October 23, 2006
Disney and Best Practices vs. Acceptable Practices
Posted by Darian Ibrahim

While today might be about Enron rather than Disney, I promised two posts on Disney, so here goes the second...

In response to Disney, Lisa asked why courts feel the need to distinguish between best practices and acceptable practices, as only the latter are relevant to legal liability. Both Melvin Eisenberg, see 62 Fordham L. Rev. 437 (1993), and Gordon have argued that a dual structure of corporate law which bifurcates best practices and acceptable practices does serve a purpose. By aiming discussions of best practices at directors, it encourages better behavior; by aiming discussions of acceptable practices at courts, it tells them when to impose liability. In my last post on individual vs. collective director liability, I noted that courts have used the laxer collective approach to assess liability in duty of care cases, meaning that a single director’s carelessness is legally excused if the other directors complied with their duties. I also noted that courts have only implicitly adopted this approach. Could courts be hiding the ball on the collective approach because they aren’t eager to announce to directors just how low the bar is set, perhaps in the hopes of encouraging better conduct?

I’m skeptical that hiding the ball in this way pays great dividends in practice, as directors surely know how low the bar is set for careless behavior. Even if directors don’t know that liability will be assessed only collectively, they have to be aware of the business judgment rule and § 102(b)(7). Also, it could be that courts haven’t explicitly addressed the choice of assessment approach for other reasons (maybe it’s obvious? or maybe courts haven’t thought it through?). But I like to think that the courts’ handling of the individual/collective question may support Gordon’s and Eisenberg’s very interesting work.

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