Business Judgment Rule Offers a Safe Haven in the ‘War on Woke’

Corporations face a quagmire of legislation passed by Republican legislatures in their war against so-called “woke” policies. Several states have passed laws barring public entities from making investments based on environmental, social, and governance (ESG) issues, with some of the bills’ sponsors deriding it as “woke capitalism.” Diversity, equity, and inclusion (DEI) initiatives have been targeted as “woke indoctrination.” Hundreds of anti-LGBTQ bills have been introduced, including bans on drag shows and LGBTQ-themed books, and restrictions on gender-affirming medical care.

Often, these laws are in direct opposition to corporate policies, and can put companies at odds with the needs and viewpoints of their employees, customers, and business partners. At the same time, boards of directors must answer to corporate shareholders who see controversial issues as a threat to company value.

The business judgment rule offers a safe haven in this potential conflict. The Delaware Chancery Court recently held that the board of The Walt Disney Company exercised its business judgment in publicly opposing Florida’s so-called “Don’t Say Gay” bill. The court’s decision offers guidance for directors who must navigate decisions on these issues.

The Business Judgment Rule: The Basics

The business judgment rule was developed in U.S. common law, primarily by the Delaware Court of Chancery. The rule recognizes that business decisions may put the company at risk, and that taking greater risks may be necessary to maximize long-term value. Boards of directors need the ability to make those decisions without fear of legal challenges by corporate shareholders. The business judgment rule provides a level of protection as long as directors fulfill their fiduciary duties. It also constrains courts from deciding what constitutes sound business judgment.

To qualify for business judgment rule protections, a board must meet the following criteria:

• Make decisions in good faith and in the best interests of the corporation.

• Make informed decisions by considering all available data and relevant facts.

• Refrain from making decisions involving conflicts of interest or self-dealing.

Courts presume that directors are immune from liability when a shareholder challenges a business decision. The burden is on the plaintiff to prove that the business judgment rule does not apply. If the court finds that the rule does not apply, the burden shifts back to the directors to prove that the substance of the decision was fair and the decision-making process was proper.

The Disney Decision

In February 2022, the Florida House of Representatives passed the Parental Rights in Education Act (HB 1557), commonly known as the “Don’t Say Gay” bill. Disney came under fire for supporting some of the bill’s sponsors, and responded by issuing an internal memo reaffirming its commitment to diversity. Disney employees and business partners were frustrated by this tepid response. When the bill passed the Florida Senate, Disney’s CEO indicated that the company would oppose the legislation more actively. Florida Gov. Ron DeSantis immediately criticized Disney and began a public battle with the company. During that time, Disney’s stock price fell sharply.

Shareholder Kenneth T. Simeone sued The Walt Disney Company, demanding an inspection of the company’s books and records. Simeone also sought to depose a corporate representative to testify regarding the materials. After deposing Simeone, Disney learned that his demand was prompted by counsel associated with a public interest law firm. Simeone admitted that the purported reasons for his demand were a ruse, and that the true objective was to learn who was responsible for opposing the Florida law.

The Delaware Chancery Court held for Disney, finding that Simeone’s lawsuit was based on his disagreement with a Disney board decision, and that he had provided no evidence of wrongdoing. Thus, he had no basis for demanding books and records under Delaware General Corporate Law.

Key Takeaways

The Disney case is instructive for any organization facing decisions regarding controversial sociopolitical issues. Using the business judgment rule as a guide, directors can insulate themselves from legal challenges.

Disney convened a special board meeting to discuss its response to HB 1557 before publicly announcing its opposition to the law, and kept detailed minutes of the deliberations. In that meeting, the board and corporate officers considered the reactions of Disney employees and business partners, among other relevant facts. The Chancery Court held that it was a valid exercise of business judgment as long as those viewpoints were weighed against the company’s long-term interests. The court also found that none of the directors acted against Disney’s best interests because of their personal beliefs.

The Republican “war on woke” is leading to anti-LGBTQ legislation, and laws banning DEI initiatives and ESG investing. These laws arouse passionate, opposing opinions among shareholders, employees, and other stakeholders, making it difficult for boards of directors to avoid taking a position on these issues. The business judgment rule can help directors avoid a breach of fiduciary duty as they make difficult strategic decisions.

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