March 11, 2009
Drawing the Line on Conscious Disregard
Posted by Andrew Lund

As I posted yesterday, there’s a good chance that the Delaware Supreme Court’s opinion in Ryan v. Lyondell will turn on the application of Revlon and not the Chancery Court’s analysis of plaintiff’s good faith claim.  Clearly, though, something needs to be said about the relationship between due care and good faith.  The test for determining whether a breach of due care rises to the level of “conscious disregard” is significantly indeterminate at this point.  While Ryan indicated that almost any due care claim will state a conscious disregard claim at the pre-trial stages, Chancellor Chandler’s contemporaneous opinion in McPadden v. Sidhu (and recent opinion in the Citigroup litigation) suggests that it will be nearly impossible to state a conscious disregard claim for purposes of avoiding exculpation.

 

The indeterminacy is no surprise.  At least since Hillary Sale’s seminal article, everyone has recognized that the new good faith poses a serious line-drawing problem.  On the one hand, good faith can’t be too broad for fear of swallowing up due care exculpation clauses.  On the other, it can’t be too narrow or else become toothless.  Many have offered solutions – resort to a scienter analysis, requiring “plus” factors to exist, limiting conscious disregard to instances of non-deliberation, limiting it to non-transactional, monitoring cases (the recent AIG and Citigroup decisions suggest a further distinction within this approach: monitoring business decisions vs. monitoring criminal behavior), etc. 

 

In my most recent article I contend, uncontroversially, that we can’t be sure that any of these attempts to draw the line will get it right.  First, some line-drawing proposals (say, requiring some level of egregiousness) don’t provide much determinacy at all.  More importantly, the line drawing is bound to be problematic because we can’t be sure of the costs imposed by, and benefits gained from, the conscious disregard standard.  Accordingly, even those proposals described above that provide a clear standard may still not get the balance right.

 

If I were forced to hazard a guess, I’d expect that the Delaware Supreme Court will ultimately adopt a standard that errs on the side of protecting 102(b)(7) clauses and reject the approach taken in Ryan v. Lyondell.  That is, its best guess is that a robust conscious disregard standard is less valuable than due care exculpation, all things considered. And maybe that’s the right answer if we are limited, as the court is, to tweaking judicial doctrine. 

 

But, because it’s just a guess and might turn out to be the wrong one, we may want to consider an alternative to relying solely on the courts.  Along these lines, I suggest in my article that (1) Delaware courts adopt a more robust version of the conscious disregard standard and (2) the Delaware legislature amend 102(b)(7) to permit firms to opt out of conscious disregard liability.  Tomorrow I’ll post about the advantages of that approach and talk a bit about objections that might be raised.

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