Lots of bloggers writing about Disney ...
Larry Ribstein makes a bunch of excellent points. I will highlight two. First, he notes that fiduciary duty claims other than self-dealing will be very tough to win:
[T]he only way a board is going to be held liable for breach of fiduciary duty when it it isn't self-dealing is to (1) really not have any idea what it is doing; and (2) not have a 102(b)(7) clause in the charter; or (3) have such a clause but proceed in conscious disregard of the board's responsibility, which would be truly puzzling in the absence of self-dealing. In other words, the board will be liable for non-self-dealing conduct on a cold day in August in Miami under a blue moon.
Second, Larry provocatively asserts:
The opinion resoundingly denounces the federal approach to corporate governance in SOX. The opinion says that the court is going to trust the board's judgment as long as the board shows any sign of actually exercising this judgment.
Hmm. I am not so sure that the Delaware Supreme Court was using this case to "denounce" the feds, but I think we can safely conclude that Delaware has fairly modest aspirations for fiduciary law. And, in my view, that is a good thing.
Steve Bainbridge doesn't like Justice Jacobs' formulation of the business judgment rule. Steve is right that the business judgment rule functions as more than a procedural "presumption," and that framing the rule using that term makes it appear as "nothing more than a restatement of the basic principle that the defendant is entitled to summary judgment whenever plaintiff fails to state a prima facie case."
But I think Steve leaves the track with this statement:
[I]n the opinion (e.g., at 66) we find reference to the idea that "gross negligence (including a failure to inform one’s self of available material facts)," violates the duty of care. The word "including" would seem to imply "but not limited to," which suggests some scope for substantive review of board decisions.
Gross negligence might be evidenced by a failure to inform oneself -- indeed, the obligation to inform oneself is the core requirement of the duty of care -- but there may be other aspects of "care" that do not go to the substantive merits of the decision. For example, in Cede v. Technicolor, Inc., 634 A.2d 345, 368 (Del. 1994), the Court stated that "a director's duty of care requires a director to take an active and direct role in the context of the sale of a company from beginning to end." In the following sentence, the Court mentions the duty to gather information as a separate requirement of the duty of care. In my view, Steve is reading the wrong thing into Justice Jacobs' use of the word "including." Besides, Justice Jacobs clearly segregated the substantive review into the section on "waste."
Steve has a separate post on the duty of good faith in which he takes on the already infamous footnote 112. Steve suggests that resolution of the issue may not matter much: "It's hard to imagine a case in which the defendants would be found to
have acted in bad faith as defined by Justice Jacobs without also
having violated either their care or loyalty duties somewhere along the
line." I think that I agree with this, but I wonder whether "intentional violations of law" will become a viable category of good-faith litigation.
Speaking of "intentional violations of law," Steve asks in another post whether "intentional violation of law = bad faith." Steve writes in response to my post: "I have not seen anything in the opinion squarely so stating and, upon reflection, I think Gordon ought to be wrong - at least insofar as he may be suggesting that intentional law violations per se constitute bad faith."
Responding to the first part of his statement is easy. On page 72, Justice Jacobs describes "knowing violation[s] of law" under Section 102(b)(7) of the DGCL as an example of "subjective bad faith." Justice Jacobs also quotes approvingly from Chancellor Chandler's opinion, which states, "A failure to act in good faith may be shown ... where the fiduciary acts with the intent to violate applicable positive law." So I don't think that there is much doubt about where the Delaware courts stand on this.
As to whether this ought to be the result, Steve argues that "fiduciary obligation and the duty to act lawfully make a bad fit." It's an interesting argument, but it flies in the face of a long history of treating illegality as a form of bad faith. When I was researching The Shareholder Primacy Norm, I found this doctrine used quite commonly among 19th Century courts. It's not likely to be changed now.
As you might imagine, Elizabeth Nowicki is disappointed in the opinion, which makes her flu feel all the more oppressive. Elizabeth criticizes the Court for rejecting the appellants' claim that "directors violate their duty of good faith if they are making material decisions without adequate information and without adequate deliberation." She wonders, "am I to believe that the good court is saying that such decisions *are* acts in good faith?" Whether she believes it or not, the answer is yes.
Elizabeth's indignation has some intuitive appeal. Indeed, the Court recognizes that existence of some overlap between the duty of care and the duty of good faith, but argues that the duties should remain (?) distinct: "The conduct that is the subject of due care may overlap with the conduct that comes within the rubric of good faith in a psychological sense, but from a legal standpoint those duties are and must remain quite distinct." The reason is obvious:
To adopt a definition of bad faith that would cause a violation of the duty of care automatically to become an act or omission “not in good faith,” would eviscerate the protections accorded to directors by the General Assembly’s adoption of Section 102(b)(7).
At one time, I thought the Court might use Disney to reinvigorate Smith v. Van Gorkom, but this statement (and others like it) should put that fear to rest. Litigants will not be allowed to use the duty of good faith to outflank exculpation when the underlying behavior is nothing more than a failure to gather adequate information or a failure to act with adequate deliberation.
This new opinion has lots of little nuggets, and I will attempt to say a few more things later today. As always, your comments are most welcome.
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