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August 10, 2005

Van Gorkom and 102(b)(7)

Posted by Steve Bainbridge

Elizabeth Nowicki suggests:

If the Van Gorkom case arose in today's 102(b)(7) world, the directors should still be liable under a correct interpretation and application of 102(b)(7). Do I think the majority of Delaware courts would ever reach that same conclusion? No.

I agree with the first part but not the second. As for the latter, if Randy Holland got to write the opinion, I bet he would. Indeed, about 5 years ago or so, I heard Holland give a speech from which I inferred that he thinks 102(b)(7) would not have saved the Trans Union board.

As to the first part, I observed in my Corporation Law and Economics treatise that:

.... notice that the statute apparently distinguishes self-dealing (“improper personal benefit”) from the duty of care. Given Technicolor’s conflation of loyalty and care causes of action, plaintiffs can end-run § 102(b)(7) provisions by characterizing their claim as a loyalty violation. Interestingly, Chancellor Allen has suggested that Van Gorkom itself can be interpreted as a loyalty case.[1] Similarly, the Delaware supreme court has opined that Van Gorkom included a disclosure violation and implied that such violations have a loyalty component.[2] Ironically, a § 102(b)(7) provision thus might not have insulated the directors from liability in the very transaction that motivated the statute’s adoption.

[1] Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1052 n.4 (Del. Ch. 1996) (“I see it as reflecting a concern with the Trans Union board’s independence and loyalty to the company’s shareholders”).

[2] Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1166 n.18 (Del. 1995) (“In Van Gorkom, it was unnecessary for this Court to state whether the disclosure violation constituted a breach of the duty of care or loyalty or was a combined breach of both since 8 Del.C. § 102(b)(7) had not yet been enacted.”). In addition, according to the Sixth Circuit, a § 102(b)(7) liability limitation provision may not insulate directors from duty of care claims based on intentional or reckless misconduct. McCall v. Scott, 250 F.3d 997, 1000-01 (6^th Cir. 2001).