Challenging Snapchat’s Direction as a Company Under the Business Judgment Rule

In its latest attempts at coping with growing pains, the parent company of Snapchat, Snap Inc., has laid off about 100 employees. This follows the company’s decision to cut about 120 engineers earlier in March, and another 22 employees in January from the content department.

Snap went public last year to much fanfare but has since largely failed to meet expectations. Snapchat allows users to send videos, images, and text with special filters that disappear after being viewed. The initial public offering price of shares in its parent company was $17, yet as of Thursday, its share price is now at $15.87. This is in stark contrast to Facebook’s share price of $159.79 — which is representative of a 4% climb despite revelations of its mishandling of user data.

It is very much likely that this and other layoff decisions at Snapchat which can be explained as a reasonable business judgement will go undisturbed by the courts.

Some have blamed Snapchat’s decline on a recent spate of questionable decisions such as a redesign of the app which alienated many of the network’s most frequent consumers. Celebrity users like Chrissy Teigen have also deactivated their account on the app. Thus, it is likely that the company’s woes have left many investors questioning the direction of the organization.

The shareholders of Snap Inc. are the owners of the corporation (at-least in concept), so some may be left wondering to what extent could they challenge the decision-making of the board of directors. The courts largely follow what has been deemed the business judgement rule in analyzing the propriety of a board decision. The rule provides that courts generally will not second-guess decisions made by corporate boards of directors which reflect the exercise of reasonable business judgment, even if those decisions violated the relevant standard of conduct. In other words, the court will not interfere with the exercise of business judgment, merely for such judgment being bad. Moreover, a mere failure to follow the lead of other directors in the same field, even for those corporations that are losing money, is not sufficient to second-guess the decisions made by corporate boards.

However, directors still owe a duty to the shareholders, to inform themselves of all information relevant and reasonably available to them before making a business decision. A breach of this duty by the director’s will allow the courts to second-guess the director’s business actions.

In this case, it is unlikely that Snap’s board of directors has displayed bad decision-making that rises to a level of violating this standard. While the decision to redesign the Snapchat app may have left many shareholders scratching their head, the change is reflective of a belief that it will place Snapchat in a better position to monetize media content — a reasonable business judgement. Additionally, the company’s recent slew of layoffs was explained by Imran Khan, the company’s chief strategy officer, as being part of a series of tough decisions made to further its efforts at restructuring. Khan claims that “[a]s a result, new structures have been put in place for content, engineering, sales and many other parts of Snap. . . [t]hese changes reflect our view that tighter integration and closer collaboration between our teams is a critical component of sustainably growing our business.” As such, it is very much likely that this and other layoff decisions at Snapchat which can be explained as a reasonable business judgement will go undisturbed by the courts.