I know this is late notice, but I have a small role in an online symposium on benefit corporations being held today at 3:30 pm Eastern (12:30 pm Pacific). The symposium features essays on Professor Michael Dorff’s recent book on benefit corporations, Becoming a Benefit Corporation. The essays will be published in a forthcoming issue of the Southwestern University Law Review. I am writing a foreword for the issue. If you have time and want to register to attend, the flyer is included above. You also can just register here.

Happy Halloween!

The Delaware Supreme Court just heard oral argument in the TripAdvisor case. Both sides had talented lawyers representing them. Keith Bishop has also covered this here. You can watch the oral argument here:

I’d like to offer three quick thoughts.

The Reincorporation Premium/Discount

At around the 28th minute, counsel for the stockholder made claims about there being a Nevada discount. This doesn’t seem to be supported by the weight of the evidence–or recent evidence. Steven Davidoff Solomon summarized the evidence in a recent memorandum that was attached to The Trade Desk Proxy. This is what he found:

24. Professors Paul Gompers, Joy Ishii, and Andrew Metrick also examined Professor Daines’ results as part of their study of 1,500 large firms to assess how firm governance affects stock returns. Consistent with the unique nature and heterogeneity of each company, they found that the premium observed in Professor Daines’ study was attributed to various governance characteristics, such as a classified board, limited ability to call special shareholders’ meetings, and state law and charter takeover protections. After controlling for these factors, they discovered that the Delaware premium was no longer statistically significant. In other words, Professors Gompers, Ishii, and Metrick concluded that any valuation increase in Delaware firms identified by Professor Daines was not due to incorporation in Delaware, but rather to the individual governance choices of those firms.

25. Finally, in a 2020 article, Professor Ed Fox investigated whether there is a premium for controlled companies incorporated in Delaware.35 Replicating the Daines study with a smaller sample of firms, Professor Fox found a potential effect for middle-market diffusely held Delaware firms, but it was not significant. He also examined controlled firms, like The Trade Desk, and discovered that “controlled Delaware firms have a lower Tobin’s Q compared to controlled firms incorporated elsewhere, after factoring in firm characteristics.”36 In other words, Professor Fox identified a Delaware effect, but it was negative for controlled firms. He found that controlled Delaware firms are, on average, worth 4.9% less than similarly situated firms incorporated elsewhere.

26. Regarding Nevada firms and the value of Nevada incorporation, the primary study by Professors Clark and Barzuza found that, as of 2011, Nevada is the place of incorporation for 8.0% of all public firms incorporating outside their headquarters state, making it second only to Delaware in attracting out-of-state incorporations.37 Professors Clark and Barzuza also replicated the Daines study and found “no discernible valuation effect for firms that incorporate in Nevada,” in contrast to Delaware firms, which are “valued higher than firms incorporated in Nevada and other states outside Delaware.”38 This discrepancy may be attributed to the fact that the Nevada firms in their sample are significantly smaller than Delaware firms, potentially leading to a lower overall value. Additionally, the value differential could reflect differences in the quality of firms incorporating in Delaware versus Nevada.39

27. Professor Eldar has more recently analyzed studies of whether Nevada firms have a premium or discount. He states that “there seems to be no convincing evidence that incorporation in Nevada adversely affects share prices.”40 Professor Eldar also conducted his own study and concluded that “the evidence supports the hypothesis that Nevada’s protectionist laws do not harm shareholder value…. ”41

28. Ultimately, these and other studies suggest that while incorporating in Delaware may have had some value in the past, the premium has diminished as capital markets have matured. Additionally, these findings are subject to limitations, such as the inability to fully control for selection effects and omitted variable bias. More specifically, it is possible that these studies observed higher or lower-quality companies choosing Delaware, Nevada, or elsewhere, and that these unobserved characteristics influenced the results. Furthermore, the findings of Professors Gompers, Ishii, and Metrick, along with subsequent research, support the idea that any observed valuation effects of incorporation may also be attributed to the unique governance characteristics of the companies.42

In short, there doesn’t seem to be any meaningful change in stock price when firms pick Nevada over Delaware. To the extent that controlled firms really do trade at a discount in Delaware, reincorporation might offer a minority stockholder benefit by helping reduce that discount.

What Companies Give Up When They Decamp to Delaware

If Delaware does start imposing liability for reincorporations, other states might respond. Nevada made this point in its brief by pointing out that stockholders might sue under the law of other states because a reincorporation to Delaware would deprive them of their rights to a jury trial.

But there are other differences between the states. Take constituency statutes for instance. Over thirty states have them. They generally provide that the corporation’s board may consider constituencies other than shareholders when making decisions. Nevada’s constituency statute allows a corporate board to take into account the interests of “the corporation’s employees, suppliers, creditors or customers” among an array of other constituencies when considering the interests of the corporation. Reincorporation to Delaware trims away a corporate board’s ability to consider these other interests directly and makes it so that they must be considered through the lens of what best advances shareholder interests.

The states that charter corporations surely have an interest in them. As there isn’t a good mechanism for these constituencies to sue for the loss of their ability to be considered as part of the interests of the corporation, states might authorize their attorney generals to seek damages for reincorporations to jurisdictions that apply different standards.

Damages Remain Speculative

Either for the loss of the constituency statutes or for other changes in rights between states, figuring out damages appears to be a really nasty thicket. I don’t know any great way to do it. I don’t think anyone does. How do you value a different set of statutes, different cases, and a different court system? I don’t know. I don’t think the Delaware Supreme Court has a great answer either. It might be better to just treat damages here as too speculative.

Tulane Law School invites applications for its Forrester Fellowship and Visiting Assistant Professorship, both of which are designed for promising scholars who plan to apply for tenure-track law school positions. Both positions are full-time faculty in the law school and are encouraged to participate in all aspects of the intellectual life of the school. The law school provides significant support and mentorship, a professional travel budget, and opportunities to present works-in-progress in faculty workshops. 

Tulane’s Forrester Fellows teach legal writing in the first-year curriculum to first-year law students in a program coordinated by the Director of Legal Writing. Fellows are appointed to a one-year term with the possibility of a single one-year renewal. Applicants must have a JD from an ABA-accredited law school, outstanding academic credentials, and significant law-related practice and/or clerkship experience. If you have any questions about this position, please contact Erin Donelon at edonelon@tulane.edu.

Tulane’s visiting assistant professor position is supported by the Murphy Institute at Tulane (http://murphy.tulane.edu/home/), an interdisciplinary unit specializing in political economy that draws faculty from the university’s departments of economics, philosophy, history, and political science. The position is designed for scholars focusing on regulation of economic activity very broadly construed (including, for example, research with a methodological or analytical focus relevant to scholars of regulation).  If you have any questions about this position, please contact Adam Feibelman at afeibelm@tulane.edu.  

Tulane is an equal opportunity employer and candidates who will enhance the diversity of the law faculty are especially invited to apply. Please apply through interfolio: http://apply.interfolio.com/156399

I previously posted about an anti-activist bylaw at a closed end fund, meant to head off Saba Capital. The bylaw provided that an activist who obtained more than 10% of the fund’s voting power would not be able to vote the excess, unless the remaining fund shareholders voted to permit it. The Second Circuit found that bylaw ran afoul of the Investment Company Act.

Eaton Vance came up with a new tactic. Funds, unlike operating companies, have a large retail shareholder base. And retail shareholders often don’t cast ballots at all.

For ordinary director elections, retail lack of participation isn’t a huge problem. The directors are elected by a plurality standard, so you don’t need a majority of shares to vote in favor. And that means when an activist like Saba comes along, Saba can defeat the sitting directors under a plurality standard.

So! Eaton Vance funds passed a bylaw that provided for majority – not plurality – voting, but only if a director election is contested. And further, the bylaw provided that if no candidate receives a majority, then the sitting directors get to maintain their seats as holdover directors.

Which functionally means that, in a contested election, the activist is subject to a higher voting threshold than the incumbent nominees. A threshold that, due to lack of retail participation, is unlikely to be met.

Saba challenged the bylaw in court, and after a bench trial, the Massachusetts Superior Court upheld the bylaw. The court agreed that if the bylaw made it impossible for a challenge to succeed, it would violate both the terms of the Trust – which was functionally a contract – and the Investment Company Act. But, the court found as a factual matter that the bylaw did not make it “impossible or impracticable” to elect challenger nominees.

I know very little about closed end funds; the Investment Company Institute, unsurprisingly, defends them and accuses activists of taking advantage of market dislocations that cause the funds to trade below their NAV. Meanwhile, the Working Group on Market Efficiency and Investor Protection in Closed-End Funds concludes that these “market dislocations” are ubiquitous and activism in closed end funds is important to protect investors.

But what interests me here is that nothing in the Massachusetts opinion discusses fiduciary obligations. The only questions the court addresses are whether the bylaw is a violation of statute or contract. Apparently, at some point earlier in the case, Saba did argue that the bylaw breached the Trustees’ fiduciary obligations, citing Delaware law; for whatever reason, the court did not address that argument in its final ruling.

I don’t know Massachusetts trust law, but in Delaware, we’d of course say that inequitable action does not become permissible simply because it is legally possible; the actions of Delaware corporate directors are “twice tested”: first for legal validity, and second for compliance with fiduciary obligation. But I find it very difficult to believe that Delaware, anyway, would conclude that a bylaw that imposes different voting thresholds for challengers and sitting directors (with shifting thresholds depending on the existence of a contest) comports with fiduciary obligations. If nothing else, the incumbents would have to identify a “threat” justifying a defensive measure, and “shareholders might vote for a policy I think is bad” is not a cognizable threat.

And finally, the latest Shareholder Primacy podcast is up.  This week, Mike Levin talks with Harvard Law’s Ben Bates about his paper on advance notice bylaws, forthcoming in the NYU Law Review.  Available at Apple, Spotify, and YouTube.

A law firm recently reached out to me to conduct a CLE on Mental Health Challenges in the Age of AI. It was an interesting request. I’ve spoken about AI issues on panels, as a keynote speaker, and in the classroom, and I wrote about it for Tennessee Journal of Business Law. I also conduct workshops and CLEs on mental health in the profession. But I’ve never been asked to combine the topics. 

Before I discussed issues related to anxiety about job disruption and how cognitive overload affects the brain, I spent time talking about the various tools that are out there and how much our profession will transform in the very near future.

If you’re like many lawyers I know, you think that AI is more hype than substance. So I’ll share the information I shared with the law firm.

According to a  2024 Bloomberg survey on AI and the legal profession, 69% of Bloomberg survey respondents believe generative AI can be used ethically in legal practice. But they harbor “extreme” or “moderate” concerns about deep fakes (e.g., human impersonations, hallucinations and accuracy of AI-generated text,  privacy, algorithmic bias, IP, and of course, job displacement.

Those are all legitimate concerns. But you’ve heard the saying by now that AI won’t replace lawyers — it will replace lawyers who don’t use AI. I think that’s true and there’s some evidence to back me up. 

During the CLE, I highlighted statistics from the 2024 Clio Legal Trends Report, which compiled findings from a comprehensive survey of 1,028 legal professionals, including lawyers, paralegals, and administrative staff; 1,437 Clio customers; and a random sample of 500 law firms across the United States. Clio employed a large language model (LLM) to evaluate the work activities outlined in the Occupational Information Network (O*NET) database, assigning automation scores to various legal tasks. This analysis involved over 7 million time entries from anonymized billing data, categorizing work activities according to their revenue contributions. Here are some key findings from Clio’s report:

  • In 2023, 19% of lawyers used AI for work. In 2024 that number jumped to 79%.
  • 25% have adopted AI “widely or universally.”
  • 84% of legal respondents believed law firm AI use will increase over the next 12 months, including 68% of those who aren’t currently using the technology.
  • 74% of hourly work in the legal industry could be automated by AI including 57% of lawyer work, 69% of paralegal work, and 81% of legal assistant work.

But what would clients think if we used AI for their work? 70% of clients are either agnostic or would prefer to work with firms that use AI, including 59% of baby boomers, 68% of Gen X, 75% of Millenials and 81% of Gen Z. One in six Americans has consulted with ChatGPT for legal advice.

For business lawyers, life is becoming exponentially easier (unless you bill by the hour, which will be the subject of another post). Why? You can use Spellbook AI, which claims to be “the only GPT-4 powered tool that has been tuned for contracting & integrated with Word…In the same manner that a junior associate would be expected to accomplish work without constant supervision, Spellbook Associate can use a single prompt to effectively work through legal matters such as producing complete financing documents from a term sheet, reviewing hundreds of documents for risks and inconsistencies and revising employment packages.” 

Fortune 500 companies and law law firms use Harvey, which is trained on extensive U.S. and EU legal databases, covering over 50 languages and various legal systems.  Paxton maintains a legal library with over 200 million documents, does real-time clause comparison, redlining, and contract creation suggesting language for contracts based on regulatory guidelines. CoCounsel, backed by Thompson Reuters, extracts data from contracts and ensures that contracts comply with a company’s policies. And there are so many more.

This isn’t hype and it’s not going away. 

Although I require my students to  use AI for brainstorming in my business associations and transactional skills classes, many law schools, ban or discourage AI. But that’s changing. 55% of law schools surveyed by the ABA  reported that they offer classes dedicated to teaching students about AI. 83% reported the availability of opportunities, including clinics, where students can learn how to use AI tools effectively. 93% of respondents expect to change their curricula to address the prevalence of AI tools. Although only 29 deans responded to the survey, we should still pay attention to these statistics. My institution, the University of Miami has just appointed a Chief Artificial Intelligence Officer and has rolled out a program on AI in teaching. My law school hired an AI fellow to help faculty members and students integrate the technology and has established an AI Lab. 272  law professors have joined the AI & Law-Related Course Professor List, the brainchild of Daniel Linna from Northwestern and April Dawson of NCCU.

I spend hours a day thinking and learning about AI with all of the good, the bad, and the ugly. But with all of the new tools, I also have to think deeply about how I train the next generation of lawyers. Having access to a precedent to draft from is one thing, but these AI platforms are pretty good and will only get much much better very very soon. 

As you think about your own experiences, whether you’re part of a law firm, an academic institution, an in-house legal team, or a client of legal services, consider these questions:

  1. How do you currently incorporate technology in your legal practice or teaching?
  2. What are your biggest concerns about using AI in your legal work?
  3. In what ways do you think AI can enhance the negotiation and drafting process?
  4. How do you ensure ethical compliance while integrating AI tools?
  5. What skills do you believe are essential for the next generation of legal professionals in an AI-driven environment?
  6. How can collaboration among legal professionals improve the implementation of AI tools?
  7. What training or resources would be most helpful for you or your team in adopting AI technologies?
  8. How do you communicate the value of AI tools to your clients or colleagues?
  9. What strategies can you use to maintain client trust when implementing AI solutions?
  10. How can law schools better prepare students for a future where AI plays a significant role in legal practice?

Today, we’ve got a guest post from David Lourie at the University of Detroit Mercy School of Law. He will present the teaching exercise below at the Transactional Law and Skills Pedagogy Panel at AALS this year. Some of the other presenters may also post write ups of their teaching exercises as well. I’ll aim to link them all to each other as this goes on so readers can find interesting teaching exercises. — BPE

On the first day of my Transactional Skills course, I have students engage in an active, experiential exercise where they apply diverse aspects of transactional skills to a relatable problem.   Later in the semester, when students have greatly enhanced their technical expertise, I assign students a related, out-of-class, multi-part exercise where they are graded.  In both exercises, students have three main tasks: thinking strategically, negotiating, and drafting. 

In the first exercise, I use a problem from Sepinuck’s Transactional Skills textbook as a starting point, but I greatly expand what the students must do so that I can preview the entire course and showcase the broad skills the students will utilize as transactional lawyers.  First, I divide the students into groups of four.  I then provide them with a scenario where they are moving into an apartment together for the law school academic year and provide background on each student, including their budget and social preferences such as quiet hours, cleanliness, and preferences on guest policies.  I also present information about the “real” apartment, that I choose from listings of apartments in downtown Detroit where our school is located, such as the total rent, different room options, garage space, and campus location. 

The students are first tasked to strategically discuss the issues that should be addressed in a “Roommate Agreement” among the four roommates (e.g., rent, social issues) and to prioritize those issues.  I then ask each group to share the issues they believe should be in the Roommate Agreement with the entire class.  Next, I facilitate an all-class discussion where we analyze the similarities and differences between the issues each group identified.  As a class, we decide on the issues to address in the Roommate Agreement.  This prepares students for what’s to come in the course: although students do not yet know the technical details of clauses such as a merger or indemnity clause, they begin to think strategically about the type of clauses that should be included and what those clauses should accomplish – so, for example, without using the word “merger clause,” a student may understand that they want to protect the integrity of the writing.

Next, I pick a particular clause the class has agreed should be in the Roommate Agreement – such as how the security deposit will be apportioned and who will be responsible if any issues limit the return of the deposit from the landlord, and have each group conduct an internal four-person negotiation of that clause, with each student representing their interests.  Once the groups have negotiated the parameters of the clause, I have them work as a team of four to draft it for the Roommate Agreement.  This previews for students the technical drafting skills they will learn during the semester: students often realize it is easier to “talk out” a contract clause than to draft it.  Once each group has drafted its clause, I return to an all-class discussion.  I put each group’s clause on a slide, and the class discusses the strengths and weaknesses of the clause.  This allows me to introduce concepts such as covenants, conditions, and declarations and how they should be utilized when drafting.

This exercise effectively engages students by taking a holistic approach to transactional skills.  Students have three main tasks: thinking strategically, negotiating, and drafting.  It simulates what students will be doing as transactional lawyers and the skills they will learn throughout the semester through an experiential exercise that is relatable and accessible.  This is not just a theoretical exercise but a practical simulation of the future work students will be doing, reinforcing the relevance of the course to their future careers.

As the semester progresses and the students’ technical knowledge of contract drafting and strategy grows, we perform an enhanced multi-part exercise where the expectations are higher (students draft the entire contract), most of the work takes place outside of class, and the assignment is graded.  Here, I divide students into groups of four, with one group representing the law school’s Student Bar Association (“SBA”) and the other representing a downtown Detroit venue where the SBA is hosting a Halloween party.  I provide the two sides with different instructions – describing what their side is seeking to obtain in a written contract to have a successful event. 

There are three parts to this assignment.  First, the groups of four meet internally to discuss their strategy and the clauses they believe should be in a final written agreement and turn in a written “strategy memo” that documents this.  Next, I give the groups one week to negotiate the full agreement terms with their counterparts (i.e., price, cancellation, venue logistics, etc.).  Once complete, each group turns in a “negotiation memo” that discusses the results of their negotiations and assesses how it went – what went well and what they would look to improve on.  Lastly, I give each group one week to draft the final written agreement between the SBA and the venue.  At this point in the course, the students are experienced in the technical aspects of contract drafting and can draft a contract as they will as associate attorneys at their future jobs.

My second “jot” was published on Jotwell last week. Titled “Digital Engagement and the Retail Investor,” the jot summarizes and comments on Sergio Alberto Gramitto Ricci & Christina M. Sautter, Wireless Investors & Apathy Obsolescence, 100 Wash. U. L. Rev. 1653 (2023). The meat of the jot is set forth below.

The article’s insights (and embedded take-aways from Gramitto Ricci and Sautter’s earlier work) are relevant to several large-scale business law topics. Two are most salient for me: shareholder primacy and the reasonable investor standard. Each area of inquiry and debate connects with the composition or behaviors of corporate shareholders.

Whether addressing shareholder primacy as a matter of the locus of corporate governance power as among the corporation’s internal constituents (through, e.g., voting or derivative litigation) or in terms of the objective of board decision making, shareholder apathy and coordination may be important to analyses and judgments. In shareholder primacy debates, assumptions often are made about the nature and interests of corporate shareholders. Changes in the identity and engagement of shareholders may alter those assumptions.

Similarly, the reasonable investor standard (which is incorporated in materiality definitions used in, among other things, federal securities regulation) is rooted in an understanding of investor (including shareholder) identity and conduct. The standard is intended to be objective. But investment markets and investors evolve over time. Thus, objective assessments of them also must evolve. Wireless Investors & Apathy Obsolescence, taken alone or together with Gramitto Ricci and Sautter’s related work, provides evidence of changes in equity investment markets and shareholder behavior patterns that may be significant to applications of the reasonable investor standard.

If I must say so myself, the entire jot is worth a read! But more importantly, the article itself is important to many current (and likely future) conversations in corporate finance.

A few years ago and before I had tenure, one of my more senior UNLV colleagues asked me to write a short piece for the ABA’s Human Rights Magazine on corporate political spending. As this isn’t my primary focus, I benefited enormously from reading work from Dorothy Shapiro Lund and Leo Strine as well as Tom Lin. The format didn’t allow for citations so I try to just use their names whenever I talk about it so it’s clear their ideas influenced me.

I made the time to write it and the essay has resulted in a decent amount of outreach to talk about the topic. Last week, a portion of an interview I gave to Marketplace ran. They reached out because of that short piece in the ABA magazine. Since then, I’ve heard from classmates I haven’t talked to for some time calling and texting to tell me they heard the interview. Apparently, I’m friends with an NPR-listening crowd.

If you want your work to reach larger audiences, you really have to write short pieces in addition to law review articles. On a few occasions, I’ve had op-eds follow law review articles. It’s a challenge to distill a complex law review article into an op-ed, but I find it helps to remember that you don’t need to give them the full argument–just make your case in a fair way.

When you reach a broader audience, you also see a broader range of reactions. Some hostile email has come in from offended stockbrokers or lawyers from time to time, but overall I think the benefits outweigh the blowback.

Now that I’m on the other side of the tenure divide, I’d probably still want to write that small piece, but I wouldn’t feel any pressure to do it. If it makes sense for you, I’d encourage you to do some short form writing as well. We often measure ourselves by our law review footprints, but I don’t know how much that will always matter. As institutions get better at measuring other forms of scholarly impact, you might see surprising returns from shorter-form work. You might also independently decide that doing some things with broader distribution matters to you even if your institution isn’t skilled at counting and quantifying that impact.

Hi, everyone – welcome to BLPB at the new place! As you can see, we’ve imported our old posts over here but in the process, the authors got scrambled for a lot of the older ones … we’ll work that out eventually. So! Moving on –

OpenAI’s been in the news, again, and there are some interesting things to talk about.

First, apparently both OpenAI, and Anthropic before it, have been raising funds through SPVs.  The SPV formally invests in the company; the SPV raises the funds from the real investors.

The purpose of that is the securities laws. If OpenAI/Anthropic have too many investors, they’ll have to make public filings.  But each SPV counts as a single investor.  So, by taking investment through SPVs, OpenAI and Anthropic can keep their formal investor count below the threshold of becoming a public company, while in fact raising capital from a dispersed group.

That said, it only works if OpenAI/Anthropic are not the ones organizing the SPVs. If they are, they’re evading the statutory limit on the number of investors a private company can take on.  The SEC’s view is that this trick only works if the SPVs are organized independently of the issuer.  I had a blog post on this way back when it was relevant to Uber.

When Uber did this, the impression I got was that investment banks created the SPVs to please clients who wanted access to a hot startup, and who were wealthy but didn’t, individually, have the kind of cash that attracts the attention of venture-backed companies.  But OpenAI’s SPVs are not being organized by investment banks; they’re being organized by large venture capital firms, who have preexisting investments in OpenAI. 

According to Anat Alon-Beck and John Livingston, this is becoming increasingly common, suggesting we’ve come a long way from investment banks trying to please clients who want access, and now this is just an alternative way to meet the capital raising needs of startup companies while allowing them to stay private.  OpenAI, we know, has enormous need for capital.

Point being, I wonder in these situations just how “independent” the SPV capital raises are, which is supposed to be a precondition to avoid counting their investors as investors in the issuer.  After all, VC firms often get governance rights along with their investments, they provide counseling/guidance to their portfolio firms, so in some sense they “are” the issuer, potentially going out and organizing an SPV so that they can funnel money to the firm while staying under the securities laws’ radar.  That whole process not only exposes perhaps smaller investors to increased risks, but also permits large and societally important firms to stay dark, without exposing their operations to public scrutiny.

But that’s not the only interesting OpenAI news!  There are also reports that it may abandon its current structure – an LLC, where investors can receive only a capped profit, operated by a nonprofit – in favor of a public benefit corporation.

That fact itself tells you something about the toothlessness of the public benefit corporation structure, but one of the weirder things is that apparently they’re claiming the public benefit form will help fend off activist attacks.

As I’ve previously discussed, there’s nothing about the benefit corporation form that, in fact, does prevent activism. OpenAI is still a private company, and I imagine is quite a long ways from going public, which means it’s insulated from activist attacks currently.  Even if it does go public, I find it difficult to imagine it wouldn’t have a multi-class share structure that would be sufficient to fend off activists, and since the benefit corporation form itself doesn’t do that work, I view the choice of the benefit corporation form as greenwashing, i.e., an attempt to put a happier face on the fact that the company is abandoning the nonprofit mission that was supposed to protect humanity, or whatever.

But maybe I’m wrong about that.  This is an interesting question, we could ask, post Coster v. UIP Cos. In Coster, the Delaware Supreme Court laid out the framework for assessing defenses that interfere with shareholder voting:

When a stockholder challenges board action that interferes with the election of directors or a stockholder vote in a contest for corporate control, the board bears the burden of  proof. First, the court should review whether the board faced a threat “to an important corporate interest or to the achievement of a significant corporate benefit.” The threat must be real and not pretextual, and the board’s motivations must be proper and not selfish or disloyal. As Chancellor Allen stated long ago, the threat cannot be justified on the grounds that the board knows what is in the best interests of the stockholders.

Second, the court should review whether the board’s response to the threat was reasonable in relation to the threat posed and was not preclusive or coercive to the stockholder franchise. To guard against unwarranted interference with corporate elections or stockholder votes in contests for corporate control, a board that is properly motivated and has identified a legitimate threat must tailor its response to only what is necessary to counter the threat. The board’s response to the threat cannot deprive the stockholders of a vote or coerce the stockholders to vote a particular way.

Is there an argument that benefit corporation directors have more leeway to interfere with shareholder voting, say, if an activist wants to run a proxy contest, than they would in an ordinary corporation?  After all, Coster says a defense cannot be motivated by the directors’ belief they know what is best for stockholders – but what if the defense were motivated by the directors’ belief that the stockholders’ interests must not be permitted to overwhelm a stakeholder’s interest in a corporation established to advance that interest?

My suspicion is, it shouldn’t matter.  The form itself represents a choice by investors to pursue a social mission; which means that ultimately the mission rests in their hands.  Plus, Delaware amended its statute to permit conversion to, and away from, the benefit corporation form with a mere 50-percent vote (rather than a supermajority), and also removed statutory provisions that would have granted shareholders in ordinary corporations appraisal rights upon conversion to a benefit corporation.  All of which suggests that the principle that the “shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests” remains just as intact in a benefit corporation as it does with any other corporation, which means there should be no special license to interfere with shareholder voting.  I mean, if shareholders can convert to ordinary corporation status with a mere 50% vote, surely directors can’t interfere with shareholders’ choice to do that kind of thing.

Plus, given how weak the enforcement rights are in benefit corporations alleged to have strayed from their social missions, I suspect that if Delaware courts were to rule that the form grants directors more leeway to fend off activists, suddenly corporate America would discover a new love of social purpose.

But, I suppose this is an issue lurking around that Delaware may one day have to confront.

And another thing.  New Shareholder Primacy podcast is up!  This time, me and Mike Levin talk SEC climate change rules, and the activist attack at Pfizer. Available at Apple, Spotify, and YouTube.