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David Marcus of The Deal discusses an important
footnote in Vice Chancellor Strine's opinion in the recent Massey derivative
During oral argument, I pointed out that Strine referred
to Massey shareholders as the least sympathetic victims in
response to plaintiff's arguments that the board should be held accountable for
the blatant violations of miner health and safety laws at the Upper Big Branch
Mine. In the written opinion, Vice Chancellor Strine expands on that view
in footnote 185. Given the immediate reaction from plaintiff's counsel to the opinion, it's worth
reading and remembering who are the real victims and who benefited from the
acts of management:
Footnote 185 The plaintiffs point out that one
consequence of the loss of confidence the stock market had in Massey management
in the wake of the Upper Big Branch Disaster was a decline in the company's
trading multiple. The plaintiffs argue, with a rational basis, that
Massey now trades at a discount to its fundamental earnings potential in
comparison to other industry competitors because those competitors are judged
to have a more sound approach to operating a coal company in a durably safe and
profitable manner than Massey does. PX-94 at 8.
But although this may in fact be a market reality, it
seems to me doubtful that this translates into a basis for a future damage
award in a derivative case. An entertainment restaurant corporation whose
non-executive Chairman is Warren Buffett and whose CEO is Jimmy Buffett might
well trade at a higher multiple than its competitors because the market
perceives it to be run by financial geniuses who are better than most.
Its rivals may trade at lower multiples because they have more ordinary
management or even because some have management that is perceived to be poor in
quality. Such deviations would not ordinarily provide the basis for any
imposition of fiduciary liability.
In a derivative suit, there is no doubt that Massey
fiduciaries could face large liability claims. For example, it is
plausible for Massey to seek to hold managers culpable if their nonexculpated
breaches of fiduciary duty proximately caused the Upper Big Branch
Disaster. Such proof could subject them to hundreds of millions of
dollars in liability for items such as lost mining profits and the cost of
settlements and fines. PX-32 at 8; PX-94 at 14. But the notion that
a derivative judgment could be premised on the delta between Massey's trading multiple
under the former fiduciaries and what it would be under non-breaching
fiduciaries is not immediately plausible. There are numerous problems
with such an adventurous approach, not the least of which is that the only
damages that could be awarded would be based on an estimate of the extent to
which the defendants' non-exculpated breaches affected the multiple, not the
extent to which the market's overall assessment of their competence diminished
the multiple. That is, to the extent that the market simply viewed the
Massey management as grossly negligent or incompetent that would provide no
basis for an award, and it would be incredibly difficult to figure out what
portion of the delta was attributable to what factors. Not only that, to
the extent that the delta was attributable to other more traditional subjects
of a damages award, such as lost profits from the Upper Big Branch mine or
fines or settlement costs, that would have to be accounted for in order to
avoid double counting. Given these factors, I am not convinced that an
award of this type could be based on anything other than speculation.
This brings up another mundane, but important
reality. The stockholders of Massey had an annual opportunity to elect
directors. If the plaintiffs' rendition is correct - and it has
plausibility - it was publicly and widely known that Massey took an adversarial
approach to its relation to its regulators and had suffered adverse legal
judgments and excessive miner injuries for years. The plaintiffs, as investors,
continued to invest in a company they say was well known to treat its workers
and the environment poorly and that viewed laws as something to avoid, rather
than to comply with in good faith.
The primary protection for stockholders against incompetent
management is selecting new directors. It may well be that the corporate
law does not make stockholders whole in situations like this when it is alleged
that corporate managers skirted laws protecting other constituencies in order
to generate higher profits for the stockholders. If that be so, it should
be no surprise as any human approach to justice will always fall short of the
ideal. It also may be that if stockholders come out a bit worse, then
justice is in fact done. Remember that to the extent that Massey kept
costs lower and exposed miners and the environment to excess dangers, Massey's
stockholders enjoyed the short-term benefits in the form of higher
profits. The very reason for laws protecting other constituencies is that
those who own businesses stand to gain more if they can keep the operation's
profits and externalize the costs. Thus, the stockholders of
corporations, especially given the short-term nature of holding periods that
now predominate in our markets, have poor incentives to monitor corporate
compliance with laws protecting society as a whole and may well put strong
pressures on corporate management to produce immediate profits. William
W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 275,
1284 (2002) ("For equity investors in recent years, the practice of shareholder
value maximization has not meant patient investment. Instead, it has meant
obsession with short-term performance numbers."). Stockholder pressure to
produce profits might increase the already well-known risk that profit-seeking
entities have incentives to take the profits of their operations for themselves
and externalize the risk of operations to others, be it to their workers or
society as a whole in the form of environmental degradation.
This is not to say that our law does not permit Massey to
recoup its proven lost profits and injury if it can link them to non-exculpated
breaches of fiduciary duty by its directors and officers. It does.
Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (citing Stone ex rel. AmSouth
Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006); Malpiede v. Townson,
780 A.2d 1075 (Del. 2001); Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch.
2003)). But it is to say that to the extent that there is some residual
damage to the corporation in a situation like this when the pursuit of profit
for stockholders resulted in damage to other constituencies that is not capable
of remediation, that might be thought to act as a useful goad to stockholders
to give more weight to legal compliance and risk management in making
investment decisions and in monitoring corporate performance. In the end,
the most sympathetic victims here were not stockholders, they were Massey's
workers and their families, who suffered injuries and lost lives and loved
ones, and the communities who have suffered because of environmental
degradation due to of the company's failure to meet its legal responsibilities.
cry for the shareholders. Here
are the real victims.
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