Interestingly, the Supreme Court’s decision also did not reach the merits of the appellants' claim regarding the legitimacy of the director-by-director approach vs. analyzing the board as a collective body. Certainly a lot of attention was given to this approach, particularly after Emerging Communication, which suggested that directors with specialized knowledge may receive some heightened scrutiny. Although the Chancery Court’s decision appeared to back away from this more stringent approach, that court still assessed each Disney director individually in a manner that suggested that in order to be protected from liability, there needed to be a record reflecting that each director had sufficiently informed himself or herself. At the very least this director-by-director approach suggested that all board minutes needed to provide more robust accounts of individual director’s questions and comments. On appeal, the appellants’ claimed that such an approach was improper, and instead argued that the Chancery Court should have assessed the liability of the board as a whole. The Supreme Court declined to rule on the merits of this issue, but rejected the claim in part because appellants had not proven how the Chancery Court’s analysis was prejudicial and yielded an outcome different from a collective analysis. On the one hand the appellants’ argument appears to be taking a step back from the heightened scrutiny apparently required by the individualized approach adopted by the Chancery Court. Hence one could read the Supreme Court’s decision as essentially saying that because the appellants claim did not pass muster under a more stringent standard of review, it certainly would fail under the more lax “collective board” analysis. On the other hand, the Court’s opinion can be viewed as suggesting that there may be no real distinction in the two modes of analysis. If this view is correct, perhaps directors need not be concerned about creating individualized records of their actions.
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1. Posted by Darian Ibrahim on June 9, 2006 @ 9:05 | Permalink
Lisa, I think you raise a very interesting issue re: collective vs. individual treatment of the directors (but of course I would think that as I've got a work-in-progress on the subject). I see no way that plaintiffs benefit from collective as opposed to individual treatment, and the fact that the Disney plaintiffs argued this on appeal suggests a kitchen sink approach rather than well thought through arguments.
I read the Court's opinion as simply taking a pass on the issue. Although it may be too early, given the very few cases that explicitly address this, to know what effect one approach or the other would have on director liability, my paper argues that there could be important differences. Would love to get your comments on the draft when it comes together (within the next few weeks, I hope) if you'd be interested in taking a look.
2. Posted by Gordon Smith on June 9, 2006 @ 9:26 | Permalink
Darian, We have discussed this before, and I thought it was interesting that the Court left the issue open. I am glad to see that Lisa blogged about it.
I wonder whether there is much practical difference between the two approaches. This doesn't seem like loyalty, where we kick the analysis into a different gear when only one director has a conflict. If one director fails to exercise case, so what? As long as the other directors are careful, it really shouldn't matter. As a result, it seems to me that a plaintiff would have to show that lots of the directors -- perhaps even all of the directors -- failed to exercise due care before the plaintiff could prevail.
The hardest case: what if all but one of the directors failed the test of diligence? Should that one director's diligence compensate for the laxity of the rest of the board? That doesn't seem all that different from delegating a task to the CEO. (For example, the decision to fire Ovitz was make by Eisner.) Ultimately, however, I think the court would have to decide whether that one director fulfilled the duty on behalf of the whole board ... which is really another way of asking whether the board fulfilled its duty of care.
3. Posted by Lisa Fairfax on June 9, 2006 @ 19:08 | Permalink
If the court gives the director by director approach real meaning, it is possible that directors who are charged with a care violation will choose to mount a seperate defense and "break rank" with other directors who have less of a track record regarding their questions and comments. This could make the sole director scenario Gordon mentions have real implications for those other directors.