Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson's Choice during a National Crisis

Abstract

This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America’s acquisition of Merrill Lynch and the impact of a flawed merger execution on the board’s subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of the crisis was Bank of America’s acquisition of Merrill Lynch. While this acquisition was pending, Merrill Lynch was accruing losses at an astonishing rate, so much so that Bank of America considered exercising the merger agreement’s material adverse effect clause to abort the deal. The board of directors ultimately decided against doing this, but only after the government, fearing the injection of more systemic risk into the financial system if the deal fell through, threatened to fire the board and management. This episode, unique in modern business history, provides an object lesson on the public-private nature of corporate governance during a national crisis. This topic is important, and thus far has not been developed in either the judicial or scholarly literature, presumably because this country has not experienced a crisis of this scale since the 1930s. The Bank of America Merrill Lynch episode serves as a contextualizing vehicle to advance a theory of public necessity exemption to fiduciary duty. A board’s action to nationalize corporate governance and purpose per public necessity is authorized by Delaware law, specifically section 122(12) of the Delaware General Corporation Law, which thus far has received scant attention. This Article constructs around this statute a framework for recognizing a fiduciary exemption based on the board’s determination that the firm, being uniquely situated to avert or mitigate the public crisis, should provide aid. Simply stated, public necessity, a well established concept borrowed from tort law, excuses the destruction of private property (in the case of corporate law, transfer of assets to other parties or causes). When the board perceives that the stake in the public welfare is great enough, the shareholder primacy norm can and sometimes does fail the stress test of a crisis.

Keywords: corporate governance, Bank of America, Merrill Lynch, section 122(12), financial crisis, Bernanke, Paulson, Ken Lewis, market crash

JEL Classification: H1, G3, G2, D6, E58, E65, E61, K22, K23, P1, l2, l5, N2, N4