In 2018, the Delaware courts confronted an extraordinary crisis of corporate governance: an open conflict between a corporation’s board of directors and its controlling shareholder. The board of CBS Corporation, a large media firm, voted to issue a dividend that would have diluted the shares of its controlling shareholder, National Amusements, Inc. (NAI). The dividend would have severed NAI’s control, leaving the board in sole command of CBS’s future. NAI challenged the CBS board’s authority to issue the dividend, and litigation ensued. In CBS v. National Amusements, Inc., the Delaware Court of Chancery issued a brief ruling denying CBS’s motion for a temporary restraining order. The opinion described the broader issue in the case as the problem of first-mover advantage. The problem derives from two lines of Delaware cases that place inconsistent demands on boards of directors and controlling shareholders. It can be formulated as follows: When a board of directors reasonably believes that a controlling shareholder threatens to exploit a corporation or its minority shareholders, can it adopt measures to preempt such exploitation by the controller, or can the controller take action to preserve its control by preempting the board’s efforts? But before the court could address this question on the merits, the parties settled. The central corporate governance issue in the case remains unresolved.
This Note proposes that courts respond to contemporary developments in corporate law, chief among them the rise of dual-class stock structures in American corporations, by resolving the first-mover advantage problem raised in CBS v. National Amusements, Inc. The Delaware courts should settle the problem by assigning first-mover advantage to controlling shareholders in corporations with one-share-one-vote regimes and by assigning first-mover advantage to boards of directors in corporations that have dual-class stock structures. By distinguishing among corporations on the basis of their stock structures in assigning first-mover advantage, courts can help restore the balance of power between boards and controllers, alleviate the increased agency costs of corporations with dual-class stock structures, and make progress toward regularizing what remains an unsettled area of corporate law.
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