Shareholder Wealth Maximization and Its Implementation Under Corporate Law

This Article tackles the question of when courts should intervene in the decision-making of a corporation and review a corporate business decision for shareholder wealth maximization. This Article takes a very traditional approach to answering this question. It notes with approval that courts have historically been very hesitant to participate in the process of determining if a corporate decision is wealth maximizing. Courts have restrained themselves from interfering with board decision-making because they understand that it is the board of directors (the board) in coordination with executive management that has the best information and expertise to determine if a corporate decision meets the objective of shareholder wealth maximization. Nevertheless, the courts have found that they can play a wealth-enhancing role if they focus on making corporate authority accountable when there is sufficient evidence to show that the corporate decision was somehow tainted. Therefore, the courts will interpose themselves as a corrective mechanism when a board decision is tainted with a conflict of interest, lack of independence, or where gross negligence in the process of becoming informed in the making of a business decision is implicated. When judicial review veers from this traditional approach, the court’s opinion must be closely scrutinized to see if the court had valid reasons for implementing a different approach. Such a veering from the traditional path can be found in the Delaware Chancery case of eBay Domestic ∗ Visiting Assistant Professor of Law at the Case Western Reserve University School of Law (spring semesters of 2013 and 2014). I would like to thank Professors Stephen M. Bainbridge, Robert Bird, Jay Brown, Christopher M. Brunner, Lawrence Cunningham, George W. Dent Jr., Martin Gelter, William Judge, Andrew Lund, Andrew Keay, Charles R. Kormos, Henry G. Manne, Haskell Murray, Paul Rose, Lynn A. Stout, Mark Underberg, and David G. Yosifon for their helpful comments and insights. This Article is dedicated to my wife, Susan Thea David, and my daughter, Amy David Sharfman. 1. A.O. Scott, The Stuff of Life in Bitter Marginalia: ‘Footnote,’ a Satire and Family Drama by Joseph Cedar, N.Y. TIMES (Mar. 8, 2012), http://www.nytimes.com/2012/03/09/movies/ footnote-a-satire-and-family-drama-by-joseph-cedar.htmll (reviewing the film Footnote). 1 Sharfman: Shareholder Wealth Maximization and Its Implementation Under Corp Published by UF Law Scholarship Repository, 390 FLORIDA LAW REVIEW [Vol. 66 Holdings, Inc. v. Newmark, a case where the court, in its review of a shareholder rights plan under the Unocal test, required the directors to demonstrate that the corporate policy being defended by the poison pill enhanced shareholder value. As argued here, the court was wrong in its approach, and in general courts should never be in the position of adding this additional component of analyzing board decisions for shareholder wealth maximization unless the business decision was tainted with a conflict of interest, lack of independence, or gross negligence. INTRODUCTION 391 I. SHAREHOLDER WEALTH MAXIMIZATION AS A NORM OF CORPORATE GOVERNANCE 393 II. SHAREHOLDER WEALTH MAXIMIZATION AS THE OBJECTIVE OF CORPORATE LAW 394 III. WHY COURTS AVOID THE REVIEW FOR SHAREHOLDER WEALTH MAXIMIZATION 399 A. The Foundation: The Board of Directors as the Locus of Authority Under Statutory Law 401 1. The Value of Authority 402 a. The Value of Authority and Large Corporations 403 b. The Protection of Board Authority and Small Companies 404 2. The Value of Accountability 405 B. Chancellors and Judges as the Locus of Authority for Determining Shareholder Wealth Maximization 406 1. Implementing Fiduciary Duties as Tools of Accountability 409 2. Market Tools of Accountability 411 IV. THE REVLON DUTY: THE EXCEPTION THAT IS LOSING ITS SPECIAL STATUS 412 A. The Unocal Test 413 B. The Unocal Test and the Revlon Duty 415 V. EBAY DOMESTIC HOLDINGS, INC. V. NEWMARK 419 A. eBay and the Unocal Test 420 B. A New Requirement 423 C. The Unocal Test as a Conditional Business Judgment Rule 424 D. The Link 425 2 Florida Law Review, Vol. 66, Iss. 1 [], Art. 7 http://scholarship.law.ufl.edu/flr/vol66/iss1/7 2014] SHAREHOLDER WEALTH MAXIMIZATION 391 VI. THE IMPACT OF EBAY 428 CONCLUSION 430