By Alyssa Atkisson
Abstract. WWE founder Vince McMahon is alleged to have breached his fiduciary duties as controlling shareholder in a series of sandbag moves.
The Chairman
The WWE (World Wrestling Entertainment)[1] would not exist without Vince McMahon. He has been the face of the WWE for nearly four decades.[2] Credited with transforming the organization into the publicly-traded, global fan-sensation of today,[3] Mr. McMahon has served as Chairman of the Board, CEO, and even a main entertainer.[4] Recently, his reputation has been upset by reports that “the boss”[5] allegedly made payments with company funds totaling $12 million to silence allegations of sexual misconduct by multiple women.[6] In the aftermath of the reports, first published by the Wall Street Journal in June 2022,[7] the WWE announced he would be stepping down from his roles as chairman and CEO.[8] This hiatus was short-lived and in January of 2023 Mr. McMahon returned to the main event as Chairman.[9]
Drama Fit for a WWE Storyline
Despite his resignation in Summer 2022, Mr. McMahon remained controlling shareholder maintaining “81% of WWE’s total voting power.”[10] He is alleged to have used this authority to orchestrate his comeback.[11] Following a unanimous Board determination that Mr. McMahon should not return as the Executive Chairman,[12] he executed a series of contested moves. As documented in a SEC Schedule 13D/A filing, Mr. McMahon acted by written consent on January 5, 2023 to remove three directors “without cause,” elect himself and two new directors to fill these vacancies, and amend the bylaws to “enable . . . stockholder rights.”[13] In filling the director vacancies, Mr. McMahon appointed himself and two former WWE co-presidents,[14] described as “loyalists.”[15] One day after the release of the written consent, two directors resigned from the Board, including the “Lead Independent Director.”[16] On January 10th, the “WWE announced that the Board unanimously elected [Mr.] McMahon as Executive Chairman.”[17] Further, the bylaw amendments now required stockholder approval for any Board-approved transactions purporting to: “(i) enter into or modify any contracts or transactions respecting ‘certain media rights’; (ii) issue stock; or (iii) enter into or modify any contract with a ‘change of control’ provision relating to the composition of the Board.”[18] Coincidentally, a prospective sale of WWE has been reported since these changes took effect.[19]
Mr. McMahon asserted his “direct participation, leadership, and support as controlling stockholder”[20] is required for “negotiations of the [WWE’s] media rights and . . . the strategic alternatives review [which] must occur in tandem.”[21] Moreover, he proclaimed his actions were necessary to “capitalize on a unique opportunity to maximize long-term value for all of the [WWE’s] stockholders.”[22] However, not everyone is willing to accept these “good faith efforts.”[23] On January 10, 2023, Scott A. Fellows filed a class action in the Court of Chancery of the State of Delaware “on behalf of himself and all other similarly situated stockholders of [WWE] against . . . Vincent K. McMahon.”[24] The complaint alleged that Mr. McMahon violated his fiduciary duties to the WWE and its stockholders by executing the written consent.[25] Additionally, the written consent prevented the Board from performing their core fiduciary duties.[26]
Botched Fiduciary Duties
Unfortunately for Mr. McMahon, he is not being sued in “wrestler’s court”[27]—he is facing real legal consequences for his potential fiduciary violations. The complaint states he “exercise[d] his powers as controlling stockholder in a [manner] that would his [sic] impose his will on the Board and WWE.”[28] “Controlling stockholders are fiduciaries of their corporations’ minority stockholders.”[29] As a fiduciary, Delaware law subjects a controlling stockholder to the duties of loyalty and care.[30] The duty of loyalty requires actions be made in good faith for the advancement of the corporation’s best interest.[31] This means that a controlling shareholder’s conduct must be consistent with the corporation’s charter from Delaware[32] and refrain from self-interests that disadvantage the corporation.[33] The complaint alleged that Mr. McMahon’s written consent unilaterally “usurp[ed] the power of the Board over critical corporate management functions and vest[ed] it solely in [himself].”[34] Because the WWE’s charter does not delegate any managerial responsibilities to shareholders, the complaint charged Mr. McMahon to have violated the charter and Section 141(a) of the DGCL.[35] Moreover, when he executed the written consent to remove three directors and reinstate himself and two “cronies,”[36] he was acting in his own self-interest and against the WWE’s best interests; as it “was the Board’s ‘unanimous view that [Mr. McMahon’s] return to the Company . . . while government investigations into [his sexual] [mis]conduct by the U.S. Attorney’s Office and SEC are still pending, would not be prudent from a shareholder value perspective.’”[37] The Plaintiff seeks declaratory relief that both the written consent and bylaw amendments are “void and invalid.”[38]
The Finisher
This is still a pending legal matter, but it will be interesting to monitor how the litigation develops in light of recent Court of Chancery opinions. In general, a breach of a fiduciary duty claim receives the business judgment standard of deference so long as the business decision is executed in good faith.[39] An exception to the business judgment rule exists when the presumptions of good faith are refuted.[40] “Because Delaware law seeks to protect minority investors, major corporate transactions with controlling stockholders are subject to this searching [entire] fairness review even if procedural protections have been put in place.”[41] Recent Delaware case law has re-affirmed the entire fairness standard is appropriate for controlling stockholders[42] and has “reiterated that ‘entire fairness’ is an extremely difficult standard . . . to satisfy.”[43] Thus, most breach of fiduciary duty claims will survive a motion to dismiss under this standard of review.[44] Mr. McMahon has not yet filed an answer to this complaint, but when he does, he will have “‘to demonstrate that the challenged act or transaction was entirely fair to the corporation and its [stockholders].’”[45] If this total shareholder smackdown advances to trial, it is guaranteed to be a primetime Chancery event!
About the Author:
Alyssa is a second-year, regular division student expected to graduate May 2024. She earned both her undergraduate degree and MBA from Saint Joseph’s University in Philadelphia. Alyssa is the incoming External Managing Editor for Volume 49 of the Delaware Journal of Corporate Law. She is also a member of the Transactional Law Honor Society. Alyssa plans to use her business background to practice corporate law in Delaware after she graduates from Delaware Law School.
[1] Vincent McMahon, Forbes (Feb. 20, 2023), https://www.forbes.com/profile/vincent-mcmahon/?sh=77e88c761b89.
[2] Mr. McMahon Bio, WWE, https://www.wwe.com/superstars/mr-mcmahon (last visited Feb. 20, 2023).
[3] Vincent McMahon, supra note 1.
[4] Mr. McMahon Bio, supra note 2.
[5] Mr. McMahon Bio, supra note 2.
[6] Marc Raimondi, Report: WWE’s Vince McMahon paid total of $12M to 4 women to quiet sexual misconduct allegations, ESPN (July 8, 2022), https://www.espn.com/wwe/story/_/id/34212870/report-wwe-vince-mcmahon-paid-total-12m-4-women-quiet-sexual-misconduct-allegations. See also Kyle Feldscher, How WWE’s Vince McMahon ruthlessly got his job back despite allegations of sexual assault and misuse of company funds, CNN (Jan. 14, 2023), https://www.cnn.com/2023/01/14/media/wwe-vince-mcmahon-explainer/index.html.
[7] Joe Palazzolo & Ted Mann, WWE Board Probes Secret $3 Million Hush Pact by CEO Vince McMahon, Sources Say, Wall St. J. (June 15, 2022, 3:52 PM ET), https://www.wsj.com/articles/wwe-board-probes-secret-3-million-hush-pact-by-ceo-vince-mcmahon-sources-say-11655322722.
[8] Raimondi, supra note 6.
[9] Manish Pandey, WWE: Stephanie McMahon resigns as father Vince becomes chair again, BBC (Jan. 11, 2023), https://www.bbc.com/news/newsbeat-6423770.
[10] Verified Class Action Complaint for Declaratory Relief at 9, Fellows v. McMahon, C.A. No. 2023 (Del. Ch. filed Jan. 11, 2023) [hereinafter Complaint].
[11] Complaint, supra note 10, at 3.
[12] Complaint, supra note 10, at 3.
[13] World Wrestling Ent., Inc., Schedule 13D (Jan. 6, 2023) (Item 4: Purpose of Transaction).
[14] Complaint, supra note 10, at 3.
[15] Mike Leonard, Vince McMahon’s Return to WWE Helm Draws Investor Litigation, Bloomberg L. (Jan. 11, 2023 11:31 AM), https://news.bloomberglaw.com/esg/vince-mcmahons-return-to-wwe-helm-draws-investor-litigation.
[16] Complaint, supra note 10, at 22.
[17] Complaint, supra note 10, at 23.
[18] Complaint, supra note 10, at 4.
[19] Luca Shaw, Vince McMahon Is Asking $9 Billion for His Wrestling Empire, Bloomberg (Feb. 17, 2023 1:54 PM EST), https://www.bloomberg.com/news/articles/2023-02-17/vince-mcmahon-is-asking-9-billion-for-his-wrestling-empire?leadSource=uverify%20wall#xj4y7vzkg.
[20] World Wrestling Ent., Inc., Schedule 13D (Jan. 6, 2023) (Item 4: Purpose of Transaction).
[21] World Wrestling Ent., Inc., Schedule 13D (Jan. 6, 2023) (Item 4: Purpose of Transaction).
[22] World Wrestling Ent., Inc., Schedule 13D (Jan. 6, 2023) (Item 4: Purpose of Transaction).
[23] World Wrestling Ent., Inc., Schedule 13D (Jan. 6, 2023) (Item 4: Purpose of Transaction).
[24] Complaint, supra note 10, at 1.
[25] Complaint, supra note 10, at 30.
[26] Complaint, supra note 10, at 26.
[27] List of Professional Wrestling Terms, Fandom, https://prowrestling.fandom.com/wiki/List_of_professional_wrestling_terms (“Wrestler’s Court”) (last visited Feb. 20, 2023).
[28] Complaint, supra note 10, at 3.
[29] eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 26 (Del. Ch. 2010).
[30]Directors’ Fiduciary Duties: Back to Delaware Law Basics, Skadden, 2 (Feb. 19, 2020), https://www.skadden.com/-/media/files/publications/2020/02/directorsfiduciarydutiesbacktodelawarelawbasics.pdf.
[31] Directors’ Fiduciary Duties, supra note 30, at 2.
[32] 8 Del. C. § 141(a).
[33] Directors’ Fiduciary Duties, supra note 30, at 2.
[34] Complaint, supra note 10, at 29.
[35] Complaint, supra note 10, at 29.
[36] Complaint, supra note 10, at 30.
[37] Complaint, supra note 10, at 18.
[38] Complaint, supra note 10, at 29–30.
[39] Directors’ Fiduciary Duties, supra note 30, at 3.
[40] Delman v. GigAcquisitions3, LLC (Gig3), No. 2021-0679-LWW, 2023 WL 29325, at *11–12 (Del. Ch. Jan. 4, 2023) [hereinafter Gig3].
[41] The Delaware Way: Deference to the Business Judgment of Directors Who Act Loyally and Carefully, Delaware.Gov,https://corplaw.delaware.gov/delaware-way-business-judgment/ (Delaware Corporate Law) (last visited Feb. 20, 2023).
[42] See Topic: Entire Fairness, K&L Gates LLP., https://www.klgatesdelawaredocket.com/category/entire-fairness/ (last visited Feb. 20, 2023). For example, the Court of Chancery has found the entire fairness standard applicable in a variety of controlling stockholder capacities, including certificate of incorporation amendments, compensation packages, and SPAC transactions. See generally City Pension Fund for Firefighters & Police Officers in City of Miami v. The Trade Desk, Inc., No. CV 2021-0560-PAF, 2022 WL 3009959 (Del. Ch. July 29, 2022); In re Tesla Motors, Inc. S’holder Litig., No. CV 12711-VCS, 2022 WL 1237185 (Del. Ch. Apr. 27, 2022); Gig3, 2023 WL 29325, at *1.
[43] Edward B. Micheletti et al., Delaware Corporate Law: Recent Trends and Developments, Skadden (Apr. 19, 2022), https://www.skadden.com/insights/publications/2022/04/takeaway-recent-developments-in-delaware-corporate-law.
[44] See Gig3, 2023 WL 29325, at *8 (“The pleading standards for purposes of a Rule 12(b)(6) motion are minimal.” (internal quotation marks omitted)).
[45] Id. at *20.