This week, I have been teaching Van Gorkom and for the first time I found it nearly impossible to gain any real student support for the dissenting position—even among students with some experience in the business world. This has not always been the case. Indeed, in past classes I have been able to generate a lively debate regarding issues of formalism over substance, the efficacy of the business judgment rule, the propriety of courts’ second-guessing the decisions of seemingly accomplished business-men, and whether we should make allowances for decisions made under time pressure. This week, I have been debating primarily with myself.
In fact, students were either puzzled or incredulous at my statements that many corporate practitioners and scholars reacted to Van Gorkom with shock and disbelief. I know that Van Gorkom has its proponents, but the universal support for its pronouncements exhibited by my students seemed interesting to me, to say the least. In fact, based on their responses to my questions, it seemed apparent to me that a good percentage of my class believed that the directors’ conduct in Van Gorkom could be construed as reckless, and hence potentially criminal. My students’ reactions to Van Gorkom appear to represent a tangible example of the manner in which corporate governance scandals and their related trials may be having an impact on what students and future corporate attorneys perceive to be acceptable norms of corporate behavior. However, I am not sure if their reactions reflect a temporary response to the impact of Enron and the present trial, or if their views regarding corporate conduct will impact their perceptions about corporate norms of behavior in a more permanent fashion.
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1. Posted by Harry S. Gerla on February 9, 2006 @ 7:30 | Permalink
In answer to your main question, how long will the "Enron Effect" last, I'd say a couple of years at most. After that, unless another major scandal comes along, law students like the general public, will forget about Enron and return to the notion that legal controls over director behavior are just another form of government interference in the free market. I wish I were merely being sarcastic when I say this, but unfortunately it seems to be true.
For example when I taught Trans Union last semester, the few students who spoke up about the case were generally hostile to the majority opinion and sympathetic to McNally's dissent.
In fact, until I mentioned it, no one even brought up Enron as perhaps justifying a legal requirement for a more proactive role for directors in corporate management.
Perhaps this is because the student body at my school is generally "conservative," or because Enron is already "wearing off," or my students didn't really know enough about Enron to make the possible connection between the behavior of the board in Enron and the behavior condemned in Smith v. Van Gorkum
2. Posted by Christine on February 9, 2006 @ 10:44 | Permalink
Lisa, I teach the Chancery Court's opinion in the Disney case after Van Gorkum. I would be interested to hear what your students think of that opinion. The stakes were smaller, but the board seemed no more in the loop than the Van Gorkum board. I would think that if your students agreed with the Van Gorkum case, they would (possibly) disagree with the Disney case.
3. Posted by Gordon Smith on February 9, 2006 @ 13:40 | Permalink
Christine,
I thought Chancellor Chandler did a nice job of distinguishing Van Gorkom in the Disney opinion. Even if the Trans Union board were grossly negligent, the Disney board might not be.
4. Posted by Lisa Fairfax on February 10, 2006 @ 7:57 | Permalink
I teach the Disney case right after Van Gorkom as well, and most of my students disagreed with the Disney decision. Although my students understood the distinctions the court made between the two cases, most were simply not convinced that the distinctions should have made a difference in the outcome. Students appeared most comfortable with the court's reasoning regarding reliance and the difference between reliance on the compensation expert in Disney and reliance on the CFO in Van Gorkom. On the stakes issue, some students were open to the notion that a board's approval of an employment agreement required less procedural rigor than approval of a merger. However, most students were troubled by the characterization of $140 million as "small" stakes. Ultimately, however, it was my impression that students believed the process to be defective enough to warrant liability.
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