The Case Against Portfolio-Wide Fiduciary Duties
Why Vice Chancellor Laster rejected James McRitchie's portfolio theory-based argument
Yesterday’s post was:
Shareholder Proposals and the "Significance"/"Relevance" Test
The Securities and Exchange Commission’s Rule 14a-8 gives shareholders the right to submit proposals to be included in a company’s proxy materials. But that right is not unlimited. Among the key exclusions available to companies is Rule 14a-8(i)(5), known as the
In it, I criticized proposals to have the SEC determine the significance of shareholder proposals based on their impact on investors’ portfolios rather than on the specific company on whose proxy materials the activist wishes to have the proposal appear.
Some shareholder activists would like to see courts take a similar portfolio-wide approach to director fiduciary duties. In McRitchie v. Zuckerberg,1 Plaintiff James McRitchie—a self-described shareholder activist—alleged that Meta’s directors, being concentrated investors with substantial holdings in Meta stock, prioritize firm-specific gains over broader economic interests. This priority supposedly conflicts with diversified investors’ interests, who benefit when company performance aligns with general economic trends.
The complaint argued that under Modern Portfolio Theory, investors should diversify. It suggested that fiduciary duties should serve diversified investors, implying that corporate management should focus on the broader economy’s health. In a long and very scholarly opinion, Delaware Vice Chancellor Laster rejected that argument. In my view, he was quite correct to do so.
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