1. law, govt and politics

At Least Somewhat Exaggerated: How Reports of
the Death of Delaware’s Duty of Care Don’t Tell the
Whole Story
CHRISTOPHER A. YEAGER*
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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I. DELAWARE’S DUTY OF CARE THROUGH THE PASSAGE OF SECTION
102(B)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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II. EULOGIZING THE DUTY OF CARE IN DELAWARE: WHY SOME ARGUE
IT NO LONGER EXISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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III. FINDING THE PULSE: EVIDENCE THAT THE DUTY OF CARE STILL
EXISTS IN DELAWARE TODAY . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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A.
THE STANDARD RULE DICHOTOMY: HOW DELAWARE COURTS
IMPOSE THE DUTY OF CARE OUTSIDE THE STRICT CONFINES OF
DOCTRINE
B.
.......................................
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MERGERS AND PLAINTIFFS’ SUCCESS OBTAINING NONMONETARY
RELIEF FOR BREACHES OF THE DUTY OF CARE
D.
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PROCEDURE AND THE ENDURING LINK BETWEEN CARE AND
LOYALTY
C.
......................................
..............
THE POSSIBILITY OF CARE-BASED LIABILITY FOR OFFICERS
1402
......
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CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1407
INTRODUCTION
In 1985, corporate law underwent a sea-change as the Delaware Supreme
Court in Smith v. Van Gorkom found that the directors of Trans Union violated
their duty of care when they sold the company to takeover specialist Jay
Pritzker for $55 per share—a $17 premium over the prevailing market share
price.1 The next year, Delaware’s legislature swiftly responded to the business
* Georgetown Law, J.D. 2014; University of Pennsylvania, B.A. 2009. © 2015, Christopher A.
Yeager. I would like to thank Professor Robert B. Thompson for his guidance and assistance in
developing this Note. Thank you also to the members of The Georgetown Law Journal for their
insightful comments and hard work in refining this Note and preparing it for publication. Lastly, I am
grateful to my wife, Sarah Stewart Yeager, and my parents for their constant support and encouragement. Any errors are my own.
1. See 488 A.2d 858, 873, 875, 893 (Del. 1985).
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community’s newfound anxiety over the threat of personal liability for breaches
of the duty of care by passing section 102(b)(7) of Delaware’s General Corporation Law.2 The new law allows a corporation to insert a provision into its charter
exculpating directors for monetary damages in connection with a breach of their
fiduciary duty of care.3 Boards, fearing another Van Gorkom, leapt into action,
almost uniformly ensuring their charters had an exculpation provision.4 The
legislature’s enactment of section 102(b)(7) alarmed many academics. One
scholar, for instance, has argued that the passage of section 102(b)(7) shows that
Delaware’s duty of care is dead and that, more broadly, legislatures have been
willing to emasculate corporate law in order to appease powerful directors.5
Another has similarly asserted that Delaware’s action began the “evisceration”
of the duty of care.6
This Note probes the truth of such claims. It finds that Delaware’s duty of
care continues to live on to this day and, in certain respects, is of greater legal
consequence than before Van Gorkom. Part I will discuss the duty of care in
Delaware through 1986 and show that section 102(b)(7) merely gave legislative
sanction to long-standing judicial reluctance to award monetary damages for
breaches of the duty of care. Part II will provide a brief overview of the theory
that, since passage of section 102(b)(7), the duty of care has become a dead
letter in Delaware corporate law. Part III will rebut those theories by pointing to
four strands of Delaware corporate law in which the duty of care is of continued
significance.
I. DELAWARE’S DUTY OF CARE THROUGH THE PASSAGE OF SECTION 102(B)(7)
In Delaware, directors—as representatives elected to look out for shareholders’ interests—owe fiduciary duties to their corporation’s shareholders.7 Delaware law traditionally divides directors’ fiduciary duties into two principal
2. DEL. CODE ANN. tit. 8, § 102(b)(7) (2015).
3. Id. Although § 102(b)(7) allows for the elimination of director’s liability for monetary damages in
duty-of-care cases, the statute does not address suits for nonmonetary relief such as an injunction, nor
does it provide for exculpation of directors in duty-of-loyalty suits.
4. Randy J. Holland, Del. Supreme Court Justice, Delaware Directors’ Fiduciary Duties: The Focus
on Loyalty, Address Before the Institute for Law and Economics at the University of Pennsylvania
School of Law (Nov. 11, 2008), in 11 U. PA. J. BUS. L. 675, 692 (“[A]lmost all Delaware corporations
have adopted 102(b)(7) provisions.”), available at http://scholarship.law.upenn.edu/cgi/viewcontent.
cgi?article⫽1334&context⫽jbl.
5. See Steven A. Ramirez, The Special Interest Race to CEO Primacy and the End of Corporate
Governance Law, 32 DEL. J. CORP. L. 345, 359 (2007).
6. Marc I. Steinberg, Commentary, The Evisceration of the Duty of Care, 42 SW. L.J. 919, 920
(1988). Steinberg notes, however, that compared to other states, Delaware’s response was more
moderate and concedes that Delaware’s duty of care remains good law for injunctive relief. See id. at
922.
7. Nadelle Grossman, Director Compliance with Elusive Fiduciary Duties in a Climate of Corporate
Governance Reform, 12 FORDHAM J. CORP. & FIN. L. 393, 400 (2007).
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categories: the duties of care and loyalty.8 The duty of care requires directors to
act on an informed basis, including in the decisionmaking context, and to
exercise due care in their other responsibilities as well, including oversight
functions.9 The duty of loyalty, in contrast, is meant to ensure that the director
pursues in good faith the interests of the corporation and its shareholders rather
than her own.10 Shareholders may bring action against directors who have
allegedly breached their fiduciary duties in the form of either a direct suit on
behalf of the affected shareholders or a derivative lawsuit on behalf of the
corporation.11 When these suits are brought, the Delaware courts place a thumb
on the scale in favor of the directors by presuming that “the directors of a
corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company.”12 This presumption—known as the business judgment rule—can be rebutted by showing that
the board breached its duty of care or loyalty.13 If it is rebutted, the burden
shifts to the defendant directors to prove the “entire fairness” of the transaction.14
While the duty of care existed long before the Van Gorkom court used it as a
basis for directorial monetary liability in 1985,15 the standard that would trigger
liability for its breach was hardly a matter of settled law. Some cases, drawing
on the basic lexicon of tort law, apparently used something akin to an ordinary
8. See, e.g., In re Orchard Enters., Inc. Stockholder Litig., 88 A.3d 1, 32 (Del. Ch. 2014). (“Directors
of a Delaware corporation owe two fiduciary duties—care and loyalty.”); see also Grossman, supra
note 7, at 400. As will be explored later, it was not always so clear that directors’ fiduciary duties
generally fell in two—rather than three—principal buckets. See infra Part III.A.
9. See 1 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, BALOTTI AND FINKELSTEIN’S DELAWARE LAW OF
CORPORATIONS AND BUSINESS ORGANIZATIONS § 4.15 (2015) (noting that “directors must exercise the
requisite degree of care in the process of decisionmaking and act on an informed basis” and also that
“directors must also exercise due care in the other aspects of their responsibilities, including their
delegation functions.”); Grossman, supra note 7, at 402–07 (discussing duty of care in the business
decision context and separately in the oversight context).
10. See, e.g., Leo E. Strine, Jr. et al., Loyalty’s Core Demand: The Defining Role of Good Faith in
Corporation Law, 98 GEO. L.J. 629, 634 (2010) (indicating that duty of loyalty is implicated where
“actions must be undertaken in good faith to advance the corporation’s best interests and because
directors owe an affirmative obligation to put in a good faith effort to responsibly carry out their
duties”).
11. See Grossman, supra note 7, at 400. As the Delaware Supreme Court explained in Tooley v.
Donaldson, Lufkin, & Jenrette, Inc., the difference turns on who suffered the alleged harm and who
would receive the benefit of recovery or other remedy. See 845 A.2d 1031, 1033 (Del. 2004). Additional
legal hurdles apply to derivative suits, including the so-called demand requirement of Chancery Rule
23.1 that plaintiffs in derivative actions try to first obtain relief from the board. See Aronson v. Lewis,
473 A.2d 805, 811–12 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.
2000); DEL. CH. CT. R. 23.1.
12. Aronson, 473 A.2d at 812.
13. See id.; Grossman, supra note 7, at 401.
14. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993); see also Grossman, supra note
7, at 401.
15. See, e.g., Allied Chem. & Dye Corp. v. Steel & Tube Co., 120 A. 486, 494 (Del. Ch. 1923).
Delaware was not alone in recognizing a duty of care. In Litwin v. Allen, a New York Supreme Court
recognized that “[a] director is called upon ‘to bestow the care and skill’ which the situation demands.”
25 N.Y.S.2d 667, 678 (Sup. Ct. 1940) (quoting R.R. Co. v. Lockwood, 84 U.S. (17 Wall.) 357, 383
(1873)).
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negligence standard to determine breaches of the duty of care.16 Other cases,
however, required something stronger, looking instead for directorial action
closer to recklessness.17 The apparent ambiguity certainly did not go unnoticed
by the Delaware courts, as the supreme court showed in 1984 when it forthrightly acknowledged that “Delaware cases use a variety of terms to describe
the applicable standard” in a duty-of-care suit.18
The ambiguity surrounding the standard that triggered liability under Delaware’s duty of care persisted because, in practice, cases where directors were
held liable for breaches of the duty of care were rare. Writing in 1968, Professor
Joseph Bishop expressed skepticism that the duty of care remained a viable
basis for directorial liability, remarking that the class of cases in which directors
were held liable for “honest negligence” had been “virtually extinct for a
quarter of a century.”19 Taking an even longer view of history, Professor Bishop
remarked that finding cases in which industrial corporations’ directors were held
liable in derivative actions for negligence without charges of self-dealing was
like “search[ing] for a very small number of needles in a very large haystack.”20
Putting the matter somewhat more bluntly, Professors Lawrence Cunningham
and Charles Yablon acknowledged that casebooks and commentators before
1985 bifurcated corporate fiduciaries’ obligations into separate duties of care
and loyalty but claimed that “everyone knew that only the duty of loyalty
mattered.”21
Van Gorkom changed all that. In that case, James Van Gorkom, the chairman
and chief executive officer of Trans Union, met with senior management to
discuss business problems the company faced due to its inability to generate
enough taxable income to take full advantage of its investment tax credits, a
problem that hampered its competitiveness.22 In the course of the discussion,
Van Gorkom and management considered selling the company for somewhere
16. See Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963). In that case, plaintiffs
brought a derivative action against the directors of Allis-Chalmers alleging breach of fiduciary duty to
the company when the directors failed to uncover and prevent illegal antitrust activity by company
employees. Although the Delaware Supreme Court sided with the defendants, it remarked that “directors of a corporation in managing the corporate affairs are bound to use that amount of care which
ordinarily careful and prudent men would use in similar circumstances.” Id. at 127, 130, 131; see also
Litwin, 25 N.Y.S.2d at 677–78.
17. See Allied Chem. & Dye Corp., 120 A. at 494 (explaining that the sale of a company’s assets can
be blocked when the price to be paid falls short enough of the fair value “that it can be explained only
on the theory of . . . a reckless indifference to the rights of others interested”).
18. See Aronson, 473 A.2d at 812. Despite the verbal ambiguity that the supreme court noticed, it
remarked that it was “satisfie[d] . . . that under the business judgment rule director liability is predicated
upon concepts of gross negligence.” Id.
19. Joseph W. Bishop, Jr., Sitting Ducks and Decoy Ducks: New Trends in the Indemnification of
Corporate Directors and Officers, 77 YALE L.J. 1078, 1098–99 (1968).
20. Id. at 1099.
21. Lawrence A. Cunningham & Charles M. Yablon, Delaware Fiduciary Duty Law After QVC and
Technicolor: A Unified Standard (and the End of Revlon Duties?), 49 BUS. LAW. 1593, 1597 (1994).
22. Smith v. Van Gorkom, 488 A.2d 858, 864–65 (Del. 1985).
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between $50 and $60 per share.23 Van Gorkom said he felt comfortable selling
his shares for $55 apiece and sought out talks with his acquaintance, Jay
Pritzker, a specialist in corporate takeovers.24 At Pritzker’s insistence that any
deal be consummated quickly, the board agreed to sell Trans Union after a
single two-hour meeting less than a month later for $55 per share—a substantial
premium over the prevailing market price.25 Following the announcement,
several key officers threatened to resign if the terms of the sale were not altered;
accordingly, the agreement was modified to allow Trans Union to solicit and
receive higher bids, with any competing bidder receiving the same information
as Pritzker’s group.26 The board approved the revised agreement without seeing
its text.27 The Delaware Supreme Court found the defendant directors “fail[ed]
to inform themselves of all information reasonably available to them and
relevant to their decision to recommend the . . . merger”28 and held them monetarily liable for breaching their duty of care before the case was settled for
$23.5 million.29 In so doing, the Delaware Supreme Court settled—seemingly
once and for all—that “gross negligence is . . . the proper standard for determining whether a business judgment reached by a board of directors was an
informed one” and, in effect, whether directors could be held monetarily liable
for a breach of the duty of care.30
Panic followed.31 According to one study, liability insurance for corporate
directors and officers underwent more than a tenfold increase in premiums.32 In
direct response to the Van Gorkom decision and the ensuing liability crisis, the
Delaware legislature enacted section 102(b)(7), permitting corporations to exculpate their directors for monetary damages stemming from a breach of the duty
of care.33 In crafting the new policy, section 102(b)(7)’s drafters’ central mission was to create “a statute that would only immunize conduct that breached
23. Id. at 865.
24. Id. at 865–66.
25. Id. at 869, 874–75.
26. Id. at 869–70.
27. Id. at 882–83.
28. Id. at 893.
29. See J. Robert Brown, Jr. & Sandeep Gopalan, Opting Only in: Contractarians, Waiver of
Liability Provisions, and the Race to the Bottom, 42 IND. L. REV. 285, 298 n.71 (2009) (noting
settlement amount). The Delaware Supreme Court had ordered the court of chancery to award damages
equal to the extent to which the fair value of Trans Union exceeded $55 per share, the share price at
which Pritzker bought Trans Union. See Van Gorkom, 488 A.2d at 893.
30. Van Gorkom, 488 A.2d at 873.
31. Holland, supra note 4, at 691.
32. Fred S. McChesney, A Bird in the Hand and Liability in the Bush: Why Van Gorkom Still
Rankles, Probably, 96 NW. U. L. REV. 631, 647 n.70 (2002) (citing Michael Bradley & Cindy A.
Schipani, The Relevance of the Duty of Care Standard in Corporate Governance, 75 IOWA L. REV. 1,
50–51 (1989)).
33. Malpiede v. Townson, 780 A.2d 1075, 1095 (Del. 2001) (“[A]s a matter of the public policy of
this State[,] Section 102(b)(7) was adopted by the Delaware General Assembly in 1986 following a
directors and officers insurance liability crisis and the 1985 Delaware Supreme Court decision in Smith
v. Van Gorkom.”).
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the duty of care without involving more serious misconduct.”34
The medicine worked: In the quarter following the passage of section 102(b)(7), insurance premiums actually decreased.35 Since 1986, section
102(b)(7) charter provisions have become a virtual ubiquity among Delaware
corporations,36 and more than two decades have passed without a single Delaware court imposing monetary liability on a director solely for a breach of the
duty of care.37 Going forward, it seemed that the duty-of-care haystack would
contain even fewer needles.
II. EULOGIZING THE DUTY OF CARE IN DELAWARE: WHY SOME ARGUE IT NO
LONGER EXISTS
Unsurprisingly, many academics have seen in the post-section 102(b)(7) era’s
dearth of successful care-based lawsuits for monetary damages proof that the
duty of care has withered into something close to a vestigial artifact of corporate
law. According to one view, Delaware’s enactment of section 102(b)(7) is part
of a broader “race to the bottom” in corporate law, in which legislatures
gradually water down the law’s strength to placate directors at the expense of
shareholder protections.38 Under this theory, directors in Delaware saw the
chance to relieve themselves of the legal obligations flowing from their duty of
care.39 Responding to this opportunity, directors of companies already incorporated in other states threatened to reincorporate in Delaware if their current
states did not make similar changes to the laws.40 Not wanting to lose the
corporations to Delaware, states began to enact laws similar to Delaware’s
section102(b)(7)—with forty states passing director-protecting legislation in the
first two years after Van Gorkom, according to one count.41 With the necessary
legislative reforms in place, the story goes, directors used their control of the
proxy machinery to kill the duty of care and continue thereafter with further
34. Strine et al., supra note 10, at 662. One of Strine’s coauthors, R. Franklin Balotti, was one of the
four members of the Delaware State Bar Association group tasked with drafting the language of section
102(b)(7). He writes that the drafting committee’s aim in crafting the new law was squarely aimed at
this purpose rather than insinuating that “acts or omissions not in good faith” do not constitute a
“breach of the duty of loyalty.” See id. at 661–63. Compare DEL. CODE ANN. tit. 8, § 102(b)(7)(i) (2015)
(referring to “any breach of the director’s duty of loyalty to the corporation or its stockholders”) with id.
§ 102(b)(7)(ii) (referring to “acts or omissions not in good faith”).
35. See Bradley & Schipani, supra note 32, at 52.
36. Holland, supra note 4, at 692. This phenomenon is hardly unique to Delaware. See Lawrence A.
Hamermesh, Why I Do Not Teach Van Gorkom, 34 GA. L. REV. 477, 490 (2000) (observing that
“[c]harter provision enabling statutes like Delaware’s section 102(b)(7), moreover, have been almost
universally implemented by corporations to which such laws apply.”) In fact, exculpation provisions are
so common that, in a sample of one hundred Fortune 500 companies, only two—neither of which were
Delaware corporations—had failed to adopt an exculpation provision. See id.
37. See Grossman, supra note 7, at 404.
38. See, e.g., Ramirez, supra note 5, at 358.
39. See id.
40. See Steinberg, supra note 6, at 920.
41. Ramirez, supra note 5, at 359 (citing James J. Hanks, Jr., Evaluating Recent State Legislation on
Director and Officer Liability Limitation and Indemnification, 43 BUS. LAW. 1207, 1209–21 (1988)).
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efforts to limit their legal responsibilities in other ways.42
Although not every academic subscribes to this particular sequence of events,
the view that section 102(b)(7) killed off Delaware’s duty of care is hardly
heretical.43 One commentator, for instance, saw in section 102(b)(7) legal
permission for corporate directors to “opt out” of duty of care liability.44
Another, noting criticism of section 102(b)(7), suggested that similar statutes
subsequently enacted in other states have allowed the duty of care a sort of
“death with dignity.”45 Others still see in section 102(b)(7) an effort to push the
courts out of the business of policing the duty of care by itself.46 The formulations vary, but the takeaway is clear: The war over the duty of care is over, and
the directors won. “[T]here will never be another Van Gorkom,” former Delaware Supreme Court Justice Andrew Moore once famously remarked.47 In the
view of many, Justice Moore’s words are correct because the duty that was
the basis of the court’s decision in Van Gorkom has since been shelved by the
legislature.48
III. FINDING THE PULSE: EVIDENCE THAT THE DUTY OF CARE STILL EXISTS IN
DELAWARE TODAY
If the passage of section 102(b)(7) truly were an effort to “obliterate” the duty
of care,49 one might expect to encounter the doctrine rarely, if at all, in litigation
involving corporations whose charters include such exculpation provisions. This
is, however, not the case—including during the years when the post-revolutionary fervor following the legislature’s passage of section 102(b)(7) was presumably at its fiercest. This Part will argue that there are at least four strands of
Delaware jurisprudence that show that the duty of care lives on. Section A will
examine a series of cases in which the Delaware Supreme Court went out of its
way to impress upon litigants the continued importance of the duty of care. This
section will argue that, although the duty of care may not have directly affected
the outcome of these particular cases, the language used in the supreme court’s
opinions was intended to send an unmistakable signal that the court would
42. See id. at 359–60.
43. See Grossman, supra note 7, at 404 (noting that “several commentators [have] conclude[d] that
the fiduciary duty of care exists only as an aspirational and unenforceable standard”).
44. See Joel Seligman, Essay, The Case for Federal Minimum Corporate Law Standards, 49 MD. L.
REV. 947, 974 & n.129 (1990) (internal quotation marks omitted).
45. Park McGinty, The Twilight of Fiduciary Duties: On the Need for Shareholder Self-Help in an
Age of Formalistic Proceduralism, 46 EMORY L.J. 163, 171–72 & n.4 (1997).
46. See Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law
Jurisprudence, 55 DUKE L.J. 1, 14 (2005) (noting that “the dynamics of [section] 102(b)(7) created an
immediate dismissal right for duty-of-care claims,” and that in passing section 102(b)(7), the legislature
affirmed “the principle that the judiciary would stay out of corporate governance, provided that the
board did not behave disloyally or . . . in bad faith”).
47. See McChesney, supra note 32, at 632 (quoting Oral Argument, Moran v. Household Int’l, Inc.,
500 A.2d 1346 (Del. 1985)) (internal quotation marks omitted).
48. See Steinberg, supra note 6, at 920.
49. Ramirez, supra note 5, at 359.
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continue to police boardrooms for gross procedural negligence to the extent of
its ability. Section B will examine several cases where the Delaware Supreme
Court formally held that courts must perform an inquiry into directors’ compliance with the duty of care despite the presence of a section 102(b)(7) exculpation provision in all but the most limited circumstances. Section C will consider
the duty of care in the unique context of mergers and argue that the duty of care
remains a critical tool for parties seeking an injunction, which, given the money
typically at stake, is often a more desirable remedy than would be directorial
monetary damages. Finally, section D will argue that the duty of care lives on as
a possible basis for monetary damages against corporate officers. Taken together, these four strands provide more than ample evidence to conclude that,
contrary to the views of some, Delaware’s duty of care lives on and is poorly
suited to play the lead role in a morality play about states’ tendencies to water
down their corporate laws.
A. THE STANDARD RULE DICHOTOMY: HOW DELAWARE COURTS IMPOSE THE DUTY OF
CARE OUTSIDE THE STRICT CONFINES OF DOCTRINE
It is perhaps tempting to conclude that doctrine is the only weapon in any
court’s arsenal; however, such a position takes an unduly narrow view of the
courts’ ability to influence corporate actors. Edward B. Rock, for instance,
argues that Delaware corporate law judges are better thought of “as preachers
than as policemen.”50 Rather than simply making prosaic pronouncements of
judicially enforceable constraints on directorial action, Rock argues that Delaware courts develop “standards of conduct” for directors through decisions that
are, in some sense, “corporate law sermons.”51
Putting aside for a moment the efficacy of any such sermons, in the years
since the passage of section 102(b)(7), those in the pews have been treated to a
number of discourses concerning the importance of full directorial compliance
with the duty of care. One early homily came in Cede & Co. v. Technicolor,
Inc.52
Technicolor, by all accounts, was an unlikely candidate to have much relevance to Delaware’s duty of care in the post-exculpation world, having arisen
from a set of facts that predated the passage of section 102(b)(7).53 Technicolor
involved a complicated set of issues involving claims relating to both the duty
50. Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L.
REV. 1009, 1016 (1997).
51. Id. (internal quotation marks omitted).
52. 634 A.2d 345 (Del. 1993).
53. Technicolor involved a suit by a dissenting shareholder against Technicolor and seven of its
directors relating to its acquisition by MacAndrews & Forbes Group in 1982 and 1983. Id. at 349–50.
As such, the Technicolor directors faced the threat of personal monetary liability for breaches of the
duty of care, for which directors of corporations with an exculpation provision today could not be held
liable. See E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate
Law and Governance from 1992–2004? A Retrospective on Some Key Developments, 153 U. PA. L.
REV. 1399, 1428 & n.91 (2005) (noting that Technicolor arose before enactment of section 102(b)(7)
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of care and loyalty;54 however, for purposes of the suit, the Delaware Court of
Chancery was willing to assume that the directors had violated their duty of
care.55 Even still, Chancellor Allen found that the question did not require
resolution because the plaintiff did not prove injury stemming from any breach
of the duty of care.56 The Delaware Supreme Court surmised from Chancellor
Allen’s opinion concerning the need to prove causation an effort to cabin the
effects of Van Gorkom on Delaware law.57 The Delaware Supreme Court
reversed this aspect of the decision58 and seized on it as an opportunity to
defend the importance of the duty of care as articulated in Van Gorkom.59 In so
doing, the Technicolor court remonstrated that the duty of care was not a
subsidiary duty60 in post-section 102(b)(7) Delaware but was “of equal . . . significance” with the duty of loyalty.61
The Delaware Supreme Court insinuated that its concern with adherence to
the duty of care could have some doctrinal bite.62 For the first time, the
Delaware Supreme Court said a shareholder plaintiff has to establish that the
defendant directors “breached any one of the triads of their fiduciary duty—
good faith, loyalty or due care.”63 More than simply reiterating the importance
of the duty of care as an abstract matter, the triad-formulation created at least
the conceptual possibility that a director could face monetary liability for
careless decisions: Although the duties of care and loyalty may long have been
separate and distinct,64 it now seemed possible that sufficiently careless decisions could amount to bad faith.65 If true, such a fact would be significant
because section 102(b)(7) excludes from its protections breaches of the duty of
and was, consequently, “anomalous doctrinally” because personal liability for breaches of the duty of
care have since been mooted).
54. See Technicolor, 634 A.2d at 366.
55. Cinerama, Inc. v. Technicolor, Inc., No. 8358, 1991 WL 111134, at *17 (Del. Ch. June 24, 1991),
aff’d in part, rev’d sub nom. Technicolor, 634 A.2d at 345.
56. Id. at *18.
57. See Technicolor, 634 A.2d at 358–59, 371. The Delaware Supreme Court characterized Chancellor Allen’s opinion as leaving “no doubt that [the chancellor] was referring to the Court’s decision in
Smith v. Van Gorkom,” when he “subordinat[ed] the due care element of the business judgment rule.”
Id. at 358.
58. See id. at 371.
59. See Strine et al., supra note 10, at 684. It perhaps bears noting that Justice Horsey, who reversed
Chancellor Allen’s decision in Technicolor, also authored the original opinion in Van Gorkom. See id.
60. See id.
61. Technicolor, 634 A.2d at 367.
62. Cf. Strine et al., supra note 10, at 691 (noting that the key area in which the debate about the
distinction between the duty of loyalty and good faith had some “policy bite was in addressing
the liability of directors in situations when they lacked any personal economic motive to injure the
corporation”).
63. Technicolor, 634 A.2d at 361.
64. See id. at 367 (“Duty of care and duty of loyalty are the traditional hallmarks of a fiduciary who
endeavors to act in the service of a corporation and its stockholders.”).
65. See, e.g., Veasey & Di Guglielmo, supra note 53, at 1449–50 (“[T]he many process flaws in this
case raise serious questions as to the independent directors’ good faith.”) (quoting Emerald Partners v.
Berlin, No. 295, 2003 WL 23019210, at *1 (Del. Dec. 23, 2003)).
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loyalty66 and acts or omissions not in good faith.67 Consequently, were some
sufficiently troubling breaches of the duty of care to rise to the level of bad
faith, directors could face monetary damages.68 By concealing that Technicolor
was a relative rarity given section 102(b)(7)’s inapplicability to its facts and by
insinuating that there could be a backdoor through which the duty of care could
slip to impose liability on directors, the Delaware Supreme Court’s message
was hard to miss—the duty of care still matters.
In the years to follow, the Delaware Supreme Court kept the sermons coming
concerning the duty of care, with its audience’s interest piqued not least because
of the court’s triad language in Technicolor. One of its more detailed discourses
on the duty of care came in Brehm v. Eisner.69 In that case, a dissatisfied
shareholder of the Walt Disney Company brought a derivative claim against
Disney’s board of directors concerning the short-lived and extraordinarily costly
tenure of Michael Ovitz as president.70 Ovitz’s five-year agreement with Disney
gave him a base salary of $1 million per year, a discretionary bonus, and two
sets of stock options that would enable him to purchase up to five million shares
of Disney stock.71 In the event of a no-fault termination—which, as it happened, would come just over fourteen months later—Ovitz was entitled to the
present value of his remaining salary payments through September 30, 2000, a
$10 million severance payment, an additional $7.5 million for each fiscal year
left under the agreement, and the immediate vesting of a portion of his stock
holdings.72 The plaintiff challenged both the old board’s approval of the employment agreement and the new board’s decision to “rubber-stamp” Eisner and
Ovitz’s decision that Ovitz leave the company pursuant to a no-fault termination
agreement.73
The chancery court, however, dismissed the complaint with prejudice for
failure to set forth particularized facts amounting to a reasonable doubt that the
business judgment rule had been successfully rebutted.74 The Delaware Supreme Court, hardly enamored of the “pastiche of prolix invective”75 that was
the complaint, held that the plaintiff’s “blunderbuss of a mostly conclusory
pleading” should be dismissed—but without prejudice.76 In so doing, the
66. See DEL. CODE ANN. tit. 8, § 102(b)(7)(i) (2015).
67. See id. § 102(b)(7)(ii) (2015).
68. Even still, former Chief Justice of the Delaware Supreme Court E. Norman Veasey, writing in
2005 with Christine T. Di Guglielmo, said that, were he a director, he “would not lose much sleep over
it.” Veasey & Di Guglielmo, supra note 53, at 1448. That was, of course, good advice because, as will
be further discussed, the Delaware Supreme Court in Stone v. Ritter in 2006 held that “the fiduciary
duty violated by that [bad faith] conduct is the duty of loyalty.” 911 A.2d 362, 369–70 (Del. 2006).
69. 746 A.2d 244 (Del. 2000).
70. See id. at 248–49.
71. Id. at 250.
72. Id. at 250–51.
73. Id. at 251–52 (internal quotation mark omitted).
74. Id. at 248.
75. Id. at 249.
76. Id. at 267.
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Delaware Supreme Court articulated a new test for the duty of care and made
clear that its primary task in assessing the chancery court’s dismissal of the suit
was to determine whether or not the Disney board’s actions passed or failed this
revised test.77 Although the Delaware Supreme Court did not excuse demand, it
is difficult to square the holding in Brehm with the theory that the duty of care
had died in Delaware: The supreme court, applying a clarified due care test,
allowed the plaintiff to refile a claim against directors that would ultimately go
all the way to trial.78 Given the high rate at which cases settle before trial on the
merits,79 the supreme court’s decision to let the case survive, if only after
refiling, sent a clear signal that duty-of-care violations should not be ignored
when assessing the merits of a claim.
To be sure, as time continued to pass and the decades since the passage of
section 102(b)(7) began to pile up, not every development in the Delaware
Supreme Court’s fiduciary-duty jurisprudence was good news for plaintiffs.
Perhaps most significantly, the Court in Stone v. Ritter80 finally put to rest the
triad-based theory that directorial carelessness could result in monetary liability
as a breach of good faith. In that case, the plaintiff shareholders sued certain
current and former directors of AmSouth Bancorporation for not exercising
sufficient oversight that would have prevented employees of AmSouth’s whollyowned banking subsidiary from failing to file “Suspicious Activity Reports” as
required by federal law.81 The discovery that AmSouth employees had failed to
file the required reports arose in the course of a government investigation
following the implosion of a Ponzi scheme run by an attorney and an investment advisor, who had used AmSouth accounts to generate interest payments to
the scheme’s victims.82 As part of the government’s investigations, AmSouth
and its banking subsidiary were required to pay $40 million in fines and an
additional $10 million in civil penalties.83 In rejecting the plaintiffs’ claims, the
Delaware Supreme Court noted that directorial liability for failures of oversight
involves a question of whether the directors acted in good faith.84 In order for a
77. See id. at 259. The Delaware Supreme Court said that the chancery court’s “due care test,” which
asked whether the directors were “reasonably informed” in their actions, was “too cryptic[].” Id. The
Delaware Supreme Court then said that presuit demand could be excused if the courts determine that
“the particularized facts in the complaint create a reasonable doubt that the informational component of
the directors’ decisionmaking process, measured by concepts of gross negligence, included consideration of all material information reasonably available.” Id. The court then said that it would “apply this
analytical framework to the particularized facts pleaded.” Id.
78. See In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 756 (Del. Ch. 2005). As the rest of
the story unfolds, the plaintiffs did not prevail at trial. Id. at 779.
79. See, e.g., Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84
NW. U. L. REV. 542, 590 (1990) (noting that, even despite Delaware’s speedy resolution of cases, most
matters settle before the supreme court has a chance to review them).
80. 911 A.2d 362 (Del. 2006).
81. Id. at 364–65 (internal quotation marks omitted).
82. See id. at 365.
83. Id.
84. See id. at 369 (noting that the standard for “so-called ‘oversight’ liability draws heavily upon the
concept of director failure to act in good faith”).
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failure of oversight to rise to the level of bad faith, the court noted, the board’s
inaction must amount to a “sustained or systematic failure of the board to
exercise oversight—such as an utter failure to attempt to assure a reasonable
information and reporting system exists.”85 In approving this standard, the court
acknowledged that “a failure to act in good faith requires conduct that is
qualitatively different from, and more culpable than, the conduct giving rise to a
violation of the fiduciary duty of care.”86 As a result, the Delaware Supreme
Court had officially closed the door to plaintiffs’ lawyers’ long-running hopes to
transmogrify good faith into grounds from which a successful suit for directorial
monetary liability for breaches of the duty of care could be launched.87
But even if the triad theory of fiduciary duty was, ultimately, unavailing to
plaintiffs’ lawyers hoping to smuggle the duty of care in through good faith,
the Delaware Supreme Court had hardly decided to shelve its sermons on the
importance of the duty of care. One particularly forceful explication of the
significance of care in Delaware came in Lyondell Chemical Co. v. Ryan.88 In
that case, the Delaware Supreme Court considered a claim by a shareholder of
Lyondell, then the third largest independent, publicly traded chemical company
in North America, stemming from the company’s acquisition by Basell AF, a
privately held Luxembourgian company.89 The suit alleged that the directors
breached their fiduciary duties in part by their two months of inaction after an
affiliate of an entity owned by Basell’s owner filed a form with the Securities
and Exchange Commission disclosing its right to acquire an 8.3% block of
Lyondell’s stock—a sign that the company was “in play.”90 The court of
chancery remarked that the facts of the case were “somewhat novel” in that
Lyondell was neither in financial peril nor otherwise in the market for a merger
85. Id. (quoting In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996))
(internal quotation marks omitted). In so doing, the Delaware Supreme Court ratified a standard for
oversight claims set forth a decade earlier by the court of chancery in Caremark. In that case, the court
of chancery approved a settlement in a derivative suit brought against directors of Caremark International over their failure to monitor the company’s employees’ actions, which resulted in the corporation
being indicted for multiple felonies relating to violations of various laws and regulations applying to
healthcare providers and also resulted in a plea agreement requiring the company to make various
payments ultimately totaling approximately $250 million. Caremark, 698 A.2d at 960–61, 967.
86. Stone, 911 A.2d at 369.
87. See id. at 370 (remarking that good faith could be described as part of a triad of duties only
“colloquially” and that “the obligation to act in good faith does not establish an independent fiduciary
duty that stands on the same footing as the duties of care and loyalty”). Although significant, the Stone
court’s conclusion that there were only two primary fiduciary duties was hardly a new idea. In Guttman
v. Huang, for instance, then-Vice Chancellor Strine argued that good faith was the “essence” of loyalty
rather than a separate, coequal fiduciary duty because, although one could act in subjective good faith
but disloyally, one could not act loyally while acting in bad faith. 823 A.2d 492, 506 n.34 (Del. Ch.
2003).
88. 970 A.2d 235 (Del. 2009).
89. Id. at 237.
90. Id. at 237, 241–42 (internal quotation marks omitted).
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partner before the transaction;91 instead, the board was merely a “passive
conduit” for Basell’s “unsolicited, attractive bid.”92 The court of chancery
seemed to think there was something careless in Lyondell’s behavior, noting
that the plaintiff’s complaints “relate primarily to the . . . duty of care” and that
the plaintiff may be able to prove the breach at trial.93 Even still, because of the
presence of an exculpation provision pursuant to section 102(b)(7), the plaintiff’s only hope at trial was to prove a violation of the duty of loyalty.94
The board’s conduct in agreeing to the merger had some striking similarities
to Van Gorkom. Like Van Gorkom where the court was unwilling to find a
breach of the duty of loyalty,95 the Delaware Supreme Court found that the
Lyondell directors could not have been disloyal because they (1) met several
times to discuss Basell’s offer, (2) were generally aware of Lyondell’s value, (3)
followed their financial and legal advisors’ advice, and (4) attempted to negotiate a higher price from Basell even though Lyondell’s financial advisors termed
the offer “an absolute home run.”96 But also like Van Gorkom,97 the Delaware
Supreme Court was troubled by the directors’ seeming lack of care, stating its
willingness to assume “that the Lyondell directors did absolutely nothing to
prepare for Basell’s offer” and that the directors “did not even consider conducting a market check before agreeing to the merger.”98 Unfortunately for the
plaintiff, the merger had already been consummated, meaning no care-based
relief was available.99 Accordingly, the Delaware Supreme Court granted summary judgment for the defendants.100
At first blush, the supreme court’s refusal to grant relief in Lyondell may
seem to corroborate the claim that the duty of care was dead in Delaware;
however, a closer look reveals that the decision was, in fact, another opportunity
for the justices to preach the importance of care. For its part, the court of
chancery had hardly been blind to the deficiencies in the board’s process of
preparing for the merger, calling the directors’ inaction “troubling” and denying
summary judgment on the basis of a possible breach of the duty of loyalty.101
The Delaware Supreme Court decided to reverse not because it was untroubled
91. Ryan v. Lyondell Chem. Co., C.A. No. 3176-VCN, 2008 WL 2923427, at *11 (Del. Ch. July 29,
2008), rev’d, 970 A.2d 235 (Del. 2009).
92. Id.
93. Id.
94. Id. The court of chancery acknowledged that the exculpation provision barred only an award of
monetary damages for a breach of the duty of care but observed that monetary damages were the only
remedy currently open to the plaintiff. Id.
95. See Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985) (noting that the case does not present a
question concerning the directors’ duty of loyalty or good faith).
96. Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239, 244 (Del. 2009).
97. See Van Gorkom, 488 A.2d at 893.
98. Lyondell, 970 A.2d at 244 (internal quotation marks omitted).
99. See id. at 237.
100. Id.
101. Ryan v. Lyondell Chem. Co., No. 3176-VCN, 2008 WL 2923427, at *11, *16 (Del. Ch. July 29,
2008), rev’d, 970 A.2d 235 (Del. 2009).
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by the directors’ inert response to the prospect of the merger; much the opposite,
the court indicated that it would not have questioned a denial of summary
judgment, if possible, on the basis of a breach of the duty of care.102 Instead, the
Delaware Supreme Court’s decision makes clear that the duties of care and
loyalty both exist and have distinct roles to play.
One could be forgiven for concluding that the Delaware Supreme Court’s
sermonizing is more a matter of legal aesthetics than real world consequence.
But as Rock noted, “[M]ost managers most of the time seem to do a pretty good
job looking out for shareholders’ interests[,]”—a fact he attributed to directors’
natural tendency to internalize “standards of conduct” set forth in Delaware
courts’ opinions.103 At least as far as carelessness in the boardroom goes, he
seems to be right. One study found that the surge in insurance premiums that
followed Van Gorkom resulted in policies with prices exceeding their actuarially
fair values, meaning that the increase came not from a radically enhanced risk
of directorial liability for gross negligence but rather was, in large measure, a
testament to the inelasticity of insurance prices.104 In other words, something
other than the bare risk of monetary liability ensured that the directors adhered
to their fiduciary duty of care—and that something may well have been community standards of conduct preached by the Delaware Supreme Court.
B. PROCEDURE AND THE ENDURING LINK BETWEEN CARE AND LOYALTY
At the same time the Delaware Supreme Court was preaching the virtues of
care, it was also resisting efforts by litigants to chip away at the procedural role
of the duty of care. In the years following Van Gorkom, defendant directors
sought to use section 102(b)(7) to nip duty of care suits in the bud. Although
they received some help from the Delaware Supreme Court in Malpiede v.
Townson,105 the justices were reluctant to wall off the duty of care entirely from
the duty of loyalty and, accordingly, often required lower courts to conduct a
full inquiry as to each duty.106
In Malpiede, the Delaware Supreme Court was faced with a case in which
questions concerning the directors’ level of care had been fully disentangled
from questions surrounding their degree of loyalty. The shareholder plaintiffs
sued, among others, certain directors of Frederick’s of Hollywood asserting
care- and loyalty-based fiduciary duty claims relating to the company’s merger
into Knightsbridge Capital Corporation.107 After finding that the duty of loyalty
claims were properly dismissed, the Delaware Supreme Court was confronted
102. Lyondell, 970 A.2d at 243. Unfortunately for the plaintiff, for reasons to be discussed later,
summary judgment in favor of the defendants is appropriate when a purely care-based suit seeks
monetary damages. See infra notes 105–109 and accompanying text.
103. Rock, supra note 50, at 1010, 1013.
104. See Bradley & Schipani, supra note 32, at 74.
105. 780 A.2d 1075 (Del. 2001).
106. See infra notes 112–17 and accompanying text.
107. Malpiede, 780 A.2d at 1079.
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with the question of whether the corporation’s exculpation provision could be
used to defeat the plaintiffs’ duty of care claim at the summary judgment stage,
or whether the case could proceed despite the impossibility of an award of
monetary damages.108 Even assuming gross negligence in the directors’ failure
to use a routine technique to resist corporate takeover efforts called a poison pill
to forestall Knightsbridge’s advances, the Delaware Supreme Court nonetheless
found that the case could be dismissed, holding that “if there is only an
unambiguous, residual due care claim and nothing else . . . Section 102(b)(7)
would bar the claim.”109
Celebration in the boardrooms was short-lived. Just a few months later in
Emerald Partners v. Berlin, the Delaware Supreme Court confirmed that Malpiede’s willingness to let section 102(b)(7) provisions defeat fiduciary duty claims
applied in only a narrow set of circumstances.110 In that case, Emerald Partners—a New Jersey limited partnership—sued to block a merger between May
Petroleum and thirteen subchapter S corporations owned by its chairman and
chief executive officer, who also owned 52.4% of May Petroleum.111 Because
the chairman and CEO stood on both sides of the transaction, the court’s initial
standard of review—unlike in Malpiede—was not the business judgment rule
but entire fairness.112 The Delaware Supreme Court reasoned that transactions
requiring entire fairness review from the beginning “are inextricably intertwined
with issues of loyalty.”113 Accordingly, unlike in Malpiede, in which only
residual duty of care claims could provide the basis for liability and so could be
dismissed on the basis of an affirmative defense raising section 102(b)(7),114 the
conflicted transaction in Emerald Partners required an actual determination at
trial as to the entire fairness of the transaction.115
In so deciding, it was not lost on the Delaware Supreme Court that many
conflicted transactions could involve a breach of the directors’ duty of care but
not loyalty, meaning that, after trial, the directors would be exculpated from
paying damages.116 Even still, the Delaware Supreme Court was unwilling to let
defendants treat care-based suits as wholly distinct from loyalty-based suits. As
a result, a particular class of cases—those in which the only viable claims
involve a breach of the duty of care but which nonetheless require entire
108. Id. at 1089–90.
109. Id. at 1089, 1094.
110. 787 A.2d 85 (Del. 2001).
111. Id. at 88.
112. Id. at 94 (“[Chairman and Chief Executive Officer Craig] Hall’s stance on both sides as a
corporate fiduciary, alone, is sufficient to require the demonstration of entire fairness.”) (quoting
Emerald Partners v. Berlin, 726 A.2d 1215, 1221 n.8 (Del. 1999)) (internal quotation marks omitted);
see, e.g., Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994) (“The initial burden of
establishing entire fairness rests upon the party who stands on both sides of the transaction.”).
113. Emerald Partners, 787 A.2d at 93.
114. See Malpiede, 780 A.2d at 1094.
115. Emerald Partners, 787 A.2d at 93.
116. See id.
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fairness review from the beginning—would have to be litigated completely,
despite section 102(b)(7)’s predictable effect.117 Because the Delaware Supreme
Court was unmistakably aware that section 102(b)(7) was, in some sense, a
rebuke by the legislature of the Van Gorkom decision,118 it is not hard to
imagine that, perhaps, what motivated the Delaware Supreme Court in
Malpiede and Emerald Partners was less doctrinal purity than judicial passiveaggressiveness—that is, an attempt on the part of the courts to tell the legislature that section 102(b)(7) could not stop the courts from policing directorial
carelessness. But an arguably sounder perspective is that the court’s decisions in
Malpiede and Emerald Partners instead reflect the courts’ continued awareness
that the duties of care and loyalty are generally interconnected and, consequently, both important. Given the unique role the duty of care has come to play
in the context of mergers—a topic taken up in the next section—this latter
interpretation seems closer to the mark.
C. MERGERS AND PLAINTIFFS’ SUCCESS OBTAINING NONMONETARY RELIEF FOR
BREACHES OF THE DUTY OF CARE
In contemplating the effect that section 102(b)(7) had on duty-of-care suits in
Delaware, it is easy to overlook that, as a direct response to Van Gorkom,
section 102(b)(7) by its terms applies only to care-based suits against directors
for monetary damages.119 Consequently, other forms of remedies—most significantly injunctions—are presumably still on the table. Hardly an inconsequential
technicality, the clear “majority of fiduciary litigation in Delaware is in the form
of challenges to director actions taken in the context of the sale of a company.”120 Because merger litigation tends to be filed and settled quickly so that
the transaction can be consummated and the profits reaped,121 an injunction will
often be the most desirable remedy from the perspective of the plaintiff who
wants to have maximum leverage over the defendant directors in settlement
negotiations.
At roughly the same time that Delaware expanded and then reined in its duty
of care through Van Gorkom and the enactment of section 102(b)(7), the state
117. See id. The court reasoned that, because damages are a proper focus in a suit subject to the
entire fairness standard only after a court finds the transaction to have been less than entirely fair, it then
follows that “the exculpatory effect of a Section 102(b)(7) provision only becomes a proper focus of
judicial scrutiny after the directors’ potential personal liability for the payment of monetary damages
has been established.” Id.
118. See Malpiede, 780 A.2d at 1095 (“[A]s a matter of the public policy of this State[,] Section
102(b)(7) was adopted by the Delaware General Assembly in 1986 following a directors and officers
insurance liability crisis and the 1985 Delaware Supreme Court decision in Smith v. Van Gorkom.”).
119. See DEL. CODE ANN. tit. 8, § 102(b)(7) (2015).
120. Robert B. Thompson & Randall S. Thomas, The New Look of Shareholder Litigation: AcquisitionOriented Class Actions, 57 VAND. L. REV. 133, 167 (2004).
121. See id. at 191 (noting that early settlement or dismissal for mergers and acquisition suits is
socially desirable because it allows defendants to move ahead with their business and plaintiffs to be
promptly compensated).
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witnessed a dramatic uptick in hostile takeover activity.122 Not surprisingly, the
duty of care became a valuable tool for litigants seeking compensation for
careless directorial action in a merger. An early suit concerning directorial
carelessness in a merger was Revlon, Inc. v. MacAndrews & Forbes Holdings,
Inc.123 Revlon concerned a bidding war between Ronald Perelman, the chief
executive officer of Pantry Pride, and Forstmann Little, a private equity firm, for
control of Revlon.124 Despite Pantry Pride’s vow to top any bid Revlon received, Revlon agreed to a deal with Forstmann Little for the purchase of
Revlon at $57.25 per share.125 Perelman, offering $58 per share, sued to
invalidate Revlon’s deal with Forstmann Little.126 The Delaware Supreme
Court’s holding in the case—that a board’s duty shifts from preserving the
corporate entity to maximizing the company’s value for the shareholders once
break-up becomes inevitable—is, of course, well known.127 Somewhat obscured by subsequent discussions of directors’ Revlon duties, however, is that
the duty of the “auctioneer” recognized by the Delaware Supreme Court in this
case is, at bottom, a straightforward application of the duty of care to the sale of
a company.128
Revlon was just one case in which the Delaware Supreme Court gave specific
guidance as to how directors’ fiduciary duties operate in a merger context. In
Unocal Corp. v. Mesa Petroleum Co.,129 the Delaware Supreme Court expressly
acknowledged that directors’ “duty of care extends to protecting the corporation
and its owners from perceived harm whether a threat originates from third
parties or other shareholders”;130 however, it articulated a new, intermediate test
for determining when an effort to resist a takeover attempt comports with the
directors’ fiduciary duties.131 Similarly, in Paramount Communications Inc. v.
122. See Stephen J. Lubben & Alana J. Darnell, Delaware’s Duty of Care, 31 DEL. J. CORP. L. 589,
601 (2006) (noting a “flurry” of hostile takeover activity during early- and mid-1980s).
123. 506 A.2d 173 (Del. 1986).
124. Id. at 175–76.
125. Id. at 178, 181.
126. Id. at 179.
127. Id. at 184.
128. See id. at 184–85 (“No such defensive measure can be sustained when it represents a breach of
the directors’ fundamental duty of care.” (citing Smith v. Van Gorkom, 488 A.2d 858, 874 (Del. 1985))).
129. 493 A.2d 946 (Del. 1985). In Unocal, the board of Unocal approved a self-tender offer for 49%
of the company’s outstanding shares provided Mesa Petroleum Co. acquired 64 million shares, in an
effort to fight off Mesa’s two-tiered “front loaded” cash tender offer at $54 per share. Id. at 949 (internal
quotation marks omitted). In order to ensure that Mesa could not circumvent Unocal’s defensive tender
offer, the board sought to exclude Mesa from its tender offer. Id. at 951. The Delaware Supreme Court
vacated the preliminary injunction granted by the court of chancery. Id. at 959.
130. Id. at 955.
131. The targeted corporation’s board action would be entitled to the protection of the business
judgment rule if the defendants showed (1) that, in good faith and after reasonable investigation, the
board had reason to believe that a danger to corporate policy and effectiveness existed and (2) that the
board’s action was reasonable given the threat the corporation faced. See Revlon, 506 A.2d at 180
(articulating the Unocal test). In subsequent cases, the Delaware Supreme Court clarified that a board’s
action fails this test where it is either coercive in that it is “aimed at ‘cramming down’ on its
shareholders a management-sponsored” plan or preclusive in that a successful takeover would be
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QVC Network Inc., the Delaware Supreme Court held that Revlon’s care-based
duty of the auctioneer applies in the context of a sale of a company previously
held in a “fluid aggregation of unaffiliated stockholders” to a controlling
shareholder.132
Although all of these cases ultimately are geared, at least in part, toward
assessing whether directors have complied with their fiduciary duty of care,
Professor Stephen J. Lubben and Alana J. Darnell argue that they have, in fact,
replaced the duty of care entirely with a new set of purely merger-based
rules.133 Lubben and Darnell argue that Omnicare, Inc. v. NCS Healthcare,
Inc.134 demonstrates that the Delaware Supreme Court has strained to resolve
cases under Unocal and Revlon when a straightforward application of the duty
of care would have been more appropriate.135 In Omnicare, NCS, a pharmacyservices provider, was on the brink of bankruptcy.136 In order to consummate an
acquisition by Genesis, it agreed to an “exclusivity agreement” locking up the
deal, pursuant to Genesis’s wish not to be a “stalking horse.”137 The Delaware
Supreme Court enjoined the merger under Unocal.138 Lubben and Darnell argue
that the Unocal line of cases was meant to protect against director entrenchment—a risk NCS’s shareholders plainly did not run.139 That the Delaware
Supreme Court jammed Omnicare into a Unocal analysis rather than an unadorned duty-of-care approach,140 the theory goes, shows that the duty of care
in Delaware, at best, has been “proceduralize[d]” into a burden-shifting vehicle.141
Certainly, this argument has its appeal; however, particularly in the years
since Lyondell, it seems descriptively inaccurate. In a number of recent cases,
perhaps recognizing the limits of merger analysis in policing directorial carelessness, the Delaware courts have been explicit in their reliance on the duty of care
when granting nonmonetary relief. For instance, in Police & Fire Retirement
System of City of Detroit v. Bernal, the plaintiff shareholder moved to expedite
the proceedings concerning its motion to block a merger between Data Domain
and NetApp, Inc.142 In ruling on the plaintiff’s motion to expedite, the chancellor observed that he was confronted with the question of whether the plaintiff
“mathematically impossible or realistically unattainable.” Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d
1361, 1387–89 (Del. 1995).
132. 637 A.2d 34, 43 (Del. 1994).
133. See Lubben & Darnell, supra note 122, at 601.
134. 818 A.2d 914 (Del. 2003).
135. See Lubben & Darnell, supra note 122, at 590–92.
136. Omnicare, 818 A.2d at 918, 921.
137. Id. at 921–22 (internal quotation marks omitted).
138. The Delaware Supreme Court found that, in the absence of a “fiduciary out” clause, the
“defensive measures [were] both preclusive and coercive” and “[t]herefore . . . invalid and unenforceable.” Id. at 918.
139. See Lubben & Darnell, supra note 122, at 619–20.
140. Lubben and Darnell argue that a reasonable director would not have agreed to NCS’s deal with
Genesis without a fiduciary-out clause because NCS then could not consider other deals. See id. at 626.
141. Id. at 609 (internal quotation marks omitted).
142. No. 4663-CC, 2009 WL 1873144, at *1 (Del. Ch. June 26, 2009).
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stated a sufficiently colorable claim to warrant expedited proceedings.143 Deciding that the plaintiff in fact had such a claim, the chancellor made clear that
section 102(b)(7) has no application in a suit concerning the duty of care in
which the plaintiff does not seek monetary damages.144 Unsurprisingly, the
plaintiff’s claim rested in large measure on the Delaware Supreme Court’s
decision in Revlon;145 however, the chancellor’s opinion made clear that the
relief he was granting stemmed from the strength of the plaintiff’s duty of care
theory146 rather than some abstract conceptualization of Revlon divorced from
the duty of care. If Delaware’s duty of care had become a dead letter because of
either section 102(b)(7) or Revlon, one would not know it from this case.
Bernal was hardly the only instance in recent years of Delaware courts
granting nonmonetary relief on the basis of the duty of care or, at least, coming
close. In Koehler v. NetSpend Holdings Inc., the court of chancery considered
the plaintiff shareholder’s motion to preliminarily enjoin Total System Services,
Inc.’s acquisition of NetSpend Holdings, Inc.147 Although the vice chancellor
ultimately declined to grant relief based on a balancing of the equities, he
cautioned that he could not find that the board was “sufficiently informed to
create a process to ensure best price” and, accordingly, breached its duty of
care.148
That same month, a different vice chancellor granted a preliminary injunction
against Morgans Hotels Group’s recapitalization plan in a separate case.149 That
plan involved the sale of the company’s “crown jewel” assets.150 With the deal
having fallen apart, a new board being subsequently elected, and a derivative
action ultimately filed against members of the Morgans board that had sought to
consummate the transaction, the court, in ruling on the directors’ motion to
dismiss, observed that the original injunction had been granted on the basis of
“inadequate notice and other process failures.”151 Even still, the court also
observed that, at least with respect to one director, “the plaintiffs had not shown
a reasonable probability of success on the merits of establishing a breach of the
duty of loyalty.”152 Consequently, it would be a fair inference to draw that the
143. See id. at *2.
144. See id. (“[O]n a motion for a preliminary injunction, the plaintiff does not have to overcome the
hurdle of an exculpatory provision that, as permitted by 8 Del. C. § 102(b)(7), exculpates directors from
personal liability for monetary damages for certain breaches of fiduciary duty.”) (emphasis omitted).
145. See id.
146. See id. at *3. The chancellor observed that Lyondell showed that “a plaintiff faces a significant
burden in showing that a board acted in bad faith by failing to . . . carry out their fiduciary duties in a
sale of control.” Id. Accordingly, the chancellor said, “in cases such as this one, the shareholders’ only
realistic remedy . . . may be injunctive relief.” Id.
147. No. 8373-VCG, 2013 WL 2181518, at *1 (Del. Ch. May 21, 2013).
148. Id. at *13.
149. See Kalisman v. Friedman, No. 8447-VCL, 2013 WL 2055190 (Del. Ch. May 14, 2013).
150. OTK Assocs., LLC v. Friedman, 85 A.3d 696, 709 (Del. Ch. 2014) (internal quotation marks
omitted).
151. Id. at 714.
152. Id. at 725.
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court’s reasoning for granting the original preliminary injunction was premised
at least in part on a violation of the duty of care. Taken together, these cases
powerfully demonstrate that the Delaware courts stand ready to grant nonmonetary relief to plaintiffs asserting a pure duty of care claim, a fact wholly
inconsistent with the theory that the duty of care has been wiped from Delaware
case law and at odds with Lubben and Darnell’s assertion that Revlon and
related cases have somehow created grounds for relief unmoored from breaches
of the duty of care. There is, however, one final strand in which the duty of care
has appeared in Delaware case law in recent years which makes clear that the
duty of care lives on.
D. THE POSSIBILITY OF CARE-BASED LIABILITY FOR OFFICERS
Perhaps one of the clearest objections to the thesis that section 102(b)(7)
obliterated the duty of care in Delaware is that the provision, by its very terms,
applies only to directors of corporations.153 Consequently, it would require an
extraordinary contortion of the statutory text to bring within its purview, for
instance, nondirectorial officers. Part of the reason that commentators were not
quicker to see signs of life in Delaware’s duty of care by virtue of section 102(b)(7)’s inapplicability to officers may be that it was not a settled matter
that officers of Delaware corporations owed fiduciary duties in the same measure as a director until 2009, when the Delaware Supreme Court handed down
its decision in Gantler v. Stephens.154 In that case, shareholders of First Niles
Financial, Inc. alleged that certain of the company’s directors and officers
violated their duties of care and loyalty by rejecting a good opportunity to sell
the company.155 In reversing the chancery court’s dismissal of the case, the
supreme court explicitly held that officers owe the same fiduciary duties to the
company as directors and cautioned that although “legislatively possible,” no
statutory provision currently authorized exculpation of corporate officers in the
same manner that section 102(b)(7) allows for exculpation of directors.156
The Gantler court’s observation was hardly a casual remark without actual
consequence. In a recent suit against a director who also served as chief
executive officer, the court of chancery, citing Gantler, took pains to note that,
although section 102(b)(7) does not apply to actions taken in one’s capacity
solely as an officer, the plaintiff had not distinguished between acts that the
defendant took as CEO and as a director.157 Also, just last year, in In re Rural
Metro Corp. Stockholders Litigation, erstwhile shareholders of the former
153. See DEL. CODE ANN. tit. 8, § 102(b)(7) (2015). § 102(b)(7) allows a provision eliminating or
limiting the personal liability “of a director” or of “stockholders . . . for breach of fiduciary duty as a
director.” Id.
154. 965 A.2d 695 (Del. 2009).
155. Id. at 699.
156. Id. at 708–09 & n.37.
157. See In re Celera Corp. S’holder Litig., No. 6304-VCP, 2012 WL 1020471, at *27 & n.191 (Del.
Ch. Mar. 23, 2012), aff’d in part, rev’d in part on other grounds, 59 A.3d 418 (Del. 2012).
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Rural/Metro Corporation sued, among others, RBC Capital Markets for aiding
and abetting the company’s directors’ breach of fiduciary duty in merging with
an affiliate of Warburg Pincus.158 Drawing on the Gantler court’s observation
about officers, the court of chancery rebuffed RBC’s argument that it should be
protected by the corporation’s exculpation provision as a party accused of
aiding and abetting the breach of duty.159 In so doing, the court reiterated that
“[t]he literal language of Section 102(b)(7) only covers directors . . . .”160 The
lesson, it seems, is clear: Section 102(b)(7) has no direct bearing on any
fiduciaries’ duty of care other than the corporate directors acting in their
capacity as directors.
CONCLUSION
Neat as it may be, the narrative that Delaware shelved the duty of care when
it enacted section 102(b)(7) is more fiction than fact. Before the supreme court
strengthened it in Van Gorkom, the duty of care had an obscure and uncertain
history in Delaware. The absence of clarity concerning what standard even
triggered its breach before the 1980s showed its limited vitality. This Note has
argued that four strands permeate Delaware corporate law which collectively
illustrate the continued relevance of the duty of care. First, the Delaware
Supreme Court’s “sermonizing” in the years after passage of section 102(b)(7)
created a standard of conduct in board rooms that, while not judicially enforceable through monetary damages, nonetheless contributed to corporate governance no more careless than in the years before Van Gorkom. Second, the
Delaware Supreme Court rebuffed efforts of litigants to cabin judicial inquiry
into compliance with directors’ duty of care in suits asserting violations of both
fiduciary duties. Third, and perhaps most significantly, the Delaware courts have
granted nonmonetary relief on the basis of pure duty of care claims, particularly
in the years since Lyondell. Fourth, and finally, the courts have been unmistakably straightforward in acknowledging that section 102(b)(7) provides no protection in care-based suits against corporate officers even for monetary damages.
Taken together, these strands demonstrate the continued relevance of the duty of
care in Delaware corporate law. But, more than that, they provide strong
evidence that Delaware law has continued to insist upon a certain level of care
in the boardroom. And that, perhaps, is why directorial carelessness, so far, has
not become a hallmark of corporate management in the post-section 102(b)(7)
era.
158. 88 A.3d 54, 63 (Del. Ch. 2014).
159. Id. at 86. The decision also acknowledged that the chancery court in In re Del Monte Foods Co.
Shareholders Litigation observed that section 102(b)(7) does not protect aiders and abetters. See id.
(citing 25 A.3d 813, 838 (Del. Ch. 2011)).
160. Id.