5 ms·

The idea that the board's fiduciary means they must maximize profits at the expense of all else is a bit of a myth. Yes, they need to look out for their shareho

The idea that the board's fiduciary means they must maximize profits at the expense of all else is a bit of a myth. Yes, they need to look out for their shareholders but they also need to do right by the company, and companies can be formed for any legal purpose and everyone (the company and the shareholders) values things differently. It's generally been upheld that the board has a lot of autonomy and, outside of gross negligence, is generally protected by the business judgement rule.

tsimionescu 4y ago
> Yes, they need to look out for their shareholders but they also need to do right by the company, and companies can be formed for any legal purpose and everyone (the company and the shareholders) values things differently The board has a lot of leeway into how they achieve profit for the shareholders, but all decisions they make must be nominally in the interest of that goal (assuming we're discussing a for-profit company such as Twitter). They can basically claim anything they do is done in the interest of shareholder value and be safe, but if they said "we know the company will lose money on this, but we really like X so we'll spend company money on it", they would pretty clearly be in breach of their fiduciary duty.
- philistine 4y ago
  You gave a very clear example of a breach. To add to your point, Elon's offer is both conditional on financing and too low, so we will implement a poison pill would never be seen as a breach.
- tuckerman 4y ago
  At least in Delaware law, a board's fiduciary duty involves a duty of care, loyalty, and good faith. While acting to maximize their personal interests or egregiously working against profits could be considered a breach, not trying to maximally make profits probably wouldn't be. All of this would need to be litigated on a case-by-case basis, but many modern cases have found that companies can freely act to maximize the wages of their employees at the expense of dividends or act charitably even when there aren't tax breaks. That said, I'm not sure this really even applies in the case of Twitter---I think its not unreasonable to argue that the innate value of Twitter is so much higher than what Musk is offering that its better for the shareholders to wait even thinking purely in terms of profits (I would probably personally disagree with that, but I don't think its any more unreasonable than plenty of other valuations I see)
  - tsimionescu 4y ago
    Yes, they don't have to maximize profits, but they also can't ignore profit to the benefit of other values they deem more important, per the very old but still in force Dodge v Ford. As long as they are not egregiously and obviously acting against that goal, or taking decisions without deliberation, the law would favor them in any trial that only hinged on whether the price offered by Musk was better than the market. Basically the burden of proof to show that it could not have been a good business decision would lie with the plaintiff, and I very much doubt that you could build a solid case of that.
    - tuckerman 4y ago
      I don't think Dodge v. Ford isn't a great case to cite here for two reasons: 1) I think the trend of accepting that corporations can exist for reasons other than to generate profit is a post-ww2 phenomenon and this case is from 1919 2) Perhaps more importantly, Dodge v. Ford was a case before the Michigan Supreme Court and, to my knowledge, has never been used in a case in Delaware.
    - madhadron 4y ago
      I mean, saying "We are concerned about a hostile takeover attempt by a person who isn't allowed to be an officer of a public company anymore because he has show himself either unwilling or unable to be a fiduciary for stockholders, and we are trying to protect our stockholders from him" seems like a slam dunk in court.
      - tsimionescu 4y ago
        Musk is offering to buy out all stockholders, so if the sale goes through, he will be the sole owner of Twitter, and all current stock holders will receive cash. On the other hand, the board can easily say "we don't beleive this deal offered by a person who isn't allowed to be a public officer of a company anymore will ever go through, either because he will retract it or because he will be unable to secure funding; and we beleive attempting the deal will hurt stock prices and profits for current shareholders" and then I agree, it would probably be a slam dunk in court.
- LocalPCGuy 4y ago
  Achieve profit is not the same thing as provide value or best interest of. It could be. It does not have to be.
  - tsimionescu 4y ago
    A for-profit company is there for profit. There is no other way to interpret shareholder value in a for-profit company, for purposes of discussing fiduciary duty. Now, providing profit/share-holder value need not mean maximizing said profit - it just means that profit must always be considered in any business decision, it can never be entirely ignored in favor of other things. Note that not even shareholders get to decide what kind of value they expect their board to offer them. That definition of value is set in stone by the type of corporation. The board of a for-profit company has a fiduciary duty to the shareholders of the company as pertains to profits. If 100% of the shareholders of Twitter voted to ask the board to sacrifice profit for free speech; and the board decided to ignore this request entirely and publicly announced they would limit free speech at every trun to focus on profits, the shareholders would have no chance of winning a breach of fiduciary duty trial against the board. The board has no legal duty to uphold some abstract values that shareholders hold dear, they only have a legal duty to act in the interest of company profit as they see fit.
    - PaulDavisThe1st 4y ago
      > it just means that profit must always be considered in any business decision, it can never be entirely ignored in favor of other things. The word "entirely" is doing a lot of work there. > The board of a for-profit company has a fiduciary duty to the shareholders of the company as pertains to profits. This is a dramatic oversimplification that borders on falsehood, as you noted yourself in your previous paragraph. As a trivial example, the board would be entirely entitled to claim that their goal is very long term profit maximization, and that this will result in decades of losses (effectively Amazon's strategy). We also now have "Public Benefit Corporation" as a codification of a for-profit corporation that does not have profit as its primary motivation (at least in 35 states & DC), but obviously that does not apply in the case of Twitter.
- hajile 4y ago
  We are the largest perennially unprofitable company to ever exist. The richest guy in the world offered to invest a fifth of his net worth into the gamble of turning our company profitable while making our shareholders a massive profit. Instead, we poisoned the system knowing that the stock is all but guaranteed to tank massively reducing our market cap and hurting our ability to take out still more loans to continue our unprofitable venture. But we're holding true to our other nebulous values. They'll have a very compelling argument.
  - tsimionescu 4y ago
    To prove a breach of fiduciary duty, you generally have a very high burden of evidence, unless you can show some conflict of interest or obvious lack of deliberation. Otherwise, the business judgement rule is applied, where the presumption is that the directors acted in good faith, and you would essentially have to prove that it is impossible for Twitter stock to grow beyond the current offer.
    - hajile 4y ago
      What answer could they give for their actions that isn't immediately disprovable garbage? Do you really think that discovery would show that this was all in good faith? I'd bet heavily that a lot of ideological discussions would be disclosed. As that is completely contradictory to what Twitter claims is their goal, bad faith would be the only remaining option.
      - tsimionescu 4y ago
        I would bet that no such ideological grounds would be found in discovery, even if it were true, unless the board are complete morons to discuss such things over email. Instead, it is easy to expect they would discuss the sincerity of Musk's offer (the chance that they may accept it only for it to be retracted, as happened with the board membership offer), the plausibility of him having the required financing, the stock price today vs 6 months ago compared to the offer, and similar business discussions. I also don't personally believe this is an ideological battle at all - it's much more likely to be a financial manouever or simple ego-driven ambition by Musk.
friesfreeze 4y ago
Under DE law, my understanding is that you are slightly off on this. Boards do have a duty to maximize shareholder value. THAT SAID, the business judgement rule provides that judges will not second guess the board absent evidence of gross negligence or total disregard of duty. This is because the Delaware court has decided that judges are not better than boards at evaluating business decisions. BUT! Overcoming the BJR is very difficult unless management stupidly says the quiet part out loud. Dodge v. Ford is a celebrated case in this regard because Ford basically said at trial "Yeah my main consideration in taking [specific action] is not maximizing shareholder value" and the judge was like "Haha no, that's not how any of this works - you can't do [specific thing] now." But if Ford was like "Yeah [specific thing] would be GREAT for shareholders" under the BJR the judge would have been like "Okay, great, keep doing what you are doing. How could I possibly know better than you?" Also there is no "need to do right by the company" - squeezing value out of the company and all of its stakeholders is completely consistent with the duties of the board members. How else would the private equity industry exist? (jk!)
- JumpCrisscross 4y ago
  > have a duty to maximize shareholder value Not to maximize profits. Courts give companies a wide berth in defining shareholder value.
  - friesfreeze 4y ago
    Right, though I don't think it is so vague as to be meaningless. The stakeholder / shareholder value debates in corporate governance play on the extremities of this distinction a lot, with the current koan being that what is good for stakeholders is good for shareholders.
    - JumpCrisscross 4y ago
      > don't think it is so vague as to be meaningless It's not, particularly in the context of takeover defenses. There were cases in the 80s where Delaware ruled that only shareholder interests--not all stakeholders'--can be considered when a Board uses its "business judgment" to deploy a poison pill. But shareholders can have aims other than maximizing profit, and companies are free to respond to them.

tsimionescu 4y ago

> Yes, they need to look out for their shareholders but they also need to do right by the company, and companies can be formed for any legal purpose and everyone (the company and the shareholders) values things differently The board has a lot of leeway into how they achieve profit for the shareholders, but all decisions they make must be nominally in the interest of that goal (assuming we're discussing a for-profit company such as Twitter). They can basically claim anything they do is done in the interest of shareholder value and be safe, but if they said "we know the company will lose money on this, but we really like X so we'll spend company money on it", they would pretty clearly be in breach of their fiduciary duty.

philistine 4y ago
You gave a very clear example of a breach. To add to your point, Elon's offer is both conditional on financing and too low, so we will implement a poison pill would never be seen as a breach.
tuckerman 4y ago
At least in Delaware law, a board's fiduciary duty involves a duty of care, loyalty, and good faith. While acting to maximize their personal interests or egregiously working against profits could be considered a breach, not trying to maximally make profits probably wouldn't be. All of this would need to be litigated on a case-by-case basis, but many modern cases have found that companies can freely act to maximize the wages of their employees at the expense of dividends or act charitably even when there aren't tax breaks. That said, I'm not sure this really even applies in the case of Twitter---I think its not unreasonable to argue that the innate value of Twitter is so much higher than what Musk is offering that its better for the shareholders to wait even thinking purely in terms of profits (I would probably personally disagree with that, but I don't think its any more unreasonable than plenty of other valuations I see)
- tsimionescu 4y ago
  Yes, they don't have to maximize profits, but they also can't ignore profit to the benefit of other values they deem more important, per the very old but still in force Dodge v Ford. As long as they are not egregiously and obviously acting against that goal, or taking decisions without deliberation, the law would favor them in any trial that only hinged on whether the price offered by Musk was better than the market. Basically the burden of proof to show that it could not have been a good business decision would lie with the plaintiff, and I very much doubt that you could build a solid case of that.
  - tuckerman 4y ago
    I don't think Dodge v. Ford isn't a great case to cite here for two reasons: 1) I think the trend of accepting that corporations can exist for reasons other than to generate profit is a post-ww2 phenomenon and this case is from 1919 2) Perhaps more importantly, Dodge v. Ford was a case before the Michigan Supreme Court and, to my knowledge, has never been used in a case in Delaware.
  - madhadron 4y ago
    I mean, saying "We are concerned about a hostile takeover attempt by a person who isn't allowed to be an officer of a public company anymore because he has show himself either unwilling or unable to be a fiduciary for stockholders, and we are trying to protect our stockholders from him" seems like a slam dunk in court.
    - tsimionescu 4y ago
      Musk is offering to buy out all stockholders, so if the sale goes through, he will be the sole owner of Twitter, and all current stock holders will receive cash. On the other hand, the board can easily say "we don't beleive this deal offered by a person who isn't allowed to be a public officer of a company anymore will ever go through, either because he will retract it or because he will be unable to secure funding; and we beleive attempting the deal will hurt stock prices and profits for current shareholders" and then I agree, it would probably be a slam dunk in court.
LocalPCGuy 4y ago
Achieve profit is not the same thing as provide value or best interest of. It could be. It does not have to be.
- tsimionescu 4y ago
  A for-profit company is there for profit. There is no other way to interpret shareholder value in a for-profit company, for purposes of discussing fiduciary duty. Now, providing profit/share-holder value need not mean maximizing said profit - it just means that profit must always be considered in any business decision, it can never be entirely ignored in favor of other things. Note that not even shareholders get to decide what kind of value they expect their board to offer them. That definition of value is set in stone by the type of corporation. The board of a for-profit company has a fiduciary duty to the shareholders of the company as pertains to profits. If 100% of the shareholders of Twitter voted to ask the board to sacrifice profit for free speech; and the board decided to ignore this request entirely and publicly announced they would limit free speech at every trun to focus on profits, the shareholders would have no chance of winning a breach of fiduciary duty trial against the board. The board has no legal duty to uphold some abstract values that shareholders hold dear, they only have a legal duty to act in the interest of company profit as they see fit.
  - PaulDavisThe1st 4y ago
    > it just means that profit must always be considered in any business decision, it can never be entirely ignored in favor of other things. The word "entirely" is doing a lot of work there. > The board of a for-profit company has a fiduciary duty to the shareholders of the company as pertains to profits. This is a dramatic oversimplification that borders on falsehood, as you noted yourself in your previous paragraph. As a trivial example, the board would be entirely entitled to claim that their goal is very long term profit maximization, and that this will result in decades of losses (effectively Amazon's strategy). We also now have "Public Benefit Corporation" as a codification of a for-profit corporation that does not have profit as its primary motivation (at least in 35 states & DC), but obviously that does not apply in the case of Twitter.
hajile 4y ago
We are the largest perennially unprofitable company to ever exist. The richest guy in the world offered to invest a fifth of his net worth into the gamble of turning our company profitable while making our shareholders a massive profit. Instead, we poisoned the system knowing that the stock is all but guaranteed to tank massively reducing our market cap and hurting our ability to take out still more loans to continue our unprofitable venture. But we're holding true to our other nebulous values. They'll have a very compelling argument.
- tsimionescu 4y ago
  To prove a breach of fiduciary duty, you generally have a very high burden of evidence, unless you can show some conflict of interest or obvious lack of deliberation. Otherwise, the business judgement rule is applied, where the presumption is that the directors acted in good faith, and you would essentially have to prove that it is impossible for Twitter stock to grow beyond the current offer.
  - hajile 4y ago
    What answer could they give for their actions that isn't immediately disprovable garbage? Do you really think that discovery would show that this was all in good faith? I'd bet heavily that a lot of ideological discussions would be disclosed. As that is completely contradictory to what Twitter claims is their goal, bad faith would be the only remaining option.
    - tsimionescu 4y ago
      I would bet that no such ideological grounds would be found in discovery, even if it were true, unless the board are complete morons to discuss such things over email. Instead, it is easy to expect they would discuss the sincerity of Musk's offer (the chance that they may accept it only for it to be retracted, as happened with the board membership offer), the plausibility of him having the required financing, the stock price today vs 6 months ago compared to the offer, and similar business discussions. I also don't personally believe this is an ideological battle at all - it's much more likely to be a financial manouever or simple ego-driven ambition by Musk.

friesfreeze 4y ago

Under DE law, my understanding is that you are slightly off on this. Boards do have a duty to maximize shareholder value. THAT SAID, the business judgement rule provides that judges will not second guess the board absent evidence of gross negligence or total disregard of duty. This is because the Delaware court has decided that judges are not better than boards at evaluating business decisions. BUT! Overcoming the BJR is very difficult unless management stupidly says the quiet part out loud. Dodge v. Ford is a celebrated case in this regard because Ford basically said at trial "Yeah my main consideration in taking [specific action] is not maximizing shareholder value" and the judge was like "Haha no, that's not how any of this works - you can't do [specific thing] now." But if Ford was like "Yeah [specific thing] would be GREAT for shareholders" under the BJR the judge would have been like "Okay, great, keep doing what you are doing. How could I possibly know better than you?" Also there is no "need to do right by the company" - squeezing value out of the company and all of its stakeholders is completely consistent with the duties of the board members. How else would the private equity industry exist? (jk!)

JumpCrisscross 4y ago
> have a duty to maximize shareholder value Not to maximize profits. Courts give companies a wide berth in defining shareholder value.
- friesfreeze 4y ago
  Right, though I don't think it is so vague as to be meaningless. The stakeholder / shareholder value debates in corporate governance play on the extremities of this distinction a lot, with the current koan being that what is good for stakeholders is good for shareholders.
  - JumpCrisscross 4y ago
    > don't think it is so vague as to be meaningless It's not, particularly in the context of takeover defenses. There were cases in the 80s where Delaware ruled that only shareholder interests--not all stakeholders'--can be considered when a Board uses its "business judgment" to deploy a poison pill. But shareholders can have aims other than maximizing profit, and companies are free to respond to them.