Quick post today to mention that I did a podcast!  Evan Epstein of UC Law San Francisco hosts a regular podcast called “Boardroom Governance” for which he’s interviewed everyone who has anything to do with corporate issues – academics, practitioners, board members, you name it.  Recently, he was kind enough to invite me for an interview.  It was a great discussion, covering everything from Twitter v. Musk (of course), to the McDonald’s decision, to Sam Bankman-Fried, to public benefit corporations, to Domino’s pizza.

You can give it a listen here (and at that link there’s a handy index, if you want to jump to particular points).

This post was originally intended to be submitted as a comment to Ann Lipton’s recent “Don’t Say Anything” post – so please read that post first before continuing. I ultimately decided to publish this as a free-standing post because it got a bit long for a comment and I’ll be better able to follow any subsequent comments here. As always, I remain open to changing my mind in the light of convincing feedback.

Ann’s post starts by referencing “Florida’s ‘Don’t Say Gay’ law, HB 1557.” For context, the following from Heritage Action’s Executive Director Jessica Anderson (here) may be helpful:

While the Left and the corporate media continue to lie about Florida’s Parental Rights in Education bill, HB 1557, Florida Republicans haven’t stopped working to protect parents and children. Nothing in the bill bans the word ‘gay’ or censors schools — it simply protects grades K-3 from sexualized instruction and bolsters parents’ rights to know what’s going on in their children’s lives at school.

As for the substance of the case, I predict that Chancery will not dismiss the request. Why? Because it does not have to dismiss it in order to discourage “bullying” because this is not properly dismissed as bullying (i.e., an improper purpose). Simeone is certainly not the only shareholder to be concerned about Disney’s decision possibly being tainted by political bias – and this request is a proper way to try to get at the truth on that issue. What’s the most likely form of circumstantial evidence of political bias in a case like this? I believe it is failures of information-gathering that conveniently tilt in only one partisan direction. For example, if the decision-makers utterly failed to even consider simply firing the disruptive employees as a way to restore order at the company, or if they utterly failed to account for the completely foreseeable costs of backlash – in the form of state action or an even bigger PR nightmare – for trying to undermine the decisions of a democratically elected governor arguably doing precisely what he was democratically elected to do (cf. “Nikki Haley Says Florida’s Parental-Rights Law Doesn’t Go ‘Far Enough’“), then we start to get smoke suggesting a fire of politically biased willful blindness. Phrased more conventionally, if the corporate decision-makers failed to properly inform themselves in the course of reaching their decision, then they breached their duty of care, and if their information-processing failures rose to the level of consciously disregarding their known duty to become fully informed, then they engaged in non-exculpable bad faith. Given the highly politicized nature of this dispute, and the specter of political bias it raises, granting the request here seems perfectly in line with Section 220’s purpose and precedents. FWIW, I have previously written about the need for enhanced scrutiny in cases like this here, here, and here; Senator Marco Rubio has linked to some of that work here.

As for the concern that granting this request will somehow sanction improper or illegal “bullying” of corporations by political actors, I don’t think corporate decision-makers can ignore likely material impacts of political actions simply because they believe those actions may ultimately be deemed illegal. For example, should corporate decision-makers ignore the potential costs/benefits of President Biden’s loan forgiveness program because it may ultimately be ruled illegal? I think not.

As you may be aware, a Disney shareholder, Kenneth Simeone, has filed a Section 220 action in Delaware Chancery seeking books and records pertaining to Disney’s announcement in early 2022 that it opposed Florida’s “Don’t Say Gay” law, HB 1557. 

Before the law was passed, Disney’s CEO, Robert Chapek, told employees that the company would not take a public position on the law.  That decision infuriated Disney employees, who, among other things, began staging walkouts in protest.  Ultimately, Chapek reversed course and publicly stated that Disney opposed the law.

In the wake of that announcement, Governor Ron DeSantis and the Florida legislature voted to dissolve Disney’s self-governed Reedy Creek Improvement District, although they later walked back their actions by maintaining the district but transferring control to Florida political appointees.  Chapek was fired by the board (likely for a host of reasons), and former CEO Robert Iger was restored to his old role.

Anyway, Simeone claims that he has a credible basis to suspect that Disney’s public opposition to the law was the result of mismanagement and breach of fiduciary duty.  In particular, he claims that Disney’s officers and directors may have put their personal political preferences ahead of shareholder interests, and that therefore he is entitled to further information to investigate.  Among other things, he seeks information about whether any of the directors are beholden to LGBTQ+ rights organizations, or whether they are beholden to directors who are.  The case is set for trial in Delaware, Simeone v. The Walt Disney Co., No. 2022-1120-LWW.

So, first, let’s just state the obvious: Disney facially had a legitimate business reason for its opposition to the law.  The company had become ungovernable, and silence was becoming a public relations nightmare.  That doesn’t mean Chapek handled things well or even competently, nor is it a statement about anyone’s true motivation; it’s simply that there was a patently legitimate reason for the about-face. 

What’s also obvious is that this 220 action was undertaken to punish Disney for expressing a (liberal) political opinion, and to deter other corporations from doing the same.   The difficulty from Delaware’s perspective is that, especially after AmerisourceBergen v. Lebanon County Employees’ Retirement Fund, the bar for obtaining books and records is very low.  The shareholder does not have to establish a viable claim for breach of fiduciary duty; investigating mismanagement is enough, if only because evidence of mismanagement might be used to run a proxy contest or otherwise communicate with other shareholders about further courses of action.  The shareholder does not have to articulate any particular plan of action after obtaining such evidence; in a mismanagement investigation, Section 220 does not require that shareholders identify the “ends” to which they might apply the materials.  And though courts have rejected demands in the past when there was reason to suspect the shareholders’ motivations were pretextual or based on personal political beliefs, the fact that a petitioner might harbor such beliefs does not itself undermine an otherwise-legitimate request for materials.  Therefore, it seems that Delaware Chancery will be in the difficult position of having to do three things simultaneously: Dismiss the action, without setting new standards that make legitimate claims difficult to bring, while also making clear that Delaware is not a forum for bullying companies that make political statements with which some segment of the public disagrees.

But there’s another insidious aspect to this dispute.  Simeone’s brief lays out a truly convincing case that DeSantis’s actions against Disney were explicit retaliation for its speech, in violation of the First Amendment.  And yet the legal argument Simeone makes is, to comply with their fiduciary duties and otherwise properly manage the company, Disney’s officers and directors should have anticipated unconstitutional action by the governor of Florida and modified their behavior accordingly.

And it gets worse.  Simeone is not, as far as I know, in any way affiliated with the State of Florida, but other investors are.  DeSantis has already implied he would manipulate Florida’s public pension funds into initiating litigation against any portfolio companies that anger him; imagine if he retaliated against a company for expressing opposition to him and then caused Florida’s own fund (or even funds sponsored by sympathetic states) to bring lawsuits claiming the company was at fault for bringing about the very harm his own administration inflicted.

That said, from a pure shareholder primacy/wealth maximization point of view, I’m not sure Simeone is wrong; Disney has no right even to stand up for its own freedom of speech, unless there is a business purpose for doing so.  Unless, of course, there’s a general public policy principle that corporate directors are not obligated to manage the company in anticipation of overtly unconstitutional action by U.S. government officials.