against the backdrop of three related bankruptcies ongoing in New Jersey federal court – those of P&B, Charles, and William. But Lillian’s failure to stop the advances was not the cause of P&B’s demise. The Francis opinions themselves describe creditors filing approximately $70 million in claims, which was roughly $60 million more than the advances. Press accounts attributed the onset of P&B’s woes to excessive losses from tornadoes in the Midwest during 1974. Newspapers reported that the outsized storm losses occasioned uncharacteristic payment delays by P&B. When anxious client firms demanded to see P&B’s books, the advances came to light. The firms were spooked 13

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My guess is the bankruptcy trustees planned to delay civil litigation against Charles and William until after the conclusion of the criminal case. Yet, after they were exonerated in the fall of 1979, a civil lawsuit against them never materialized. The bankruptcy, criminal trial, and Francis litigation were covered comprehensively by The Daily Record (Morristown, New Jersey) and other local newspapers. For national coverage, see Jonathan Kwitney, Hundreds of Insurers Search for Remnants of Missing Millions, Wall St. J., Oct. 12, 1976, at 1; Alfonso A. Narvaez, 2 Brothers Are Indicted in Theft of $8 Million in Insurance Fees, N.Y. Times, Mar. 11, 1977, at 43; and Jonathan Kwitney, Pritchard Brothers Are Acquitted by Jury in Embezzlement Case, Wall St. J., Dec. 17, 1979, at 28. Another gender-based irony is that the judgment deprived the daughter of this inheritance.

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and began to deal directly with reinsurers. This decimated P&B’s commission revenues in 1975 and unleashed a cash flow death-spiral that proved fatal to the firm by year’s end. This thicker portrait of P&B’s demise – in contra-distinction to the Ponzi scheme/lethal advances caricature presented in the trial opinion and adopted on appeal – appeared not only in New Jersey newspapers, but also in The New York Times and Wall Street Journal (WSJ). The narrative, absent from the record, puts Lillian’s inability to stop the advances in a different light. It was a small part of the story. Another vignette suggests the advances were irrelevant to P&B’s failure. The WSJ reported that a consortium of ceding firms offered to purchase P&B’s assets and liabilities in the latter half of 1975. Such a buyout would have rendered the advances toothless. According to theWSJ, Charles terminated the buyout when the bidders refused to offer him a large salary to lead the post-acquisition company. If the account is accurate, it was Charles’ refusal to sell P&B, rather than the advances or Lillian’s failure to stop them, that caused the firm’s failure. The appellate division issued its affirmance in the fall of 1979, shortly after Charles and William had been exonerated of all criminal charges. The jury issued the not-guilty verdict swiftly, after a four-week trial in New Jersey. The men’s exoneration undermined the “intent-to-defraud” theory, and the appellate division backtracked. Instead of fraudulent conveyances, the advances were now characterized as conversion, a cause of action where fraudulent intent need not be proven. After the criminal verdict, jurors relayed that the prosecutor failed to present any evidence that the men did not intend to repay the advances. This raises a question regarding the (subsequent) appeals, because Lillian would not have had a duty to stop the advances if she reasonably believed they might be repaid. Viewed logically, if a prosecutor, ex post, failed to persuade jurors that Charles and William intended not to repay the advances, why should Lillian have believed the men would not repay them? The opinion that appears in casebooks is the final appeal decision – the 1981 New Jersey Supreme Court affirmance of Lillian’s negligence. It was decided unanimously, en banc by six (male) judges.16 Its flaws are discussed immediately below. Jurisprudential Infirmities 1. Mistaken Choice of Law Based on the internal affairs doctrine – the rule that governs choice of law in corporate fiduciary lawsuits – New York’s law should have applied in Francis, not New Jersey’s. Pritchard & Baird was incorporated in New York in 1959, when it converted from partnership to corporate form. In the deviation from mainstream choice of law doctrine, we perhaps again see the overhang of the other civil and criminal proceedings in New Jersey and the judicial anxiety they engendered. Were 16

Ten (male) judges found Lillian negligent in Francis, with no dissent.

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these New Jersey judges defensive, thus “trying too hard” to demonstrate that New Jersey’s law could respond to the sons’ perceived wrongdoing and the $70 million in bankruptcy losses? The factors cited to justify applying New Jersey law are customarily afforded little or no significance in corporate fiduciary duty lawsuits. The law of the state of incorporation is nearly universally applied. My intuition is that the idiosyncratic choice of law in Francis is a “tell,” exposing the decision’s embeddedness in legal and social conflicts extraneous to Lillian’s conduct.

2. Ignoring the Burden of Persuasion The Francis trial and Supreme Court opinions read as if the courts were oblivious to the operation of the burden of persuasion.17 The subject is simply never mentioned. This is a stunning omission, and one I regard as having been outcome determinative. As this commentary shows, there were more than enough factual, evidentiary, and doctrinal gaps for the courts to have ruled that the plaintiffs failed to make their case. In corporate fiduciary duty lawsuits, moreover, plaintiffs face an exceptionally high burden for obtaining personal liability against directors. Commentators and judges highlight the need to avoid liability via hindsight bias – as might arise from a subsequent corporate bankruptcy filing or criminal indictment, as was true with P&B. Courts are urged to evaluate directors’ conduct in light of the realistic complexities and uncertainties they would have faced in real time. (This commentary discusses the many complexities and uncertainties Lillian would have faced, visà-vis the advances, as a director on P&B’s board from 1970 to 1975.) Overzealous director liability judgments are discouraged on the grounds that they would disincentivize honest people, like Lillian, from serving on boards.18 Hence, directors who act in good faith, as Lillian did, are almost never found liable for nonfeasance, as Smith observes.

3. Deficient Evidentiary Record Formally speaking, no trial opinion issues in Francis. Stanton announced his judgment orally, from the bench. He wrote what I refer to as the “trial opinion” in rejecting a defense motion for rehearing or amendment of his holding. Perhaps this explains why there is so little reference to the evidentiary record and no solicitude toward the allocation of the burden of persuasion therein. The defects in the evidentiary record become apparent upon reflection. Two of the four directors who might have testified about what Lillian knew and did as a 17

18

At one point, Smith muses that he might have remanded for lack of proof were causation not lacking. Perhaps he resisted doing so because it would have conflicted with his remit to produce a comprehensive appellate opinion. It was uniformly agreed that Lillian exhibited no bad faith.

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board member were deceased before the trial: Senior and Lillian herself. The other two directors, Charles and William, eschewed giving testimony based on their Fifth Amendment right under the Constitution. This means no one who served with Lillian testified about her board service or knowledge of the firm. Also, since Charles and William were president and vice president, no senior executive officer who would have worked with Lillian, as a director, provided testimony. The opinions observe that P&B’s minutes were cursory and provided no evidence that Lillian discussed or tried to stop the advances. But the gap should not have been prejudicial to her defense. Cursory minutes are the norm in closely held corporations like P&B. They should not have been construed as a comprehensive record of the directors’ discussions. Since all the board members were also immediate family members, most of the directors’ conversations would have been “off the record,” undocumented.19 In addition, documentary evidence of directors’ conversations was less available then, in the era before emailing and text messaging. This normal evidentiary void should not have worked to the plaintiffs’ advantage. The opinions, including Smith’s, make much of the fact that Charles instructed another P&B officer to circulate the financials only to him. They presume this demonstrated their contents did not reach the full board. Yet it proved no such thing. Once the financials were delivered to Charles, the firm’s president, he had a duty and opportunity to relay them to his fellow board members. And even if Lillian did not read the statements herself, she had a statutory right to rely on Charles’ account of their contents. He had a fiduciary duty to be candid with her about them. Notably, even today, boards nearly universally obtain internal corporate reports via a channel mediated through the highest company executive (i.e., CEO or president). Subordinate corporate officers do not convey corporate information directly to corporate directors.20 Thus, the fact that Charles had the subordinate officer direct the financial statements only to him is meaningless in regard to whether Lillian ultimately received them or knew about their substance. Defense counsel apparently described Lillian as a “figurehead director“ who “served at the behest” of her husband.21 Perhaps this description shaped the judges’ opinion that Lillian was passive and ignorant. But should it have been relevant? Formally speaking, since Senior owned a controlling block of stock prior to 1974, all the members of P&B’s board served at his behest. He could have removed them or chosen not to re-elect them. In addition, “figurehead director“ is not a legal term or category. It is a lay term describing someone who is expected to “toe the line” and be 19

20

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Perhaps many took place at the meals that the daughter described, with Lillian cooking for the family. See, e.g., Yaron Nili & Kobi Kastiel, “Captured Boards”: The Rise of “Super Directors” and the Case for a Board Suite, 2017 Wis. L. Rev. 19 (2017) (proposing solutions to outside directors suffering information capture by CEOs). I suspect the rationale was to fit Lillian’s circumstances into the exculpatory framework of General Films, Inc. v. Sanco Gen’l Mfg. Corp., discussed below.

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chary exercising their board power. Hence, the epithet illuminates other parties’ expectations of a director, not their legal authority or actual conduct. It seems unsurprising that Senior would have regarded – even perhaps spoken of – Lillian’s directorship in this condescending manner. (Unpacking these biases is vital work in a feminist reading of Francis.) Perhaps the daughter, too, had a diminished view of her mother’s office.22 But in actuality, “figurehead director” reveals nothing about what Lillian knew or did as a director. Indeed, the trial court agreed, rejected the term, and observed that the case needed to be decided upon facts. The use of the term should have been irrelevant as proof of what Lillian did or did not do at P&B. It appears that the only testimony presented was Lillian’s daughter’s. The problem is that the daughter was not a stockholder, officer, or director of P&B. Hence, she was unqualified to opine about what her mother did as a director. The daughter testified that her mother was principally a loving caregiver and homemaker. Apparently, the courts construed this to mean Lillian was “a no show” as a director. But the “caregiver” testimony was actually also irrelevant. A person (of any gender) might spend most of their time caring for their family and still competently perform the tasks required of an outside director. Furthermore, the daughter might have presumed Lillian was ignorant, when instead she was discretely safeguarding P&B’s confidential information from someone who was technically a corporate outsider. Lastly, the defense introduced evidence that Lillian experienced a period of grief, illness, and excessive alcohol consumption after Senior’s death in December 1973. Presumably the defense thought the information would be exculpatory. While it was not, it also was not evidence of nonfeasance constituting gross negligence. For example, the opinions describe Senior as being in ill-health and “uninvolved” in the business after 1971. Yet although he remained on the board for two more years during which advances were paid, Senior was not joined in the breach of due care claim brought against Lillian. In sum, the courts concluded Lillian was a negligent director responsible for the excessive advances based on flawed evidence and conclusory assumptions shaped by gender bias.

4. Absence of Precedents for Finding Lillian Liable The courts lacked corporate fiduciary duty precedent to support finding Lillian negligent. The trial court stated expressly that there were no New Jersey precedents remotely relevant to adjudicating the case. The appellate division affirmed Lillian’s liability without comment. In response to these weaknesses, presumably, the New Jersey Supreme Court sought to fill the legal void. The result, unfortunately, is a verbose, sometimes erroneous survey of largely irrelevant cases. Notwithstanding its extraordinary effort, 22

Because Lillian was deceased, her daughter formulated the defense.

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the court found not a single corporate fiduciary case that supported finding Lillian negligent. For example, although a long string of bank director cases was cited, almost all of them were already several decades old, reflecting laws and commercial conditions outdated by the 1970s. Furthermore, the bank director cases were not decided on fiduciary duty grounds. Rather, the claims therein rested on the respective directors’ failure to execute duties expressly enumerated in their banks’ charters or bylaws. Nor were P&B’s savvy institutional clients remotely analogous to individual bank depositors needful of judicial protection.23 The only relevant corporate fiduciary duty precedent cited by the Supreme Court is Barnes v. Andrews – a famous New York Learned Hand opinion.24 Shockingly, it cites Barnes as if it helped the plaintiffs’ case. This was incorrect. In Barnes, a nonfeasant director was held not liable for breach of fiduciary duty. Hence the case was powerful precedent for finding Lillian non-liable. The other relevant precedent – although not one based in corporate law – was General Films, Inc. v. Sanco Gen’l Mfg. Corp.25 The decision should have been powerful exculpatory authority. General Films is an appellate opinion issuing from the same appellate division that resolved the first Francis appeal. Indeed, it was decided only about a year before the Francis trial. Most likely the defense pressed the case as a “winner.” In General Films, a wife who was an “inactive” outside director was held non-liable, whereas her husband, an executive at the company, was found liable for conversion. But the trial and Supreme Court opinions batted away this exculpatory precedent, stating that in General Films the conversion was a one-time occurrence that the wife could not have prevented. Yet, as explained earlier, Lillian lacked the power to stop the advances both as a stockholder and as a director. 5. No Mention of the Men’s Fiduciary Breaches Although the men were not part of the fiduciary litigation, the courts could have made note of how extraordinary it was that Lillian faced a breach of duty claim when they did not. Such dicta are not uncommon. Senior, Charles, and William should have been defendants for breach of fiduciary loyalty. Taking personal advances without a board vote, as all the men did, is classic prohibited self-dealing. The opinions characterize Senior’s conduct as “honest” because his advances did not directly cause P&B financial losses. (Either enough profits accrued to cover the advances during those years, or Senior repaid the shortfall.) But Senior’s advances 23

24 25

It is exceptional for courts to expand corporate fiduciary duties to apply to third parties like the institutional insurance firms in Francis, who had the capacity to self protect, ex ante, through contracts. 298 F. 614 (S.D.N.Y 1924). 153 N.J. Super. 369 (App. Div. 1977).

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did cause losses, indirectly. He established the dangerous compensation practice that Charles and William followed, to ill effect. Like all directors, Senior also had a duty of care to be informed about P&B’s business. Since he originated the practice, Senior was on notice to ask his sons if they were taking their salaries as advances. Moreover, since he remained the controlling shareholder through 1973, Senior (unlike Lillian) possessed legal authority to stop the advances. He could have removed Charles and William from the board, or even from their executive positions, if warranted. Precisely the breach of care claim brought against Lillian should have been brought against him. Finally, directors owe one another a duty of candor. If Senior regarded the advances as material to P&B’s business, he had a duty to discuss them with Lillian. Together, as half of the board, they could have barred payment of the advances, if necessary. If Senior had fulfilled his candor duty to Lillian, she could not rightly have been found negligent for not knowing about them. Charles and William also owed Lillian a duty of candor as their fellow board member. If they fulfilled this duty, by discussing P&B’s financial condition and their advances with Lillian, she could not rightly have been found negligent under a due care theory. Given the inadequate evidentiary record, there is no way to know if the men fulfilled their candor obligations to Lillian. But the courts should not have presumed that they did not discuss their advances with her. FOCUSING ON FRANCIS REWRITTEN

The Francis opinions are immensely complex and problematic, and Smith and I take nearly opposite tacks in responding to their deficiencies. I endeavor to deconstruct them from the inside; in contrast, Smith’s mostly “goes around” the Supreme Court opinion’s flaws. He relies principally on his interpretation of the New Jersey statute on directors’ duties, as supplemented by critical feminist theory, in analyzing Lillian’s duties and performance. Smith and I concur that liability against Lillian was barred by a lack of causation. She could not have stopped the advances. Admonishing her sons would have been useless. Nor was there, nor should there be, a duty on directors to sue their cohort, as the Supreme Court suggested. The ensuing chaos would be catastrophic, especially in close corporations. I choose to scrutinize the flaws in the evidentiary record; Smith elects to accept the record and move on. Consequently, his opinion finds Lillian ignorant of P&B’s business affairs, including its finances. Nevertheless, based on the sound notion that directors have plural roles, as well as the operation of the director reliance statute, Smith declines to require that Lillian herself must have read the financials. Yet Smith finds Lillian negligent on the grounds that she failed a duty to effect a better financial oversight system at P&B. But in this move, Smith deviates from the established duty of directors to be informed, enunciating, instead, a duty requiring

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directors to safeguard the adequacy of their firm’s financial oversight system. While I reject that Lillian was a proper defendant for such bold legal experimentation, Smith’s finding would have pushed the law in a positive, feminist direction. As discussed in the conclusion to this commentary, this facet of Smith’s rewrite prefigures present-dayCaremark director duties. These duties demand that boards demonstrate oversight over corporate risk management and the integrity of financial reporting.26 Hence the modern incarnation of the duty that Smith applies requires more genuine leadership and accountability from boards. It prevents them from being merely old boys’ clubs. The Directors’ Duties Statute Smith focuses squarely on the New Jersey directors’ duties statute.27 The statute admonished that directors should conduct themselves with the diligence, care, and skill characteristic of “prudent men in similar circumstances and like position.” Smith uses feminist theory as an aide to deconstructing the statute’s use of “prudence” (reasonableness) and “prudent men.” He aptly observes that the statute’s text links prudence with maleness – hence, imprudence would implicitly be linked with genders other than male. The language may have influenced the judges to regard Lillian, a woman, as imprudent and careless, he observes. Smith also concludes that by describing prudent “men” rather than prudent “persons,” the statute echoes the bias that boards would be composed only of men, not someone like Lillian. These are all sound insights. Smith embraces the trial court’s choice of New Jersey law. New York’s analogous statute described “a director’s duty,” singular. Consequently, Smith regards the plural syntax of New Jersey’s statute as a deliberate validation of directors having diverse roles. Although Smith’s statutory line of reasoning collapses with the mainstream choice of corporate law (New York’s), his claim about boards encompassing diverse director roles is compelling. Boards would lose valuable candidates if every director had to be optimally qualified and active in all areas. The director reliance-on-experts statutes implicitly affirm this point. In addition, boards would be inefficient deliberative bodies if delegation of responsibility were prohibited. The modern rise of functional board committees illustrates Smith’s point; so too does modern commentary describing the multiple functions of corporate boards.28 Smith’s close reading of the directors’ duties statute forms the basis of his conclusion that Lillian could have brought value to the board even if she was not 26

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For a recent application of Caremark duties, see In re Boeing Co. Deriv. Litig., C. A. 20190907-MTZ (Del. Ch. Sep. 7, 2021). See supra note 8. See, e.g., Lynne L. Dallas, The Multiple Roles of Corporate Boards of Directors, 40 San Diego L. Rev. 781 (2003).

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informed about the nuts and bolts of P&B’s business. He hypothesizes that perhaps she was the social and emotional “glue” that kept the board operating. I did not find this conjecture persuasive since I believe Lillian’s passivity and ignorance about P&B were unproven. Perhaps my difference with Smith here mirrors the more general difference between so-called liberal feminists, who emphasize the equality of women in all spheres, and so-called difference feminists, who emphasize the unique affective virtues women often bring to bear. Feminist Critical Theory I had a difficult time absorbing portions of the feminist theory Smith incorporates into his opinion. Here it is significant that Smith was limited to feminist writings extant circa 1981. It is painful to realize how inchoate feminist criticism remained even at that date. In lieu of paraphrasing, I will briefly enumerate the smart ideas that Smith culls from the feminist theory he quotes. First, it is important to avoid the linguistic conflation of “men” with “persons” or “humanity”; they are not the same. Second, there are indeed many forms of prudence and reasonableness that may contribute value to corporate boards. Recent pressure for greater demographic and viewpoint diversity on boards reflects the widespread acceptance of this truth. Third, too often “reasonable man” tests have been an excuse for narcissistic self-reflection by male judges. The original Francis opinions are rife with this problem. Fourth, feminism’s respect for pluralism connects it to larger progressive movements seeking justice and equality. A feminist critique of Francis demands that we take Lillian seriously as a wife, mother, homemaker, human being, and director. Finally, feminism’s respect for plural viewpoints should inspire judges, lawyers, and legal commentators to embrace open-mindedness, respectfulness, and mindfulness. The tenor of Smith’s opinion is impeccable in this regard. Insufficient Analysis of Lillian’s Precise “Circumstances and Position” In the first portion of this commentary, I discussed many circumstances limiting Lillian from robustly inhabiting her directorship. Since the directors’ duties statute called for consideration of a director’s particular circumstances and position, and since Smith invokes the statute as his principal analytic framework, he might have delved more deeply into what facts were and were not proven about Lillian’s circumstances and position on the board. I admit that the intellectual effort is not a happy one, however. The portrait that emerges is rife with gender-based subordination. I will make only a few more observations on this subject. That Lillian was not compensated as a director should have been highly relevant to her defense. In light of the statute, the question should have been: “How much diligence can reasonably be expected of an unpaid business director?” Almost any

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adult would devote little effort to a business – in comparison to a charitable, family, or leisure activity – where they were unpaid. This situation would be exacerbated where the other directors were highly compensated, as were Senior, Charles, and William. Second, Lillian had a gender-based disincentive to defy the other directors, namely the men in her family. For a woman to do so openly in that era was taboo. Still in the early 1970s, especially for an upper middle-class woman, situations of divorce or children being alienated – which might have ensued – were matters for harsh gossip and social ostracism. That the topic in question would have been the men’s compensation would have raised the stakes of confrontation considerably. Finally, despite the trial court’s protestations, Lillian’s age and precarious health after 1973 were germane to her “circumstances and position” on P&B’s board. Lillian was seventy-five years old when her sons’ advances commenced. If she hesitated to confront them, perhaps she reasonably feared she might soon depend on them for eldercare. Even to this day, in the United States, responsibility for eldercare resides principally with individual families. Contemporary feminist “vulnerability theory,” founded by law professor Martha Fineman, speaks to the legitimacy of this concern, as it might have affected Lillian’s capacity to object to her sons’ advances.

A Duty to Demand More Robust Financial Oversight Smith finds Lillian negligent for failing to demand a more effective financial oversight system. This portion of his rewrite is fascinating, departing radically from the original. Since no such fiduciary duty existed in 1981, is Smith’s move bold legal innovation or error? I reject that Lillian was an appropriate defendant for such judicial creativity. As an outside director and someone not a professional businessperson, she lacked the leverage to do what Smith expects. Given the contextualized standard in the statute, that fact should have been decisive. Also, a reasonable person in Lillian’s position would presume that her sons – business professionals and P&B’s senior-most executives – would have established efficient financial controls. There was no legal duty to have an outside auditor at P&B. Nor had the firm’s insurance clients provided for an outside audit in their contracts. Smith proposes Lillian could have called for the establishment of a board audit committee to enhance financial oversight, but such committees were then nonexistent in family-run firms like P&B. Moreover, they require a cohort of financially expert, independent directors to be effective – something P&B did not have and would not have adopted.29 29

Even Lillian would not be considered an “independent” director in the modern jurisprudence, on account of her family ties to the other directors. I note, too, that the record lacks support for finding that Lillian did not address the financial oversight changes that Smith discusses.

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CONCLUSION

In ruling that Lillian fell short of a duty to establish a financial monitoring system for P&B, Smith was channeling a legal standard first enunciated by the Delaware Court of Chancery in 1996 in In re Caremark International, Inc. Director Caremark duties were subsequently validated by the Delaware Supreme Court in Stone v. Ritter in 2006.30 Although Francis was not the right context for this judicial innovation, recognition of Caremark duties forty years ago would have been a salutary, feminist turn. On account of Caremark duties and related law reforms, a variety of value-destroying risks are now more likely to come to the attention of boards, who can respond to them.31 Tasking directors not only with reducing risks to the business, but also with reducing externalities arising from the business, reflects a feminist inclusiveness and respect for others. In signaling that this duty could have emerged earlier, Smith’s Francis makes an important contribution.

Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981) justice jonathan w. smith delivered the opinion of the court I

The issue raised in this appeal is whether a single female director in a privately held family corporation is personally liable for failing to prevent her fellow directors from misappropriating funds held in trust. The applicable standard is established by N.J.S.A. 14A:16-14, which dictates that corporate “directors and members of any committee” are required to “discharge their duties . . . with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.” In applying this pluralistic standard to the present case, we must weigh what duty the statute imposes on individual directors to prevent wrongdoing by fellow directors. In addition, we must analyze how courts should factor in gender and sex when applying the standards of “prudent men” to individual women. The director in question is the late Lillian G. Pritchard, who at the time of her death was a director and the largest shareholder of a prominent reinsurance firm, Pritchard & Baird Intermediaries Corp. (Pritchard & Baird). Defendant Lillian 30

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698 A.2d 959 (Del. Ch. 1996); 911 A.2d 362 (Del. 2006). Notably, Smith concludes Lillian was negligent for failing to meet this oversight responsibility, but the modern jurisprudence provides for director liability only for bad faith oversight failures. For further discussion of the expanded role of corporate boards, see Faith Stevelman and Sarah C. Haan, Boards in Information Governance, 23 U. Pa. J. Bus. L. 181 (2020).

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P. Overcash is Mrs. Pritchard’s daughter and the executrix of her estate. The plaintiffs are the trustees in bankruptcy of Pritchard & Baird. The administrators of the estate of Charles Pritchard Sr. are joined in the suit. Mr. Pritchard was, prior to his death, the president, director, and majority shareholder of Pritchard & Baird. The case concerns more than $10 million paid by Pritchard & Baird to Charles Pritchard Jr. and William Pritchard, both of whom were officers, directors, and shareholders of the corporation. These payments were made over several years as part of a pattern of improper transfers from Pritchard & Baird to members of the Pritchard family. In total, Pritchard & Baird paid $4,391,133.21 to Charles Jr. , $5,483,799.02 to William, $189,194.17 to Charles Sr. , $123,156.51 to Lillian Overcash, and $33,000 to Lillian Pritchard. Aggregated, these improper payments totaled $10,388,736.91. At trial, the court characterized the payments as fraudulent conveyances under N.J.S.A. 25:2-10 and held Mrs. Pritchard liable for the entire amount: the $33,000 she received personally and the $10,355,736.91 that was transferred to other family members while she was a director. 162 N.J.Super. 355, 392 A.2d 1233. As to the latter amount, the trial court held that Mrs. Pritchard was liable in negligence for failing to prevent the transfers in her capacity as a director. The appellate division found that the payments were improper conversions of trust funds rather than fraudulent conveyances but affirmed the trial court’s holding that Mrs. Pritchard was negligently liable for the entire amount. 171 N.J.Super. 34, 407 A.2d 1253 (1979). We granted certification limited to the issue of Lillian Pritchard’s liability in negligence. 82 N.J. 285, 412 A.2d 791 (1980). Both lower courts found Mrs. Pritchard negligent because she failed to notice the improper payments and failed to act decisively to prevent such payments. The lower courts also found that Mrs. Pritchard was the proximate cause of the more than $10 million in losses sustained by the plaintiffs, taking the unusual step of holding a director personally liable for nonfeasance. We decline to follow them in this novelty. While we agree with the lower courts’ conclusion that Mrs. Pritchard was negligent, we limit the scope of negligence to her failure as a member of the board to ensure that proper supervisory mechanisms were in place. We do not agree, however, with the lower courts’ conclusion that Mrs. Pritchard was negligent for failing to skillfully read the corporation’s financial statements or for failing to notice and protest against the misappropriation of funds by her fellow directors. In addition, we reject the lower courts’ finding that Mrs. Pritchard’s negligence proximately caused the Plaintiff’s losses. Accordingly, we reverse. II

The matrix for our decision is the intersecting professional, legal, and interpersonal relationships that constituted Lillian Pritchard’s social world. From these

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relationships arose a complicated web of legal and non-legal duties that, due to the privately held family-owned nature of the firm, were often in conflict. As a director, she owed fiduciary duties to the shareholders of the corporation, who happened to be her husband and sons, and, after her husband’s death, herself. After she became the largest shareholder of the corporation, she was owed fiduciary duties by the other directors, who were her sons. In addition, as a director in a reinsurance company, she had certain duties to care for the money entrusted to the corporation by its clients. Intertwined with all of this, Mrs. Pritchard surely believed she owed other non-legal, ethical duties arising from her position as a wife, mother, and citizen. These duties not only connected her to various individuals but also caught her up in larger corporate, social, and legal systems. One of these systems was the reinsurance business. The reinsurance business that became Pritchard & Baird was founded as a partnership between Charles Pritchard Sr. and George Baird in the mid 1940s. In 1959, Pritchard & Baird was incorporated in the State of New York and acquired the assets and assumed the liabilities of the former partnership. At the time of its founding, the corporation was entirely owned and governed by members of the Pritchard and Baird families. Of the 200 shares issued by the corporation, Charles Pritchard Sr. owned 120 shares; Charles Pritchard Jr. and William Pritchard owned 15 shares each; and George Baird and his wife Marjorie owned 50 shares collectively. Director positions were similarly divided between the two families: the five directors were Lillian Pritchard, Charles Pritchard Sr., Charles Pritchard Jr., Marjorie Baird, and George Baird. This division of ownership and control continued until 1964, when Mr. and Mrs. Baird sold their shares back to the corporation and resigned from the board of directors. From 1964, the three Pritchard men held their original shares, and no additional shares were issued by the corporation. During this period, William Pritchard joined Lillian, Charles Sr., and Charles Jr. on the board. After Charles Sr. died in 1973, Lillian inherited 72 of the 150 existing shares and became the largest shareholder in the corporation, with a 48 percent stake. From 1973 until the corporation’s bankruptcy in 1975, Lillian, Charles Jr., and William were the only three directors on the board. During its relatively short life, Pritchard & Baird experienced a meteoric rise followed by a catastrophic and sudden implosion. During the time that Charles Sr. controlled and managed the firm, it grew to be one of the largest reinsurance firms in the country, handling hundreds of millions of dollars of reinsurance business and employing over 100 people. In developing its large market share, Pritchard & Baird developed an impeccable reputation. This reputation and the trust it inspired were vital to attracting business in a reinsurance industry marked by unusual informality. At its essence, reinsurance is a risk-spreading strategy through which insurance companies agree to indemnify one another for all or a portion of losses incurred due to successful claims on a policy. In a reinsurance transaction, the primary insurer (the firm holding the

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policy) purchases indemnification from a reinsurer by transferring a portion of the premium collected on the primary policy. In practice, groups of insurance companies pool together in a multiparty agreement. Reinsurance brokers like Pritchard & Baird play a key role in these transactions by negotiating and administering the contractual relationships. As part of administering the contract, reinsurance firms collect the premia payments from the primary insurers and hold the funds in trust to be distributed to the reinsuring firms. Brokers such as Pritchard & Baird are so integral to the process that the parties do not know each other’s identities and hence “rely to a large extent upon the knowledge, skill, integrity and bookkeeping of the reinsurance broker.” 162 N.J. Super. At 361. Despite the large sums of money entrusted to reinsurance brokers, the industry is almost completely free of governmental regulation. Id. Perhaps because of this lack of regulation, the industry possesses – in the words of one expert at trial – “a magic aura around it of dignity and quality and integrity.” With respect to quality and integrity, Pritchard & Baird’s customers were not penalized for their trust while the firm was under the leadership of Charles Pritchard Sr. Behind the scenes, however, the firm adopted irregular bookkeeping and governance practices that would make it easier for Charles Jr. and William to misappropriate funds after Charles Sr. receded to the background. With respect to bookkeeping, Charles Sr. and the corporation’s accountant devised an irregular system that, contrary to industry practice, involved commingling of corporate and customer funds. From these commingled funds, Charles Sr. withdrew substantial sums as “loans,” but without having such loans approved by the board. These amounts acted as an advance of profits to Charles Sr. at the end of the year; corporate profits were first used to wipe out the loans before any remaining profits were distributed. In this respect, Mr. Pritchard treated the corporation as something akin to a sole proprietorship, both in freely accessing funds during the year and in relying on a system that was “on about the same level of accounting sophistication as one would expect in a one-man carpenter shop.” 162 N.J. Super. At 363. The trial court found that despite the insufficiency of this accounting system, Charles Sr. used it honestly and was generally able to cover the loan amounts with actual profits each year. Id. Beginning in 1966, Charles Pritchard Sr. began to withdraw from active management of the corporation. After he became ill in 1971, he ceased participation in corporate affairs, but remained a director until his death in 1973. In 1968, Charles Jr. was elected president, and William was elected executive vice president. From 1968 until the corporation’s bankruptcy in 1975, Charles Jr. was the chief manager and dominant director of Pritchard & Baird. Under Charles Jr.’s regime, Charles Jr. and William exploited the corporation’s unconventional accounting and “loan” practices to remove money from the company. Beginning in 1970, the two Pritchard brothers took increasingly large shareholder loans. Where the size of Charles Sr.’s loans had essentially mirrored

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corporate profits, the loans to Charles Jr. and William had, by 1973, ballooned to exceed annual corporate revenues. At the time of the bankruptcy, there were “shareholder loans” totaling $12,333,514.77. These loans drained the company of assets, leaving it severely under-capitalized. This fact was recorded openly in the company financial statements, which consistently demonstrated a working capital deficit that grew year-by-year, in near lockstep with the amount of shareholder loans recorded. As this ballooning working capital deficit revealed, Pritchard & Baird no longer had enough cash on hand to cover its obligations. This evidence was obscured from the board of directors by two changes in the accounting practices of the company. First, starting in 1970, Charles Jr. ordered that the company financial statements be directed solely to him rather than to the board at large. Second, while an independent accounting firm had produced the financial statements until 1970, from 1971 onward the company financials were produced internally only. Similarly, during that period, the board as whole appears not to have discussed the financial affairs of the company in detail: the minutes reveal a board acting primarily on formal issues that did not touch on the overall state of the business. Pritchard & Baird was able temporarily to mask its under-capitalization by delaying payments of premia to reinsurers for up to ninety days. So, rather than passing new premia payments on to the reinsurers, it used incoming cash to cover other obligations. This strategy delayed a reckoning for Pritchard & Baird for several years, until attempts by creditors to collect forced the company into bankruptcy in 1975. In 1976, the bankruptcy court directed the trustees for Pritchard & Baird to initiate the case before us. At trial, Charles Jr. and William dismissed from the case in favor of the bankruptcy proceedings, denying creditors the opportunity to recover anything from these two individuals – who had actively participated in misappropriating the funds. We note here that Lillian Pritchard, the individual whose negligence is at issue in this case and who is the only director before this court, is essentially absent from the narrative above; she would appear to be the director least connected to the alleged misappropriations at issue. Indeed, her lack of participation in the affairs of Pritchard & Baird was a notable theme in the proceedings of the trial court. While Lillian appears to have attended many board meetings and voted on various matters over the years, it also appears that she was regularly absent and generally disengaged from business affairs. The trial court found that Mrs. Pritchard did not know about the misappropriation of funds and did not intend to “cheat anyone or to defraud creditors of the corporation.” 162 N.J. Super. At 369. It also found, however, that Mrs. Pritchard had not paid the “slightest attention” to her duties as a director or to the business affairs of the corporation. Id. at 370. Indeed, this lack of attention to business matters was part of the defense at trial: Mrs. Pritchard was not a sophisticated businesswoman, but rather, in the words of her daughter, Lillian Overcash, “a wonderful cook and a wonderful baker . . . [who] loved her kitchen and . . . spent

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most of her years cooking for my father and for all of us.” Brief for Appellants at 7. Unfortunately, Mrs. Pritchard died between the time of Pritchard & Baird’s bankruptcy and the trial. As a result, the court did not have the benefit of her own testimony in reaching its decision. In addition, it was unable to hear from Charles Jr. and William, who refused to testify pursuant to the Fifth Amendment of the United States Constitution. III

To hold Lillian Pritchard liable for negligence requires a finding that (a) Mrs. Pritchard owed a duty of care to the creditors of Pritchard & Baird; (b) Mrs. Pritchard failed to fulfill that duty; and (c) her failure to fulfill this duty was the proximate cause of the losses sustained by Pritchard & Baird’s creditors. In New Jersey, a director’s duty of care is governed by N.J.S.A. 14A:16-14, which dictates that corporate “directors and members of any committee” are required to “discharge their duties . . . with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.” On choice of law, we agree with the trial court’s reasoning and conclusion that New Jersey law governs this case. 162 N.J. Super at 366. Like many negligence tests, New Jersey’s evaluation of directorial prudence entails a form of the “objective” reasonable man standard. Decisions about negligence under such tests require the decision-maker to engage in a double act of imagination: the jury or judge must imagine an average reasonable person and must further imagine how that person would act within the given the facts of the case. N.J.S.A. 14A:16-14 complicates the imaginative leap required, however, turning negligence from an individual to a collective affair. Individual directors have personal “duties” to fulfill, but these duties are performed within the context of a community of directors. “Directors” (plural) must discharge “their duties” (plural) as a community of “ordinarily prudent men” (plural) would do in like positions. Individual duties are thus comprehensible only in relation to the duties of fellow directors. While N.J.S.A. 14A:16-14 does not impose any specific duty upon the board, it presumes board review of corporate financial information and limits liability for directors who rely in good faith on documents prepared for and presented to them: In discharging their duties, directors and members of any committee designated by the board shall not be liable if, acting in good faith, they rely upon the opinion of counsel for the corporation or upon written reports setting forth financial data concerning the corporation and prepared by an independent public accountant or certified public accountant or firm of such accountants or upon financial statements, books of account or reports of the corporation represented by them to be correct by the president, the officer of the corporation having charge of its books of account, or the person presiding at a meeting of the board.

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Here, as in the rest of N.J.S.A. 14A:16-14, the action contemplated is collective. Notably, there is no affirmative duty imposed on the board (or any individual director) to review the financial statements. Rather, there is an implied duty upon the board to supervise the financial state of the corporation and a waiver of liability for directors who rely on experts (accountants) or those with responsibility over financial affairs (the board president or the officer in charge of accounts). The statute thus presumes a collective duty of familiarity with financial accounts, while also recognizing different roles and responsibilities with respect to such accounts. The significance of the plural language in N.J.S.A. 14A:16-14 can be seen through comparison with one of the statutes upon which it is based, Section 717 of the New York Business Corporation Law (L.1961, c.855, effective September 1, 1963). See Commissioners’ Comments 1968 and 1972, N.J.S.A. 14A:6-14. The New York statute frames a director’s duties using singular nouns: “A director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances.” N.Y.Bus. Corp. Law § 717 (McKinney). Despite this singular language, the statute’s legislative notes make clear that directors’ duties are not a “one size fits all” description: “The adoption of the standard prescribed by this section will allow the court to envisage the director’s duty of care as a relative concept, depending on the kind of corporation involved, the particular circumstances and the corporate role of the director.” Commissioners’ Comments 1968, N.J.S.A. 14A:6-14. Indeed, context-specific flexibility was a prime motivation for the New York legislature in adopting Section 717 as a law for both public and private corporations. As the report of the Chairman and chief counsel of the New York Joint Legislative Committee states, the statute “reflects an attempt to merge the interests of public issue corporations and closely held corporations.” Anderson & Lesher, The New Business Corporation Law, xxvii, reprinted in N.Y.Bus.Corp. Law §§ 1 to 800 xxv (McKinney). In light of the singular language in New York Business Corporation Law Section 717, we read the plural language of N.J.S.A. 14A:16-14 as intentional. While the New Jersey legislature mirrored the overall substance of its New York model, it chose to shift from singular to plural nouns when naming directors. This shift makes the contextual, social focus of N.J.S.A. 14A:16-14 explicit and unmistakable. In New Jersey, duties owed by a board vary based on the type of business, and the duties owed by any individual director may vary depending on each director’s role within the corporation. IV

Given this flexibility in the statute, we must ask two interrelated questions: What duties did the Pritchard & Baird board owe to its creditors? What duties did Lillian Pritchard individually owe, given her role within the corporation? First, however, we

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briefly address the role that gender inevitably plays in our analysis. In part, we are compelled to do so by the gendered language of N.J.S.A. 14A:16-14, which imposes a duty on directors to act as prudent “men.” We are also compelled to do so by our conviction that Mrs. Pritchard’s gender has played a crucial but unspoken role in this case. The failure of the lower courts to address gender directly has, in our view, confused these proceedings and led to error. We begin by noting some obvious but necessary facts related to the masculine language of N.J.S.A. 14A:16-14. First, masculine language is often used in American English to signify the broader category of universal humanity. It is not uncommon to hear, for example, about the history of “mankind.” Second, because the statute is the only standard applicable to directors’ duty of care, we have no choice but to interpret “men” in this universal sense in order to create a standard applicable to both male and female directors. Third, because of all this, it is correct to gloss N.J.S.A. 14A:16-14 as stating that directors must perform their duties as ordinarily prudent “persons” would in similar circumstances. Male and female directors alike are expected to act according to the same standard of prudence. Applying this understanding of N.J.S.A. 14A:16-14 to Mrs. Pritchard, the trial court rejected the defendant’s argument that Mrs. Pritchard could not perform her duties because she was a “simple housewife” who was in over her head. In so doing, the court framed N.J.S.A. 14A:16-14’s gender-free standard as a matter of women’s dignity and equality before the law: [Mrs. Pritchard] was a person who took a job which necessarily entailed certain responsibilities and she then failed to make any effort whatever to discharge those responsibilities. The ultimate insult to the fundamental dignity and equality of women would be to treat a grown woman as though she were a child not responsible for her acts and omissions.

162 N.J.Super. at 371. Of course, we agree with the trial court that women should be treated with equal dignity under the law. We are troubled, however, with the unreflective ease with which the trial court applies the traditional “reasonable man” standard to Mrs. Pritchard. Our discomfort is related to a fourth fact about the masculine language of N.J.S.A. 14A:16-14, namely that the use of masculine nouns to describe universal standards of reasonableness reflects more than mere linguistic convention. Rather, it reflects both historic and contemporary corporate power structures: the vast majority of directors in New Jersey corporations have been, and continue to be, men. Despite the fact that it establishes a standard applicable to men and women alike, N.J.S.A. 14A:16-14 is not gender neutral. Rather, it reflects and perpetuates the historic exclusion of women from the corporate boardroom. For this reason, we believe a judge seeking to implement a non-gendered standard of reasonableness must read critically against the gendered logic of the statutory language. This critical counterreading is required because of the internal tension of the statutory language itself,

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which uses masculine language to reach a universal end. We must, in other words, read against the history and structure of the statute to realize its full intent. Sensitivity to the impact of gendered language in the law is, as we enter the 1980s, a nascent field of inquiry in legal scholarship. We can learn lessons in critical counter-reading from feminist scholars in the humanities and social sciences, where robust work on gender and interpretation have developed in recent decades. Based on such scholarship, we offer five principles of critical counter-reading, which we draw upon in considering Lillian Pritchard’s purported negligence. First, recent scholarship foregrounds the way in which institutional language is shaped by male dominance over such institutions. Hence, for example, literary canons have been shaped by male readers interpreting predominantly male texts. Feminist scholars argue that this has led to a situation in which male critics have institutionalized certain male-centered values as universal and insist on evaluating female-authored texts by the same criteria. This facile equation of male categories with universal categories impacts not just literary discourse but all discursive domains in which values and categories are defined as male. According to Nelly Furnam: “It is through the medium of language that we define and categorize areas of difference and similarity, which in turn allow us to comprehend the world around us. Male-centered categorizations predominate in American English and subtly shape our understanding and perception of reality.” Nelly Furnam, The Study of Women and Language: Comment Vol. 3, No. 3, 4 Signs 182, 182 (1978). How might our perceptions of reality be subtly shaped by the N.J.S.A. 14A:16-14 male-centered categorization of “prudential men” acting on a corporate board? The supposedly universal, non-gendered standard of “prudential men” inevitably evokes images of male persons in the imagination of the legal decision-maker. (For this judge, the image that repeatedly springs to mind is a drawing from the children’s book Eloise, which depicts General Motors businessmen deliberating through the smoky haze of their Plaza Hotel conference room.) These images may, in turn, implicitly suggest to a judge or jury that female directors have acted reasonably when they have acted in a manner perceived as male. In addition, because linguistic meaning depends upon oppositions and difference, the pairing of “prudent” with “men” suggests that “imprudent” or “negligent” would be paired with the opposite of “men.” Thus, while the concept of “prudent businessmen” can surely be contrasted with “imprudent businessmen,” the specter of “imprudent women” or “negligent housewives” could also lurk in the imagination. Far from being a mere game with words, the law’s historical disregard for the rationality of women and the characterization at trial of Lillian Pritchard as a hapless housewife remind us that we must be aware of this spectral “other” invoked when “prudence” and other forms of “reason” are equated with maleness. Second, feminist theories of interpretation teach that male-defined discourses marginalize and even mute female voices. This muting often takes the form of silence: because men continue to dominate institutional discourse and mechanisms

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of dissemination, women have fewer opportunities to speak and fewer means of being heard. Even when women do speak or write, their voices are nonetheless mediated and refracted by the male-centered structure of language. Thus, female discourse necessarily involves a struggle against marginalization from within: in order to speak, women must use the same language that mutes their voices. See, e.g., Edwin Ardener, The ‘Problem’ Revisited, in Perceiving Women 19, 21–22 (Shirley Ardener ed., 1975) (explaining that women are rendered “inarticulate” because dominant social discourse is articulated “in terms of a male world-position”). See also Gerda Lerner, The Majority Finds Its Past: Placing Women in History 178 (1979) (“Women have been left out of history not because of the evil conspiracies of men in general or male historians in particular, but because we have considered history only in male-centered terms. We have missed women and their activities, because we have asked questions of history that are inappropriate to women.”). See also Adrienne Rich, When We Dead Awaken: Writing as Re-Vision in On Lies, Secrets, and Silence 35 (1979) (“A radical critique of literature, feminist in its impulse, would take the work first of all as a clue to how we live, how we have been living, how we have been led to imagine ourselves, how our language has trapped as well as liberated us, how the very act of naming has been till now a male prerogative, and how we can begin to see and name – and therefore live – afresh.”). In the context of N.J.S.A. 14A:16-14, female directors are required to utilize the language of “prudent men” to demonstrate that they have acted with due care. Moreover, in most cases they are required to use the language of prudent, reasonable men while appearing before judges and justices who are themselves male. This scenario constitutes a double-bind in which even successes reinforce the perception that male-centered language is the only means through which a woman can demonstrate her reasonableness. In the context of the present case, awareness of the muting of female directors is particularly urgent: because Mrs. Pritchard is not alive to speak for herself during these proceedings, she is doubly muted, both by male-centered discourse and by her own death. Moreover, given the management structure of the corporation, Mrs. Pritchard may have been marginalized from the centers of power in a male-dominated company, despite being the largest shareholder after Charles Sr.’s death. For all these reasons, in attempting to evaluate her rationale and prudence, we are forced to listen carefully for her absent voice if we are to justly evaluate the reasonableness of her conduct. Third, when describing the role of women in business, feminist scholars reject any simplistic dichotomy between public and domestic spheres, or between wage economies and home economics. Such a dichotomy, they argue, is an historical aberration tied to the industrial separation of male wage laborers from a more traditional economy centered around the home. See, e.g., Lerner, supra at 141. Feminists link the creation of a separate domestic sphere with the prevalent perception that traditional female work is geared toward family and relational rewards rather than monetary compensation. Id. at 132. Mirroring this separation, writing

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about women often prioritizes private and biographical matters over public occupational ones. See, e.g., Lerner, supra at 9 (explaining how the biographer of a female life “feels obliged first of all to concern himself with his subject’s sexual role. Was she married? A Mother? . . . If she was married, one is under an obligation to explain that she did not neglect her children or perhaps that she did. And always there is the crucial question: ‘What was her relationship to her father?’”). As we discuss more fully below, the trial court opinion in the present case mirrors these preoccupations, defining Mrs. Pritchard through her relationship to the men in her family and, in particular, viewing maternal neglect as a key factor in assessing directorial negligence. Feminist writers counter the perceived dichotomy between domestic and public spheres by showing that women have always exercised power and influence through avenues outside the main corridor of male power. See, e.g., Lerner, supra at 11 (“[Women] found a way to make their power felt through organizations, through pressure tactics, through petitioning, and various other means; these later become models for other mass movements for reform.”). In a recent study, Rosabeth Moss Kanter explored the ambiguous status of wives in corporations, demonstrating that they are simultaneously outside the formal power corporate structure and also integral to that same structure. According to Kanter, the line between public corporate life and private domestic life is particularly blurred for people at the highest levels of management. Rosabeth Moss Kanter, Men and Women of the Corporation 119 (1977) (finding that, in the marriages of corporate executives, “both husband and wife can be made into public figures with no area of life remaining untinged with responsibilities for the company”). Kanter thus explores the ambiguous status of wives in corporations. In this context of overlapping business and family spheres, women who are not employed by the firm are nonetheless integral to its business success, playing an important role in building trust with business partners and potential investors. Id. at 120–21. This insight complicates the more typical contemporary view of a separate domestic sphere and encourages us to imagine how an apparently domestic housewife – like Mrs. Pritchard – may have contributed to corporate success, despite her apparent disinterest in business. Fourth, feminist interpretative theories insist that juridical and ethical concepts such as “reason” are not essential or abstract ideals but rather cultural phenomena situated in a web of social relationships. Feminist interpreters regularly warn against “essentialist” views that espouse unchanging abstract ideals that are applicable to all persons at all times. As an antidote to such essentializing, feminists draw attention to the cultural historicity of ideas. For example, the emphasis of much twentiethcentury literary criticism on the unity and integrity of the literary work does not reflect the timeless artistic value of these qualities. Rather, it reflects the sociopolitical context of the male Anglo-American critics writing such criticism. Indeed, unity itself is viewed suspiciously by many feminists as a structural manifestation of totalizing, essentializing “male” logic.

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According to this line of thinking, the problem with a “reasonable man” test goes deeper than the mere use of “man” rather than “person.” Even a single “reasonable person” test perpetuates male domination by erasing gender difference and thereby perpetuating the fiction that all humans, male and female alike, can be understood in terms of a singular essence. This rejection of unity and essentialism extends even to ideas about what is “female” and “feminist.” A frequent theme of feminist debates is that there is no essential female “reasonableness” nor any singular feminist perspective. See, e.g., Annette Kolodny, Dancing through the Minefield: Some Observations on the Theory, Practice, and Politics of Feminist Literary Criticism, 6 Feminist Stud. 1 (1980). Rather than advocating for a unitary feminism, feminist interpreters prioritize dialogue among voices, especially among voices muted and marginalized by dominant discourse. In this approach, feminists suggest that women should find common cause not only with other women but rather with all persons whose diverse voices – such as those rooted in racial or class differences – are marginalized by dominant discourse. In short, feminist interpreters aim to be pluralists (rather than essentialists) who assert that aesthetic, ethical, and moral judgments should arise out of intersecting, culturally situated perspectives, rather than emanating from a fictional “objective” person removed from culture. See Id. at 17 (explaining that the diversity of viewpoints among feminists should encourage them to embrace a pluralistic approach to values). This preference for diversity over essentialism makes feminist interpretation especially apt for understanding the plural “reasonable (prudent) men” test in N.J.S.A. 14A:16-14. On its face, New Jersey’s plural standard is no less sexist than New York’s singular test. Indeed, a plural conception of “reasonable men” may augment the semantic sexism of the singular “reasonable man” standard. (Rather than evoking one male person, the plural test conjures an image of a boardroom populated solely by men.) However, the semantic exclusion of a “reasonable men” standard is undermined from within by the substantive pluralism it imagines. Although the rule evokes an all-male community of directors, the fact that it denotes community rather than individuality necessarily evokes multiple perspectives, multiple voices, and, perhaps, multiple gender identities. It thus calls us to consider diverse persons, perspectives, roles, and skills when evaluating the effectiveness and reasonableness of corporate directors. Fifth, feminist interpreters elucidate the need for decision makers to be aware of their own socio-cultural positions, especially when such decision makers occupy a position of dominance. Thus, male decision makers must take special care to remember their own gendered perspective when determining what is reasonable. To do otherwise is to perpetuate the harmful fiction that there is no essential difference between male reason and human reason, that the “reasonable man” is the sine qua non of universal human rationality and ethical decision making. In contrast, for male judges like the author of this opinion, acknowledging our

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gendered perspective can make us more attuned to our own limitations and more receptive to ideas of reasonableness we might hear from people whose perspectives have been marginalized. Moreover, intentionally acknowledging our own perspective and bias draws attention to our own imaginative process and makes the easy conflation of judicial and universal reason less likely. This imaginative work also represents important epistemological and ethical work, forcing us to leave the fictional platform of our own objectivity and, through dialogue with differing perspectives, arrive at rules and standards that more closely match the shared “reason” of society. This process, in turn, equips us to achieve the chief goal of the reasonableness standard: to hold actors to the standards of the community as a whole. Such standards are no less “objective” than the traditional unitary standards for reasonableness simply for being rooted in dialogue. To the contrary, dialogue nudges us closer to objectivity by situating ethical and prudential standards outside the individual decision-maker and within the social and cultural networks from which they come. V

With these principles of critical counter-reading in mind, we turn to consider whether Lillian Pritchard was negligent as a director of the corporation. As we have noted above, N.J.S.A. 14A:16-14 requires directors to perform their duties as prudent men would under similar circumstances. Moreover, through its exceptions from liability for directors who rely in good faith on prepared reports and financial statements, it suggests that a prudent board has a duty to stay abreast of the business affairs of the corporation, including through reviewing corporate finances. These exclusions from liability further suggest that: (a) Each individual director has a role to play in the overall governance of the corporation; (b) The role of each respective director in this overall governance regime is varied; and (c) Some directors, officers, and professional experts (i.e., accountants) will exercise more authority than others over the contents of financial statements and reports. Notably, the statute imposes no specific duty on any individual director. The oversight role it imposes is collective in the first instance and only secondarily individual. Accordingly, we adopt a three-pronged test for assessing the liability of individual directors under N.J.S.A. 14A:16-14. Under this test, courts should consider: (a) Whether the corporate board as a whole is prudentially constructed to govern the corporation with diligence, care, and skill; (b) Whether each individual director has a reasonably defined role that serves a legitimate business purpose; and (c) Whether such director has acted with reasonable diligence, care, and skill in fulfilling that role. This three-pronged test will, however, apply only in situations where the board owes a duty of care. While the primary fiduciary obligation of directors is to corporate stockholders (see Whitfield v. Kern, 122 N.J. Eq. 332, 341 (E.A. 1937)),

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directors have been held to owe fiduciary duties to creditors in special circumstances. Most frequently, such duty arises in cases of insolvency. Id. at 342, 345. However, courts have also recognized a duty to creditors when the corporation can be deemed to hold third-party funds in trust. See Campbell v. Watson, 62 N.J. Eq. 396, 50 A. 120 (Ch. 1901) (finding that directors of a bank have a duty of care to depositors). See also McGlynn v. Schultz, 90 N.J. Super. 505 (Ch.Div. 1966), aff’d, 95 162 N.J. Super. 412 (App.Div.) certify. Den. 50 N.J. 409 (1967) (holding directors liable when they did not insist on segregating funds held in trust). The duty of care arises in such cases because those entrusting the money to the corporation should reasonably be able to expect that the board will act with ordinary, reasonable prudence regarding such funds. In this case, three facts lead us to find that such conditions are present: (1) Insurance firms transmitting funds to Pritchard & Baird expected those funds to be passed along; (2) Based on industry practice, such firms could reasonably have expected those funds to be segregated while in Pritchard & Baird’s possession; and (3) The unregulated, trust-based nature of the reinsurance industry created a reasonable expectation that firms would act as a prudent trustee with respect to such funds. We therefore agree with the lower courts that the Pritchard & Baird board owed fiduciary duties to the creditors of the firm. However, as to the question of Mrs. Pritchard’s negligence, we find the trial court fails to account for the plural nature of directorial responsibility in New Jersey; instead, the court applies a universal monadic standard of prudence to Mrs. Pritchard. Moreover, the court’s monadic standard asserts that all directors have a specific “bare minimum” duty to read and “react appropriately” to the information in the corporation’s financial statements. Indeed, to avoid negligence under this standard, directors of a reinsurance company who cannot spot malfeasance in financial statements must be aware of their insufficient skill and resign from the job. We reject such a narrow specific duty as contrary to the diversity of possibilities allowed under N.J.S.A. 14A:16-14. We further note that the trial court’s application of a monadic “reasonable man” standard perpetuates the structural sexism embedded in the test. As we noted above, reasonable man tests obscure the distinction between the “objective” standard and the subjective male decision-maker. Here, Judge Stanton’s assertion that a prudent director would have spotted malfeasance in the Pritchard & Baird financial statements appears to be rooted in the ease with which he himself ascertained the misappropriations. Judge Stanton thus errs by universalizing his own interpretive skill and instituting it as a minimum standard of prudence. We do not believe this conflation between Judge Stanton and the “reasonable man” reflects sexist ill-will by the court toward Mrs. Pritchard. Rather, we highlight it to underscore our assertion that judges have a responsibility to consciously read against this universalizing tendency embedded in the classic reasonable man test. The trial court opinion also demonstrates how easily underlying cultural attitudes can infringe upon the objectivity of judicial reason. While Judge Stanton insists that

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the inherent dignity of women requires the court to judge Mrs. Pritchard only in her capacity as a director of the corporation, the opinion as a whole tells a different story. Mrs. Pritchard is introduced not as a director and shareholder of the company but rather as the wife of the company founder. 162 N.J. Super. At 359. She is subsequently described as receiving loans in her role as Charles Sr.’s widow. Id. at 364. Perhaps more significantly, the two directors who stole from the company are most regularly referred to as the “sons.” The inescapable impressions are that (a) family roles are primary in the court’s imagination and (b) Mrs. Pritchard is being judged according to the court’s view of maternal, rather than directorial, responsibility.1 For the court, the case seems more a tale about family dysfunction than one of failed corporate governance. Although Mrs. Pritchard is explicitly judged as a negligent director, the narrative, tone, and vocabulary of the opinion suggest that she is actually liable for being an overly indulgent mother. This narrative is revealingly ironic: while insisting that Mrs. Pritchard elevate herself above her family ties to exercise her duties as a director, the court shows itself unable to do the same. As if unwittingly following the structural logic of the reasonable man test, the court excludes Mrs. Pritchard from the boardroom and emphasizes her role as housewife and mother: even when she receives an improper payment as an insider of the corporation, she receives it as a “widow.” The overall impression is that Mrs. Pritchard has been swept up in the court’s larger moral opprobrium and its desire to find some measure of justice for Pritchard & Baird’s creditors. Indeed, one wonders whether Mrs. Pritchard would have been liable had she not been her fellow directors’ mother. The court’s emphasis on Mrs. Pritchard’s family role does not, strictly speaking, contradict its finding that she is negligent. It does, however, undermine trust in whether the court has sufficiently identified and accounted for the larger cultural narratives about women that shape its own reasoning.

VI

Having rejected the trial court’s negligence analysis as insufficiently narrow, we turn to apply the three-pronged test set forth above to the question of whether Mrs. Pritchard was negligent in the performance of her duties.

A Here, Mrs. Pritchard had a responsibility to ensure that the board be structured to provide prudent oversight over Pritchard & Baird’s financial affairs. Mrs. Pritchard herself did not need to review or comprehend the details of the financials. But she, 1

Like the biographers of women described by Lerner, the trial court treats marital connection and parental neglect as the fundamental facts of Mrs. Pritchard’s life.

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along with the other members of the board, was required to take reasonable steps to ensure that the financial oversight contemplated by N.J.S.A. 14A:16-14 was provided. While Charles Pritchard Sr. was leading the company, the board appears to have been reasonably well constructed with respect to financial oversight. We find this despite the unconventional accounting and shareholder loan practices that were instituted during this period. These practices may themselves have been unreasonable; certainly, subsequent events show that they were dangerous. However, N.J.S.A. 14A:16-14 clearly establishes that directors are entitled to rely upon financial statements prepared by professionals. Here, the accounting system was developed by Pritchard & Baird’s accountant, and the financial statements were, until the end of 1970, prepared by the external accountant and circulated to the board. The board structure from 1970 through 1975 is a different matter. Under the leadership of Charles Jr., Pritchard & Baird ceased using an external accountant and prepared its own threadbare internal financial statements. More troublingly, Charles Jr. directed that those financial statements be given only to him. Together, these two changes simultaneously removed the corporation’s two chief financial oversight mechanisms, namely independently prepared financial statements – which had provided an external professional check on mismanagement and fraud – and the circulation of financial statements to the board – which had ensured that multiple members of the board were involved in such supervision. In a closely held corporation where board members also act as executives, collective review could reasonably be expected to discourage malfeasance by any one powerful director. By allowing these two structural mechanisms to be abolished, without protesting or proposing any replacement mechanisms, Mrs. Pritchard failed in her duty. To be sure, other possible board structures could have fulfilled the board’s basic oversight responsibility here. (For example, a board audit committee could have reviewed the financial statements and provided a thorough prose report to the board.) There must be some oversight structure, however, and after 1970, Pritchard & Baird had none. B At trial, both counsel for the defense and the court agreed that Mrs. Pritchard had no legitimate business role in the company. For the defense, this lack of a role excused Mrs. Pritchard from liability: because Mrs. Pritchard was a mere figurehead, they argued, she had no business responsibility and therefore could not be liable. For the trial court, this lack of a role was a key component of her negligence: because Mrs. Pritchard was a figurehead director with no business skills, she should have resigned rather than holding onto a job she could not perform. We disagree with both the defense and the trial court because they adopt an overly narrow conception of what legitimate roles a director can play. Underlying this misconception is an assumed separation between Mrs. Pritchard’s traditional business role and her other roles within the family. Counsel for the

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defense argued at trial that Mrs. Pritchard could not be liable as a director because she was a simple housewife and then a widow, a person whose true competence and belonging were rooted in home and hearth. The trial court appears to have agreed with the assertion that Mrs. Pritchard did not belong in the boardroom, suggesting that Mrs. Pritchard’s duty may have been to recognize her own lack of fitness and resign. Similarly, the court’s insistence on referring to Mrs. Pritchard in familial terms – as a “mother” or “widow” rather than a “director” – suggests unconscious resistance to her identity as a member of the board, almost as if the mere presence of such a “domestic” director contributes to the sordidness of the affair. This dynamic is mirrored in the analysis itself: in considering Mrs. Pritchard’s negligence as a director, the analysis deems her social role within the board and family to be irrelevant. We reject this bifurcation of “business” and “domestic” roles as artificially limiting. As we noted above, this bifurcation is especially inadequate when applied to the blended domestic and business roles of a woman like Mrs. Pritchard, who was both a director and the wife or mother of company executives. Consequently, we must consider possible intersections between business and domestic spheres to properly evaluate directors’ actions. This not only flows from the feminist-informed principles of critical counter-reading we enumerated above; it also follows from the pluralistic logic of N.J.S.A. 14A:16-14 itself. That is, given the collective responsibility placed upon the board in the statute, ignoring certain roles and relationships as being inappropriately domestic would mean rejecting potentially beneficial systems of board oversight. Indeed, there are strong reasons to believe that accounting and financial skills are not enough to manage and oversee a successful company. Where individuals possess other skills and experience that might serve the overall health of the business – including the health of the financial bottom line – it may be in the best interest of the corporation to enlist such persons to the board, even if they lack the financial skill to personally read and interpret the financial statements. Such beneficial skills could include traditional business skills, such as marketing. They could also include non-traditional business skills: for example, an expert in group psychology could be a valuable addition by increasing the communication, efficiency, and happiness on the board. Long experience with community stakeholders or deep relationships within the organization may also qualify persons to serve on the board. Such diversity of skills and experience might lead to corporate boards being more prudent rather than less so. In the context of a family corporation like Pritchard & Baird, perhaps the ability to navigate complicated relationships among the other board members is qualification enough for a board seat. We think it is entirely possible that Mrs. Pritchard could have served a valuable role by mediating difficult relationships between the other directors. We know, for example, that Charles Sr. mistrusted Charles Jr. and complained to Mrs. Pritchard that their eldest son would “take the shirt off [his] back.” 162 N.J. Super. At 370. At trial, the defense argued that Mrs. Pritchard served

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as a director only as an “accommodation to her husband and sons.” Id. at 371. The trial court interpreted this statement as an indication that Mrs. Pritchard was a mere figurehead director, enlisted just to make up the numbers. But perhaps in this accommodation we should also hear a hint of Mrs. Pritchard’s value to the firm: while she may not have cared for the particulars of the reinsurance business, she cared enough for the other directors to sit on the board and attend some fifty board meetings. In a family where care appears to have been in short supply, such care may have been invaluable. Her apparently disqualifying quality, her “domesticity,” might actually have been an important business asset. Unfortunately, we cannot know from the record whether Mrs. Pritchard played this type of role – or any other non-traditional role. We only know that the trial court found that Mrs. Pritchard was financially unskilled and that she did not read or ask for the financial statements after 1970. Because of the narrow conception of director responsibility assumed by counsel and judge at trial, no one asked what other contributing role (or roles) she might have played. Were we not prepared to reverse the lower court decisions on other grounds, we would remand for further inquiry on this topic.

C The trial court found that Mrs. Pritchard did not make the “slightest effort to discharge any of her responsibilities as a director of Pritchard & Baird.” 162 N.J. Super. At 370. Because we do not have a full picture of what her specific board duties were, we cannot agree with this statement. We can, however, answer two narrower questions based on the record before us. Because Mrs. Pritchard did not have an individual responsibility to review the financial statements, we do not hold her negligent for failing to read the financial statements and notice the inappropriate shareholder loans. We do find, however, that Mrs. Pritchard was negligent in fulfilling her part in the board’s responsibility to ensure that Pritchard & Baird had some reasonable oversight structure in place. As we noted above, the elimination of circulated, externally prepared financial statements simultaneously eliminated the two practices by which the board could apprehend financial malfeasance. This sudden shift should have been jarring to the entire board. Mrs. Pritchard had a duty to inquire into the change in practice and to work toward having the practices reinstated or replaced by other reasonable practices. She made no such effort. The trial court found that she did not pay the “slightest attention to the affairs of the corporation.” Id. It also found that she did not ask for the financial statements. In reviewing these findings of fact by the trial court, we are constrained to leave the facts “undisturbed unless they are so wholly insupportable as to result in a denial of justice,” and we must exercise our own original fact-finding jurisdiction “sparingly and in none but a clear case where there is no

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doubt about the matter.” Rova Farms Resort Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 483–84, 323 A.2d 495 (1974). Although the record in this case is made unsatisfyingly incomplete and is marred especially by the absence of testimony from any members of the Pritchard family who served as directors, we do not believe the trial court’s findings of fact are “wholly unsupportable,” or that alternative facts are matters of “no doubt.” Accepting, as we must, that Lillian was inattentive to corporate affairs and took no action at all with respect to the inadequate financial reporting within the corporation, we hold that she is negligent. We stress the narrowness of this holding, however. We do not hold that an individual director must take any particular action when confronted with a sudden change in the board’s oversight of corporate finances. Rather, we hold that a director must take some action and show some interest in such a change. Whether such action and interest is prudent must be considered in context and by utilizing the principles articulated in this opinion.

VII

This finding of negligence notwithstanding, Mrs. Pritchard is not liable for the losses sustained by Pritchard & Baird’s creditors unless her negligence proximately caused those losses. Kulas v. Public Serv. Elec. & Gas Co., 41 N.J. 311, 317, 196 A.2d 769 (1964). In establishing proximate cause, the plaintiff bears the burden of demonstrating that Mrs. Pritchard’s failure to ensure that reasonable controls were established was (a) a cause-in-fact of the losses sustained and (b) a substantial factor in bringing about the harm. It also requires the plaintiff to demonstrate the amount of harm that resulted from Mrs. Pritchard’s negligence. Establishing causation-in-fact in cases of directorial nonfeasance is a difficult matter, because it requires determining a counter-factual: what would have happened had the negligent director performed her duty? This question requires courts to determine the steps a director reasonably should have taken and then decide whether such steps would have prevented the harm. Because this analysis is inherently speculative, courts in New Jersey and other jurisdictions have been hesitant to find causation in nonfeasance cases. In a leading case on the subject, Judge Learned Hand illustrates the difficulty of the task: Suppose I charge [the defendant] with complete knowledge of all [that was to happen in the future]. What action should he have taken, and how can I say that it would have stopped the losses? . . . It is easy to say that he should have done something. But that will not serve to harness upon him the whole loss, nor is it the equivalent of saying that, had he acted, the company would now flourish.

Barnes v. Andrews, 298 F. 614 (S.D.N.Y. 1924). As with determinations of negligence, assessments of causation for director nonfeasance should consider the power

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structure and culture of the board. When speculating as to whether certain reasonable actions would have prevented loss, one must consider the role and relative power of the director within the board as substantial factors impacting the likelihood that the director’s action will prevent harm. Thus, when directors fail to set up adequate financial controls, it is reasonable to imagine that such controls are a cause-in-fact of theft by employees. Campbell v. Watson, 62 N.J. Eq. 396 (holding directors of a bank liable for theft by a bank cashier, when the directors failed to review the bank’s ledger every quarter as required by the bank’s bylaws). However, when one director fails to prevent malfeasance by a more dominant and influential director, it is harder to conclude that action by the less-dominant director would have prevented the harm. It is especially difficult to speculate on the hypothetical outcomes in family-dominated businesses, in which generational and gendered power dynamics may be particularly complex. See Allied Freightways, Inc. v. Cholfin, 325 Mass. 630 (1950) (holding that a director of a corporation was not liable for her failure to supervise the corporation, because it was unlikely that she could have dissuaded her husband from making improper disbursements when the husband was “in sole charge of the conduct of the business”). What actions could Mrs. Pritchard have taken when Charles Jr. gutted the financial oversight system of Pritchard & Baird? At a bare minimum, she could have asked about the change and insisted that the corporation replace the abandoned procedures with equally effective alternatives. At the extreme, if the other directors – who in 1970 and 1971 still included Charles Sr. – had refused, she could have protested and resigned to avoid further complicity in the board’s failure to supervise the corporation’s finances. In imagining this list of potential actions, we do not hold that any specific actions should have been taken or that they are per se required of prudent directors. (Perhaps other actions would have proven reasonably prudent in context.) Rather, we imagine them merely to consider whether some readily conceivable actions would have prevented harm to the plaintiffs. Would any of these actions have deterred Charles Jr. and William? The personalities of the Pritchard sons revealed in the record suggest that they would have ignored any inquiry, protest, or resignation by Mrs. Pritchard. On this point, we disagree with the trial court, which generously (and implausibly) imputed healthy moral intuitions to Charles Jr. and William: “The actions of the sons were so blatantly wrongful that it is hard to see how they could have resisted any moderately firm objection to what they were doing.” 162 N.J.Super at 372. Such a supposition assumes that the sons would have been (a) ashamed of their wrongdoing when it was brought to light; (b) cowed by repudiation by their mother and/or father; or (c) sufficiently afraid of outside detection and punishment that they would refrain. The sons’ consistently brazen behavior leads us to believe that any such outcomes were exceedingly unlikely. Charles Jr.’s behavior, in particular, suggests a bold, egotistic narcissism unlikely to be deterred by moral shame, filial piety, or fear of

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punishment. When we add to this the marginalization of Mrs. Pritchard in the company’s financial dealings, we think it more likely than not that her protests would have been ignored. Even assuming that she had discovered the misappropriations and thereby had further duties, we do not believe her failure to act is a causein-fact of the plaintiff’s losses. Certainly, we believe that any assertion to the contrary is conjecture at best, and we decline to impose personal liability on this basis. Indeed, we see no reason to believe that anything short of a lawsuit by Mrs. Pritchard would have deterred Charles Jr. and William. However, this court has never imposed an affirmative duty upon directors to initiate lawsuits, and we will not do so here. Directors are required to act as reasonably prudent persons would; they are not required to take all actions necessary to prevent wrongdoing. Such an affirmative duty to sue is surely beyond the standard we would expect of reasonably prudent directors. As we have noted throughout this opinion, directors exercise their duties within a matrix of intersecting social and cultural dynamics. Requiring directors to sue one another would be to require colleagues to sue colleagues, friends to sue friends, and mothers to sue sons. The most predictable outcome of such a rule would be to deter board service by qualified and caring individuals. This could, in turn, deny corporations the efficiencies that can occur when people with long-standing business and family relationships work together. Applied generally to family-controlled corporations, it could even limit the ability of small family firms to adopt the corporate form if such firms cannot attract independent directors. We believe such a loss to New Jersey corporations and consumers clearly outweighs any minimal oversight gains that might arise from such a strict standard. We find that Mrs. Pritchard’s negligence did not proximately cause the losses to the plaintiffs. Accordingly, we reverse.

VIII

In reversing, we acknowledge that we have denied relief to Pritchard & Baird’s creditors. Given the magical aura of trust in the reinsurance industry, some may believe our decision unjustly leaves reinsurers vulnerable to similar misappropriations in the future. To this, we reply that director liability under N.J.S.A. 14A:16-14 is not the only means by which insurance companies can protect themselves. Rather than relying on mystical corporate auras, insurance companies can require by contract that reinsurance companies conduct independent audits or have independent directors on the board. They can lobby for regulation that would bring the reinsurance industry in line with other industries that hold funds in trust, such as the banking industry. They can also require personal guarantees from corporate executives, especially when the reinsurance firm is a closely held company dominated by a few shareholders. N.J.S.A. 14A:16-14 exists to ensure reasonable prudence on the

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part of directors; it is not an indemnity clause designed to shift risk from insurance companies to passive directors. We also acknowledge that our decision runs counter to a certain moral intuition that the creditors are more deserving of Mrs. Pritchard’s money than are her heirs. To this, we note only that liability under N.J.S.A. 14A:16-14 is not assessed against families and, therefore, does not support taking from Mrs. Pritchard’s estate to cover the sins of her sons.

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12 Commentary on In re The Walt Disney Co. Derivative Litigation laura rosenbury

BACKGROUND

In In re The Walt Disney Company Derivative Litigation, decided in 2006, the Delaware Supreme Court reviewed the findings of the Delaware Chancery Court, entered after a 37-day bench trial. Shareholders of the Walt Disney Company had sued the company, alleging that the $130 million severance paid to former Disney President, Michael Ovitz, constituted a breach of fiduciary duties and waste on the part of the board and several individual officers. The Chancery Court found that the shareholders had failed to meet the requisite burden of proof for a derivative action,1 and the shareholders argued on appeal that the Chancery Court had made multiple factual and legal errors.2 In re Disney is notable for showing the extreme latitude afforded by the business judgment rule – even in circumstances of suspicious board conduct. It is also considered an iconic case in corporate law in light of its historical significance as a waypoint in the development of the doctrine of the duty of good faith. Around the same time that the Delaware Supreme Court reviewed the lower court findings, housing prices began to decline in the United States (after they had peaked early in 2006), foreshadowing the 2008 financial crisis.3 Disney, too, was in a period of decline4 and had recently appointed Bob Iger as CEO to transform the

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In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 779 (Del. Ch. 2005). In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 46–47 (Del. 2006). See, e.g., Adam J. Levitin & Susan M. Wachter, Explaining the Housing Bubble, 100 Geo. L.J. 1177 (2012). Laura M. Holson, How the Tumultuous Marriage of Miramax and Disney Failed, N.Y. Times, Mar. 6, 2005, at A1 (“Disney’s fortunes were in a tailspin, brought on by a lingering recession and a decline in attendance at its theme parks as potential visitors were reluctant to travel [following the Sep. 11, 2001 terrorist attacks]. The company’s ABC network was lagging in the ratings. And investors were beginning to pressure Mr. Eisner to improve Disney’s financial performance. As a result, all of Disney’s divisions were forced to cut costs.”).

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company, as the successor to Michael Eisner,5 after nearly half of Disney’s shareholders withheld their proxies to re-elect Eisner to the board, citing the “troubled kingdom” over which he reigned.6 More important to the litigation, however, was Disney’s overall decline from the so-called Disney Renaissance period of 1989–1999, during which Disney’s animated films enjoyed far greater critical acclaim and commercial success than they had in decades.7 Two such films, The Lion King (1994) and Pocahontas (1995), were released around the same time of the factual circumstances precipitating the litigation. Those films had been preceded by a string of profitable classics, including The Little Mermaid (1989), Beauty and the Beast (1991), and Aladdin (1992). During this period, the company enjoyed considerable success, as did the United States economy overall under Alan Greenspan’s tenure as Chair of the Federal Reserve from 1987 to 2006. The success empowered Disney’s senior executives, who significantly expanded Disney’s corporate empire. In 1995 (the same year Ovitz was hired), Disney acquired and merged with Capital Cities/ ABC Inc. for $19 billion – the second largest corporate takeover ever at the time – to form an international multimedia conglomerate.8 Disney even bought into the “dotcom bubble” of the mid-1990s, with purchases of an internet search engine and software company.9 Disney’s success at the time arguably set the stage for the events analyzed in In re The Walt Disney Company Derivative Litigation.

ORIGINAL OPINION

The Delaware Supreme Court ultimately agreed with the Chancery Court that neither the Walt Disney Company boards at issue, nor the Disney officers, breached their fiduciary duties of care and loyalty or committed waste when they hired

5

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Laura M. Holson, Next Disney Chief Plan’s Company’s Transformation, N.Y. Times, Aug. 15, 2005, https://www.nytimes.com/2005/08/15/business/media/next-disney-chief-plans-companystransformation.html (“When a Delaware judge last week upheld Disney’s $140 million severance package granted to Michael S. Ovitz in 1996, after only 14 months as president, it closed one of the last pieces of unfinished, unflattering business from the Eisner era. [Incoming chief executive] Mr. Iger, though, has not been waiting for judges or anyone else to fix problems that festered on Mr. Eisner’s watch.”). Kenneth N. Gilpin, Disney Dissidents Rebuke Eisner, Denying Him 43% of Vote, N.Y. Times, Mar. 3, 2004, https://www.nytimes.com/2004/03/03/business/media/disney-dissidents-rebuke-eis ner-denying-him-43-of-vote.html. Elizabeth Balboa, From Zero to Hero: A Look Back at the Disney ‘Renaissance’ Period, Yahoo! Finance (Mar. 20, 2017), https://finance.yahoo.com/news/zero-hero-look-back-disney201637532.html (“[F]rom 1989 through 1999 [the Disney Renaissance produced] 10 of the most profitable feature films, which earned acclaim in the form of several Academy Awards and nominations.”). Geraldine Fabrikant, Walt Disney to Acquire ABC in $19 Billion Deal to Build a Giant for Entertainment, N.Y. Times, Aug. 1, 1995, at A1. Saul Hansell, With Go Network, Disney Steps into the Portal Wars, N.Y. Times, Dec. 13, 1998, at C1.

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Michael Ovitz as CEO in 1995 and gave him a $130-million payout upon his termination just fourteen months later. In reaching this conclusion, the Delaware Supreme Court deferred to the Chancellor’s determinations of the credibility of live witness testimony during the 37-day bench trial. The court accepted the Chancellor’s other factual findings to the extent they were “supported by the evidence” and “the product of an orderly and logical reasoning process.”10 The court reviewed the Chancellor’s legal conclusions de novo. In affirming the Chancery Court’s holding, the Delaware Supreme Court reinforced “the presumptions that cloak director action being reviewed under the business judgment standard.”11 This business judgment rule presumes that “the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company,”12 unless plaintiffs are able to show that the directors breached their fiduciary duties or acted in bad faith. The supreme court found that the shareholders had failed to rebut these presumptions. Of particular importance, the supreme court affirmed that the Disney Board’s sole legal obligation at issue was to hire a CEO; the board as a whole was not required to approve either the compensation or termination of Ovitz, in particular because such decisions were the province of the board’s compensation committee (in the case of compensation) or the board’s chair (in the case of termination).13 The supreme court held that the board met its sole legal obligation; the members of the compensation committee acted in good faith and breached no duty of care when they approved Ovitz’s initial compensation package, including the provisions related to payments in the event of a non-fault termination; and the board chair and another officer acted in good faith and breached no duty of care when they determined that Ovitz could not be terminated for cause.14 The supreme court repeatedly emphasized that the board had failed to follow corporate governance “best practices,” but this failure was not sufficient to rebut the presumptions of the business judgment rule. Popular reaction to the decision was muted, as the Delaware Supreme Court’s opinion came down ten years after Ovitz received his severance package. Scholars conceded that the supreme court’s analysis was doctrinally correct, but many lamented the failure of the court to articulate new standards that might constrain executive compensation, particularly when board directors have close relationships with the officers being compensated.15

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906 A.2d at 50. 906 A.2d at 52. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 906 A.2d at 53–54. 906 A.2d at 72–73. See, e.g., Claire A. Hill & Brett H. McDonnell, Disney, Good Faith, and Structural Bias, 32 J. Corp. L. 833 (2007); Usha Rodrigues, From Loyalty to Conflict: Addressing Fiduciary Duty at the Officer Level, 61 Fla. L. Rev. 1 (2009).

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In re The Walt Disney Co. Derivative Litigation FEMINIST JUDGMENT

The outcome and style16 of the rewritten opinion presented here is the same as that of the presumably non-feminist Delaware Supreme Court, but the analysis is decidedly feminist. The opinion of Professor Hillary Sale, writing as Justice Sale, critiques the “flawed process deployed at Disney” even as she affirms the Chancery Court’s conclusion that the Disney directors engaged in good-faith decision-making and therefore did not breach their fiduciary duties. In affirming the Delaware Supreme Court’s conclusion, Sale frames the facts in a new way that highlights the limited process required by the business judgment rule. The directors of the Disney boards at issue permitted the chair, Michael Eisner, to inform and update them about Ovitz’s hire, compensation, termination, and exit package in a minimalist and haphazard manner. Eisner contacted most directors individually instead of convening special meetings, whether telephonic or otherwise, of the boards as a whole. In these “one-off” conversations, Eisner primarily informed the directors of his own decisions rather than engaging in a deliberative process. Eisner also did not insist on robust negotiation of the company’s agreements with Ovitz, and the directors did not ask whether Eisner had done so. At no point did the directors insist on meeting as a whole to discuss Ovitz or ask for independent verification of Eisner’s statements. Particularly with respect to Ovitz’s termination, the full board failed to discuss or otherwise investigate whether the $130 million payout was appropriate. Sale emphasizes that best practices would demand much more than this minimalist process, echoing some of the concerns of the Delaware Supreme Court. By deploying feminist principles, Sale goes well beyond the supreme court’s discussion of best practices, however. Sale sets forth an alternative “inclusive process” that greatly expands the supreme court’s conception of ideal corporate governance. In Sale’s articulation, this inclusive process would repeatedly convene the entire board to present and engage with multiple views about each stage of Ovitz’s relationship with Disney. Directors would not simply defer to Eisner’s statement of the facts or his conclusions. Instead, they would challenge Eisner’s “imperial nature” and insert themselves into all conversations related to succession planning for Eisner, which is a key role of any board. Directors would resist the side conversations that perpetuate a “clublike atmosphere” in favor of open deliberations that are designed to ensure that all directors have the same information and are free to voice concerns about that information. In short, the boards would have convened in order to collaborate, asking Eisner follow-up questions, explaining different assessments, and listening to and weighing multiple points of view.

16

The style of this rewritten opinion is different than the others in this volume because Justice Sale closely tracks the Delaware Supreme Court’s original use of judicial writing style, word choice, citations, and headings.

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Sale’s embrace of this more inclusive process reflects “a world comprised of relationships rather than of people standing alone.”17 In Sale’s view, decisions are more thoughtful when they are the product of discussion and collaboration instead of deference to an individual’s desired outcome. In this way, Sale extends the insights of relational (or cultural) feminist legal theory to the context of corporate boards. As Robin West has articulated, relational feminism calls on law to recognize and support the “profoundly relational” aspects of human experience, including by valuing that which is “relational rather than autonomous.”18 At the time of the Disney decision, legal feminists had applied such insights primarily to family law, social security law, and employment law, asking courts and lawmakers to value the care that women have traditionally provided to others. By extending relational feminist reasoning to corporate boards, Sale reveals the importance of relational dynamics beyond traditional care work. In fact, Sale’s analysis illustrates the ways in which corporate boards are inherently relational, even if directors fail to take full advantage of that relational nature. Sale therefore urges boards to embrace processes that take advantage of collaboration, discussion, and deliberation, so that “all members feel a sense of belonging, a role in the mission, and a say in governance.” In turn, Sale emphasizes that such processes would “produce better substance.” At the same time, Sale remains relational herself, refusing to adopt an imperial approach that rivals Eisner’s. She emphasizes that courts do not “tell fiduciaries how to do their jobs better.” Directors are not liable simply because they fail to live up to aspirational best practices or ideal corporate governance. In this way, Sale rejects the temptation of what some call “governance feminism.”19 She remains mindful that a relational approach is defeated when one power grab is simply replaced by another, no matter how well intentioned or feminist. In the absence of evidence of the Disney directors’ conscious disregard of their duties, Sale defers to the decision of the collective. In this way, Sale reinforces the power of the Disney boards’ business decision-making even as she urges boards to embrace better and more inclusive processes. In addition to calling for more inclusive processes, Sale urges corporate boards to be more mindful of board composition. The potential of an inclusive process depends on the composition of the collective, because diverse members bring diverse perspectives, producing “creative friction” that avoids groupthink and enhances collective judgment. Sale points out that the two Disney boards at issue were predominantly male, with only one Black female director out of a total of first fifteen, then sixteen, directors. This factual statement in and of itself is a marked departure from the opinion of the Delaware Supreme Court, which neglected to 17

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Carol Gilligan, In a Different Voice: Psychological Theory and Women’s Development 29 (1982). Robin L. West, The Difference in Women’s Hedonic Lives: A Phenomenological Critique of Feminist Legal Theory, 15 Wis. Women’s L.J. 149, 210–12 (2000). See, e.g., Janet Halley et al., From the International to the Local in Feminist Legal Responses to Rape, Prostitution/Sex Work, and Sex Trafficking: Four Studies in Contemporary Governance Feminism, 29 Harv. J.L. & Gender 335 (2006) (defining and critiquing governance feminism).

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mention board composition at all. But Sale does more than simply state these facts; she also details why board diversity matters. Sale emphasizes that diversity is about much more than representation; it also enhances decision-making. She relies on nascent literature at the time describing how diverse teams, including diverse boards, performed better across multiple metrics – including productivity, profitability, innovation, growth, and adherence to ethical duties. Research after the Disney decision has reinforced those earlier studies.20 Moreover, literature available at the time of the opinion, as well as that which followed, emphasizes that teams and boards do not realize such benefits with only one token member who is diverse. Instead, at least three diverse board members are needed to create the critical mass necessary for improved performance. Sale emphasizes that gender-diverse boards, in particular, “are less likely to suffer from groupthink,” again building upon the insights of relational feminists, who focus on the ways in which women are often socialized differently than men, leading to different values and perspectives. Sale persuasively explains how gender diversity and a more inclusive culture could have altered the board’s decisions in several ways. This focus on difference often leads to concerns about essentialism,21 but Sale ably addresses those concerns. She avoids essentialism by focusing on the intersectional nature of gender. Gender always has a race, just like race always has a gender.22 Sale is quick to emphasize that the only woman on the Disney Board, Reveta Bower, was a Black woman, and she acknowledges that race and gender cannot – and should not – be separated. At the same time, Sale rightly emphasizes that Bower’s experience should not be considered to be the same as those of the two men of color on the boards, Ignacio Lozano and Sidney Poitier. Although Bower, Lozano, and Poitier were all sidelined by Eisner and other directors, they appear to have been marginalized in different ways, which limited their ability to form the critical mass necessary to provide the creative friction that improves board performance. Sale also takes her intersectional analysis beyond gender and race to look at the other aspects of Bower’s identity that might have led Eisner and others to proceed without seeking Bower’s input. Bower was not, like her peers, “an actor or Hollywood powerhouse.” Instead, Bower was the headmaster of the prestigious private school that Eisner’s children attended. With this background, Bower could have brought a fresh perspective to board deliberations, but her ability to do so was likely hampered by the power dynamics inherent in her relationship with Eisner outside of the board. Sale therefore engages in a decidedly anti-essentialist and thoroughly intersectional feminist approach. Of course, given that all individuals 20

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For an overview of more recent studies, see Why Diversity and Inclusion Matter (Quick Take), Catalyst (June 24, 2020), https://www.catalyst.org/research/why-diversity-and-inclusion-matter/. See, e.g., Angela P. Harris, Race and Essentialism in Feminist Legal Theory, 42 Stan. L. Rev. 581 (1990). See Kimberlé Crenshaw, Demarginalizing the Intersection of Race and Sex: A Black Feminist Critique of Antidiscrimination Doctrine, Feminist Theory and Antiracist Politics, 1989 U. Chi. Legal F. 139; Harris, supra note 21.

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have a “self that is multiplicitous, not unitary,”23 it may be difficult to determine when sufficient commonality exists for diversity to make a difference in corporate board decision-making in the way that Sale seeks. Yet, Sale is not deterred. Instead, she engages in a complex consideration of gender and identity, extending her abhorrence of groupthink to feminism itself, so that we may rise above simplistic understandings of women’s identities and roles in the boardroom and beyond. Finally, Sale implicitly evokes both relational and postmodern feminist legal theory when she highlights how a particular form of relationship – male friendship – influenced the board decisions at issue in this case. From the third paragraph of her opinion, Sale emphasizes that Eisner and Ovitz had been friends for over twenty-five years and speculates that Eisner thought he could control Ovitz because of this relationship. She also emphasizes that the Disney boards appeared “to have been well-stocked with primarily male friends” of Eisner. Because of these friendships, Sale analogizes the Disney boards to a men’s club. Yet these friendships have the potential to do much more than create a clublike atmosphere. In fact, although Sale does not go this far, these friendships created conflicts of interest that Delaware law has sought to recognize and manage.24 Law in the United States has long privileged certain intimate relationships between adults – marriage and marriage-like relationships – over other relationships between adults, namely friendship.25 Postmodern feminist legal theory asks why law constructs relationships in this manner, asking who benefits and who may be harmed.26 In the context of corporate governance, courts likely would have intensely questioned the directors’ judgment if Eisner had wanted to install his spouse rather than his friend as the CEO – particularly if, in doing so, Eisner had transferred all risk to Disney, thereby creating a low-risk, high-reward situation for his spouse. Indeed, courts would presume such a scenario created a taint of self-interest, requiring more rigorous due diligence from the board. Although Delaware courts also have considered ways in which friendship may create conflicts of interest,27 courts do not automatically presume self-interest in the context of friendship. Why 23 24

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Harris, supra note 21, at 608. See, e.g., Sandys v. Pincus, 152 A.3d 124 (Del. 2016) (finding that co-ownership of a private jet “signaled an extremely close, personal bond” indicative of a lack of independence); Del. Cnty. Emps. Ret. Fund et al. v. Sanchez, 124 A.3d 1017 (Del. 2015) (finding a lack of directorial independence on account of a “close personal friend[ship] of half a century” among other reasons); but see Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) (rejecting a challenge to directors’ independence that was based on the allegation that the directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as ‘friends.’”). See Laura A. Rosenbury, Friends with Benefits?, 106 Mich. L. Rev. 189 (2007). See generally Mary Joe Frug, A Postmodern Feminist Legal Manifesto (An Unfinished Draft), 105 Harv. L. Rev. 1045 (1992). See Lisa M. Fairfax, Sarbanes-Oxley, Corporate Federalism, and the Declining Significance of Federal Reforms on State Director Independence Standards, 31 Ohio N. U. L. Rev. 381 (2005) (discussing Delaware courts’ willingness to consider social and professional ties in independence inquiries).

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should courts treat a friendship of twenty-five years so differently than a marriage, including a marriage that might be relatively fleeting? Sale does not answer that question, but she does repeatedly emphasize the importance of the friendships among Disney’s male directors. She recognizes that there are a range of relationships that lie between the extremes of spouses and strangers, and she implies that boards embracing best practices should be diligent in ensuring that such relationships do not distort board decision-making. Such diligence goes beyond addressing concerns about nepotism raised by a board chair seeking to hire a spouse, child, or other legal family member. Instead, Sale indicates that boards must ensure that relationships among directors do not create groupthink or produce deference to an imperial leader. That the relationships at issue in this case are friendships between men also matters greatly to Sale. In her statement of facts, Sale takes time to illustrate the ways in which friendships between Disney’s male directors created performances of masculinity that impeded effective governance. On the front end, for example, Director Irwin Russell, a friend of Eisner’s, deferred to Ovitz’s attorney, seemed overly concerned with Ovitz’s downside protection, wanted to address the lifestyle challenges that Ovitz would face upon joining a public company, and failed to consult others until the financial terms were largely set. Russell then dismissed the compensation consultant’s concerns and failed to provide them to the compensation committee. In return, the compensation committee paid Russell $250,000 for a month’s work on the deal. Likewise, on the back end, the directors renominated Ovitz to a three-year term on the board just before his termination because they did not want to “engage in a ‘public hanging.’” In highlighting these and other facts, Sale provides an excellent case study of the ways in which powerful men perform their masculinities through friendship, asserting dominance at times, deferring at other times, and protecting male egos throughout.28 Sale therefore suggests that boards should be mindful of performances of masculinity, because those performances, in and of themselves, can detract from ideal board decision-making. Even more, such performances certainly impede the inclusive process and creative friction that Sale seeks.

CONCLUSION

Sale’s feminist judgment reaches the same conclusion as the Delaware Supreme Court and closely tracks the court’s organization and style. Yet the judgment is decidedly feminist because of its focus on inclusivity, diversity, and the ways in 28

For more on such performances of masculinity, see Nancy E. Dowd, The Man Question: Male Subordination and Privilege (2010); Angela P. Harris, Theorizing Class, Gender, and the Law: Three Approaches, 72 Law & Contemp. Probs. 37 (2009); Ann C. McGinley, Masculinities at Work, 83 Or. L. Rev. 359 (2004).

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which gender is performed through relationships. By focusing on approaches designed to foster more inclusive processes and creative friction on corporate boards, Sale uses a feminist lens to offer new paths for more effective corporate governance, even within the current confines of the business judgment rule.

In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006) justice hillary a. sale delivered the opinion of the court In August 1995, The Walt Disney Company entered into an employment agreement with Michael Ovitz. The terms of the agreement provided that Ovitz would become the company president and serve in that role for five years. Yet a short fourteen months later, the company terminated Ovitz without cause. The severance payment was valued at $130 million. Whether – and how – the board of directors, together with Michael Eisner (Chief Executive Officer) and Sanford Litvack (Executive Vice President and General Counsel), made those decisions have been the subject of considerable public speculation. These questions are at the core of this matter, which presents the appeal of a post-trial opinion of the shareholder derivative actions. The Chancery Court ruled on several pre-trial opinions, one of which was appealed to this Court, resulting in a trial. After a 37-day trial, the Chancellor issued an opinion finding that the plaintiffs had failed to meet the requisite standard of proof for a derivative challenge based on either a breach of fiduciary duties or waste against the board and Eisner, Litvack, and Ovitz. Despite our serious misgivings about the directors’ actions and approach – namely the one-off and non-inclusive decision-making atmosphere, the composition of the board in terms of its lack of gender diversity (for example), and the actions of Eisner, Ovitz, and Litvack as outlined below – we ultimately agree with the Chancery Court and uphold its findings. I

This case has its roots in the approach of a CEO who faced health issues and wanted to control his succession (and maybe his successor). The board, which appears to have been well-stocked with primarily male friends of the CEO, and which operated a bit like the type of private men’s clubs that have been on the wane for many years now,1 went along with the CEO’s proposal, raising few questions about the strategy, 1

For example, lawsuits and other pressure resulted in changes to the granting of alcohol licenses that essentially made it impossible for private clubs that did not allow certain groups (like

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compensation, or execution. This is what happens when a board lacks diversity and the creative friction that diversity creates. It is what happens when a board has fewer than three women on it, and it is what happens when the CEO decides to hire a friend with whom he has had a social relationship for over twenty-five years – and over whom he believes he can exercise control.2 Nevertheless, these choices, although inconsistent with good corporate governance, arguably careless, and possibly even lacking in emotional intelligence, do not amount to actions not taken in good faith – at least not unless we are prepared to rule that a board that is virtually all male itself lacks good faith. Therefore, these choices are not ones for which we can impose liability, no matter how tempted we might be. A In order to understand the decision, it is best if we begin with a description of the process and players. Michael Eisner, the chair and CEO, was good friends with Michael Ovitz, who had a long history with the Creative Artists Agency (CAA), in which he was a founding partner. CAA was a privately held premier Hollywood talent agency, controlled by Ovitz and Ron Meyer. In April 1994, after Eisner had a heart attack and realized that he might not live forever, he spent time thinking about a potential successor and focused on Ovitz, a friend of twenty-five years. Ovitz, in turn, had just learned that his co-founder was leaving CAA for a position that Ovitz had wanted, thus making it unpalatable for Ovitz to remain at CAA. At the time, Eisner had been president of Disney for only three months, having succeeded Frank Wells, who had died in a helicopter crash a year earlier.3 Following Wells’s death, Disney created a shortlist of potential internal successors (and no external candidates) but found none of them viable. Thus, Eisner assumed the presidency.4 In the spring of 1995, after initial discussions between Eisner and Ovitz, and apparently little consultation with the board of directors,5 Eisner reached out to

2

3

4 5

women) to become full-fledged members and to serve alcohol. See, e.g., Anti Bias Rules Could Open Private Club’s Doors, Bos. Herald, May 20, 1992, at 061; John W. Frece, Clubs that Discriminate Could Lose Liquor Licenses, Balt. Sun (Mar. 30, 1994), https://www .baltimoresun.com/news/bs-xpm-1994-03-30-1994089063-story.html. It may also be symptomatic of the entertainment industry’s business model that undervalues women – and a company that is famous for perpetuating gender stereotypes and overemphasizes female characters’ physical appearance. See, e.g., Mia Adessa Towbin et al., Images of Gender, Race, Age, and Sexual Orientation in Disney Feature-Length Animated Films, 15 J. Feminist Fam. Therapy 19 (2004). In more than half of such films, Disney also fails to feature at least two women who talk to each other about something other than a man – a test widely known as the “Bechdel test,” named after the American cartoonist Alison Bechdel, in whose 1985 comic strip Dykes to Watch Out For the test first appeared. Alison Bechdel, Dykes to Watch Out for (1986). In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 699 (Del. Ch. 2005) (citing Tr. 4148:11–4150:5). Id. (citing Tr. 3997:24–3999:4; see also 6025:7–19). Eisner did discuss the Ovitz possibility with Roy Disney (a director) and Sid Bass, who were two of the company’s largest shareholders.

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Irwin Russell, an entertainment lawyer who was Eisner’s personal attorney and the chair of Disney’s Compensation Committee, to strike a deal. Russell negotiated with Ovitz’s attorney and was told, but did not verify, that Ovitz was making between $20 and $25 million per year from CAA and owned 55 percent of the company. Ovitz insisted that he would not give up that ownership interest without downside protection. When Russell had put together the basic terms of Ovitz’s agreement, he provided a case study of it to both Eisner and Ovitz. Russell noted that the compensation seemed extraordinary, stating that the proposed salary was at a very high level for any corporate officer and higher than Eisner’s. He further noted that the stock option grant exceeded Disney’s standards and would be subject to criticism. His words fell on (tone) deaf ears, and the case study was not provided to any other board member. Due to Disney’s policy against front-loading contracts, Russell and Eisner looked for other ways to provide Ovitz with downside protection. When considering his compensation, however, the compensation committee did not consider Ovitz’s agreement with Ron Meyer and Bill Haber to transfer their interests in CAA in exchange for 75 percent of the next four years’ revenues. The negotiations resulted in a salary of $1 million and a bonus (which Ovitz was told would be approximately $7.5 million annually) with a very lucrative multi-year option package – that would allow Ovitz to receive payments even if he was fired for reasons other than gross negligence or malfeasance. Disney also agreed to purchase Ovitz’s personal jet for $187,000 more than its appraised value, his BMW at acquisition cost (not its depreciated market value), and his computers at replacement value instead of book value. In Russell’s opinion, it was “appropriate to provide Ovitz with downside protection and upside opportunity” – even if all of the risk of the arrangement was transferred to Disney. Indeed, Russell apparently felt that regardless of the anticipated “very strong criticism,” Disney needed to address the “lifestyle challenges” Ovitz would face when leaving CAA’s considerable cash compensation and perquisites, because at Disney, a public company, the cash compensation would be lower. As the facts make clear, Disney was very willing to offer up that protection, even though when Ovitz negotiated to leave CAA, he transferred his interests with an agreement for an exchange of revenues over a multi-year period, subject to some financial benchmarks. It was unclear that Ovitz would receive the projected revenues or even whether CAA would be profitable in his absence; therefore, arguably, this potential compensation should not have been considered. Nevertheless, the record indicates that the Disney Compensation Committee did not consider the tentativeness of this arrangement. Although Russell conducted all the initial negotiations on his own, he did consult other experts, notably all men, but “only after there was a good possibility of a deal” and the “financial terms of the OEA [were] sufficiently concrete.”6 He engaged Graef Crystal, a compensation consultant, and Ray Watson, another member of the 6

907 A.2d at 704 n.40, 704.

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compensation committee, in the process. Crystal’s report, however, was presented after extensive discussion between the three men, working through “various assumptions and manipulat[ing] inputs in order to generate a series of values” attributable to the agreement.7 The report highlighted the low-risk, high-return aspect of the package, to which Crystal was “philosophically opposed.” Most concerning to Crystal was the $50 million option appreciation guarantee, with an in-the-money windfall available at the end of five years. Russell raised these concerns to Eisner alone, who stated that he did not read the package the same way and pushed back. As a result, Crystal revised his views in part, but remained concerned about the overall size of the compensation package, which, notably, was larger than that of any public company officer at the time. Crystal’s revised report was completed six days after the original memo and four days after the letter agreement (“OLA”) was signed and the press release issued. During the same week, Eisner spoke with Ovitz and worked through proposed “titles” and what turned out to be significant opposition from key Disney officers. Ovitz apparently believed that he and Eisner would be equals and co-CEOs, but Eisner was not interested in sharing his title as Chair. In addition, Sanford Litvack, who was General Counsel, and Steve Bollenbach, who was Chief Financial Officer, were both opposed to Ovitz’s hire. They felt privileged not just to express that view but also to demand that they not report to Ovitz. The record indicates that Litvack believed that he should be getting the job and resented Ovitz.8 Bollenbach’s reasons for opposing Ovitz were less clear. Bollenbach’s “testimony seemed disingenuous . . . when he pinned his resistance on the fact that he had been part of a cohesive trio.”9 His testimony emphasizes the degree of privilege the male leaders of Disney exhibited. The result was that Eisner went back to Ovitz to tell him that he would become the president but not the chief operating officer, and that two of Disney’s key officers would continue to report to Eisner. With “his back against the wall,” and despite the “mutiny,” Ovitz agreed to accept the conditions.10 A mere two days following Crystal’s original memo and only four days after contacting Watson, Eisner and Ovitz signed the OLA, which was made public that day.11 Eisner then proceeded to inform the rest of the compensation committee and the board, by phone and individually, although it remains unclear whether he

7 8 9 10 11

Id. at 704. Id. at 706–07. Id. Id. at 707. Making the OLA public only furthered Eisner’s overconfidence that Ovitz was the right candidate and that his compensation was appropriate. J. Edward Russo & Paul J. H. Schoemaker, Managing Overconfidence, MIT Sloan Mgmt. Rev., Jan. 1992, at 12 (“[W]e often lean toward one perspective, and the natural tendency is to seek support for our initial view rather than to look for disconfirming evidence.”)

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discussed the terms (as opposed to the decision).12 During the same period, an attorney at Disney worked to translate the terms into actual compensation and discovered that the tax implications were problematic. As a result, Russell, and not the committee, concluded they should eliminate the provision guaranteeing the $50 million option appreciation and revised it to achieve the back-end guarantee. More than a month later, the compensation committee met to address multiple Disney compensation issues, including Ovitz’s agreement. The meeting lasted one hour. Crystal’s analysis and concerns, including that there were no public company presidents with compensation comparable to Ovitz’s, were not provided to the committee. Indeed, the committee was given only Watson’s analysis, which used a different methodology. Crystal testified that he was available by phone, but no-one called – likely because they did not receive his report. In addition to voting to compensate Ovitz at this meeting, the committee voted to pay Russell for his negotiations and work on Ovitz’s compensation over the prior month, at the rate of $250,000.13 Next, the full board, which had only one female member, convened in executive session, where it learned of the unique reporting structure but not of the concerns of Bollenbach and Litvack. Eisner led the discussion, and Watson and Russell responded to questions. Then, the board voted unanimously to elect Ovitz as President; however, it was not until almost three weeks later that the Disney Compensation Committee actually approved the terms of Ovitz’s employment agreement (OEA) and Ovitz’s option award.

B Ovitz officially became President on October 1, 1995, and it quickly became apparent that he was not going to succeed. Indeed, within months, the disconnect between Ovitz and his style versus that of Disney – and public companies more generally – became painfully obvious. From the beginning, the Ovitz–Litvack– 12

13

Delaware courts have criticized this kind of informal process. See, e.g., Cellular Info. Sys., Inc. v. Broz, 663 A.2d 1180, 1186 (Del. Ch. 1995) (emphasizing the importance of board formality and the group dynamics of board action in corporate law: “Formality in such circumstances is not ‘mere formality,’ but is treated by courts as important because it tends to focus attention on the need for deliberation and the existence of accountability structures. With respect to group dynamics, it is an old rule that boards may act with legal effect only at duly convened meetings at which a quorum is present. Again, functional reasons underlie the law’s insistence on correct form. See Robert C. Clark, Corporate Law 110–112 (1986).”) Although board members are sometimes compensated for taking on considerable extra work, at best this is an odd situation. If Disney needed outside counsel to negotiate with Ovitz, the far better practice would have been for the company to hire counsel rather than using a member of the board. Eisner and Russell created the impression that Russell was being enriched through his relationship with the company. Nevertheless, $250,000, while a very significant sum of money to most of us, was – to a Hollywood entertainment lawyer like Russell – presumably not sufficient to call his judgment into question.

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Bollenbach situation operated with tension, with Ovitz struggling to accept the agreed-upon reporting structure. Further, within a month of Ovitz starting in the role, Litvack began to complain about Ovitz’s aggressive style, and Eisner indicated that the relationship might not improve. When the January 1996 corporate retreat occurred, the challenges became even more apparent. At a Disney resort in Florida, the group engaged in activities and visits to the parks, with group transportation by bus. Ovitz, however, refused to ride the bus with Eisner and others, insisting on a limousine. He also declined to participate in activities and made inappropriate demands of park employees. In short, Ovitz declined to be part of the group or the culture. This individualistic approach continued, and the relationship with Eisner began to deteriorate such that by the summer of 1996, Eisner had spoken with multiple directors about Ovitz’s failure to adapt to Disney’s culture. One board member, Gary Wilson, said that when he went cycling in France with Eisner and Ovitz in June of 1996, he realized that the rumors were true and there was a problem with Ovitz assimilating into the company. Thus, by the fall of 1996, just over one year after the initial hiring discussions, the board members shifted gears and began to focus on whether to terminate Ovitz, responding to what they were hearing internally and externally. The media was reporting on tensions within the team, including an article based on an interview with Bollenbach. Eisner told the board that he “did not trust” Ovitz, noting noncompliance with expense policies and other concerns.14 Litvack said the same and complained of “spin” and being “handled.” Ovitz, of course, told a different story. He complained of Eisner’s micro-managing and explained that his inability to get things done or gain traction at Disney was due to his different philosophy. Once again, Eisner took matters into his own hands. First, he sent Litvack to tell Ovitz that Eisner no longer supported or wanted him at Disney. Ovitz responded that if Eisner wanted him out, he “could tell him so to his face.”15 Second, after this childish approach failed, Eisner urged a “trade” to Sony. This too failed. The board as a whole did not discuss the deteriorating relationship with Ovitz. Instead, Eisner spoke with some but not all members, relaying concerns and challenges. He also wrote a letter stating that if he were to be hit by a truck, Ovitz should not be named CEO, noting erratic behavior and pathological problems. But only Russell and Watson saw this letter. Eisner’s public comments, however, were in stark contrast. For example, both Eisner and Ovitz appeared on Larry King’s show and refuted the rumors about their relationship and Ovitz’s position. Eisner even stated that “[i]f given the chance, he would hire Ovitz again.”16 These comments certainly appear to be a shameless 14 15 16

907 A.2d at 720. Id. at 725. Id. at 726.

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attempt to cover the real situation and – although this is not a court that addresses federal securities law – might well be in the zone of securities fraud. C As the situation progressed, it became clear that Ovitz would not exit and make the problem go away. Eisner then began to press for termination, and he asked Litvack about the grounds for doing so. Litvack revisited the agreement, refreshing his understanding of “malfeasance” and “gross negligence.”17 He reviewed the facts of which he was aware (to be distinguished from collecting all possible facts or requesting an outside investigation), but “freely admitted” that he did no legal research, did not consult outside counsel, and produced no written work product at all. Doing so, in his view, was a “CYA tactic.”18 Nevertheless, Litvack concluded that it was a “no-brainer” that Ovitz could not be terminated for cause, and he relayed that view to Eisner.19 Eisner, in turn, “checked with almost anybody” (to be distinguished from anyone he could name) and concluded there was no for-cause option.20 It also appears that Litvack decided that approaching Ovitz to negotiate a decreased exit package was not an option, despite the fact that the original agreement anticipated at least five years of employment. Litvack’s view was that Ovitz would not agree, and any attempt to coerce him would be bad for Disney. Thus, Litvack never proposed a for-cause termination or used it as a negotiating tool to, for example, extract a lower payout. Indeed, the only negotiation over Ovitz’s termination seems to have been the rejection of extra benefits that he requested. Apparently not wanting to engage in a “public hanging,” at its November meeting, the board renominated Ovitz to a three-year term.21 Immediately afterwards, a subset of the board held an executive session to discuss the problems with Ovitz. Unfortunately, there are no minutes that record evidence of the discussion. Throughout this time, Ovitz apparently believed that the situation could still be rectified. After this board meeting and several conversations with board member Wilson, Ovitz finally began to comprehend that his time at Disney was running out. Thereafter, the negotiations, which were minimal, commenced. Although Ovitz made many demands – including “keeping his seat on the board, obtaining a consulting/advising arrangement with Disney, the continued use of an office and staff (but not on the Disney lot), continued health insurance and home security, continued use of the company car and the repurchase of his plane” – the resulting 17 18 19 20 21

Id. Id. Id. Id. Id.

at 728. at 729 n.264. at 729 n.269 (citing Tr. 6114:24-10). at 729 n.270 (citing Tr. 438:10-21). at 730 n.276 (citing Tr. 377:21-3772:16).

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termination agreement provided that Ovitz would receive a payout consistent with his original contract, which was a very substantial sum.22 In the midst of this, the Executive Performance Plan Committee (EPPC) met to consider annual bonuses for executive officers. At this meeting, Russell informed his fellow board members of the impending termination and then recommended they pay Ovitz his $7.5 million-dollar discretionary bonus, without – it appears – any discussion of whether or why, despite Ovitz’s performance issues and impending termination. Indeed, it appears that Russell may have incorrectly advised the board that the bonus was contractually obligated despite the discretionary language in the contract. No-one spoke up or contradicted Russell, including Litvack, who later said he did not want to embarrass Russell (to be distinguished from hewing to his fiduciary duties). Indeed, shortly thereafter, Russell and Litvack “sheepishly” admitted that the bonus was a mistake, noting that “it would be illogical and impossible to justify any bonus one day and fire [Ovitz] the next.”23 Then, they asked the EPPC to rescind the bonus, which it did. As discussions with Ovitz moved forward, discussions with individual board members continued. When a termination was finally agreed upon, it was memorialized in a letter and announced publicly – without the board having seen the letter or the terms. Apparently, the board members felt that Eisner had the power to make the decision on his own, and Eisner did not attempt to contact board members by phone to discuss it. The company did send copies of the termination letter to each board member, but with no additional information. Litvack signed the letter, and he did so only because no-one else was available. The resulting payout to Ovitz was $130 million. Today, this is a substantial sum; ten years ago, it was worth even more. The plaintiffs, concerned about a payout of this size for what amounted to approximately fourteen months of problematic employment, filed the litigation that led to the trial and this review.

II

On appeal, we review the Chancery Court’s findings for errors in the application of the law, while respecting its first-hand decision-making with respect to the facts. There are two sets of decisions by the board at issue: the OEA and non-fault termination (NFT), as well as a series of decisions by Eisner, Litvack, and Ovitz. We separate the latter group because these three people are officers who are agents of the company, and their role and choices are cabined differently than decisions of the board. The Chancery Court found that neither the board nor the officers breached their fiduciary duties of care and loyalty, and we agree. Nevertheless, we

22 23

Id. at 732–33. Id. at 739 n.350 (citing PTE 93).

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address the directors and officers separately, clarifying that although the directors may avail themselves of the business judgment rule, the officers may not. A The plaintiffs argued that the board violated its fiduciary duties with respect to both the OEA and the NFT. Delaware law deploys the business judgment rule to protect business decisions where “in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”24 These are rebuttable presumptions, and to do so, the plaintiffs must prove that the board members were not entitled to the protections of the business judgment rule, either because they did not make a decision or because they acted in a grossly negligent or non-good faith manner. Success would result in a burden shift to the defendants to prove their actions were entirely fair to the corporation. The Court of Chancery rejected the plaintiffs’ arguments; thus, burden shifting to the defendants did not occur. 1 There are alleged breaches of fiduciary duty in this case. The first focuses on the duty of care, which is subject to a gross negligence standard.25 The second is the duty to act in good faith. There are at least three categories of actions that fall into the good-faith space. The first is where a fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation. The second is where the fiduciary acts to violate applicable positive law. The third occurs when the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for her duties. The first two categories are not at issue here, and we hold that the Chancery Court correctly found that the directors did not violate the third one. 2 The plaintiffs’ arguments center on questions about whether the board had a legal obligation to approve the OEA, the hiring of Ovitz, or the NFT. The answer, in this case, is that the board was required to approve only one of these, the actual hiring of Ovitz, which the Chancery Court found it did. Decisions about compensation at Disney are relegated, under the bylaws, to the compensation committee. The Chancery Court found that the appropriate bodies – the board for hiring and the compensation committee for the OEA and NFT – did exercise their duties. 24 25

Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). See Tomczak v. Morton Thiokol, Inc., CIV. A. No. 7861, 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990) (“In the corporate context, gross negligence means ‘reckless indifference to or a deliberate disregard of the whole body of stockholders’ or actions which are ‘without the bounds of reason.’”).

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Moreover, having read the company’s governing documents, we find that the Chancery Court did not err in its interpretation of those documents. The board was not required to approve either the compensation or the termination of Ovitz, and compensation was the province of the compensation committee. In light of these legal findings and given that we are bound by the lower court’s factual determinations, we do not reverse its decision with respect to the board and its good-faith decision-making. That being said, we think it worth expounding further on the role of the board, the privilege of serving as a director, and – even if it did not constitute a breach of fiduciary duty – the flawed process deployed at Disney. 3 As Section I of this opinion makes clear, Eisner set out to hire a friend of twenty-five years as his potential successor at Disney. The framing for this decision was that Eisner suffered a heart attack just months after stepping into the role of CEO, when his predecessor was killed in a helicopter accident. Thus, the Disney Board was faced in rapid succession with concerns about succession. Although one member of the compensation committee was actively engaged in the negotiations, the others appear to have been informed by phone, and even then only when the deal was largely complete. The same is true for the board, which did not question even the extraordinary sum. As stated previously, the board was not obligated to do so. Moreover, under Delaware law, the board was entitled to rely on the committee’s determinations, but that does not mean it was required to do so. Indeed, the board had the right and the opportunity to question the committee’s approach. It did not do so. The question is why. The answer appears to be, in part, because of Eisner’s method of speaking with directors individually, which we regard as a poor substitute for convening the full board and engaging in a discussion.26 The same is true of the NFT, which again Russell “negotiated” in his role as Chair of the compensation committee. We stress the word “negotiated” here, because there does not appear to have been any negotiation beyond the rejection of Ovitz’s demands that exceeded the terms of the OEA. In reliance on Litvack, Russell moved forward with an understanding that anything other than a no-fault termination was a non-starter and simply put the terms into writing. Note what did not happen here. The board did not vote on, or even meet to discuss, the termination. The directors did not ask for an independent investigation to determine whether a for-cause termination was possible. And even though the compensation committee discussed the matter, it did not vote on it. Indeed, there seems to have been some confusion among board members as to whether they needed to vote or convene. Some thought that Eisner had the power to make the decision on his own – although that power does not, itself, determine the board’s 26

See Broz, 663 A.2d at 1186.

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role; others apparently assumed that if they needed to be involved, Litvack would have notified them. In short, Ovitz was terminated without cause and without board discussion of the facts and circumstances. Ovitz received a payout under his contract without an internal investigation, seemingly without pushback and, instead, with the apparent assumption by Litvack that doing so was required (and his testimony at trial indicated that he has not changed his mind in the ensuing decade).27 Indeed, it appears that Ovitz was terminated in much the same fashion that he was hired: by Eisner and Russell, without consultation or engagement with others. It also appears he was an unlikely fit from the beginning. For many unschooled in corporate law and fiduciary duties, this recitation of facts would seem to lead to only one conclusion: this board, or at least Eisner and some directors, must be liable. How could a fiduciary not ask more questions? How could a fiduciary – or a group of them – allow Ovitz to leave with such outrageous compensation? How could they not convene to address the matter? The answer lies in this Court’s role, the law, and, we venture to say, the composition of the Disney Board. This Court does not tell fiduciaries how to do their jobs better, desirous as that would be at times – including in this particular case. Nevertheless, this is not the first time that we have opined on one-off approaches, but we hope that it is the last.28 To be clear, we think that individual phone calls from a CEO in lieu of a telephonic board meeting, for example, are a very poor substitute for an inclusive process that benefits from the multiple views of an array of directors – particularly a diverse array, as we discuss below. Yet, whatever we think about the “process” here and the many ways in which we note below that it could have been better, we will not find liability for failing to meet an aspirational view – even if it is our own – of what the best practices or ideal corporate governance standards are. As unsavory as some might find this statement, particularly when it results in a payment of $130 million for fourteen months of employment, it is the cornerstone of Delaware law and a core strength of corporate governance more generally. Director fiduciaries are granted wide latitude in business decision-making (to be distinguished from the abdication of decision-making). There are, of course, limits on those degrees of freedom. Directors must act faithfully and honestly on behalf of the shareholders, and as long as they do so, their choices are allowed. Shareholders do at times – as in this case – disagree with the decisions and outcome. Reasonable people can do so, but reasonable disagreement is not our standard, and nor should it be, particularly in hindsight. Recall that in a public

27

28

Itself a very male approach. Allan Pease & Barbara Pease, Why Men Don’t Listen & Women Can’t Read Maps: How We’re Different and What to Do About It 139 (2001) (Men see asking for directions as “admitting they are wrong, and to be wrong is to fail”). See Broz, 663 A.2d 1180.

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company like Disney, the shareholders have made a choice. In exchange for limited liability, they have given up the right to manage, to make management decisions, and to second-guess those decisions over time. There are many reasons for this tradeoff, not least of which is that risk and profits are largely correlated and also are not completely predictable. If we want business leaders to take risks and to innovate and generate the profits that shareholders desire, we must accept that shareholders will not like every decision – particularly later, when the decision has proved flawed. Nevertheless, that is the choice shareholders make when they invest in companies. Absent board member disloyalty, or gross negligence (which in most companies is exculpated), liability is not available. The obligation of directors is to act in good faith to make informed decisions that are untainted by self-interest. Without proof of the failure to do so, the argument is really one about the choice of the decisionmakers or the wisdom of the decision, both of which will vary. On this point, however, our law is clear: these areas are the purview of the directors – not the shareholders, and not the court. That being said, as is our standard approach, the Court does provide guidance when a board falls short of best practices, and that certainly is the case here. The imperial nature of Eisner, his approach to the board, and the decisions with respect to the hiring and firing of Ovitz are stunning. And even if board approval was not required at all stages of the Ovitz saga, the decision to hire him was tied to succession planning for Eisner, who had only recently (and as a result of a lack of a succession plan) succeeded Wells. These are certainly the type of decisions about which the board might well have been concerned and into which it might even have inserted itself, despite the proverbial “nose in, fingers out” adage. Therefore, in the hope of improving future processes, we expound on the process and the opportunities for the board, creating the possibility that the opinion might provide some guidance to other officers and directors of the many corporations subject to Delaware law. Succession planning at the top is a key role of the board, yet this board appears not to have engaged fully in the process. Instead, the board members deferred to Eisner even when doing so resulted in his hiring an old friend with a compensation package larger than that of any other public company officer. One might pause here to ask how that happened. The answer appears to be deference and a clublike atmosphere, in which individual and/or side conversations with board members were more common than convening the board for a thorough discussion. In the case of the Disney Board, the decision to convene would in normal course have been made by the chair – here, Eisner. Nevertheless, other board members could have asked for a meeting. They were not required to do so, legally; yet, we pause to ask whether the process would have been improved if they had done so. We think yes. We still firmly believe that good processes produce better substance. In short, boards should take the time to do it right, in a thorough and inclusive manner. Nevertheless, given the composition of the board, we are skeptical that process alone would have produced better results. We address that point next.

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4 In general, boards have great flexibility to organize their structure and to operate in a manner that enables them to fulfill their legal duties and responsibilities. State corporate law vests the ultimate power and duty to manage the business of the corporation with the board of directors29 and permits the board to delegate tasks and functions to committees.30 In the aftermath of Enron, however, the federal government intervened with requirements that at least some committees of the board be comprised solely of independent directors.31 What the statutes and regulations do not address, however, is the diversity of those directors – independent or not. We turn to that point now, addressing the issue of diversity and elaborating on our skepticism about whether process alone might have improved the Disney Board’s decision-making. There were two boards here: the one at the time of the OEA, and the one at the time of the NFT. Our analysis applies to both. The OEA board comprised fifteen people and the NFT board sixteen, only one of whom was a woman. One woman on a board of fifteen or sixteen people is simply not enough. The research is very compelling: a board needs at least three women before gender diversity brings results, and the reason for that requirement is inclusion.32 We address diversity first and then turn to inclusion. In doing so, we draw on the work of multiple governance groups and a burgeoning area of empirical research. This Court has often considered finance-related research in various valuation and other contexts. Today, we expand the use of academic and corporate research to elaborate on board composition. The facts of this case, and so many others, compel us to do so, in the hope of shedding light on best practices related to shareholder value.33 To be sure, at this time the work in this area is somewhat nascent; nevertheless, it is compelling. Diverse teams, including boards, perform better. Companies with greater diversity have increased productivity and profitability.34 Increasing the number of women 29 30 31 32

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Del. Code Ann. tit. 8, § 141(a) (2003). Id. at § 141(c). Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745. David A. Braun, Debra L. Brown & Vanessa Anastasopoulos, Women on Boards: Not Just the Right Thing . . . But the “Bright” Thing, Conference Board of Canada Rep. 341-02, at 12 (2002) (finding boards need a critical mass of women to change their behavior and performance: “[R]esearch into attitudes of men towards women in management indicates that a critical mass of 35 per cent may be necessary before male subjects’ attitudes change. At times, then, one, or even two, women on an 11-person board may not be sufficient to promote change, and even this level of commitment may be only of a token nature.”). See, e.g., In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) (twelve out of thirteen directors were male); Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (ten male directors). Steven Ramirez, Diversity and the Boardroom, 6 Stan J.L. & Bus. Fin. 85, 86 (2000) [hereinafter Diversity and the Boardroom] (“[T]he American business community is discovering that pursuing the opportunities inherent in American diversity enhances workforce productivity and thus increases profitability.”); see also David A. Thomas & Robin J. Ely, Making Differences Matter: A New Paradigm for Managing Diversity, Harv. Bus. Rev. 79 (1996).

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and minorities in the business-place and on the board, if done while developing inclusion, produces an environment that is conducive for creative friction or positive fact-based debates that result in innovation and growth.35 For example, a 1995 study by the Covenant Investment Group found that businesses committed to promoting minority and women workers had higher annual returns than companies without diversity.36 In fact, the returns for the diverse firms were more than double those of their counterparts (18.3 percent versus 7.9 percent).37 The market’s reaction to firms recognized for their diversity gains is consistent, revealing positive increases in stock prices for those companies compared to others that are subject to sanction over discrimination. The same is true for boards of directors. Recent research has shown that board diversity can “enhance the bottom line.”38 Moreover, and key to this case, a heterogeneous board can help to avoid the groupthink that is so perilous to creative and effective decision-making.39 The concept of groupthink is rooted in the work of Irving Janis, and despite it being more than thirty years old, many boards have failed to heed the teachings. The simple fact is that people like people who are like themselves. Although this tendency is not evil, it can be pernicious. This is especially true in the boardroom, where if people have similar backgrounds and attitudes, they are particularly likely to follow each other’s leads and fail to engage in effective challenge and debate – the hallmarks of a diverse and inclusive culture. In simple terms, groupthink occurs when people follow the leader, even unknowingly. We should not be surprised by this outcome. When people engage with people similar to themselves, the conversation is easier, less stilted, more comfortable. That comfort, however, is exactly what gets in the way of good outcomes. Discussions that arise from different viewpoints tend to be more fact-based and are correlated with better business outcomes.40 These discussions might feel like conflict,

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Diversity and the Boardroom, supra note 34, at 98 (“In this study, the Conference Board concluded that board diversity can enhance shareholder value. In sum, ‘leading companies are integrating diversity into corporate objectives with the belief that a diverse workforce can help generate new ideas and help companies be more responsive to diverse markets.’”); see also Poppy Lauretta McLeod et al., Ethnic Diversity and Creativity in Small Groups, 27 Small Grp. Res. 248, 251, 256–57 (1996) (finding that ethnically diverse workgroups, including Asian, African, and Hispanic Americans, produced higher quality ideas than all-Anglo groups). Fed. Glass Ceiling Comm’n, A Solid Investment: Making Full Use Of The Nation’s Human Capital 5 (1995). Id. See The Conference Board, Report No. 1130-95-Rr, Diversity: Business Rationale and Strategies (1995). See Taylor H. Cox Jr., Cultural Diversity in Organizations: Theory, Research & Practice (1994); Irving L. Janis, Victims of Groupthink; A Psychological Study of Foreign-Policy Decisions and Fiascoes 192 (1972). Orlando C. Richard, Racial Diversity, Business Strategy, and Firm Performance: A ResourceBased View, 43 Acad. Mgmt. J. 164 (2000) (“Proponents of diversity maintain that different

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but they actually produce the friction that is key to the power and benefits of diversity.41 No doubt this is the reason that institutional investors increasingly call for more diversity in companies and in the boardroom.42 Gender-diverse boards are less likely to suffer from groupthink. They are more likely to consider alternatives, enrich the quality of ideas, and provoke livelier boardroom discussions, all of which leads to enhanced decision-making.43 Thus, the sense of infallibility and excessive optimism associated with groupthink (and which arguably was evident in Ovitz’s hiring) is less likely to occur.44 In part this is true because “women are less affected than men by the over-optimism bias.”45 And it appears that more women means more accountability: boards with three or more women are more likely to adopt policies that guard against self-serving behavior, which is rooted in conflicts of interest and ethical

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opinions provided by culturally diverse groups make for better-quality decisions . . . and appear useful for making valuable judgments in novel situations. Heterogeneity in decision-making and problem-solving styles produces better decisions through the operation of a wider range of perspectives and a more thorough critical analysis of issues.”); see also Cox, supra note 39; Charlan Jeanne Nemeth, Minority Dissent as a Stimulant to Group Performance, in Productivity and Process in Groups 95 (Stephen Worchel, Wendy Wood & Jeffry A. Simpson eds., 1992); Poppy L. McLeod & Sharon A. Lobel, The Effects of Ethnic Diversity on Idea Generation in Small Groups, Ann. Meeting of the Acad. of Mgmt. (1992). See, e.g., Niclas L. Erhardt et al., Board of Director Diversity and Firm Financial Performance Management Publications, Mgmt. Publ’ns (2003), https://lib.dr.iastate.edu/management_ pubs/13 (citing Cecily Cannan Selby, From Male Locker Room to Co-ed Board Room: A Twenty-Five Year Perspective, in Women on Corporate Boards of Directors: International Challenges and Opportunities 239 (Robert J. Burke & Mary C. Mathis eds., 2000): “Selby . . . interviewed women board members from top U.S. firms and observed that by including gender diversity on their boards firms concomitantly included diversity in other experiences and values. She notes that the ‘questioning culture’ of a board can be influenced, in a positive respect, by having women board members.”). Since the 1990s, institutional investors including TIAA-CREF, one of the nation’s largest institutional investors, and CalPERS, the largest public pension fund in the U.S., have been emphasizing the need for directors with diverse experience. See Steven A. Ramirez, A Flaw in the Sarbanes-Oxley Reform: Can Diversity in the Boardroom Quell Corporate Corruption?, 77 St. John’s L. Rev. 837, 847 (2003). TIAA-CREF issued a “Policy Statement on Corporate Governance” in the early 1990s, which expressed the desire for more diversity in the boardroom, and in 2000, TIAA-CREF expanded on that statement by saying that diversity in “experience, gender, race and age” should be considered as a director qualification. See TIAA-CREF, Policy Statement on Corporate Governance (Mar. 2000). Additionally, CalPERS stated in 1998 that “[w]ith each director nomination recommendation, the board [should] consider[] the mix of director characteristics, experiences, diverse perspectives and skills that is most appropriate for the company.” See Cal. Pub. Employee Ret. Sys., Corporate Governance Core Principles & Guidelines: The United States 6 (Apr. 13, 1998). See Lorin Letendre, The Dynamics of the Boardroom, 18 Acad. Mgmt. Exec. (1993–2005) at 101–04 (Feb. 2004). See Warren E. Watson, Kamalesh Kumar & Larry K. Michaelsen, Cultural Diversity’s Impact on Interaction Process and Performance: Comparing Homogenous and Diverse Task Groups, 36 Acad. Mgmt. J. 590 (June 1993). Marleen A. O’Connor, The Enron Board: The Perils of Groupthink, 71 U. Cin. L. Rev. 1233, 1307 (2003).

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lapses – thus increasing accountability.46 Further, as a recent Catalyst report reveals, companies with the highest representation of women on their top management teams had a 35.1 percent higher return on equity and a 34 percent higher total return to shareholders than companies with the lowest female representation.47 Given the fiduciary duties of directors, we are hard pressed to see a downside to adding more women to boards. Indeed, board diversity appears to be a proverbial “no-brainer.” Of course, diversity can also produce differences of opinion that may result in arguments. In the words of the CEO of Bell Atlantic, “[i]f everybody in the room is the same, you’ll have a lot fewer arguments and a lot worse answers.”48 This view is confirmed by the research, which indicates that companies that “effectively manage diversity” can achieve improvements in their human resource efficiency, marketing effectiveness, and innovation and creativity.49 What does effectively managing diversity mean? At least in part, it means that the boardroom operates in an inclusive manner, where all members feel a sense of belonging, a role in the mission, and a say in the governance.50 That is partly why the research indicates that to access the value of having women on the board, there should be a minimum of three women.51 These numbers can help to prevent tokenism, where some board members are treated differently from others, and can create more room for the comfortable expression of ideas, which is a form of inclusion. The numbers foster participation, which is the key to unleashing the power of diversity.52 In short, the Disney Board had three diverse members, but because it did not operate in an inclusive manner, it squandered the power of that diversity.53 Recall, for example, that the two diverse members of the compensation committee were not included in discussions. Yet, to access the creative friction and corporate metrics that

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Braun et al., supra note 32. The Bottom Line: Connecting Corporate Performance and Gender Diversity, Catalyst (2004). Geoffrey Colvin, The 50 Best Companies for Asians, Blacks, & Hispanics, Fortune Mag. (July 19, 1999). See Taylor Cox, Jr. & Carol Smolinski, Managing Diversity and Glass Ceiling Initiatives as National Economic Imperatives, U.S. Dep’t of Labor Glass Ceiling Comm’n (Jan. 31, 1994). Frederick A. Miller & Judith H. Katz, The Inclusion Breakthrough: Unleashing the Real Power of Diversity (2002) (arguing that leveraging the power of diversity requires building an inclusive culture). Judy B. Rosener, America’s Competitive Secret: Utilizing Women as a Management Strategy 120–21 (1995) (finding that a single board member is often dismissed as a token, and two are not enough to be taken seriously, but three female board members gives the board a critical mass). See Diversity and the Boardroom, supra note 34, at 119 (citing 1998 AMA Survey Senior Management Teams: Profiles and Performance, Am. Mgmt. Ass’n 7 (1998) (“[T]he Association concluded that ‘it is not the predominance of any one group, but rather the participation of numerous diverse members that seemed to lead to superior performance.’”)). Susan E. Jackson, Consequences of Group Composition for the Interpersonal Dynamics of Strategic Issue Processing, 8 Advances in Strategic Mgmt. 345, 370–71 (1992) (arguing that ineffective norms and processes can squander the potential benefits of diversity by stifling the expression of disagreement).

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diversity produces, the board needed to embed inclusive debates and discussions into its culture. There are some simple rules to consider that might improve boardroom practices: No interrupting; everyone speaks once before anyone speaks twice; and all ideas are on the table before they are critiqued. These might sound like the basic rules of kindergarten, but they are not.54 They are the norms of good conversation and debate. 55 They are also the norms of participative boards, those “characterized by high CEO and board power, discussion, debate, and disagreement,” and they are associated with higher numbers of female directors.56 According to Catherine Daily, “Importantly, participative boards [are also] significantly associated with higher perceived and objective company performance.”57 Indeed, we venture to say that if this board had benefited from the power of gender diversity and an inclusive culture, the outcome might have been different in several ways. First, the board might not have hired Ovitz – at least not without discussion and debate. Second, it might not have paid him more than any other public company officer at the time. Third, it might not have granted him an array of embarrassing perquisites. Fourth, it might not have agreed to a no-fault termination with a huge payout. Fifth, although we are tongue-in-cheek here, the board might have kept minutes, which could have been extremely helpful in this process and potentially saved considerable expense. And sixth, the board might have engaged in better and more conscientious practices that would have allowed it to win dismissal on the front end, thus saving both the board and Delaware taxpayers the costs of multiple briefs, considerable discovery, a trial, and this second appeal. Consider the following situations implicating questions of diversity. The OEA Compensation Committee had four members, two of whom were men of color. In addition to Russell and Watson, who were discussed previously and both of whom played actual roles in the Ovitz compensation process, were Ignacio Lozano, a Mexican American, and Sidney Poitier, a Bahamian American and former client of Ovitz. Neither Lozano nor Poitier were invited to play a role or included in the process, except for a brief call at the end to apprise them of the existing decisions. Indeed, Russell first called Poitier the day before the OEA was signed and the press

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Robert Fulghum, All I Really Need to Know I Learned in Kindergarten: Uncommon Thoughts on Common Things (1988). Emily Post & Peggy Post, Emily Post’s Etiquette (17th ed. 2004). Catherine M. Daily et al., A Decade of Corporate Women: Some Progress in the Boardroom, None in the Executive Suite, 20 Strategic Mgmt. J. 93, 97 (1999). Id. Indeed, this Court deploys norms to build its own inclusive culture, ensure that input from all members factors into outcomes, and avoid our own versions of one-offing. See David A. Skeel, Jr., The Unanimity Norm in Delaware Corporate Law, 83 Va. L. Rev. 127 (1997) (analyzing the Delaware Supreme Court’s norm of unanimous opinions and the practices that have been put in place to protect this norm, including avoiding conversations between individual justices – as opposed to the group – about pending opinions).

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release issued, and notified Lozano only after the press release went out.58 Moreover, the trial testimony indicated that neither person of color was told of Crystal’s concerns about the pay package or made privy to the analysis. Indeed, prior to the phone calls, Russell and Watson discussed, finalized, and presented the OEA without sharing Crystal’s concerns or any others. Although Lozano and Poitier could have pushed back on the decision, the lack of an inclusive process made it less likely that they would do so. It is not therefore surprising that they did not. For example, when Russell and Watson presented their findings and conclusions for a vote, half of the committee had already drafted and approved of the OEA. Arguably, Russell and Watson did not value Poitier and Lozano’s opinions and marginalized them as members, making it harder for either of them to question – let alone challenge – the preexisting decisions. The two men may have been assimilated, but they were not included.59 Indeed, marginalization and tokenism result in this type of disempowerment. Participation, not predominance, is what produces the effects of diversity; and inclusion, which certainly did not happen here, is vital.60 Everything we have just said applies also to Bower, an African American and the lone female on the Disney Board. She was not on the compensation committee. Even if she had been, it is unlikely, given the treatment of Lozano and Poitier, that she would have been consulted or included in any way. Indeed, her testimony reveals that she, too, was a marginalized board member. She was not an actor or Hollywood powerhouse. She was the headmaster of the local prep school that Eisner’s children attended. One might even argue that, given her background, other board members might have believed she was unlikely to know much about these sorts of employment contracts or compensation agreements; yet, if included in discussions, she might have had a sense about potential public reaction to the enormity of the compensation and exit packages. A more diverse board, operating in an inclusive manner, might well have called formal meetings of both the compensation committee and the board to review compensation and termination decisions. As the research indicates, inclusive meetings with a diverse array of directors are likely to result in attention to facts and objective evidence – spreadsheets and data, for example – and are therefore more likely to result in better decision-making.61 Inclusive meetings could have benefited 58

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Indeed, both Lozano and Poitier testified as to their approval of the hiring of Ovitz, but neither mentioned any discussion as to their opinion – or if they were even asked – about the terms of Ovitz’s compensation package. This signals a lack of inclusion in the “important” decisions. Nicola Pless & Thomas Maak, Building an Inclusive Diversity Culture: Principles, Processes and Practice, 54 J. Bus. Ethics. 129, 130 (2004) (noting that assimilation results in minorities and women underperforming because they are not heard or included and thus cannot add value to corporate performance). See Diversity and the Boardroom, supra note 34, at 119. See Samuel R. Sommers, On Racial Diversity and Group Decision Making: Identifying Multiple Effects of Racial Composition on Jury Deliberations, 90 J. Pers’lity & Soc. Psych. 597 (2006) (finding heterogenous groups outperformed homogenous groups in every

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from creative friction, and they might have checked the egos and optimism that infected the “process” that did occur. Indeed, it is possible that someone might even have raised the fact that the NFT provisions could apply in the eventuality that Ovitz failed spectacularly and quickly. Unfortunately, in 2006, despite considerable conversation about and calls for diversity, the failure to address it does not amount to a breach of a board’s fiduciary duty, at least not of the loyalty variety. And, as previously stated, this board was protected by an exculpation clause that relieved it from liability for breaches of anything less. Thus, we are left with citing the evidence and acting within our role as an educator for boards about process and power, in the hope that change will occur, and with the goal of creating space that would – in the future – create the possibility of liability if ignored.

B Before we conclude, we need to address Ovitz, Eisner, and Litvack. All three of these men are officers, and although we agree with the Chancery Court that they are not liable, we want to clarify what their duties were and the fact that the business judgment rule simply does not apply to them. In short, officers are different from directors. Officers of a corporation, like directors, owe fiduciary duties. Yet, unlike directors, officers are agents and are not subject to exculpation. They are also not subject to the business judgment rule, which is a common law invention designed to encourage the board in its risk-taking and decision-making, but which we have not previously applied to corporate officers. Cases against corporate officers are rare, in part because this state clarified only recently its jurisdiction over them, and in part because the actions often at issue in these sorts of cases are board-level decisions. We begin with Ovitz. We agree with the Chancery Court that Ovitz did not become a fiduciary until he signed the OEA. One might ask whether Ovitz might have thought about whether and how he wanted to enter Disney – and whether a package of the magnitude at issue here would send the types of signals that it appears he sent after starting his job. Nonetheless, regardless of the privilege inherent in his negotiations for the OEA and the NFT, Ovitz assumed no fiduciary duties to the corporation until he was actually an employee. Thus, he was free to use his privilege to negotiate for an outrageous package, and he did so. Plaintiffs also argue that Ovitz violated his duties in accepting the NFT provisions of the OEA when he was terminated. We do not agree. Ovitz did not make this decision, did not like this decision, and did not see it coming. Once the decision was made, Ovitz was entitled to the terms of the OEA, including the amounts in the deliberation measure, including: number of case facts discussed, number of factual inaccuracies, number of uncorrected inaccurate statements, and amount of “missing” evidence cited).

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NFT. His comeuppance, if any, has been in the very public exposure of his inadequacy – if not incompetence, the trial testimony probing those issues in some detail, and the resulting humiliation. Although it does not provide the plaintiffs with damages, it will have to suffice. With respect to Eisner, our holding is somewhat different. We agree with the Chancery Court that however imperial and privileged, Eisner’s decisions do not amount to a breach of loyalty, nor were they lacking in good faith, however hindered by his ego they might have been. Further, even if we were to agree with the plaintiffs about any lack of care here, Disney’s indemnification clause, which covers officers, applies. Finally, our holding also applies, for various reasons, to Litvack. First, his main roles – other than acting with the same considerable privilege of his male counterparts – were confined to the NFT and the discretionary bonus. In making his determination that Ovitz could not be terminated with cause, Litvack appears to have relied largely on his own sense of the law. It should be noted that Litvack was a well-pedigreed individual with considerable legal experience. Although many other lawyers might not have had the ego to consult themselves, we cannot fault him for doing so. Indeed, if we were to find liability for this sort of ego-based decisionmaking, we would likely have to find liability in most of the decisions we review. Moreover, whatever the possible flaws here, the lower court found that the NFT was well within the purview of the decision-makers, including Litvack, and we do not disagree.62 Nevertheless, we address this issue to lay to rest confusion about whether and when the business judgment rule applies (to the board, but not to officers) and to clarify the point that officers are agents, with their own fiduciary duties that are distinct from those of the board. Given the indemnification provisions, however, liability does not extend to the officers in this case – absent a finding that they failed to act in good faith. The Chancery Court did not so find, and we do not find fault with its reasoning.63 The judgment of the Chancery Court is affirmed. It is so ordered.

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Because the $7.5 million-dollar bonus awarded to Ovitz prior to his termination was later rescinded, there was no harm done and thus no basis for damages to be awarded. See In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 45 n.34 (Del. 2006). No matter how wasteful the payout of the NFT may appear, the decision to payout the terms of the NFT was not waste. Waste will be established in the rare “unconscionable case where directors irrationally squander or give away corporate assets.” Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000). Here, the payout of a contractually obligated amount was not waste. Additionally, the approval of the NFT provisions was not wasteful, because despite the large payout sum, the terms had a rational business purpose: to persuade Ovitz to join Disney. Thus, this claim of waste also fails.

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part v

Closely Held Businesses and Other Considerations Regarding the Composition of Boards, Management, and Owners

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13 Commentary on Ringling Bros-Barnum & Bailey Combined Shows, Inc. v. Ringling gabriel rauterberg

BACKGROUND

Should the shareholders of a corporation be free to redesign their rights by contract? With some ambivalence, the law empowers them to do so by enforcing shareholder agreements that alter shareholders’ fundamental rights to vote, sue fiduciaries, and sell their shares. Perhaps no twentieth-century case is as familiar an icon of this fact as Ringling Bros.-Barnum & Bailey Combined Shows, Inc., et al. v. Ringling.1 The case commonly serves as a metonym for the legal transition from widespread judicial resistance to shareholders’ tailoring of corporate rights to widespread judicial acceptance.2 Ringling Bros., the story goes, sees our key corporate jurisdiction, Delaware, in the midst of this transition, affirming that shareholders have no affirmative duties to vote their shares and that they can contract directly with one another over those votes and how they will be voted. This transition, moreover, is taken to be a positive one in which judges come to embrace the freedom of shareholders to tailor the structures of control. So goes a familiar story. The rewritten judgment in Ringling Bros. reveals social, political, and legal complexities elided by the historical opinion. It adopts a contextual approach, emphasizing the broad realities that drive individuals’ motivations, and reaches conclusions supported by that rich context. The opinion finds the contract ambiguous and hence in need of judicial interpretation. The central tension in contract interpretation is between formalistic (or textual) and contextual approaches.3 1 2

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The rewritten opinion argues for a contextual approach in which the disputed contract is not enforced, although shareholders’ ability to tailor governance is still recognized. But is this contextual approach preferable to the original decision? Even if it is, should contextualism favor not enforcing the shareholder agreement at issue? The answers depend, in part, on whether shareholder agreements constitute a distinctive class of contract favoring a specific interpretive approach and whether a contextual interpretation requires non-enforcement. Moreover, the jurisprudence and normative desirability of shareholder agreements is nowhere near as clear as Ringling Bros. or the commentary around it suggest.4 Lastly, Ringling Bros. raises other questions that feminist perspectives might illuminate. Much of corporate law, scholarship, and practice anesthetizes the role of shareholders, treating shareholder apathy as appropriately rational, when it may be nothing of the kind. I situate the opinion contextually, explain the original judgment, explore the contributions of the rewritten judgment, and then consider further avenues for feminist analysis of Ringling. Without context, the stakes of Ringling Bros. would be missed. Circuses today are a sideshow, a strange and marginal form of entertainment. The first half of the twentieth century, however, “[was] an era when the circus [was] truly the most popular form of American entertainment.”5 And the Ringling Bros.-Barnum & Bailey Combined Shows (“Ringling”) was the “Greatest Show on Earth” – a major source of employment, mass entertainment, and revenue.6 While the initial Ringling Brothers circus was founded by five of seven brothers (it later merged with Barnum & Bailey), the circus offered a surprisingly prominent – though imperfect – role for women as well. The assertion of female employees’ rights in circuses

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and familiarity can render invisible. These authors doubtless informed Means’s rewritten opinion. See, e.g., Larry Catá Backer, Director Independence and the Duty of Loyalty: Race, Gender, Class, and the Disney-Ovitz Litigation, 79 St. John’s L. Rev. 1011, 1020 (2005) (discussing “the importance of relational analysis in fact-dependent legal analysis in order to expose and give appropriate significance to all aspects realistically touching on actions or transactions subject to legal regulation”); Theresa Gabaldon, Experiencing Limited Liability: On Insularity and Inbreeding in Corporate Law 9, in Progressive Corporate Law 111 (Lawrence E. Mitchell ed., 2000) (“Feminist emphasis on non-abstracted experience is often reflected in an insistence on contextualizing analysis, thereby resisting its universalization.”); Shannon Kathleen O’Byrne & Cindy A. Schipani, Feminism(s), Progressive Corporate Law and the Corporate Oppression Remedy: Seeking Fairness and Justice, 19 Geo. J. Gender & Law 61, 88 (“Oppression’s equitable, contextualized, fact-specific, and potentially discerning focus rejects the unbridled laissez-faire zeitgeist previously inhabiting the field of minority stakeholder rights.”). See Gabriel Rauterberg, The Separation of Voting and Control: The Role of Contract in Corporate Governance, 38 Yale J. on Reg. 1124 (2021). Lily Rothman, The Surprising Role of Circus Performers in the Fight for Women’s Suffrage, Time (Oct. 8, 2018), https://time.com/5417007/circus-suffrage/. Marissa Perino, The Rise and Fall of the ‘Greatest Show on Earth’ and the Ringling Family’s Circus Empire, Bus. Insider (Dec. 6, 2019), https://www.businessinsider.com/ringling-broscircus-empire-family-history-2019-12.

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coincided with broader upheaval around women’s suffrage.7 While massive suffrage rallies were being held in New York city, women performers in Barnum & Bailey’s circus were creating their own suffrage group, the Barnum & Bailey’s Circus Women’s Equal Rights Society.8 And at the heart of the Ringling Bros. litigation are two women seeking to exercise corporate power in a business world dominated by men: Edith Conway Ringling and Aubrey Haley (earlier Aubrey Ringling), two of the three major shareholders of Ringling during the 1940s.9 In short, Ringling was a major commercial enterprise that mattered to the society of the time and to the people who owned the circus. In the early twentieth century, courts frequently viewed shareholder agreements with suspicion.10 Ringling Bros. was part of an upheaval in the judicial interpretation and enforcement of shareholder agreements, which in turn was part of a long-term transition toward court enforcement of such agreements.11 To treat Ringling Bros. as the endpoint in that transition would be misleading, however. Almost seventy-five years after Ringling Bros., the jurisprudence of shareholder agreements remains strikingly underdeveloped. Basic questions about the fiduciary duties created by these agreements,12 the rights that corporations can grant shareholders under them,13 and the scope of the statutory rights shareholders can waive by them remain unresolved.14 7

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Rothman, supra note 5; see also Janet M. Davis, The Circus Age: Culture and Society Under the American Big Top (2002). Id. For a fascinating tour of the case’s factual background and an insightful analysis of the issues involved, see J. Mark Ramseyer, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling: Bad Appointments and Empty-Core Cycling at the Circus, in Corporate Law Stories 135 (J. Mark Ramseyer ed., 2009). The rewritten opinion makes use of facts from Professor Ramseyer’s work. 5 Fletcher Cyc. Corp. § 2065 “Separation of voting power from stock ownership” (“In early court decisions there were two lines of authority, each viewing an agreement as either invalid or revocable that separated voting power from stock”); Id. (“According to the greater number of such authorities, it was contrary to public policy to permit or contract for a separation of the voting power of corporate stock from its ownership,”). See, e.g., D’Arcangelo v. D’Arcangelo, 137 N.J. Eq. 63, 43 A.2d 169 (Ch. 1945); Roberts v. Whitson, 188 S.W.2d 875 (Tex. Civ. App. Dallas 1945), writ refused w.o.m., (Oct. 3, 1945); Creed v. Copps, 103 Vt. 164, 152 A. 369, 370 (1930). See George D. Hornstein, Stockholders’ Agreements in the Closely Held Corporation, 59 Yale L.J. 1040 (1950). See van der Fluit v. Yates, No. CV 12553-VCMR, 2017 WL 5953514, at *5 (Del. Ch. Nov. 30, 2017); In re Hansen Med., Inc. S’holders Litig., No. 12316-VCMR, 2018 WL 3030808, (Del. Ch. June 18, 2018). See Rauterberg, supra note 4, at Section V.A. Manti Holdings, LLC. v. Authentix Acquisition Co., C.A. No 2017-0887-VCSG (Del. Ch. Oct. 12, 2018) (addressing when shareholders can waive their appraisal rights by contract); Bonanno v. VTB Holdings, Inc., 2016 WL 614412, at *15 (Del. Ch. Feb. 8, 2016) (addressing when shareholders can waive their rights to bring internal corporate claims in Delaware by contract). See also Jill E. Fisch, Stealth Governance: Shareholder Agreements and Private Ordering, 99 Wash. U. L. Rev. 913 (2021), https://scholarship.law.upenn.edu/faculty_scholar ship/2199/.

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The original opinion framed the core dispute as a concern about the validity of the election of the company’s board of directors at the 1946 stockholders’ meeting. The court viewed that dispute as turning on a contract between two of the company’s major shareholders. There were 1,000 shares of Ringling, of which Edith Conway Ringling owned 315, Aubrey Haley 315, and John Ringling North 370. Cumulative voting was in place. With a seven-director board, this meant that Conway Ringling had 2,205 votes, Haley had 2,205 votes, and Ringling North had 2,590. A widow, a daughter-in-law, and a nephew of the founding brothers thus held shares of the business, and the dispute was between the widow and daughter-in-law. In 1941, petitioner Edith Conway Ringling and defendant Aubrey Haley (earlier Aubrey Ringling) had entered a memorandum of agreement in which, inter alia, the parties agreed that when “exercising any voting rights . . . each party will consult and confer with the other and the parties will act jointly . . . in accordance with such agreement as they may reach.”15 If the two parties failed to agree, the contract directed the parties to “arbitration” with their attorney Karl Loos, whose “decision thereon shall be binding upon the parties.”16 Haley and Conway Ringling had voted together at the 1943, 1944, and 1945 stockholders’ meetings and elected five of the board’s seven directors at each meeting.17 At the 1946 meeting, however, Haley’s husband (acting as proxy for his wife) and Conway Ringling did not agree on whom to elect to the board. In fact, the parties had a much broader falling out. When they failed to agree, Loos directed the parties to vote for specific directors, pursuant to the agreement’s arbitration provision. Haley ignored Loos’s direction. The court viewed the key issue as whether Loos had the right to direct the parties’ votes pursuant to the agreement. The original opinion’s author, Vice-Chancellor Seitz, determined that the agreement was “sufficiently definite in terms of the duties and obligations imposed on the parties to be legally enforceable.”18 The ViceChancellor then turned to the defendants’ contention that the agreement violated

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49 A.2d at 605. Given recent interest in the scope and justification of the internal affairs doctrine, it is worth noting that Ringling Bros. raises the interesting question of whether a shareholder agreement that tailors the voting rights of shareholders in a Delaware corporation must be decided under Delaware law or whether the contract could select another forum. 49 A.2d at 607. In Ringling Bros., the court holds that “Delaware law must be applied to test the validity of this Agreement” because the agreement deals with the voting rights of stockholders in a Delaware corporation. Id. Id. at 605. As part of its interpretation of the agreement, the court holds that it is not merely an agreement to agree precisely because it designates an arbitrator as the manner of resolving failures to agree. Id. at 607. Id. at 605. Id. at 607–08.

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public policy.19 The court found that the agreement’s “objects and purposes” are lawful in principle20 and that the “only serious question” of public policy involved whether the arbitration provision improperly effected “an irrevocable separation of voting power from stock ownership.”21 Reflecting on the fragmented state of the law, Vice-Chancellor Seitz noted that “[p]erhaps in no field of the law are the precedents more varied and irreconcilable than those dealing with this phase of the case.”22 In a famous holding, the Vice-Chancellor concluded that the agreement did not violate public policy and was enforceable, and that Loos’s direction, when appropriate under the agreement, should be specifically enforced.23 The court determined the stockholders’ meeting a “nullity to the extent that it failed to give effect to the provisions of the Agreement” and ordered a new stockholders’ meeting.24

FEMINIST JUDGMENT

The rewritten feminist judgment, a dissent, adopts a contextualist approach to interpreting the agreement. Professor Benjamin Means, writing as Justice Means, finds that the arbitration provision was not designed to address truly foundational disagreements between the parties.25 As a result, when the parties no longer wished to govern the corporation together, the agreement’s basic purpose was thwarted. 19

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The court also holds that the agreement does not constitute a voting trust. If it had, it would have been unenforceable because it failed to satisfy the statutory requirements of a voting trust in Delaware. Id. at 608. The court quotes the general principle for the lawfulness of such agreement as follows: “agreements and combinations to vote stock or control corporate action and policy are valid, if they seek without fraud to accomplish only what the parties might do as stockholders and do not attempt it by illegal proxies, trusts, or other means in contravention of statutes or law.” Id. at 609 (citations omitted). Id. at 609. Id. Id. at 611. While the question “who are the corporation’s directors?” seems an odd one for public companies, disputes about the composition of the board are sufficiently common in private companies that they are a font of some of the most important case law on shareholder agreements. See, e.g., Klaassen v. Allegro Dev. Corp., No. CV 8626-VCL, 2013 WL 5739680, at *24 (Del. Ch. Oct. 11, 2013), judgment entered, (Del. Ch. 2013), and aff’d, 82 A.3d 730 (Del. 2013), and aff’d, 106 A.3d 1035 (Del. 2014) (addressing the interaction among charter, bylaw, and shareholder agreement terms jointly defining the rights of various shareholders as to the composition of the board); Sheldon v. Pinto Tech. Ventures, L.P., No. 81, 2019, 2019 WL 4892348, at *4 (Del. Oct. 4, 2019) (addressing whether shareholders with director designation rights and voting obligations under a shareholder agreement constituted a collective controlling shareholder). In adopting this approach, Means draws on a long tradition of feminist analysis that emphasizes sensitivity to factual context as well as the importance of understanding the vulnerabilities, power, and ideology affecting the parties in a suit. See, e.g., Martha A. Fineman, The Vulnerable Subject: Anchoring Equality in the Human Condition, 20 Yale J.L. & Feminism 1 (2008); Frances Olsen, The Family and the Market: A Study of Ideology and Legal Reform, 96 Harv. L. Rev. 1497 (1983).

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Justice Means concludes that the agreement then ceased to be enforceable and should not have bound the parties. The dissenting rewritten opinion’s normative foundation is the view that contract law’s central purpose is to facilitate individuals’ autonomy. The parties to the voting agreement in Ringling Bros. used their agreement to combine their voices and strengthen their role in the corporation’s management. Once the parties had fallen out, however, the agreement no longer facilitated its objective of joint, cooperative management. Vice-Chancellor’s Seitz’s opinion, in Means’s view, was unduly formalistic. It followed the contract’s defined procedure for resolving disputes even as the contract’s basic purpose failed. A contract only needs interpretation by a court if it is ambiguous. Means’s argument begins with exactly this finding. Given the ambiguities of the text, he frames the dispositive issue as whether the parties intended to act jointly to achieve the objectives that had motivated their agreement. Means finds that they did not. In particular, he holds that the arbitration provision was not intended by the parties to resolve “fundamental disputes concerning the governance of Ringling.” The opinion offers three main reasons for this holding. First, because Mr. Loos was the parties’ attorney, and an attorney cannot act contrary to their clients’ interests, Mr. Loos’s role must have been fairly limited. Second, there was no reasonable basis for Mr. Loos’s decisions, given the parties’ lack of cooperation with one another. Third, the voting agreement could not promote good governance, given the parties’ basic opposition to cooperating with one another. Means’s core contribution with the rewritten opinion is to articulate and apply this contextualist approach. I evaluate the contribution along two fronts. First, I address whether shareholder agreements as a distinctive class of contract favor a specific interpretive approach. Second, I address whether non-enforcement of the contract is appropriate even assuming a contextualist interpretive approach, or separately, an approach aimed at facilitating individual autonomy. Lastly, I suggest another avenue for insight into shareholder agreements and Ringling Bros. from feminist approaches. How should judges interpret contracts? A textualist approach focuses on the contract as written and abstracts away from non-textual evidence. A contextualist approach emphasizes non-textual evidence in guiding the court’s interpretation of a contract. The battle between textualism and contextualism is one of the dominant themes of contract litigation and of contract scholarship.26 The debate between them has not lasted a century because it is an easy one. In an obvious sense, both textualist and contextualist approaches can sometimes facilitate parties’ autonomy. Context can be used to create ex-post ambiguity and overturn the actual understanding that parties shared when entering a contract. Textualism can lead courts to enforce contracts that one party might not have read or understood. 26

See, e.g., Alan Schwartz & Robert E. Scott, Contract Interpretation Redux, 119 Yale L.J. 926 (2010).

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My aim here is to simply raise the question of whether that longstanding debate can gain greater traction by emphasizing the distinctive features of shareholder agreements. A shareholder agreement is an unusual kind of contract. Shareholder agreements are contracts among the shareholders of a corporation, which sometimes include the corporation itself as a party. They are routinely used to alter corporate shareholders’ basic rights. There are at least a few respects in which they are unusual. First, because shareholders are affected by how other shareholders exercise their control rights, there are often immediate and consequential effects on thirdparty shareholders to the formation of a shareholder agreement. These externalities, whether positive or negative, are significant and are baked into shareholder agreements as a class of contract. Second, a shareholder agreement, like certain forms of long-term contracting, routinely addresses matters that are radically open-ended and will change considerably over several years. Third, the constellations of power created by shareholder agreements often generate new fiduciary duties or affect the fiduciary discretion of directors; they are contracts that create and constrain fiduciary action. Arguably, by entering into their agreement, Conway Ringling and Haley shifted from being minority stockholders with no fiduciary duties to being a collective controlling shareholder with fiduciary duties to the corporation as a whole. In resolving whether a textualist or contextualist approach was correct in Ringling Bros., it is worth considering in which direction these factors weigh. Shareholder agreements are a highly unusual subset of contracts and plausibly call for a distinctive jurisprudence and interpretive approach. Now to a cautionary note. The rewritten opinion casts the ultimate stakes of whether the contract is enforced as being fairly low. Contractual enforcement, according to the rewritten opinion, can neither create control for the parties nor deny it to them. Under cumulative voting, each of the three shareholders gets to elect two directors. If the two women combine their votes, they can elect five directors, but four directors are all that is needed to control the majority of the board. As a result, control turns on whether two of the shareholders decide to form a coalition and have their directors vote together. Perhaps one omission of the rewritten dissenting opinion is that it does not address the possibility that the contract between Haley and Conway Ringling may have been intended to commit them to forming a long-term coalition of control. The terms of the contract commit the parties, when “exercising any voting rights,” to “consult and confer with the other” and to “act jointly . . . in accordance with such agreement as they may reach.”27 This is a commitment to jointly exercise control that defines a mechanism for ameliorating any disagreements. Arguably, the contract was written precisely to bind the two parties to exercise control jointly even 27

The contract also created a right of first refusal for each party as to the other’s shares. See 49 A.2d at 605.

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when they (or their spouses) considered defecting from cooperation. The basis for Mr. Loos’s decisions and for his vision of good governance could have turned on his reconstruction of how the parties had voted in the past. More importantly, the prospect of his determining how both of them would vote might have acted as a powerful inducement for them to resolve their disagreements. Lastly, Ringling raises a host of other issues that would benefit from feminist analysis. For example, a central theme of feminist analysis has been a withering critique of the public/private divide – or to be more precise, a set of varied critiques of the varied senses of public and private and the foundational role they play in ordering legal and political thought.28 Shareholder agreements, particularly a voting agreement like the one in Ringling Bros., empower shareholders to contract over their future votes; in a sense, they let shareholders replace politics with contract – or perhaps make contract a different form of politics. Bargaining with others over one’s vote and contractually committing it to a candidate, perhaps for many years, is obviously something forbidden in our “public” and “political” democracy. Yet Ringling Bros. stands, famously, for Delaware’s willingness to approve such behavior in the “private” and “contractual” sphere of corporate democracy. The analogy between political and corporate democracy can easily be overstated, but it can also be understated. A feminist critique might suggest that the jurisprudence of shareholder agreements reflects too sharp a normative discontinuity between the role of citizens in a democracy and of shareholders in a corporation. Although secret, the democratic vote is a quintessentially political and public act and one whose normatively rich character is undeniable. Ringling Bros. not only blesses contracting over votes, but everything about the judicial conceptualization of that act seems to treat the corporate vote as alienable, personal, private, and of little moral consequence to others. Ringling Bros. is arguably part of the anaesthetization of shareholders’ responsibility for their votes and corporate conduct in corporate law. Nothing similar happens with the board, whose role is often discussed and defined by courts in deeply moralized terms. It would be not only unlawful but presumably also immoral for a director to fail to take seriously their directorial duty. Shareholder apathy is clearly legal, but that does not decisively silence its moral and political dimensions. Is shareholder apathy immoral? Whether this distinction is appropriate is an inquiry ripe for feminist analysis.

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See, e.g., Tracy E. Higgins, Reviving the Public/Private Distinction in Feminist Theorizing Symposium on Unfinished Feminist Business, 75 Chi.-Kent L. Rev. 847 (1999-2000) (“attacking the public/private line has been one of the primary concerns (if not the primary concern) of feminist legal theorizing for over two decades”); Ruth Gavison, Feminism and the Public/Private Distinction, 45 Stan. L. Rev. (1992); Carole Pateman, Feminist Critiques of the Public/Private Dichotomy, in Public and Private in Social Life 281, 281 (S. I. Benn & G. F. Gaus eds., 1983).

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CONCLUSION

The voting agreement in Ringling Bros. – and in shareholder agreements more generally – raises issues that corporate law and scholarship often overlook. In particular, such agreements highlight some of the tensions in the duties imposed on those who exercise corporate power. Why is the fiduciary discretion of the board sometimes inalienable, while shareholders can generally contract away how they will vote to each other or to a third party? As a normative matter, are shareholders actually free of any obligations as to whether they should vote and how? And if corporate voting is in fact not a morality-free zone, even for the smallest shareholder, then is the demoralized way courts address shareholder voting – as if there were no saints and sinners here – an appropriate jurisprudence?29 Means’s rewritten opinion takes up the most famous case of the shareholderagreement canon and revisits a key question, namely, how these agreements should be interpreted. He shows the usefulness of a feminist lens in exploring this concern. The other questions are likewise ones that critical perspectives on corporate law, such as feminist theory, could prove useful in investigating.

Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, 53 A.2d 441 (Del. 1947) justice benjamin means, dissenting This case concerns the enforceability of an arbitration provision in a shareholder vote pooling agreement and the legality of the vote pooling agreement itself. I dissent because, as a threshold matter, I do not believe that the vote pooling agreement applies in the circumstances presented by this case. The majority, like the court below, errs by ignoring significant ambiguities concerning the vote pooling agreement’s scope and interprets the agreement in a fashion that runs counter to its purpose, which was to help Edith Conway Ringling and Aubrey B. Ringling Haley coordinate their votes, consistent with their shared interests as shareholders of Ringling Bros.-Barnum & Bailey Combined Shows, Inc. (“Ringling Bros.”). If contract law can be said to serve a central purpose, it is to enhance the autonomy of people who use contracts to define their reciprocal relationships with others. For women, contracts can be a way of overcoming the societal expectation 29

See Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. Rev. 1009, 1017 (1997).

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that they will play a subordinate role. In this case, the vote pooling agreement formalized the parties’ intention to combine their voting power in order to act as Ringling Bros.’ controlling shareholder. So long as they remained aligned in interest, Ms. Conway Ringling and Ms. Ringling Haley would run the circus, and the other shareholder, John Ringling North, would not. Consistent with that objective, the vote pooling agreement included a dispute resolution mechanism to provide neutral guidance if the parties were unable to reach agreement on a particular vote. Yet the instant dispute goes well beyond a mere disagreement concerning how to vote; it calls into question the underlying premise of the vote pooling agreement. After a falling out, Ms. Conway Ringling and Ms. Ringling Haley no longer had shared interests, and their governance goals for Ringling Bros. were diametrically opposed in all relevant respects. Consequently, the vote pooling agreement could not facilitate joint ownership of Ringling Bros. and could only be invoked to override the voting preferences of one or both women in favor of decisions made by Karl D. Loos, the designated arbitrator. That is the context in which we should understand Mr. Loos’s instruction that Ms. Ringling Haley vote for a board candidate favored by Ms. Conway Ringling. In effect, we are asked to decide whether the vote pooling agreement divorced ownership and voting rights so that Ms. Ringling Haley could be compelled to vote her stock against her ownership interest. As discussed below, such a result is not required by the language of the vote pooling agreement and runs counter to its evident purpose. Consequently, I would dismiss this lawsuit. Assuming arguendo that the majority’s interpretation is correct, however, and that the vote pooling agreement does govern the parties’ dispute, I concur with the ViceChancellor and would enforce the arbitrator’s ruling concerning how the parties’ stock was to be voted. The majority’s refusal to follow its own reasoning to its natural conclusion by ordering specific performance is, in my view, a second error. The vote pooling agreement’s arbitration provision states that the arbitrator’s ruling “shall be binding.” Accordingly, if we read the arbitration provision to cover all disputes, even those occasioned by a total breakdown of the parties’ relationship, then the question whether the arbitrator had a legal proxy to vote the shares himself should not preclude us from effectuating the parties’ intent. Essentially, my disagreement with the majority’s approach is that it treats the context of the vote pooling agreement as irrelevant. When adjudicating contract disputes, we should always be mindful of who the parties are as well as their bargaining power, their preexisting relationships, what they reasonably expected to accomplish through their contractual arrangement, and how the court’s intervention would impact those expectations. Here, we should take notice of the fact that the parties to the vote pooling agreement are women who had been excluded from full participation in their family’s business despite their collective ownership of a majority of the stock. Not only are Ms. Conway Ringling and Ms. Ringling Haley

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the only women on the board of directors of Ringling Bros., but, to my knowledge, they are the only women connected to this lawsuit. All the lawyers, judges, witnesses, experts, and other participants are, without exception, men. The gender diversity of the legal profession and of corporate boards is a topic beyond the scope of this dissent. However, I mention it here to underscore why a vote pooling agreement might have seemed a useful bulwark for the women’s ability to exercise their rights, collectively, as the majority shareholder – in a sphere in which the presence of women was unusual and sometimes unwelcome. Viewed in proper context, the vote pooling agreement uses contract law to enhance the control rights that come with ownership, not to supplant them. Yet the majority contents itself with a technical analysis of the vote pooling agreement and does not pretend to have addressed, much less crafted, a lasting solution to the parties’ governance dispute. I

To situate my departure from the majority’s reasoning, this section draws from the record below to provide a fuller account of the parties’ dispute. Ringling Bros. is a family-owned circus struggling to transition to a second generation of family ownership. The circus was founded by five brothers who were partners and generally followed a share-and-share-alike approach with respect to management and the division of profits. Although they did not create formal distinctions among themselves, the five brothers chose not to include their sister in the business. Women in the family participated in and benefited from the business only through male relations, a pattern that has continued to the present day. As readers of this opinion will already be aware, the Ringling brothers built the circus into one of the best recognized brands on the planet. Over time, the original partnership arrangement was replaced with a more formal corporate structure. By the mid-1930s, through a combination of deaths and indebtedness, control of Ringling Bros. balanced precariously – as if on one of its own tightropes – between family successors and outside creditors. The three remaining family shareholders were John Ringling North, eldest son of Ida North, the sister who had not been included in the original partnership; Ms. Conway Ringling; and Ms. Ringling Haley. Ms. Conway Ringling is the widow of Charles Ringling, one of the corporation’s five founding brothers. Ms. Ringling Haley is the widow of Richard Ringling, the son of another of the corporation’s founders. In order to retire onerous debt obligations that threatened the family’s position, Mr. Ringling North arranged for new credit from the Manufacturers Trust Bank. This credit was given to Mr. Ringling North on condition that the other shareholders, Ms. Conway Ringling and Ms. Ringling Haley, pledge their shares into a trust that would preclude them from exercising independent voting rights during the pendency of the loan. It appears that Mr. Ringling North had personal connections

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with senior executives at Manufacturers Trust Bank and that the loan was made, in part, because of those connections. (Since most political and economic power is held by men, it is not surprising that personal connections of this kind tend to reinforce that power and make it difficult for women to stand on an equal footing). Under the circumstances, Ms. Conway Ringling and Ms. Ringling Haley had little choice but to agree to limit their voting rights as a condition of the loan. Through the efforts of Mr. Ringling North, who was by all accounts a skillful manager, the loan was repaid in timely fashion and full control of the circus returned to the family, at which point the voting trust expired by its own terms. Even before their temporary dispossession was at an end, Ms. Conway Ringling and Ms. Ringling Haley planned to take a more active role in the affairs of Ringling Bros. In 1941, they signed a memorandum of agreement that would replace the autonomy-limiting terms of the voting trust that had been imposed upon them with a vote pooling agreement of their own devising. The vote pooling agreement took effect in 1943 upon the expiration of the voting trust. The vote pooling agreement was designed to maximize the parties’ joint influence, providing that “each party will consult and confer with the other and the parties will act jointly in exercising such voting rights in accordance with such agreement as they may reach with respect to any matter calling for the exercise of such voting rights.” The two women owned a majority of Ringling Bros. and indicated their intention to exercise their combined power rather than leaving effective control in the hands of Mr. Ringling North. The vote pooling agreement does not speak to questions of circus management directly, but it empowers Ms. Conway Ringling and Ms. Ringling Haley to elect five of the corporation’s seven directors. If they were to act independently, Ms. Conway Ringling and Ms. Ringling Haley would each have the power to elect two members of the board. By combining their votes, the two women could elect an additional board member, thereby maximizing their control of the board pursuant to the corporation’s cumulative voting rules. As the majority explains in its opinion, cumulative voting is a familiar method for guaranteeing board representation to minority shareholders; it provides that each shareholder has a total number of votes equal to the number of shares owned by the shareholder, multiplied by the number of board positions to be filled. Once calculated, those votes can be concentrated on a single board candidate or dispersed across all eligible board positions, depending on how many board candidates the shareholder is able to elect. Absent that coordination, Mr. Ringling North would prevail and could select three members of the board. The identity of the seventh and final board member thus depended on whether Ms. Conway Ringling and Ms. Ringling Haley could agree upon a candidate. Yet the account sketched above is incomplete in one crucial respect. Regardless of who selected the seventh board member, the board once empaneled would make its decisions by majority rule, and the conduct of board members cannot be governed by a shareholder vote pooling agreement. Here, as elsewhere, there is an

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important distinction between the role of a shareholder and that of a director. Thus, even though Ms. Conway Ringling, Ms. Ringling Haley, and their respective designees serve together as board members, they are under no obligation to work together in that capacity merely because they – as shareholders – are signatories to a vote pooling agreement. And since each of the three shareholders could appoint at least two members of the board, achieving a working majority of four directors required the agreement of two of the three family factions. As a matter of corporate governance, then, the identity of the seventh board member was purely epiphenomenal, that is, without independent causal significance. So long as Ms. Conway Ringling and Ms. Ringling Haley were aligned, they controlled Ringling Bros., voting together to elect a mutually agreeable board member and acting jointly as board members to effectuate their shared purposes. Once Ms. Conway Ringling and Ms. Ringling Haley no longer had the same goals, it followed that they would be unable to decide who should serve as the seventh board member; more importantly, they would pursue different visions as board members. Each of the two women retained the right to combine with Mr. Ringling North and to form a majority voting block on the board of directors that would be unassailable as a practical matter, whether it consisted of four or five of the seven directors. Consequently, the vote pooling agreement could not have been expected to forestall the possibility of a realignment of control. The record in this case is not as well developed as it might have been concerning the immediate causes of the dispute between Ms. Conway Ringling and Ms. Ringling Haley, but some additional background may be helpful. As an initial observation, it appears that Ringling Bros. was not a company in which women were encouraged to exercise power directly, even when they inherited it. (The Ringling Bros. name itself already presumes male ownership and control.) Perhaps for that reason, both women intended to install male relatives in high-level managerial positions rather than pursuing those opportunities for themselves. Specifically, Ms. Conway Ringling wished to advance the career prospects of her son Robert Ringling, while Ms. Ringling Haley promoted the interests of her husband, James Haley. By contrast, although his mother had not been included as a co-owner of the business, Mr. Ringling North felt free to acquire power and to wield it in his own right. Mr. Ringling North retained his position as president until he resigned in 1943 over a dispute concerning the advisability of operating the circus during wartime. At that time, Robert Ringling became president of Ringling Bros. James Haley served as a senior officer. Shortly thereafter, a circus fire claimed dozens of lives and James Haley was arrested and convicted of manslaughter. Mr. Ringling was not in the jurisdiction and escaped prosecution. Mr. Haley served several months in prison and was released in late 1945. During Mr. Haley’s imprisonment, Mr. Ringling North visited Mr. Haley and took the opportunity to build a relationship with Mr. Haley and with Ms. Ringling Haley. Despite their involvement in the

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management decisions that led to disaster for the circus, it appears that Mr. Ringling and Ms. Conway Ringling did not attempt to contact Mr. Haley. The shareholder vote at issue in this case took place in April 1946. By that time, for reasons not stated in the record, but which may perhaps be surmised from the foregoing facts, Ms. Ringling Haley and her husband had aligned themselves with Mr. Ringling North – and against Ms. Conway Ringling and her son. As is not uncommon in family business disputes, this new alignment of interests came with significant interpersonal animosity. To state the obvious, regardless of the identity of the seventh director, there was no longer any prospect that the directors selected by Ms. Conway Ringling would coordinate with the directors selected by Ms. Ringling Haley. Acting as arbitrator, Mr. Loos first sought to adjourn the shareholder meeting and then directed that Ms. Conway Ringling and Ms. Ringling Haley combine their votes to ensure the reelection of a candidate, William P. Dunn Jr., who had previously been acceptable to both women when they held a controlling block on the board of directors. Mr. Haley, as proxy holder for Ms. Ringling Haley at the meeting, refused to obey Mr. Loos’s instruction, which made it possible for Mr. Ringling North to select his preferred candidate, George Woods, for the final board position. This litigation ensued.

II

The Vice-Chancellor identified two issues for decision: whether the vote pooling agreement was valid and, if so, whether the arbitration provision was subject to specific enforcement. The majority likewise assumes that these are the principal issues for decision on appeal. There is, however, a third threshold issue that should be dispositive: whether the vote pooling agreement binds either party when, as in present circumstances, the parties no longer intend to act jointly to achieve the objectives that had motivated them to enter the agreement. The purpose of contract interpretation is “to arrive at the probable intent of the parties.” Radio Corp. of Am. v. Phila. Storage Battery Co., 23 Del. Ch. 289, 6 A.2d 329, 334 (1939). Where a contract contains ambiguities, “it is the duty of the court to give effect to the intention of the parties where it is not wholly at variance with the correct legal interpretation of the terms of the contract.” Id. at 340. Further, [T]he Court should consider the agreement as a whole, should put itself in the position of the parties, and should examine the circumstances in which the contract was made; and a construction should be sought that will give full force and effect to all of the provisions of the agreement rather than, by attributing a narrow and technical meaning to a single term, produce confusion and uncertainty.

Id. at 334. Viewed in proper context, I believe that the vote pooling agreement contains significant ambiguities that must be resolved if we are to ascertain the

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parties’ intent with respect to its scope. On the one hand, the vote pooling agreement states that it is valid for ten years from when it was signed and does not provide for unilateral exit. Anticipating that disagreements might arise, the vote pooling agreement also contains a deadlock resolution mechanism that states that “[i]n the event the parties fail to agree with respect to any [voting] matter . . . the question in disagreement shall be submitted for arbitration to Karl D. Loos . . . and his decision thereon shall be binding upon the parties hereto.” Thus, the mere fact that the parties disagree is not fatal to the enforceability of the agreement. Nor does the vote pooling agreement state that the arbitrator’s role is limited to certain kinds of disputes. To the contrary, the agreement encompasses “any” disagreements between the parties concerning their votes as shareholders. Achieving the overall purposes of the vote pooling agreement arguably requires a pre-commitment to align the parties’ votes, even though it was understood that resolving disagreements would, in the moment, limit the autonomy of one (or both) of the shareholders. Part of freedom is the ability to make choices. The law of contract empowers individuals by enabling them to create enforceable commitments. On the other hand, the purpose of the vote pooling agreement is to create a mechanism for the parties to “consult and confer” with each other in order to “act jointly in exercising [their] voting rights.” Here, if we put ourselves in “the position of the parties” and consider the “circumstances in which the agreement was made,” Radio Corp. of Am., 6 A.2d at 334, it is doubtful whether the arbitration provision was meant to apply to all disputes between the parties, no matter how serious. In the context of having recently been deprived of their voting autonomy by a voting trust agreement that was imposed on them, the vote pooling agreement can be understood as a statement of intent that Ms. Conway Ringling and Ms. Ringling Haley would act jointly going forward. The arbitration provision provides a mechanism for achieving that purpose. In drafting the provision and appointing himself as arbitrator, Mr. Loos might have believed that he could play a constructive role by helping the two women resolve practical disagreements that might arise during the life of the vote pooling agreement, settling disputes before they could erupt. Should the parties’ relationship collapse, however, there would no longer be anything Mr. Loos could do as arbitrator that would preserve the parties’ alignment. Despite the absence of express limiting language, the vote pooling agreement’s arbitration clause does not appear to have been designed to address fundamental disputes concerning the governance of Ringling Bros. The plausibility of this interpretation is bolstered by several considerations. First, since it is ethically impermissible for an attorney to act adversely to a client’s interests, the most reasonable interpretation of the arbitration clause is that Mr. Loos’s role as arbitrator was limited to dealing with non-fundamental, practical disagreements. Arguably, it is consistent with that limited role for Mr. Loos to have drafted the arbitration clause without including a proxy that would enable him to

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vote the parties’ shares over their objection. If arbitration rulings were intended to guide the parties in contexts in which the parties themselves were capable of moving forward jointly, there would be no reason to invest the arbitrator with independent power to enforce his rulings. This interpretation also fits with a general view of the agreement as bolstering the autonomy of the two women who signed it – rather than subjecting their views to being overridden by their male attorney. It may be that Mr. Loos felt an obligation to “save” the women by resolving their dispute, even though the parties could no longer work together on any issues; but if so, this impulse rested on the unwarranted assumption that Ms. Ringling Haley lacked the agency to make her own decisions. Second, once the parties’ relationship fractured, there was no longer any reasonable basis for Mr. Loos to decide how their shares should be voted. Why was Ms. Conway Ringling’s preferred outcome deemed to be superior to Ms. Ringling Haley’s? The vote pooling agreement does not clarify matters by stating that “arbitration shall be exercised to the end of assuring for the respective corporations good management and such participation by the members of the Ringling family as the experience, capacity and ability of each may warrant.” No evidence suggests that any of the nominees to the board lacked the capacity to perform the role. As best I can discern, moreover, Mr. Loos did not purport to decide who was best qualified to serve on the Ringling Bros. board of directors. Instead, perhaps because he was hamstrung by a conflict of interest, given his fiduciary obligations to each of the shareholders, Mr. Loos’s ruling merely continued the status quo concerning board membership. Ironically, then, the arbitration clause appears to have created the sort of rudderless deadlock that businesses sometimes encounter when no-one has the power to change a course of action without a majority vote. It is not clear why this result is better than allowing each shareholder to vote however she sees fit, especially when the cost of Mr. Loos’s involvement is the disempowerment of one of the women, who would then lose the right to vote in her own perceived self-interest. Third, and perhaps most significant, even if Mr. Loos’s ruling were informed by a considered view about how to achieve the goals of sound management and appropriate family participation, the vote pooling agreement could not be expected to promote those purposes so long as the two parties were fundamentally at odds. Regardless of who served as the seventh director, Mr. Ringling North could form a working majority of four or five directors with either Ms. Conway Ringling or Ms. Ringling Haley. The only way around that result would be for Mr. Loos to force one of the two parties to vote for a slate of directors comprised of designees that supported the other party’s position, totally disempowering one of the two parties to the vote pooling agreement. Or, if we are indulging speculation, perhaps Mr. Loos could resolve a deadlock by forcing a vote for designees of his own choosing that would disregard the preferences of either of the two parties and implement independent governance decisions consistent with Mr. Loos’s view of what was best for the corporation. Presumably, this court would reject paternalistic actions of that

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kind as being inconsistent with the purpose of the agreement, even if not expressly disallowed by it, which again illustrates why it is necessary to understand the context in which the vote pooling agreement was made if we are to interpret it sensibly. Thus, ultimately, the identity of the seventh board member – the issue that Mr. Loos intervened to resolve – does not appear to have had any practical importance. The majority does not acknowledge this shortcoming or explain what purpose it believes the arbitration clause could possibly serve when all depends on which two of the three shareholders make common cause with each other. Arguably, it is not the province of the court to decide whether a lawsuit is sensible if it presents legal issues for resolution, but the gap is uncommonly large between the legal issues resolved today and the crux of the parties’ dispute. In sum, although the parties’ agreement contains a tie-breaking mechanism, it does not provide a principled basis for deciding which shareholder’s interests should take precedence when a dispute concerns not just a practical means to achieving an agreed-upon end but also the fundamental goals to be sought. Indeed, since the designated arbitrator, Mr. Loos, serves as legal counsel for both women and drafted their vote pooling agreement, we should not lightly presume that he chose to put himself in a position that could require him to sacrifice one client’s interests to the other’s. Perhaps Mr. Loos’s assertion of the arbitrator’s prerogative in this matter – despite a direct conflict of interest between his clients – might be excused in part by the exigencies of the situation, namely a last-minute failure of the parties to adjourn the shareholders’ meeting and a breakdown of communications at the meeting. Even so, this court need not endorse the result. It would be a cruel irony to interpret an autonomy-facilitating agreement to allow a male attorney to take away the autonomy of his female clients and make decisions for them. Consequently, I would reverse the lower court and dismiss the action outright. III

Accepting the questionable premise that the vote pooling agreement covers the instant dispute, however, I disagree with the majority concerning the remedy that should follow. I would hold that the arbitrator’s ruling concerning the vote is specifically enforceable. As noted previously, the agreement states that the arbitrator’s rulings “shall be binding.” To dwell on the specifics of coupling a proxy with an interest is to find technical fault with the agreement. If the arbitration clause was meant to bind the parties in all circumstances, then the absence of a voting proxy would appear to have been an unintended oversight. For the majority, though, the omission of a voting proxy precludes the possibility of specific enforcement of the arbitrator’s ruling. Taking pains to avoid a grant of specific performance, the majority determines that the remedy for breaching the vote pooling agreement is that any votes cast contrary to the arbitrator’s direction are void. This invented injunctive remedy is unduly punitive in that it strips Ms.

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Ringling Haley of her board representation altogether. The result, a three-to-three deadlock on the Ringling Bros. board of directors, serves no-one’s interests. Nor does the majority manage to avoid the supposed evils of specific enforcement in the absence of a voting proxy. In function, the injunctive relief granted by the majority amounts to a kind of specific performance that dare not speak its name. It is as if we have locked all doors but the one designated by the arbitrator and informed Ms. Ringling Haley of her Hobson’s Choice: that she is not required to use that door, but she is prohibited from using all others. It is hard to see how these contortions advance the interests of justice. Perhaps my colleagues would respond that the holding will stand as a warning to future parties to draft agreements more carefully, but there is little reason to think that is true. For many family-owned businesses, cost considerations limit the involvement of lawyers. Even when money is not an obstacle, family businesses often enlist counsel to represent multiple constituencies, a practice that limits the ability of the lawyer to advocate for each participant’s distinct interests. In addition, and relatedly, when shareholder bargains implicate family relationships, the parties may hesitate to demand protections that signal a lack of mutual trust. Rather than adhering stubbornly to the four corners of a contract, courts should account for the circumstances in which a contract was made when they seek to interpret it. Taken too far, ostensible deference to private ordering can display a regrettable indifference to the parties’ actual intentions. IV

In future cases, I expect that we will have the opportunity to consider the extent to which shareholders can enter into bargains with one another in ways that adjust the corporate form to suit their particular needs. When those cases arise, we should recognize that close corporations are hybrid entities in which the participants may view one another as partners, and yet, as shareholders, lack the default protections of partnership law. Through shareholder agreements, the parties can bridge the gap between the corporate form and their own expectations: identifying and defusing potentially contentious issues; safeguarding minority investors against overreaching; and providing efficient, fair mechanisms for resolving disputes that cannot be prevented. Today’s holding is a step in the right direction in that it affirms the legitimacy of a vote pooling agreement among close corporation shareholders, stating that the agreement “offends no rule of law or public policy of this state.” By implication, the majority’s holding recognizes the permissibility of private ordering to tailor corporate governance. This is a valuable contribution to Delaware jurisprudence. The default rules of corporate law often need adjusting in the context of specific business arrangements. Alongside charter amendments and corporate bylaws, shareholder agreements can help investors to allocate the rights and responsibilities of

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shared ownership. To the maximum extent our state corporate law allows, we should encourage parties and their counsel to select the legal tools that best suit their particular circumstances. As our jurisprudence in this area develops, however, I hope that we will not allow an instinct toward formalism to blind us to the context in which shareholder contracts are negotiated, executed, or (in some cases) foregone. It is not a sufficient answer to shareholder vulnerability to declare that shareholders could have bargained for protection before investing. For example, in an unequal society like ours, women may not always have the practical ability to negotiate contractual terms, and family relationships between parents and children, siblings, and spouses can make arm’s-length bargaining unrealistic. Nor should we assume that a contract fully captures the parties’ intended bargain. In each case, our goal should be to understand the parties’ bargain in its full context and to apply the law with sensitivity in order to seek a just resolution. For a vivid illustration of the defects of formalism, one would be hard pressed to improve on today’s decision. By voiding votes cast contrary to the instructions of the arbitrator, the majority coerces Ms. Ringling Haley into following the arbitrator’s rulings for as long as the vote pooling agreement remains in effect. To this extent, the majority has taken away Ms. Ringling Haley’s autonomy. Yet, as a practical matter, Ms. Ringling Haley and Mr. Ringling North still have the ability to control the board of directors of Ringling Bros., if by a majority of one vote instead of two votes. To the extent that dissension among the three shareholders is a problem for Ringling Bros., the court has not addressed it. The pointlessness of the outcome shows why legal rules should be applied with due regard for the people they are meant to assist. V

Contracts are not written in a vacuum. In a family business in particular, we should be aware that participants often struggle to reconcile their business and family values and role expectations. Accounting for these variables does not supplant contract law with equity but recognizes that contracts are embedded in context and should be understood as practical tools for achieving human aims rather than as ghostly artifacts of a hidden, divine order. Therefore, rather than resting on formalistic interpretive principles, we would do better to take into consideration the parties’ expectations, their bargaining power, their preexisting relationships, and any other factors relevant to doing justice in individual cases. In the case before us today, the majority should have interpreted the vote pooling agreement in light of its purpose, which was to facilitate Ms. Conway Ringling’s and Ms. Ringling Haley’s joint control of Ringling Bros. Having been outmaneuvered by their nephew, Mr. Ringling North, and forced to surrender their voting privileges until the corporation’s debts were repaid, the two women decided to reassert their

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full rights of ownership. Their vote pooling agreement documented and gave life to that understanding. After their relationship broke down, however, the vote pooling agreement no longer served a logical purpose. Although the vote pooling agreement’s arbitration provision does not contain any explicit limitation – perhaps because fire, imprisonment, and discord were not contemplated at the time of formation – I would hold that the provision was not meant to include the resolution of fundamental disputes between the parties. It follows that the case should have been dismissed. I respectfully dissent.

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14 Commentary on Donahue v. Rodd Electrotype jessica kiser

BACKGROUND

Donahue v. Rodd Electrotype Company of New England stands for the premise that stockholders in a close corporation owe partnership-like fiduciary duties and are not protected from liability through this quasi-corporate form. Courts must look beyond the “corporation” label. In the case, the Massachusetts Supreme Judicial Court was particularly concerned with “the plight of the minority stockholder in a close corporation.”1 The case involved a suit brought by a minority stockholder, Euphemia Donahue, against Harry Rodd and several members of his family (acting together as the majority stockholder) and the other board members of the Rodd Electrotype Company of New England, a Massachusetts close corporation. She alleged that the company breached its fiduciary duties to her when it purchased forty-five shares of company stock from Harry Rodd.2 The trial judge dismissed the plaintiff’s suit, finding that the company’s purchase of shares was not a breach of any fiduciary duty because the corporate decision was made in good faith and with inherent fairness.3 The Appeals Court affirmed the trial court’s decision.4 ORIGINAL OPINION

Chief Justice Tauro, writing for the majority on the appeal to the Massachusetts Supreme Judicial Court, reversed the rulings of those courts in favor of the plaintiff. 1

2 3

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Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 591 328 N.E.2d 505, 514 (1975) [hereinafter Donahue I]. Id. at 579, 328 N.E.2d at 508. Id. at 580, 328 N.E.2d at 509. The inherent or entire fairness standard is less onerous than the utmost good faith and loyalty standard ultimately adopted by the court in Donahue. It is the test used when evaluating the actions of a majority stockholder outside of a close corporation context. 18A Am. Jur. 2d Corporations § 647, Westlaw (database updated Nov. 2020). Donahue v. Rodd Electrotype Co. of New England, 1 Mass. App. Ct. 876, 307 N.E.2d 8 (1974) [hereinafter Donahue II].

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In doing so, the court made a decisive pronouncement: stockholders in a close corporation owe one another a higher standard of fiduciary duty than the inherent fairness standard imposed on other corporate decision-making. A close corporation must be treated like a partnership; as such, the stockholders owe each other a duty of “utmost good faith and loyalty.”5 This partnership-like standard of loyalty is said to be necessary to prevent majority stockholders from oppressing or disadvantaging minority stockholders.6 Chief Justice Tauro’s opinion discussed the risks faced by the minority stockholder in a close corporation in substantial detail. Given the fact that a close corporation typically involves “(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation,” minority stockholders are at especially high risk of oppression and “freeze-outs” that could prevent them from realizing any return on their investment in the corporation.7 The majority stockholders can withhold employment opportunities at the corporation and decline to issue dividends. The minority stockholder may be left with no choice but to sell its stocks back to the company at deflated prices due to the lack of an outside, competitive market for such stocks. This was the only option available to the plaintiff prior to filing the lawsuit. Because she had obtained her stock as the widow of a former employee of the company, she was not herself employed by the company or otherwise engaged in the management of the company.8 She had offered to sell her stocks to the company previously, but declined to sell when the company refused to pay more than $200 a share.9 Her refusal to sell is unsurprising given the fact that the company eventually paid $800 a share to Harry Rodd, and the lower courts held that $800 was on the low end of a fair price.10 As a corollary to the heightened duty of loyalty imposed on stockholders in a close corporation, the court also created a rule to be used in the event that a close corporation seeks to purchase its own shares. This rule, sometimes called the “equal opportunity rule,” states that a close corporation seeking to purchase the shares of a

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6 7 8 9 10

Donahue I at 598, 328 N.E.2d at 518. The initial phrasing of this heightened fiduciary duty is often traced to the case of Meinhard v. Salmon, in which the court held that partners owe each other “the punctilio of an honor the most sensitive.” Meinhard v. Salmon, 249 N.Y. 458, 463–64 (1928). Donahue I at 588, 328 N.E.2d at 513. Id. at 586. Donahue I at 584 n.10, 328 N.E.2d at 511. Id. Donahue II at 877, 307 N.E.2d at 9 (1974) (noting that the $800 per share paid to Harry Rodd appeared to be less than book value or liquidation value). For context, Euphemia Donahue’s shares would have been worth $36,000 if she had been paid the same $800 per share. That $36,000 in 1975 would have had buying power equivalent to more than $160,000 in 2020. Bureau of Lab. Statistics, U.S. Dep’t of Lab., CPI Inflation Calculator, Bureau of Lab. Stat., https://www.bls.gov/data/inflation_calculator.htm.

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controlling stockholder must offer each other stockholder “an equal opportunity to sell a ratable number of his shares to the corporation at an identical price.”11 The importance of the holding in Donahue has been debated.12 The Court’s focus on minority stockholder oppression and its imposition of the “utmost good faith” standard upon close corporation stockholders has certainly led to increased focus on minority stockholder rights and protections.13 This is an important contribution, given the state of the law at the time Donahue was decided. While the court in Donahue noted that numerous cases had already suggested that close corporations may entail special trust relationships that justify enhanced partnership-like duties, the standard view was that close corporations should be treated in the same fashion as other corporations.14 Under the traditional approach to corporate fiduciary duties, stockholders are typically seen as independent and rightfully self-motivated entities without fiduciary duties to other stockholders.15 Additionally, corporate decisions are given the benefit of the business judgment rule, a legal doctrine that effectively immunizes the decisions of corporate management from later scrutiny absent clear evidence of a conflict of interest or breach of good faith by the decision-makers.16 If such standards were still utilized in the close corporation context, minority stockholders would rarely have opportunities for the redress of oppressive acts by the majority. However, the Donahue court’s equal opportunity rule has not fared as well as the court’s holding on close corporation fiduciary duties. Some courts expressly rejected its adoption.17 Within a year after Donahue was decided, the Massachusetts Supreme Judicial Court issued a holding in Wilkes v. Springside Nursing Home, Inc. that criticized the equal opportunity rule and replaced it with a framework that allows the majority stockholders more flexibility in decisions that affect the minority stockholders.18 While the Wilkes Court affirmed the heightened fiduciary duty required among close corporation stockholders, it ruled that unequal treatment between the majority and minority is permissible if the majority can provide a legitimate business purpose for such unequal treatment.19 The clear protection for 11 12

13 14 15 16

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Donahue I at 598, 328 N.E.2d at 518. See, e.g., Daniel S. Kleinburger, Donahue’s Fils Aine: Reflections on Wilkes and the Legitimate Rights of Selfish Ownership, 33 W. New Eng. L. Rev. 405, 409 (2011); Douglas K. Moll, Of Donahue and Fiduciary Duty: Much Ado About. . .?, 33 W. New Eng. L. Rev. 471, 473 (2011). Id. Moll, supra note 12, at 475–76. Id. 18B Am. Jur. 2d Corporations § 1450, Westlaw (database updated Nov. 2020) (“A director’s exercise of judgment in good faith will not subject the director to liability, and corporate directors are shielded from all liability except for self-dealing, willful misconduct, or gross negligence.”). See, e.g., Clagett v. Hutchison, 583 F.2d 1259, 1264 (4th Cir. 1978) (rejecting the rule in Maryland, the court states that “the rule, if applied, would likely result in the stifling of many financial transactions due either to a purchaser’s inability to purchase the additional shares, or from a lack of inclination to purchase those shares.”). Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 353 N.E.2d 657 (Mass. 1976). Id. at 850, 353 N.E.2d at 663. For cases following the new rule cited in Wilkes, see, for example, Harris v. Mardan Bus. Sys., Inc., 421 N.W.2d 350, 353 (Minn. Ct. App. 1988), and Baker v. Com. Body Builders, Inc., 507 P.2d 387, 390, 396 (Or. 1973).

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minority stockholders in the equal opportunity rule has been replaced, and cases following Wilkes have allowed board members to selectively repurchase stock over minority stockholder objections when a legitimate business purpose could be provided.20 FEMINIST JUDGMENT

The rewritten majority opinion of Professor Cindy Schipani, writing as Justice Schipani, reaches the same conclusions as the original opinion and continues to show genuine concern for the minority stockholder. Again, the court holds that majority stockholders in close corporations owe the same duties to their minority stockholders as partners do to one another: utmost good faith and loyalty. As such, the Rodd family (working together as majority stockholders) breached their duty to Euphemia Donahue and her son when they arranged to have the corporation repurchase Harry Rodd’s shares without offering an equal opportunity to the Donahues. While the holdings are essentially the same, and both the original opinion and the feminist judgment base their reasoning on the ability of majority stockholders to oppress minority stockholders in a close corporation, Schipani uses the feminist judgment as an opportunity to further expound on the varied ways in which Euphemia is oppressed – not just by the majority stockholders in this corporate transaction but also by the system and society in which the transaction took place. As such, Schipani calls upon all courts to recognize the power imbalances and marginalization faced by litigants in each case (rather than just in a close corporation context); she explains that a court must “acknowledge this unequal distribution of power, critique, and dismantle it.” This is the heart of the feminist approach taken by the feminist judgment: a court must acknowledge the contextual marginalization faced by the parties before it and make holdings that work to promote human flourishing, in light of society’s history of social and economic subordination of various marginalized groups.21 Power and Gender The feminist judgment explains that Euphemia is not simply oppressed because the Rodd family members act together as a controlling stockholder group. She is also oppressed because her gender precludes her from the protection offered by being an insider as an employee-stockholder. Schipani’s feminist approach posits that the law cannot be applied objectively – as if it exists separately from the “social and 20

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See, e.g., Toner v. Balt. Envelope Co., 304 Md. 256, 498 A.2d 642 (1985) (finding no oppression when shares of shareholder were selectively repurchased after that shareholder threatened to initiate liquidation proceedings). Kellye Y. Testy, Capitalism and Freedom: For Whom?: Feminist Legal Theory and Progressive Corporate Law, 67 Law & Contemp. Probs. 87, 94 (2004).

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economic subordination that have excluded women from key positions of power and influence.” In directing the court to acknowledge these sorts of power differentials, the feminist judgment appeals to the ideals of liberal feminism, which suggest that inequality in corporate decision-making is a problem that may be remedied through laws mandating equal treatment, and to relational feminism, which stresses the importance of context and detail in decision-making and analysis. The call for attention to context, to both Euphemia’s personal familial and financial context as well as the societal context in which this case exists, is a standard tool of feminist critique. Early feminist scholars noted that details of power and privilege can too easily be ignored in the absence of an intentional focus on context.22 The feminist judgment thus stands out by breaking from the common practice of using abstractions to hide from a discussion of factual contextual details of subordination.23 While the original opinion sees Euphemia as oppressed solely by her status as a minority stockholder, the feminist judgment recognizes that there are variations of oppression within that minority stockholder label. Numerous scholars and studies have documented the history of women’s subordination and discrimination in the workplace.24 Rather than note these trends in the abstract, Schipani uses the example of Harry Rodd’s own daughter to illustrate how this subordination impacts all of the women at the heart of this case. Euphemia only possesses shares in the corporation because she was married to a male employeestockholder. Phyllis Mason, Harry Rodd’s daughter, also possesses shares in the corporation; however, she is the only member of the Rodd family who is not also an employee of the corporation. While her status as a member of the family entitled her to an ownership of shares, it did not grant her entry to the workforce. In fact, it was her husband, William Mason, who was employed in the “family business.” Both instances could be the result of the system of imposed domesticity that has been pervasive in Western society since the eighteenth or nineteenth century. That system presupposes that women should remain home to tend to the family, while men are better suited to “market work” outside the home.25 These pervasive stereotypes build upon and reinforce the idea that the ideal worker is available to work full-time and overtime, without being burdened by 22

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See, e.g., Debora L. Threedy, Dancing Around Gender: Lessons from Arthur Murray on Gender and Contracts, 45 Wake Forest L. Rev. 749 (2010) (feminism recognizes that a “call for attention to context is often a call to pay attention to unequal distribution of power.”). Katherine Hall, Theory, Gender and Corporate Law, 9 Legal Educ. Rev. 31, 44 (1998) (“Corporate law hides these issues of power and privilege behind the language of objectivity and neutrality and the abstract formalism of many legal concepts.”). See, e.g., Frances E. Olsen, The Family and the Market: A Study of Ideology and Legal Reform, 96 Harv. L. Rev. 1497 (1983); Vicki Schulz, Reconceptualizing Sexual Harassment, 107 Yale L.J. 1683 (1998); Kathryn Abrams, Gender Discrimination and the Transformation of Workplace Norms, 42 Vand. L. Rev. 1183 (1989). Joan C. Williams, Market Work and Family Work in the 21st Century, 44 Vill. L. Rev. 305, 312 (1999) (“A 1998 survey found that two-thirds of Americans believe it would be best for women to stay home and care for family and children.”).

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childcare responsibilities.26 When the ideal worker is viewed in this way, the result is a preference for male workers and reduced employment options for women. Women are doubly impacted, as this system both expects them to take the primary responsibility for childcare and also penalizes them if childcare responsibilities interfere with their ability to be an ideal worker.27 According to the U.S. Bureau of Labor Statistics, only 47 percent of women with children under the age of eighteen worked outside the home in 1975.28 This percentage decreased for women whose children were all under six years of age.29 Among those women working in 1983 (a full eight years after this case was decided), 45.1 percent were working as administrative support or service workers.30 These are not the sort of jobs that typically come with stock options and authority for corporate decision-making. Women like Euphemia and Phyllis were cut off “from the social roles that offer authority and responsibility.”31 This is important context to recognize and include in the analysis of how stockholder oppression played out for Euphemia because of her status as a minority stockholder and a woman.

Intersectionality and the Risk of Essentializing The feminist judgment also directly addresses the critique that we should avoid essentializing the experience of one person for all similarly situated persons. By recognizing that Euphemia needs protection, it further amplifies the difference between her and the male controlling stockholders. As such, by helping Euphemia, the court could be further denying her agency and subjugating her. By attributing some element of Euphemia’s oppression to her particular gender identity, the court could be further encouraging the idea that women are less able or less powerful than men in a corporate law context. However, Schipani clarifies that Euphemia’s lack of power is a “difference” that is not indicative of an inherent deficiency. As such, the assistance of the court is needed not to correct for what Euphemia lacks, but instead to correct for a system of economic and social subordination that already exists and from which the majority stockholders have unfairly benefited. This is an important distinction because it invites the court to explore 26 27 28

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Id. at 311. Id. at 312. Bureau of Lab. Statistics, U.S. Dep’t of Lab., Labor Force Participation Rate of Mothers, 1975–2007 (Jan. 8, 2009), https://www.bls.gov/opub/ted/2009/jan/wk1/art04.htm. Id. Bureau of Lab. Statistics, U.S. Dep’t of Lab., The Labor Force Experience of Women from ‘Generation X’ (Mar. 2002), https://www.bls.gov/opub/mlr/2002/03/art1full.pdf. Williams, supra note 25, at 312. See also Rosabeth M. Kanter, Men and Women of the Corporation 17 (1977) (“In over half of the companies, women held only 2 percent or fewer of the first-level supervisory jobs . . . In three-fourths of the companies, women held 2 percent or fewer of the middle management jobs; and in over three-fourths of the companies, they held none of the top management jobs.”).

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issues of subordination as they apply to any stockholder. Such subordination may be due to a history of gender discrimination and oppression, but the court is also asked to look for power inequities based on race, class, or myriad other marginalized identities. By recognizing that the court cannot impute Euphemia’s lack of information and power to all minority stockholders or all women alike, the feminist judgment opens the door to a discussion of intersectionality. The concept of intersectionality centers on the idea that multiple identities and forms of subordination may intersect and interact to create the lived experience of a particular individual.32 This concept offers a pathway through which feminism can lessen the risk of overgeneralization and stereotyping. While Kimberlé Crenshaw had not yet published her analysis of the concept that she called “intersectionality” at the time of this holding,33 the feminist judgment recognizes that Euphemia’s experience does not reflect the experience of all women. Although women as a group historically have been subordinated and marginalized, especially when it comes to market work and corporate decision-making, modern feminism acknowledges that there will always be differences among women. Just as feminism embraces the differences between men and women and the social and legal consequences of those differences, it must not ignore the differences among women. To do so would be to further marginalize those at multiple peripheries. When viewing this case through the lens of intersectionality, a feminist scholar must also recognize that the case involves issues of class and socioeconomic status. According to the facts, Joseph Donahue purchased shares in the Royal Electrotype Company of New England, Inc. (the prior name of the defendant close corporation) while he was a laborer at the company.34 While it is true that he eventually became a corporate vice president of the company, the court indicated that he never participated in the management of the business.35 This context is relevant to the issue of stockholder oppression, especially when we consider that Joseph may have been less sophisticated in these matters than some of his wealthier fellow stockholders and may have been coerced into buying the shares to curry favor with his employer. While the facts in the original opinion failed to highlight the educational and socioeconomic differences between the stockholders in this case, an intersectional inquiry would also have added nuance to the feminist analysis. It may be fair to assume that Joseph – and even more likely Euphemia – lacked some of the educational and financial resources that may have been available to the majority stockholders. Such a disparity would have allowed Euphemia to be easily oppressed

32

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See Kathy Davis, Intersectionality as Buzzword: A Sociology of Science Perspective on What Makes a Feminist Theory Successful, 9 Feminist Theory 67, 68 (2008). Id. at 68. Donahue I at 581, 328 N.E.2d at 509. Id.

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by the majority. The feminist judgment invites future courts to explore intersectionality by opening the door to a more nuanced exploration of power imbalances. POTENTIAL IMPACT OF THE FEMINIST JUDGMENT

Feminist theory’s focus on examining relational contexts and power imbalances, as explored in the feminist judgment, applies not just to women who have historically lacked agency in corporate management. It also applies to employees more broadly, and to the spouse and family members who benefit from an employee’s wages. The context of this case speaks to power dynamics between majority and minority stockholders within a close corporation, but it also opens the discussion to the work of progressive corporate law scholars who resist the hegemony of stockholder primacy.36 While the original opinion in Donahue focuses on Euphemia in her role as a minority stockholder, it glosses over the fact that Joseph was an employee before he was a stockholder. Euphemia was the spouse of an employee before she was the widow of a stockholder. The feminist judgment recognizes that a contextual feminist analysis requires us to explore the myriad stakeholders of all genders who may lack agency and managerial control in a close corporation. It challenges us to explore the consequences of corporate control and decision-making for the rights of employees and the beneficiaries of that employment, including the spouses and families of employees. The feminist judgment, if handed down in 1975, could have started discussions that would have contributed to the modern progressive movement that argues that corporate law and policy should expand their focus beyond maximizing stockholder value to maximizing stakeholder value. Corporate law’s focus on stockholder interests, often referred to as the “shareholder primacy norm,” essentially argues that the managers of a corporation must place the interests of stockholders above all else, as the stockholders are the true owners of the corporation.37 If the stockholders are the true owners, then the shareholder primacy norm argues that fiduciary duties must be crafted in such a way as to ensure that managers act for the benefit of the stockholders before their own self-interest.38 However, progressive scholars and advocates argue that corporations do not have to be arranged in such a manner. Numerous states have passed statutes that allow corporations to consider the interests of stakeholders rather than 36

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See, e.g., Silke Machold, Pervaiz K. Ahmed & Stuart S. Farquar, Corporate Governance and Ethics: A Feminist Perspective, 81 J. Bus. Ethics 665 (2008); Cheri A. Budzynski, Can a Feminist Approach to Corporate Social Responsibility Break Down the Barriers of the Shareholder Primacy Doctrine?, 38 U. Tol. L. Rev. 435 (2006); Janis P. Sarra, Corporate Governance Reform: Recognition of Workers’ Equitable Investments in the Firm, 32 Can. Bus. L.J. 384 (1999). Kellye Y. Testy, Linking Progressive Corporate Law with Progressive Social Movements, 76 Tul. L. Rev. 1227, 1231 (2002). Id. Dodge v. Ford Motor Co., 204 Mich. 459, 507, 170 N.W. 668, 684 (1919).

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simply the stockholders when making business decisions.39 Some states have even responded to criticism of the shareholder primacy norm by creating special corporate forms, such as “benefit” corporations, which are expressly permitted to consider outside stakeholders.40 In the past few decades, feminist scholars have advocated for the use of feminist theory in analyzing the pitfalls of the shareholder primacy norm. Feminism’s fundamental focus on context and connectedness could be a useful framework through which to analyze the effects of corporate law on diverse stakeholders and could provide theoretical support for reform efforts. Reform efforts must recognize, for example, that employees and the families of employees are important stakeholders. Their personal financial resources are intertwined with the financial successes or failures of the corporation. For example, if it were not for Chief Justice Tauro’s willingness to create enhanced fiduciary duties in close corporations and to create the short-lived equal opportunity rule, Euphemia would have had no way to receive a fair value for her stocks, which may have been her primary source of funds after her husband’s death. In one of the earlier feminist critiques of corporate law, Kathleen Lahey and Sarah Salter applied a critical feminist lens to corporate hierarchy and management in the 1980s. They determined that the corporation’s focus on hierarchy disempowered the individual by forcing a split between the employee’s personal and professional lives.41 The feminist judgment touches on this division of people into professional and personal spheres in the attention it devotes to discussing how family and gender roles intersect with the oppression at issue in Donahue. Theresa Gabaldon and other feminist scholars have argued that courts have a long history of creating a false dichotomy between business interests and family interests.42 The Donahue case is ripe with “family interests,” and that is part of the context that should have been explored more in the original opinion in order to make a ruling that best recognizes the power imbalances faced by the various parties. While the original opinion notes that the Rodd family members are expected to vote in harmony due to their strong family ties and interconnected careers, the opinion neglected to see that important family interests were at stake on both sides of the dispute. For example, Joseph purchased his shares in the close corporation using money that could have otherwise benefited his spouse and child (who eventually 39

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See Edward S. Adams & John Matheson, A Statutory Model for Corporate Constituency Concerns, 49 Emory L.J. 1085, 1123–24 (2000); Ronald J. Colombo, Taking Stock of the Benefit Corporation, 7 Tex. A&M L. Rev. 73, 111 (2019). Alicia E. Plerhoples, Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In?, 14 U.C. Davis Bus. L.J. 247 (2014); Alina S. Ball, Social Enterprise Governance, 18 U. Pa. J. Bus. L. 919 (2016). Kathleen A. Lahey & Sarah W. Salter, Corporate Law in Legal Theory and Legal Scholarship: From Classicism to Feminism, 23 Osgoode Hall L.J. 543, 553–57 (1985). Theresa A. Gabaldon, Feminism, Fairness, and Fiduciary Duty in Corporate and Securities Law, 5 Tex. J. Women & L. 1, 20 (1995).

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inherited those shares and brought this suit). This business decision had a direct impact on his family’s interests, and it impacted the funds available to support his wife upon his death. Hardships such as these fall disproportionately on women, as women are likely to be in positions of relatively little power as employees or to be the widowed spouses of employees due to their longer average lifespans than men’s. A 1995 study of Australian corporate litigation found that of all the cases that included a woman as a party, only 13 percent involved a woman litigant acting in her individual capacity.43 In the remaining cases, the female litigants were parties to the litigation as a result of their status as wives, mothers, daughters, or widows of other parties.44 Given the societal roles played by the majority of women in the 1970s in the United States, even fewer women may have been litigating such cases on their own behalf at the time of this suit. Movements for corporate social reform should take note of feminist scholarship on the overlap of business and family (or professional and private) interests, because such work supports the need for corporations to reconsider the primacy of stockholders. The interests of employees and families are integral to business undertakings. Often the focus of progressive corporate law scholarship is on the stakeholders who are overlooked by large multinational corporations – those which unfairly cause harms that are felt by the poor and otherwise marginalized. However, those harms are not only caused by multinational corporations. Close corporations should not be overlooked for the harms that they can inflict on employees and their families. The feminist judgment contributes to the dialogue about what corporations of all sizes and forms owe to employees, families, and society.

Donahue v. Rodd Electrotype Co. of New Eng., Inc., et al., 328 N.E.2d 505 (Mass. 1975) justice cindy schipani delivered the opinion of the court Plaintiff Euphemia Donahue, a minority stockholder in the Rodd Electrotype Company of New England, Inc. (Rodd Electrotype), a Massachusetts close corporation, brings this suit against the directors of Rodd Electrotype, namely Charles H. Rodd, Frederick I. Rodd, and Harold E. Magnuson, and against the former director, officer, and controlling shareholder of Rodd Electrotype, Harry C. Rodd (hereinafter “the defendants”). The plaintiff alleges that the defendants breached their fiduciary duty to her. We agree. 43

44

Hall, supra note 23, at 47 (citing Peta Spender, Exploring the Corporations Law Using a Gender Analysis, 3 Canberra L. Rev. 82, 87–89 (1996)). Id.

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The plaintiff seeks to rescind Rodd Electrotype’s purchase of Harry Rodd’s shares in Rodd Electrotype and to compel Harry Rodd to “repay to the corporation the purchase price of said shares, $36,000, together with interest from the date of purchase.” The trial judge, after hearing oral testimony, dismissed the plaintiff’s bill on the merits. He found that the purchase was without prejudice to the plaintiff and implicitly found that the transaction had been carried out in good faith and with inherent fairness. The Appeals Court affirmed the trial court’s decision. We reverse their decisions. The plaintiff is a minority shareholder in Rodd Electrotype. She and her son are the only shareholders in Rodd Electrotype who are not members of the Rodd family. Defendant Harry C. Rodd began his employment with Rodd Electrotype in 1935, when the company – then named Royal Electrotype Company of New England – was a wholly-owned subsidiary of a Pennsylvania corporation, the Royal Electrotype Company. He rapidly rose to power: In 1936, he was elected director; in 1946, he succeeded to the position of general manager and treasurer; and in early 1955, he assumed the presidency of the company. In the same year that Rodd was elected director, the plaintiff’s husband, Joseph Donahue (now deceased), was hired as a “finisher” of electrotype plates. Donahue worked on operational matters at the plant. He would go on to become superintendent in 1946 and corporate vice president in 1955, but he never participated in the management aspect of the business. During their employment, Harry Rodd and Joseph Donahue were able to purchase common stock in the subsidiary, Royal Electrotype Company of New England. Harry Rodd acquired two hundred shares for $20 a share and Joseph Donahue acquired fifty shares for $20 a share. The parent company retained 725 of the outstanding shares, and Lawrence W. Kelley owned the remaining 25 shares. In 1955, Rodd and Donahue’s employer, the subsidiary Royal Electrotype Company of New England, purchased the 725 outstanding shares from its parent company. The purchase amounted to $135,000. In order to execute the purchase, then-president Harry Rodd mortgaged his home and loaned his employer a substantial portion of the funds. With this transaction, Harry Rodd, as president and shareholder, held a dominant 80 percent interest and thus assumed control of Royal Electrotype Company of New England. Joseph Donahue was the only minority shareholder. Rodd’s dominance continued, and in 1960, he renamed the company “Rodd Electrotype.” In 1962, Rodd promoted his son, Charles H. Rodd, to the position of corporate vice president. A year later, Charles joined his father on the company’s board of directors. Joseph Donahue, also a corporate vice president, did not sit on the board. In 1964, Harry Rodd replaced Joseph Donahue with another son, Frederick Rodd, as plant superintendent. By 1965, Charles Rodd had succeeded his father as president and general manager of Rodd Electrotype.

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During the Rodd family’s rise to power, the Donahues remained minority shareholders. In 1962, Joseph Donahue gave his wife Euphemia Donahue, who is the plaintiff in this case, joint ownership of his fifty shares. In 1968, the couple transferred five shares to their son, Dr. Robert Donahue. Upon her husband’s death, in 1969, the plaintiff became the sole owner of the 45-share block. In May 1970, Harry Rodd was 77 years old. The record indicates that for some time he had not enjoyed the best of health and that he had undergone a number of operations. His sons wished him to retire, and Mr. Rodd was not averse to this suggestion. However, he insisted that some financial arrangements be made with respect to his remaining 81 shares of stock. A number of conferences ensued. Harry Rodd and Charles Rodd (representing the company) negotiated the terms of purchase for forty-five shares, which, Charles Rodd testified, would reflect the book value and liquidating value of the shares. A special board meeting convened on July 13, 1970. As the first order of business, Harry Rodd resigned his directorship of Rodd Electrotype. The remaining incumbent directors, Charles Rodd and Harold E. Magnuson (clerk of the company and a defendant and defense attorney in the instant suit), elected Frederick Rodd to replace his father. The three directors then authorized Rodd Electrotype’s president (Charles Rodd) to execute an agreement between Harry Rodd and the company, in which the company would purchase forty-five shares for $800 a share ($36,000). The stock purchase agreement was formalized between the parties on July 13, 1970. Two days later, a sale pursuant to the July 13 agreement was consummated. At approximately the same time, Harry Rodd resigned his last corporate office, that of treasurer. Harry Rodd completed divestiture of his Rodd Electrotype stock in the following year. As was true of his previous gifts, his later divestments gave equal representation to his children. Two shares were sold to each child on July 15, 1970, for $800 a share, and each child was given ten shares in March 1971. An inference is permissible that the “gift” of these shares was a part of the “deal” for the stock purchase. Thus, in March 1971, the shareholdings in Rodd Electrotype were apportioned as follows: Charles Rodd, Frederick Rodd, and Phyllis Mason each held fifty-one shares, and Euphemia Donahue and her son Robert Donahue held fifty shares together. A special meeting of the stockholders of the company was held on March 30, 1971. At the meeting, Charles Rodd, company president and general manager, reported the tentative results of an audit conducted by the company auditors and reported generally on the company events of the year. For the first time, the Donahues learned that the corporation had purchased Harry Rodd’s shares. According to the minutes of the meeting, following Charles Rodd’s report, the Donahues raised questions about the purchase. They then voted against a resolution, ultimately adopted by the remaining stockholders, to approve Charles Rodd’s report. Although the minutes of the meeting show that the stockholders unanimously voted to accept a second resolution ratifying all acts of the company president, who had

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executed the stock purchase agreement in the preceding year, the trial judge found – and there was evidence to support his finding – that the Donahues did not ratify the purchase of Harry Rodd’s shares. Cf. Braunstein v. Devine, 337 Mass. 408, 413 (1958). A few weeks after the meeting, the Donahues, acting through their attorney, offered their shares to the corporation on the same terms given to Harry Rodd. Magnuson replied by letter that the corporation would not purchase the shares and was not in a financial position to do so. In years prior (between 1965 and 1969), the company had offered to purchase the Donahues’ shares at amounts between $40 and $200 a share – totaling between $2,000 and $10,000. Harry Rodd’s purchase price had been $800 per share. This suit followed. The plaintiff argues that the company’s purchase of Harry Rodd’s shares was an unlawful distribution of corporate assets to controlling shareholders. She claims that the company’s failure to offer her an equal opportunity to sell her shares constitutes a breach of fiduciary duty. We note that the plaintiff was a minority shareholder in a close corporation that operated on the basis of exclusive majoritarian control. In Rodd Electrotype, control rested with, and was severely limited by, a board comprised mostly of a father and son. The plaintiff was marginalized on several levels: her position as a minority shareholder, her gender, and her subordinated status as a perpetual outsider to the Rodd family. The fate of Euphemia’s investment in the company rested only and completely with the Rodds. The plaintiff’s vulnerability is not necessarily unique in the context of close corporations such as Rodd Electrotype. Close corporations are characterized by a small number of shareholders, a management structure often controlled by majority shareholders, and the absence of a ready market for the shares. Because previous opinions have referred to the distinctive nature of close corporations without defining it, Brigham v. M & J Corp., 352 Mass. 674, 678, 227 N.E.2d 915 (1967); Samia v. Cent. Oil Co. of Worcester, 339 Mass. 101, 112–13, 158 N.E.2d 469 (1959), we hold that a close corporation comprises the following three factors: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction, and operations of the corporation. This definition combines interpretations from multiple courts. Some have emphasized an “integration of ownership and management” in which the stockholders occupy most of the management positions. See Kruger v. Gerth, 16 N.Y.2d 802, 806, 263 N.Y.S.2d 1, 210 N.E.2d 355 (1965) (Fuld, J., dissenting); Helms v. Duckworth, 101 D.C. Cir. 390, 249 F.2d 482, 486 (1957). Other courts and commentators focus on the number of stockholders and the nature of the market for the stock, arguing that there is little market for corporate stock because close corporations have few stockholders. See Galler v. Galler, 32 Ill.2d 16, 27, 203 N.E.2d 577, 583 (1965); accord, Brooks v. Willcuts, 78 F.2d 270, 273 (8th Cir. 1935); F. Hodge O’Neal, Close Corporations: Law and Practice § 1.02 (1971).

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Close corporations are defined not by the size of their employee pool but by operating as an enterprise wherein ownership is limited to the original parties (or shareholder-approved transferees), ownership and management are in the same hands, and the owners are quite dependent on one another for the success of the enterprise. Practically, a close corporation may operate as a partnership between only two or three people who contribute their capital, skills, experience, and labor. Kruger v. Gerth, 16 N.Y.2d 802, 805, 263 N.Y.S.2d 1, 3, 210 N.E.2d 355, 356 (1965) (Desmond, C.J., dissenting). A close corporation thus closely resembles a partnership. Indeed, both commentators and courts have noted that close corporations often operate as little more than an “incorporated” or “chartered” partnership, see Ripin v. United States Woven Label Co., 205 N.Y. 442, 447, 98 N.E. 855, 856 (1912); Clark v. Dodge, 269 N.Y. 410, 416, 199 N.E. 641 (1936) – and one in which shareholders may choose to provide additional “benefits peculiar to a corporation, limited liability, perpetuity and the like.” See In the Matter of Surchin v. Approved Bus. Mach. Co., Inc., 55 Misc.2d 888, 889, 286 N.Y.S.2d 580, 581 (Sup. Ct. 1967). For additional commentary, see George D. Hornstein, Stockholders’ Agreements in the Closely Held Corporation, 59 Yale L.J. 1040 (1950), and George D. Hornstein, Judicial Tolerance of the Incorporated Partnership, 18 Law & Contemp. Probs. 435, 436 (1953); cf. Barrett v. King, 181 Mass. 476, 479, 63 N.E. 934 (1902). At its heart, however, a close corporation retains important characteristics of a partnership because ownership is limited to, retained by, and dependent upon the original shareholders. This intimate bond is central to the definition of a close corporation. Thus, just as in a partnership, the relationship among the stockholders must be one of trust, confidence, and absolute loyalty. Although fashioning a partnership as a close corporation might provide some advantages for stockholders (e.g., limited liability, perpetuity), it also creates opportunities for majority shareholders to oppress or disadvantage minority shareholders through “freeze-outs.” For example, majority shareholders may refuse to declare dividends, drain corporate earnings through exorbitant salaries or bonuses to majority shareholders (or relatives), and charge the corporation high rent for property leased from majority shareholders. These actions deprive minority shareholders of corporate offices, employment, and funds (e.g., when a corporation sells off its assets at an inadequate price). See generally Note, Freezing Out Minority Shareholders, 74 Harv. L. Rev. 1630 (1961); F. Hodge O’Neal & J. Derwin, Expulsion or Oppression of Business Associates 42 (1961). The power of majority shareholders to declare or withhold dividends is a key issue in this case, and it functions as a means to disadvantage minority shareholders. See Hayden v. Beane, 293 Mass. 347, 199 N.E. 755 (1936); Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 11–12, 20 N.E.2d 482 (1939); Casson v. Bosman, 137 N.J. Eq. 532, 45 A.2d 807 (Ct. E. & A.1946); Patton v. Nicholas, 154 Tex. 385, 393, 279 S.W.2d 848 (1955); cf. Taylor v. Standard Gas & Elec. Co., 306 U.S. 307, 323, 59 S. Ct. 543, 83 L. Ed. 669 (1939).

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Minority shareholders are especially vulnerable to freeze-outs when they have a substantial percentage of their personal assets invested in the corporation. Galler v. Galler, 32 Ill.2d 16, 27, 203 N.E.2d 577 (1965). Given the fundamental resemblance of a close corporation to a partnership, the trust and confidence necessary for this scale and manner of enterprise, and the inherent danger to minority interests in the close corporation (e.g., freeze-outs), this court holds that stockholders in a close corporation owe one another the duty of “utmost good faith and loyalty,” as stated by Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). This court agrees that this fiduciary duty is “more exacting than the traditional good faith and inherent fairness standard.” Id. Indeed, where traditional fiduciary duty law falls short, as in the case at bar, this court has the responsibility to acknowledge the law’s shortcomings and correct them. The Meinhard court further elaborates: “Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” Id. This court agrees that the heightened standard, not only applies to partners in partnerships, see Cardullo v. Landau, 329 Mass. 5, 8, 105 N.E.2d 843 (1952); DeCotis v. D’Antona, 350 Mass. 165, 168, 214 N.E.2d 21 (1966), but also to stockholders of close corporations. We hold that close corporations require a duty of trust, confidence, and absolute loyalty among shareholders instead of the traditional “good faith” standard. This heightened standard means that stockholders in close corporations must conform to the strict good faith standard when carrying out their management and stockholder responsibilities. They may not act out of avarice, expediency, or self-interest in violation of their duty of loyalty to the other stockholders and to the corporation. Winchell v. Plywood Corp., 324 Mass. 171, 177, 85 N.E.2d 313 (1949). Similarly, directors are not “permitted to serve two masters whose interests are antagonistic.” Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 411, 8 N.E.2d 859, 904 (1937). Their paramount duty is to the corporation, and their personal pecuniary interests are subordinate to that duty. Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 196, 80 N.E.2d 522, 527 (1948). In determining whether the purchase of Harry Rodd’s stock satisfies the applicable strict fiduciary standard, we regard the entire Rodd family as a group of majority shareholders. The evidence demonstrates that the Rodd family operated as a closeknit unit with strong community of interest. Samia v. Central Oil Co. of Worcester, 339 Mass. 101, 112, 158 N.E.2d 469 (1959). First, because Harry Rodd hired his sons to work in the family business, it is realistic to assume that appreciation, gratitude, and filial devotion would prevent the younger Rodds from opposing a plan that would provide funds for their father’s retirement. Second, when Charles Rodd and Frederick Rodd were called on to represent the corporation in its dealings with their father, they must have known that their further advancement within the corporation (and attainment of the benefits of control) relied upon their father’s retirement – and that his retirement depended upon the purchase of his stock.

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Therefore, failure to complete the corporate purchase would have delayed, and perhaps have suspended indefinitely, the transfer of these benefits to the younger Rodds. They could not be expected to oppose their father’s wishes in this matter. The Rodds, like all other officers, directors, and controlling shareholders in close corporations, are bound by the duty of loyalty, which requires fiduciaries to put the interests of the corporation ahead of their own. In representing the corporation in its dealings against their father, the Rodds procured a personal benefit by way of selfdealing and therefore had a conflict of interest. A conflict of interest exists when the fiduciary knows that, at the time of being asked to take action with regard to a potential transaction, either the fiduciary or a person related to them (1) is a party to the transaction or (2) has a beneficial financial interest in the transaction; and then, the fiduciary exercises their influence to the detriment of the corporation. The Rodds’ negotiations exemplify self-dealing, as they were involved on both sides of the transaction. Normally, such a transaction might be rectified or “cleansed” if it is approved by a vote of a majority of the fully informed, disinterested directors. In no way, however, could this transaction have been approved by a majority of fully informed, disinterested directors. There were no disinterested directors on the board of Rodd Electrotype. The defendants correctly claim that the evidence did not prove the existence of any express agreement involving a quid pro quo (e.g., subsequent stock gifts for votes from the directors), but an express agreement is not necessary to demonstrate the identity of interest that disciplines a controlling group acting in unison. Sagalyn v. Meekins, Packard & Wheat, Inc., 290 Mass. 434, 438–39, 195 N.E. 769 (1935); Lydia E. Pinkham Medicine Co. v. Gove, 298 Mass. 53, 9 N.E.2d 573 (1937); Shaw v. Harding, 306 Mass. 441, 28 N.E.2d 469 (1940); Murphy v. Hanlon, 322 Mass. 683, 79 N.E.2d 292 (1948); see also Adolf A. Berle Jr., “Control” in Corporate Law, 58 Colum. L. Rev. 1212, 1215 (1958). On its face, the purchase of Harry Rodd’s shares by the corporation is a breach of the duty that the controlling stockholders, the Rodds, owed to the minority stockholders, Euphemia and Robert Donahue. The purchase distributed a portion of the corporate assets to Harry Rodd, a member of the controlling group, in exchange for his shares. The plaintiff and her son were not offered a fair opportunity to sell their shares to the corporation. In fact, their efforts to obtain an equal opportunity were rebuffed by the corporate representative. As the trial judge found, they did not – in any manner – ratify the transaction with Harry Rodd. The plaintiff’s misfortune at the hands of the Rodds is a predicament that might occur in any close corporation. The plaintiff’s plight, however, is far greater. The plaintiff has been subordinated by deeply rooted social hierarchies that serve to create and perpetuate the severe power imbalances that weigh against her. In considering the broader context of this transaction, we are able to examine the social structures of domination that are at play here. Strict requirements of loyalty and good faith go a long way toward protecting the plaintiff’s interests, especially

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where she lacks the ability to garner such protection for herself. To end the story there, however, would ignore the need for such protection in the first place. Thus, the court is compelled to address the unconscious and systemic subordination that places the plaintiff in this position in the first place. To assert the plaintiff’s need for protection is not to say that all widows, nor all middle-aged or older women, require protection. The need for protection is not necessarily triggered simply on the basis of gender. Protection is necessitated by circumstances of social and economic subordination that have excluded women from key positions of power and influence. Such subordination has created and perpetuated a lack of equality and justice in many areas, but especially in the close corporation. One example of such subordination is a view (either conscious or unconscious) that women are inherently less powerful than men. To observe how this view played out at Rodd Electrotype, consider the circumstances of Phyllis Mason, another female minority shareholder in Rodd Electrotype. That Mason is a minority shareholder in Rodd Electrotype is meaningful. Mason, like the plaintiff, obtained ownership in the company from a man: in Mason’s case, her father. Mason holds fifty-one shares and the plaintiff holds fifty. Phyllis Mason is also a married woman, yet she – rather than her husband – retains ownership of the minority stake even though her husband also worked for the Rodd corporation. Mason’s father and brothers manage the company, holding positions of great power and ultimate decision-making. Her father and brothers were willing to divide their ownership for her benefit. Yet she, unlike her brothers, was not elected to the board. Perhaps she was uninterested in obtaining a board seat. Perhaps she did not care to make the day-to-day decisions that would affect her stake in the company. Perhaps she was content to remain on the sidelines. Or, perhaps, she was not given the opportunity. This accounting of the facts is not meant to suggest that the Rodds were actively discriminating against the plaintiff or Mason on the basis of their gender. Instead, it intends to paint a picture of potential unconscious subordination at work in Rodd Electrotype and in the society in which Rodd Electrotype exists more generally. It is likely that gender operated here as a signal of power. The inner circle that executed power in this company was dominated by the male members of one family: Harry, Charles, and Frederick Rodd. On the outskirts of that circle, the Rodds cut Mason a slice of their pie. Further away from that inner circle sat the plaintiff: the widow of a laborer turned shareholder. The Rodds refused to buy back the plaintiff’s and her son Robert’s shares in 1971, when the Donahues offered their shares for buy back on the same terms given to Harry Rodd. The plaintiff’s husband, Joseph Donahue, was the original shareholder who gave joint ownership rights to his wife. The Rodds’ actions evidenced a very narrow concentration of undemocratic corporate power, which this court must challenge. From the outset and throughout his career, Joseph Donahue was in a different position than Harry Rodd and his sons. He was a finisher who rose through

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the ranks – from laborer to plant superintendent and corporate vice president – only to be replaced by one of Rodd’s sons. His involvement with Rodd Electrotype did not include management of the company but was based more specifically in operational matters. Yet at least he was still involved in operational matters. The plaintiff, on the other hand, was fundamentally excluded from the work that her husband performed and through which he obtained ownership in the company. That the plaintiff is a widow of an employee-shareholder is key. She played no part in the founding, building, or growth of Rodd Electrotype. She has no claim of birthright or sweat equity. Implicit here is the contextual truth: the plaintiff’s status as a woman prevented her from ever holding such a role. In sum, Mrs. Donahue found herself at the bottom of a social hierarchy where familial ties were the deciding currency, and those who sat at the top possessed all the power, with no accountability. It is this court’s goal to acknowledge that unequal distribution of power, to critique it, and to dismantle it. As noted above, Joseph Donahue occupied a role that his wife could not. Thus, the plaintiff likely faced not only unconscious subordination but also subordination and exclusion from a system created to prohibit her from working. This court recognizes that the ideals of domesticity for women are long-held and deeply entrenched. In some ways, those ideals began to operate as a tool for bolstering capitalism, by insulating employers from the private costs of workers, to the detriment of women. For the plaintiff and others like her, the system of wage labor would have been prescriptive. The system of wage labor is premised on the notion that only men can serve as ideal workers, unencumbered by the responsibilities of childcare. Childcare falls instead on women’s shoulders. Should the plaintiff have sought employment at Rodd Electrotype (and by rare stroke of chance, gained it), she likely would not have held the same position or gained the same influence as her husband. That is because men are likely to earn more and advance further in a career than could a woman in the same job. Thus, it would have been virtually impossible for the plaintiff to obtain an ownership share in the company by merit, as her husband did, due to structural pressures. To expand further, this system of wage labor by which Mr. Donahue was able to rise up from finisher to shareholder was designed by men and for men. This male dominance pervades nearly all facets of life, defining what is and what should be according to male standards. The ideal worker is then hired and rewarded according to male-centric standards and expectations, which the plaintiff would have been prevented from meeting. Thus, the wage labor system perpetuated in the Rodd Electrotype company created the plaintiff’s reliance on her husband’s earnings. Instead of relying on her husband, she now relies on the male majority decisionmakers. It would be unjust for this court to allow this system to continue subordinating the plaintiff. Rodd Electrotype is, at its core, a business. Yet it is also so much more. The Rodds and the Donahues both stand behind it. The context is key: it illuminates the

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pervasive and rigid social hierarchy at work in this close corporation, by which some groups enjoy a privilege denied to others. Where family or close personal relationships are involved to systematically subordinate others and deny rightful opportunity, this court demands change. This court is empowered to inquire further beyond the corporate form, to delve deeply into the context of the plaintiff’s unequal relationship with the Rodds and the operation of Rodd Electrotype, and to take remedial action where the corporate form is abused for the sake of subordinating, isolating, and denying rightful opportunity to those who are relying upon it. This court is firmly committed to the pursuit of equality and human flourishing, and to that end holds that, in a close corporation, majority shareholders owe their minority counterparts trust, confidence, and absolute loyalty. This is a heightened fiduciary standard requiring more than mere good faith. It requires shareholders to refrain from acting out of avarice, expediency, or self-interest in violation of their duty of loyalty to the other shareholders and to the corporation. This court holds that the Rodd family violated that standard when it refused to buy the plaintiff’s shares at the same price it bought the majority shares. In turn, this court demands that the corporation offer every other shareholder the chance to sell a ratable number to the corporation at an identical price. Otherwise, the controlling shareholder unfairly benefits from the creation of a market for company shares and from preferential distribution of assets. This ruling is based primarily on the furtherance of the principles of fairness, equality, and human flourishing. Yet this court is also acutely aware of the dangers of claiming subordination based on economic and gender identity. This court does not aim to say that the plaintiff was in a less powerful position because women themselves are inherently less powerful than men. This court’s holding is limited to showing misuse of the close corporate form. Yet were this court to ignore Mrs. Donahue’s gender and economic identity in issuing the ruling, inequalities would continue to run rampant. This court is, by all accounts, taking action to protect the plaintiff. In addition, however, this court must also acknowledge the inherent and critical risk that such action may have the effect of resubordinating the plaintiff and others like her. However, if economic and social subordination already exist and are already at play in a dangerous way, as this court believes is the case, we will not sit back and be idle. The plaintiff needs protection not because of who she is but because of how the system has categorized her. This opinion seeks to remedy a flawed system. The social hierarchy at play in Rodd Electrotype is predicated on subordinating certain people on the basis of their supposed difference. Such difference, whether it be economic or gendered, does not manifest or acknowledge an inherent deficiency. Instead, it has become a means for concentrating power in the hands of an exclusive majority. Winning protection does not acknowledge, reward, or reify an inherent weakness or a lesser identity. It

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acknowledges that the majority has capitalized on an individual’s difference in order to justify, explain, and maintain its own dominance. Because of the foregoing, we hold that on its face, the purchase of Harry Rodd’s shares by the corporation is a breach of the duty that the controlling shareholders, the Rodds, owed to the minority stockholders, the plaintiff and her son. The company distributed a portion of the corporate assets to Harry Rodd, a member of the controlling group, in exchange for his shares. The plaintiff and her son were not offered an equal opportunity to sell their shares to the corporation. In fact, their efforts to obtain an equal opportunity were rebuffed by the corporate representative. Thus, we hold that the plaintiff is entitled to relief. This case is remanded to the Superior Court for entry of judgment in conformity with this opinion. It is so ordered.

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part vi

Protecting Investors and Potential Investors in Corporations

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15 Commentary on SEC v. W. J. Howey Co. et al. kristin johnson and carla reyes

INTRODUCTION

For decades, legal academics have expressed concerns that the United States Supreme Court’s decision in Securities and Exchange Commission v. Howey (“SEC v. Howey”) increasingly lacks utility in the evolving modern financial market landscape, at least in part because of its lack of uniform application and resulting invitation to litigation.1 The original opinion examines the economic realities of a curious financial arrangement centered on the nature of a certain orange grove profit-sharing enterprise. Embracing congressional intent to protect passive investors, Howey sets out a legal standard for determining when such a financial arrangement may qualify as a “security” as defined under Section 2(1) of the Securities Act of 1933. More specifically, Howey aims to clarify the types of financial arrangements that may be deemed “investment contracts” – a catch-all term captured in the statutory definition of “security” that would render such arrangements subject to federal securities regulations. According to some scholars, Howey – as developed and applied over time – fails to advance the core policy goals of securities regulation, because it may offer similarly situated investors vastly different (and, in some cases, markedly insufficient) protection under federal securities laws.2 This critique posits that commonly accepted understandings of Howey foster a legal standard incapable of offering meaningful investor protection.3 In her rewritten opinion, Professor Theresa Gabaldon, writing as Justice Gabaldon, highlights an overlooked reason the flexible Howey test fails to protect 1

2 3

See, e.g., Miriam R. Albert, The Howey Test Turns 64: Are the Courts Grading this Test on a Curve?, 2 Wm. & Mary Bus. L. Rev. 1, 8 (2011); Theresa A. Gabaldon, A Sense of Security: An Empirical Study, 25 J. Corp. L. 307, 316 (2000). See, e.g., Albert, supra note 1, at 8. Id. at 9.

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investors and emphasizes the missed opportunity represented by the original decision in SEC v. Howey. In particular, Gabaldon points to the possibility that promoters will purposefully engage in regulatory arbitrage, designing investment contracts to evade the narrow, detailed elements of the Howey test by simply planning around them. As Gabaldon explains, the Court’s failure to adopt a value-centric regulatory paradigm represents a missed opportunity and establishes a legacy that leaves investors vulnerable to lower courts’ ability to navigate the quagmire of promoters’ creative schemes. Gabaldon laments that by making the test both too detailed and too flexible, the Supreme Court failed to design the Howey test in a way that would impose a more responsible, responsive, and inclusive investment culture. Although we do not disagree that Howey and its progeny developed less than uniformly, we argue in this commentary that the Howey test’s extreme flexibility remains very relevant to modern securities regulation and investment strategy. Indeed, the Howey test is so flexible that the SEC successfully uses it in new frontiers of technology-based financial products.4 In 2020 alone, the SEC announced more than $44.5 million worth of settled enforcement actions, pursued under arguments that relied primarily on the Howey test and its progeny. As a result, few corporate law cases have produced a legal standard as widely recognized or as frequently cited by those inside and outside of the legal industry as SEC v. Howey.5 This commentary contextualizes Gabaldon’s rewritten SEC v. Howey opinion by illuminating the dynamics within investment culture that foster asymmetries of information and empower promoters to compete in capital markets while showing little or no regard for the long-term consequences of invested capital, vulnerable investors, other stakeholders (creditors, employees, or suppliers), or the environment. To do so, the commentary first details some of the lesser-known historical details of the women involved behind the scenes of the Howey citrus grove operation. The commentary then provides evidence supporting Gabaldon’s observation that securities regulation, including the Howey test, has failed to produce responsible and inclusive investment culture. The commentary argues, however, that Howey’s window of opportunity for achieving Gabaldon’s vision may not yet have fully closed. Indeed, the SEC’s use of the Howey test to rein in wayward investment contract issuers and prevent fraud in the cryptocurrency context offers an opportunity to realize Howey’s full potential to influence the culture, stability, and integrity of securities markets.

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See, e.g., Usha Rodrigues, Embrace the SEC, 61 Wash. U. J.L. & Pol’y 133 (2020); Darren Sandler, Citrus Groves in the Cloud: Is Cryptocurrency Cloud Mining a Security?, 34 Santa Clara Comput. & High Tech. L.J. 250 (2018). According to Justice Gabaldon, “there have been no fewer than 792 cases decided and over 300 law review articles written in which either the ’33 or ’34 Act definition of a security has played a prominent role.” Gabaldon, supra note 1, at 308. Many of those decisions and articles center on Howey and its progeny. Id.

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BACKGROUND

Regulation of capital markets is guided by three core policy objectives: efficiency, fairness, and stability.6 To advance those goals, the Securities Act of 19337 and the Securities Exchange Act of 19348 seek to mitigate asymmetries of information through a mandatory disclosure regime, general anti-fraud protections, and other origination and secondary market trading regulations, such as the prohibitions against insider trading.9 The Securities Act, for example, requires issuers to share material information – such as audited financial data relating to registered securities offerings – and prohibits issuers from making material misrepresentations or omitting material facts when distributing securities.10 If the sale of a financial instrument falls within the scope of the Securities Act, the issuer of the instrument must either register and comply with a variety of disclosure requirements or demonstrate that the offering qualifies for an exemption to registration. The financial instruments subject to federal registration and disclosure requirements are enumerated in Section 2 of the Securities Act of 1933; they include a long litany of specifically identified financial instruments, including for example notes, stocks, bonds, debentures, and a catch-all category of “investment contracts.”11 The term “investment contract” is not explicitly defined in the Securities Act and remained undefined until the Supreme Court’s landmark decision in the Howey case. W. J. Howey Company owned a significant amount of land in Lake County, Florida, on which it planted citrus groves. Howey-in-the-Hills Service, Inc., offered citrus grove cultivation and development services and held a strong reputation regarding those services. As far as the public knew, William J. Howey was the key figure powering both companies. Indeed, the public and the prospective citrus grove purchasers would have known Mr. Howey from his celebrity-like role in developing most of Lake County. During the time of the events that led to the SEC enforcement action, Mr. Howey owned most of the town in Lake County that continues to bear his name: Howey-in-the-Hills.12 On the south end of town stood Mr. Howey’s Floridian Hotel.13 On the north end of town, Mr. Howey built a twenty-room mansion having

6

7 8 9

10

11 12

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Kristin N. Johnson, Decentralized Finance: Regulating Cryptocurrency Exchanges, 62 Wm. & Mary L. Rev. 1911, 1928 (2021). 15 U.S.C. § 77a et seq. 15 U.S.C. § 78a et seq. M. Todd Henderson & Max Raskin, A Regulatory Classification of Digital Assets: Toward an Operational Howey Test for Cryptocurrencies, ICOs, and Other Digital Assets, 2019 Colum. Bus. L. Rev. 443, 447 (2019). Kristin N. Johnson, Regulating Innovation: High Frequency Trading in Dark Pools, 42 J. Corp. L. 833, 842–44 (2017). 15 U.S.C. § 77b(a)(1) (defining “security”). Melvin Edward Hughes, Jr., William J. Howey and His Florida Dreams, 66 Fla. Hist. Q. 243, 248 (1988). Id. at 247

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an area of 7,200 square feet.14 Mr. Howey also built the Floridian Country Club and golf course near town,15 and, of course, adjacent to town, his citrus groves rolled across a total of 60,000 acres.16 All one had to do was literally look around Howey-inthe-Hills to feel Mr. Howey’s preeminent position and success. Eager to take advantage of the opportunity to acquire cheap land at depressed post-war prices, Mr. Howey organized a scheme to solicit passive investors to fund the ongoing development of his citrus groves.17 As the master architect of his citrus grove enterprise, Mr. Howey dutifully organized the W. J. Howey Company as a Florida corporation in 1922. A decade later, he organized Howey-in-the-Hills Service, Inc., as a Florida service corporation. Mr. Howey marketed a unique investment opportunity to purchase land by the acre, at a fixed price, and employ Howey-in-the-Hills Service to tend the citrus trees. When a purchaser opted to use Howey-in-the-Hills Service, the purchaser gave the company a leasehold interest for a term of ten years, without an option for cancellation and with full discretion in the production, marketing, and sale of the crops. In return, the purchasers received a portion of the net profits from the sale of fruit harvested from the tract of land they had purchased. Mr. Howey’s plan to grow his business with this creative investment scheme worked exceptionally well. Within the next ten years, the firm experienced remarkable sales and growth: During the three-year period ended May 31, 1943 . . . the Howey Company sold fiftyone (51) parcels of land comprising 195.26 acres of grove property. Of the fifty-one purchasers[,] forty-two entered into the service contract with the Service Company for the care of their properties. The contracts covered 166.54 acres, or 85% of the acreage sold by the Howey Company during that period.18

To fuel this exceptional level of growth, Mr. Howey marketed his companies’ land and services to non-Florida resident business professionals who had little knowledge of citrus farming. Mr. Howey targeted potential purchasers while they stayed at his Floridian Hotel.19 Most of the purchasers did not care about the land but rather sought profits from an investment of capital that would not require much actual work on their part: Mr. Howey and his companies would do all the work. But why would vacationers trust their investment money to W. J. Howey Company and Howey-in-the-Hills Service, Inc.? The real question may be what would prevent them from trusting the two companies with their investment. The man behind the corporate veil served, for more than ten years (1925–36), as the mayor of the town named after him.20 14

15 16 17 18 19 20

Id. at 249; see also Peggy Beucher Clark, Images of America: Howey-in-the-Hills 40 (2011). Hughes, supra note 12, at 248. Id. at 243, 246. Id. at 246–47. SEC v. W. J. Howey Co., 60 F. Supp. 440, 441 (1945). Id. at 12, 243, 246. Id. at 258.

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The purchasers could probably think of no better companies to trust with their investments, given that their founder was so successful as to lead Florida’s growing dominance in the citrus industry.21 Indeed, although this point is not mentioned in the original opinion, Mr. Howey also built, owned, and operated the first citrus juice plant in Florida – a plant that continues to operate to this day as Silver Springs Citrus.22 Given all of Mr. Howey’s links to various stages of citrus production in Florida, it is not hard to imagine that purchasers of W. J. Howey Company’s land contracts might have believed that whatever profit figures Mr. Howey quoted would essentially be a sure thing. In fact, Mr. Howey told his investors to consider their citrus grove contracts as better than a bond, saying “[n]o bond had ever been issued that represents a safer investment than does an orange or grapefruit grove properly located and properly attended.”23 But Howey did not build the citrus grove business alone. His wife, Mary Grace Hastings Howey, suffered under the weight of the citrus grove investment structure for some time. According to the Howeys’ granddaughter, Westa Bryant, Mr. Howey’s strength centered in his power of persuasion.24 He would travel to cities in the north, such as Chicago and New York, to attract investors over fancy meals.25 Meanwhile, Mrs. Howey remained at home to tend the citrus groves.26 According to Westa, “[m]y grandmother said that they were developing land for groves 24 hours a day, even at night.”27 In other words, Mrs. Howey was a key figure in the Howey-in-the-Hills Service enterprise that tended the citrus crops for the investors.28 Her contributions in this regard are often dismissed by Howey-inthe-Hills historians, who describe her as “the quintessential southern hostess, extending hospitality to neighbors, customers, dignitaries, and U.S. presidents.”29 Given the patriarchal nature of the Florida southern culture at the time,30 Mrs. Howey likely enjoyed very little opportunity to speak her mind about the

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26 27 28

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Mr. Howey enjoyed such notoriety, for example, that he was recruited by the Florida Republican Party to run for governor twice. He did not succeed. Id. at 253–63. Id. at 250. Id. at 248 (quoting the Howey Trib., January 1926). Jeremy Fallstrom, Granddaughters Celebrate Town’s Founder During Howey-in-the-Hills’ Birthday Celebration, Orlando Sentinel (May 20, 2015), https://www.orlandosentinel.com/ news/lake/os-lk-howey-birthday-relatives-20150520-story.html (“Our grandmother said he had a silver tongue”). Chitra Ragavan, How A 1920s Florida Citrus Land Baron Created the Acid Test for Crypto Tokens, Forbes (Nov. 14, 2017), https://www.forbes.com/sites/chitraragavan/2017/11/14/how-a1920s-florida-citrus-land-baron-created-the-acid-test-for-crypto-tokens/?sh=5d3d81e04a3c. Id. Id. Mac Asbill, Jr. Tax Treatment of Patronage Refunds, 42 Va. L. Rev. 1087, 1103 (1956) (citing Mary Grace Howey, 13 CCH Tax Ct. Mem. 399 (1954)). Clark, supra note 14, at 46. Gary R. Mormino, Twentieth-Century Florida: A Bibliographic Essay, 95 Fla. Hist. Q. 292, 297–98 (2017).

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business.31 If Mr. Howey told her to tend citrus groves while he was in Chicago and to develop more land than she truly had capacity to attend to, she likely had little opportunity to object.32 During the early 1940s, the SEC initiated enforcement actions against several similar agriculture-based financial arrangements. In SEC v. Bailey, the SEC introduced claims against E. R. Bailey’s Tungland, Inc. and Ocala Ridge Tung Plantations, Inc.. These companies owned large tracts of land in Marion County, Florida, and they solicited investors to purchase a “sales” contract conveying a small tract of land by warranty deed for growing tung trees along with a “services agreement” for development – namely for clearing, fencing, plowing, and harrowing the land and for planting, fertilizing, and cultivating a stated number of tung trees for a term of four years.33 In both Bailey and Howey, the SEC alleged that the economic realities of the contract arrangements constituted “investment contracts” and therefore “securities” as the term is defined in Section 2(1) of the Securities Act of 1933. According to the SEC, in the absence of an exemption, the defendants violated Section 5 of the Securities Act of 1933 by failing to register the securities (the warranty deed or service contract arrangements) prior to sale. Similar to Howey, the enterprises at the heart of Bailey engaged in national marketing campaigns. Radio broadcasts hailed the tung oil extracted from tung trees as “Florida’s Liquid Gold.” Advertisements touted the scientific management and care by the experts who would plant, cultivate, and manage tung trees on behalf of investors. Alluring statements promised investors substantial returns.34 The court in Bailey advanced a broad interpretation of the term “investment contracts” and asserted a similarly broad interpretation of the SEC’s authority to ferret out efforts to evade the nation’s nascent mandatory disclosure regime.35 Thanks to Bailey and earlier state court decisions, by the mid-1940s, the SEC had honed its Section 5 enforcement strategy related to unregistered agricultural investment arrangements, and Howey presented an opportunity for the commission to obtain an opinion from the highest federal court interpreting the term “investment contract” to support that strategy. The SEC, however, was not successful at the outset of the Howey litigation. The federal district court in Orlando distinguished Howey from Bailey and similar precedent, concluding that the defendants in Howey 31

32

33 34

35

Indeed, as Justice Gabaldon previously explained, a core feminist concern centers “on the position of women in a patriarchal society and on methods of expunging patriarchy.” Theresa A. Gabaldon, The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, 45 Vand. L. Rev. 1387, 1415 (1992). “Feminism in law has focused on the unjust subordination of women. . . . [F]eminism maintains that culturally, politically, economically, and legally, women have been, and still are, subordinated, oppressed, degraded, and ignored.” Nancy Levit, Feminism for Men: Legal Ideology and the Construction of Maleness, 43 UCLA L. Rev. 1037, 1041 (1996). SEC v. Bailey, 41 F. Supp. 647, 648–49 (1941). Id. (“These companies carry on extensive advertising campaigns over the country . . . . In the advertising[,] the cultivation of tung trees is portrayed as a means of securing a substantial income on a small investment.”) Id.

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were “not selling securities as that word is defined in the Securities Act” and, therefore, the defendants had not violated Section 5 by failing to register the warranty deed or service contract arrangements with the SEC prior to the sale and distribution of the arrangements.36 Upon appeal, the Fifth Circuit Court of Appeals affirmed the lower court’s decision.37 By the time the Supreme Court considered the issues presented by Mr. Howey’s citrus grove operations, Mr. Howey had suffered a heart attack and died.38 After his death in 1938, Mrs. Howey kept roughly 1,000 acres of citrus land39 but sold the W. J. Howey Company and the Howey-in-the-Hills Service, Inc., to Claude Vaughan Griffin, who then oversaw the defense of the litigation.40 In Howey, the Supreme Court rejected the above rationale and determined that the land sales contract, the warranty deed, and the service contract together constituted an investment contract within the meaning of securities regulation. To reach that conclusion, the Supreme Court first needed to define “investment contract” for the purposes of the Securities Act. Relying on prior judicial interpretation of the term, the Court defined “investment contract” as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.”41 In announcing this test, the Court emphasized the importance of furthering the aims of full and fair disclosure embodied in the Securities Act and the need to establish a flexible definition that could adapt to “the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”42 Notably, the SEC pursued the action against the two companies and did not pursue additional action against any of the individual business officers (or in the case of Mr. Howey, his estate). In focusing the facts on the corporate entities, the only individuals it discussed at any length are the purchasers – described as “businesspeople” and “professionals.” Thus, on the facts as presented in the original Howey opinion, the narrative of the case appears to suggest that Florida corporations lured unsuspecting, well-meaning, and respectable business professionals into securities transactions without complying with relevant disclosure laws. Setting the case up this way obfuscates the structures of power and authority that enabled Mr. Howey – a prominent, landowning, politically influential white man – to launch and operate 36 37

38 39 40 41 42

SEC v. W. J. Howey Co., 60 F. Supp. 440, 442 (1945). SEC v. W. J. Howey Co., 151 F.2d 714, 717 (1945) (focusing almost exclusively on the “nexus” of the inquiry for determining whether an arrangement is an “investment contract” – whether the underlying asset at the center of the financial arrangement had intrinsic value that rendered the arrangement less speculative). Hughes, supra note 12, at 264 (noting Mr. Howey’s death on June 7, 1938). Id. at 252. Id. at 251. S.E.C v. W. J. Howey Co., 328 U.S. 293, 299 (1946). Id.

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an enterprise, solicit investors, and construct and distribute interests in financial arrangements that paralleled the investment arrangements in Bailey, despite successful enforcement actions by the SEC that deemed these same arrangements “securities.” As Gabaldon explains, failing to acknowledge these power structures “has the effect of devaluing actors’ special circumstances, as well as decreasing their personal responsibility.” THE FEMINIST JUDGMENT

In her concurrence, Gabaldon rejects the four-part Howey test for identifying which financial instruments qualify as securities when they are not otherwise among those specifically enumerated in the Act. In particular, Gabaldon points out that the Howey test is too detailed, hinting that the Court missed an opportunity to advance the deeper objectives underlying securities regulation policy, namely, to reduce information asymmetries and fraud. In particular, Gabaldon laments the Court’s use of too detailed a test for investment contracts as a missed opportunity to inspire better conduct in securities markets or shape the values inherent in investment culture. The problem, as identified by Gabaldon, is that by designing a test with specific elements, flexible or not, the U.S. Supreme Court made a power judgment in favor of savvy promoters. By elaborating a test with specific elements, the Court, Gabaldon argues, “simply hands a template to those who may lack concern for others and who choose to cut corners.” As a result, Gabaldon worries that the Howey test insufficiently protects investors in contexts beyond Howey-in-the-Hills and that the Howey test fails to adequately shape ways of thinking about investment activity and the operation of markets. Gabaldon argues that linking investor protection to passivity allows investors to disclaim responsibility for how their funds are used. In fact, a comparison of the stipulated facts offered as background in the majority opinion with the details discussed above regarding Mr. Howey’s prominence in Lake County, Florida, and his reliance on Mrs. Howey to manage the cultivation business at home bears out Gabaldon’s concern. Considering the extensive additional details about Mr. Howey’s operations that were not mentioned in the original Supreme Court decision, in light of Galbadon’s insight as to the connection between passivity and lack of responsibility, reveals how the majority opinion simply perpetuated the prevailing culture of the time. As Gabaldon explains, the emphasis on passive investment as a key to triggering investor protection rules “contemplates and portrays as normal a distancing from decision-making and implies a lack of responsibility for how one’s funds are employed.” Indeed, Gabaldon observes that this piece of the test should be expected to enable “managers to disregard and even to exploit employees, customers, communities, and the environment.” Mrs. Howey’s investments in and commitment to the business are what Gabaldon thinks should fall within any proper definition of an “investment contract.” Though Mrs. Howey did not invest money, one can hardly doubt that she was invested in the Howey citrus businesses. Excluding her from the story ignores not only an important manager and employee of the enterprise but also someone whom the securities laws https://doi.org/10.1017/9781009025010.021 Published online by Cambridge University Press

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should protect. Under Justice Gabaldon’s approach, securities laws would recognize that investors in an enterprise may be “as a practical matter, impotent vis a vis the large enterprises in which they invest;” however, rather than accept and validate that status quo, Gabaldon calls for a rule that also “encourages caring or compassion for the employees and customers who may be even more vulnerable than investors themselves.” In other words, Justice Gabaldon’s definition of “investment contract” would focus on, rather than ignore, Mrs. Howey as a crucial actor in the case – as an “investor” in the enterprise because of her role as an active manager of the labor intensive business. Gabaldon’s concerns closely track the behind-the-scenes realities of the case that lead, as she anticipates, to harmful consequences in modern times. In Howey, a male celebrity-like figure promoted a business actively managed by an unacknowledged woman in his life. When powerful men like William J. Howey and his Chicago-based investors plan – over fancy dinners in resorts – the economic futures of others who they intend to exploit, while equally qualified women such as Mrs. Howey undertake the actual work, we are presented with the quintessential picture of an investment “bro culture.” Indeed, the type of bro culture clearly evident when considering the extended facts of the Howey case has, just as Gabaldon predicted, thrived in U.S. capital markets.

HOWEY’S IMPACT ON INVESTMENT CULTURE

If the Court had taken Gabaldon’s approach, investment culture might have looked quite different than it does at present. As Gabaldon notes, the passive investment requirement enables investors to distance themselves from responsibility in how their investment is used. Investors may ignore the exploitation of employees, customers, and other people in the name of separating ownership and control. So long as the enterprise pursues profit, consistent with shareholder primacy directives, investors and promoters have very little incentive to raise important questions about corporate social responsibility. In this way, both the passivity and expectation-ofprofit elements of the Howey test lay the foundation for extreme toxicity in investment culture – a culture that is exploitative and demeaning and pursues short-term profit over long-term values.43 In doing so, the Howey test sets up an investment culture that privileges and empowers the decision-making ingroup and disempowers the outgroup. In the investment culture of the early 1920s, this scenario often meant that women and the laborers who worked in the orange groves were disempowered. Laws and regulations, as well as formal and informal social norms, reinforced this power dynamic and, in the context of the Howey case, obscured the lived realities of the individuals whose contributions to the enterprise lay at the heart of the case. 43

The history of investment banking behavior stands as witness to Justice Gabaldon’s argument. Claire A. Hill & Richard W. Painter, Better Bankers, Better Banks: Promoting Good Business Through Contractual Commitment 97 (2015).

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To wit, research demonstrates that venture capitalists disproportionately invest in businesses led by men.44 In fact, the investment bro culture resounds so strongly in capital markets that many female-led or female-labor intensive ventures include men mainly because doing so increases the likelihood of investment and helps to moderate any interactions with other men.45 Adding men to a female-led venture thus helps the venture to combat a commonly held myth in U.S. capital markets, namely, that women primarily start businesses related to their personal hobbies, which are unlikely to produce a strong return on investment.46 Other myths related to the nature and experience of women in business may contribute to the trend of capital market investment in male-dominated ventures.47 Perhaps if the Howey Court had used the approach proffered by Justice Gabaldon’s concurrence, which looks beyond the narrowly stipulated facts to the reality of those contributing to the Howey-in-the-Hill enterprise, the Howey decision would have ushered in a more value-centric standard, such as the one proposed in Gabaldon’s concurrence. Ultimately, the details of the story have a place.48 And had they been acknowledged, perhaps the Court may have considered a stronger standard-setting approach over a detailed test that puts even more power into the hands of those who already wield it, rather than limiting it. By adopting a detailed test that prioritizes the speculative nature of an investment opportunity and by characterizing investors as “passive,” and by attributing limitations to passive investors in speculative investments, the Howey test ultimately played a significant role in undermining accountability. The approach underlying the Howey test also had the effect of marginalizing certain classes of investors and eroding their role in influencing the direction of the enterprise.49 If instead, the Howey Court had opted for the more robust standard proposed by Gabaldon’s concurrence, it would have encouraged promoters and investors to accept a greater sense of responsibility for the consequences of developing and promoting enterprises; it would also have allocated a greater measure of power to the vulnerable in capital markets rather than to those who can carefully plan around detailed rules. If the Court had done that, perhaps the playing field would be more 44

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Benjamin P. Edwards & Ann C. McGinley, Venture Bearding, 52 U.C. Davis L. Rev. 1873, 1877 (2019). Id. at 1913. Candida Brush et al., The Diana Project – Women Business Owners and Equity Capital: The Myths Dispelled 2 (2008). Id. at 7 (naming eight myths about women and equity capital). Theresa A. Gabaldon, Corporate Conscience and the White Man’s Burden, 70 Geo. Wash. L. Rev. 944, 946 (2002) (describing the problem of essentializing as “taking the essence of [an] experience, desire[], etc., as representative of that of a larger and perhaps universal group” – such that the important details of an individual’s story is abstracted in unhelpful ways). See Sarah C. Haan, Corporate Governance and the Feminization of Capital, 74 Stan. L. Rev. 515, 522 (2022) (“Over the first half of the twentieth century, the percentage of women among individual shareholders at American public companies contiuously grew until, sometime between 1952 and 1956, women became the majority . . . . Before the 1929 stock market crash, women shareholders outnumbered men at some of America’s largest and most influential public companies”).

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level, and women would not have to pretend that their businesses are run by men just to catch investor attention. Instead, the Court’s Howey decision reflects the gender politics of the twentieth century, in which the strong male managers enjoyed privilege over the weak (often female) investors and behind-the-scenes participants in the venture.50 However, history reveals a more complicated narrative than twentieth-century gender politics acknowledged.51 Had the Howey Court adopted Gabaldon’s approach, it could have highlighted, and perhaps combated, the darker elements of American business – rather than adopt a standard that would discourage certain stakeholders from assuming responsibility or enable them to escape accountability for the harms and negative externalities engendered by their enterprises. Specifically, the Court’s refusal to adopt a standards-based approach such as that offered in Gabaldon’s concurrence potentially ignores, at best, and perpetuates and encourages, at worst, both privilege and exploitation as well as disregard for stakeholder groups with limited capacity to influence the decision-making bodies in corporations – particularly those that register equity shares and distribute them to geographically dispersed shareholders. Consequently, the Court’s approach not only obscures Mrs. Howey’s contributions as both an owner and co-laborer in tending the citrus groves, but it also disregards the contributions of the agricultural workers employed by the Howey enterprise. Despite a burgeoning labor rights movement unfolding at the height of the Howey family’s success, agricultural workers across the United States remained among the most vulnerable segments of the national workforce.52 Attempts by agricultural laborers to demand better working conditions and pay elicited swift and often violent responses.53 Noting that the Howeys’ citrus grove empire likely relied heavily on disempowered workers who faced harsh and demoralizing working conditions,54 it might be fair to note that upon inheriting the business, Mrs. Howey may have continued to employ approaches adopted by her husband, Mr. Howey, and others in their community.55 The Court’s emphasis on passive investment and its effect on decreasing responsibility and accountability for practices undertaken by the enterprise did nothing to discourage such practices. Rather, the original opinion in Howey might be seen as part of a broader pattern in “post-Civil War, nineteenth- and twentieth-century jurisprudence that depicted women as incapable of performing labor, voting, becoming lawyers, serving on juries, or maintaining a life beyond the care of their 50 51

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See Id. at 6. Michele Goodwin, A Different Type of Property: White Women and the Human Property They Kept, 119 Mich. L. Rev. 1081, 1086 (2021). James Gilbert Cassedy, African Americans and the American Labor Movement, 29 Prologue: Fed. Recs. & Afr. Am. Hist. (1997). Id. Sean Sellers, Greg Asbed & Coalition of Immokalee Workers, The History and Evolution of Forced Labor in Florida Agriculture, 5 Race/Ethnicity: Multidisc. Glob. Contexts 29 (2011). Goodwin, supra note 51, at 1106.

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children and husband.”56 If the Court had adopted a Howey test that incorporated Gabaldon’s insights and emphasis on a more standards-based approach, perhaps the case could have earlier ushered in important social values – such as diversity, sex equality, labor rights, and corporate responsibility – and would thereby have acted as an early restraint on the toxic investment culture that has traditionally devalued such considerations.

HOWEY’S CONTINUING IMPORTANCE

In 2017, the SEC issued the “DAO Report,” explaining its conclusion that certain cryptographic tokens qualify as investment contracts and thus as securities subject to regulation under the Howey test.57 One might colloquially describe the creation and sale or distribution of cryptographic tokens as a hybrid between crowdfunding and conventional capital raising.58 These token sales or “initial coin offerings” offer a new method for business ventures to raise funds.59 Investors in token sales range from individual enthusiasts of distributed ledger technology to established venture capital firms such as Pantera Capital, Blockchain Capital, the Digital Currency Group, and Fenbushi Venture Capital.60 Although many scholars critique the application of the Howey test to cryptographic tokens,61 the SEC actively enforces securities laws against unregistered offerings of tokens.62 In fact, in subsequent speeches and documents, the SEC even enunciated a version of the Howey test focused on cryptographic tokens.63 In doing so, the SEC emphasized that the “focus of the Howey analysis is not only on the form and terms of the instrument itself (in this case, the digital asset) but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold (which includes secondary market sales).”64 Here, the SEC seems to follow Gabaldon’s concurrence by expanding the idea of financial benefit to include nearly any method of realizing appreciation on the asset; it also takes a fairly expansive view of what might constitute “the efforts of

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Id. at 1107. U.S. Sec. & Exch. Comm’n, Release No. 81207, Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017). Padraig Walsh, Blockchain’s Brave New World: Initial Coin Offerings, Forbes (June 21, 2017), https://www.forbes.com/sites/walshpadraig/2017/06/21/blockchains-brave-new-world-initial-coinoffering/#6ad5b3c37897. Id. Id. See, e.g., Randolph Robinson II, The New Digital Wild West: Regulating the Explosion of Initial Coin Offerings, 85 Tenn. L. Rev. 897 (2018). Cyber Enforcement Actions, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/spotlight/cyber security-enforcement-actions (last visited June 22, 2021). Framework for “Investment Contract” Analysis of Digital Assets, U.S. Sec. & Exch. Comm’n (Apr. 3, 2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digitalassets#_edn1. Id.

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others.”65 Just as Gabaldon’s concurrence indicates, the more expansive approach allows the SEC to attempt to moderate the behavior of promoters, sponsors, and other third parties involved in providing essential managerial efforts for tokens and their related enterprises. Some cryptographie and token developers object to the application of the Howey test to this asset class. These commentators view the transparency and auditability of cryptographic tokens as a superior method of reducing information asymmetries. The details, they argue, are available in the open-source code.66 In reality, however, the code remains unreadable to the vast majority of common investors, and the other documents purporting to provide disclosures often fail to do so entirely. In fact, such documents often contain outright discrepancies and obfuscation of information.67 Such discrepancies suggest that blockchain-based markets are – like any other markets – deeply influenced by the limits of existing regulation and investment culture unless the law actively strives to inculcate different values.68 For example, according to Nian Hu, “[b]eing a bitcoin bro isn’t just defined by your occupation or hobby; it’s a lifestyle, an image, an aesthetic.”69 Permitting a culture that limits responsibility and accountability actively prioritizes the contributions based on sex, and turns a blind eye to discriminatory behavior engenders myriad concerns. First, just as with Mrs. Howey, excluding women from the story of crypto ignores and devalues the many and important contributions of women to blockchain and cryptocurrency development.70 Second, just as ignoring the labor conditions of agricultural workers in Florida as part of the Howey story helped to perpetuate a culture that ignored discriminatory business practices, so too will failing to emphasize diversity in blockchain and cryptocurrency development perpetuate deeper patterns of discrimination in technology sectors.71 Third, the intentional exclusion of women and diverse technologists will impair the performance of the technology over time. Just as corporate C-suite and board diversity positively impact corporate culture and performance,72 evidence shows that 65 66

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Id. Jonathan Rohr & Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets, 70 Hastings L.J. 463 (2019). Dave Hoffman, Coin-Operated Capitalism, 119 Colum. L. Rev. 191 (2019). Nian Hu, The Bitcoin Bro: The Devaluation of Female Intelligence in the Tech Industry, Harv. Crimson (Sept. 28, 2017), https://www.thecrimson.com/column/femme-fatale/article/2017/9/ 28/hu-bitcoin-bro/. Id. Alexander Guzman, Cristian A. Pinto-Gutierrez & Maria Andrea Trujillo, Signaling Value Through Gender Diversity: Evidence from Initial Coin Offerings, 13 Sustainability 700, 700–01 (2021). See, e.g., Sarah Myers West, Meredith Whittaker & Kate Crawford, Discriminating Systems: Gender, Race, and Power in AI, AI Now 10, 10–15 (Apr. 2019); Stacy M. Brown, America’s STEM Conundrum Continues to Thwart People of Color, Wash. Informer (Aug. 4, 2021). See, e.g., Yaron Nili, Beyond the Numbers: Substantive Gender Diversity in Boardrooms, 94 Ind. L.J. 145 (2019); Theresa M. Welbourne, Cynthia S. Cycyota & Claudia J. Ferrante, Wall Street Reaction to Women in IPOs: An Examination of Gender Diversity in Top Management Teams, 32 Grp. & Org. Mgmt. 524 (2007).

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gender diversity in the context of crypto-related investment contracts not only increases the total amount of funding raised by the securities offering but also reduces the likelihood of long-term token failure significantly.73 Further, research indicates that racial and ethnic diversity in science, technology, engineering, and mathematics leads to innovation and critical thinking while reducing errors.74 As a result, encouraging racial diversity in blockchain technology and cryptocurrency development should be a key goal of legal rules – such as the Howey test – that are applied to cryptocurrency in the name of protecting investors. The important investments of the women and people of color helping to build the technology and the enterprises that use it ought to be valued and protected by the securities laws. Valuing such investments would likely improve economic returns for all investors, rather than condoning behavior that privileges certain investors over others. It might not be too late to encourage important values and enable better conduct in at least one area of capital market regulation. With trillions of dollars of investment activity directed at cryptographic tokens, it is important to make the effort to do so. CONCLUSION

As Gabaldon rightly reminds us, securities regulations seek “to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mail, and to prevent frauds in the sale thereof.”75 Although the original Howey opinion ostensibly sought to clarify the boundaries of the catch-all category of investment vehicles subject to the disclosure and anti-fraud regime created to achieve those policy goals, Gabaldon’s concurrence adds a critical dimension to Howey by pointing out the Court’s failure to seize an important opportunity to shape investment culture. Regulating newly emerging markets through the lens of investment contracts may offer the SEC an opportunity to add the kind of interpretive gloss required to move the Howey test closer to Gabaldon’s vision.

SEC v. W. J. Howey Co. et al., 328 U.S. 293 (1946) justice theresa gabaldon, concurring in the result I do not take exception to Justice Murphy’s statement of the facts, but I do choose to highlight those very few facts that I believe should be dispositive. This case involves the application of § 2(1) of the Securities Act of 1933 to an offering of units of a citrus grove development coupled with a contract for 73 74

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Guzman et al., supra note 70, at 714. Rachel D. Godsil, Why Race Matters in Physics Class, 64 UCLA L. Rev. Disc. 40, 48-49 (2016). Pub. L. 73-22. 48 Stat. 74 (1933).

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cultivating, marketing, and remitting the net proceeds to the investor. The purchasers for the most part are non-residents of Florida. They are predominantly business and professional people who lack the knowledge, skill, and equipment necessary for the care and cultivation of citrus trees, and the contracts they are offered preclude them from entry onto their units. The units are marketed as likely to give rise to substantial profits. I agree with the majority’s conclusion that W. J. Howey Company and Howey-inthe-Hills Service, Inc. are in violation of the Securities Act of 1933 but disagree with the majority’s unduly restrictive definition of “investment contract.” This definition drew from authorities such as State v. Gopher Tire & Rubber Co., 177 N.W. 937, 938 (Minn. Sup. Ct. 1920) and is to the following effect: an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interest in the physical assets employed in the enterprise.

There are aspects of this definition with which I agree, but many more with which I do not. Section 2(1) of the Act defines the term “security“ to include the commonly known documents traded for speculation or investment, such as stock, bonds, and debentures. The definition also includes “securities” of a more variable character, including “investment contract” and “evidence of indebtedness.” As briefed, the legal issue in this case turns upon a determination of whether, under the circumstances, the land sales contract, the warranty deed, and the service contract together constitute an “investment contract” within the meaning of § 2(1). An affirmative answer in this case necessarily would bring into operation the registration requirements of § 5(a), unless the security is granted an exemption under § 3 or the relevant transactions are granted an exemption under § 4. The lower courts, in reaching a negative answer to this problem, treated the contracts and deeds as separate transactions involving no more than an ordinary real estate sale and an agreement by the seller to manage the property for the buyer.

I

The long title of the Act conveys that its purpose is “to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof.” Pub. L. 73–22, 48 Stat. 74 (1933). This contrasts with the more restrictive approach taken by many states at the time of enactment, which called on securities regulators to assess the merits of investments proposed to be offered. It is incumbent on me to take exception to both disclosurebased and merit-based regimes. The former surely disregards the possibility (indeed,

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likelihood) that individual investors will not be capable of assessing the disclosure they are given; the latter ignores the risk that initially promising enterprises subsequently may be mismanaged – perhaps deliberately so. Ideally, full disclosure and initial merit both would be necessary, but not sufficient, conditions to an offering. An additional requisite (which I further address below) might call on the promoters of, as well as the participants in, investment schemes to assume responsibility – perhaps in the form of a fiduciary duty – for the ongoing operation of their enterprises. Although the title of the Act, after its homage to “full and fair disclosure,” goes on to allude to “other purposes,” there does not in fact appear to be anything in the Act that aspires to anything beyond disclosure. It thus behooves those concerned with the safety of contributors to an enterprise to make the most of the safeguards the Act does provide. In advocating for an expansive interpretation of the term “investment contract” and thus an expansive application of the Act, I believe it may be useful to expand on the possible purposes of regulating investment transactions. One obvious possibility is protection of vulnerable investors from would-be predators. If one truly were interested in protecting the vulnerable, however, the securities laws would not stop at disclosure. As noted above, many recipients of disclosure will be unable to deal with it effectively. It might be argued, of course, that disclosure indeed can protect vulnerable investors through market mechanisms. After all, any disclosure to unsophisticated investors by way of a registered public offering also will be received by financial analysts and investors who are savvier. The result presumably is a price that reflects the value of the investment, thus insulating unsophisticated investors from their own folly. This is a spare and arguably incorrect model. Surely, markets do not always act rationally. One need only think about the early seventeenth-century tulip craze, the Mississippi Company mania instigated in France in the early eighteenth century by the memorably named John Law, and the contemporaneous South Sea bubble in England to illustrate this point. The transactions involved did not, of course, have the protections of the Act, but there is no reason to think that disclosure would have averted them. It is true that markets do seem eventually to adjust, but that hardly protects those who have entered transactions before an adjustment occurs. It is only a short step to the conclusion that the Act does not so much concern itself with actual protection of the interests of vulnerable investors as it does with inducement of the belief that such protection exists. In other words, it is entirely plausible that the actual goal of the Act is one of investor confidence. Ironically, the historic bubbles alluded to above have taught us that there can be such a thing as investor overconfidence. They moreover graphically warn of the danger that anonymous markets can lead to conduct that is, at best, amoral, as one purchaser makes a speculative short-term acquisition in the hope of selling to another purchaser before the bubble is burst. Clearly, our lawmakers consciously chose to eschew the more robust model of merit evaluation. That may be because it would be prohibitively expensive or

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because it would require activity for which government actors would not be particularly well suited. Moreover, and without a doubt, proponents of disclosure over merit would contend that merit-based regulation is unduly paternalistic. One wonders if reactions would be quite the same if the word “maternalistic” were substituted. I believe that they would, for it seems that the drafters of the Act were not of a mind to require caretaking or compassion and instead invoked a dichotomous view of the world, in which the requisites for successful markets and happily functioning families are strictly separate. In any event, as I have noted above, I would not find merit regulation to be an adequate model for securities regulation. This is because it does nothing to inspire the type of conduct that I would prefer to encourage from promoters on an ongoing basis – and from investors themselves. This conduct will be further described in my discussion of the specifics of the majority’s definition of “investment contract.” II

Notwithstanding the modest protections of the Act, we must recognize the wisdom of the drafters in attempting to extend those protections broadly by using terms encompassing far more than traditionally recognized securities. The Court therefore properly holds that the lower courts have disregarded the intended breadth of coverage and have exalted form over substance. The result of the lower courts’ holdings has been to disregard the needs of clearly vulnerable investors. Although the majority opinion in this case adequately addresses those needs in the context of the instant case, I believe it does not go far enough in protecting investors in other contexts or in appropriately shaping ways to think about investment activity and the operation of markets. It is with these goals in mind that I turn to consideration of the proper test for coverage by the Act. Congress chose to use both rules of coverage (by referring to known instruments) and what essentially are principles of coverage (by adopting broad and somewhat indeterminate wording). It falls to us to explicate and apply those principles carefully. The majority derived its test for the existence of an “investment contract” through perusal of cases in which that term was interpreted for purposes of state securities regulation. Thus, as noted above, the majority holds that an “investment contract is a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Even given the relatively paltry aims of the Act, I reject this definition as too narrow. Before addressing my concerns about the narrowness of the majority’s definition, I note that it should also be rejected because it is too detailed. Detailed rules are devoid of emotional appeal and lose any capacity to inspire – as opposed to govern – conduct or to shape values. In part, this is because they simply create opportunities

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to plan around them. The promoters of the Howey scheme itself might, for instance, ask investors to contribute some minimal managerial effort in order to evade coverage under the Act.1 This type of planning almost certainly will prompt both abuse and future litigation. Encrusting a rule with barnacles that are appropriate in the particular case in which they are developed runs the risk of creating the misleading impression that all, or most, variations have been considered and that those that are not reflected are unimportant. In addition, the specification of details suggests that we, as judges, had access to all of the information that possibly could be relevant to the propriety of any future action by promoters. This has the effect of devaluing actors’ special circumstances, as well as decreasing their personal responsibility. A more general definition of “investment contract” would almost certainly have superior value-shaping ability, simply because its message would be more easily understandable than that of the version supplied by the majority. Moreover, a perception that the coverage of the federal securities laws cannot be manipulated by the wealthy and well-advised could be expected to enhance investor confidence. It is possible that the frequency of litigation would increase, but that is not necessarily true. For one thing, the occasions to litigate details would be fewer; for another, the breadth of a more general definition might have a prophylactic effect, discouraging conduct that might otherwise give rise to legal proceedings. To articulate the same thought somewhat differently, I note that the choice between general and specific language can play a role in allocating power between enforcement authorities and transactional planners. Specific language simply hands a template to those who may lack concern for others and who choose to cut corners. To the extent that enforcement authorities can more predictably be relied upon to consider the interests of the truly vulnerable than can those who seek the capital of vulnerable investors, the choice of whom to empower seems clear.

III

I now turn to the specifics of the majority’s test with which I disagree. The passivity requirement. The majority’s definition limits investment contracts to “transactions or schemes” in which the investor relies “solely [on] the efforts of the promoter or a third party.” I note, first, that although passive investors certainly are in need of protection (and passivity indeed is affirmatively required by the contracts offered by the Howey enterprise), mandating passivity as the price of that protection seems bad policy. It contemplates and portrays as normal a distancing from decisionmaking and implies a lack of responsibility for how one’s funds are employed. 1

Although it is possible that some future court will recognize this danger and will substitute the word “primarily” for the word “solely,” the majority’s use of that term is an example of the absolutism that I protest in this concurrence.

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This easily releases managers to disregard – and even to exploit – employees, customers, communities, and the environment. I therefore would not limit “investment contracts” to contracts involving passive investors. It well may be that many investors are, as a practical matter, impotent vis-à-vis the large enterprises in which they invest, but the majority’s approach perpetuates the view that such impotence is as it should be. Finding a balance between protecting the vulnerable and encouraging passivity is a difficult task. That does not mean the task should not be undertaken or that the issue should be ignored. Every parent surely recognizes that children must be cared for but that they also need to learn to tie their shoes – and to play nicely with others. As a symbolic matter, the majority’s articulation normalizes passive investment and in no way encourages caring or compassion for the employees and customers who may be even more vulnerable than investors themselves. In fact, the passivity requirement brings to mind very uncomfortable recent memories. We should not forget that many otherwise good men and women in Germany were passive with respect to the horrors of the Holocaust. If it is possible to avert one’s eyes from such outright atrocities, it is correspondingly easy to look away from what may be the routine exploitation of workers and consumers. Almost certainly, people reading these words will have the uncomfortable reaction that there is a need for linedrawing. As will become even more apparent below, I disagree. Lines encourage conduct that comes up to the line. In any event, I can think of no real reason why eliminating the passivity requirement would wreak any adverse consequence. What would be the harm in extending the protections of the securities laws even to those who are actively involved in an enterprise? The answer presumably is that compliance with the securities laws has costs that should not unnecessarily be imposed. That, of course, begs the questions of what the protections of the securities laws really should be and what compliance should require. The former question is addressed above. The latter is a matter that is informed at least as much by the structure of exemptions and the demands of registration as it is by the definition of “investment contract.” As I note below, there is no reason to think that lobbying interests will fail to ensure that those points are amply tweaked to avoid significant burdens on capital formation. At the risk of prolonging what already promises to be a lengthy concurrence, as well as the risk of provoking my male colleagues, I do wish to say a few words about passivity and vulnerability from the perspective of a woman. I believe that few would disagree that women are vulnerable by reason of our relative average size and historical relegation to subservient positions vis-à-vis our male counterparts. That vulnerability should not dictate – and in recent years has not dictated – passivity. One need only recall the image of Rosie the Riveter, the example of the brave young women who joined the Women’s Air Force, and the inspiration of the female members of the French Resistance in order to recognize that, in the right circumstances, the “weak” can be exceptionally strong. I therefore would reimagine

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securities regulation to call upon both those who raise capital and those who contribute it to take responsibility for its use, on an ongoing basis. The requirement of a motive to profit. The majority’s definition of “investment contract” requires that the investor be “led to expect profit.” Emphasizing a profit motivation is similarly bad policy. Granted, receipt of some sort of return is inherent in the concept of “investment,” but I would not wish the decision in this case to be read as suggesting that one’s investment must result in any particular form of benefit, including benefit to oneself. I prefer an interpretation that would still protect those who are hoping that use of their input (in whatever form) will be put to some socially useful purpose, either in addition to or in lieu of a benefit to themselves. Managers already have more than ample motivation to focus on profit. Enshrining in the federal securities law an assumption that profit is all that an investor legitimately seeks is a step I would not choose to take.2 It is not far-fetched to imagine, for example, a situation in which an investor might decide to contribute resources to a struggling local enterprise out of concern that its employees be permitted to maintain their livelihoods. Similarly, one might invest in a company contributing to a war effort or attempting to develop socially beneficent items such as life-saving medicines. In fact, one need look no further than the landmark case of Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. Sup. Ct. 1919), for a somewhat ironic example of what might be called an attempt at socially conscious investing.3 There, as is doubtless known to all members of the bar, Henry Ford proposed both to reduce the price of the cars produced by the company he dominated, as well as to forego payment of special dividends in favor of investment in plant expansion. Some of the shareholders were said to “cheerfully accede” to these plans; the Dodge brothers, who were significant stakeholders in the Ford Motor Co. but also operated a competing business, famously did not. The Michigan Supreme Court, of course, took the position that [a] business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend of a change in the end itself, to the reduction of profits, or to the nondistribution of profits among shareholders in order to devote them to other purposes.

170 N.W. at 684. This language is quoted for two reasons. The more obvious is that it is exactly the type of jurisprudential endorsement of profit motivation that I would prefer to avoid. The less obvious reason is just as central to my point. This has to do 2

3

I note, as an aside, that parents “invest” in their children by way of decades of expenditure, love, and interaction. They do so without requiring anything whatsoever, or expecting anything whatsoever, simply in the hope that those children will thrive. For purposes of this opinion, I choose to elide the question of whether Mr. Ford’s motives were other than as represented.

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with the at least ostensible conflict in shareholder motivations revealed in the case. The Dodge brothers sought profit maximization and immediate distribution of profits to shareholders. Mr. Ford, a shareholder himself, and apparently other shareholders too, took an alternative view. My focus is on the “other” shareholders. I would have great difficulty in justifying the conclusion that if, by happenstance, their investments were not in stock and had taken some more idiosyncratic form, those others should be regarded as any less deserving of coverage by the federal securities laws than were the frankly self-interested brothers Dodge.4 The failure to define “investment.” In what may appear to be an aside but is in fact also central to my analysis, I additionally must respectfully criticize my majority colleagues’ failure to more usefully articulate some standard for the chosen term “investment.” It is possible that they simply intend to suggest that any profitmotivated purchase of an interest in an enterprise is automatically an investment. If so, I disagree. In my view, “investment“ should connote a commitment to an enterprise, to its employees, to its customers, and to the communities in which it operates. Bestowing the protections of the federal securities laws on the short-term purchase of an interest in an enterprise with the intention of turning a quick profit on it can only encourage that type of activity. This seems, yet again, poor policy. It is true, of course, that stock speculation is well known yet stock is clearly included in the definition of a “security.” I also concede that inquiry into even the objective motivation of stock purchasers would create an unadministrable morass. The case of stock is, however, easily distinguishable from that of an alleged investment contract, since in the case of the latter, an in-depth inquiry will necessarily already be underway. The common enterprise requirement. The majority’s definition requires investment in a “common enterprise.” I reject this requirement as unnecessarily limiting. As one might surmise from what I have written above, I applaud the notions of community and common enterprise, but requiring them as the quid pro quo for protection presents the opportunity for abuse and invites speculation about what commonality entails. There is nothing in the wording of the term “investment contracts” that speaks to commonality. I note as well that the terms “stock” and “bonds” literally extend to holders who may not have interests in common with others. I therefore reject the requirement of commonality in favor of something more inclusive. In light of the extensive exemptions available under the Act, there is no reason to fear that the burdens of registration under §5 will be extended to all transactions. As an example of the conundrum posed by the majority’s commonality requirement, consider the following. Assume that an elderly and recently widowed woman is solicited to be the sole purchaser of a grain mill. She is told that it is profitable and 4

The investments in the Dodge case were, of course, in the form of stock, which is separately stated to be a security.

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that its current owner or manager is willing to continue to operate the business. The value of the enterprise is vastly overstated. If the purchase involves the transfer of stock, the protections – including the anti-fraud provisions – of the federal securities laws presumably will apply.5 If, instead, the transaction is structured as the transfer of an asset coupled with a management contract, the “common enterprise” requirement would seem, without any particular justification, to strip those protections. Similarly, if there had been only one victim of the Howey scheme itself, the majority’s opinion evidently would have precluded any enforcement action from proceeding. Perhaps this rationale is explicable from the standpoint of conserving prosecutorial resources, but it could not extend to any possible private right of action under Section 12 of the Act. I do, however, endorse the “enterprise” requirement. If it is to be the case that the federal securities laws do not cover every business transaction, a dividing line must be found. If someone is solicited to purchase a painting by a promising young artist whose work may appreciate in value, there presumably is no coverage under the federal securities laws. This is sensible in light of the main thrust of the Act, which is to provide disclosure with respect to a variety of matters relating to the operation of a business. If, however, one is solicited to contribute funds to retain artists to produce paintings to be marketed at some point in the future, an enterprise exists, and coverage by the Act seems entirely apt. The investment of money requirement. The majority’s definition literally calls for the investment of “money.” This is a trivial point, as I believe lower courts should be willing to interpret this language, but I do call on them to do so. Surely, contributions of diamonds, used cars, services, or the like should suffice. To claim otherwise is sophistry and would, once again, lead to the possibility of exploitation by canny planners, as all they would need to do is request the purchasers of investments to buy and contribute some item or items required to operate the business.

IV

What I am left with is contemplation of the simple words “investment contract.” I have no novel insights into the concept of “contract” and would leave it to the generations of lawyers who have warmed a seat through the first year of law school to recognize the relevant arguments. With respect to “investment,” I would – in keeping with my already articulated disagreements with my colleagues – recognize that the term relates to a contribution of money, property, effort, or something else of value, made following a suggestion that deployment of that contribution might result in long-term benefit to the investor or any third party (including, for this purpose but without exclusivity, 5

I do not take the majority’s definition of “investment contract” to extend to any of the other terms utilized in the statutory definition of a “security.”

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communities or the environment) that the investor might hope to assist. The contribution in question may have been made either by the investor or the investor’s predecessor in interest, thus clarifying that, absent applicable exemptions, aftermarket transactions are subject to coverage by the Act.6 I reiterate that I would not fear that this definition would unnecessarily burden either the agglomeration of capital or the amassment of funds for charitable purposes (with respect to which exemptions already exist). There are ample exemptions and sufficient pressure from those with financial interests to create more – enough to lead me to believe that, were the majority to endorse my definition, our decision would years from now be largely symbolic. Symbols, however, are important.

6

The definition I have suggested invites the argument that short-term speculators who simply seek to turn a quick profit on resale would forfeit protection under the Act, both for themselves and their hapless purchasers. To clarify, however, the insertion of the words “following a suggestion” is intended to eliminate focus on an investor’s state of mind or actual motivations.

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16 Commentary on U.S. v. Chestman donna m. nagy

The federal prohibition of insider trading arises from a series of decisions by the U.S. Supreme Court and lower federal courts interpreting the broad antifraud provisions of the federal securities laws. United States v. Chestman,1 an en banc decision in 1991 by the U.S. Court of Appeals for the Second Circuit, narrowed the scope of that prohibition with its ruling that a husband and wife do not share the type of fiduciary relationship that is essential for trading based on material nonpublic information to constitute securities fraud. The effect of Chestman on insider trading jurisprudence eroded over time through decisions by other circuit courts as well as rulemaking by the U.S. Securities and Exchange Commission (SEC). Nonetheless, in the opinion’s wake, criminal prosecutors and SEC enforcement attorneys faced higher hurdles in insider trading cases involving family members and friends as opposed to corporate officers and directors or others in business or employment relationships.

BACKGROUND

According to the Supreme Court, fiduciary principles are essential to the insider trading offense that arises under section 10(b) of the Securities Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5. Pursuant to the “classical theory” developed more than forty years ago in Chiarella v. United States,2 silence about such information is misleading and is therefore a fraud “in connection with the purchase or sale of [a] security” when a securities trader owes a duty of trust and confidence to the issuer’s shareholders.3 In contrast, under the “misappropriation theory,” which was entrenched by lower federal courts prior to its resounding endorsement in 1

2 3

United States v. Chestman, 947 F.2d 551 (2d Cir. 1991) (en banc), cert. denied, 503 U.S. 1004 (1992). Chiarella v. United States, 445 U.S. 222 (1980). See Id. at 228.

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United States v. O’Hagan,4 the fraudulent conduct is premised on a securities trader’s secret use of confidential information for personal profit in breach of a duty of trust and confidence owed to the information’s source.5 Both theories likewise extend Rule 10b-5 liability to certain “tippers” and “tippees”: namely, to persons who breach a duty of trust and confidence by providing trading tips to others for personal benefit and to the recipients of such tips who know or should have known of the breach.6 Insider trading or tipping can be charged as a civil offense in enforcement actions initiated by the SEC, or, in instances of “willful” violation, can be criminally prosecuted by the Department of Justice (DOJ).7 While the presence of a fiduciary-like relationship between the trader (or tipper) and either the securities issuer’s shareholders or the source of the information is essential to Rule 10b-5 insider trading liability, SEC enforcement officials and DOJ prosecutors are quite adept at convincing courts to find that prerequisite. Misappropriation theory cases, in particular, often involve decisions that stretch the boundaries of fiduciary principles almost beyond recognition.8 But the Second Circuit’s en banc decision in Chestman constituted a rare and jarring government defeat. Indeed, the U.S. Attorney at the time, Rudy Giuliani, and the other criminal prosecutors who brought the indictment had generally readied themselves and the public for convictions in insider trading cases, whether in jury trials (as in Chestman) or through guilty pleas, including those in the headline-grabbing prosecutions of Wall Street titans – such as Ivan Boesky (who inspired, in part, the famous fictional Wall Street [1987] character Gordon Gekko) and Michael Milken (who was later pardoned by President Donald Trump in February 2020).9 They also came to expect such jury verdicts to be sustained on appeal. Criticisms of the vagaries and inconsistencies of U.S. insider trading law had not yet reached the crescendo that can be heard today,10 and few would have predicted the Second Circuit’s ruling that duties of trust and confidence are not inherent in marital

4 5 6 7

8

9

10

United States v. O’Hagan, 521 U.S. 642 (1997). See Id. at 651–52. Dirks v. SEC, 464 U.S. 646 (1983); Salman v. United States, 137 S. Ct. 420 (2016). See 15 U.S.C. § 78ff(a) (2018) (authorizing fines of not more than $5 million and/or imprisonment for not more than twenty years for a willful violation of an Exchange Act provision or rule). See Donna M. Nagy, Insider Trading and the Gradual Demise of Fiduciary Principles, 94 Iowa L. Rev. 1315, 1357–64 (2009) (discussing notable cases imposing Rule 10b-5 liability regardless of whether the trader or tipper breached what can reasonably be deemed a fiduciary-like duty). See also infra notes 37–38 and accompanying text. See generally James B. Stewart, Den of Thieves (1991); see also James B. Stewart & Jesse Drucker, Milken Had Key Allies in Pardon Bid: Trump’s Inner Circle, N.Y. Times, Mar. 1, 2020, https://www.nytimes.com/2020/03/01/business/michael-milken-trump-pardon.html. See Peter J. Henning, What’s So Bad About Insider Trading Law?, 70 Bus. Law. 751, 751 (2015) (quoting scholars and commentators who have depicted U.S. insider trading law as “‘[a] theoretical mess,’ ‘seriously flawed,’ ‘extraordinarily vague and ill-formed,’ ‘arbitrary and incomplete,’ a ‘scandal,’ and even ‘astonishingly dysfunctional’”).

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relationships11 – at least not solely from the perspective that the foregoing legal context provides. The facts leading to Chestman, as well as the original judgment itself, occurred during a period of significant disturbance in marital, family, and gender dynamics in American society. According to some studies, the 1980s were a peak period for divorce rates, which have declined along with the marriage rate since that time.12 It was also in the very same month that Chestman was decided, in October 1991, that some say that the third wave of feminism emerged.13 This is the social and political context in which the original Chestman opinion was released.

ORIGINAL OPINION

Chestman’s facts involved a series of conversations over a five-day period in November 1986 among the immediate and extended family members of Ira Waldbaum, the then-president and controlling shareholder of the corporation that owned the Waldbaum’s supermarket chain. Ira informed his sister, Shirley Waldbaum Witkin, about his agreement to participate in a soon to be announced tender offer by the Great Atlantic and Pacific Tea Company (also known as A&P). Ira emphatically cautioned Shirley that the imminent takeover was not to be discussed with anyone. Shirley nonetheless told her daughter (Waldbaum’s niece), Susan Witkin Loeb, admonishing her to keep the secret, but allowing her to tell her husband Keith Loeb. Susan then confided in Keith, imploring confidentiality because disclosure “could possibly ruin the sale.” Keith, however, telephoned his stockbroker, Robert Chestman, who was well aware of his client’s status as a Waldbaum family in-law member. It was the conversation between Keith and Chestman, together with their purchases of Waldbaum’s stock a few hours later, that constituted the undisclosed misappropriation of Susan and her family’s confidential information. Keith told Chestman that he “had some definite, some accurate information” that the company was being sold at “a substantially higher” price than the stock’s market value, and he sought Chestman’s advice as to what to do. Chestman declined to advise Keith “in a situation like this.” But shortly thereafter, Chestman bought Waldbaum stock for his own account (3,000 shares), for Keith’s account (1,000 shares), and for several other of his clients’ discretionary accounts (a total of 7,000 shares). Later in the trading day, Keith also placed his own 1000-share purchase order. Waldbaum’s 11

12

13

See David A. Lipton, Insider Trading with Impunity, N.Y. Times, Oct. 27, 1991, at C13 (noting that “[i]t may come as a surprise that men are now absolved of fiduciary duties to their inlaws”). Dr. Randal S. Olson, 144 Years of Marriage and Divorce in 1 Chart, Randal S. Olson (June 15, 2015), http://www.randalolson.com/2015/06/15/144-years-of-marriage-and-divorce-in-1-chart/. Meredith A. Evans & Chris Bobel, I Am a Contradiction: Feminism and Feminist Identity in the Third Wave, 22 New Eng. J. Pub. Pol’y 207, 208 (2007) (describing one account of the emergence of third-wave feminism during the controversial confirmation hearings of Justice Clarence Thomas, the U.S. Supreme Court’s second African American justice).

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stock was selling at approximately $25 at the time of these purchases, and the price nearly doubled the next morning after the tender offer was publicly announced. The SEC’s investigation into these suspiciously timed pre-announcement Waldbaum stock purchases resulted in a Rule 10b-5 civil settlement with Keith for his unlawful tipping and trading. Keith then became a cooperating witness for the DOJ in its criminal insider-trading case against Chestman, who repeatedly denied ever having spoken to Keith about Waldbaum’s impending sale. Chestman’s claim, both in the SEC investigation and at his criminal trial, was that he made the Waldbaum stock purchases based entirely on his own market research and the stock’s “unusually high trading volume.”14 Chestman was ultimately convicted by a jury and sentenced to prison on ten counts of insider trading in violation of Exchange Act section 10(b) and Rule 10b-5, ten counts of mail fraud, ten counts of insider trading in violation of Exchange Act section 14(e)and Rule 14e-3’s tender-offer fraud prohibitions, and one count of perjury in connection with his SEC testimony. A three-judge panel of the U.S. Court of Appeals for the Second Circuit, however, overturned these convictions. The Second Circuit then agreed to rehear the case en banc and reinstated Chestman’s section 14(e)and Rule 14e-3 convictions. But the en banc court affirmed the panel’s reversal of Chestman’s section 10(b), Rule 10b-5, and mail fraud convictions, by a vote of six to five. At the time of the en banc decision, a majority of the Supreme Court had yet to endorse the misappropriation theory of insider trading.15 But the theory was already well ensconced in the Second Circuit, in a series of appellate decisions that affirmed the application of the misappropriation theory in the context of employment relationships. Specifically, on each of those occasions, the Second Circuit concluded that an employee’s failure to disclose the use of confidential information for personal securities trading deceived and defrauded the employer, as the source of the information, in violation of Rule 10b-5.16 The government in Chestman argued that Keith’s failure to disclose to Susan his trading and tipping fell well within this paradigm of deception by a fiduciary. It further contended that Chestman’s knowing use of the material nonpublic information obtained by that deception constituted securities fraud. The en banc majority’s refusal to take a more expansive view of the relationship necessary to trigger a duty to disclose the self-serving use of confidential information flowed from its concern that the broader construction of Rule 10b-5 could “lose method and predictability, taking over ‘the whole corporate universe.’”17 14 15

16

17

Id. See Carpenter v. United States, 484 U.S. 19 (1987) (affirming by a 4–4 vote the Second Circuit’s judgment upholding insider trading convictions under Rule 10b-5’s misappropriation theory, in a case involving a tipper-journalist who defrauded his Wall Street Journal employer). See, e.g., United States v. Grossman, 843 F.2d 78 (2d Cir. 1988) (tipper-attorney defrauded his law firm and its clients); SEC v. Materia, 745 F.2d 197 (2d Cir. 1984) (tipper defrauded his printing-firm employer); United States v. Newman, 664 F.2d 12 (2d Cir. 1981) (tippers defrauded their investment-bank employers and the bank’s clients). Chestman, 947 F.2d at 567.

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Thus, although the Supreme Court in Chiarella had recognized disclosure obligations stemming from a “‘fiduciary or other similar relation of trust and confidence,’”18 the Chestman majority narrowly construed that phraseology to apply only to “hornbook fiduciary relations,”19 such as director–shareholder, attorney– client, and principal–agent, or to the “functional equivalent of a fiduciary relationship.”20 And in the majority’s view, “marriage . . . without more” or “mere kinship . . . of itself” did not constitute a relationship that was “inherently fiduciary,” particularly “in the context of Rule 10b-5 criminal liability.”21 The Chestman majority did not go so far as to exclude all undisclosed misappropriations by a family member from criminal insider-trading liability, but it did set out exacting parameters for when a family relationship could be regarded as “a fiduciary relation or its functional equivalent.”22 After observing that a fiduciary-like relationship “cannot be imposed unilaterally by entrusting a person with confidential information,” the majority pointed to “reliance, and de facto control and dominance” as the “characteristics . . . at the heart of the fiduciary relationship.”23 In other words, confidence must be “‘reposed on one side and there [must be] resulting superiority and influence on the other,’”24 and the entruster must rely on the fiduciary “to serve his interests.”25 In the majority’s view, the government failed to prove beyond a reasonable doubt that Keith and Susan’s relationship fell within these fiduciary parameters, with the consequence that Chestman could not be criminally liable under Rule 10b-5 as Keith’s tippee. Several factors influenced that conclusion. First, the court noted that a mere “don’t tell” admonishment from Susan could not create for Keith a fiduciary obligation in the absence of an “explicit acceptance by Keith of a duty of confidentiality.”26 The court also regarded Susan’s disclosure to Keith about the imminent tender offer as entirely “gratuitous,” noting that it was “unprompted” and “served no purpose, business or otherwise.”27 Moreover, while there was testimony that the couple “shared and maintained generic confidences” on prior occasions, the court saw no evidence of a pattern of “sharing business confidences.”28

18

19 20 21 22 23 24

25 26 27 28

Chiarella, 445 U.S. at 228 (emphasis added) (quoting Restatement (Second) of Torts § 551(2) (a) (1976)). Chestman, 947 F.2d at 568. Id. Id. at 567–68. Id. at 571. Id. at 567–69. Id. at 568 (quoting Mobil Oil Corp. v. Rubenfeld, 72 Misc.2d 392, 400, 339 N.Y.S.2d 623, 632 (Civ. Ct. 1972)). Id. at 569. Id. at 571. Id. at 568–71. Id. at 571.

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But the Second Circuit granted the government an important victory with respect to the validity of SEC Rule 14e-3, which prohibits securities trading while in possession of confidential tender offer-related information, even in the absence of a fiduciary’s deception. After finding that the SEC “acted well within the letter and spirit”29 of its rulemaking authority under section 14(e) of the Exchange Act, the court concluded that Chestman’s awareness of Keith’s status as a Waldbaum in-law, coupled with the nature of Keith’s tip, “provided sufficient evidence” from which a jury could infer Chestman’s knowledge that the tender offer “information originated, ‘directly or indirectly,’ from an insider at Waldbaum.”30 By a vote of ten to one, the en banc court affirmed Chestman’s section 14(e) and Rule 14e-3 conviction.

REACTION TO CHESTMAN

Although the Chestman decision prompted some to quip that the ruling created “an ‘insider trading family exemption’ for cases involving anything other than a possible takeover,”31 SEC and DOJ officials resolved to allow no such thing. In the government’s view, Chestman’s unnecessarily narrow approach to the misappropriation theory in non-business relationships did not adequately protect investors and the securities markets from the misuse of material nonpublic information. The SEC, in particular, continued to bring Rule 10b-5 charges in cases involving confidential information misappropriated by spouses, relatives, and friends.32 And, when defendants opted to litigate rather than settle, the SEC looked to courts outside the Second Circuit to interpret the necessary relationship of “trust and confidence” more broadly. The SEC’s litigation strategy in “family and friends” insider trading cases met with considerable success. The Eleventh Circuit’s ruling in SEC v. Yun33 was especially significant because it involved a trading tip by a senior executive’s wife, who had been entrusted by her husband with confidential information pertaining to his company’s unannounced negative earnings. The SEC alleged that she had breached a spousal confidence to benefit her friend and business partner, who had purchased put-option contracts based on the misappropriated information. Echoing the views expressed by the five en banc judges dissenting in Chestman, the Yun panel concluded that a spouse who trades or tips “in breach of a reasonable and legitimate expectation of confidentiality held by the other spouse sufficiently subjects the former to insider trading liability” under Rule 10b-5.34 Yun’s rejection of 29 30 31

32

33 34

Id. at 559. Id. at 563. Kurt Eichenwald, Business and the Law; Insider Trading, All in the Family., N.Y. Times, Oct. 10, 1991, at D2. See, e.g., SEC v. Saul, Litigation Release No. 12469 (May 8, 1990) (misappropriation case involving tender-offer information entrusted by a father to his son, filed the week following the initial panel decision in Chestman). See also SEC v. Saul, 1991 WL 133738 (N.D. Ill. July 12, 1991) (denying defendants’ motion for summary judgment). SEC v. Yun, 327 F.3d 1263 (11th Cir. 2003). Id. at 1272–73.

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Chestman’s more exacting parameters was fueled in part by the Supreme Court’s ringing endorsement of the misappropriation theory in its 1997 decision in O’Hagan. Indeed, the Yun panel used the phrase “duty of loyalty and confidentiality” interchangeably with “duty of trust and confidence,” mirroring the alternate terms embraced by Justice Ruth Bader Ginsburg in her opinion for the six-to-three O’Hagan majority.35 While the Yun case was in litigation, the SEC also set out to use its rulemaking authority under section 10(b) to nullify Chestman’s narrow approach to the misappropriation theory. Rule 10b5–2, which the SEC adopted in August 2000 after a period of public notice and comment, enumerates three non-exclusive situations in which a person has a “duty of trust or confidence” for purposes of the misappropriation theory: (1) when the person receiving the information “agrees to maintain [that] information in confidence;” (2) when the persons involved in the communication “have a history, pattern, or practice of sharing confidences” that results in a reasonable expectation of confidentiality; and (3) when the person receives such information from a spouse, parent, child or sibling, unless the person can show affirmatively, based on the particular facts and circumstances of that family relationship, that “he or she neither knew nor reasonably should have known that the person who was the source of the information expected that the person would keep the information confidential. . . .”36 Although the validity of Rule 10b5–2 has met with multiple challenges from insider trading defendants seeking adherence to Chestman’s narrower view, each court considering the issue has deferred to the SEC’s “permissible reading” of the section 10(b) requirement of a “deceptive device or contrivance.”37 Moreover, courts at times have looked outside of the three situations in Rule 10b5–2 to recognize misappropriation theory liability against defendants who traded on the basis of confidential information that was stolen from – not even entrusted to them by – their relatives or friends.38 35

36 37

38

See, e.g., Id. at 1269 (observing that misappropriation theory liability “is based on the notion that the outsider breaches ‘a duty of loyalty and confidentiality’ to the person who shared the confidential information with him”) (quoting United States v. O’Hagan, 521 U.S. 642, 652 (1997)). SEC Rule 10b5-2(b)(1)-(3); 17 C.F.R. § 240.10b5–2(b)(1)-(3) (2020). See, e.g., United States v. McGee, 763 F.3d 304, 310, 313, 316 (3d Cir. 2014) (upholding the validity of Rule 10b5–2 in a criminal case against a member of Alcoholics Anonymous, who traded securities based on confidential information entrusted to him by a corporate executive whom he had sponsored at group meetings). See, e.g., SEC v. Fettner, Litigation Release No. 24468 (May 7, 2019) (consent order imposing sanctions against a defendant, who, as a guest in the home of a long-time friend, surreptitiously viewed documents contemplating a corporate acquisition by a company that employed his friend as its general counsel).

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Many legal scholars were also staunch critics of the Chestman decision, with several critiques advancing a distinctly feminist perspective. Of particular note is an article by Professor Judith Greenberg, who explored at length the multiple ways in which “[i]deas about gender roles, the family, and the market are important to the structure of insider trading law.”39 In the course of her insightful analysis, she called out the Chestman majority for its “rather tortured reading of past cases and present facts, in an effort to conceive of the familial setting as outside of the doctrinal requirements for liability under Rule 10b-5.”40 Professor Theresa Gabaldon has likewise observed that the “neglect of human relationships tends to be particularly symptomatic of complex, commercial regulatory schemes”41 and highlighted the inconsistent views of fiduciary principles in Reed and Chestman.42 She also goes further than the SEC did in Rule 10b5–2 by eschewing a “trust and confidence” presumption and instead arguing, albeit in a different context, for the imposition of fiduciary obligations among spouses and relatives, notwithstanding the facts of a particular relationship.43 Finally, and not surprisingly, even apart from the application of Rule 10b5–2, Chestman is no longer controlling precedent in the Second Circuit. A recent panel left no doubt when it ruled explicitly that “Chestman’s three-factor standard of ‘reliance, and de facto control and dominance’ does not state the exclusive test of fiduciary status, nor the proof necessary to sustain a conviction under the misappropriation theory.”44

FEMINIST JUDGMENT

The rewritten majority opinion of Professor Karen Woody, writing as Second Circuit Judge Woody, recognizes that there was ample authority under the common law to place the case’s tipping and trading well within the Supreme Court’s deception-by-a-fiduciary paradigm. Doing so easily allows Woody to affirm the jury’s finding that Chestman violated Rule 10b-5 when he purchased Waldbaum stock on the basis of takeover-related information that he knew had been secretly misappropriated from the Waldbaum family. But Woody’s feminist judgment not only exposes the Chestman majority’s unnecessarily restrictive view of fiduciary 39

40 41

42 43

44

Judith G. Greenberg, Insider Trading and Family Values, 4 Wm. & Mary J. Women & L. 303, 367 (1998). Id. Theresa A. Gabaldon, Assumptions about Relationships Reflected in the Federal Securities Laws, 17 Wis. Women’s L.J. 215, 215 (2002). Id. at 233. Theresa A. Gabaldon, Love and Money: An Affinity-Based Model for the Regulation of Capital Formation by Small Businesses, 2 J. Small & Emerging Bus. L. 259, 286 (1998). United States v. Kosinski, 976 F.3d 135, 151 (2d Cir. 2020) (observing that because the evidence was otherwise sufficient to convict the defendant, “we do not address the application of Rule 10b5–2”).

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relationships. It also demonstrates how an examination of the power imbalance in Keith and Susan’s relationship would have led the majority to a different result, even under its own stilted interpretation of fiduciary duties. In addition, Woody’s opinion embraces feminist practical reasoning to develop an alternative version of insider trading liability, which recognizes a Rule 10b-5 disclosure duty owed to contemporaneous traders whenever an informational asymmetry has been wrongfully obtained. Had other federal courts followed Woody’s groundbreaking approach in the decades that followed, insider trading jurisprudence in the United States would not be the magnet for criticism that it is today.45 Woody’s analysis finds that “[a] marriage, if it is nothing else, is definitionally a relationship of trust and confidence” and that “husbands and wives are legally intertwined in ways that are often more complex and significant than those of business partners, employers and employees, or doctors and patients.” She also sensibly draws from both family law and trust law to highlight “the countless rights and responsibilities afforded to parties in marital relationship.” Woody’s analysis leaves little doubt that had the Chestman majority scanned a greater range of hornbooks, it could not have reasonably excluded marital relationships from the common-law associations typically recognized as “inherently fiduciary.” Woody’s decision to focus initially on the fiduciary status of marriage per se, rather than on particular aspects of Keith and Susan’s relationship, reflects feminist values that are concerned with power and position. As Woody sees it, by virtue of her status as Keith’s spouse, Susan had a legal entitlement to his respect for her confidences, even if she did not routinely repose in him such confidences, and whether or not he had previously proven his loyalty by any objective measure. As a feminist judge, Woody is sensitive to the ways in which law can reinforce gendered power imbalances,46 and she therefore does not regard trust and confidence as marital obligations that must be negotiated or that can be disclaimed.47 She therefore explicitly eschews what – years later – became the SEC’s approach in Rule 10b5–2(b)(3), which in her words merely creates a “presumption that can be overcome with factual evidence suggesting that a particular marriage is not a relationship of trust and confidence.”48 45 46

47

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See supra note 10 (quoting unequivocally critical assessments). See Barbara Bennett Woodhouse, Sex, Lies, and Dissipation: The Discourse of Fault in a NoFault Era, 82 Geo. L.J. 2525, 2527 (1994) (observing that “[f]eminist legal theory consciously exposes how legal norms reflect and bolster gendered imbalances of power”). A recent empirical study of the sixty-six “friends and family” insider trading cases in the U.S. that were reported between 2008 and 2018 revealed that seventeen cases involved spousal misappropriation, with all but one of those involving “allegations of husbands misappropriating information from their wives.” Joan MacLeod Heminway, Women Should Not Need to Watch Their Husbands Like [a] Hawk, 15 Tenn. J.L. & Pol’y 162, 190–91 (2020). Other feminists have similarly advocated for the imposition of fiduciary obligations among spouses and relatives in business transactions notwithstanding the facts of a particular relationship. See Gabaldon, supra note 43, at 286.

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But as a feminist concerned with context,49 Woody also goes on to demonstrate why it was eminently reasonable for Susan to have entrusted Keith with the business secret belonging to her family. Doing so allows Woody to implicitly reveal the Chestman majority’s compounded error: not only did the court read into fiduciary law unfounded requirements for “reliance,” “de facto control,” and “dominance,” it also failed to acknowledge the trial evidence that would have satisfied its own exacting parameters. Whereas the majority blithely surmises that Susan’s disclosure to Keith was entirely “gratuitous,” Woody’s feminism prompts her to credit the compelling reasons for Susan’s disclosure. Namely, Susan told Keith about the impending takeover “in the course of discussing the financial benefits they and their children would receive as a result of the transaction,” and Susan’s warnings about the deal’s secrecy were intended to protect the transaction’s culmination. It is likewise clear from Woody’s rewritten opinion that Susan relied on Keith’s management of their investment portfolio at the brokerage firm and that he controlled the investment decisions in their account, including the decision that accorded Chestman discretionary trading authority. By explicitly acknowledging Keith’s “dominance” and “control” as well as Susan’s “reliance,” Woody underscores the extent of Keith’s fraudulent deception. Woody’s approach also relieves Susan of the “double-bind”50 compelled by the original opinion – to choose between keeping silent because the information communicated to her husband would not be protected, or looking out for her family’s financial interests. Having affirmed the jury’s finding that Keith’s tipping and trading deceived and defrauded Susan as the source of the confidential takeover information, Woody’s feminist judgment turns to an analysis of the fairness in holding Chestman criminally liable as a co-participant in Keith’s fraud on Susan. Here, based upon Chestman’s fourteen years as a stockbroker and a host of factors indicating his “consciousness of guilt,” Woody reasonably concludes that Chestman knew both that he was in receipt of a lucrative secret that Keith had misappropriated from the Waldbaum family and that he was violating Rule 10b-5 by purchasing stock on the basis of that material nonpublic information. In the final section of her Rule 10b-5 analysis, Woody breaks new ground by recognizing that there are other victims apart from Susan and her family who were deceived and defrauded by Keith’s tipping and Chestman’s trading. Specifically, Woody determines that the Waldbaum shareholders who were selling their stock in the market contemporaneously with Chestman’s purchases were also deceived and defrauded under Rule 10b-5. Woody reaches this conclusion by looking beyond

49

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See Elizabeth M. Schneider, Gendering and Engendering Process, 61 U. Cin. L. Rev. 1223, 1231–32 (1993) (advocating a feminist method that “explore[s] a richer, more focused, complex and contextual analysis. . .”). Martha Chamallas, Introduction to Feminist Legal Theory 8–10 (2d Ed. 2003).

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fiduciary obligations to embrace a fuller rendition of the common law – one that renders silence misleading in transactions that are based on a material informational advantage that was wrongfully obtained. In so doing, Woody employs what Katherine Bartlett has termed “feminist practical reasoning.”51 As the final section of her Rule 10b-5 analysis reveals, Woody employs this legal method not only by focusing on the unfairness to those contemporaneous traders who lose out to persons “who cannot claim to deserve [their] trading profits” but also by unearthing features of common-law disclosure duties and the default principle of caveat emptor, which other federal courts, including the Supreme Court, have tended “to overlook or suppress.”52

U.S. v. Chestman, 947 F.2d 551 (1991) circuit judge karen woody delivered the opinion of the court Following a jury trial, defendant Robert Chestman was convicted of ten counts of securities fraud, fraudulent trading in connection with a tender offer, and mail fraud, as well as thirty-one counts of perjury in the U.S. District Court for the Southern District of New York. Chestman appealed. A panel from this Court, composed of Circuit Judges Miner and Mahoney, in addition to Judge Carman of the U.S. Court for International Trade, sitting by designation, reversed the defendant’s convictions. United States v. Chestman, 903 F.2d 75 (2d Cir. 1990). The government petitioned for a rehearing en banc. United States v. Chestman, 1990 U.S. App. LEXIS 17228 (Aug. 24, 1990). The government did not seek rehearing on Chestman’s perjury conviction, and therefore this Court does not undertake that review. On en banc reconsideration, we conclude that the defendant’s securities fraud convictions under section 10(b) of the Securities Exchange Act of 1934 (1934 Act), section 14e-3 of the 1934 Act, and 18 U.S.C. § 1341 should be affirmed. We vacate the decision of the panel in its entirety.

I

Oft overlooked in the panel’s decision and the decision of the trial court is the central figure of this case, Susan Loeb. Susan Loeb is married to Keith Loeb, and defendant Robert Chestman acted as the broker for stocks jointly owned by both Keith and Susan. Susan is the granddaughter of Julia Waldbaum, whose husband 51 52

Katherine T. Bartlett, Feminist Legal Methods, 103 Harv. L. Rev. 829, 863 (1990). Id. at 836.

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founded Waldbaum, Inc. (Waldbaum), a publicly traded supermarket chain. The Waldbaum family owned 60 to 70 percent of the stock, and various family members served on the board. Susan’s uncle, Ira Waldbaum, was the president and controlling shareholder of the company. Susan and Keith, while not employees, directors, or otherwise involved with the management of Waldbaum, owned a significant amount of stock in the company because of gifts of stock from both Susan’s mother, Shirley Waldbaum Witkin, and her grandmother, Julia. On November 21, 1986, Ira Waldbaum agreed to sell Waldbaum to the Great Atlantic and Pacific Tea Company (A&P). The resulting stock purchase agreement required Ira to tender a controlling block of Waldbaum shares to A&P at a price of $50 per share. Two days later, Ira told three of his children, all employees of Waldbaum, about the pending sale, admonishing them to keep the news quiet until a public announcement. Ira also told his sister, Shirley Witkin, and offered to tender her shares along with his controlling block of shares. Ira was clear with Shirley that the sale was “not to be discussed.” Susan’s mother Shirley lived with Joan Sierchio, Susan’s sister. On November 24, Joan asked if Susan could assume the carpooling duties that day. When Susan inquired why Joan was unable to pick up her children, Joan responded that she had to take their mother “someplace.” This vague response worried Susan because Shirley Witkin was “elderly and in frail health.” Gov’t’s Br. At 8. Susan then called her mother directly to inquire about her whereabouts. To put Susan’s fears about her health to rest, Shirley told Susan about the Waldbaum sale and explained that she was going to the bank to get the stock certificates that she planned to transfer to Ira. Shirley swore Susan to secrecy, telling Susan that the acquisition would be very profitable to the family and that any premature disclosure could ruin the deal. Susan then asked her mother whether she could tell her husband Keith. Shirley responded by allowing Susan to tell Keith but not anyone else. The next day, November 25, Susan told her husband about the pending tender offer and cautioned him not to tell anyone because “it could possibly ruin the sale.” She stated that she mentioned multiple times that the information was confidential. On November 26, Keith Loeb telephoned Robert Chestman at 8:59 a.m. and left a message that Chestman should call him “ASAP.” Over the previous few years, Chestman had executed several transactions involving Waldbaum stock for Keith Loeb. Chestman was aware that Loeb was related to the Waldbaums. In fact, Loeb had previously sent Chestman a copy of Susan’s birth certificate to verify that her mother was Shirley Waldbaum Witkin. When Chestman reached Loeb later that morning, Loeb told Chestman that he had “some definite, some accurate information” that Waldbaum was about to be sold at a “substantially higher” price than its market value. Chestman replied that he would check the stock’s activity. Loeb asked Chestman several times for advice, and Chestman responded that he could not tell Loeb what to do “in a situation like this.”

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At 9:49 a.m., Chestman bought 3,000 shares of Waldbaum stock for his own account, at $24.65 per share. Between 11:31 a.m. and 12:35 p.m., he bought an additional 8,000 shares for his clients’ discretionary accounts, including 1,000 shares for the Loeb account. Around 4:00 p.m., Loeb called Chestman again and inquired about the stock. Chestman told Loeb that the stock was up a few points but that he had not seen any news about it. Loeb again asked Chestman for advice. Chestman again responded that he could not advise Loeb, but that based on his preliminary research, the company was a buy. Loeb then ordered 1,000 shares. Chestman did not tell Loeb that he had already purchased 1,000 shares for the Loeb account. At the close of trading on November 26, the tender offer was publicly announced. Waldbaum stock rose to $49 per share the next business day. Chestman enjoyed an overnight profit of $250,000. Several days later, Loeb received a confirmation slip of the trade in the mail and feigned surprise to Susan, stating, “Gee, look what Bob [Chestman] bought for us now.” Pursuant to an investigation by the Securities and Exchange Commission (SEC), Loeb agreed to cooperate with the government. The terms of his cooperation agreement required that he disgorge the $25,000 profit from his purchase and sale of Waldbaum stock and pay a $25,000 fine. Chestman testified in the SEC inquiry and stated that he purchased the Waldbaum stock based solely on his own research and denied he had spoken to Loeb before he bought the stock. Chestman was indicted by a grand jury on July 20, 1988 and charged with ten counts of insider trading in connection with a tender offer, ten counts of securities fraud in violation of Rule 10b-5, ten counts of mail fraud, and one count of perjury in connection with Chestman’s testimony before the SEC. A jury convicted him on all counts. Chestman appealed on the basis that there was insufficient evidence to prove his securities fraud, mail fraud, and perjury convictions. Chestman also challenged the validity of Rule 14e-3 and claimed that the SEC exceeded its statutory authority in promulgating the Rule. A panel of this Court reversed the convictions on all counts. This en banc review followed. II

A. Section 10(b) and Rule 10b-5 Chestman’s convictions under section 10(b) are grounded in the misappropriation theory of insider trading. With respect to the shares bought on behalf of Keith Loeb, Chestman was convicted of aiding and abetting Keith Loeb’s misappropriation of nonpublic information in a breach of fiduciary duty to Susan Loeb. With respect to the shares bought for himself and his other clients, Chestman was a tippee of the misappropriated information. In order for his convictions to be upheld, we must find that the government presented sufficient evidence to prove that Keith Loeb breached a fiduciary duty to his wife Susan Loeb and that Chestman was aware of that breach of duty. https://doi.org/10.1017/9781009025010.022 Published online by Cambridge University Press

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The classical theory, which the Supreme Court established in 1980 and reaffirmed three years later, regards insider trading as a fraud on the parties to a securities transaction, when those parties trade with a person who remains silent about material nonpublic information in breach of a fiduciary-like disclosure duty. Chiarella v. United States, 445 U.S. 222 (1980); Dirks v. SEC, 463 U.S. 646 (1983). Pursuant to this theory, persons who owe fiduciary-like duties of trust and confidence to an issuer’s shareholders must either disclose all material nonpublic information in their possession or abstain from trading in the issuer’s shares. The failure to “disclose or abstain” in such transactions constitutes a violation of Rule 10b-5. This case, however, does not involve the classical theory of insider trading but instead involves the misappropriation theory. The misappropriation theory states that a person violates Rule 10b-5 when they misappropriate material nonpublic information in breach of a fiduciary duty or similar relationship of trust and confidence and use that information in a securities transaction. See Carpenter v. United States, 484 U.S. 19, 24 (1987); SEC v. Materia, 745 F.2d 197, 201 (2d Cir. 1984); United States v. Newman, 664 F.2d 12 (2d Cir. 1981), aff’d after remand, 722 F.2d 729, cert. denied, 464 U.S. 863 (1983). In contrast to the classical theory of insider trading, the misappropriation theory does not require that the buyer or seller of securities be defrauded. Newman, 664 F.2d at 17. Instead, the misappropriation theory often focuses on a fraud or deceit, usually upon the source of nonpublic information, and allows for liability under Rule 10b-5 even if that source of information is not affiliated with the buyer or seller of the securities at issue. See United States v. Carpenter, 791 F.2d 1024, 1032 (2d Cir. 1986). As the Court in Carpenter v. United States, 484 U.S. 19 (1987) explained, “[t]he concept of ‘fraud’ includes the act of embezzlement, ‘which is the fraudulent appropriation to one’s own use of [property] entrusted to one’s care by another.’” Id. at 27. Carpenter further clarified that the “intangible nature” of material nonpublic information “does not make it any less ‘property’ protected by the mail and wire fraud statutes.” Id. at 24. The Court therefore affirmed the Second Circuit’s judgment that the mail and wire fraud statutes had been violated by a reporter and those who received his tips in a trading scheme involving the pre-publication use of material nonpublic information belonging to the reporter’s employer, the Wall Street Journal. Although Supreme Court support of the misappropriation theory is still unclear after the Court’s equal division on Carpenter allowed this Court’s ruling to stand, the misappropriation theory has been upheld in the Third, Seventh, and Ninth Circuits. See SEC v. Cherif, 933 F.2d 403 (7th Cir. 1991); SEC v. Clark, 915 F.2d 439 (9th Cir. 1990); Rothberg v. Rosenbloom, 771 F.2d 818 (3d Cir. 1985), rev’d on other grounds after remand, 808 F.2d 252 (3d Cir. 1986), cert. denied, 481 U.S. 1017 (1987). Moreover, this Court has repeatedly opined upon and endorsed the misappropriation theory of insider trading. See United States v. Grossman, 843 F.2d 78 (2d Cir. 1988); Materia, 745 F.2d 197; Newman, 664 F.2d 12; Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff’d, 484 U.S. 19 (1987). https://doi.org/10.1017/9781009025010.022 Published online by Cambridge University Press

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1. Misappropriation Theory and Marital Relationships The misappropriation theory as applied in this Court and other circuits is predicated upon a fiduciary relationship or a similar relationship of trust and confidence. The fiduciary relationships examined in earlier cases have primarily involved business or employment relationships. See, e.g., Grossman, 843 F.2d 78 (involving law firm members); Materia, 745 F.2d 197 (involving the employee of financial printing company); Newman, 664 F.2d 12 (involving investment bankers); SEC v. Musella, 578 F. Supp. 425 (S.D.N.Y. 1984) (involving the manager of office services for a law firm); United States v. Willis, 737 F.Supp. 269 (S.D.N.Y. 1990) (involving a psychiatrist’s breach of duty to patient); SEC v. Peters, 735 F.Supp. 1505 (D. Kan. 1990) (involving a breach of duty between business partners). However, the case at bar is not the first one in which we have considered the misappropriation theory as applied to a breach of confidence among family members. United States v. Reed, 601 F. Supp. 685 (S.D.N.Y. 1985), rev’d on other grounds, 773 F.2d 477 (2d Cir. 1985) (involving the son of a corporate director). In Reed, the son of a director of Amax Petroleum Company allegedly traded in Amax options on the basis of nonpublic information he obtained from his father. The District Court denied the defendant’s motion to dismiss the indictment, holding that common-law principles of fiduciary relationships dictate that misappropriation of nonpublic information by one family member to another is a breach of a relationship of trust and confidence and constitutes fraud under Rule 10b-5. Reed, 601 F. Supp. at 703–18. The Reed Court grounded its holding in its interpretation of fiduciary relationships as they are defined in the law of trust and of trade secrets. Id.; George G. Bogert, The Law of Trusts and Trustees § 482 at B15.1 (rev. 2d ed. 1978) (“[F]requently the parties are related by blood or marriage in such close degree that the imposition of great trust and letting down of all guard and bars is natural.”). In order for defendant Chestman’s convictions to stand, we must find (1) that Keith Loeb misappropriated information from Susan Loeb, and (2) that Chestman was aware of the misappropriation. Misappropriation requires the predicate breach of fiduciary relationship or similar relationship of trust and confidence. Hence, the critical issue before us is whether the marital relationship is also a fiduciary one. This Court has made clear that a fiduciary relationship does not arise solely by the transfer or disclosure of confidential information. Walton v. Morgan Stanley & Co., 623 F.2d 796, 799 (2d Cir. 1980) (applying Delaware law). Rather, the disclosure must be made within the context of a relationship of trust and confidence. A marriage is, if nothing else, definitionally a relationship of trust and confidence. See Walter C. Tiffany, Handbook on the Law of Persons and Domestic Relations 6 (Roger W. Cooley ed., 3d ed. 1921) (outlining the ways in which the essentials of marriage include mutual consent). Marriage serves as a prime example of a significant human relationship that typically involves an

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extraordinarily deep connection based upon common experience and cultural values, as other areas of law – specifically, family law – recognize. Indeed, one does not need to delve far into family law to understand that husbands and wives are legally intertwined in ways that are often more complex and significant than is the case with business partners, employees, and employers, or with doctors and patients. There are countless rights and responsibilities afforded to parties in a marital relationship. A non-exhaustive list of these rights and responsibilities includes the presumption of children being dependents of the marriage, regardless of paternity; tax incentives for creating and remaining in a marriage; rights afforded to marital partners related to medical decisions and the marital estate; and rights related to immigration status, among other things. See generally Unif. Marital Prop; see also, e.g., In re Analytical Systems, 113 B.R. 91, 94 (N.D. Ga. 1990) (“[T]he confidential relationship between husband and wife . . . entitles each to rely upon the representations of the other”). In light of such jurisprudence and common experience, defining a marital relationship as a fiduciary one does not strike this Court as an extension of existing law or principle; rather, holding that spouses are fiduciaries to each other merely underscores what most of us already have assumed ought to exist as a norm within the context of familial relationships. Thus, it is irrelevant whether Chestman could point to evidence that the Loebs’ marriage was one in which there was no trust or confidence and no history or pattern of sharing confidential information with reasonable reliance upon the other spouse to keep the confidence. We do not intend to create a presumption that can be overcome with factual evidence suggesting that a particular marriage is not a relationship of trust or confidence. Rather, the holding we are establishing today is that husbands and wives are, as a normative rule, fiduciaries to each other. See H.L.A. Hart, Essays in Jurisprudence and Philosophy 29 (1983) (underscoring that rules are devices intended to affect human behavior in more than one specific circumstance). Indeed, the facts in the instant case do not show that there is any reason to doubt that the Loebs enjoyed a relationship of trust and confidence in their marriage. The evidence instead shows that Susan and Keith respected each other’s confidences. Susan testified that she and her husband had shared confidences in the past and that on each such occasion they had indicated to each other that the confidences would be honored. In keeping with this history of shared confidences, in the instant case, Susan told Keith about the A&P acquisition in the course of discussing the financial benefits they and their children would receive as a result of that transaction. She repeatedly emphasized the need for absolute secrecy about the merger. Even if Susan and Keith did not enjoy trust and confidence in their marriage, such an unfortunate reality could not change the nature of the marital relationship as a fiduciary one. An agent that acts contrary to its fiduciary duties to her principal remains a fiduciary, albeit one that has breached such duties.

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The topic of fiduciary breach brings us to the second factor in this analysis: whether Chestman was aware that the information about the upcoming change in the Waldbaum stock price had been misappropriated. On this point, the record is replete with indications that Chestman was aware that Keith had obtained the information from Susan and her family and that the information was confidential. Chestman was an experienced broker who was aware of Keith’s relationship to the Waldbaum family. Before his trades on November 26, Chestman never executed a trade in Waldbaum stock unless Keith Loeb specifically instructed him to do so. The record also indicates that Chestman knew that Keith was nervous and asking for advice. Chestman had told Keith that he could not tell him what to do “in a situation like this” and told Keith to make up his own mind. Chestman did not tell Keith, later in the day, that he had already made the purchase of stock; nor did Chestman record that purchase on his daily blotter. Chestman, in his testimony to the SEC, denied the conversation with Keith that morning had ever taken place. All of these factors indicate a consciousness of guilt and a keen awareness that Chestman was in possession of nonpublic information that had been misappropriated by Keith Loeb. 2. Misappropriation Theory and Contemporaneous Investors As outlined above, Chestman is liable for insider trading under the misappropriation theory, because he traded with the knowledge that Keith Loeb misappropriated the information in breach of a fiduciary duty to Keith’s wife, Susan. In short, Keith Loeb misappropriated information; and Chestman, because he traded on the information, is liable for violating Rule 10b-5 via misappropriation derivatively. Yet there exists an alternative manner in which the misappropriation theory can result in liability for Chestman. Chestman can be held liable under Rule 10b-5 based upon a breach of Chestman’s own duty to contemporaneous traders and shareholders and because he failed to disclose the misappropriated information to his trading counterparts. This theory is not a novel one. It was first promulgated by Chief Justice Burger in his dissent in Chiarella. Chiarella, 445 U.S. at 243–45. Burger situated his argument in the common law and the history of fraud as intended to prevent the exploitation of stolen information. Burger stated that the way in which a trader acquires information, which he then conceals from the trading counterparty, is “a material circumstance” that gives rise to a duty to disclose if the information is acquired by illegal act. Id. at 240 (citing W. Page Keeton, Fraud – Concealment and NonDisclosure, 15 Tex. L. Rev. 1, 25–26 (1936)). Burger further asserted the following bright line rule: “a person who has misappropriated nonpublic information has an absolute duty to disclose that information or refrain from trading.” Id. at 240. Thus, Chiarella and its progeny squarely refute earlier common-law precedent that prohibited trading on the basis of any inside information absent disclosure. In rejecting the idea that there should be absolute “parity of information” in the

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securities markets, Chiarella requires the existence of a duty to disclose; yet the Chiarella opinion, and in particular Burger’s dissent, leaves open the possibility that there exists a duty to disclose to the marketplace if the information that a trader possesses was obtained via deception, theft, or illegal act. Although Burger’s dissent did not create binding precedent, this Court in Carpenter considered and approved the concept of a duty to refrain from trading while in possession of misappropriated information. In Carpenter, we acknowledged that in addition to a fiduciary duty created by the employer–employee relationship, the defendants “had a corollary duty, which they breached, under section 10(b) and Rule l0b-5, to abstain from trading in securities on the basis of the misappropriated information or to do so only upon making adequate disclosure to those with whom they traded.” Carpenter, 791 F.2d at 1034. Having considered and endorsed this theory in Carpenter, the Court today finds more than ample basis for furthering the rule that a duty to disclose is triggered if the inside information is wrongfully obtained. This interpretation of the misappropriation theory is broader than the interpretations found in other courts in that it does not require the existence of an underlying fiduciary relationship, provided the information is obtained wrongfully. However, recognizing a misappropriation-based duty to disclose based upon wrongfully obtained information squares with the underlying purpose and philosophy of section 10(b) and Rule 10b-5. A more encompassing duty to disclose based on misappropriation is a necessary guardrail for promoting the efficiency of the securities markets and avoiding the tangible harm to market institutions that flows from the exploitation of stolen information. See Dirks, 463 U.S. at 653 n.10 (“[T]he Cady, Roberts Commission recognized, and we agree, that ‘[a] significant purpose of the Exchange Act was to eliminate the idea that use of inside information for personal advantage was a normal emolument of corporate office.’”) (quoting Cady, Roberts, 40 S.E.C. 907, 912 n.15 (1961)). This extension of the misappropriation theory undoubtedly will be met by the critique that it results in a return to a generalized “disclose or abstain” rule requiring parity of information. However, unlike the parity of information theories rejected in Chiarella and Dirks, the disclosure duty under this theory would not threaten legitimate research and analysis or innocent investor behavior. Just as under the fiduciary obligation theory articulated in Chiarella and Dirks,1 disclosure under this 1

Critics likely will suggest that Dirks forecloses the existence of a duty to shareholders or market participants, given that the Court held that to determine whether an insider’s disclosure of material nonpublic information “itself ‘deceive[s], manipulate[s], or defraud[s]’ shareholders, . . . the initial inquiry” focuses on “whether the insider receives a direct or indirect personal benefit from the disclosure.” Dirks, 463 U.S. at 663. However, the Court took pains to point out that Dirks did not “misappropriate or illegally obtain the information about [the company whose stock was traded].” Id. at 665. The Court’s holding in Dirks, therefore, does not foreclose a viable alternative duty of disclosure when there has been a misappropriation. See also Bateman Eichler Hill Richards, Inc. v. Berner, 472 U.S. 299, 313 n.22 (1985) (interpreting Dirks to leave room for a duty based on misappropriation. “We also

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conception of misappropriation theory is compelled only when the information is the property of another and was obtained via misappropriation, so that the trader cannot claim to deserve the trading profits from information that the victim could not lawfully obtain. Trading for personal gain on the basis of confidential information that he had no right to use, Chestman injured the efficiency and integrity of our securities markets. For this reason, Chestman has violated Rule 10b-5, and his conviction is appropriate.

B. Mail Fraud Chestman’s mail fraud convictions were based on the same theory as his Rule 10b-5 convictions. The same fraudulent scheme that served as the basis for the Rule 10b-5 convictions also was the basis for the mail fraud convictions. A scheme to misappropriate material nonpublic information in breach of a fiduciary duty of confidentiality constitutes a fraudulent scheme sufficient to sustain a mail fraud conviction. See Carpenter, 484 U.S. at 27–28; Newman, 664 F.2d at 19. For this reason, Chestman’s mail fraud convictions are affirmed.

C. Rule 14e-3 The enabling statutes for Rule 14e-3(a) are section 14(e) and section 23(a)(1) of the 1934 Act. Section 14(e) provides: It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.

15 U.S.C. § 78n(e). The first sentence of section 14(e) is a self-operative provision, which Congress enacted as part of the Williams Act, Pub.L. No. 90-439, 82 Stat. 454 (1968). Congress added the second sentence, a rulemaking provision, in 1970. Section 23(a)(1), in turn, authorizes the SEC “to make such rules and regulations as may be necessary or appropriate to implement the provisions of this chapter for which [it is] responsible or for the execution of the functions vested in [it] by this chapter.” 15 U.S.C. § 78w(a)(1). have noted that a tippee may be liable if he otherwise ‘misappropriate[s] or illegally obtain[s] the information.’” (quoting Dirks, 463 U.S. at 665)).

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Acting pursuant to the authority granted by sections 14(e) and 23(a)(1), the SEC promulgated Rule 14e-3 in 1980. Rule 14e-3(a), the subsection under which Chestman was convicted, provides as follows: If any person has taken a substantial step or steps to commence, or has commenced, a tender offer (the “offering person”), it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from: (1) The offering person, (2) The issuer of the securities sought or to be sought by such tender offer, or (3) Any officer, director, partner or employee or any other person acting on behalf of the offering person or such issuer, to purchase or sell or cause to be purchased or sold any of such securities or any securities convertible into or exchangeable for any such securities or any option or right to obtain or to dispose of any of the foregoing securities, unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed by press release or otherwise.

17 C.F.R. § 240.14e-3(a). One violates Rule 14e-3(a) if they trade on the basis of material nonpublic information concerning a pending tender offer that they know or have reason to know has been acquired “directly or indirectly” from an insider of the offeror or issuer, or someone working on their behalf. Rule 14e-3(a) is a disclosure provision. It creates a duty in those traders who fall within its ambit to abstain or disclose, without regard to whether the trader owes a preexisting fiduciary duty to respect the confidentiality of the information. Chestman claims that the SEC exceeded its authority in drafting Rule 14e-3(a) – more specifically, in drafting a rule that dispenses with one of the common-law elements of fraud, breach of a fiduciary duty. In promulgating Rule 14e-3(a), the SEC acted well within the letter and spirit of section 14(e). Recognizing the highly sensitive nature of tender offer information, its susceptibility to misuse, and the often difficult task of ferreting out and proving fraud, Congress sensibly delegated to the SEC broad authority to delineate a penumbra around the fuzzy subject of tender offer fraud. See generally Mark J. Loewenstein, Section 14(e) of the Williams Act and the Rule 10b-5 Comparisons, 71 Geo. L.J. 1311, 1356 (1983) (“It is difficult to see why Congress would grant such broad powers to the SEC if the SEC was not expected to have some leeway in utilizing its powers.”). To be certain, the SEC’s rulemaking power under this broad grant of authority is not unlimited. The rule must still be “reasonably related to the purposes of the enabling legislation.” Mourning v. Family Publications Service, Inc., 411 U.S. 356, 369 (1973) (quoting Thorpe v. Housing Authority of City of Durham, 393 U.S. 268, 280–81 (1969)). The SEC, however, in adopting Rule 14e-3(a), acted consistently with this authority. While dispensing with the subtle problems of proof

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associated with demonstrating fiduciary breach in the problematic area of tender offer insider trading, the rule retains a close nexus between the prohibited conduct and the statutory aims. In sum, the language and legislative history of section 14(e), as well as congressional inactivity toward it since the SEC promulgated Rule 14e-3(a), suggest that Congress empowered the SEC to prescribe a rule that extends beyond the common law. Chestman points to nothing in the language or legislative history of section 14 (e) that suggests a different interpretation of the statute. We thus find no basis in Chestman’s argument that the SEC exceeded its statutory authority by promulgating Rule 14e-3. We similarly find no basis for Chestman’s claim that his 14e-3 convictions violated his due process because he did not have due notice that his conduct was criminal. A basic reading of the rule makes clear that this argument is frivolous. Finally, we do not find any legitimacy in Chestman’s argument, made for the first time in his en banc brief, that the sufficiency of the evidence was lacking on the Rule 14e-3 convictions. Chestman’s argument is rooted in the notion that the government did not present evidence that Chestman knew the information about the merger originated from the Waldbaum company, a Waldbaum company insider, or a person acting on the company’s behalf. Chestman’s argument here is baseless, as the facts make clear that he was aware that the information stemmed from Susan Loeb by virtue of her being a family member of the Waldbaums. III

This Court acknowledges the fiduciary relationship that exists within a marriage and finds that Keith Loeb misappropriated information from Susan Loeb and passed that information on to Robert Chestman in violation of Rule 10b-5. This Court further acknowledges that Chestman breached a duty to contemporaneous traders when he traded on information obtained via misappropriation, in violation of Rule 10b-5. Chestman’s mail fraud convictions were premised upon the same fraud and deceit as were his convictions under Rule 10b-5. Accordingly, we affirm Defendant’s convictions. It is so ordered.

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part vii

From Foundations to Future Directions

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17 The Importance of Incorporating Feminist Perspectives in Corporate Law: Analyzing the Foundations and Future Directions of Feminist and Feminist-Inspired Corporate Law Scholarship anne m. choike, martha albertson fineman, and cheryl wade What does feminism offer corporate law? Corporations are central to the economic and material well-being of individuals and society. In addition to producing and distributing goods and services, in the United States today they act as a basic conduit for employer-provided social welfare benefits, such as health insurance or old age pensions. Although corporations wield significant power in contemporary society, gender (as defined later in this chapter) also significantly determines power. While assessing the nature, design, and functioning of the corporation with respect to gender and gender relations would thus seem expected, traditional practitioners and scholars often view a partnership between feminist theory and corporate law as being unlikely and even unnatural.1 Indeed, mainstream corporate law has typically ignored the gendered structural and systemic effects of corporate decisions.2 In contrast, this chapter argues that a feminist and feminist-inspired analysis is vitally important to corporate law and policy for the creation of a just legal framework. By showing how corporate law has sometimes been shaped by the false assumptions, blind spots, and missed opportunities of conventional frameworks, feminist and feminist-inspired analysis offers avenues for corporate law to promote

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But see Katherine H. Hall, Starting from Silence: The Future of Feminist Analysis of Corporate Law, 7 Corp. & Bus. L.J. 149 (1994). See also Theresa A. Gabaldon, Feminism, Fairness, and Fiduciary Duty in Corporate and Securities Law, 5 Tex. J. Women & L. 1, 14 (1995). For example, in 2002, Janis Sarra presented what seemed “oxymoronic” to many: a feminist economic analysis of corporate governance in the global marketplace. In her article The Gender Implications of Corporate Governance Change Corporate Governance, Sarra demonstrated that a feminist analysis of corporate governance can also be an economic analysis and the two can work together to maximize the wealth of the enterprise, and in turn, all of its constituents, including women. See Janis Sarra, The Gender Implications of Corporate Governance Change Corporate Governance, 1 Seattle J. Soc. Just. 457, 462 (2002); see also Kellye Y. Testy, The Beginning of Herstory for Corporate Law Corporate Governance, 1 Seattle J. Soc. Just. 453 (2002). Sarra, supra note 1.

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prospects for fuller, freer lives among the persons who control and are affected by corporations. This chapter connects the rewritten judgments contained in this volume to feminism more broadly in order to demonstrate why a feminist and feminist-inspired perspective matters to corporate law. Specifically, we address four questions about how feminism can enhance corporate law:  First, what inequality does feminism’s focus on gender identity, among other intersectional identity characteristics, reveal about corporate law’s substance and operation?  Second, what does feminism contribute to understanding – and enhancing – the values and ethical framework underlying the role and function of the corporation as a social institution?  Third, does feminism as a unique form of critique support the privileges conferred upon, and the power allocated among, corporate actors – privileges and power which includes those that the state provides through corporate law?  Fourth, thinking beyond identity, how do analyses of corporate privilege benefit from feminism-inspired universal theories, including analyses of human vulnerability, which originate from but are not constrained by a gendered lens? We organize the rest of this chapter according to these questions. The first three questions roughly correspond to central concepts in each wave of feminism, as applied to corporate law: the first wave’s focus on formal equality, the second wave’s focus on ethics and relational difference, and the third wave’s focus on power. The fourth question corresponds to vulnerability theory, a framework that is inspired by feminism but does not focus on gender. To our knowledge, the chapter is the first documented effort to comprehensively organize feminist and feminist-inspired corporate law literature in this manner.3 In doing so, this chapter not only provides theoretical grounding for the chapters in this volume but also for continued inquiry beyond this volume by scholars, students, and practitioners. We hope to provide an overview highlighting the most relevant literature in the area of – or relating to – feminist and feminist-inspired corporate

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Of course, it would be folly and unfeminist to fail to credit feminist corporate law scholars to whom we are deeply indebted for laying groundwork for – and indeed, inspiring – our analysis with their similar work. See, e.g., Kellye Y. Testy, Capitalism and Freedom: For Whom?: Feminist Legal Theory and Progressive Corporate Law, 67 Law & Contemp. Probs. 87, 98 (2004) [hereinafter Testy, Capitalism and Freedom]; Kellye Y. Testy, A Market Path to Liberation?: Feminism, Economics, and Corporate Law, in Law and Economics: Alternative Economic Approaches to Legal and Regulatory Issues 55 (Margaret Oppenheimer & Nichola Mercuro eds., 2005).

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law scholarship, while also identifying important open issues and directions for future research.

1. FEMINISM AS A RESPONSE TO INEQUALITY AND DISCRIMINATION IN CORPORATE LAW

Corporate law can have unequal consequences that may become more visible through feminism’s focus on gender4 and intersectional identity characteristics, such as race, religion, and beyond. Feminist analysis can highlight and remedy ways in which corporate law may foster and perpetuate unequal access and opportunity based on gender. Indeed, most feminist corporate law scholarship to date has focused on this lens of feminism as addressing inequality and anti-discrimination. This section presents some of the scholarship exemplifying feminism as an approach to inequality and analyzes the benefits and drawbacks of such an approach. Prior to the 1990s, legal scholarship in corporate and securities law contained almost no discussion of the gendered aspects of corporate law, including any disadvantages the dominant theoretical approaches might present for corporate participants based on gender, race, and class.5 Feminists often identified as “liberal” took the critical first step toward recognizing the relevance of feminist analysis to corporate law by acknowledging the various guises of inequality.6 This branch of feminism is concerned mostly with women’s exclusion and marginalization. In the context of corporate law, the concern has been focused mostly on the effects of 4

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In this chapter, we use the terms “gender” and “gender identity” to mean a person’s “innermost concept of self as male, female, a blend of both or neither – how individuals perceive themselves and what they call themselves. One’s gender identity can be the same or different from their [assigned] sex.” Sexual Orientation and Gender Identity Definitions, Hum. Rts. Campaign, https://www.hrc.org/resources/sexual-orientation-and-gender-identity-terminologyand-definitions (last visited Sept. 24, 2021). We use this term intentionally instead of “sex,” in effort to emphasize gender’s social, rather than biological, construction. We also intend gender to expansively include people whose gender expression is the same or different from cultural expectations associated with their assigned sex. We extend this definition analogously to legal entities’ “gender” later in this chapter, at the same time that we recognize the inherent complexities and limits of this definition in such context for all the reasons later discussed. We also recognize that many of the authors and authorities we discuss in this chapter fail to recognize their cisnormativity as well as the full gender spectrum, including nonbinary genders. We hope that this acknowledgement clarifies that our use of their language is not endorsement, and we attempt to avoid the unfortunate oversights of some feminists to date in their focus on cisgender women rather than nonmale people more broadly. Janis Sarra, Martha’s Garden: Cultivating and Nurturing Alternative Visions of Corporate Law Through the Feminism and Legal Theory Workshop, in The Feminism and Legal Theory Project – The 20th Summer Workshop 1 (2003), https://heinonline.org/HOL/Page?handle= hein.peggy/felthpros0001&div=19&collection=peggy; c.f. Kathleen A. Lahey & Sarah W. Salter, Corporate Law in Legal Theory and Legal Scholarship: From Classicism to Feminism, 23 Osgoode Hall L.J. 543, 550 (1985). Theresa A. Gabaldon, Like a Fish Needs a Bicycle: Public Corporations and Their Shareholders Symposium: Women and the New Corporate Governance, 65 Md. L. Rev. 538–78 (2006).

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women’s unequal and discriminatory exclusion from corporate organizations, whether intentional or not. Feminism, as focused on this form of inequality, has been applied in the areas of corporate personhood, fiduciary duties in corporate governance, and the composition of management and boards. Most feminist corporate law scholars have focused on rights-based remedies in their critical analyses.7 These feminist approaches have examined corporate personhood by focusing on genders of the natural persons who comprise the constituents of the corporation – and even on the “gender” of the corporation as a separate legal person. For example, in her article Women and the Epistemology of Corporations Law, Peta Spender notes that when women form and manage their own companies, lenders more frequently ask women than men for personal guarantees, which undermines the organization’s separate legal personality.8 Conversely, Spender argues that legal personality has the greatest content as a concept when women are merely “passive” shareholders in widely held companies.9 On the basis of these observations, Spender outlines a spectrum of legal personality based on the extent of women’s participation in the business enterprise.10 One meaningful consequence of analyzing legal personality from this feminist perspective is to reveal that legal personality in practice is partly a matter of social context. Legal personality is embedded in social relationships and thus may be of less avail to women in a sexist social context. In addition to considering the relationship of corporate shareholders of different genders to the corporation, a feminist perspective focused on inequality considers the influence of context upon legal personality. In surveying the work of other feminist scholars and proposing arguments of her own, Katherine Hall, in her article titled The Interior Design of Corporate Law: Why Theory is Vital to the Development of Corporate Law in Australia, presents several alternatives for understanding the identity of a corporation as it relates to women. Specifically, the alternatives that Hall presents are assigning a gender to a corporation based on the composition of its shareholders; assigning a gender to a corporation based on the corporation’s characteristics or values – and whether those characteristics or values are male- or femalegendered; and assigning a gender to an organization by determining who utilizes 7

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See, e.g., Gillian Hadfield, Feminism, Fairness, and Welfare: An Invitation to Feminist Law and Economics, 1 Ann. Rev. L. & Soc. Sci., 291–93 (2005) (discussing the value of rights, such as to be free of discrimination or harassment in the workplace, as not being subject to the “separability thesis” in economics). Peta Spender, Women and the Epistemology of Corporations Law, 6 Legal Educ. Rev. 195, 198 (1995) (“separate legal personality is meaningless because the ventures are almost always small and women are required to provide more personal guarantees than their male counterparts”). But see Sarah C. Haan, Corporate Governance and the Feminization of Capital, 74 Stan. L. Rev., 515 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3740608 (synthesizing historical evidence to show that women invested in widely held companies were hardly passive). Spender, supra note 8, at 198 (arguing that “[t]he legal concept of separate legal personality gathers momentum as we move through a hierarchy of participation”).

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and benefits from the corporation’s activities. Hall argues that the effect of considering the gender identity of an organization works to reveal the agents and beneficiaries of such organizations as men: after all, it has generally been men who have defined the corporation to meet traditionally male needs and using traditionally male concepts. The extent and importance of corporate activity has meant that the corporation has been a very significant source of power for those who have used it. In the context of our gendered society, the corporation has been (and continues to be) a very important tool for men.11

By raising consciousness about this state of affairs, feminist corporate law can more explicitly consider the ways in which corporate law can also operate by and for women. Feminism as focused on gender-based discriminatory exclusion from the corporate world has also addressed fiduciary duties in corporate governance. One way in which this has been done is by questioning whether corporate law should differentially apply substantive fiduciary duties, with different standards for men and women, to account for gender effects resulting from power dynamics. According to Caroline Forell in her article Essentialism, Empathy and the Reasonable Woman, the answer is yes. Forell argues that the “reasonable person” standard in law is actually a male standard and that this standard is inappropriate in areas where men and women have different views about what is harmful, particularly with respect to sexual issues. Similarly, in Theory, Gender and Corporate Law, Katherine Hall highlights the difficulty of applying the same standards of director conduct to male and female directors. Hall critiques the mechanical application of fiduciary duties resulting in women being held accountable for company liabilities in cases in which women were, in theory, involved in company management, but were powerless in practice. In one such case, a wife was held equally monetarily liable as her husband. However, she was a company director in name only and was excluded from the business decisions that her husband made. Holding her liable ignored a reality inequitably shaped by power and gender. In another case, a woman who was only passively engaged in a family business was held liable for “choosing” the corporate form of business organization and then not meeting the associated director duties. Forell’s and Hall’s works both lay the groundwork to consider deep questions about how the law should account for disparate power dynamics in formally neutral systems – and the inequalities that result – on account of gender. Feminism as focused on inequality has also addressed the composition of corporate boards of directors.12 The issue of diversity in firm leadership has been thrust into 11

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Katherine Hall, The Interior Design of Corporate Law: Why Theory is Vital to the Development of Corporate Law in Australia, 7 Austl. J. Corp. L. 1, 97–98 (1996). At least one initiative has also focused on gender diversity in corporate management. In 2019, the New York City Comptroller launched an initiative requesting that fifty-six S&P 500 companies “adopt a policy requiring the consideration of both women and people of color for every

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the spotlight with the passage of domestic legislation and exchange listing requirements that address gender and other types of diversity on boards. California’s legislature passed Senate Bill 826 in 2019 in order to increase gender diversity on corporate boards.13 The bill includes a progressive requirement for minimum female representation on corporate boards in the state of California and applies to both publicly held domestic and foreign corporations that are headquartered in California.14 It required that, by the close of 2019, all publicly held corporations headquartered in California must have at least one female member on their board of directors. By the close of 2021, those requirements increased to two female members for boards having five directors and three female members for boards of six or more directors.15 In addition, California also enacted another measure in 2020 aimed at increasing other types of board diversity.16 The law, AB 979, requires that public companies headquartered in California have a certain number of directors on their boards who are “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self‑identifies as gay, lesbian, bisexual, or transgender.”17 If these requirements are not met by the relevant deadlines,18 a noncompliant company risks significant monetary penalties.19 California’s legislation was ultimately followed in 2021 by new Nasdaq listing rules to advance board diversity and enhance the transparency of board diversity statistics.20 It has also generated identical legislation in other open board seat and for CEO appointments.” Boardroom Accountability Project – Overview, Off. of the N.Y.C. Comptroller Scott M. Stringer, https://comptroller.nyc.gov/services/ financial-matters/boardroom-accountability-project/overview/ (last visited Oct. 2, 2021). 13 Cal. Corp. Code § 301.3 (West 2019). 14 The bill states that it applies both to publicly held general domestic corporations and foreign corporations that have their principal executive offices located in California (as indicated on their SEC 10-K). For purposes of the statute, “publicly held corporation” means “a corporation with outstanding shares listed on a major United States stock exchange.” See Cal. Corp. Code § 301.3. 15 See Cal. Corp. Code § 301.3. Additionally, the bill provides that corporations may increase the number of directors on their boards to meet the requirement (a male director need not be replaced with a female director). 16 David A. Bell, Dawn Belt & Jennifer J. Hitchcock, New Law Requires Diversity on Boards of California-Based Companies, Harv. L. Sch. F. on Corp. Governance (Oct. 10, 2020), https:// corpgov.law.harvard.edu/2020/10/10/new-law-requires-diversity-on-boards-of-california-basedcompanies/. 17 Id. 18 Id. 19 Id. (articulating $100,000 for the first violation and $300,000 for each subsequent violation, with each required director seat not held by a member who meets the diversity requirements counted as a separate violation). 20 Under the new set of rules, certain Nasdaq-listed companies must meet two requirements. First, they must annually disclose statistics about the board’s voluntary self-identified gender characteristics, racial characteristics, and LGBTQ+ status for the current and prior year.

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states21 as well as significant discussion among mainstream corporate law scholars.22 Prior to the passage of CA SB 826 and other domestic initiatives inspired by it, there were efforts abroad along the same lines,23 with some corporate law scholarship analyzing women’s role in corporate governance.24 These feminist scholars’ works

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Second, they must either include on their board, or publicly disclose why their board does not include a certain number of “Diverse” directors. In this context, the rules define “Diverse” to mean “(1) a director who self-identifies her gender as female, without regard to the individual’s designated sex at birth (‘Female’), (2) a director who self-identifies as one more or of: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities (‘Underrepresented Minority’), and (3) lesbian, gay, bisexual, transgender or a member of the queer community (‘LGBTQ+’).” Nasdaq, “Nasdaq to Advance Diversity through New Proposed Listing Requirements” (Dec. 1, 2020), https://www.nasdaq.com/press-release/nasdaq-to-advance-diver sity-through-new-proposed-listing-requirements-2020-12-01. As of May 2022, however, the future of California’s legislation as well as Nasdaq’s listing rules remains uncertain. In April and May 2022, both AB 979 and SB 826, respectively, were struck down in the Superior Court of the State of California for the County of Los Angeles, after a conservative legal advocacy group Judicial Watch filed a lawsuit challengeing each of California’s board diversity measures. See Crest et al. v. Padilla, LA Super. Ct. Case No. 19STCV27561 (2019) and Crest v. Padilla, LA Super. Ct. Case No. 20STCV37513 (2020). It remains unknown how the State of California will respond to these rulings, and appeal as well as subsequent legislative efforts are both possible. Also, in August 2022, the U.S. Court of Appeals for the Fifth Circuit is tentatively scheduled to review a petition by The Alliance for Fair Board Recruitment (Alliance) that seeks review of the Securities and Exchange Commission’s recent approval of Nasdaq’s board diversity listing rules. Alliance for Fair Board Recruitment, et al. v. Securities and Exchange Commission, No. 21-60626 in the United States Court of Appeals for the Fifth Circuit (Nov. 22, 2021). Both Judicial Watch and Alliance contend that California’s legislation, as well as Nasdaq’s board listing rules, violate equal protection principles; additionally, Alliance argues that the SEC’s order and Nasdaq’s rule violate the First Amendment’s free speech clause, and that the SEC exceeded its statutory authority. Amelia Miazad, Sex, Power, and Corporate Governance, 54 U.C. Davis L. Rev 1913, 1952 (2021) (“six states have either enacted or are considering legislation mandating or encouraging more women on boards”) (internal citations omitted). See, e.g., Jill E. Fisch & Steven Davidoff Solomon, Centros, California’s “Women on Boards” Statute and the Scope of Regulatory Competition, 20 Eur. Bus. Org. L. Rev. 493 (2019). Norwegian Public Limited Liability Companies Act, § 6-11a. Darren Rosenblum’s article Feminizing Capital: A Corporate Imperative analyzes Norway’s groundbreaking corporate board quota, which mandated that all publicly listed corporations in Norway include at least 40 percent women on their boards. Rosenblum considered empirical evidence about the effect of female management on companies’ return on investment. Darren Rosenblum, Feminizing Capital: A Corporate Imperative, 6 Berkeley Bus. L.J. 55 (2009). Aaron Dhir’s article Towards a Race and Gender-Conscious Conception of the Firm: Canadian Corporate Governance, Law and Diversity critiques the argument that a “lack of qualified applicants” is the actual reason for board homogeneity. Attributing this problem to bias instead, Dhir advocates for a Norway-like law as the remedy, as well as an increased role for institutional investors in demanding equal gender representation. Aaron A. Dhir, Towards a Race and Gender-Conscious Conception of the Firm: Canadian Corporate Governance, Law and Diversity, 35 Queen’s L.J. 569 (2009). Janis Sarra’s article The Gender Implications of Corporate Governance also examines accountability by corporate decision makers with a look at boardroom demographics, cross-cultural implications of corporate decision making, and the treatment of gender in other corporate governance regimes. She urges that although board

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identify various obstacles that women face in ascending to leadership roles within organizations – which persist despite the push for gender equality in access and opportunity. Corporations must confront and correct these barriers. Using a feminist perspective in corporate law can help do so, first by bringing attention to them and ultimately through identifying solutions. Despite these examples of feminist scholarship focused on inequality in the composition of corporate stakeholders, many aspects of corporate practice remain relatively untheorized. For instance, scholars have not explored whether businesses that are owned by women do, could, or should take a distinct form of proprietorship – beyond certification that establishes them as women-owned businesses. It also remains largely unknown whether gendered patterns of ownership (i.e., the relationship between any particular form of ownership and the gender of an organization or the organization’s owners) predominate in particular industries. Henry Hansmann pioneered a contextual approach to theorizing ownership in his seminal work the ownership of enterprise.25 In this work, Hansmann observed that particular characteristics of the industry in which a company operates lead to certain patterns of ownership predominating in that industry.26 Hansmann did not examine gendered patterns of ownership, although that might be a logical feminist extension of his work. One example of the gendered differences that the form of ownership may make arises in the context of public or private forms of firm ownership. This is because the ownership of a firm, including which funds own the firm, matters to the firm’s operations, governance, and performance.27 Because whether a firm is public or private dramatically affects the composition of which funds own that firm, the decision about going public or staying private has important consequences for firm governance and performance.28 Research by Waverly

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policies may appear to be neutral, women are not yet viewed as valuable participants in decision making and continue to face enormous barriers to accessing board positions and thus to influencing corporate governance. Sarra, supra note 1. Feminist scholarship has also considered the roles of women in the organization as worker-owners: Miriam A. Cherry’s Decentering the Firm article explores using limited liability company membership as a remedy to the subordination and exclusion of low-wage, immigrant women from corporate governance and ownership. Miriam A. Cherry, Decentering the Firm: The Limited Liability Company and Low Wage Immigrant Women Workers, 39 U.C. Davis L. Rev. 787 (2006). Henry Hansmann, The Ownership of Enterprise (2000). Id. Specifically, Hansmann proposed that whatever constituency gets the most net benefit from ownership will own, rather than contract with, the company. The dominant form of ownership in the economy today is the investor-owned company. Certain industries commonly have companies that are instead owned by customers (such as wholesale, housing, and mutual banking) or workers (professional services, and producers (fungible goods or services); some industries (education and health care) tend have no owners at all and are structured as nonprofit organizations. See, e.g., Shai Bernstein, Xavier Giroud & Richard R. Townsend, The Impact of Venture Capital Monitoring, 71 J. Fin. 1591 (2016). See Gabriel V. Rauterberg, The Public/Private Divides Revisited (Working Paper, 2021) (exploring the effects of being public and private on firms’ ownership structure and performance).

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Deutsch demonstrated that emerging managers of women-led funds are more likely to find funding for their investments in women- and minority-led operating companies among high net worth individuals, rather than from larger foundations, corporate investors, and pension funds.29 In addition, engagement with the contributions of Black feminist legal scholars concerning anti-essentialism and intersectionality in corporate law, scholarship, and theory, although rare, is vitally needed to bring marginalized women into the center of corporate culture and theorizing. In the early 1990s, Black feminist legal scholars offered insightful critiques of feminist legal theory’s response to inequality and discrimination. In separate groundbreaking articles, Kimberlé Crenshaw30 and Angela Harris31 critiqued feminist legal theory by asserting that it assumed a universal voice or experience among women. Crenshaw and Harris articulated and advocated for anti-essentialist approaches to feminist legal theory that would look beyond what they defined as heterosexual, middle-class, White women’s experiences to explore the impact of the law in a more inclusive way. Crenshaw and Harris both explained how such “essentialized” feminist discourse marginalizes and renders invisible the experiences of women of color. Their analyses offer new insights for addressing inequality and discrimination in corporate culture and law. Scholarship by one of this chapter’s authors on the salience of race in the business setting similarly highlights the ways in which the intersection of race and gender in corporate cultures disadvantages women of color.32 Differences in status between White and Black women in the business setting provide a vivid example of the idea that there is no universal “women’s experience.” In 2021, for example, Thashunda Brown Duckett became only the fourth Black woman to serve as CEO of a Fortune 500 company when she was appointed CEO of Teachers Insurance and Annuity Association of America. Rosalind Brewer served as CEO of Walgreens Boots Alliance. Ursula Burns was the first Black woman 29

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Waverly Deutsch, Women and Minority Investors Are Taking Matters into Their Own Hands: The VC industry Continues to Pay Lip Service to Diversity, Chi. Booth Rev. (May 10, 2021), https://review.chicagobooth.edu/entrepreneurship/2021/article/women-and-minority-investorsare-taking-matters-their-own-hands (citing data revealing that “early LPs [limited partners] tended to be high-net-worth individuals” in women-led investment funds operated by emerging managers, and that such emerging managers “said that many LPs (especially larger foundations, corporate investors, and pension funds) frequently commented that the women’s funds were too small and didn’t have enough of a track record.”). Kimberlé Crenshaw, Mapping the Margins: Intersectionality, Identity Politics, and Violence against Women of Color, 43 Stan. L. Rev. 1241 (1991). Angela P. Harris, Race and Essentialism in Feminist Legal Theory, 42 Stan. L. Rev. 581 (1990). See Cheryl L. Wade, Corporate Governance as Corporate Social Responsibility, Empathy and Race Discrimination, 76 Tul. L. Rev. 1461 (2002) (discussing the lack of empathic understanding for women of color in the corporate setting); Cheryl L. Wade, Gender Diversity on Corporate Boards: How Racial Politics Impedes Progress in the United States, 26 Pace Int’l L. Rev. 23 (2014) (framing failures to achieve diversity as the result of persistent discrimination and noting that Norway’s success in achieving gender diversity on corporate boards is impossible in the United States because of the latter nation’s racial diversity and politics).

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Fortune 500 CEO, serving from 2010 to 2016 at Xerox. Mary Winston was Bed Bath & Beyond’s interim CEO in 2019.33 On the other hand, “[o]f the 83 women who have been CEOs of Fortune 500 companies since 2000, 72 have been white women.”34 Men of color, even Black men, have fared slightly better than Black women when it comes to leading the most successful corporations. Twice as many Black men have held CEO positions compared to Black women. And it was not until 2010 that Ursula Burns became the first Black woman Fortune 500 CEO, 21 years after the first Black man became CEO in 1987. The differences in the number of Black women who lead large corporations, on the one hand, and, on the other, the number of White women and Black men in those roles demonstrate the gist of the insights offered by Black feminists. Corporate actors who ignore the relevance of intersectionality and antiessentialism risk unthinking advocacy for gender diversity that benefits only – or primarily – White women. The same unwitting result occurs with respect to efforts aimed at achieving greater racial diversity. The focus, typically unconsciously, primarily benefits men. In other words, as Black feminists have stated, essentialism unintentionally inspires the idea that all the women are White, and all the people of color are male.35 Corporate governance practices that ignore Black feminists’ advocacy for anti-essentialist approaches produce C-suites and boards with few or no Black women. The same observation about the relevance of intersectionality can be and has been applied with respect to Latina, Asian, and Indigenous women. Much more can – and some say needs to – be done at the intersection of gender, race, and other demographics in corporate cultures. Feminist scholarship that employs an implicitly essentialist focus on cisgender, heterosexual, middle-class White women in corporate law and culture eclipses not only the experiences of women of color, as pointed out by Crenshaw and Harris, but also of others who have been marginalized because of their ethnicity, religion, poverty, disability, sexual orientation, gender identity, and so on. Obscured is the reality of discrimination against women of color and other traditionally marginalized individuals who are in relationship with corporations, whether as consumers or workers, as well as female entrepreneurs of color who own small businesses that supply the goods and services that corporations need.36 33

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See Kathy Gurchiek, Rosalind Brewer Becomes Third Black Woman to Head a Fortune 500 Company, SHRM (Feb. 2, 2021), https://www.shrm.org/resourcesandtools/hr-topics/behavioralcompetencies/global-and-cultural-effectiveness/pages/rosalind-brewer-becomes-3rd-blackwoman-to-head-a-fortune-500-company.aspx. Richard L. Zweigenhaft, Diversity Among Fortune 500 CEOs from 2000 to 2020: White Women, High-Tech South Asians, and Economically Privileged Multilingual Immigrants from Around the World, Who Rules America? (Jan. 2021), https://whorulesamerica.ucsc.edu/power/diver sity_update_2020.html. See, e.g., All the Women Are White, All the Blacks Are Men, But Some of Us Are Brave, Akasha Gloria Hull, Patricia Bell-Scott, Barbara Smith, eds. (1982). See, e.g., Marie Boyd, Gender, Race & the Inadequate Regulation of Cosmetics, 30 Yale J.L. & Feminism 275, 291–92 (2018) (discussing racial and class differences in employment within beauty industry and consumption of cosmetics).

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As we enter the third decade of the twenty-first century, some Black and other feminist legal scholars have taken a nonessentialist approach that employs Crenshaw’s theory of intersectionality in contexts outside of corporate law and theory. Renee Allen eloquently describes what she calls “intersectional battle fatigue” to analyze “systemic, gendered racism” in the legal academy.37 Marissa Jackson Sow powerfully uses narrative to describe the relevance of gender and antiBlackness in the context of the relationship between a municipal government and its Black citizens.38 Sahar Aziz and Wendy Greene, among others, have written about other forms of racialized discrimination faced by women of color, building on the works of Harris and Crenshaw and tying those works to recent developments.39 Paulette Caldwell was one of the first scholars to use intersectionality theory in the context of corporate employers’ alleged workplace discrimination against Black women in her eloquent description of racialized hairstyles.40 Trust Kupupika describes Black feminist legal theory as follows: “Black feminist legal theory has offered the tool of intersectionality to modern feminist movements to help combat interlocking systems of oppression. Despite this tremendous offering, intersectionality has become wholly divorced from its Black feminist origins. This is significant because without a deep engagement with Black feminist legal theory, intersectionality is devoid of its revolutionary potential.”41The work of these Black and other feminists fully embraces an identity-based approach in an attempt to create a just society. In the context of corporate law and governance, this approach leaves room for recognizing that all corporate stakeholders – regardless of the components of their identity, such as race and gender – are exposed to the potentially negative impact of corporate activity.42 Although some of these applications are 37

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Renee Nicole Allen, From Academic Freedom to Cancel Culture: Silencing Black Women in the Legal Academy, 68 UCLA L. Rev. (2021) See, e.g., Marissa Jackson Sow, Coming to Terms: Using Contract Theory to Understand the Detroit Water Shutoffs, 96 N.Y.U. L. Rev. 29 (2021). See generally D. Wendy Greene, Black Women Can’t Have Blonde Hair. . .in the Workplace, 14 J. Gender, Race & Just. (2011) (analyzing racialized hairstyles and employment discrimination endured by Black women and the failure of courts to acknowledge this form of discrimination); Sahar F. Aziz, Coercive Assimilationism: The Perils of Muslim Women’s Identity Performance in the Workplace, 20 Mich. J. Race & L. 1 (2014) (advocating for an expansive interpretation of Title VII to address workplace discrimination and the “intersection of religion, race, gender, and ethnicity”). Paulette Caldwell, A Hair Piece: Perspectives on the Intersection of Race and Gender, 1991 Duke L.J. 365 (1991). Trust Kupupika, Shaping Our Freedom Dreams: Reclaiming Intersectionality Through Black Feminist Legal Theory, 107 Va. L. Rev. 27 (2021). The work of Black feminists, however, asserts that in this exposure, the extent of latent vulnerability may be universal but nonetheless different in degree. In other words, Black feminists would argue that all stakeholders may be universally vulnerable, but not all stakeholders are equally or similarly situated in their vulnerability. Some stakeholders are more susceptible to the negative externalities that corporations impose than others. This is in many ways merely a restatement of a discrimination perspective, with which those who adopt a more inclusive and universal analysis would argue. Later in this chapter we describe the important

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outside of conventional corporate law and theory, they are nonetheless powerful and relevant examples that can and arguably should inspire corporate law scholars to further extend the important concepts of intersectionality in their work. These brief summaries of some of the feminist scholarship approaching inequality in corporate law show the advantages of a feminist response to the exclusion and marginalization of women. Feminism in this regard has advocated for, and has sometimes even achieved, important advances for individuals excluded from the privileges and protections of corporate law. Some of the most notable successes have been mandated diversity on boards43 and anti-discrimination law resulting in more women in the workplace.44 If the proposals discussed in this section and advanced by feminist corporate law scholars in the areas of corporate personhood, leadership, and fiduciary duties were also to be adopted, inequalities might be further mitigated. Yet, there remain important limitations of anti-discrimination and inclusionfocused feminism as a response to inequality. By focusing on instances of gender

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insights of universal vulnerability theory that supplements demographic identities like race and gender with social identities that form inherently unequal paired relationships (such as employers and employees, or debtors and creditors) that operate as social or institutional identities independent of personal characteristics. See infra Section 4 of this chapter. Discrimination can and does still exist in the context for these universal social identities. For example, the lessons of Black feminist theory challenge the idea that all debtors are similarly situated in the degree or extent of their vulnerability. For example, venerable corporations settled litigation alleging that their agents and employees engaged in predatory lending practices that caused borrowers or debtors, many of them women, to default on home mortgages. While it is true that all debtors – or in this example mortgagors – are susceptible to predatory lending practices, research reveals that Black borrowers were intentionally targeted for predatory mortgages in numbers that were disproportionately higher than similarly situated White borrowers in the years leading up to the Great Recession of 2008. Janis Sarra & Cheryl L. Wade, Predatory Lending and the Destruction of the African-American Dream 2 (2020) (“African Americans were four times as likely as similarly situated white Americans to pay sub-prime rates on their mortgages, even when controlling for factors such as borrower income and property location.”). Black feminist theory highlights the salience of race in the relationships between debtors and creditors. In other settings, the work of Black feminists provides context that reveals the failure of governments, courts, and the law in general to achieve justice for corporate stakeholders – employees or debtors, for example – who are Black. Legal history is replete with examples of the state’s failure to support social relationships in the business context when social identity intersects with Black, female identity. However, such targeted analysis also often obscures larger, more enduring structural inequities, inequities that if remedied would improve the position of all of those who occupy the disadvantaged social position. In other words, this set of statements can mischaracterize and distort an analysis based on universal social or institutional categories, such as vulnerability theory. From a universal social justice perspective, an anti-discrimination and inequality focused analysis might narrow our inquiry by obscuring the issues associated with universal social categories or institutional (rather than individual) identities that affect everyone in society. Infra Section 4 of this chapter. We as co-authors intentionally highlight these relevant, distinct perspectives – even though the focus of this chapter does not allow us to fully analyze and reconcile them here – as we believe in the great value of acknowledging and dialoguing across difference. See, e.g., Cal. Corp. Code § 301.3 (West 2019). Fair Employment and Housing Act, Cal. Gov’t Code § 12926 (West 2020).

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inequality and exclusion, does feminism obscure – and leave untouched – other more basic underlying societal inequalities? In response, some feminist scholars have analyzed the use and distribution of power and critiqued the structures of subordination that result in inequality more broadly.45 Another disadvantage of focusing on exclusion is that while advances may be made, women may still not occupy positions of power or may be forced to assimilate to, rather than challenge and change, existing hierarchies and inequalities.46 Certain feminist approaches address the values and cultures that result in inequality and have looked beyond who populates corporate structures to the nature of the corporate institution itself and its relationship to our larger society. This is the topic of the next section.

2. FEMINISM AS AN ETHICAL FRAMEWORK AND VALUE ORIENTATION IN CORPORATE LAW

Stepping back from a consideration of the position of individuals or groups within the corporate structure, one could ask the following meta-questions: what are the values and ethics underlying the role of the corporation in society today, and how might they be different in a just society? Of course, corporations are central to the material condition of society and, hopefully, they contribute to general societal well-being. However, the contributions and practices of corporations are not intrinsically socially beneficial; indeed, corporations can be influenced by potentially harmful normative views, values, and historical practices, such as the sinister legacies of colonialism and slavery.47 There are also critiques assessing the possible coercive application of norms found in political and economic theories, such as liberalism,48 pluralism,49 capitalism,50

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See infra Sections 3 and 4 of this chapter; see also Testy, Capitalism and Freedom, supra note 3. Individuals and institutions may even superficially reference or otherwise use nonmale and nonWhite people to acquire social and economic value, without implementing structural changes to foster real inclusion. Nancy Leong, Racial Capitalism, 126 Harv. L. Rev. 2151 (2013); see also Nancy Leong, Identity Capitalists: The Powerful Insiders Who Exploit Diversity to Maintain Inequality (2021). The authors thank Khaled Beydoun for his comments on this topic. Matthew Desmond, In Order to Understand the Brutality of American Capitalism, You Have to Start on the Plantation, N.Y. Times Mag., Aug. 14, 2019, https://www.nytimes.com/interactive/ 2019/08/14/magazine/slavery-capitalism.html (“[A]round the world, there are many types of capitalist societies, ranging from liberating to exploitative, protective to abusive, democratic to unregulated. When Americans declare that ‘we live in a capitalist society’ . . . what they’re often defending is our nation’s peculiarly brutal economy. ‘Low-road capitalism,’ the University of Wisconsin-Madison sociologist Joel Rogers has called it.”). Hall, supra note 11, at 16–42. Dalia Tsuk Mitchell, Corporations without Labor: The Politics of Progressive Corporate Law, 151 U. Pa. L. Rev. 1861 (2003). Testy, Capitalism and Freedom, supra note 3, at 88–93; see also Sarra, supra note 1, at 462.

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economics,51 contractarianism,52 patriarchy,53 and dominance.54 Many feminist commentators note that as a result of these underlying values, corporate law’s formally gender-neutral rules impose injustices upon women and people of color55 and reflect a deep cultural pattern of defining men as being “dichotomously different from, and more powerful than, women, and defining minds as being radically disconnected from, and more powerful than, nature, matter, and emotion.”56 Feminist law scholars have also argued that feminist concepts and values can supply a different ethical framework and orientation for corporate law. Specifically, “relational” (also known as “cultural”) feminist scholars emphasize an “ethic of care” and that the capacity to respond to the needs of others is a core aspect of being human.57 Some feminist scholars have begun to explore how the material situation of others, including the larger community, should influence corporate relationships and recast traditional corporate theory.58 Feminist corporate law scholars have repeatedly challenged the dominant corporate governance theory of shareholder primacy and shareholder wealth maximization as well as capitalist doctrines that value capital and efficiency, which in turn dictate how and to whom corporations and their boards can be held accountable. These scholars further argue that these corporate law theories obscure the practical reality of corporations and fail to adequately capture the extent of corporate activity or power.59 Feminist corporate law scholars share the foregoing concerns, as well as concerns about “concentration and anti-democratic use of corporate power” more broadly, with progressive corporate law scholars.60 Indeed, in one of the seminal works by feminist corporate law scholar Kellye Testy, she argues for the unification of progressive corporate law scholars with feminist corporate law 51

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Theresa A. Gabaldon, The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, 45 Vand. L. Rev. 1387, 1402–13, 1425–27 (1992). Sarra, supra note 1, at 461–66; Hall, supra note 11, at 21–42; Terry O’Neill, The Patriarchal Meaning of Contract: Feminist Reflections on the Corporate Governance Debate, in Perspectives on Company Law 2, 33–47 (Fiona Macmillan Patfield ed., 1997). Testy, Capitalism and Freedom, supra note 3. Id. Sarra, supra note 5; Richard R. W. Brooks, Incorporating Race, 106 Colum. L. Rev. 2023 (2006). Julie A. Nelson, Does Profit-Seeking Rule Out Love? Evidence (or Not) from Economics and Law, 35 Wash. U. J.L. & Pol’y 69 (2011). Janet Johansson & Michaela Edwards, Exploring Caring Leadership Through a Feminist Ethic of Care: The Case of a Sporty CEO, 17 Leadership 318 (2021), https://journals.sagepub.com/ doi/epub/10.1177/1742715020987092. Sarra, supra note 5; see also O’Neill, supra note 52 (discussing “responding to another’s expression of her own desires, goals, and needs” in a corporate context; and how these values of self-interest are traditionally defined by corporate roles, such as shareholder versus manager). Hall, supra note 11, at 34–35; Dalia Tsuk Mitchell, supra note 49. Testy, Capitalism and Freedom, supra note 3, at 91. This chapter does not discuss progressive corporate law in depth.

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scholars.61 Specifically, Testy makes a case that progressive corporate law can be enhanced by “key feminist values: nurturing connectedness, attending to context, and furthering human equality and flourishing.”62 Despite the potential for progressive corporate law and feminist corporate law to share these common values, what arguably differentiates a feminist approach is that one of its “primary aim[s] is to understand and value women’s differences, whether biologically or culturally based, and to insist that those differences be accepted by law and society rather than used to discount women.”63 Feminist concepts as an alternative ethical framework have been developed and applied to critically assess the role and purpose of corporate limited liability. One feminist corporate law scholar, Theresa Gabaldon, has proposed addressing criticisms of limited liability through a relational feminist approach. In her article The Lemonade Stand: Feminist and Other Reflections on the Limited Liability of Corporate Shareholders, Gabaldon argues that “the fact that limited liability is enshrined in the law can inflict a separate harm by shaping values and social reality”64 and that a “mandate of enterprise responsibility would serve as important affirmation of the social values of care and responsibility.”65 Indeed, she extends her analysis of limited liability beyond entities to encompass sole proprietorships and partnerships as well, for the reason that feminist values would discourage “profit at the price of uncompensated risk to third parties . . . in all contexts.”66 Other arguments that Gabaldon makes from a relational feminist approach include that limited liability “exhibits a rigid rule-orientation that is inconsistent with many feminist methods and values” and that the discouragement of passive investment that would result in the absence of limited liability reflects “the feminist belief that the interest in monitoring is a social good, not a duplicative waste.”67 Gabaldon’s contribution enhances corporate law more broadly because it challenges the dominant discourse that limited liability is a necessary component of asset partitioning68 and shows that effective asset monitoring and risk management could nonetheless take place within a different legal framework. Practically, this would likely result in companies and decision-makers seeking contractual and nonlegal alternatives to limit their ultimate potential liability. Forms of this non-legal risk mitigation could include the formation of partnerships to share risk, increased 61 62 63

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Id. at 99. Id. Id. at 94. Relevant to the previous section on feminism as an approach to inequality, Testy additionally states that “[o]ne of the goals of a feminist approach to law is the elimination of gender-based classifications in order to promote both formal and substantive equality.” Id. Gabaldon, supra note 51, at 1428. Id. at 1454. Id. at 1430. Id. See generally Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 Yale L.J. 387 (2000).

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and more comprehensive insurance coverage, limiting the reach of a business to a smaller population of customers, and spending additional time and money on the front end of production and service provision (e.g., product design safety, product testing, and preparation of service providers). The insurance industry is one example that demonstrates it is possible to conduct significant operations without the protection of limited liability for shareholders.69 Feminism has also examined and emphasized the role of corporate agency and culture in ordering society more broadly. Corporate cultures and the burdens that corporate employment impose on individuals’ lives profoundly shape individual behaviors, households, and society at large. Attending more closely to this channel of values and impact would lead us both to understand it better and also to question how it should operate. For instance, we might seek a richer set of normative values to be embodied in corporate culture, as we sometimes expect from other social institutions. In this vein, Kathleen Lahey and Sarah Salter have examined work by Dorothy Smith that critiques the “legal structure of the corporation in order to discover just how corporate capitalism . . . mediates social behavior.”70 Specifically, Lahey and Salter summarize Smith’s argument that the market-based culture of the modern corporation “appropriates the entire family of middle class managers” – in particular, middle-class women – who sustain “the moral status of the manager . . . central to a particular person’s acceptability as manager.”71 Other scholarship has focused on corporate culture and its impact upon the individual behaviors of corporate constituents and stakeholders within the corporation, such as Amelia Miazad’s article Sex, Power and Corporate Governance.72 As Miazad documents, corporate culture is beginning to replace compliance-based approaches as a focus of corporate governance. While compliance is mandated by law, the quality of that compliance is an internal matter that falls within the discretion of corporate officers and boards.73 Officers may decide to do the bare minimum necessary to limit legal liability when it comes to compliance. In effect, compliance programs are often mere window dressing or cosmetic in nature.74 Of course, some officers may decide to create and implement robust compliance programs that take seriously the substance of legal strictures and shape a corporation’s culture for the better, but all too often the structure of incentives works in the other direction.75 Even when laws are in place, 69 70 71 72 73

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Andrew Verstein, Enterprise Without Entities, 116 Mich. L. Rev. 247 (2017). Lahey & Salter, supra note 5, at 550. Id. at 552. Miazad, supra note 21, at 1921–26. See generally Geoffrey Miller, The Compliance Function (NYU L. & Econ. Working Paper No. 14-36, 2014), http://dx.doi.org/10.2139/ssrn.2527621. See generally Cheryl L. Wade, Effective Compliance with Antidiscrimination Law: Corporate Personhood, Purpose and Social Responsibility, 74 Wash. & Lee L. Rev. 1187 (2017). See generally Donald C. Langevoort, Behavioral Ethics, Behavioral Compliance, in Research Handbook on Corporate Crime and Financial Misdealing 263 (Jennifer Arlen ed., 2018).

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enforcement may be complicated or compromised. Both men and women may be unwilling to act to effect, encourage, or support the kinds of cultural changes that are likely to promote the inclusion and advancement of people of nonmale genders, prioritizing instead concerns about institutional fit and loyalty to the company.76 An understanding of the effects of corporate culture on individual incentives coupled with the fact that business leadership is predominantly male, provides invaluable insight about how to make corporate workplaces more inclusive, including not only gender but also other forms of diversity. Meaningful cultural change will require more than including a representative proportion of women among an organization’s leadership.77 Not only women but also men must concern themselves with equitable corporate governance and decision-making. Increasing the equitable practices at all levels of corporate hierarchies and phases of business will be possible only if there is a substantial change in the way companies are managed. Nonmale people should not be expected to do all the work toward achieving gender equality in the business setting alone: men must be full partners and participants.78 Many men in corporate law scholarship and corporate institutions have indeed engaged with a key question of relational feminism – namely, what differences women possess and how to value them – when they attempt to justify a “business case” for greater inclusion of women in corporations. Indeed, this argument from relational feminism is perhaps the one most commonly, if implicitly, put forth by conventional corporate law scholars when advocating for change in the corporation as a social institution.79 However, unless culture and the resulting discrimination and other disadvantages that women and other marginalized people continue to face are addressed, an increase in workplace diversity will only increase the number of problems these groups encounter.80 More broadly, a failure to effect change will

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Devon Carbado and Mitu Gulati discuss how some workers ignore workplace racial and gender conflicts. Carbado and Gulati explain that White men who deplore sexist conduct may fail to challenge such conduct in order to demonstrate their loyalty to the corporation. Likewise, women may fail to challenge sexist jokes and comments because they want to demonstrate that they fit in. See Devon W. Carbado & Mitu Gulati, Working Identity, 85 Cornell L. Rev. 1259 (2000). Miazad, supra note 21. See Trina Grillo & Stephanie M. Wildman, Obscuring the Importance of Race: The Implication of Making Comparisons Between Racism and Sexism (or Other-isms), 1991 Duke L.J. 397, 407–08 (1991) (pointing out that in the race discrimination context, it is important for White Americans to talk about White supremacy, rather than “asking people of color to do all the work”). See also Cheryl L. Wade, Transforming Discriminatory Corporate Cultures: This Is Not Just Women’s Work, 65 Md. L. Rev. 346 (2006). See, e.g., Binay K. Adhikari, Anup Agrawal & James Malm, Do Women Managers Keep Firms Out of Trouble? Evidence from Corporate Litigation and Policies, 67 J. Acct. & Econ. 202 (2019); Yaron Nili, Beyond the Numbers: Substantive Gender Diversity in Boardrooms, 94 Ind. L.J. 145 (2019). See generally Cheryl L. Wade, “We Are an Equal Opportunity Employer”: Diversity Doublespeak, 61 Wash. & Lee L. Rev. 1541 (2004).

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have substantial negative consequences, not only for individual women but for society generally. In addition, “women as women” must be able to succeed in the corporation.81 Women are just as capable as men of participating in toxic culture and abusing or failing to use their institutional agency to support all women and other marginalized people within the corporation. For example, Katherine Hall states that “the silence on feminist analysis of corporate law has not been the result of a lack of women academics” but “the result of a lack of connection between [women’s] interest in corporate law and [their] identity as women” as well as the way in which “women academics, just as women generally, have internalized the values of capitalism, patriarchy, and domination which are reflected by the corporation.”82 Feminism as an ethical framework and value orientation underlying the role and purpose of corporations must also overcome representation and intersectionality issues. As Theresa Gabaldon highlights in her article Like a Fish Needs a Bicycle, “[to] focus on the values of women seems to assume that those values will be selfevidently common and appears to suggest that any given woman’s experience is an appropriate surrogate for the experience of all.”83 As these relational feminist perspectives illuminate, corporate law protects the governance decisions of business leaders from any and all demographic groups who act in their corporate capacity and establish business cultures in which people can be treated unfairly, even abusively. This point goes beyond looking at the position of women and other marginalized groups to consider the social identity of all corporate constituents or actors generally, particularly in relation to the social identity of corporations. Perhaps the greatest limitation of a purely relational feminist approach to corporate law is its focus on reforming corporate constituents and the corporation itself from within to reflect feminist values and ethics. Relational feminism acknowledges the broad role and purpose of the corporation in society. Yet, it does not take aim at the private nature of the corporation that protects the perpetuation of corporate values and power.84 While “an expansive and increasingly vocal number of stakeholders influence corporate decision-making,” with rare exception they are private actors: institutional investors, pension funds, proxy advisors, shareholder activists, 81

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See Catherine A. MacKinnon, On Exceptionality: Women as Women, in Feminism Unmodified 71 (1987) (arguing that feminism should allow “women to be women on our own terms” and eradicate a “definition of women in law and in life that is not ours”) (emphasis in original). Hall, supra note 1, at 155–56; see also Sarra, supra note 1, at 459 (reflecting on how, in spite of feminism informing her work, her past “failure to articulate the gender effects of corporate law may itself be a function of the place of feminism in the hierarchy of economic and corporate law theory”). Gabaldon, supra note 6. Such protection is similar to the way in which a man was traditionally unaccountable at common law for actions within his “private” family sphere. See, e.g., Elizabeth Cady Stanton, Presentation to the Seneca Falls Convention: Declaration of Sentiments and Resolutions (July 19, 1848). The authors thank Nancy Chi Cantalupo for her comment regarding this insight.

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shareholder plaintiffs, employees, insurance brokers and underwriters, law firms, and board advisors.85 Lawmakers and regulatory monitors have enacted limited reforms, most of which remain focused on compliance-based regulation and antidiscrimination efforts, such as board diversity mandates and initiatives targeted toward addressing pay inequity.86 Feminism as a critique of corporate power and privilege considers the fundamental issue of the corporation’s social and political status – in particular, its power. That is the topic of the next section of this chapter.

3. FEMINISM AS A CRITIQUE OF CORPORATE POWER AND PRIVILEGE

What power should be conferred by law and policy on the corporation as a legal entity, as well as its various stakeholders (e.g., boards, management, shareholder, workers, and consumers)? Using feminism to evaluate corporate power allows us to fruitfully revisit the justifications offered for state subsidies and support. Is the special legal identity (personhood) of the corporation and its agents warranted, and, if so, what should be the nature and extent of their special treatment? Feminism as a critique of power is currently employed by feminist corporate law scholars to deconstruct dichotomies that pervade corporate law, such as distinctions between the concepts of public and private,87 individual and collective,88 competition and cooperation,89 principal and agent,90 and self-interest versus responsiveness.91 Corporate structure is among the areas of corporate law in which feminist scholars have revealed these fictions using the feminist method of contextualization.92 Kellye Testy uses contextualization to reveal misleading fictions among 85 86 87

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Miazad, supra note 21, at 1936–59. Id. at 1951–55. See Dalia Tsuk Mitchell, supra note 49, at 1870–1909; Testy, Capitalism and Freedom, supra note 3, at 105; Leslie Bender, Feminist (Re)Torts: Thoughts on the Liability Crisis, Mass Torts, Power, and Responsibilities Frontiers of Legal Thought, 1990 Duke L.J. 848, 864–72 (1990) [hereinafter Bender, Feminist (Re)Torts]. Bender, supra note 87, at 864–72. Terry O’Neill, Gender and Corporate Personhood: A Feminist Response to David Millon, 2 Stan. Agora 77 (2001), http://agora.stanford.edu/agora/libArticles2/abstracts/absoneill.html. O’Neill, supra note 52, at 40–43. Id. Other areas of corporate law in which feminist scholars have revealed misleading fictions include corporate identity. In Feminist (Re)torts, Leslie Bender analyzed how corporations appear or are presented in contrast to how they function in the United States, arguing “[t]he public/private distinction is about politics and power, not a description of reality.” Bender, supra note 87, at 868. To support her argument, Bender points out that corporations may “own more assets, possess more political and economic bargaining power, and often employ more people than many public, governmental bodies.” Id. at 866. Nonetheless, corporations are “treated as individuals despite the reality of their increased collective power.” Id. at 867. See also supra Chapter 1 of this volume, for more information about the feminist method of contextualization.

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constituents’ relationships within the corporate structure. In her article Capitalism and Freedom for Whom?: Feminist Legal Theory and Progressive Corporate Law, Testy demonstrates that the Team Production Model, which views a wide array of corporate participants as a team and is presented as an alternative to shareholder primacy model for corporate governance, actually operates to enforce shareholder primacy in practice. She points out that shareholders in both models retain most of the bargaining power due to liquid trading markets, which means that a board will most likely continue to allocate decision-making resources to the shareholders.93 Janis Sarra similarly argues that “[t]here continues to be inadequate analysis of governance structures that would best enhance [those] firm specific investments” made by not only equity investors94 but also “creditors, employees, suppliers, consumers, and local communities.”95 Testy and Sarra are among a chorus of feminist corporate law scholars who are concerned with corporate responsibility96 and suggest reforming the relationships among corporate constituents and considering a broader range of stakeholders, “without the hierarchy of the shareholder primacy model.”97 These arguments are often paired with progressive or communitarian analyses,98 and even mainstream corporate law scholars have argued for a more expansive notion of ownership.99 What feminist perspectives highlight in particular is that conventional allocations of corporate power to equity investors particularly harm women. This is because women are relatively more exposed to firms as stakeholders than as shareholders.100 In addition, because stockholding wealth is predominantly held by men, women are

93

94 95 96

97

98

99

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Testy, Capitalism and Freedom, supra note 3, at 102, 101–05. Additionally, Testy explicitly describes how context can and has been used as a feminist method of legal analysis on demographics, types of corporations, and separating markets from capitalism; Testy also argues that limited liability doctrines of alter ego and piercing the corporate veil need to be tailored to the context of whether shareholders are individuals or other corporations. See Id. Sarra, supra note 1, at 476. Id. at 477. Cheri A. Budzynski, Can a Feminist Approach to Corporate Social Responsibility Break Down the Barriers of the Shareholder Primacy Doctrine?, 38 U. Tol. L. Rev. 435–66 (2006); O’Neill, supra note 52, at 28–32 (arguing that corporate governance is driven by underlying, unacknowledged patriarchal ideology, and developing a non-patriarchal, socially responsible theory of the modern corporation that recognizes caregiving is a human – not only a feminine – responsibility); O’Neill, supra note 89, at 82–83 (describing a feminist approach to socially responsible corporate governance that is based on human responsiveness to other people’s needs). See, e.g., Testy, Capitalism and Freedom, supra note 3, at 98; Sarra, supra note 1, at 476 (arguing for the enterprise wealth maximization model). See, e.g., Testy, Capitalism and Freedom, supra note 3, at 98; Sarra, supra note 1, at 466; O’Neill, supra note 52, at 43–47. See generally Bernard Black, Corporate Law and Residual Claimants (Stan. L. & Econ. Olin Working Paper No. 217, 2009), https://ssrn.com/abstract=1528437 [https://perma.cc/UCU8DVVM]. Sarra, supra note 1, at 464–65 and 473–74.

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fewer in number among the powerful investor class and therefore also participate relatively less in the benefits of the shareholder primacy paradigm – but could participate more if investments of other types (e.g., labor) were recognized. These critiques of corporate power by feminist corporate law scholars matter to corporate law more broadly because they challenge accepted protections offered by corporate law. Many commentators on corporate law envision the choices and conduct of corporations to be private in character. Feminists, however, have been critics of the public–private divide. Many of the decisions that corporations make are not appropriately considered private because they impact large groups of people and diverse stakeholders. Addressing significant costs caused by one entity on large groups of the public is typically “public law,” but corporations are able to use private law in a way that subjects them to relatively modest private remedies to answer for harms they visit upon the public at large.101 With courts and legislatures reluctant to interfere in matters of economic enterprise, even in regard to issues that have public implications, the governance of private sector firms is left to “internal” processes.102 For example, a corporate board’s decision about taking affirmative steps to increase the number of women on corporate boards is, with some exception,103 a matter that each company is left to decide for itself. Another way in which corporations enjoy significant latitude in their decision-making and activities is provided by the business judgment rule, one of the foundational tenets of corporate governance. Under this rule, courts defer to corporate boards. As a result, any decision that is not conflicted or grossly negligent, even if it is unwise, is typically immune from successful suit. There are still other issues in corporate law that would benefit from a feminist critique of corporate power. Among corporate law’s most foundational concerns is

101 102

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Bender, supra note 87, at 866–67. Of course, corporations are subject to regulation with respect to their imposition of negative consequences on non-manager, non-shareholder groups, however. These groups, which include employees and environmental stakeholders, are considered to be “external” to the corporation – even though their contributions, including provision of labor or natural resources, are critical to the corporation’s functioning. The rights of these non-shareholder, non-managerial constituencies are deemed the concern of consumer, labor, employment, and environmental law, not corporate law, under the dominant view. But see Elizabeth Pollman, Constitutionalizing Corporate Law, 69 Vand. L. Rev. 639, 670–71 (discussing the way in which Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682 (2014) has “put pressure” on state corporate law to resolve disputes traditionally addressed in labor, employment and constitutional law). Similarly, case law involving corporations and their compliance with environmental, labor, employment and consumer laws and regulations almost always overlooks the overlap with corporate governance and corporate law. Yet, effective compliance is good corporate governance, and these internal corporate processes have potential consequences that reverberate beyond the corporation’s shareholders and managers to reach stakeholders and the public. When private firms fail to bear the full costs of their operations upon all organizational constituents, victims must litigate for themselves. See, e.g., Miazad, supra note 21, at 1952 (“six states have either enacted or are considering legislation mandating or encouraging more women on boards”) (internal citations omitted).

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the nature and boundaries of firms: what are the reasons that individuals sometimes organize economic activity through corporations and entities, rather than transacting solely through contracts? The pursuit of a “theory of the firm”104 is distinct from questions concerning the purpose of firm activities (e.g., generating wealth for the owners versus conducting socially beneficial activities for the citizenry more broadly) or questions about whose interests a firm should pursue (e.g., shareholders, stakeholders, or charitable classes). While economists have dominated the discussion about theories of the firm, “a combination of legal and economic analysis opens the door for other disciplines besides economics to describe the social nature of the entities called firms.”105 Theories of the firm are important because they have influenced the design of the legal framework within which firms are created and function – and consequently, the balance of powers and privileges legally conferred upon its constituents through its operations. Theories of the firm shape resource allocation, production methods and volume, and pricing, among other firm decisions, and therefore a theory of the firm that is influenced by feminism would also address those issues and their impact on questions of justice. A feminist or feminist-inspired methodology can suggest an alternative and more comprehensive understanding of how firms could (or should) be organized and operated more justly. For example, vulnerability theory – discussed at greater length in the next section of this chapter – argues that the formation of the firm, like any other social institution and set of relationships, should be understood as a state-constructed response to human vulnerability.106 When vulnerability – in addition to, or in lieu of, economic efficiency – is the foundation for a theory of the firm, the balance of power allocated to and among corporate actors may be assessed differently and adjusted in recognition of their interdependency (rather than one party’s dependency on and subordination to another). Perhaps in a world with a vulnerability-inspired theory of the firm, principals might have greater responsibilities to their agents; even in economic activity that is organized through contracts, contractual co-parties might be assigned greater responsibility to each other. Though the effect may be to blur the line between economic activity organized through firms, on the one hand, and contracts on the other, this result could more realistically represent the interconnectedness that parties have to one another.

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Ronald H. Coase, The Nature of the Firm, 4 Economica 386, 388 (1937). Eric W. Orts, Shirking and Sharking: A Legal Theory of the Firm, 16 Yale L. & Pol’y Rev. 265, 267 (1998). Martha Albertson Fineman, The Vulnerable Subject: Anchoring Equality in the Human Condition, 20 Yale J.L. & Feminism 24 (2008) [hereinafter Fineman, The Vulnerable Subject] (stating that firms are one of the “structures [that] our society has and will establish to manage our common vulnerabilities.”).

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4. TOWARD A FEMINIST-INSPIRED INSTITUTIONAL ANALYSIS OF CORPORATE LAW

Feminist legal theorists should seek to reconceptualize a new relationship between life and law.107 A feminist approach to considering the relationship between life and law compels us to consider whose experiences form the basis for the legal frameworks that establish the foundation for our relationships within society.108 Valuing the experiences of all individuals – whether they identify with a particular gender identity such as male, female, or nonbinary, or other socially constructed categories – is essential to imagine new and more just ways for members of society to relate to one another. To that end, in this section we consider the ways in which a feministinspired analysis is helpful to understand how corporate law and corporations – as institutions that confer salient social identities such as worker, owner, principal, agent, and beyond – contribute to societal inequities as they are currently constituted. We note that some feminist and critical theory scholars have moved beyond a focus on demographic differences and identity generally, focusing instead on a universal legal subject and the necessary role of government and law in building a just society.109 However, that inquiry is beyond the scope of this chapter. Vulnerability theory is a particularly relevant alternative to an individualistic rights-based or social contract paradigm when considering the effects of the corporation on society.110 Vulnerability theory begins by emphasizing that “vulnerability is and should be understood to be universal and constant, inherent in the human condition.”111 The significance of the theory for corporate law is the assertion that, as a result of our vulnerability, human beings are constantly and continuously dependent upon a variety of interdependent social institutions and relationships for the resources and assets (resilience) we need to enable us to cope with our vulnerability

107 108 109

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MacKinnon, supra note 81. Id. See, e.g., Martha Albertson Fineman, Evolving Images of Gender and Equality: A Feminist Journey, 43 New Eng. L. Rev. 101 (2009); Marc Spindelman, Feminism without Feminism, 9 Issues in Legal Scholarship 1 (2011). A growing collection of articles has been written by Martha Albertson Fineman explicating vulnerability theory, including: Beyond Equality and Discrimination, 73 SMU L. Rev. F. 51 (2020); Vulnerability and Social Justice, 53 Val. L. Rev. 341 (2019); Vulnerability and Inevitable Inequality, 4 Oslo L. Rev. 133 (2017); Equality and Difference – The Restrained State, 66 Ala. L. Rev. 609 (2015) [hereinafter Fineman, Equality and Difference]; Beyond Identities: The Limits of an Anti-Discrimination Approach to Equality, 92 B.U. L. Rev. 1713 (2012); The Vulnerable Subject and the Responsive State, 60 Emory L.J. (2011); The Vulnerable Subject, supra note 106; Reasoning from the Body: Universal Vulnerability and Social Justice, in Jurisprudence of the Body 17 (Chris Dietz, Mitchell Travis & Michael Thompson eds., 2020); and Injury in the Unresponsive State: Writing the Vulnerable Subject into Neo-Liberal Legal Culture, in Injury and Injustice: The Cultural Politics of Harm and Redress 50 (Anne Bloom, David M. Engel & Michael McCann eds., 2018). Fineman, The Vulnerable Subject, supra note 106.

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over the course of our lives. These institutions and relationships are created and maintained by law, hence the state is responsible to see that they operate justly. Social institutions, such as those within the economic, cultural, and political systems are organized to – and do – affect everyone in society. They are inescapably significant for the individual, defining the relevant social roles or identities that form the institutional environment in which everyone must live their day-to-day lives.112 These social identities, many of which are encapsulated within the corporate form, often involve inevitably unequal relationships, in which individuals are expected to serve different social functions. Examples of such inherent social or institutional inequality include employer–employee, parent–child, debtor–creditor, teacher–student, and shareholder–consumer. These social pairings do not lend themselves to a critique based on the analysis of traditional inequality and anti-discrimination. The issue is not equality and inclusion, but whether these social identities and the institutions and relationships they reflect are justly arranged. Social institutions such as the corporation allocate privilege, sometimes to the disadvantage of individuals operating within them. A vulnerability analysis focuses on the justice of those arrangements in these inherently unequal spheres, not the identity characteristics of the people who occupy them.113 Also significant for corporate law is the fact that vulnerability theory recognizes that, as human creations, social institutions and relationships (including those defining the corporation) are also vulnerable, although differently so than are human beings. Social institutions can be corrupted or captured; they also can falter, decline, or fail to accomplish their stated objectives. For example, one of this chapter’s co-authors has explored how corporate law’s embeddedness has resulted in failures to promote justice through heightened corporate standards or equitable governance and profit distribution in domestic state-level corporate law.114 In particular, the current process of making corporate law at the state level overlooks the dynamics of localities at the sub-state level, which indirectly influences the substantive content of corporate law. Meaningful differences among sub-state level localities, including cities’ positions within a hierarchical global network,115 contribute to the inhibition of legislative and political coalitions among those localities that would be necessary to gather the political will to enact progressive corporate law at the state level. Vulnerability theory compels consideration of these structural differences that 112

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See, e.g., Lua K. Yuille, Identity Value & Corporate Resilience (Working Paper, 2021) (presented at Emory University School of Law’s Vulnerability and the Human Condition Initiative Virtual Workshop on Vulnerability and Corporate Subjectivity in October 2021). Fineman, The Vulnerable Subject, supra note 106. This does not mean that anti-discrimination laws are unnecessary or unimportant, only that they are not exclusively so. Anne M. Choike, The Political Economy of Local Corporate Law (Working Paper, 2021) (presented at Emory University School of Law’s Vulnerability and the Human Condition Initiative Virtual Workshop on Vulnerability Theory, the Employment Relationship, and the State in March 2021). See generally Saskia Sassen, The Global City: New York, London, Tokyo (2001).

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arise because of the embeddedness within social relationships of an institution such as corporate law. In this case, considering the embeddedness of corporate law – and the corporate constituents who create it – within a competitive, hierarchical, global network of cities is essential to understanding (and ultimately remedying) the dysfunction in existing processes for producing corporate law. Vulnerability theory argues that, as vulnerable entities, social institutions and their relationships are necessary and that in performing important social functions, they are deserving of state support. However, that support is only warranted when the institution or relationship is actually operating consistently with the social purpose for which it was designed and that politically justified its creation and ongoing subsidy from the state. Therefore, the state must assume ongoing responsibility to monitor, adjust, and reform the laws and policy enabling the corporation to act as an entity in society. Although scholars, lawmakers, and even the business community itself have repeatedly called for reconsideration of corporations’ relationships to their stakeholders,116 debates regarding the justification for doing so continue, and real change remains elusive. Vulnerability theory provides a strong rationale and the basis for beginning such reform. It makes an even broader point about the dependence of society on some version of the corporate form both to generate and distribute societal wealth, recognizing that this dependence includes a web of relationships that extends far beyond the corporation itself – including but not limited to the corporation’s dependence upon shareholders, managers, and corporate welfare. Additionally, this web of relationships also includes workers, consumers, and others in society who depend on the corporation and one another. Importantly, we must fully articulate and explore in our scholarship the responsibility for the state and law to ensure that those relationships operate justly.117 The corporation is one important means or mechanism, among many interrelated institutional arrangements, whereby society reproduces itself through the laws and policies that govern the generation and distribution of social benefits and endeavors to ensure individual and societal well-being. The corporation, like the family and the financial system, is a constructed or contrived “mediating institution,” designed by the state as a mechanism to accomplish a societal objective. It provides a collective good when it fosters economic growth, distributes goods and services, and provides quality employment and certain social welfare benefits to employees. The form and nature of this social construct for the distribution of certain social goods are the result of political, practical, and policy choices, reflected in corporate law; they are also reflected in employment, consumer, health, and 116

117

See, e.g., Kent Greenfield, Reclaiming Corporate Law in a New Gilded Age, 2 Harv. L. & Pol’y Rev. 1 (2008); Statement on the Purpose of a Corporation, Bus. Roundtable (Aug. 19, 2019), https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020 .pdf; Accountable Capitalism Act, S. 3348, 115th Cong. (2018). George Shepherd, Not Just Profits: The Duty of Corporate Leaders to the Public, Not Just Shareholders, 23 J. Bus. L. 823 (2021).

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other bodies of law that impact the distribution of societal benefits and burdens.118 For example, whether to characterize “human capital” – that is, workers – as “productive assets (akin to physical assets) . . . [or] as investors of human capital, akin to shareholders who invest financial capital in the firm” is an intentional decision, with significant consequences for how corporations interact with their labor force.119 Vulnerability theory helps to reveal these consequences, especially by providing a framework for robustly analyzing not only how “employees [may be] differently vulnerable compared to shareholders, or other stakeholders” and the corporation itself, but also how all humans are vulnerable – as is the corporation – in the context of their interrelated and dependent social functions. In addition to the topics briefly discussed in this section, an assessment of vulnerability theory in relation to corporate law is being pursued by scholars elsewhere. They ask a variety of questions, including: What are the manifestations of the state addressing individual vulnerability through an emphasis on corporate resilience? How is corporate vulnerability used in politics, law, and social science? How is corporate vulnerability qualitatively different from other types of institutional vulnerability? How does the increasing emphasis on competition within the corporation change the societal environment for addressing vulnerability? Is it possible for the state to address workers’ vulnerability within existing corporate governance structures? The breadth and importance of these questions, among many others, demand more analysis than we can adequately conduct in this section. We nonetheless conclude with these questions in the hope of drawing attention to the many possible applications of vulnerability theory to corporate law. *** 118

119

Two fundamental questions posed by vulnerability theory are: (1) what does it mean to be human? (i.e., what is the essence of the human condition?); and (2) what does our answer to the first question suggest for the way we should organize a just society? (i.e., how should it inform law and policy?). In response to the latter question in particular, vulnerability theory looks to the state and institutions for the just ordering of society and questions “how,” “why,” and “for whom” the state and institutions operate. In response to these questions, vulnerability theory recognizes humans’ physical embodiment and embeddedness in economic, social, cultural, and institutional relationships. Fineman, Equality and Difference, supra note 110, at 618. As physically embodied beings, humans are vulnerable to changes – both positive and negative developments – that are beyond our control. Embodied differences include “shared biological and developmental stages” that all individuals experience as well as differences that emerge “as a product of social relations and conventions and which remain socially or politically significant.” Id. at 619. For embedded differences, vulnerability theory focuses on “exploring the implications that arise from [our embeddedness] within society and its institutions.” Humans are social beings who react in relation to others and societal institutions; as individuals, however, humans are differently situated within “webs” of economic, social, cultural, and institutional relationships that structure our opportunities and ultimately affect individual outcomes. Id. at 622. This chapter’s space and scope limitations prevent us from summarizing the details of vulnerability theory in greater detail here. George S. Georgiev, The Human Capital Management Movement in U.S. Corporate Law, 95 Tul. L. Rev. 639, 662 (2021). We interpret the author’s use of the phrase “differently vulnerable” to mean “differently situated.”

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The question posed at the opening of this chapter was “what does feminism offer corporate law?” Our ultimate motivation to pursue an answer grew out of dissatisfaction with corporate law’s failure to address pressing social issues and inequalities and our desire to explore its potential more fully. Can corporate law respond to misogyny, racism, homophobia, ableism, and other forms of discrimination? Can the values that corporate law reflects align with the outcomes we want to promote as a society? Can corporate law reign in unchecked corporate power? Can corporate law create more equal social identities and relationships among corporate stakeholders? These are difficult questions, because the ability of corporations to respond to broad social problems is not obvious. As with feminism more broadly, there is no single approach to addressing these questions. Yet, feminist and feminist-inspired theory and methodology are unified in their pursuit of a legal framework in which corporations reflect societal shifts within the world today. Although feminist scholars have advanced their visions of more just corporations, a communal approach to facilitate this endeavor has been largely missing. On a broader level, the absence of feminist perspectives in contemporary corporate law is due in part to the relative absence of feminist perspectives in the law school curriculum. This absence is accentuated within corporate law courses and the general business law curriculum. Corporate law cases, casebooks, and other texts focus primarily on the role and interests of corporate actors, who have usually been male.120 Feminist corporate scholarship also has been slow to develop, producing an insightful but still small body of feminist corporate law work.121 In addition, outside of general feminist legal theory workshops122 and the occasional law review 120

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See andre douglas pond cummings, Steven A. Ramirez & Cheryl L. Wade, Toward a Critical Corporate Law Pedagogy and Scholarship, 92 Wash. U. L. Rev. 397, 415 (2014) (critiquing corporate law casebooks that “implicitly accommodate the racial pseudo-science of yesteryear that white male domination is not just acceptable but natural and unworthy of critique or analysis”). While the area of feminist corporate law scholarship has grown a bit since feminist methods were first applied to corporate law in the mid-1980s, the number of scholars occupying the field today remains small. Feminist analyses of corporate law have slowly developed with a handful of corporate law feminists using corporate law to advocate for reform. Hall, supra note 1; Gabaldon, supra note 6. Feminist legal theory is intellectually indebted to one of the authors of this chapter, Martha Albertson Fineman, for initiating The Feminism and Legal Theory Project (“FLT Project”) in 1984, as well as The Vulnerability and the Human Condition Initiative (“VHC Initiative”) in 2008. The Feminism and Legal Theory Project, Emory Univ. Sch. of L., https://law.emory.edu/ centers-and-programs/feminism-and-legal-theory-project-history.html (last visited Oct. 2, 2021); see also History for The Vulnerability and the Human Condition Initiative | Emory University, Emory U.: Vulnerability & Hum. Condition Initiative, https://web.gs.emory.edu/vulner ability/about/history.html (last visited Oct. 2, 2021). Scholars have presented their work in feminist and feminist-inspired corporate law at workshops hosted by the FLT Project and the VHC Initiative. See, e.g., Sarra, supra note 5; VHC Initiative Virtual Workshop on Vulnerability and Corporate Subjectivity (2020); VHC Initiative Virtual Workshop on Vulnerability Theory, the Employment Relationship, and the State (2021). At this time, the authors are unaware of any recurring workshop series or projects solely dedicated to feminist or feminist-inspired corporate law.

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symposium dedicated to issues in corporate law affecting women,123 there is no central place where feminist or feminist-inspired corporate law scholars and their scholarship have been consistently gathered. Without exposure to feminist approaches in law school, it is hardly surprising that business professionals (such as corporate board members), practicing attorneys, and judges do not advance feminist perspectives in corporations in any systematic way. Compounding these problems are the different perspectives and divisions within feminism itself. Feminist work, like all grounded scholarship, thrives when it is produced in community and through conversation and critique. To address this gap, this volume is intended to begin to organize a communal approach to feminist thinking about corporate law. In this final chapter, we have focused on representing, supporting, and extending that effort. The chapter has exemplified the collective approach embraced throughout this volume. We as coauthors have drawn upon our various ideological and demographic backgrounds and our diverse intergenerational knowledge from different academic and practice settings. We have also attempted to analyze a spectrum of perspectives within feminist and feminist-inspired corporate law. This chapter supports the other chapters in this volume by providing a complementary and expanded background for understanding feminist theories, methods, and their application to corporate law. It places in context not only the volume’s various chapters but also relevant feminist corporate law scholarship, and we have suggested a way forward that builds on those insights. Finally, this chapter extends the work of the contributors in this volume. Our hope is that the feminist corporate law literature discussed in this chapter may also prove helpful to students, scholars, and practitioners interested in exploring feminist corporate law. That foundation will support readers in applying the insights in this volume – whether as professionals or practitioners addressing real world issues or as teachers bringing feminist perspectives into corporate law, throughout the law school curriculum and beyond. We are excited as we envision how the application of the insights in this chapter, and in the whole volume, might shape corporate law going forward. The possibilities for greater justice in corporate law, using gender as an initial impetus and inspiration to explore – in the spirit of many strands of feminism – even broader themes of equity in social ordering are within our collective imagination.

123

See, e.g., Cheryl L. Wade, Introduction to Symposium on People of Color, Women, and the Public Corporation: The Sophistication of Discrimination, 79 St. John’s L. Rev. 887 (2005); Lisa M. Fairfax & Paula A. Monopoli, Women and the “New” Corporate Governance, 65 Md. L. Rev. 301 (2006); 2006 Symposium: Current Developments in Gender and the Workplace, 13 Wm. & Mary J. Women & L. 703 (2006). Eric C. Chaffee, Perspectives on Gender and Business Ethics: Women in Corporate Governance, 37 Dayton L. Rev. 1 (2011). At this time, the authors are unaware of any journal solely dedicated to feminist or feminist-inspired corporate law.

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Index

Academy of Motion Picture Arts and Sciences, 162, 164 Adler & Shaykin, 145, 154 adverse action, 184 Ahold NV, 111 Ailes, Roger, 252 Aladdin (1992), 302 Albertsons Co., 111 Aldewereld, Simon, 140, 151 Alexander, Sander P., 140 Allen, Renee, 429 Allen, William T., 264 Alphabet, Inc., 252 Amax Petroleum Co., 410 American Apparel, Inc., 250 American Home Products Corp., 145 American Women (1963), 76 Amott, Teresa, 97 Andover, 132 Andrews, William Shankland, 209 Anti-Referral Payments Law, 264 Assembly Bill 979 (2020), California, 424 Aziz, Sahar, 429 Bailey, E.R., 378 Bainbridge, Stephen, 168 Baird, George, 281 Baird, Marjorie, 281 Barker, Norman, 258, 262 Barnum & Bailey’s Circus Women’s Equal Rights Society, 333 Bartlett, Katherine, 406 Beauty and the Beast (1991), 302 Bell Atlantic, 324 Ben Ammar, Tarak, 163–64 benefit corporations, 5, 359

Bennett, Jay I., 140, 151 Bergerac, Michel aversion to Pantry Pride, 153–54, 160 board composition, 151 intentions for Revlon, 142–43 leadership of Revlon, 130, 140, 142 Pantry Pride negotiations, 142 personal background, 141 treatment of Perelman, 131, 142 view of women, 135, 141 Berle, Adolf, 193, 213, 216 Bipartisan Campaign Reform Act of 2002, 47–49 Blackmar, Abel E., 208 Blockchain Capital LLC, 384 board diversity benefits, 229, 305, 321–24, 326, 385 critical mass, 306, 310, 321, 324 spectrum of qualifications, 276–77, 295, 307 board independence, 150–51 board-rule principle, 240 Boesky, Ivan, 397 Boies, David, 163 Bollenbach, Steve, 312–14 Bosnia-Herzegovina, 255 Bottner, Irving J., 140, 151 Bower, Reveta, 306, 326 Brandeis, Louis, 195, 212 break-up fees, 132 Brennan, James, 237 Brewer, Rosalind, 427 Bristol Hotel, The, 193, 196, 198, 204–6 Bryant, Westa, 377 Bureau of Labor Statistics, U.S., 356 Burger, Warren, 412 Burke, Tarana, 164 Burns, Jacob, 140, 151

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Index

Burns, Ursula, 427 Business Corporation Law, New York, 285 business judgment rule applicability to officers, 249, 327–28 balance of power, as a, 241 definitions, 148, 241, 327, 353, 439 demand futility, and, 249, 259 effect on corporate law, 26 generosity of latitude, 301 investigation into procedure, as a, 231 jurisprudential precursor, 95 presumption of good faith, 303 protection of decisions, as, 317 requirements for protection, 242, 244 requirements for rebuttal, 254, 303, 317 standard of review, 148, 224 business purpose test, 114 business resilience, 98, 108 business-relationship binary, 200 Caldwell, Paulette, 429 California State Teachers Retirement System, 253 Capital Cities/ABC, Inc., 302 Cardozo, Benjamin, 191, 195–96, 199–201 Caremark International, Inc., 264 Carlton, William career and leadership, 64, 84 defense, 81 liability, 63, 84, 87 suit and rulings, 64, 66, 73–74, 81, 87 withdrawing of profits, 67 Carman, Gregory W., 406 Cascade Engineering, 99–100 Catalyst, 324 catch-22, 20, 22 causation-in-fact, 297–98 cause, 185 Chamallas, Martha, 6, 22 Chapman, Georgina, 163 Charney, Dov, 250 Chelberg, Bruce, 235 Chestman, Robert breach of duty, 416 convictions mail fraud, 414, 416 overview, 399, 406, 408 perjury, 406 Rule 10b-5, 408, 410, 414 Rule 14e-3, 401 defense, 415–16 information awareness, 398, 401, 412, 416 insider trading, 398, 407 liability Rule 10b-5, 399–400, 403, 412, 414

Rule 14e-3, 401, 416 relationship with Loebs, 406, 412 testimony, 399, 412 Chicago Lyric Opera Association, 223, 233, 237 Choudhury, Barnali, 99–100 citizen, definition of, 50 Citizens United, 36, 46–48 citizenship, American, 46, 56–57, 59, 61 Civil Rights Act of 1964, 46, 59, 194, 260, 263 civil rights movement, 46 Civil War, American, 211 Clayton Act of 1914, 105 Clinton, Bill, 162 Clinton, Hillary Hillary The Movie (2008), 47–49 presidential candidacy, 36, 162, 164 sexist news coverage on, 36–37 Weinstein donations, 162 close corporations agreements in, 117 definition, 115, 123–24, 348, 363–64 fiduciary duties in, 116, 120, 123–24, 126, 351–52, 365 majority shareholder power, 364 minority shareholder power, 352 codes of conduct, 166–67 Cohen, Rodgin, 163 Cohen-Hatfield Industries, 142 Columbia University, 132 conflict of interest, 366 Congress, U.S. creation of the SEC, 193, 389, 414–15 political speech, and, 49 voting rights, and, 50 consent contract theory, 174 consequence management, 172 Constitution, U.S. corporate rights, and, 49, 53, 56, 60 Fifteenth Amendment, 56 Fifth Amendment, 52, 272, 284 First Amendment, 46, 49, 52, 54–55, 60 Fourteenth Amendment, 45, 52, 56–60 legacy of inequality, 45, 60–61 Nineteenth Amendment, 46, 58, 193 Reconstruction Amendments, 61 voting rights, and, 50 Consumer Reports, 112 contextualism, 336 contract creditors, 65, 68 contract law, 339 contracts, 173, 178, 349 contractual enforcement, 337 Conway Ringling, Edith contract terms, 337, 340

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

Index dispute, 334, 340, 343–44 empowerment, 333, 342–43, 349 marginalization, 340–41 stock ownership, 334, 341 Coolidge Prosperity, 192–93 Coolidge, Calvin, 192 Cooper, Anna Julia, 97 corporate activity, 4 corporate constituencies, 7 corporate governance, 7, 25, 138, 147, 254 corporate law definitions, 4, 6, 63 mediation, 7 societal impact, 4–5, 63–64 state-level complications, 442 corporate personhood, 27, 52–54, 60–61, 63 corporate political speech, 35, 37, 41–42, 46, 49, 59, 61 corporate rights, 49, 51–52, 54–55, 57, 59–61 corporate social responsibility movement, 25 corporate veil, 55, 64, See also piercing the corporate veil corporations advantages, 81 artificial beings, as, 46, 51, 54–55, 57, 59–61, 82 creatures of the state, as, 50–52, 54, 60–61, 80, 241, 444 protection of beneficiaries, 55 societal impact, 3–5, 419, 443 stand-alone entities, as. See separate corporate personality Covenant Investment Group, 322 Creative Artists Agency, 310 Crenshaw, Kimberlé, 357, 427 critical feminist theory, 96, 98 crown jewel lock-ups, 132 Crystal, Graef, 312–13, 326 cultural feminism. See relational feminism cumulative voting, 342 cure periods, 162 Davy, Elizabeth J., 207 Davy, John M., 207 Declaration of Independence, 198, 204 declaratory judgment, 123 Delaware Court of Chancery enhanced scrutiny framework, 129 lack of women jurists, 137 purpose, 24 Delaware law board responsibility, 148 business judgment rule, 317 codes of conduct, 167 conflicts of interest, 307

dominance of, 24, 129 enhanced scrutiny jurisprudence, 129 hostile takeovers, 129 indemnification, 165–66 limited liability companies, 165 presumption of good faith, 261, 319 Delaware Supreme Court business judgment rule, 303 enhanced scrutiny framework, 129 lack of women jurists, 139 shareholder primacy norm, 128 Delhaize Group, 111 Delhaize USA, 111 Delmonico’s, 204 demand futility, 259, 261 Demoulas Super Markets, Inc. community dependence, 124 core business, 111, 121 corporate governance, 119, 124 corporate structure, 120 customer-rebate policy, 121 Market Basket, 111, 121 profitability, 121, 125 profit-reinvestment policy, 124–25 profit-sharing policy, 121–22, 127 shareholder dividends, 119, 125 suits and rulings, 112, 120–22, 127 tax status, 117, 122, 127 Demoulas, Arthur S. executive discontent, 112, 122 family dynamics, 112, 120, 126–27 fiduciary duties, 112, 123, 127 shareholder dividends, 119, 125 stock ownership, 122, 126 suits and rulings, 112–13, 120–22, 127 wealth maximization, 119, 122, 127 Demoulas, Arthur T. career and leadership, 112, 119, 121 customer-rebate policy, 121 family dynamics, 112, 120, 126–27 firing by Market Basket, 119 hiring by Market Basket, 119 management philosophy, 112, 115 profit-sharing policy, 122 shareholder dividends, 119, 125 suits and rulings, 112, 120–21 Demoulas, Athanasios, 121 Demoulas, Caren, 125 Demoulas, Diana, 125 Demoulas, Efrosine, 121 Demoulas, Evan, 126 Demoulas, Fotene, 122, 125 Demoulas, Frances, 125 Demoulas, George, 121, 126

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

449

450

Index

Demoulas, Glorianne, 125 Demoulas, Mike, 121 Department of Justice, U.S., 397, 399 Deutsch, Waverly, 427 difference feminism, 277 Digital Currency Group, Inc., 384 director disinterestedness, 158 director duties statute, New Jersey, 276–77, 279, 284–86, 288, 290–92, 294–95, 299–300 director independence, 138, 149–50, 158, 254, 262 director interestedness, 149 director liability, 271, 299–300 disclosure, 217–18, 388–89, 409 Disney Renaissance, 302 Dodge Motor Co., 93, 102, 109 Dodge, Horace career and leadership, 91, 93, 102, 109 executive discontent, 392 personal background, 93 relationship with Ford, 92 stock ownership, 93 suit and rulings, 94, 102–3 wealth maximization, 102, 109, 392–93 Dodge, John career and leadership, 91, 93, 102, 109 executive discontent, 392 personal background, 93 relationship with Ford, 92 stock ownership, 93 suit and rulings, 94, 102–3 wealth maximization, 102, 109, 392–93 Doe, John, 84 dominance feminism. See radical feminism Donahue, Euphemia board subordination, 366–67, 370 corporate share purchase, 362 marginalization, 354–57, 363, 368–69 personal background, 358 stock ownership, 352, 355, 361–62 suit and rulings, 351, 360, 363, 370 Donahue, Joseph, 357, 359, 361–62, 367–68 Donahue, Robert, 361–62 double bind, 20, 22 Douglas, William Orville, 83, 85 DreamWorks Pictures, 162 Drexel Burnham, 142, 147 Duckett, Thashunda Brown, 427 Dunn Jr., William P., 344 duty of care, 165, 224, 230, 317 duty of good faith, 317 duty of loyalty, 366 duty of trust, 402 duty to disclose, 415

Eisner, Michael career and leadership, 162, 302, 309–10 communication standards, 304, 306, 314, 316, 319–20 fiduciary duties, 328 firing of Ovitz, 314–16, 319 hiring of Ovitz, 310, 312–13, 318 suit and rulings, 301, 309, 316, 328 electioneering communications, 46–49 Eloise (1955), 287 enhanced scrutiny framework, 129, 132 Enron Corp., 321 enterprise liability theory, 66, 69, 78 enterprise value, 130 entity shielding, 7 equal opportunity rule, 352–53, 359 equity investment, 211, 217 escalator clauses, 167 Evans, Rafaele Demoulas, 125–26 Evans, Vanessa, 125 exculpatory clauses, 225, 327 executive employment agreements, 169 Farley, Lin, 173 feminism ethic of care, 113–14, 432 methods, 172 contextualization, 13–14, 289, 354–55, 437 deconstruction, 14 storytelling, 13 public-private dichotomy, 288–89, 295, 338, 359–60, 437, 439 values of, 176 waves of, 10, 398, 420 feminism and the law addressing inequalities board composition, 423–26 fiduciary duties, 118–19, 423 intersectional marginalization, 427–29 lack of representation, 137 legal personality, 27, 423 limited liability, 25 marginalization of women, 15, 21, 28–29, 254, 288–89, 433 masculinity as a standard, 4, 18, 26, 117, 176, 290 organizational ownership, 27, 426 political speech, 44 public-private dichotomy, 289 creating issue visibility, 421 critiquing corporate power, 437 challenged protections, 67, 114, 360, 439 corporate structure, 437–38 fiduciary duties, 26

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

Index protection of investors, 25, 27 theories of the firm, 440 providing ethical frameworks, 432–33 compliance programs, 434 corporate culture, 434–36 corporate power, 113, 432 limited liability, 433 reform efforts, 359 valuing all experiences, 16, 26, 290, 295, 441 vulnerability theory. See vulnerability theory feminist ethics, 115, 168 Feminist Judgments Series, 8 feminist legal theory anti-essentialist approaches, 427–28 aspirational dimension, 173 critique of, 427 feminist legal theory, Black, 420, 429 feminist practical reasoning, 406 feminist reasoning process, 11, 14 feminist relational contract theory, 174 fiduciary law, 198, 213 fiduciary obligation theory, 413 figurehead director, 272–73 Financial Responsibility Act of 1929, New York, 78–80, 82 Financial Responsibility Act of 1941, New York, 79–80 Financial Responsibility Act of 1956, New York, 77, 79–80 Fineman, Martha, 67, 71, 278 Flom, Joseph, 142–43 Floridian Country Club, 376 Floridian Hotel, 375–76 Ford Motor Co. board composition, 93, 102 defense, 103 exclusion of women, 98, 110 expansion plan, 94–95, 98, 103, 392 incorporation, 92 policies. See Ford, Henry profitability, 93, 98, 107 suit and rulings, 98, 110 Ford, Christine Blasey, 164 Ford, Henry career and leadership, 91–92 dividend-limitation policy, 94–95, 98, 103–4, 108, 392 fiduciary duties, 106 high-wage policy, 103, 109–10 management philosophy, 92, 94, 100, 103–4, 106, 109 personal background, 93 perspective on investors, 92 price-reduction policy, 95, 102–3, 107, 392

451

relationship with Dodges, 92 suit and rulings, 94–95, 102 testimony, 95, 103, 106–7, 109 Forell, Caroline, 423 formalism, 349 Forstmann Little & Co. board composition, 136 final offer, 146–47 intentions for Revlon, 145, 154–55, 158 lock-up option, 146 no-shop provision, 146 preference by Revlon, 139, 146, 154, 156–57, 159 Revlon negotiations, 132, 145–46, 153 Forstmann Sr., Julius, 132 Forstmann, Teddy intentions for Revlon, 158–59 personal background, 132, 154 preference by Revlon, 145, 156 Revlon negotiations, 145, 153 white knight, as a, 133, 135, 153 freedom of contract, 54 freeze-outs, 124–25, 352, 364 Furnam, Nelly, 287 Gabaldon, Theresa A., 67, 359, 403, 433, 436 Galinika, 247 Gekko, Gordon, 397 gender diversity benefits, 137, 229, 252, 306, 321, 323–24, 386 critical mass, 321, 324 intersectionality, 428 recent developments, 253, 385–86 General Corporation Law, California, 424 General Corporation Law, Delaware, 225, 240–41, 244 General Electric Credit Corp., 239 Gerry, Elbridge, 198 Gerry, Elbridge T., 198, 204–5, 208 Gerry, Louisa M., 193, 198, 204–5, 208–9 gerrymandering, 198 Ginsburg, Ruth Bader, 402 Giuliani, Rudy, 397 GL Corp., 237 Glass Lewis, 253 Glucksman, Lewis, 141 Goldman Sachs, 162 Google, 252 governance feminism, 305 Grand Central Terminal, 204, 208 Great Atlantic and Pacific Tea Co., 398, 407 Great Depression, the, 121, 199 Greenberg, Judith, 403 Greene, Wendy, 429 Greenspan, Alan, 302

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

452

Index

Griffin, Claude Vaughan, 379 gross negligence, 224, 317, 320 groupthink, 322–23 Gutierrez, Ambra Battilana, 163 Haber, Bill, 311 Haley, Aubrey Ringling contract terms, 337, 340 dispute, 334, 340, 343–44 empowerment, 333, 342–43, 349 marginalization, 340–41, 346, 348–49 stock ownership, 334, 341 Haley, James, 343 Hall, Katherine, 423, 436 Hamilton, Alexander, 198 Hand, Learned, 274, 297 Hannaford, 111 Hansmann, Henry, 426 Harris, Angela P., 427 Henry Meinhard Memorial Neighborhood House, 207 Hewlett-Packard Co., 250 high-yield debt, 148 Hillary The Movie (2008), 36, 47–48 hindsight bias, 271 Holmes, Oliver Wendell, 209, 215 Holmes, Patricia, 200 Hoover, Herbert, 195 Horsey, Henry Ridgley, 224 hostile acquisitions, 148–49 Howey, Mary Grace Hastings, 377–81 Howey, William J., 375–77, 379 Howey-in-the-Hills Service, Inc., 375–76, 379, 387 Howey-in-the-Hills, Florida, 375 Human Capital Management Coalition, 253 Hurd, Mark, 250 Hyatt Hotels Corp., 223 ICN Pharmaceuticals, Inc. acquisition of Galinika, 247 board composition, 257, 261–62 founding, 246 investigations into, 247 knowledge of misconduct, 258, 262, 264 protection of Panic, 258, 260, 262, 264 Ribavirin, 246 settlement of Panic’s suits, 247–48, 257, 262, 265 sexual wrongdoing policies, 258 suit and rulings, 248, 256–60 Iger, Bob, 301 indemnification, 165–66 Indian Citizenship Act of 1924, 58 initial coin offerings, 384

insider trading, 397 classical theory, 396, 409 duty to disclose, 412–13, 415 misappropriation theory, 396, 399, 401–2, 408–10, 412–14 internal affairs doctrine, 24, 270 International Telephone & Telegraph Corp., 141 intersectionality application, 16, 221, 306, 357, 428 definition, 16, 58, 357 marginalization, 427–29 spectrum, 10 intersectionality theory, 429 investment contracts definitions Bailey, 378 DAO Report, 384 Howey, 379, 387, 389–90 Howey test, 373, 379, 387 common-enterprise requirement, 393 money-investment requirement, 394 passivity requirement, 390–91 profit-motivation requirement, 392–93 investment culture, 381 investments, 393–94 Ishiguro, Kazuo, 42 Jackson Sow, Marissa, 429 Janis, Irving, 322 Jones, Paul Tudor, 164 junk-bond financing, 143 Kanter, Rosabeth Moss, 289 Karadzic, Radovan, 255 Kavanaugh, Brett, 164 Kelley, Lawrence W., 361 Kennedy, John Fitzgerald, 76 Keren, Hila, 117, 119 King, Larry, 314 King’s Speech, The (2010), 163 Klara and the Sun (2021), 42 Koenigsberg, Richard, 162 Kohlbert Kravis Robertson & Co., 239 Kruizegna, Jack, 238 Kupupika, Trust, 429 Lahey, Kathleen, 168, 359, 434 Lake County, Florida, 375 law and economics movement, 7–8, 23, 117 Law, John, 388 Lazard Frères & Co., 140, 143, 145–46 legal personality, 7, 422 Lerner, Sandy, 200 leveraged buyouts, 154, 222, 235

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

Index Lewis, Francis, 204 Lewis, Morgan, 204 liberal feminism, 11, 277, 355, 421–22 Liberty Tax, Inc., 252 Liman, Arthur, 146 limited liability abuse of, 21, 85 critiques of, 25, 67 definition, 24, 75 exceptions, 81, 86 inequitable burden, as an, 75 purpose of, 63 undercapitalization, and, 86–87 limited liability companies, 165 Lion King, The (1994), 302 Lipton, Martin, 143–44, 153 Little Mermaid, The (1989), 302 Litvack, Sanford board engagement, 319 fiduciary duties, 328 firing of Ovitz, 314–16, 318 hiring of Ovitz, 312–13 suit and rulings, 309, 328 Livingston, Robert R., 204 lock-up options, 156 Loeb, Keith cooperation with DOJ, 399, 408 insider trading, 398, 407 misappropriation, 398, 412, 416 personal background, 406–7 suit and rulings, 400 Loeb, Susan Witkin, 398, 400, 406–7 Loomis, William, 143 Loos, Karl, 334, 338, 340, 344–47 Lotos Club, The, 205 Loudon, John, 141 Lozano, Ignacio, 306, 325–26 Lyft, Inc., 70–71 MacAndrews & Forbes Co., 142 MacKinnon, Catharine, 255 Madison, James, 204 Maerov, Lance, 163–64 Magnuson, Harold E., 360, 362–63 Mahoney, J. Daniel, 406 management biases, 134, 150 Manufacturers Trust Bank, 341 Marchesa, 163 Marchese, Baldo, 73 Market Basket, 111, 114, 121 Marmon Group, Inc. core business, 223 executive discontent, 238–39 Trans Union merger, 223, 237–38, 242

453

Married Women’s Property Act of 1870, New York, 193 Marshall, John, 45, 51–52, 56, 60 masculine language, 286–88 masculinity contest culture, 134–35, 138, 153 Mason, Phyllis board subordination, 367 marginalization, 355 stock ownership, 355, 362, 367 Mason, William, 355 matrix of domination, 45 matrix of oppression, 58, 61 Matthaei, Julie, 97 May, Elsie, 206–7 May, Lois, 207 McKinsey & Co., 252 McPeak, Agnieszka, 71 Means, Gardiner, 193 Mehle, Aileen, 136, 140, 151 Meinhard, Carrie, 199, 206, 211 Meinhard, Morton H. career and leadership, 194, 203, 207 dependent position, 209, 213, 216–17 development contract, 1902, 191, 196, 205 development contract, 1922, 208 joint adventure, 196, 216–17, 219 Memorandum of Agreement, 205–6, 208–10, 216 personal background, 203, 206 relationship with Salmon, 197–98, 200–1, 203, 206, 209, 219 stock transference to Carrie, 211 suit and rulings, 192, 196, 199–201, 208–9, 215, 218–19 Mereworth Farm, 207 merger wave, 1880s, 210 merit-based regulation, 389 Merriam, Diana, 122 MeToo movement, 32, 164, 169, 249–53, 255 MeToo reps, 253 Meyer, Ron, 310–11 Miazad, Amelia, 434 Midpoint Realty Co., Inc., 207, 220 Milano, Alyssa, 164 Milken, Michael, 397 Milosevic, Slobodan, 247, 255 Miner, Roger J., 406 Miramax Films, 162–64 misappropriation, 410, See also insider trading Mississippi Co., 388 Morton H. Meinhard & Co., 207 Murray, Pauli, 58 Nasdaq Stock Market, 167 National Safety Council, 72

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454

Index

New Symphony Orchestra, 207 New T. Co., 237, 239 New York Stock Exchange, 167 New York Times, The, 163–64, 270 non-disclosure agreements, 177 North, Ida, 341 North, John Ringling bank refinancing, 341–42 contract terms, 340, 349 dispute, 343–44 stock ownership, 334, 341–42, 349 no-shop provisions, 132, 156 noteholders, 156 notes purchase rights plan, 144 O’Byrne, Shannon Kathleen, 117 O’Reilly, Bill, 252 Obama, Barack, 164 Obama, Malia, 164 Ocala Ridge Tung Plantations, Inc., 378 Onion, The, 36 Ostrander, Russell, 102 outside directors, 268 Overcash, Lillian, 268, 273, 280, 284 Ovitz, Michael career and leadership, 310, 313–14 compensation negotiations, 308, 311, 313, 315 fiduciary duties, 327 firing by Disney, 303, 309, 314–16, 319 hiring by Disney, 303, 309, 312–13 suit and rulings, 301, 309, 316, 327–28 treatment by boards, 308, 313–16 ownership, 25 Palin, Sarah, 37 Panic, Milan board composition, 260 career and leadership, 246–47, 255 protection by ICN, 258, 260 reports of sexual wrongdoing, 247, 249, 257, 260, 262, 264 suit and rulings, 248, 256–59 Pantera Capital Management LP, 384 Pantry Pride, Inc. board composition, 136 core business, 142 final offer, 147 intentions for Revlon, 152, 155, 159 junk-bond financing, 131, 143 leverage by Perelman, 142 mistreatment by Revlon, 147, 153, 156–58, 160 Revlon negotiations, 131, 143–44, 146–47, 153 suit and rulings, 132–33, 139, 147, 158 parol evidence rule, 117–18

partnership law, 191–92, 199, 202, 209 partnerships, 191 Perelman, Ron intentions for Revlon, 143, 155 personal background, 142–43, 152, 154 Revlon negotiations, 131, 142–43, 146 treatment by Bergerac, 131, 142 person, definitions of, 50, 53 pick-your-partner rule, 202 piercing the corporate veil bases, 66, 84–85 definition, 77, 82 difference in size of firm, 68, 70 injustice in the alternative, 67 purpose, 77 requirements, 65 undercapitalization, and, 68, 84–87 Pocahontas (1995), 302 poison pill, 159 Poitier, Sidney, 306, 325–26 political action committees (PACs), 49 postmodern feminism, 307–8 Pound, Roscoe, 198 preliminary injunctions, 147 President’s Commission on the Status of Women, 76 Pritchard & Baird Intermediaries Corp., 280 Pritchard & Baird, Inc. bankruptcy, 269–70, 283 board composition, 267, 281–82 development and rise, 281–82 fiduciary duties, 292 financial practices, 282, 294 governance structure, 267–68, 281 incorporation, 270, 281 suit and rulings, 266 Pritchard Jr., Charles bankruptcy, 269–70, 283 behavior, 298 board composition, 267, 281 career and leadership, 267, 282 compensation, 268–69, 278, 280 family dynamics, 296 fiduciary duties, 272, 275 financial practices, 272, 283, 294 self-dealing, 274, 280, 283 stock ownership, 280 suits and rulings, 269–70 testimony, 272 Pritchard Sr., Charles board absence, 273, 282 board composition, 267, 281, 298 career and leadership, 280–81 compensation, 278, 280

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

Index family dynamics, 273, 296 fiduciary duties, 275 financial practices, 282, 294 founding of P&B, 281 self-dealing, 274, 280, 282–83 stock ownership, 267, 272, 275, 281 suit and rulings, 269, 280 testimony, 272 Pritchard, Lillian, 272–73 board absence, 273, 283–84, 296–97 board composition, 267–68, 281 compensation, 268, 277, 280 disincentives for action, 268, 278 family dynamics, 296 fiduciary duties, 270, 275, 281, 294, 296 liability, 273, 275, 280, 284, 297, 299 marginalization familial, 273, 278 judicial, 267, 287–88, 293–96 negligence, 273, 275, 296–97, 299 stock ownership, 267, 281 suit and rulings, 266, 273, 279 testimony, 271, 273, 284, 297 Pritchard, William bankruptcy, 269, 283 behavior, 298 board composition, 267, 281 career and leadership, 267, 282 compensation, 268–69, 278, 280 fiduciary duties, 275 self-dealing, 274, 280, 283 stock ownership, 280 suits and rulings, 269–70 testimony, 272 Pritzker, Jay A. career and leadership, 222–23, 236 personal background, 226 suit and rulings, 239 Trans Union negotiations, 222–23, 236, 238 Pritzker, Robert A., 223, 239 Project Runway, 163 public corporations, 214, 320 Pujo Committee, 212 quid pro quo, 366 racial diversity, 386 radical feminism, 11, 18, 67 real-entity theory, 52 reasonable man test, 277, 284, 288, 290, 292–93 reasonable men test, 290 reasonable person test, 290 redemption of the rights, 132 reinsurance, 282

455

relational feminism application of, 10, 229, 305, 307, 436 contextualization, 14 definition, 305, 355, 358 ethic of care, 432 insights of, 306 key questions, 435 relational feminist theory, 130 Retail Wholesale & Department Store Union Local, 250 Revlon, Inc. aversion to Pantry Pride, 142, 147, 153–54, 156–58, 160 board composition, 135–36, 140–41, 151, 158 board independence, 150–51, 158 defense mechanisms, 131, 155, 157 cancellation fee, 155, 157 exchange offer, 152–53, 156, 159 lock-up option, 155–56 no-shop provision, 146, 155–56 notes purchase rights plan, 143–45, 153–54, 156 poison pill, 131, 144, 152, 159 director independence, 150 expansion into healthcare, 131, 141 National Health Lab division, 156 Vision Care division, 156 fiduciary duties, 133, 155, 157–59 Forstmann Little negotiations, 132, 145–46, 153 Independent Directors, 153 loss to shareholders, 156–59 market standing, 130, 141 Pantry Pride negotiations, 143–44, 153 preference for Forstmann Little, 133, 139, 157, 159 sale of cosmetics division, 145, 154, 158–59 suit and rulings, 132–33, 139, 147 view of women, 135, 138 Revson, Charles, 136, 140–41, 151, 154 Ribavirin, 246 Rifkind, Simon, 140, 142–43, 149, 151 Ringling Bros.-Barnum & Bailey Combined Shows, Inc., 332–33, 339 Ringling Brothers Circus, 332, 341, 343 Ringling, Richard, 341 Ringling, Robert, 343–44 Ripley, William Z., 212 Rodd Electrotype Co. of New England, Inc. board composition, 363 company culture, 369 corporate structure, 360 stock apportionment, 362 suit and rulings, 351, 370 Rodd, Charles H. board domination, 367

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

456

Index

Rodd, Charles H. (cont.) breach of duty, 366, 369–70 career and leadership, 361–62 corporate share purchase, 362 self-dealing, 365 stock ownership, 362 suit and rulings, 360 Rodd, Frederick I. board domination, 367 breach of duty, 366, 369–70 career and leadership, 361–62 self-dealing, 365 stock ownership, 362 suit and rulings, 360 Rodd, Harry C. board domination, 367 career and leadership, 361 corporate share purchase, 352, 362, 366, 370 retirement, 362, 365 stock divestment, 362 stock ownership, 361 suit and rulings, 351, 360 Roe, Richard, 84 Rohatyn, Felix, 143 Romans, Donald cash-out merger, 236–37 leveraged buyout, 222, 235, 238–39 Rosie the Riveter, 391 Royal Electrotype Co., 361 Royal Electrotype Co. of New England, 361 Rubin, Andy, 252 Russell, Irwin board composition, 325–26 compensation negotiations, 308, 311, 313 firing of Ovitz, 314, 316, 318 hiring of Ovitz, 311–13, 325–26 Sackman, Jeff, 163 Salmon Jr., Walter J., 207 Salmon, Burton, 207 Salmon, Lois, 207 Salmon, Walter J. career and leadership, 196, 198, 203, 205, 207–8 development contract, 1902, 191, 196, 204–5 development contract, 1922, 191, 196, 208, 214 fiduciary duties, 209, 213–15, 217–18 joint adventure, 216–17, 219 Memorandum of Agreement, 205–6, 210, 216–17 name change, 191, 195, 207 personal background, 203, 206–7 relationship with Meinhard, 197, 200–1, 204, 206, 219 suit and rulings, 192, 196, 201, 208–9, 215, 218–19 trustee position, 216–17

Salomon Brothers, 238 Salomon, Rudolph G., 205 Salter, Sarah, 168, 359, 434 Sarbanes-Oxley Act of 2002, 167 Sarra, Janis, 438 Saving Private Ryan (1998), 162 Schipani, Cindy A., 117 securities, 387 Securities Act of 1933 Howey coverage test common-enterprise requirement, 393 money-investment requirement, 394 passivity requirement, 390–91 profit-motivation requirement, 392–93 investment contract definition, 379, 386, 391 protection extension, 389 public-private dichotomy, 389 purpose, 379, 387–88, 394 securities definition, 386–87 test for coverage, 373, 389–90 trading regulations, 375 Securities and Exchange Commission creation by Congress, 193 cryptocurrency, and, 384–85 DAO Report, 384 insider trading, and, 396–97, 401 investigation of ICN Pharmaceuticals, 247 Rule 10b-5399, 401, 403, 409 Rule 10b5–2, 402, 404 Rule 14e-3, 401, 415–16 Securities Exchange Act of 1934, 375, 396, 401, 414 Seitz, Collins J., 334–36, 344 self-dealing, 149, 274, 366 Seon Cab Corp. case background, 62, 73 corporate structure, 64, 73, 84 insurance coverage, 62, 64, 81 status of profitability, 68 stock ownership, 66 withdrawing of profits, 67 separate corporate personality abuse of, 85 advantages, 75 application, 52, 55, 59 concerns, 75 definition, 24, 53, 60, 75 exceptions, 81–83 inequitable burden, as an, 75 privilege, as a, 82 sexual harassment, 260, 263 sexual wrongdoing, 173, 180 Shakespeare in Love (1998), 162 Shangai Fenbushi Investment Management Co., Ltd., 384

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

Index shareholder agreements, 337–39, 348 shareholder primacy norm critiques of, 133, 138, 432, 438 definition, 5, 19, 358 Delaware Supreme Court, 128 effects of, 5, 7 impact of Revlon, 133 reforms, 359 Revlon, 228 takeovers, in, 133 shareholder ratification, 243 shareholder wealth maximization imperative, 5, 8, 25, 96, 138, 432 Shaw’s, 111 Sherman Antitrust Act of 1890, 105 Sidler, Michelle, 96 Sierchio, Joan, 407 Signet Jewelers Ltd., 252 Silver Springs Citrus, Inc., 377 Silverman, Joseph, 206 Simmons, Samuel, 140, 151 Skadden, Arps, Slate, Meagher & Flom LLP, 142 Smith, Dorothy, 434 Smith, Howard, 40 Smith, Ivona, 164 social entrepreneurship, 31 socialist feminism. See radical feminism sole-interest rule, 214–15 Spencer, Herbert, 215 Spender, Peta, 422 Spielberg, Stephen, 162 stakeholder governance theory, 112 Stanton, Reginald, 269, 271, 292 State Street, 253 Stewart, Maria, 97 Stop & Shop Supermarket Co., 111 strict scrutiny, 49 Sustainability Accounting Standards Board, 253 takeover wave, 1980s, 225, 228 Tauro, Joseph L., 351, 359 team production model, 438 Temple Emanu-El, 203, 206 termination provisions, 169 Testy, Kellye, 432, 437–38 textualism, 336 theories of the firm, 440 theory of obligations, 117 tippees, 397 tippers, 397 tipping, 397 tokenism, 136, 324, 326 tone from the top, 172 tort creditors, 65, 68

457

tort law, 63 Trans Union Corp. annual report, 1979, 232–33 board composition, 222, 230, 233–34, 243–44 cash-out merger, 223, 231, 236, 238 core business, 221, 231 executive discontent, 236, 238 fiduciary duties, 243 marketplace auction, 238–39 Marmon Group negotiations, 223 Merger Agreement, 223 negligence, 224, 244 shareholder ratification, 223, 239, 243 suit and rulings, 223–24, 231, 239–40, 244 tax status, 222, 232–33, 235 Trump, Donald, 41, 164, 397 trustees, 216–17 Truth, Sojourner, 97 tung oil, 378 Tungland, Inc., 378 Twenty-First Century Fox, Inc., 252 U.S. News & World Report, 247, 257–58 Uber Technologies, Inc., 70–71 undercapitalization, 84, 86–87 Uniform Partnership Act of 1914, 191 Union Tank Car Co., 231, 233, 238 Urban Decay Cosmetics LLC, 201 value maximization, 159 Van Gorkom, Jerome board selection, 222, 233–34, 243 career and leadership, 233 decision standards, 222–24, 227, 235–39, 242–43 executive discontent, 238 Marmon Group negotiations, 222–24, 236–38 Merger Agreement, 223 oversight practices, 233 personal background, 221, 226, 234 suit and rulings, 224 Vehicle and Traffic Law, New York, 73, 77, 80, 84 veil piercing, 65 video-on-demand (VOD), 47 voting rights, 50, 56–58, 61, 193 vulnerability theory application, 67–68, 197–98, 219, 278, 391, 440, 442, 444 corresponding duty of care, 71 definition, 66, 197, 420, 440–41 key questions, 444 reform rationale, 443 W. J. Howey Co., 375–76, 379, 387 Waldbaum, Inc., 407

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press

458 Waldbaum, Ira, 398, 407 Waldbaum, Julia, 407 Waldbaum’s, 398 Walkovszky, John case background, 62, 72–73 suit and rulings, 62, 64, 72–73, 87 Wall Street (1987), 397 Wall Street Journal, The, 251, 270, 409 Walmart, Inc., 111 Walt Disney Co. board composition, 306, 309–10, 321, 326 board diversity, 324–27 board engagement, 304, 320 Compensation Committee, 303, 308, 311–13, 317–18, 324–26 decline, mid-2000s, 301–2 employment of Ovitz. See Ovitz, Michael Executive Performance Plan Committee, 316 Miramax Films purchase, 162 suit and rulings, 301–4, 309, 316–18 Washington Post, The, 164 Washington, George, 204 Watson, Ray, 311–14, 325–26 Weinstein clauses, 253 Weinstein Company Holdings LLC, The Academy recognition, 164 bankruptcy and purchase, 2018, 164 board composition, 162–64 bridge loan, 2009, 163 Code of Conduct, 163, 167, 175 core business, 179 corporate structure, 165, 170 employment of H. Weinstein. See Weinstein, Harvey founding, 162, 176 knowledge of misconduct, 168, 171, 175 Weinstein, Bob career and leadership, 162, 164, 170, 176 corporate structure, 165 firing of H. Weinstein, 164 stock ownership, 162

Index Weinstein, Harvey Academy recognition, 164 Agreement Code of Conduct section, 167–68 for-cause termination, 169, 175 indemnification clause, 166 presumption of good faith, 166 reimbursement cure, 167–69 allowance of misconduct, 175 career and leadership, 161–62, 170, 172, 176 Code of Conduct, 163, 167 corporate structure, 165 employment contracts 2005, 162 2010, 163 2015, 161, 163–64 firing by TWC, 164, 167 misuse of TWC funds, 163 non-disclosure agreements, 168–69 political involvement, 162 reports of sexual wrongdoing, 163–64, 167, 249 stock ownership, 162 Wells, Frank, 310, 320 West, Robin, 305 white knight, 135, 153–54 White, Andrew, 248–49, 257 Whole Foods Market, Inc., 111 Wilson, Gary L., 314–15 Wilson, Ian R., 141 Winston, Mary, 428 Witkin, Shirley Waldbaum, 398, 407 Woods, George, 344 Woolard, Paul P., 140, 151 Wynn Resorts, Ltd., 251 Wynn, Steve, 251 Yale University, 132 Ziff, Dirk, 163 Zilkha, Ezra K., 141

https://doi.org/10.1017/9781009025010.025 Published online by Cambridge University Press