Lyman Johnson has a very provocative new article out, which he's summarized in an equally provocative blog post:
[The article] argues that the [business judgment] rule ... has no place in litigation involving executive officers – never squarely done by the Supreme Court – and, sit down for this, should not be deployed in reviewing director conduct. Rather, in all corporate fiduciary litigation, the Supreme Court should fundamentally alter the “map” of analysis by showcasing fiduciary duties and demoting the business judgment rule. The policy rationales for the rule are sound but, beyond being irrelevant for shareholders, for directors and officers the rule introduces needless doctrinal and analytical complexity. I advance several reasons as to why the rule unnecessarily complicates corporate fiduciary litigation in an unfortunate way.
Go read the post for a summary of those reasons. He concludes:
... elevating fiduciary duties in prominence, and reducing a threshold emphasis on the business judgment rule, would facilitate teaching law students and others the rudiments of fiduciary duties. Widespread confusion persists over the rule, and not just in the ranks of the elite corporate bar.
As just one law professor who has grappled with teaching this material to law students for almost thirty years, I can say that presenting students with a coherent and cogent understanding of fiduciary duties is made more difficult by Delaware’s current business judgment rule construct. Students – having studied the concept of legal duty in diverse curricular offerings such as torts, trusts and estates, agency and partnership law, and professional responsibility – understand the importance of legal duties, including the scope of duty and situations of no-duty. The concepts of care and loyalty, in all their manifestations, are relatively easy to grasp, if of somewhat surprising contours.
Analytically and doctrinally, the teaching could stop there – with fiduciary duties and their breach – and students would have a solid and workable understanding. Little but unnecessary complexity in the law and pedagogy is added by then filtering all of the above through the threshold of the business judgment rule construct as a standard of review, particularly with the Cede breach of duty/burden shift feature.
I agree that many Delaware decisions have bollixed up aspects of the business judgment rule. I'm still annoyed with the way the Delaware Supreme Court resolved the Caremark issue and the way the Chancery Court is treating mixed-consideration cases under Revlon.
But I think the basics make good sense. Of course, I think Delaware's business judgment rule would make even more sense if the Court explicitly adopted the approach I advanced in The Business Judgment Rule as Abstention Doctrine, which argues that:
The business judgment rule is corporate law's central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders. Increasingly, moreover, versions of the business judgment rule are found in the law governing the other types of business organizations, ranging from such common forms as the general partnership to such unusual ones as the reciprocal insurance exchange. Yet, curiously, there is relatively little agreement as to either the theoretical underpinnings of or policy justification for the rule. This gap in our understanding has important doctrinal implications. As this paper demonstrates, a string of recent decisions by the Delaware supreme court based on a misconception of the business judgment rule's role in corporate governance has taken the law in a highly undesirable direction.
Two conceptions of the business judgment rule compete in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions. This view is increasingly widely accepted, especially by some members of the Delaware supreme court. The other conception treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions. The distinction between these conceptions matters a great deal. Under the former, for example, it is far more likely that claims against the board of directors will survive through the summary judgment phase of litigation, which at the very least raises the settlement value of shareholder litigation and even can have outcome-determinative effects.
Like many recent corporate law developments, the standard of review conception of the business judgment rule is based on a shareholder primacy-based theory of the corporation. This article extends the author's recent work on a competing theory of the firm, known as director primacy, pursuant to which the board of directors is viewed as the nexus of the set of contracts that makes up the firm. In this model, the defining tension of corporate law is that between authority and accountability. Because one cannot make directors more accountable without infringing on their exercise of authority, courts must be reluctant to review the director decisions absent evidence of the sort of self-dealing that raises very serious accountability concerns. In this article, the author argues that only the abstention version of the business judgment rule properly operationalizes this approach.
The abstention version of the rule is "relatively easy to grasp" and would eliminate the existing "unnecessary complexity."
