CVS’s Move to Stop Selling Tobacco and the Business Judgment Rule

As you may have heard, CVS pharmacies are planning to stop selling tobacco products.  When I heard about that, the lawyer side of my brain wondered about the thought process behind the decision.  As the company, CVS Caremark, is a publicly traded for profit corporation, and not a benefit corporation, how would the CVS board justify its decision?

I’m not going to get into whether tobacco is good or bad in and of itself or whether stopping tobacco sales is the right thing to do.  I don’t smoke, personally.  But I will note that tobacco sales bring in money, and it doesn’t really appear to cannibalize any other type of revenue.  In fact it may promote other types of revenue – for those that stop into the store to get a pack of smokes who also buy a soda or some chips. Choosing to take something that sells off the shelves has to be justified somehow.

What I am getting at here is that if CVS is making a decision that may hurt its revenue stream and hence its stock value, it could open itself up to a derivative action (I realize this is unlikely here, but bear with me).  When making a decision, the “business judgment rule” prevents a court from second-guessing a company’s actions (usually directed at individual directors and sometimes officers), but instead, allows the court to analyze and decide whether the decision was in fact reasonable or not.  Whether or not a decision was reasonable depends on the facts of any situation.

The CVS board may have justified its decision to say that they wanted to promote the health of their customers, and stopping the sale of tobacco does that (somehow).  Maybe they are rebranding as a “green” type of store.

Maybe they have evidence that there is a correlation between stopping sales of tobacco and increased sales of other products – whether vitamins or supplements.  I don’t have any evidence of same, but it may exist.

Maybe sales of tobacco products have been declining recently, or there are undue logistical or administrative burdens which selling tobacco puts on it (like collecting tax, keeping registrations current, etc.).

Just my thoughts.  I would note that their share price dropped slightly today.