August 10, 2005
The Business Judgment Triumphant
Posted by Steve Bainbridge

I'm still absorbing the opinion (gotta love footnote 1)  and don't want to shoot from the hip, but I appreciate Gordon's invitation to chime in anyway. First, I was struck by Sean Griffith's comment that the decision "slides the scale back in the direction of board authority and away from judicial accountability." Good. As I observed in my article The Business Judgment Rule as Abstention Doctrine:

Two conceptions of the business judgment rule compete in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions. This view is increasingly widely accepted, especially by some members of the Delaware supreme court. The other conception treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions. The distinction between these conceptions matters a great deal. Under the former, for example, it is far more likely that claims against the board of directors will survive through the summary judgment phase of litigation, which at the very least raises the settlement value of shareholder litigation and even can have outcome-determinative effects.

Like many recent corporate law developments, the standard of review conception of the business judgment rule is based on a shareholder primacy-based theory of the corporation. This article extends the author's recent work on a competing theory of the firm, known as director primacy, pursuant to which the board of directors is viewed as the nexus of the set of contracts that makes up the firm. In this model, the defining tension of corporate law is that between authority and accountability. Because one cannot make directors more accountable without infringing on their exercise of authority, courts must be reluctant to review the director decisions absent evidence of the sort of self-dealing that raises very serious accountability concerns. In this article, the author argues that only the abstention version of the business judgment rule properly operationalizes this approach.

Based on what I've seen from the opinion thus far (and most of what I've read here), it looks like Chandler basically agrees that courts typically ought to abstain except where there is a loyalty issue or, perhaps, a gross failure of process in connection with a final period problem.

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