August 11, 2005
No Skeleton with a Scythe
Posted by Elizabeth Nowicki

I find this discussion fascinating, as I am currently working on two “duty of care” papers. Below is my response to the suggestion that the duty of care and Van Gorkom are dead or dying. I agree with Steve Bainbridge's earlier post, but I get to the same result (I think) with a different formula.

Here is the generic duty of care analysis as I have gleaned from the Delaware courts. I break the analysis down into numbered steps to make it easier to work with, because I think that shorthand analysis is one of the ways that Delaware’s judiciary muddles some of their case law in this area:

  1. Directors are afforded significant deference from the judiciary. If a director is sued for an alleged breach of his duty of care, he will automatically be afforded the protection of the Business Judgment Rule Presumption.

  1. If, however, the plaintiff can show that one of the factual prerequisites to the business judgment rule does not exist, the director will be stripped of the protection of the presumption, and his actions will be more closely scrutinized.

  1. The four factual prerequisites to the BJR are: a decision made, in good faith, absent conflicts, after the director has become reasonably informed (and the director must not be GROSSLY NEGLIGENT with respect to this “informed” point).

  1. If one of these four factual prerequisites is missing, the action at issue will be reviewed using a reasonableness and fairness standard.

  1. However, a director can also be protected statutorily with a charter provision similar to that authorized by DGCL 102(b)(7).

  1. If a director defendant shows that such a charter provision exists, he is again presumptively protected unless a plaintiff can show that the alleged duty of care breach is based on or revolves around or is predicated on an act taken “not in good faith.” (Let us please ignore the duty of loyalty for now -- Lyman Johnson does incredible work with that in his recent article.)


Van Gorkom lives on as indicated in point 3 above. The duty of care lives on, assuming a DGCL 102(b)(7) provision, in point 6 above.

As the above analysis applies to Disney:

In the Disney case, I seems that we all agree that there is a sticky point with respect to my point 6 above. The plaintiffs’ need to show that the defendant directors acted “not in good faith.” If we agree that the definition proffered on p.123 of the Disney opinion is a useful way to assess “not in good faith,” then, interestingly, we move a bit away from fraud and closer to gross negligence with “not in good faith.”

The Chancellor said on p.123:

“Upon long and careful consideration, I am of the opinion that the concept of intentional dereliction of duty, a conscious disregard for one’s responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith. Deliberate indifference and inaction in the face of a duty to act is, in my mind, conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct....”

This language – “in the face of a duty to act,” for example, and “intentional dereliction of duty” – leads us back to a basic duty of care analysis. Did the directors breach their duty of care in a way that falls within the Chancellor's definition of "good faith"? Well, if we remove the directors from the BJR protection b/c we view their “informed” efforts as grossly negligent, then we are working with a reasonable and fair standard for purposes of assessing whether they breached their duty of care. And they would be hard-pressed to satisfy that standard. So it seems that we could find that the duty of care had been breached. And then we would circle back and query whether, having so found, the breach was based on inaction or deliberate indifference or intentional dereliction, such that the conduct was now within the reach of the Chancellor’s “good faith” definition.

The above should give a sense of why I am troubled by the opinion. Moreover, hopefully it is easy to see why the compensation committee’s actions give me pause. (A poster named Roger Hipp broke down the facts nicely in a response to my earlier “Respectful Reservations” post.) Either the actions at issue were taken “not in good faith,” such that both the BJR protection AND the statutory protection are stripped from the get-go, or the actions are “grossly negligent” with respect to the “informed” obligation, which triggers the 102(b)(7) “good faith” analysis as noted above.

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