Lyman Johnson has a short but very useful essay on fiduciary duties under Delaware corporate law. His main point follows:
Three distinct actors owe fiduciary duties – executive officers, directors, and controlling shareholders – and numerous aspects of their duties greatly differ. But Delaware corporate law is not unique in the way many believe. Conventional wisdom holds that, uniquely, corporate law’s standards of conduct (fiduciary duties) diverge from judicial standards of review, the latter being more deferential. Yet, the two sets of standards often converge and are identical. The supposed distinction is not uniformly accurate, and unenforceable standards of conduct may not be “law” at all where standards do diverge.
I concur and urge you to go read the whole thing. But I have to respectfully dissent from the following:
... if a director complies with the duty of care, the business judgment rule standard of review obtains. If a director breaches her duty of care, the business judgment rule standard does not apply. The standard of review for the duty of care thus requires that the standard of conduct be fulfilled. The former is not more forgiving, it is equivalent in its demands, again pointing toward convergence, not divergence.
To be sure, Lyman could point to Justice Horsey's Technicolor decision as support for his interpretation:
To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty—good faith, loyalty or due care. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the “entire fairness” of the transaction to the shareholder plaintiff. [Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993).]
As I explain in my book Corporate Law
Notice how the justice puts the cart before the horse. Directors who violate their duty of care do not get the protections of the business judgment rule; indeed, the rule is rebutted by a showing that the directors violated their fiduciary duty of “due care.” But this is exactly backwards. Under the abstention theory of the business judgment rule, the rule’s core purpose is to prevent precisely what Technicolor requires. Recall that the rule prevented Shlensky from even getting up to bat with his care claims. The business judgment rule thus precludes courts from asking the question of—let alone deciding—whether the directors violated their duty of care. In contrast, under Technicolor the business judgment rule’s primary function is the procedural task of assigning burdens of proof. In that limited guise, moreover, the rule merely assigns to plaintiff the burden of establishing a prima facie case—the same burden plaintiff bears in all civil litigation. If plaintiff fails to carry that burden, the business judgment rule requires the court to dismiss the lawsuit without inquiry into the merits of the decision. But so what? Under this conception, the business judgment rule is nothing more than a restatement of the basic principle that the defendant is entitled to summary judgment whenever plaintiff fails to state a prima facie case. At best, Technicolor thus trivializes the rule.
By opening the courthouse door to care questions at the outset of the litigation, however, Technicolor went beyond merely trivializing the rule to gutting it. Arguably, Technicolor broadened the scope of judicial review of board decisionmaking to reach not just the process by which the decision was made but also the substance of the directors’ decision. Significant consequences follow from this distortion of the business judgment rule. It is commonly held, for example, that mere allegations of director impropriety do not entitle plaintiff to discovery.[1] Yet, one can plausibly read Technicolor as authorizing precisely the sort of fishing expeditions the business judgment rule was intended to prevent.
Technicolor can be reconciled with the mainstream of business judgment rule analysis only by interpreting the duty of “due care” as being limited to the adequacy of the decision-making process. At several points in the opinion, Justice Horsey in fact so characterized that duty.[2] In addition, numerous Delaware precedents interpret the requirement of due care as being limited to questions of process.[3] Yet, nothing in Technicolor explicitly limits its references to the duty of care to the decision-making process. Arguably, the cart remains before the horse.
[1] See, e.g., Stoner v. Walsh, 772 F.Supp. 790, 800 (S.D.N.Y.1991).
[2] See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del.1993) (duty of care requires that directors “act on an informed basis”).
[3] See, e.g., Brehm v. Eisner, 746 A.2d 244, 264 (Del.2000) (“Due care in the decisionmaking context is process due care only.”; emphasis in original); Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 66 (Del.1989) (“our due care examination has focused on a board’s decision-making process”).
