June 09, 2006
Disney and the Fate of the Director-by-Director Analysis
Posted by Lisa Fairfax

Interestingly, the Supreme Court’s decision also did not reach the merits of the appellants' claim regarding the legitimacy of the director-by-director approach vs. analyzing the board as a collective body. Certainly a lot of attention was given to this approach, particularly after Emerging Communication, which suggested that directors with specialized knowledge may receive some heightened scrutiny. Although the Chancery Court’s decision appeared to back away from this more stringent approach, that court still assessed each Disney director individually in a manner that suggested that in order to be protected from liability, there needed to be a record reflecting that each director had sufficiently informed himself or herself. At the very least this director-by-director approach suggested that all board minutes needed to provide more robust accounts of individual director’s questions and comments. On appeal, the appellants’ claimed that such an approach was improper, and instead argued that the Chancery Court should have assessed the liability of the board as a whole. The Supreme Court declined to rule on the merits of this issue, but rejected the claim in part because appellants had not proven how the Chancery Court’s analysis was prejudicial and yielded an outcome different from a collective analysis. On the one hand the appellants’ argument appears to be taking a step back from the heightened scrutiny apparently required by the individualized approach adopted by the Chancery Court. Hence one could read the Supreme Court’s decision as essentially saying that because the appellants claim did not pass muster under a more stringent standard of review, it certainly would fail under the more lax “collective board” analysis. On the other hand, the Court’s opinion can be viewed as suggesting that there may be no real distinction in the two modes of analysis. If this view is correct, perhaps directors need not be concerned about creating individualized records of their actions.

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