Interpreting Nonshareholder Constituency Statutes

Abstract

Nonshareholder constituency statutes permit directors to consider the effects of their decisions on a variety of nonshareholder interests, such as employees, customers, suppliers, and local communities. Although highly controversial within the corporate law academy, such statutes are on the books in well over half the states and are likely to remain so for the foreseeable future. Because the statutes offer surprisingly little guidance to directors faced with corporate decisions or to courts faced with reviewing those decisions, however, courts urgently need a coherent interpretation of the statutes. But coherence alone is not enough; courts must also be faithful to the legislative intent behind the statutes. Courts cannot ignore the statutes, wish them away, or fairly interpret them as having no meaning or impact. This article therefore proposes an interpretation of nonshareholder constituency statutes that is faithful to the apparent legislative intent while also maintaining continuity with well-established principles of director fiduciary duties. The proposed approach distinguishes between two basic categories of director decisions: (i) operational issues, such as plant closings; and (ii) structural decisions, such as takeovers. The latter pose a much more serious conflict of interest for directors than do the former and therefore demand closer scrutiny. Accordingly, while arguing that director decisions with respect to operational matters should be conducted under the business judgment rule, the article argues that director decisions in the structural setting should be reviewed under a variant of the conditional business judgment rule developed by the Delaware supreme court in Unocal Corp. v. Mesa Petroleum Co.

Keywords: corporate social responsibility, nonshareholder constituency statutes, statutory interpretation, corporate takeovers

JEL Classification: K22