ProfessorBainbridge.com

Italianized Paella with a Shortcut

• 1 lb. boneless and skinless chicken breasts, cut into bite-sized pieces (I used organic, free range chicken from Gelson’s)
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• 1 tablespoon extra virgin olive oil
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• ¼ teaspoon Old Bay seasoning
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• ¼ teaspoon Paul Prudhomme poultry seasoning
  
• 6 links Italian sausage, casings removed and cut into bite-sized pieces (I used 3 sweet and 3 hot Gelson's store brand links)
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• ½ tablespoon olive oil
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• ¼ cup diced onion
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• ¼ cup diced celery
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• salt
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• 3 cloves garlic, minced fine
  
• 2 ½ cups low fat, low sodium organic chicken broth
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• 2 ½ cups dry white wine (don’t use an oaky wine, opt for something fairly neutral like a generic California or Australian white)
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• 1 14-½ ounce can diced Italian tomatoes
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• ¼ teaspoon dried oregano
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• 2 packages Alessi Risotto Milanese
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• 1 lb. deveined and peeled medium shrimp

Combine chicken pieces, olive oil, and seasonings in a non-reactive bowl and set aside to marinate for a few minutes.

Saute Italian sausage chunks in a large nonstick skillet over medium-high heat until well-browned on all sides. Transfer to a paper towel lined cookie sheet to drain. Wipe skillet with paper towels. Add chicken and saute over medium-high heat until browned on all sides. Transfer to a paper towel lined cookie sheet to drain.

Heat a large paella pan or dutch oven over medium-low heat for a few minutes. Add olive oil and heat for 1 minute. Add onions and celery. Season with salt. Sweat vegetables until soft but not brown. Add garlic. Cook 1 minute.

Add chicken broth, wine, tomatoes (with juices), and oregano to pan. Raise heat to high and bring to a boil. Reduce heat to medium low and add Alessi risotto mix packages. Stir. Cover and simmer 10 minutes.

Add chicken pieces, sausage chunks, and shrimp to pan. Raise heat to high until the mixture returns to the boil. Lower heat to medium-low, cover pan, and allow to cook 8 more minutes or until rice is al dente and shrimp is cooked through.

Serve in large pasta bowls. Top with freshly ground Parmesan cheese and chopped fresh Italian parsley.

DGCL Section 141(a) versus Precommitment Strategies

In an earlier post on Delaware Chancellor William Chandler's recent decision in Unisuper Ltd. v. News Corporation, I observed:

... as I explain in my book Corporation Law and Economics, corporate law generally ought to be enabling rather than mandatory in nature. Because director primacy is such a fundamental norm of corporate governance, however, limitations on the directors' power of fiat should be in the corporation's articles of incorporation (at least when one is dealing with a public corporation).

As I've thought about it, however, I decided that I was wrong to suggest that such limitations should be valid only if they're included in the articles of incorporation. The relevant statute is Delaware General Corporation Law section 141(a), which provides:

The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

On its face, § 141(a) is directed to an entirely different problem than the one raised by board-initiated restrictions on the board’s powers. In particular, note the reference in the second sentence of § 141(a) to the “powers and duties” of the board being “exercised or performed” by such other persons as provided in the certificate of incorporation. This language clearly reflects a concern with the special problems of close corporations, whose shareholders often seek to modify the default rules of corporate governance so as to run the firm as though it were a partnership Delaware has a special set of statutory provisions for close corporations whose articles of incorporation contain an election to be governed by those provisions. Among the special rules applicable only to such so-called statutory close corporations is a provision authorizing shareholders to limit the powers of the board of directors by mere contract. Outside of that limited context, however, § 141(a) makes clear that any such shareholder-initiated limitation on the board’s authority must be included in the articles of incorporation. Taken as a whole, therefore, § 141(a)’s language regarding exceptions to the board’s authority is not concerned with self-imposed limitations on the board’s authority. Instead, § 141(a) is concerned with ensuring the validity of such close corporation governance provisions, while requiring that they be included in the articles of incorporation rather than by mere contract. On its face, nothing in the statute compels a conclusion that the board cannot create self-imposed limitations on its authority.

Fed Ex Drivers: Employees or Independent Contractors

Whether someone is an employee (a.k.a. servant) or an independent contractor is a critical question for many reasons. An employer is generally responsible for torts committed by a servant, but generally is not liable for torts committed by an independent contractor. Employees are entitled to various job protections that independent contractors lack. And so on.

Christine Hurt blogged a recent Los Angeles Superior Court decision rejecting Federal Express' argument that its drivers are independent contractors rather than employees.

Los Angeles County Superior Court Judge Howard Schwab said FedEx had violated California law by classifying all of its single-route drivers as independent contractors and forcing them to incur expenses the company should have covered, including paying for fuel, oil, tires, repairs and liability insurance. The judge ordered payments ranging from a few hundred dollars to as much as $98,000 for about 200 class members. The case was tried over nine weeks last year. ...

In court, FedEx has argued that while it sets work rules for some contractors, they aren't employees because they don't have set start times, they can hire and fire workers, they use their own vehicles, and they choose their own routes.

I discussed these delivery driver cases in my book Agency, Partnership, & LLCs, explaining that:

Frank Frausto was a delivery driver for the Arizona Republic newspaper. Frausto’s car collided with a motorcycle driven by plaintiff William Santiago, who then sued the newspaper. The newspaper defended by claiming that Frausto was an independent contractor. The trial court agreed, granting the newspaper summary judgment on the issue as a matter of law. Applying an 8 factor test tracking Restatement (Second) § 220(2), the Arizona supreme court reversed and remanded for trial.

First, as to control by the alleged master, the court noted that the newspaper exercised little actual supervision, but was able to give Frausto specific instructions with the expectation that they would be followed. Pointing out that the power to fire is regarded as “one of the most effective methods of control,” the court noted that Frausto could be terminated without cause on 28 days notice and, moreover, could be terminated for unsatisfactory service without any notice. Second, the court noted that Frausto had no independent delivery business. He worked only for the newspaper, payments went to the newspaper and not the carrier, and accounts were serviced by the newspaper. This distinguished the case at bar from other newspaper carrier cases in which the delivery firm bought the newspapers from the publisher and resold them to delivery customers at a profit. Third, the court noted that being a newspaper carrier required little specialized or skilled training, which suggests that Frausto was a servant. Fourth, while the newspaper did not provide all of the necessary supplies, it did supply the newspapers and designated the route to be covered. Fifth, the court observed that the relationship was of indefinite duration, which points towards finding that Frausto was a servant. Sixth, Frausto was paid a regular weekly salary. Seventh, newspaper delivery was a core part of the publisher’s business. Finally, Frausto stated that he regarded himself as an employee. In sum, on all of the § 220 factors there was at least some support for treating Frausto as a servant and summary judgment was inappropriate.

I haven't seen Judge Schwab's decision, but my guess is that the key factors were (1) Fed Ex probably has the ability to fire the drivers on short notice if they fail to comply with instructions and (2) the drivers probably don't have an independent business (when Fed Ex comes to my door, the driver is in a Fed Ex truck wearing a Fed Ex uniform).

The business lesson is that out-sourcing only works if you outsource to a truly  independent business. If you try to get the benefits of vertical integration, while avoiding the legal responsibilities that attach to a vertically integrated firm, California will put substance ahead of form.

Are Lay and Skilling Finished?

Tom Kirkendall does a great job of explaining the likely implications of the plea deal by former Enron chief accountant Richard Causey. In a later post, Tom details the Causey cooperation agreement and its implications. Unlike the hyperbolic press reports, Tom's careful analysis suggests that the plea deal may not be as much of a problem for Lay and Skilling as the press thinks:

... inasmuch as Causey and his counsel have participated under a joint defense agreement with the Lay and Skilling defense teams for over two years now, virtually any of Causey's testimony would be subject to challenge as being derived from that joint defense effort. Moreover, as noted in this earlier post, Causey had problems in defending himself against the charges that Lay and Skilling do not, and his credibility may be subject to impeachment at trial through portrayal of the eve-of-trial plea deal as an effort to save his skin at the expense of his co-defendants.

Restricting Director Discretion

Larry Ribstein's got a very thoughtful post on the recent Delaware Chancery Court decision in  Unisuper Ltd. v. News Corporation. He writes:

... this case as it stands boils down to a simple one of statutory interpretation about what has to be in the certificate. It makes sense to require any contract in this situation to be clear. That’s evident from the facts here, including the considerable uncertainty about the terms of the supposed contract, and even who the parties were – not shareholders themselves, but an institutional investor group supposedly acting on behalf of shareholders whose interests in the firm the opinion didn't specify. It follows that it’s reasonable to require agreed managerial powers to be set forth in the certificate.

The more interesting question is what the certificate should be able to provide. Specifically, should a certificate that limits the board’s power to enter into a poison pill be enforceable? I think the answer to this question as a matter of policy is clearly yes.

I think that's basically right. as I explain in my book Corporation Law and Economics, corporate law generally ought to be enabling rather than mandatory in nature. Because director primacy is such a fundamental norm of corporate governance, however, limitations on the directors' power of fiat should be in the corporation's articles of incorporation (at least when one is dealing with a public corporation).

Crystal Rain

Tobias Buckell sent along a review copy of his forthcoming novel Crystal Rain. Like SM Stirling's Raj Whitehall series, whose premise it somewhat resembles, Crystal Rain is an interesting mix of fantasy and military science fiction. It starts off a bit slow, but especially picks up pace once main POV characters John deBrun and Pepper finally hook up.

Long ago, so the stories say, the old-fathers came to Nanagada through a worm’s hole in the sky. Looking for a new world to call their own, they brought with them a rich mélange of cultures, religions, and dialects from a far-off planet called Earth. Mighty were the old-fathers, with the power to shape the world to their liking---but that was many generations ago, and what was once known has long been lost. Steamboats and gas-filled blimps now traverse the planet, where people once looked up to see great silver cities in the sky.

Like his world, John deBrun has forgotten more than he remembers. Twenty-seven years ago, he washed up onto the shore of Nanagada with no memory of his past. Although he has made a new life for himself among the peaceful islanders, his soul remains haunted by unanswered questions about his own identity.

These mysteries take on new urgency when the fearsome Azteca storm over the Wicked High Mountains in search of fresh blood and hearts to feed their cruel, inhuman gods. Nanagada’s only hope lies in a mythical artifact, the Ma Wi Jung, said to be hidden somewhere in the frozen north. And only John deBrun knows the device’s secrets, even if he can’t remember why or how.

Tobias is an active blogger and is making a very aggressive effort to market the book through the blogosphere and I suspect it'll pay off. Buckell writes cleanly and skillfully, has a deft touch with plot twists, and is as good a world builder as any. What starts out shaping up as a Caribbean take on medieval fantasy turns into what Andrew Wheeler aptly calls "a lost-colony SF novel, low-tech division, conflict between more powerful alien races sub-division." Along the way, Buckell neatly avoids the Dark Lord cliche by creating bad guys who have some moral nuance. If I wasn't quite convinced by the ending, it was a plausible outcome and the ride getting there was fun.

I wouldn't put Buckell in the same class as my current favorites Charles Stross and John Scalzi, but I'd slot this book at about the same level as Andre Norton's best work, which is a pretty high standard IMHO.

Angst

I can't quite tell whether the market needs a valium or not. On the plus side, consumer confidence is way up. On the other hand, the yield curve keeps flirting with inverting, which is a traditional signal of investor lack of confidence and a frequent leading indicator of a recession. Also on the down side:

... more and more Americans seem to be stressed out, miserable and depressed, according to two new opinion polls. One long term survey shows that personal misery among Americans is at its highest levels since the early 1990s, with people saddled with woes over healthcare, unemployment, paying bills and romance. (Link)

It's all very puzzling, which makes it a good time to be in passively managed index funds. Of course, if you believe Burton Malkiel, as I do, anytime is a good time to be in passively managed index funds.

Respecting the Magisterium

There's a big fight in the St Louis Catholic diocese between the local bishop and dissident parishioners of a church who are insisting on financial independence. In a letter to the W$J's editor, Andrew Pohlman asserts that:

As a St. Louis resident and a member of the Catholic church, I am deeply offended and saddened by the actions of Archbishop Raymond L. Burke and his team of prosecutors attempting to uphold canon law ("Out of Line: A Catholic Parish Pays High Price for Independence," page one, Dec. 20). He would be best served adopting a philosophy made popular by the bracelets seen worn by Christians throughout the country: WWJD -- What Would Jesus Do? Canon law is as a matter of historical fact; man's law, not God's law. If this debate was held in front of the Pearly Gates, I am quite confident the outcome wouldn't result in the excommunication of devoted parishioners and clergy. Although I don't typically attend St. Stanislaus, I plan to attend Christmas Mass at that parish to show my support for the parishioners' mission. I don't, however, plan to repent in any way for spending time worshipping with a devoted group of followers who are simply asserting their independence under the leadership of a bishop engaged in a land-grab under the guise of a divine quest.

Pohlman's letter reflects a fundamental lack of understanding of Catholic theology; indeed, the implicit premise of Pohlman's letter is the core Protestant doctrine of sola scriptura. It is a core tenet of Catholic belief that the Church's magisterial teaching is authoritative:

We are talking not about an optional or secondary aspect of the faith, but about that which in final analysis makes Catholics Catholic and separates Catholics from other Christians. Acceptance of the magisterium and assent to the magisterium is the identifying Catholic belief.

In a real sense magisterium is an identifying mark of the Catholic Church, and acceptance of the magisterium is an identifying mark of the Catholic. In this ecumenical age I have come to understand the different Christian communities as differing indeed in doctrine, but differing also according to where they place final ecclesial authority under Christ. For the Orthodox it is the Patriarchate; for the Episcopalians it was the episcopoi or bishops; for the Presbyterians the presbytery; for the Congregationalists the individual congregation; and for the Baptists, no authority exists above the individual Christian. But for Catholics, as Section 25 of the Dogmatic Constitution on the Church of the Second Vatican Council teaches, final authority under Christ is found in the Pope and bishops, just as in the New Testament it reposed in Peter and the Apostles. (Link)

The canon law Pohlman so cavalierly dismisses is a core part of the magisterium:

... the lay Christian faithful are bound by the obligations and possess the rights which are enumerated in the canons of this title. (Canon 224)

What we have here thus is an example of the basic problem of the American Catholic Church; namely, the belief that the Church is a cafeteria.

A Note to Prof. Smith

My friend Tom Smith, Right Coast blogger and fellow corporate law professor, boasts that "USD kicks butt on bar results." Memo to Tom: Coming in sixth does not count as butt kicking in my book. Just for the record, via Paul Caron, here is the ranking of California law schools by their graduates' California bar results. The observant reader will note which school came in #1, by the way:

July 2005 California Bar Exam Law School Results (First Time Takers) v. US News & SSRN
CA Bar Rank	School	US News Overall CA Rank	US News Peer CA Rank	SSRN CA Rank
1 (88.7%)	UCLA	3	3	2
2 (88.0%)	Stanford	1	1	1
3 (87.0%)	Boalt	2	2	4
4 (84.3%)	Hastings	6	6	9
5 (81.7%)	USC	4	4	3
6 (80.0%)	USD	8	7	5
7 (75.0%)	Loyola	7	8	6
8 (74.4%)	USF	Tier 3	10	13
9 (73.8%)	Davis	5	5	7
10 (72.6%)	Pepperdine	9	10	16
11 (66.4%)	Southwest.	Tier 3	13	10
12 (63.9%)	McGeorge	10	12	15
13 (62.5%)	Santa Clara	Tier 3	9	12
14 (59.5%)	Chapman	Tier 4	17	11
15 (57.7%)	Cal- Western	Tier 4	14	14
16 (43.8%)	Golden Gate	Tier 4	14	18
17 (39.7%)	Whittier	Tier 4	16	17
18 (38.4%)	T. Jefferson	Tier 4	17	8
19 (24.6%)	Western St.	Tier 4	19	19

On another front, Professor Smith asks why there is no law wiki. Wikipedia has gotten a lot of disrespect in the blogosphere lately, but the BBC reports that Wikipedia in fact is about as accurate the Encyclopedia Britannica on science issues, which suggests the wiki idea may not be so bad after all. Indeed, Prof. Smith later noted that a law wiki in fact exists. Personally, however, I can think of at least four reasons why a corporate law wiki is unnecessary:

Is JK Rowling Channeling Hayek?

Is the Harry Potter series thinly disguised libertarian propaganda? A new article by law professor Benjamin Barton seems to suggest an affirmative answer (HT: CE Petit):

This Essay examines what the Harry Potter series (and particularly the most recent book, The Half-Blood Prince) tells us about government and bureaucracy. There are two short   answers. The first is that Rowling presents a government (The Ministry of Magic) that is 100% bureaucracy. There is no discernable executive or legislative branch, and no elections. There is a modified judicial function, but it appears to be completely dominated by the bureaucracy, and certainly does not serve as an independent check on governmental excess.

Second, government is controlled by and for the benefit of the self-interested bureaucrat. The most cold-blooded public choice theorist could not present a bleaker portrait of a government captured by special interests and motivated solely by a desire to increase bureaucratic power and influence. ...

Furthermore, Rowling eliminates many of the progressive defenses of bureaucracy. ...

Big Brother Watching Your Car?

According to the Independent (UK):

Britain is to become the first country in the world where the movements of all vehicles on the roads are recorded. A new national surveillance system will hold the records for at least two years.

Using a network of cameras that can automatically read every passing number plate, the plan is to build a huge database of vehicle movements so that the police and security services can analyse any journey a driver has made over several years.

Steven Taylor observes:

this underscores a key difference between European and American sensibilities: we are currently having a major debate over whether the NSA should ever listen in on the domestic end of an international phone call with a suspected al Qaeda operative, and the British are to keep records of where everyone is driving.

I must confess: those traffic-light cameras make me itchy, so this would be enough to give me shingles.

Kevin Drum asks:

The Independent mildly suggests that a few civil liberties nutbags might be concerned about this, but they don't even bother quoting anyone. The British seem to be surprisingly unconcerned about this. ...

Do you really believe that police aren't going to use this for random fishing expeditions against people they just don't like? Do you also believe in Santa Claus?

I wonder how long it will take before they start using this technology to automatically hand out speeding tickets. In any event, it does seem like the etirety of the West is going through a period in which the civil liberties for which our ancestors fought are slowly being eroded in the name of safety and security.

Chandler on Shareholder Power

Gordon Smith posts on Delaware Chancellor William Chandler's decision in Unisuper Ltd. v. News Corporation, a case that potentially poses a conflict between the enabling principle dear to contractarian scholars of corporate law -- i.e., the principle that corporation laws should be subordinate to private ordering -- and the basic default rule of director primacy. I haven't seen a copy of the opinion yet, but I'm very aggravated by one passage from it quoted by Gordon:

Delaware’s corporation law vests managerial power in the board of directors because it is not feasible for shareholders, the owners of the corporation, to exercise day-to-day power over the company’s business and affairs. Nonetheless, when shareholders exercise their right to vote in order to assert control over the business and affairs of the corporation the board must give way. This is because the board’s power – which is that of an agent’s with regard to its principal – derives from the shareholders, who are the ultimate holders of power under Delaware law.

Stuff and nonsense! (That wasn't the most respectful tone to use with respect to one of the best judges in the country!) As I wrote in Director Primacy: The Means and Ends of Corporate Governance:

... control—the power and right to exercise decisionmaking fiat—is vested neither in the shareholders nor the managers, but in the board of directors. According to this “director primacy” model, the corporation is a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body—a sort of Platonic guardian—serving as the nexus of the various contracts making up the corporation.

... the powers of the board of directors are neither delegated to the board by shareholders nor usurped by the former. Instead, as an early New York decision put it, the board’s powers are “original and undelegated.”

If any reader has a copy of the opinion, I would very much appreciate receiving it so that I can evaluate it in more depth.

Doyle Brunson Investigated by the SEC

Did famed poker pro Doyle Brunson try to manipulate the stock price of WPT Enterprises, the producer of the World Poker Tour, by making a fake tender offer? According to the Poker Prof:

Doyle Brunson is one of the best known professional poker players in the world and holds a record ten World Series of Poker gold bracelets including two WSOP main event championships. He continues to play in major poker tournaments and on Friday he made the final table of the Fourth Annual Five Diamond World Poker Classic's WPT Championship at the Bellagio Resort in Las Vegas where he finished third to collect $563,485 in winnings. He regularly host the world's highest limit poker players in his 'Doyle's Game' in the private 'Bobby's Room' at the Bellagio Resort.

Brunson's attorney, Alan Isaacman was quoted as saying, "We're confident that after the investigation it will be seen that the offer was a sincere offer and that there were no laws violated."

According to the SEC:

Doyle Brunson, prepared and delivered an  unsolicited  offer to buy WPT Enterprises, Inc., the publicly traded owner of  the  World Poker Tour, at a high premium  over  its  then-market  value.  Shortly thereafter, the Commission contends, a public relations  firm  Brunson hired, and a website he endorses, announced the  offer  publicly.  The Commission asserts that publication of this offer, widely  covered  in the media, triggered a steep rise  in  WPT's  stock  price  on  record trading volume.

As the Commission alleges,  however,  the  Goodman  firm  and  Brunson immediately stopped responding to WPT's requests for information about the offer. Instead, shortly after delivering the  offer,  the  Goodman firm,  at  Chesnoff's  instruction,   abruptly   withdrew   from   the engagement. When WPT publicly disclosed Brunson  and  his  law  firm's unresponsiveness, its stock price sharply declined, costing  investors tens of millions of dollars in  lost  market  value.  Brunson's  offer eventually expired by its terms.

The Commission is formally investigating whether Brunson's  offer  and its  publication  violated  federal  securities  laws,  including  the antifraud provisions of Sections 10(b) and  14(e)  of  the  Securities Exchange Act of 1934.

Presumably the Commission is looking into, inter alia, whether Brunson ran a pump and dump on WPT stock. Any other theories as to what Brunson might have been up to?

For what it's worth, poker blogger John Caldwell thinks everything was above board:

After the WPTE's stock price had levelled off from its rumor-fuelled ride, cries of "pump and dump" were heard from several business insiders. Interestingly, potentially damaging accusations of stock-price manipulation fizzled quickly and everyone involved has escaped relatively unscathed.

My two cents on this deal was this was not any kind of "pump and dump" or manipulation scheme - all involved here are way too smart (and way too wealthy) to pull something like this for short-term gain. My guess is that this deal was about privatizing WPTE, so their new online gaming site WPTonline.com could take U.S. bets, and take advantage of the fact that the WPT is the sexiest brand in poker. Because WPTE is traded on a U.S. exchange, the company can't accept American players on their site. If that situation were to change, with the marketing monolith that the WPT has become, they would instantly become a major player in the incredibly competitive (and hugely profitable) online poker space. Again - this is just my own speculation - I have not talked directly to anyone involved.

Personally, I NEVER buy the "everybody was too smart" defense. Consider poor old Sam Waksal, who was smart enough to become the CEO of a major biotech company, but still was dumb enough to commit blatant insider trading when the FEC refused to approve his drug for sale. Besides which, you're talking about Doyle Brunson, who made a career out of bluffing and famously won two major poker tournaments playing a 10-2. Maybe he thought he could bluff the SEC?

FYI, Brunson has invoked his 5th Amendment rights and declined to cooperate with the investigation.

It takes a thief: The first SEC chairman

The SEC Historical Society has new pictures and essays honoring its first chairman - Joseph P. Kennedy, Sr. President Franklin Delano Roosevelt supposedly said he appointed Kennedy to the SEC because it takes a thief to catch a thief. Indeed, the arch-liberal Kennedy clan's wealth has some pretty dubious origins:

Joseph multiplied his fortune through stock speculation; he was a master of the stock pool, a then-legal arrangement in which a few traders conspired to inflate a stock's price, selling just before the bubble burst. Some attribute these market manipulations as being in part responsible for the Stock Market Crash of 1929 which triggered the Great Depression. Ironically, a short time later he was appointed the first chairman of the Securities and Exchange Commission, where he oversaw the banning of these practices. During Prohibition, Joseph was reputedly a bootlegger, selling for several British alcohol distillers. He had a large inventory that he sold for a gain of millions of dollars when Prohibition was repealed in 1933. He invested these gains in residential and commercial real estate, the Merchandise Emporium in Chicago and Hialeah Race Track.

The Business Judgment Rule

Over at Conglomerate, Gordon Smith is discussing the view which treats the corporate directors' duty of care and the business judgment rule as a standard of conduct and a standard of review, respectively:

In this short symposium paper, I borrow from the work of Meir Dan-Cohen, Mel Eisenberg, and others to discuss the difference between "standards of conduct" [edited: see comments] and "standards of liability." The basic idea is that we want directors to hear this message: be diligent and make wise decisions. This is the standard of conduct. But we don't want to hold directors liable merely for a failure of diligence or wisdom. (Why? Two reasons: because we want directors to be bold and because we want to preserve the value of centralized decision making.) Before imposing liability, we want some evidence of wrongdoing, such as a conflict of interest. This is the standard of liability.

According to this conception, the duty of care is a standard of conduct, which specifies how directors should conduct themselves. In contrast, the business judgment rule is a standard of review, which sets forth the test courts will use in determining whether the directors’ conduct gives rise to liability. Unlike typical negligence tort cases, in which the standard of review and the standard of conduct are identical, in corporate law they purportedly diverge. The function of the business judgment rule thus is to create a less demanding standard of review than the (largely aspirational) standard of conduct created by the duty of care. But what is the standard? It may be mere subjective good faith, it may be a requirement of rationality, it may be gross negligence. No one seems to know for sure.

In my article The Business Judgment Rule as Abstention Doctrine, I argued against that approach to understanding the BJR. If the business judgment rule is treated as a standard of liability, rather than an abstention doctrine, judicial intervention readily could become the norm rather than the exception. It implies that the business judgment rule does not preclude judicial review of cases in which the board failed to exercise reasonable care. Yet, if the business judgment rule is to have teeth, it is precisely those cases in which it is especially important for courts to abstain. No matter how gingerly courts apply the standard of liability, trying to measure the “quantity” of negligence is a task best left untried. Courts will be tempted constantly to apply the standard in ways that sanction honest decisions that, with the benefit of hindsight, proved unfortunate and/or appear inept.

If the business judgment rule is framed as an abstention doctrine, however, judicial review is more likely to be the exception rather than the rule. The court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decisionmaking process was tainted by self-dealing and the like. The requisite questions to be asked are more objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus builds a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.