Activist stockholders, corporate governance challenges, and Delaware law

Abstract

Over the last several years, the U.S. capital markets have witnessed a palpable rise in the number and influence of so-called “activist investors”, meaning large, institutional investment funds employing an investment strategy of acquiring relatively large blocs of stock in publicly traded companies and wielding their legal rights as stockholders to effect some sort of policy change within the company but without attempting to acquire control. This fact concomitantly has engendered a heated debate as to whether activists’ rising influence is normatively “good” or “bad”. One thing in particular that makes this debate so contentious is activism’s resistance to easy characterization: on the one hand, stockholder activists primarily wield only the legal rights that the corporation law (and specifically the Delaware General Corporation Law (the “DGCL”), as Delaware is the State of incorporation for the majority of the U.S.’s publicly traded corporations) confers on investors to protect their investments, but, on the other hand, activist campaigns may cause collateral damage to the companies involved, implicating boards of directors’ fiduciary duties to protect the enterprise against threats to the corporate bastion. Simply put, does stockholder activism merely represent “dissent within the forum” that Delaware law is designed to safeguard, or are activists the proverbial “barbarians at the gate” that Delaware law entrusts corporate directors to repel? Whatever the answer to these and related questions, the extent to which stockholder activism primarily implicates the legal rights and duties of investors and directors vis-a-vis each other means that the DGCL and the Delaware courts necessarily serve an important intermediary role. And yet, the public policy of the State of Delaware as to matters of corporate internal affairs is to enable private ordering and eschew “one size fits all” approaches to the innumerable ways in which market participants may choose to deploy their capital as efficiently as possible in their respective circumstances. In other words, the intent of Delaware corporation law — and the function of Delaware courts in interpreting and enforcing that law — is not to take a position on the outcome of the debate surrounding stockholder activism, but to safeguard the debate itself. In this chapter, we highlight through practical examples the Delaware courts’ core competency in deciding these sometimes vexing questions in context with the tools available.