DealLawyers.com Blog

When I blogged last week about Vice Chancellor Laster’s recent decision in Bandera Master Fund v. Boardwalk Pipeline Partners, I said that the case was loaded with issues.  This Fried Frank memo (pg. 20) flags an interesting one – the decision’s potential relevance for the ongoing “shareholders v. stakeholders” debate.  Here’s an excerpt:

First, the court reiterated that, under Delaware fiduciary duty law in the corporate context, “[D]ecisions [by a board that produce greater profits over the long-term] benefit the corporation as a whole and, by increasing the value of the corporation, increase the share of value available for the residual claimants. However, Delaware case law is clear that the board of directors of a for-profit corporation must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.”

Next, the Vice Chancellor interpreted the partnership agreement at issue (which required that the general partner “pursue a course of action that is fair and reasonable to the Partnership as an entity”) to mean that the General Partner “had discretion to consider the full range of entity constituencies in addition to the limited partners, including but not limited to employees, creditors, suppliers, customers, and the General Partner itself.”

The Vice Chancellor continued: “Nevertheless, because the limited partners are one of the Partnership’s constituencies, a transaction that is in the best interests of the Partnership logically should not be highly unfair to the limited partners.” The Vice Chancellor stated that, “[u]nder a constituency-based regime like the one established by the Partnership Agreement, it is possible that benefits to the entity as a whole or to its other constituencies might outweigh harm to a particular constituency, such as the limited partners.”

Finally, he wrote, with respect to the issue in the context of a controlled company: “A party in control of an enterprise should not be able to transfer value from a particular constituency to itself, even under a constituency-based regime. Rather than a reasoned judgment about what is in the best interests of the entity, that type of value expropriation more closely resembles theft.”

I once read a comment about constituency statutes to the effect that if these statutes mean anything, they mean that sometimes, it’s okay to give shareholders the second best outcome available to them.  Vice Chancellor Laster’s opinion emphasizes that once a controller is thrown into the mix, you need to be watchful about the controlling shareholder’s potential use of a constituency regime to grab the best possible outcome available to it.

– John Jenkins