More on Sinclair and social responsibility

I suggested yesterday that the threatened litigation against the Sinclair board for planning to air Stolen Honor reflects a view that

the law says that managers must maximize shareholder value, and that managers who question this maxim will be challenged in court. In other words, lawyers are the new front line in corporate irresponsibility

But Professor Bainbridge sees this as Sinclair's cave-in to trial lawyers, arguing:

There was no plausible shareholder cause of action against Sinclair management. First, the business judgment rule precludes judicial review of decisions by corporate management. Second, the rules governing derivative litigation create huge procedural barriers for any such suit.

I wouldn't be so sure. As Professor Bainbridge explained in an earlier post, a shareholder can sue Sinclair management without going through the board if, among other things, "a majority of the directors are dominated and controlled by the alleged wrongdoers." Then the plaintiff would have to show wrongdoing, which means clearing the high hurdle of the business judgment rule.

Here Sinclair managers planned to use corporate assets to further the dominant shareholders' personal agenda of re-electing Bush. As to whether the managers were dominated, according to Sinclair's 10-K, p. 40:

David D. Smith, Frederick G. Smith, J. Duncan Smith and Robert E. Smith hold shares representing almost 90% of the vote and therefore control the outcome of most matters submitted to a vote of shareholders, including, but not limited to, electing directors, adopting amendments to our certificate of incorporation and approving corporate transactions. The Smiths hold class B common stock, which generally has 10 votes per share. Our class A common stock has only one vote per share. Our other series of preferred stock generally do not have voting rights.

So is this decision protected by the business judgment rule? I cover this issue in Ribstein & Letsou, Business Associations (4th edition 2003) at 375-83 in excerpts from two cases, Shlensky v. Wrigley, 95 Ill. App. 2d 173, 237 N.E. 2d 776 (1968) and Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919). To make a long story short, Dodge suggests that a blatant non-shareholder-maximizing motive could run afoul of the business judgment rule.

Dodge always has been regarded as an exceptional case. But the role and effect of precedents can change over time. A court deciding the Sinclair case might easily have read Dodge to extend beyond its exceptional facts. Before Kerry advocates celebrate the result of the legal threat in the Sinclair situation, perhaps they should consider the broader application of this legal principle to decisions they might like corporations to make.