“This is a stakeholder company, not a shareholder company,”

Posted by Marc Hodak on July 28, 2015 under Governance | 4 Comments to Read

Mylan’s anaphylactic reaction to a generous offer


The headline quote comes from Mylan’s Executive Chairman Robert Coury, in response to why his firm was rejecting a rather generous buyout offer from Teva.

I get it. Coury believes in the long term. He believes that “shareholders benefit from a well-run business, and to run a business well, you need to focus on all of the stakeholders we touch on a daily basis, including customers, patients, employees, suppliers, creditors and communities.” Mylan used that to defend a decision that would cause its stock to drop over 30 percent below the value of Teva’s offer, yielding a collective value deficit of $10 billion.

As a shareholder, I would love to know how Mr. Coury’s expansive focus on his stakeholders will make up for that $10 billion opportunity cost. That’s a lot of EpiPens.

Alas, Mr. Coury doesn’t have to give a [vloek] about what shareholders want to know. Even if they voted off all of the board members, he retains the sole right to appoint new ones. That’s the kind of power that would get good governance folks in America to freak out.

Or be perfectly OK with it, depending upon one’s perspective.

There is a long-running tension in corporate governance circles between the classic view of directors and managers serving as agents of the shareholders, working primarily in the shareholders’ interest, versus stakeholder theory that says the board should not overweight shareholder interests at the expense of other stakeholders, such as customers, employees, and communities.

The usual objection to the former view–sometimes called “shareholder primacy”–is that managers should not be allowed to exploit or undermine their other stakeholders in their relentless pursuit of profit for their shareholders. But this is generally a straw man objection; Mylan was right in claiming that any company pursuing shareholder value must take good care of its stakeholders. Most businesses, especially large corporations with highly evolved stakeholder ecosystems, understand this.

The “stakeholder” idea, however, goes a step further. It says that when a company arrives at a decision point where the marginal benefits to non-shareholder constituencies come at the expense of shareholders, that management should somehow balance shareholder and other stakeholders interests. This view is at once inevitable and untenable.

It is inevitable in the sense that nothing can really stop managers from making decisions that hurt shareholders. Their decisions can be “enlightened” or “wasteful,” depending on your perspective, but the business judgment rule leaves shareholders no practical recourse for challenging most management actions. That is as it should be. Corporate governance would become destructively unwieldy if shareholders could second-guess operational decisions.

But the business judgment defense only works up to a point, after which it becomes untenable. In America, that point is this: Management cannot publicly admit that their aim is to screw the shareholders. This principle goes back to Dodge v. Ford (1919), in which Henry Ford decided to eliminated all dividends because, as he said publicly, he wanted to prioritize customers and workers over shareholders, who he considered “parasites.” Most people think of this case as affirming shareholder primacy because the court ordered Ford to pay a dividend. But the case also affirmed the business judgment rule by letting Ford otherwise do what he wanted. In other words, Ford did not lose because wanted to subordinate shareholder interests; he (partially) lost because he publicly proclaimed that he wanted to subordinate shareholder interests.

So, taking a lesson from history, Mr. Coury could have argued that Mylan was refusing Teva’s kind offer because he felt that his management’s strategy would be better for shareholders in the long run. Sure, he might have had trouble keeping a straight face, with a $10 billion gap to fill, but he may have gotten away with it. But Mylan is now headquartered in The Netherlands, where the governance rules are different. There, Mr. Coury does not even have to pretend to care about the shareholders.

How this announcement ripples out to valuations of Dutch companies is, I’m sure, an interesting subject for future studies. You won’t get my surprised look if the research somehow shows that the 0.2% relative drop of Dutch stocks versus the EAFE index since Coury’s pronouncement is statistically significant. That’s because, in my experience, when top executives say they care about stakeholders instead of shareholders, what they are really saying is they are looking for a respectable way of ignoring the shareholders for their personal benefit.

A permanent discount on valuations would be the ultimate arbiter of how tenable it is to completely brush off your shareholders. A firm can possibly benefit from paying above-market wages by getting greater loyalty and talent. A firm can possibly afford to be generous in its supporting the community by having a useful ally when scandal rears its head. Paying more to suppliers can garner better quality and terms. But there is no countervailing benefit to an above-market cost of capital. That just undermines your competitiveness, and hurts the economy of your host nation.

  • Bernard S. Sharfman said,

    Here is my two cents on what you discussed above. Even under Delaware Corp. Law, the Board of Mylan has no duty to accept a great deal unless the company is up for sale. (Paramount v. Time, 1989) Based on the facts provided above, Mylan was not up for sale. The BJR under Delaware law would protect the decision not to sell. My guess is that for a breach of fiduciary duty to occur under Delaware Corp. Law, plaintiff shareholders would have to show that the Board had a total disregard for the interests of shareholders when it made its decision to reject the Teva offer. Such a disregard would probably be a breach of good faith and most likely make the Board members liable to shareholders. However, this would be an extreme set of facts. Given that Coury talked in terms of enhancing shareholder value by taking into consideration the interests of stakeholders, my guess is that the Board would not be liable under Delaware law. While Mylan shareholders may have lost out on a good deal, that is the price to be paid for corporate law providing the Board with ultimate decision making authority. Of course, this is an approach that has worked out pretty well for the last 100 years or so.

  • Marc Hodak said,

    Thanks for your comment, Bernie. Insightful as ever.

    I get that in Delaware, Revlon duties don’t kick in if the board simply ignores an unsolicited offer, and I agree that this is an appropriate standard. What I think Delaware might (and I emphasize “might”) have a problem with is when their Chairman hints that shareholder value is not the governing criteria for their refusal to engage. I think that when Coury said “We are…not a shareholder company,” he skated up to, if not past, that line. But since he’s not in Delaware, he’s in the Netherlands, he can do figure eights around that line without the least concern.

  • Bernard S. Sharfman said,

    Under Delaware law, I don’t believe that shareholder value needs to be the governing criteria, only that it is not totally disregarded. Even though I can’t cite a case that is directly on point, I believe that is what former Chancellor Chandler was saying in ebay v Newmark. However, this was a case dealing with defensive measures that were implemented by controlling shareholders who made statements to the effect that these measures were implemented without regard to enhancing shareholder value. As far as I know, eBay is the closest thing to Dodge v Ford that you will find in Delaware case law. I discuss the case in my article “Shareholder Wealth Maximization and its Implementation under Corporate Law” (Florida Law Review 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2198459

  • Marc Hodak said,

    Yes, “governing criteria” was clearly overstating the point. You’re right–they simply need to account for shareholder interests in decisions where Revlon duties aren’t triggered.

    eBay v.s Newmark does mention shareholder value maximization, but wasn’t that was merely dicta?

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