Businesses are at their most vulnerable during leadership transitions.
Lack of succession planning has been recognized as a key risk factor,
especially for closely held, family-owned businesses, but the problem is more
extensive. Even public corporations with supposedly independent boards of
directors too often fail to separate the corporation’s interests from those of
charismatic leaders who enjoy the perquisites of control and may be loath to
surrender it. Shareholders trust directors to manage business affairs, and
ensuring leadership continuity is critical to this charge. Yet succession often
remains overlooked in practice. It also remains understudied in the literature,
and state legislatures have failed to create a specific statutory requirement to
engage in succession planning. This Article draws on growing but still
nascent succession scholarship, as well as robust literature on corporate
fiduciary duties and mergers and acquisitions (M&A), to propose new
solutions to the many problems that companies face at the time of succession.
In doing so, this Article makes several contributions to the literature.
First, it provides a rich and layered account of the governance challenges that
arise at the time of succession. This is an increasingly important moment in
the life of the modern corporation, especially as companies use dual-class
shares, enterprise foundations, and other methods to retain founder control
even after going public. Second, this Article contends that a board cannot
satisfy its fiduciary duties of care and loyalty unless it ensures that the
corporation has in place a reasonable, current, well-documented, and clearly
communicated succession plan for senior management. The absence of
succession planning should be considered a per se violation of fiduciary duty.
Moreover, this Article argues that the succession plans boards
promulgate should not receive the deference accorded to most director
decisions pursuant to the business judgment rule. Instead, courts should
borrow from Delaware M&A law and apply enhanced scrutiny. In both M&A
and succession planning, when corporate managers contemplate institutional
transition, problems of agency and entrenchment abound. These inflection
points amplify the risk that corporate agents’ business judgment will be
clouded by self-interest. In M&A, boards might reject prospective deals due
to concerns that directors will lose their seats upon consummation of a change
of control. And implementing succession plans lowers the cost of leadership transition, which can facilitate management changeover and provoke
ambivalence and avoidance in director decision-making. Corporate agents in
both contexts thus confront profound economic and psychological conflicts
that might cause a board to act in its own interest instead of in the interests
of the corporation and its shareholders. In the M&A context, Delaware courts
address this concern by applying heightened judicial scrutiny, more rigorous
than the business judgment rule, but more forgiving than exacting entire
fairness review. This Article proposes application of a similar enhanced
scrutiny standard in the succession planning context and reviews several highprofile
cases to show how that standard could reshape corporate governance
to better serve the interests of all shareholders.
