Thanks for the customer service. I would like to take up a new strand, although based on my previous efforts, I expect few will follow.

I’m curious about Professor Tellman’s rejection of what seems to me the most plausible rationale for the business judgment rule: it is inefficient to have courts second-guessing business decisions that are made in good faith and are not self-interested. From an efficiency perspective, it seems to me to make plenty of sense to keep courts out reviewing such decisions except in extreme circumstances.

As I read it, Tellman’s rejection of this efficiency argument is primarily an argument by analogy. He looks at the level of review allowed for courts in other contexts, such as contract disputes, and says “why isn’t it the same for boards’ of directors?” He goes on to reject one rationale for distinguishing between corporate decisions and other types of decisions, namely the comparative expertise of corporate boards as compared with other potential plaintiffs. But that argument only begins the discussion. Perhaps the standard of review is too high in other contexts rather than being too low when applying the “Rule”? Maybe the “expertise” argument is simply the wrong one for making what is still a useful efficiency distinction between the review of corporate decisions and other matters.

I think a more careful discussion of this matter would make an interesting paper. As it presented here, it is too incomplete to persuade this reader.

OK, I'll take the bait! When I teach BJR in class, I usually contrast this deferential standard with the heightened standard for doctors, lawyers and other professionals. Why aren't officers and directors held to a higher standard. Doctors are more expert than plaintiffs, too. Why not have a system where directors are held to a "reasonable director" standard which may incorporate some of our concerns -- directors and officers make a lot of decisions with incomplete information that can be easily judged in hindsight. It's just as easy to say that a lawyer was incompetent after a trial is lost as it is to say that directors ok'd an employment agreement that was a disaster. Why not use the professional standard, with the necessity of an expert testifying as to the standard of care?

It seems to me your argument is still a justification by analogy, but I guess it is a more compelling analogy than I realized. We use the legal system to resolve most disputes. Why shouldn’t we use the legal system to resolve disputes between shareholders and directors, and, if so, why not use similar liability concepts? But I still think the question remains: perhaps it is not efficient to allow courts to get involved in reviewing most board decisions? Maybe, the business judgment rule is just a precursor to the growing use of alternative dispute resolution mechanisms or contracts that prevent enforcement by courts in many circumstances? Wouldn't that be a legitimate explanation?

I think the efficiency argument is a compelling one. I link it in the Article to the argument based on corporate democracy and the director primacy defense of the BJR. Because I think the efficiency argument is a strong one, I believe that, in circumstances where the BJR should apply (that is, where allowing the litigation to proceed would force the company to disclose its prospective business plans), courts should simply abstain from substantive review of the Board's decisions rather than apply some sort of heightened review. So viewed, the analogy that Michael Guttentag identifies disappears. And I think it ought to -- since the justifications ordinarily provided for heightened review are not compelling.

However, the efficiency of the corporate form is negated if boards are insulated from having their business judgment questioned in contexts where the corporation is not threatened with irreparable harm if the litigation proceeds. That is, assuming that the threat of litigation serves as a necessary check on board conduct.

There may be a political economy explanation (gasp!) for the BJR as well. Especially in public companies, corporate managers generally have larger and concentrated stakes in obtaining insulation from liability than shareholders--or plaintiffs' lawyers--have in making managers liable. Witness the swift passage of 102(b)(7) after Van Gorkom. The threat of reincorporation also gives managers good leverage over state legislatures (esp Delaware).

By comparison, lawyers and doctors may have different dynamics going on. (Let me take a stab at this.) Lawyers have not generally been very successful as a profession in limiting the supply of lawyers, despite the fact that we are largely self-regulating. However, the profession is quite stratified. "Elite" practice is populated by lawyers from national and regional powerhouse schools, while grads from other schools have other career paths. My intuition is that the targets for legal malpractice are typically in this latter category--and elite lawyers rarely get sued over this sort of thing. This is even more evident with disbarment and other bar discipline proceedings. It seems that one has to embezzle money from a client before bar disciplinary proceedings get initiated. In effect, elite lawyers are willing to sacrifice the folks at the bottom in order to stave off more stringent regulation, and there is a large enough pool of really bad lawyers out there to satisfy the public that lawyers are effectively self-regulating.

With doctors, OTOH, their success in constricting supply may work against them in this context. The profession is much less stratified, I think. Everyone who finishes med school gets a decent job. Good deal for doctors. But one consequence is that there isn't a big pool of non-elite doctors to sacrifice. Instead, doctors have to stick together, win, lose, or draw. This may make self-regulation more difficult than with lawyers. My sense is that doctors and tort lawyers have basically fought to a draw on medmal reform, and that someone has written a paper explaining why. My limited observation here is simply that the political economic dynamics seem different from firm managers and lawyers.

I think the political economy argument is quite interesting, and I would be curious to see if it was supported by a detailed historical analysis. My guess is that the path by which we adopted the business judgment rule is quite different from the ways in which professional liability was established for lawyers and doctors, but I have virtually zero information on this.

But I’m also still curious about the normative issues. Jeremy, your response to me includes the statement: “the efficiency of the corporate form is negated if boards are insulated from having their business judgment questioned in contexts where the corporation is not threatened with irreparable harm if the litigation proceeds.” How do you know that to be true? That was my question. One alternative hypothesis is that the current business judgment level of review provides an efficient solution to problem of judicial oversight of corporate decisions. What is the evidence that rejects (or supports) that hypothesis? Feel free to ignore these questions if you’ve had enough.

Michael, I'm not quite ready to yell uncle yet. What I take away from the Disney case is that the BJR as applied in that case permits a level of board disfunction that can be harmful to the interests of the corporation, although I don't know for certain that it was in the Disney case.

Board members should be permitted to act free from the threat of personal liability in connection with their actions (absent bad faith or intentional misconduct), but statutory protections already achieve that aim. Shareholder interests are not served and the efficiency of corporate governance strutures is undermined if every board decision could lead to a process whereby the corporation is forced to disclose confidential information underlying such decisions. Where there is no danger of such disclosure, individual board members should be held responsible (although not financially liable) if board disfunction leads to decisions that substantively harm the corporation. And the threat of such personal accountability is an appropriate incentive to promote adherence to the standard of due care.

I'm sure there are modalities of evidence that would be more satisfying than what I have written above, but I have a hard time imagining how one could demonstrate the efficiency of a counterfactual model. Permit me to turn the question around. What is the evidence supporting the proposition that it is efficient to permit a corporation to be run as Disney was run? I imagine the answer would be that by permitting some sloppiness at the margins, we also promote the general efficiency of permitting boards to make their decisions without having to look over their shoulders all the time. But I think the Disney case illustrates that the current regime gives us the worst of both worlds -- poor corporate governance, costly litigation, exposure of the humiliatingly disfunctional corporate governance structure, and no satisfaction for the shareholders.

As the traffic on this exchange and on other discussions of my BJR Article is dying down (although I hope it will continue), I will take this opportunity to thank those who have contributed to this stimulating and challenging discussion. I look forward to continuing exchanges on this and related subjects in the years to come.