Episode 22 provides a decisive and satisfying showdown between Jack’s Box plan and Richard’s consumer platform option.  Richard’s not-so-secret skunkworks project is dead, and the team sets to work on the Box believing that as soon as they deliver a working prototype, they will be free to build the platform.  But when they deliver the Box, they find Jack is prepared to double-cross them.  As Jared explains, Jack has negotiated a contract “with ’90s-era tech dinosaur Maleant Data Solutions that **exclusively** licensed the Pied Piper algorithm to Maleant for five long years!”  Jack calls a meeting of Pied Piper’s board expecting it to approve the deal.

In deciding on the Maleant contract, Pied Piper’s board is really making a strategic choice between the Box and the consumer platform.  Under the deal, Pied Piper would get a lot of short-term profit—the exact amount is never revealed—but it would give Maleant exclusive rights to the middle-out technology for five years, meaning Pied Piper would lose the right to use its own technology for the consumer platform.  Everything is riding on this board vote, but the way it plays out also raises some legal questions.

First, why does Pied Piper’s board needed to vote on the Maleant contract at all?  Why doesn’t Action Jack just sign the contract and seal Pied Piper’s fate?  After all, company bylaws typically give a company’s chief executive officer, like Action Jack, sufficient authority to enter into contracts without requiring the approval of the board.  Nevertheless, we can think of at least two good reasons for Pied Piper’s board to consider this deal.  First, there may be protective provisions in Pied Piper’s charter or in its Investors’ Rights Agreements that require that the board (including investor directors such as Raviga’s) to approve certain ‘momentous’ company actions.  What kind of actions?  Well, entering into a deal that exclusively licenses Pied Piper’s middle-out compression technology—Pied Piper’s crown jewels—to another entity could be the kind of activity that requires board approval.  (Other examples might include contracts that restrict Pied Piper’s ability to compete by imposing geographic restrictions on sales, or granting exclusive deals to certain business partners.)  Even if protective provisions don’t require board approval for these kinds of contracts, it is good corporate practice to have the board approve any contract that qualifies as material to the business.  Obtaining board approval also removes the suggestion that Jack acted without board approval, and means that Jack and the decision should be protected under the “business judgement rule,” which I’ll discuss more below.

So, Pied Piper’s board may be required to vote on the Maleant deal, but even if not, it was a good idea for the board to consider and vote on the contract.  To Jack’s mind, this means the board should take his word that the Maleant deal is awesome, and rubber stamp it.  In fact, Jack is so sure it should go down this way, he doesn’t even bother giving Erlich a copy of the contract.  But it’s not quite that simple.

The Pied Piper directors each owe the company a “duty of care” in deciding whether to approve or reject the Maleant deal.  In general, this means they needed to consider all the material information that is reasonably available to them, and act in a deliberate and informed manner.  Each of them must make their decision in good faith, in the best interests of the company, and with the amount of care a reasonable person would use.  The ‘best interests of the company’ are those things that maximize shareholder value through future growth and revenue.  Finally, (to add another layer of terminology), the “business judgment rule” protects directors from liability for unfavorable outcomes of their business decisions, so long as they acted on an informed basis, in good faith, as a reasonable person would have acted.  (In addition, Delaware companies can insulate directors from financial liability for violating the duty of care.)

To summarize all that legalese:  Pied Piper’s board members have a duty to consider reasonably available information, and make decisions that they, in good faith, believe will maximize stockholder return and the future value of Pied Piper.  If they do so, the “business judgment rule” protects them from liability even if it turns out they made terrible decisions.  As noted above, the board is really voting on whether Pied Piper will make Boxes or become a platform compression company.  Thus, the question for the board is which option (Box or platform) will maximize stockholder return, the future value of the company?  Did Pied Piper’s board properly consider this question?

For one thing, it is a little alarming that Jack didn’t tell the board about the exclusivity clause—arguably violating another of his duties:  his duty as an officer of Pied Piper to disclose information that is relevant to the affairs of the company.  His “oversight” means that Monica is left to discover the exclusivity clause during the board meeting.  This makes it difficult for any of the board members (other than Jack!) to make an informed decision about the contract and the direction of the company.

On the main issue, Jack is dead set on approving the Maleant deal, and won’t even discuss the platform option.  Richard in good faith believes the platform is in the best interests of Pied Piper, but he doesn’t have any solid numbers to make his case that the platform will provide greater returns than the Box, in either the short or long term.  Erlich hasn’t even seen a copy of the Maleant contract—and so hasn’t considered the ‘reasonably available information’—slightly hampering his ability to live up to his duty of care or figure out whether the contract is in the company’s interests.  Nevertheless, he votes with Richard against the deal.  Laurie doesn’t have any idea what the value of the platform option is, and hasn’t investigated it either.  But she takes the position that because the platform option doesn’t have an assigned market value, she is ‘obligated’ to vote for the assured, short-term profits available under the Maleant contract.   Fortunately, Monica read the contract, and discovered the exclusivity provision.  Monica believes that Laurie will remove her from the board and hold a re-vote the next day (with a more “compliant” director in Monica’s seat), but she votes against the deal anyway because she believes that the platform will be more valuable in the long term.  Jack storms out of the meeting.

Arguably, none of the board members fully lived up to their duty of care because they didn’t even try to try inform themselves about the market value of the platform option and they failed to sufficiently review and discuss the Maleant contract ahead of the vote.  Had they done these things, then no matter which way they voted, they would have been assured of protection under the ‘business judgment rule.’  For example, even if they had voted for the Maleant deal, then none of them could have been liable (to each other, or to other shareholders like the employees), if the next day Hooli put a radically higher value on the platform option making their decision look moronic.  As it was, each board member considered the information that was actually available, and from what we could tell nobody made a decision in bad faith, so they may have squeaked by in their duties.

Jack’s dramatic exit from the board meeting doesn’t end his troubles.  News breaks that Hooli has purchased Endframe (Pied Piper’s rival in the platform space), for $250 million.  This sets a fabulous market price for the platform option.  Laurie immediately fires Jack.  Unfortunately for Monica, Laurie can just as easily oust her from Pied Piper’s board.  Hooli validated Monica’s courageous vote against the Box, but Laurie could be unhappy with Monica’s lack of ‘loyalty.’  Action Jack lived by the Box—both device and management diagram—and died by it.  But we don’t yet know whether he will take Monica down with him.