Would it not have been both legal and legitimate for Twitter’s board of directors to reject Elon Musk’s acquisition offer, despite the premium that it promises current shareholders, on the grounds that a Musk-controlled Twitter could harm such other stakeholders as. . . . everyone on the planet?
Many people, including some lawyers, mistakenly assume that a board is legally required to maximize the monetary interests of shareholders.
In the most notable judicial expression of that idea, the Michigan Supreme Court in 1919 ordered the Ford Motor Company to distribute a special dividend from the company’s extraordinarily large (current, and for the foreseeable future) profits. The Court, rejecting majority shareholder and president Henry Ford’s purportedly patriotic purposes of creating more jobs at Ford and keeping automobiles affordable, insisted that a corporation is to be “organized and carried on primarily for the profit of the stockholders.” Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).
But even that decision, by using the qualification, “primarily,” allowed boards also to take into account shareholders’ non-monetary interests, as well as to consider the concerns of other parties.
Moreover, in their co-authored 2005 law review article, a current and a former member of Delaware’s influential Court of Chancery observed that the Ford holding “was atavistic even at its date of publication,” but remains in law school casebooks only because “there are no other cases that really stand for [that] position.” William T. Allen & Leo E. Strine, Jr., When the Existing Economic Order Deserves a Champion: The Enduring Relevance of Martin Lipton’s Vision of the Corporate Law, 60 Bus. Law. 1383, 1385 n.7 (2005).
By contrast, today’s casebooks emphasize that many ESG (environmental, social, and governance) initiatives are entirely compatible with shareholders’ financial interests, such as when they improve employee hiring, morale, and retention, and when they enhance a company’s public image and goodwill.
Some of these casebooks also note the Delaware Supreme Court’s recognition that a board “may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the shareholders,” Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 183 (Dec. 1986); and the United States Supreme Court’s acknowledgment that “modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so,” Burwell v. Hobby Lobby Stores, Inc., 134 S.Ct. 2751, 2771 (2014).
Indeed, in the specific context of takeovers, the Delaware Supreme Court has held that a target’s board may appropriately consider “the impact of. . . the potential acquisition on other constituencies, provided that it bears some reasonable relationship to general shareholder interests.” Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1282 n.29 (Del. 1989).
Twitter’s Certificate of Incorporation identifies the company’s purpose as “to engage in any lawful act or activity” permitted to a Delaware corporation. Its corporate governance guidelines indicate that the board is expected to “act in a manner it reasonably believes to be in the best interests of the Company and its stockholders.”
The company’s directors were certainly mindful of rising public concern and anger over, and demands for federal regulation of, Twitter’s privately-produced policies, which can increase political polarization; enable the dissemination of misinformation; and lead to mental and emotional, and even physical, harm to some users.
In this environment, Musk’s public criticisms of Twitter’s operations, especially his announced intention to radically reduce the company’s efforts (beyond complying with existing laws) to moderate content, could well have justified a conclusion by the board that his control would not be “in the best interests of the Company and its stockholders.”
In fact, in a very recent interview at TED, Musk himself seemed prepared to subordinate the financial interests of Twitter’s shareholders, instead positioning himself as a champion and defender of “freedom in the world.”
He claimed that his acquisition offer “is not a way to sort of make money. . . It’s just that I think my strong, intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization. . . . I don’t care about the economics at all.”
Twelve minutes later, Musk, who in March 2020 kept Tesla’s factory in Fremont, California operating for several days in defiance of local authorities’ pandemic-related closure orders, could not resist the opportunity to publicly revisit one of his disputes with the SEC, and to refer to some of its personnel as “those bastards.”
None of this could have reassured the directors about the potential for Twitter’s complete regulatory compliance, or constructive relationships with regulators, under Musk’s control.
If Musk could position his offer as protecting “the future of civilization,” why couldn’t Twitter’s board have justified a rejection of it on that same ground?
Shortly after insulting the SEC, Musk declined to disclose the “Plan B” that he was preparing to deploy if the board rejected his offer.
To bolster the “poison pill” arrangement that the company had already put in place, Twitter’s directors could have easily, and possibly successfully, invoked their own “Plan ESG.”
