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Stockholders – as we will see later – have a number of rights with respect to the corporation. However, one right that stockholders do not have is the right to directly manage the day-to-day operations of the business. The general corporation law, as well as the common law, vests exclusive responsibility for corporate management and decisionmaking not with the stockholders, but rather with the corporation's board of directors.
We might like to think that shareholders own and run the business, but they do not. The authority to manage and oversee the operation of the business on a day to day basis is vested exclusively with the board. To the extent stockholders have rights to oversee the operations of the business, those rights are attenuated. Perhaps the most important provision of the Delaware corporate law is §141. Delaware is by no means unique; every state has its equivalent to §141. Section 141 centralizes decisionmaking authority to the board.
The statutory authority granted to the board by §141 lies at the heart of the business judgment presumption, or the “business judgment rule.” The business judgment presumption is judicial presumption that exists as an acknowledgment of the statutory authority vested in boards, and not shareholders, to run the corporation. The effect of this judicial presumption is to cause courts to defer to decisions of the board in most matters when those decisions are challenged by stockholders.
This presumption is quite powerful and have effects beyond the courtroom. Because courts will generally abstain from intervening in disputes between stockholders and boards about most business decisions, boards will feel a great deal of latitude and independence in their decision making process. The insulation from stockholders afforded by this judicial presumption encourages boards to take business risk.EDIT PLAYLIST INFORMATION DELETE PLAYLIST
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|1||Show/Hide More||DGCL Sec. 223 - Director vacanies|
|2||Show/Hide More||DGCL Sec. 141 - Board of Directors|
Section 141 deals with the power and the structure of the board of directors. Of all the provisions in the corporate law, §141(a) is perhaps the single most important. Section 141(a) grants plenary power over the management of the corporation – not the stockholders – but to the board of directors. Among other things, §141(a) provides the statutory basis for the business judgment presumption.
Sections 141(b) & (f) describe the requirements for the conduct of regular business at board meetings or actions by the board without a meeting. Under §141©, a board is authorized to delegate almost all of its authority to committees of directors. Section 141(d) permits the creation of staggered, or classified, board structures.
Section 141(e) creates a safe harbor from liability for boards that reasonably rely on experts when making decisions. Section 141(h) provides boards the statutory authority to set their own compensation, while §141(k) describes the circumstances under which stockholders may dismiss a director.
|4||Show/Hide More||Shlensky v. Wrigley|
In this iconic case, a stockholder challenges a decision of the board of directors of the Chicago Cubs not to install lights at the field and to only play games during daylight hours.
For many years, the Chicago Cubs, a Delaware corporation, were controlled by Philip K. Wrigley – also known for his success as a chewing gum manufacturer. In many respects, Wrigley was an innovative businessman. During World War II he founded the All American Girls Baseball League to fill the void created when many professional baseball players went to war. The film, A League of Their Own, was a fictionalized account of the experiences of the AAGBL. In addition, Wrigley made a decision to increase the value of the Cubs brand by effectively giving away the rights to radio broadcasts of Cubs games.
In Shlensky v Wrigley, a stockholder sued the board of the Cubs, including Philip Wrigley, for the board's decision not to install lights and refusal to play night games at Wrigley Field.The stockholder alleged that the board's decision to only play day games at Wrigley caused the corporation to make less money than had the board installed lights and permitted the team to play night games.
This case highlights a very typical board decision and a common tension between the managers of the corporation and its stockholders. In this case we also see the degree of deference that courts will pay to a board's business judgment when that decision is made in an informed manner at arm's length.
|5||Show/Hide More||Aronson v. Lewis|
In Shlensky, the court described its policy of deferring to the decisions of the board of directors absent some evidence of fraud or wrongdoing. Aronson is the leading case for the restatement of the principle highlighted in Shlensky: the business judgment presumption, or the business judgment rule. This presumption, which is rooted in §141(a)'s allocation of exclusive management authority to the board of directors, requires that court leave board decisions undisturbed unless complaining stockholders present some evidence that the board made the challenged decisions in an uninformed manner, or in a manner not in good faith, or for reasons otherwise not in the best interests of the corporation (e.g. board self-dealing).
Note that the pleading burden is on the complaining stockholders. In the absence of facts to undermine the business judgment presumption, courts will leave board decisions, even bad ones, in place.
|6||Show/Hide More||Gagliardi v. TriFoods International Inc.|
|7||Show/Hide More||DGCL Sec. 145 - Indemnification of Directors and Other Agents|
As we learned in the Agency Course, agents acting within the scope of their agency have a common law right of indemnification. Section 145 authorizes the corporation to indemnify agents of the corporation (including directors, officers, and other agents) under certain conditions.
The statute envisions that directors seeking indemnification may well create conflicts as directors seek the approval of their fellow directors for indemnification. Consequently, the statute requires specific procedures prior to board approval of any such payments. These procedures attempt to mimic an arm's length approval of such payments by enlisting independent directors and/or unaffiliated stockholders. Note the analogue between an approval for purposes of §145 and agency law's approach to approving conflicted agent transactions.
March 15, 2017
Brian JM Quinn
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