ABA Section of Business Law
The Business Lawyer Millennium Cumulative Index
Business Judgement Rule
Guidelines for Directors: Planning for and Responding to Unsolicited Tender Offers
Committee on Corporate Laws, 41(1): 209–21 (Nov. 1985)
Although unsolicited tender offers pose some very important issues (for example, the government's proper regulatory role), this Report focuses on the responsibility of a board of directors and the issues to be considered by the board in preparing for and in reacting to an unsolicited tender offer. The wide range of actions available to the board are reviewed. Absent an abuse of discretion, and so long as improper motive or disabling self-interest is not present, the actions taken by directors basically will be governed by the business judgment doctrine.
Smith v. Van Gorkom: The Business of Judging Business Judgment
Leo Herzel and Leo Katz, 41(4): 1187–93 (Aug. 1986)
In Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), the Delaware Supreme Court failed to appreciate that, except for intentional wrongs, the market is usually better at judging managerial performance than the courts, that directors usually need to be encouraged to take risks, that good decision making cannot be codified, and that the distinction between the product and the process of board deliberations is difficult.
The ALI Corporate Governance Project in Midstream
Roswell B. Perkins, 41(4): 1195–1235 (Aug. 1986)
Several important parts of the ALI's project "Principles of Corporate Governance: Analysis and Recommendations" have been tentatively approved by the ALI's membership. This Article principally summarizes these segments of the project, with personal commentary by the author on certain features of the current drafts. The Article does not seek to catalog or respond to criticisms of the project but primarily reports on its progress to date.
The ALI Corporate Governance Project: Of the Duty of Due Care and the Business Judgment Rule, a Commentary
Charles Hansen, 41(4): 1237–53 (Aug. 1986)
At its May 1985 meeting, the ALI tentatively adopted a version of the duty of care and the business judgment rule as part of its Corporate Governance Project. This Article suggests that the formulation of the duty of care is not an accurate statement of the law as applied by the courts and that the formulation of the business judgment rule is similarly flawed but to a lesser degree.
Boardroom Jitters: Corporate Control Transactions and Today's Business Judgment Rule
Herbert S. Wander and Alain G. LeCoque, 42(1): 29–64 (Nov. 1986)
This Article analyzes recent judicial decisions refining the application of the business judgment rule in corporate control contests. The authors discuss the traditional rule and then review the new trends toward shifting the burden of proof in applying the rule and increasing the emphasis on the board's duty to exercise due care and follow appropriate procedures. The Article concludes with a discussion of the business judgment rule's application to specific defensive measures, such as defensive charter amendments and other shark repellents, poison pills, multiple vote common stock, white squire arrangements, lock-ups, golden parachutes, greenmail, standstill agreements, no-shop clauses and exclusive merger agreements, and the Pac-man defense.
The Emerging Role of the Special Committee—Ensuring Business Judgment Rule Protection in the Context of Management Leveraged Buyouts and Other Corporate Transactions Involving Conflicts of Interest
Scott V. Simpson, 43(2): 665–90 (Feb. 1988)
In an era of complex corporate transactions, the role of a board of directors is often further complicated by conflicts of interest involving some or all of the members of the board. Recent judicial decisions also indicate that the actions taken by directors may not be upheld in the courtroom unless certain procedural steps are observed in the boardroom. The special committee, consisting of disinterested directors and advised by independent legal and financial experts, has evolved as a mechanism capable of facilitating a careful review of complex issues while at the same time minimizing the effects of actual or potential conflicts of interest. In appropriate circumstances, establishing a special committee may represent the most significant procedural step that a board of directors can take to ensure that its actions will withstand judicial scrutiny.
The Role of the Business Judgment Rule in Shareholder Litigation at the Turn of the Decade
Dennis J. Block, Stephen A. Radin, and James P. Rosenzweig, 45(2): 469–510 (Feb. 1990)
This Article examines the unprecedented developments in the law surrounding the business judgment rule in shareholder derivative litigation in the 1980s, both in the context of when a prelitigation demand is required and the scope of judicial review of board decisions to refuse a shareholder's demand that litigation be commenced. Particular attention is devoted to the pending proposals to codify the law in these areas in the Model Business Corporation Act and Principles of Corporate Governance: Analysis and Recommendations.
Duty of Loyalty: The Criticality of the Counselor's Role
E. Norman Veasey, 45(4): 2065–81 (Aug. 1990)
A corporate director's fiduciary responsibilities include a duty of care and a duty of loyalty component. Duty of loyalty is an elusive concept with many facets. This Article touches on a few applications of the duty and explores some of the diverse legal and practical issues that demonstrate the critical need for good counseling.
Rejudging the Business Judgment Rule
R. Franklin Balotti and James J. Hanks, Jr., 48(4): 1337–53 (Aug. 1993)
In Aronson v. Lewis, 473 A.2d 805 (Del. 1984), and earlier cases, the Delaware Supreme Court characterized the business judgment rule as a "presumption" running in favor of directors. The authors question this characterization, examine its origins, and develop their interpretation of both the substantive and procedural aspects of the rule. (Editor's note: Aronson was recently reversed by the Delaware Supreme Court's decision in Brehm v. Eisner, 746 A.2d 244 (Del. 2000)).
The Duty of Care, the Business Judgment Rule, and the American Law Institute Corporate Governance Project
Charles Hansen, 48(4): 1355–76 (Aug. 1993)
The Article discusses a corporate director's common law duty of care and the business judgment rule and then compares the law on these subjects with their treatment by the ALI in its Principles of Corporate Governance.
New Myths and Old Realities: The American Law Institute Faces the Derivative Action
John C. Coffee, Jr., 48(4): 1407–41 (Aug. 1993)
Adopting a business-judgment test with respect to most duty-of-care actions but a "reasonableness" test with respect to many duty-of-loyalty claims, the ALI's Principles of Corporate Governance seek to confine and focus the derivative action on enforcement of a limited range of duty-of-loyalty and related claims. The author outlines the trade-offs faced in the Principles and assesses the broader public policy issues underlying shareholder litigation.
Derivative Litigation: Current Law Versus The American Law Institute
Dennis J. Block, Stephen A. Radin, and Michael J. Maimone, 48(4): 1443–83 (Aug. 1993) This Article examines the standard of judicial review governing determinations by independent directors, where these directors constitute a majority of the board, that derivative litigation against corporate directors and officers should not be pursued because such litigation, for some bona fide corporate reason, will not serve the best interests of the corporation. The current law on the issue is compared with treatment afforded the issue by the ALI in its Principles of Corporate Governance.
Advising Corporate Directors After the Savings and Loan Disaster
Harris Weinstein, 48(4): 1499–1507 (Aug. 1993) The savings and loan and bank failures of recent years have generated extensive litigation testing theories of liability applicable to directors of depository institutions. The author, formerly Chief Counsel of the Office of Thrift Supervision, argues that the traditional business judgment rule should prevail over simple negligence theories advanced by the FDIC and the RTC. By resting on post hoc reexaminations of business decisions, the simple negligence theory fails to take adequate account of the risk inherent in business decisions and unduly inhibits the service of qualified persons as corporate directors.
Exorcizing the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis
J. Travis Laster, 55(1): 109–34 (Nov. 1999)
In Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), the Delaware Supreme Court created a heightened standard of review for control-related decisions by target boards of directors in responding to threats to corporate control based upon the concern that the directors could be acting primarily in their own interests. Ten years later, in Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995), the Delaware Supreme Court announced that outside directors, who also hold substantial equity stakes in the target corporation, will be presumed to act in their own best economic interests as stockholders and, absent proof to the contrary, will not be influenced by the prestige and perquisites of board membership. Unitrin's holding suggests that the justification for Unocal review does not exist where a majority of a corporation's directors are outsiders with substantial equity stakes and that, as a result, a decision by such a board should be reviewed under the more deferential business judgment rule. This Article explores the viability of a potential exception to Unocal review for boards where a majority of the directors are outsiders with substantial equity stakes and examines the potential implications of such a rule for Delaware law.
The Modest Business Judgment Rule
Lyman Johnson, 55(2): 625–52 (Feb. 2000)
This Article argues that Delaware misformulates and misuses the business judgment rule. Properly understood, the business judgment rule's function in corporate law is quite modest. It is a narrowly drawn judicial policy of nonreview which, in duty of care cases, shields the merits of board decisions from judicial scrutiny. The Article contends that the business judgment rule, therefore, should be de-emphasized as an analytical construct in the law of director fiduciary duties and should be sharply differentiated from the broader-gauged duty of due care. Doing so will pave the way for Delaware courts to rethink the importance of articulating a robust, generally applicable—but concisely formulated—director duty of care.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
The Uncertain Efficacy of Executive Sessions Under the NYSE's Revised Listing Standards
Robert V. Hale II, 61(4):1413–1426 (August 2006)
This article briefly explores key issues relating to the use of non-management executive sessions under Section 303A.03 of the NYSE's revised listing standards, including the authority of the SEC to enforce such a requirement, the status of board actions taken at such meetings, and whether such sessions may result in altering the principal roles of the board and management. In this respect, the Disney derivative litigation affords an opportunity to consider the use of executive sessions in relation to these issues, as well as the business judgment rule. Moreover, Disney raises the question whether mandatory non-management executive sessions might have created a different outcome under the circumstances in the case. The article concludes with a discussion of some practical considerations for attorneys and corporate secretaries in complying with the requirement.
Being Informed Does Matter: Fine Tuning Gross Negligence Twenty Plus Years After Van Gorkom
Bernard S. Sharfman, 62(1): 135–160 (November 2006)
This article first establishes that there are still a number of reasons why being informed does matter, despite the ability to incorporate an exculpation clause into a Delaware corporation's certificate of incorporation. This is followed by an explanation of how Delaware's business judgment rule became transformed from a doctrine of abstention to a standard of review in the context of procedural due care. Throughout this article, it is understood that the business judgment rule exits within a framework of corporate authority and accountability and that it serves as a significant tool for the protection of corporate board authority. The article recommends that the Delaware courts adopt a lenient gross negligence standard that can be consistently applied when trying to answer the question of whether or not a board was sufficiently informed when making a business decision. However, in recognition of the understanding that the Delaware Supreme Court's decisions in Van Gorkom and Cede do not conform to such a lenient gross negligence standard in a merger situation, a less lenient gross negligence standard should be applied in that rather narrowly defined fact pattern.
Having the Fiduciary Duty Talk: Model Advice for Corporate Officers (and Other Senior Agents)
Lyman Johnson, 63(1): 147–162 (November 2007)
Countless legal materials address the fiduciary duties of corporate directors. These include extensive decisional law, numerous institutes and continuing legal education seminars, several treatises and casebooks, and the well–known Corporate Director's Guidebook, recently released in its fifth edition. By contrast, legal materials on the fiduciary duties of corporate officers—key actors and agents in any company—are quite sparse. Case law is meager and undeveloped, with even such a baseline issue as the applicability of the business judgment rule lacking resolution. Treatises, institutes, and other legal materials frequently lump officer fiduciary duties with those of directors or treat them as an afterthought or, in many instances, overlook the subject altogether. There is no preeminent, standard reference serving as the "Corporate Officer's Guidebook."
This Article seeks to begin rectifying this glaring gap in legal literature and professional practice. Fiduciary duties as a vital component of an effective corporate governance system work on an ex ante basis—i.e., officers must be advised of such duties beforehand if such duties are to influence conduct. This Article describes the sources of legal material for deriving a succinct exposition of officer fiduciary duties and then provides suggested "model" fiduciary duty advice for lawyers to use in counseling corporate officers and other senior managers.
How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors
E. Norman Veasey and Christine T. Di Guglielmo, 63(3): 761–776 (May 2008)
As business trends change and capital markets evolve, directors may face factual situations that raise new questions about the contours of directors' fiduciary duties. One increasingly common situation that presents tensions for a growing number of directors is the allegiances by individuals elected to the board by, and who may seemingly "represent," particular constituencies of the public corporation. Such "constituency directors" or "representative directors" may include, for example, directors designated by creditors, venture capitalists, labor unions, controlling or other substantial stockholders, or preferred stockholders; directors elected by a particular class of stockholders; or directors placed on the board by or at the behest of other constituencies.
We raise several questions. When a particular constituency causes one or more directors to be elected to the board, to whom or to what is that director loyal or beholden? The corporation? All the stockholders? If "yes" as to the corporation and all the stockholders, may the director give some "priority" to the views of the constituency that caused him or her to be placed on the board? Since the board must act collectively and the majority might not favor the outcome desired by the particular constituency, are these questions largely academic?
In this Article, we suggest that the existing standards of liability for breach of fiduciary duty should not change in order to account for changing circumstances. The existing standards of conduct and liability incorporate the necessary flexibility to balance the potentially competing duties of constituency directors with protection of the interests of various corporate constituencies. And if the fiduciary duty standards in corporation law are not sufficiently flexible to accommodate particular circumstances, constituents may wish to invest in an alternative entity (such as a limited liability company) governed by other law that will accommodate their needs. Or perhaps the investor may be able to effect a legally authorized change in the certificate of incorporation of the corporation to permit it to be governed more to the investor's liking.
Litigating in LLCs
Larry E. Ribstein, 64(3): 739-756 (May 2009)
One of the most important issues involving limited liability companies is the appropriate way to characterize and handle disputes among members. Courts and legislatures borrowed the derivative suit remedy from corporations and limited partnerships and applied it to LLCs without adequately considering whether this application was appropriate. In fact, this remedy is not suited to the typical business associations for which LLC statutes are designed--that is, closely held firms in which members generally participate directly in management. In this setting, the derivative remedy creates costs and complications that are unnecessary because more appropriate remedies are available, including member-authorized suits on behalf of the entity, direct suits by the injured parties, and contractual arbitration. Accordingly, the derivative suit should not be a default remedy for LLCs. More generally, this analysis provides an example of the potential risks of borrowing LLC rules from other types of business associations.
Committee on Corporate Laws, 41(1): 209–21 (Nov. 1985)
Although unsolicited tender offers pose some very important issues (for example, the government's proper regulatory role), this Report focuses on the responsibility of a board of directors and the issues to be considered by the board in preparing for and in reacting to an unsolicited tender offer. The wide range of actions available to the board are reviewed. Absent an abuse of discretion, and so long as improper motive or disabling self-interest is not present, the actions taken by directors basically will be governed by the business judgment doctrine.
Smith v. Van Gorkom: The Business of Judging Business Judgment
Leo Herzel and Leo Katz, 41(4): 1187–93 (Aug. 1986)
In Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), the Delaware Supreme Court failed to appreciate that, except for intentional wrongs, the market is usually better at judging managerial performance than the courts, that directors usually need to be encouraged to take risks, that good decision making cannot be codified, and that the distinction between the product and the process of board deliberations is difficult.
The ALI Corporate Governance Project in Midstream
Roswell B. Perkins, 41(4): 1195–1235 (Aug. 1986)
Several important parts of the ALI's project "Principles of Corporate Governance: Analysis and Recommendations" have been tentatively approved by the ALI's membership. This Article principally summarizes these segments of the project, with personal commentary by the author on certain features of the current drafts. The Article does not seek to catalog or respond to criticisms of the project but primarily reports on its progress to date.
The ALI Corporate Governance Project: Of the Duty of Due Care and the Business Judgment Rule, a Commentary
Charles Hansen, 41(4): 1237–53 (Aug. 1986)
At its May 1985 meeting, the ALI tentatively adopted a version of the duty of care and the business judgment rule as part of its Corporate Governance Project. This Article suggests that the formulation of the duty of care is not an accurate statement of the law as applied by the courts and that the formulation of the business judgment rule is similarly flawed but to a lesser degree.
Boardroom Jitters: Corporate Control Transactions and Today's Business Judgment Rule
Herbert S. Wander and Alain G. LeCoque, 42(1): 29–64 (Nov. 1986)
This Article analyzes recent judicial decisions refining the application of the business judgment rule in corporate control contests. The authors discuss the traditional rule and then review the new trends toward shifting the burden of proof in applying the rule and increasing the emphasis on the board's duty to exercise due care and follow appropriate procedures. The Article concludes with a discussion of the business judgment rule's application to specific defensive measures, such as defensive charter amendments and other shark repellents, poison pills, multiple vote common stock, white squire arrangements, lock-ups, golden parachutes, greenmail, standstill agreements, no-shop clauses and exclusive merger agreements, and the Pac-man defense.
The Emerging Role of the Special Committee—Ensuring Business Judgment Rule Protection in the Context of Management Leveraged Buyouts and Other Corporate Transactions Involving Conflicts of Interest
Scott V. Simpson, 43(2): 665–90 (Feb. 1988)
In an era of complex corporate transactions, the role of a board of directors is often further complicated by conflicts of interest involving some or all of the members of the board. Recent judicial decisions also indicate that the actions taken by directors may not be upheld in the courtroom unless certain procedural steps are observed in the boardroom. The special committee, consisting of disinterested directors and advised by independent legal and financial experts, has evolved as a mechanism capable of facilitating a careful review of complex issues while at the same time minimizing the effects of actual or potential conflicts of interest. In appropriate circumstances, establishing a special committee may represent the most significant procedural step that a board of directors can take to ensure that its actions will withstand judicial scrutiny.
The Role of the Business Judgment Rule in Shareholder Litigation at the Turn of the Decade
Dennis J. Block, Stephen A. Radin, and James P. Rosenzweig, 45(2): 469–510 (Feb. 1990)
This Article examines the unprecedented developments in the law surrounding the business judgment rule in shareholder derivative litigation in the 1980s, both in the context of when a prelitigation demand is required and the scope of judicial review of board decisions to refuse a shareholder's demand that litigation be commenced. Particular attention is devoted to the pending proposals to codify the law in these areas in the Model Business Corporation Act and Principles of Corporate Governance: Analysis and Recommendations.
Duty of Loyalty: The Criticality of the Counselor's Role
E. Norman Veasey, 45(4): 2065–81 (Aug. 1990)
A corporate director's fiduciary responsibilities include a duty of care and a duty of loyalty component. Duty of loyalty is an elusive concept with many facets. This Article touches on a few applications of the duty and explores some of the diverse legal and practical issues that demonstrate the critical need for good counseling.
Rejudging the Business Judgment Rule
R. Franklin Balotti and James J. Hanks, Jr., 48(4): 1337–53 (Aug. 1993)
In Aronson v. Lewis, 473 A.2d 805 (Del. 1984), and earlier cases, the Delaware Supreme Court characterized the business judgment rule as a "presumption" running in favor of directors. The authors question this characterization, examine its origins, and develop their interpretation of both the substantive and procedural aspects of the rule. (Editor's note: Aronson was recently reversed by the Delaware Supreme Court's decision in Brehm v. Eisner, 746 A.2d 244 (Del. 2000)).
The Duty of Care, the Business Judgment Rule, and the American Law Institute Corporate Governance Project
Charles Hansen, 48(4): 1355–76 (Aug. 1993)
The Article discusses a corporate director's common law duty of care and the business judgment rule and then compares the law on these subjects with their treatment by the ALI in its Principles of Corporate Governance.
New Myths and Old Realities: The American Law Institute Faces the Derivative Action
John C. Coffee, Jr., 48(4): 1407–41 (Aug. 1993)
Adopting a business-judgment test with respect to most duty-of-care actions but a "reasonableness" test with respect to many duty-of-loyalty claims, the ALI's Principles of Corporate Governance seek to confine and focus the derivative action on enforcement of a limited range of duty-of-loyalty and related claims. The author outlines the trade-offs faced in the Principles and assesses the broader public policy issues underlying shareholder litigation.
Derivative Litigation: Current Law Versus The American Law Institute
Dennis J. Block, Stephen A. Radin, and Michael J. Maimone, 48(4): 1443–83 (Aug. 1993) This Article examines the standard of judicial review governing determinations by independent directors, where these directors constitute a majority of the board, that derivative litigation against corporate directors and officers should not be pursued because such litigation, for some bona fide corporate reason, will not serve the best interests of the corporation. The current law on the issue is compared with treatment afforded the issue by the ALI in its Principles of Corporate Governance.
Advising Corporate Directors After the Savings and Loan Disaster
Harris Weinstein, 48(4): 1499–1507 (Aug. 1993) The savings and loan and bank failures of recent years have generated extensive litigation testing theories of liability applicable to directors of depository institutions. The author, formerly Chief Counsel of the Office of Thrift Supervision, argues that the traditional business judgment rule should prevail over simple negligence theories advanced by the FDIC and the RTC. By resting on post hoc reexaminations of business decisions, the simple negligence theory fails to take adequate account of the risk inherent in business decisions and unduly inhibits the service of qualified persons as corporate directors.
Exorcizing the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis
J. Travis Laster, 55(1): 109–34 (Nov. 1999)
In Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), the Delaware Supreme Court created a heightened standard of review for control-related decisions by target boards of directors in responding to threats to corporate control based upon the concern that the directors could be acting primarily in their own interests. Ten years later, in Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995), the Delaware Supreme Court announced that outside directors, who also hold substantial equity stakes in the target corporation, will be presumed to act in their own best economic interests as stockholders and, absent proof to the contrary, will not be influenced by the prestige and perquisites of board membership. Unitrin's holding suggests that the justification for Unocal review does not exist where a majority of a corporation's directors are outsiders with substantial equity stakes and that, as a result, a decision by such a board should be reviewed under the more deferential business judgment rule. This Article explores the viability of a potential exception to Unocal review for boards where a majority of the directors are outsiders with substantial equity stakes and examines the potential implications of such a rule for Delaware law.
The Modest Business Judgment Rule
Lyman Johnson, 55(2): 625–52 (Feb. 2000)
This Article argues that Delaware misformulates and misuses the business judgment rule. Properly understood, the business judgment rule's function in corporate law is quite modest. It is a narrowly drawn judicial policy of nonreview which, in duty of care cases, shields the merits of board decisions from judicial scrutiny. The Article contends that the business judgment rule, therefore, should be de-emphasized as an analytical construct in the law of director fiduciary duties and should be sharply differentiated from the broader-gauged duty of due care. Doing so will pave the way for Delaware courts to rethink the importance of articulating a robust, generally applicable—but concisely formulated—director duty of care.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
The Uncertain Efficacy of Executive Sessions Under the NYSE's Revised Listing Standards
Robert V. Hale II, 61(4):1413–1426 (August 2006)
This article briefly explores key issues relating to the use of non-management executive sessions under Section 303A.03 of the NYSE's revised listing standards, including the authority of the SEC to enforce such a requirement, the status of board actions taken at such meetings, and whether such sessions may result in altering the principal roles of the board and management. In this respect, the Disney derivative litigation affords an opportunity to consider the use of executive sessions in relation to these issues, as well as the business judgment rule. Moreover, Disney raises the question whether mandatory non-management executive sessions might have created a different outcome under the circumstances in the case. The article concludes with a discussion of some practical considerations for attorneys and corporate secretaries in complying with the requirement.
Being Informed Does Matter: Fine Tuning Gross Negligence Twenty Plus Years After Van Gorkom
Bernard S. Sharfman, 62(1): 135–160 (November 2006)
This article first establishes that there are still a number of reasons why being informed does matter, despite the ability to incorporate an exculpation clause into a Delaware corporation's certificate of incorporation. This is followed by an explanation of how Delaware's business judgment rule became transformed from a doctrine of abstention to a standard of review in the context of procedural due care. Throughout this article, it is understood that the business judgment rule exits within a framework of corporate authority and accountability and that it serves as a significant tool for the protection of corporate board authority. The article recommends that the Delaware courts adopt a lenient gross negligence standard that can be consistently applied when trying to answer the question of whether or not a board was sufficiently informed when making a business decision. However, in recognition of the understanding that the Delaware Supreme Court's decisions in Van Gorkom and Cede do not conform to such a lenient gross negligence standard in a merger situation, a less lenient gross negligence standard should be applied in that rather narrowly defined fact pattern.
Having the Fiduciary Duty Talk: Model Advice for Corporate Officers (and Other Senior Agents)
Lyman Johnson, 63(1): 147–162 (November 2007)
Countless legal materials address the fiduciary duties of corporate directors. These include extensive decisional law, numerous institutes and continuing legal education seminars, several treatises and casebooks, and the well–known Corporate Director's Guidebook, recently released in its fifth edition. By contrast, legal materials on the fiduciary duties of corporate officers—key actors and agents in any company—are quite sparse. Case law is meager and undeveloped, with even such a baseline issue as the applicability of the business judgment rule lacking resolution. Treatises, institutes, and other legal materials frequently lump officer fiduciary duties with those of directors or treat them as an afterthought or, in many instances, overlook the subject altogether. There is no preeminent, standard reference serving as the "Corporate Officer's Guidebook."
This Article seeks to begin rectifying this glaring gap in legal literature and professional practice. Fiduciary duties as a vital component of an effective corporate governance system work on an ex ante basis—i.e., officers must be advised of such duties beforehand if such duties are to influence conduct. This Article describes the sources of legal material for deriving a succinct exposition of officer fiduciary duties and then provides suggested "model" fiduciary duty advice for lawyers to use in counseling corporate officers and other senior managers.
How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors
E. Norman Veasey and Christine T. Di Guglielmo, 63(3): 761–776 (May 2008)
As business trends change and capital markets evolve, directors may face factual situations that raise new questions about the contours of directors' fiduciary duties. One increasingly common situation that presents tensions for a growing number of directors is the allegiances by individuals elected to the board by, and who may seemingly "represent," particular constituencies of the public corporation. Such "constituency directors" or "representative directors" may include, for example, directors designated by creditors, venture capitalists, labor unions, controlling or other substantial stockholders, or preferred stockholders; directors elected by a particular class of stockholders; or directors placed on the board by or at the behest of other constituencies.
We raise several questions. When a particular constituency causes one or more directors to be elected to the board, to whom or to what is that director loyal or beholden? The corporation? All the stockholders? If "yes" as to the corporation and all the stockholders, may the director give some "priority" to the views of the constituency that caused him or her to be placed on the board? Since the board must act collectively and the majority might not favor the outcome desired by the particular constituency, are these questions largely academic?
In this Article, we suggest that the existing standards of liability for breach of fiduciary duty should not change in order to account for changing circumstances. The existing standards of conduct and liability incorporate the necessary flexibility to balance the potentially competing duties of constituency directors with protection of the interests of various corporate constituencies. And if the fiduciary duty standards in corporation law are not sufficiently flexible to accommodate particular circumstances, constituents may wish to invest in an alternative entity (such as a limited liability company) governed by other law that will accommodate their needs. Or perhaps the investor may be able to effect a legally authorized change in the certificate of incorporation of the corporation to permit it to be governed more to the investor's liking.
Litigating in LLCs
Larry E. Ribstein, 64(3): 739-756 (May 2009)
One of the most important issues involving limited liability companies is the appropriate way to characterize and handle disputes among members. Courts and legislatures borrowed the derivative suit remedy from corporations and limited partnerships and applied it to LLCs without adequately considering whether this application was appropriate. In fact, this remedy is not suited to the typical business associations for which LLC statutes are designed--that is, closely held firms in which members generally participate directly in management. In this setting, the derivative remedy creates costs and complications that are unnecessary because more appropriate remedies are available, including member-authorized suits on behalf of the entity, direct suits by the injured parties, and contractual arbitration. Accordingly, the derivative suit should not be a default remedy for LLCs. More generally, this analysis provides an example of the potential risks of borrowing LLC rules from other types of business associations.
