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Can Publicly Traded Corporations Take a Political Stand that Hurts the Bottom Line?

Recently, the media has given significant coverage to new laws in several states placing restrictions on abortion. Among those states, Georgia stands out because of the reaction it has spurred in Hollywood. Specifically, Georgia worked for several years to bring the entertainment industry into the state by providing various financial incentives. But in the wake of the signing of the new law on May 7, a number of producers and production companies have indicated that they would not continue production in Georgia.

While individual producers might not need to answer to anybody, two massive publicly held corporations – Disney and Netflix – have joined the fray. This begs the question—can a publicly held corporation take a political position if it hurts the bottom line? (We will assume that the incentives will not be matched by a different state or that the production will be more costly if moved out of Georgia for purposes of analysis.)

First, a little background on corporate law. The corporation is managed by the board of directors who owe special fiduciary duties to the stockholders—they must have the stockholders’ interests in mind with every decision. General business decisions of the board are entitled to the business judgment rule, which basically means that a stockholder cannot attack a board decision unless no reasonable businessperson could have made that decision. Accordingly, the directors cannot waste corporate assets. So, is losing money on production – money that belongs to the corporation to be used for the stockholders’ benefit – in order to avoid a state with restrictions on abortion a waste of corporate assets?

New York and Delaware both follow a similar definition of waste: “The essence of waste is the diversion of corporate assets for improper or unnecessary purposes.” Stern v. General Elec. Co., 837 F.Supp. 72, 76 (S.D.N.Y. 1993) (quoting Aronoff v. Albanese, 85 A.D.2d 3, 446 N.Y.S.2d 368, 370 (App. Div. 2 Dept. 1982) (citing Michelson v. Duncan, 407 A.2d 211, 217 (Del. 1979))). “Whether an expenditure is wasteful depends on whether the corporation benefits from it which, ‘in turn, is generally committed to the sound business judgment of the directors’ of the corporation.” Id. The question therefore turns on whether Disney or Netflix receives a corporate benefit by moving production, if they so choose. The answer in our cases might be nuanced.

Disney CEO Bob Iger was quoted by Reuters as saying it would be “very difficult” for Disney to continue production in Georgia if the new law takes effect. Specifically, Iger stated he doubted Disney would continue production because “many people who work for [Disney] will not want to work there, and [Disney] will have to heed their wishes in that regard.” Iger is enunciating a clear business concern – available labor – to justify moving production out of Georgia. It is highly likely that this would satisfy the business judgment rule.

Netflix, on the other hand, told entertainment publication Variety that the company will work with the ACLU to fight the Georgia law in court because Netflix has “many women working on productions in Georgia, whose rights, along with millions of others, will be severely restricted by this law[.]” If the law became effective, Netflix is on record as stating the company would rethink their investment in Georgia. Netflix’s stated purpose, however, sounds closer to an ideological position than Disney’s.

I think it is an open question whether Netflix losing money to produce in another state – under these circumstances – would be corporate waste. Netflix’s stated position is concern over the law itself from an ideological perspective, one that might not be shared by all of its thousands of stockholders. A large swath also might agree but care more about profits than making a political statement with a boycott. At the same time, it is possible that Netflix’s management sees solidarity with a passionate bloc of its subscribers as a counterbalance to any lost financial incentives.