In my last post on Delaware's emergent good faith doctrine, I concluded that attempts to establish a usable test for distinguishing due care claims from conscious disregard claims are likely to fail. These tests are laible to be either vague, underinclusive (so as to not capture cases of conscious disregard) or overinclusive (swallowing up simple due care claims). The intractability of the problem assumes that there are reasons to value both due care exculpation as well as a knowledge-based culpability standard distinct from negligence or even gross negligence. Suffice it to say, I think there are reasons to value both, though others may disagree.
So what to do? Because of the uncertainty regarding the relative values of these competing considerations, there is a risk of regulatory error. Ideally, the parties to each corporate contract would be allowed to make their own determinations about the appropriate level of accountability. In this case, that would mean freeing up firms to exculpate directors for conscious disregard claims. In that scenario, the Delaware courts would do best to establish a relatively determinate and potentially overinclusive standard for determining conscious disregard (perhaps Brett McDonnell and Claire Hill's "structural bias" idea). Managers and shareholders would then determine whether to exculpate for care and the liberalized conscious disregard standard, care only or neither.
Of course, this solution is subject to concerns about the charter amendment process. In my paper I try to demonstrate why that process should be reasonably trustworthy in the context of conscious disregard exculpation. At the very least, anyone who wants to argue the other side would need to explain how conscious disregard exculpation is more problematic than due care exculpation (or else say that due care exculaption is not to be trusted either).
One final note: if the alternative is the Delaware Supreme Court adopting an underinclusive standard that truly protects due care exculpation, this solution may provide better optics for Delaware. Those concerned about federal preemption responding to Delaware's perceived pro-director bias should feel better having to defend shareholder-approved measures rather than a court-adopted standard.
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1. Posted by Lawrence Cunningham on March 12, 2009 @ 11:53 | Permalink
Intersting proposal. I've skimmed your piece but didn't see how the proposal relates to cases like Tyson I and Tyson II (options spring loading) or Ryan v. Gifford (options backdating). I may have missed it. But would exculpation for conscious disregard insulate directors from liability for money damages for those kinds of decisions?
2. Posted by Andrew Lund on March 12, 2009 @ 13:21 | Permalink
Larry,
That's a good question, especially because those opinions seem to indiscriminately toss around "good faith" without ever really separating out its various species. My initial take is that exculpation of the "conscious disregard" species of good faith wouldn't insulate the directors in Gifford or Tyson, because neither was truly a "conscious disregard" case. Really, they were either straight loyalty cases based on deceiving shareholders or deception-type good faith cases. (I confess that I remain unconvinced that the Tyson shareholders were ever lied to re: spring-loaded options.) Along these lines, an illegal action taken by the board would still violate an independent species of good faith, even if you allowed for conscious disregard exculpation. The proposal in my paper is aimed at another set of claims: those that would be exculpable but for the additional claim that the board knew it was disregarding the exculpated duty.
Andrew
3. Posted by Bernard Sharfman on March 12, 2009 @ 14:32 | Permalink
Hi Andrew,
I think allowing for a company to opt out of conscious disregard claims is quite problematic. For example, in Ryan v. Lyondell, it appears clear that the court believes good faith can be used to enforce the board’s Revlon duties. If Lyondell had a conscious disregard exculpation clause in its charter, then what tool of accountability would the court have to enforce these duties? If none, which I believe to be the case, then Revlon duties become purely aspirational. Unintended or intended consequences of your proposed exculpation clause?
4. Posted by Andrew Lund on March 12, 2009 @ 15:00 | Permalink
Bernie,
Intended. I take it you could say the same about the duty of care generally - just delete "Revlon" in your post and insert "care". And yet we've accepted (some more begrudgingly than others) that permitting due care exculpation is a good idea, all things considered. Why treat Revlon due care claims any differently?
Andrew
5. Posted by Bernard Sharfman on March 12, 2009 @ 19:04 | Permalink
Interesting point. However, you have to take corporate law where it is at this point in time. Good faith, if applied with restraint and only in select fact patterns, is a tool of accountability that I believe has great value in deterring opportunistic behavior in corporate decision making. You take that tool away and the courts are really hamstrung in restraining board authority when new fact patterns arise (fact patterns that we have yet to foresee) that make clear the courts need to act. The duty of care could have served the same function and possibly with better effect if it had a different history. That is, without Van Gorkom.
Bernie
6. Posted by Andrew Lund on March 12, 2009 @ 19:28 | Permalink
Bernie,
The view your describing is close to the one Sean Griffith attributed to DE courts re: the Disney litigation - that good faith offers some space for DE courts to play as they deem necessary. It's still just a matter of balancing the costs of indeterminacy and the benefits. I can't be sure how that comes out. At the very least, though, advocates of a broad, non-exculpable conscious disregard standard have to deal with the fact that standard D&O insurance policies seem to cover conscious disregard claims (I'm happy to be corrected on this point). Unless we limit its insurability, how much accountability does "conscious disregard" litigation provide?
Furthermore, a broad conscious disregard standard doesn't limit itself to "opportunistic" behavior. Whatever you want to say about the Lyondell board, they weren't opportunists.
All that said, I agree that a robust "conscious disregard" may be a good idea. These are just reasons to be cautious.
7. Posted by Bernard Sharfman on March 13, 2009 @ 8:08 | Permalink
One more comment. I apologize for not making clear what I meant by opportunistic behavior. The definition I use includes "failures to keep previous commitments, whether such failures result from culpable cheating, negligence, "understandable" oversight, or plain incapacity." Dooley, 47 Bus. Law. 461. If the Lyondell board had abdicated their Revlon duties, then they would have been guilty of opportunistic behavior.
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