Disney: Speaking Out on Issues of Social Significance Within Board’s Business Judgment

Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaFor Whom Corporate Leaders Bargain (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

Boards and their advisors seeking to navigate the culture wars and their often conflicting pressures from a variety of stakeholders and outside groups may find some comfort and guidance in this recent decision from the Delaware Chancery Court in Simeone v. The Walt Disney Company.  The case involved a books-and-records demand from a stockholder asserting a potential breach of fiduciary duty by Disney’s directors and officers in their determination to publicly oppose Florida’s so-called “Don’t Say Gay” bill. Originally, Disney was silent on the bill. However, following reproaches from employees and other creative partners, Disney’s board deliberated at a special meeting, and the company changed course and publicly criticized the bill.  The Court declined to grant the plaintiff’s books-and-records request, concluding that the plaintiff had not provided a credible basis from which to infer wrongdoing and thus had not “demonstrated a proper purpose to inspect books and records.” Rather, the Court concluded, the Disney board had made a business decision to reverse course—“a decision that cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome.”  Under Delaware’s business judgment rule, directors have “significant discretion to guide corporate strategy—including on social and political issues.”  Importantly, the Court confirmed that, in exercising its business judgment, a board may take into account the interests of non-stockholder corporate stakeholders where those interests are “rationally related” to building long-term value.

Background. In February 2022, the Florida House passed HB 1557, which “limits instruction on sexual orientation or gender identity in Florida classrooms.” As described by the Court, because Disney had provided financial support for some of the bill’s sponsors, it “came under scrutiny,” and its response—an internal memo indicating that it supported organizations that championed diversity—was “met with pervasive disappointment and frustration from Disney employees and creative partners.” When the bill was subsequently passed in the Florida Senate, Disney’s board held a special meeting devoted to “Political Engagement and Communications,” at which the board discussed its “communications plan, philosophy and approach regarding Florida legislation and employee response.” At the Disney annual stockholders’ meeting the next day, the company’s CEO acknowledged that the company’s original behind-the-scenes approach to engagement on the bill “didn’t quite get the job done.” He signaled plans for more active public opposition and reported on his call with the state’s Governor, during which he had expressed “disappointment and concern” about the bill. At a regular board meeting that same day, the board again discussed the Florida legislation, company values and political engagement.  The next day, the Governor criticized companies “‘like [] Disney,’” stating that “Florida policy should be ‘based on the best interest of Florida citizens, not on the musing of woke corporations.’”

As soon as the Governor signed the bill at the end of March, Disney issued a public statement opposing the law and seeking repeal or judicial invalidation. The Governor said that Disney had “crossed the line.” There followed the infamous public battle over the bill.  One threatened result was the state’s dissolution of the Reedy Creek Improvement District, a special district consisting of 25,000 acres of land, including Disney World, that Disney had the authority to govern, as well as Disney responsibility for certain state taxes and potentially over $1 billion in debts owed by the special district. (Ultimately, the Governor instead took control of the district by appointing new board members, but it turned out that the prior board had passed restrictive covenants and a development agreement giving Disney certain rights.  Litigation is ongoing.) The Governor warned that Disney “shouldn’t get involved” with the bill and that “it’s not going to work out well” for Disney.  Over the period, Disney’s stock price fell precipitously.

The “plaintiff—a longtime Disney stockholder—was solicited by counsel to serve a books and records demand,” which was submitted in July. According to the demand, the plaintiff was concerned that Disney’s officers and directors may have “plac[ed] their own political views ahead of their duties to act in the best interests of Disney and its stockholders,” and “breached their fiduciary duties to the Company and its stockholders by, inter alia, failing to appreciate the known risk that the Company’s political stance would have on its financial position and the value of Disney stock.”  The demand stated that the plaintiff wanted to “investigate potential wrongdoing, mismanagement and breaches of fiduciary duties” in connection with public opposition to the bill, determine the extent of the potential resulting loss of value, assess the board’s impartiality and explore possible remedial measures. Disney’s counsel refused, stating that the plaintiff had failed to state a proper purpose for inspection.

Negotiation ensued, following which Disney produced a number of documents, redacting certain content as agreed, including board documents concerning HB 1557 and policies concerning charitable or political contributions.  Disney declined to produce director independence questionnaires and email communications.  The plaintiff filed a complaint.

Court’s analysis.  Under Section 220, stockholders may inspect corporate books and records if they have a proper purpose. The Court found that the plaintiff did not meet that standard for three reasons: “First, the purposes described in the demand are not the plaintiff’s own purposes.  Second, the plaintiff has not provided a credible basis from which to infer possible wrongdoing.  Third, the defendant has provided the plaintiff with all necessary and essential documents.”

Plaintiff’s purpose.  Under Section 220, a proper purpose must be “reasonably related to such person’s interest as a stockholder.” In this case, however, the Court concluded that the purposes stated in the demand were “pretextual.” First, Disney was able to show that “‘the purposes for the inspection belong to [the stockholder’s counsel]’ rather than the stockholder himself.” The plaintiff had been solicited to submit the demand by an attorney from a public interest law firm that championed “Life, Family, and Freedom” and that was advancing costs for the litigation. Moreover, the plaintiff testified, and subsequently confirmed, that “his only purpose for inspection was to ‘know the person or persons who were responsible for making th[e] political decision’ at Disney to publicly oppose HB 1557.” However, the Court observed, information about the decisionmakers had already been provided. The Court found that the “plaintiff’s limited and non-substantive involvement in the demand and litigation further reveals the lawyer-driven nature of this action.”  While the law firm was certainly entitled to its beliefs, this Section 220 litigation, “which is designed to address the plaintiff’s interests as a stockholder, is not a vehicle to advance them.”

Proper purpose.  This component of the Court’s analysis is probably the most instructive in this context. The Court concluded that the main purpose of the demand was to “investigate potential wrongdoing, mismanagement and breaches of fiduciary duties.” And, the Court acknowledged, that can certainly be a proper purpose. But here’s the rub—the plaintiff failed to show “evidence to suggest a credible basis for wrongdoing.”

The plaintiff’s theory was that Disney’s board and executives breached their fiduciary duties when they decided to publicly oppose HB 1557, “despite ‘the [G]overnor’s warning,’” which led to financial harm and a stock price drop. However, the Court asserted, the plaintiff “is not describing potential wrongdoing.  He is critiquing a business decision.” Choosing whether to speak publicly on policy issues is an ordinary business decision, the Court maintained, although it can be highly contentious. As expressed by the Court, “Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).”

Facing backlash from employees and other creative partners in response to its posture of silence, Disney held a special board meeting to discuss a potential change of course.  But, “[f]ar from suggesting wrongdoing,” the Court tells us, “the evidence here indicates that the Board actively engaged in setting the tone for Disney’s response to HB 1557.  The Board did not abdicate its duties or allow management’s personal views to dictate Disney’s response to the legislation.  Rather, it held the sort of deliberations that a board should undertake when the corporation’s voice is used on matters of social significance.”

Significantly, the Court also concluded that the interests of corporate stakeholders—non-stockholders—may be taken into account when the board determines that those interests are “rationally related” to building long-term stockholder value. And that is a determination for the board. According to the Court, the

“Board’s consideration of employee concerns was not, as the plaintiff suggests, at the expense of stockholders.  A board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders—such as the workforce that drives a company’s profits—is ‘rationally related’ to building long-term value. Indeed, the plaintiff acknowledges that maintaining a positive relationship with employees and creative partners is crucial to Disney’s success. It is not for this court to ‘question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value.”

The plaintiff had also contended that the board was motivated by personal beliefs because some directors were involved with nonprofits that opposed the legislation. However, the Court did not find any evidence to question the board’s impartiality in determining its response to HB 1557; indeed, Disney’s initial silence subverted that theory. Involvement by some directors with nonprofits “does not itself create a conflict of interest—much less undermine the full Board’s deliberative process,” nor were there any facts in the record suggesting that “the directors’ personal beliefs caused them to act contrary to the interests of Disney and its stockholders. The plaintiff cannot obtain books and records to search for hypothetical conflicts.”

Nor was the Court persuaded by the plaintiff’s argument that the board ignored a “known risk” by speaking up about the legislation. While board silence could have avoided some “political blowback,” silence could also have “damaged the company’s corporate culture and employee morale. The weighing of these key risks by disinterested fiduciaries does not evidence a potential lack of due care, let alone bad faith.”

In the end, the Court concluded, while the plaintiff has “every right” to disagree with Disney’s opposition to HB 1557, that does not warrant a “Section 220 inspection.  Such an inspection would not be reasonably related to the plaintiff’s interests as a Disney stockholder; it would intrude upon the ‘rights of directors to manage the business of the corporation without undue interference.’”

Lack of Essential Information.   Finally,  the Court concluded that no further inspection was warranted because the plaintiff had not adequately shown that the information sought was essential in light of the books and records already furnished, including all relevant board-level materials. The request for three years of documents was overbroad, and the redactions had been negotiated.

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