The number of CEOs facing lawsuits from shareholders over social activism could soon be on the rise as the country grows more polarized and shareholders become more critical of the actions of top executives they perceive to be activists.
“The country is a very polarized nation right now, and as a result such law suits will probably be on the rise sooner rather than later,” said Keith Paul Bishop, a partner at California-based Allen Matkins. “I don’t know how many of them will actually succeed and some of them may even be filed just to bring attention, but it’s going to happen.”
Business judgment suits typically revolve around the "business judgment rule," which deals with the “decisions of a director made in good faith with the care that a reasonably prudent person would use and with reasonable belief that they are acting in the best interests of the corporation," according to the Legal Information Institute at Cornell University.
In Bishop’s view, the grounds for such legal actions could include arguments from shareholders that policy changes could waste company assets or that assets were used in support to activism without authorization.
“Right now, it seems more people politically on the right or the more conservative side are openly expressing the most outrage with actions they perceive to be taken by their CEO on social positions,” he said. “But things could easily go the other way. In the end, I think it’s going to be a mixed-bag.”
Bishop said shareholders who might be considering taking such an action against their CEO should go beyond arguing that an action is bad for business.
“I would advise that they think through [the] basis of [the] suit,” he said. “Just saying a given action is bad for business will be a really difficult thing to prove. I would recommend coming up with a theory that can survive all and any quick motions to dismiss.”
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