106 Iowa L. Rev. 1315 (2021)

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Abstract

The rise in shareholder activism is one of the most significant recent phenomena in corporate governance. Shareholders have successfully managed to enhance their power within the corporation, and much of that success has resulted from corporate managers and directors voluntarily acceding to shareholder demands. Directors’ voluntary acquiescence to shareholder demands is quite simply remarkable. Remarkable because most of the changes reflect policies and practices that directors have vehemently opposed for decades, and because when opposing such changes directors stridently insisted that the changes were not in the corporation’s best interest. In light of that insistence, and numerous statements from directors that they have conceded to shareholder demands as a result of fear, coercion and even blackmail, this Article focuses on whether a director’s decision to acquiesce to shareholder demands could be viewed as a fiduciary duty breach. Considerable ink has been spilled, over whether a director’s efforts to thwart shareholder demands represents a breach of fiduciary duty. However, the question of whether directors’ decision to acquiesce to shareholder demands has any fiduciary implications has been unexplored.

This Article fills this important gap and in so doing advances two critical arguments. First, this Article argues that to the extent directors have conceded to shareholder demands despite believing that they are not in the corporation’s best interests or based on fear of losing their board seat, such concessions clearly raise the specter of fiduciary duty concerns. Notably, this Article advances this argument as a scholar who is a strong advocate of increased shareholder power. In advancing this argument, this Article tackles the many reasons critics may resist characterizing director acquiescence as a breach, including the potential that directors have changed their mind, have engaged in a legitimate cost-benefit analysis, or have an obligation to comply with shareholder preferences. Second, this Article argues that there are significant negative repercussions that flow from our collective failure to highlight and examine the fiduciary implications of acquiesce in the context of shareholder activism. These include negative repercussions for our normative understanding of the appropriate contours of directors’ duties, particularly those duties to the entire corporate enterprise. These also include the need to pay close attention to understanding the appropriate balance between much needed director accountability that could stem from enhanced shareholder power, on the one hand, and on the other hand, the potential for shareholder overreach that could harm the corporation and its stakeholders—both shareholder and non-shareholder. This Article further insists that negative repercussions stem from the very real possibility that very few actors will have the incentive to explore the fiduciary duty issues that animate this Article. Indeed, those upon whom we generally rely to explore and challenge breaches of directors’ fiduciary duties—namely shareholders—are least likely to do so in the context of directorial acquiescence to shareholder demands. Hence, this Article’s exploration is critical because it may be one of the only forums in which this important issue is examined.