February 15, 2005
Oracle's Footnote 60
Posted by Gordon Smith

What is the most famous footnote in the history of law? Footnote 4 of Carolene Products? Maybe. Though I would vote for footnote 11 of Brown v. Board of Education, in which Chief Justice Warren cites several sociological studies purporting to demonstrate that that segregation could negatively affect African-American children. Empirical evidence. What a concept!

Much of fiduciary law is built on behavioral assumptions, most of which are not expressly supported by any evidence other than casual observation. In his excellent opinion in In re Oracle Corp Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003), my friend and former Skadden colleague Vice Chancellor Leo Strine discusses the decisions confronted by special litigation committees and ponders several behavioral questions:

In evaluating the independence of a special litigation committee, this court must take into account the extraordinary importance and difficulty of such a committee's responsibility. It is, I daresay, easier to say no to a friend, relative, colleague, or boss who seeks assent for an act (e.g., a transaction) that has not yet occurred than it would be to cause a corporation to sue that person. This is admittedly a determination of so-called "legislative fact," but one that can be rather safely made. Denying a fellow director the ability to proceed on a matter important to him may not be easy, but it must, as a general matter, be less difficult than finding that there is reason to believe that the fellow director has committed serious wrongdoing and that a derivative suit should proceed against him.

The difficulty of making this decision is compounded in the special litigation committee context because the weight of making the moral judgment necessarily falls on less than the full board. A small number of directors feels the moral gravity – and social pressures – of this duty alone.

Like most judges, Leo makes these assertions without a shred of empirical support. But at least he is self-conscious about it. He writes this in footnote 60 of that case:

The parties have not cited empirical social science research bearing on any of the factual inferences about human behavior within institutional settings upon which a ruling on this motion, one way or the other, necessarily depends.

If I am reading this correctly, Leo is not merely bemoaning the absence of empirical data in this case, but also inviting future litigants to supplement their arguments with such data. And as far as I can determine from the reported decisions, no one has taken him up on the offer. Even if the litigants drop the ball, those of us who study the legal obligations of directors should do better on this front.

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