The Rise of the Entrepreneur-Dominated Public Company and Its Impact on Corporate Law

Navigating the Interests of Controllers and Portfolio Investors

In recent decades, entrepreneurial-dominated public companies have gained prominence in the U.S. economy. This shift stems largely from the increase in venture capital funding, which has empowered entrepreneurs to retain control of their businesses even after going public.

This trend has challenged corporate law and governance, as controlling entrepreneurs bring both benefits and drawbacks.

Benefits:

• Limit managerial agency costs
• Preserve the entrepreneur's idiosyncratic vision

• Increased controlling shareholder agency costs
• Divergent interests from fully diversified portfolio investors

With the rise of portfolio investing, a new class of investors has emerged whose interests often conflict with those of controllers. This disparity has resulted in significant corporate legal battles in Delaware courts in recent years.

Key Cases:

• In re Match Group, Inc. Derivative. Litig.: Expanded the scope of transactions requiring procedural measures for business judgment rule protection.
• Tornetta v. Musk: Cast doubt on a bright-line equity ownership percentage test for determining control.
• W. Palm Beach Fire Fighter' Pension Fund v. Moelis & Co.: Ruled that control-shifting shareholder agreements were inconsistent with Delaware law (later overruled by legislative amendment).

The most recent and noteworthy case is McRitchie v. Zuckerberg. In this case, the court ruled that a company's board and officers are not obligated to pursue strategies that accommodate the interests of diversified portfolio investors in reducing externalities.

The Tension Between Controller Interests and Portfolio Investor Interests

The McRitchie decision highlights the tension between the interests of controllers and portfolio investors.

Controller Arguments:

• Prioritize company-specific objectives
• Seek to maximize share value in the long term

Portfolio Investor Arguments:

• Demand strategies that reduce systemic externalities (e.g., climate change)
• Value companies based on their ability to generate long-term, sustainable returns

The question becomes: How can the interests of both groups be accommodated while preserving the legitimacy of corporate decision-making?

The Role of Shareholder Voting and Delaware Law

Shareholder voting is key to aligning the interests of directors and shareholders, including both controllers and portfolio investors. However, the integrity of shareholder voting must be protected to avoid abuses by controllers.

Significance of Delaware Law:

• Delaware courts have played a crucial role in developing and enforcing corporate law
• Delaware's focus on technocratic analysis and flexible legal frameworks has attracted corporations

While Delaware law does not mandate corporate compliance with all social or political objectives, it does require compliance with positive law and protects shareholders' rights.

Conclusion

The rise of entrepreneur-dominated public companies and the diversity of shareholder interests have presented challenges to corporate law. While the board of directors has discretion in decision-making, it must consider the interests of all shareholders.

Shareholder voting and Delaware law play vital roles in balancing the diverse interests of controllers and portfolio investors. The ultimate goal is to ensure the legitimacy of corporate decision-making and protect the rights of all shareholders.

Additional Notes:

• Delaware law does not allow companies to break the law, and officers and directors face liability for intentional violations.
• Shareholders have the power to petition and influence corporate decisions through the processes of corporate democracy.