Re-evaluating the Justifications for the Existence of an Independent Duty of Care

35 The Company Lawyer 265 (2014)

10 Pages Posted: 16 May 2014 Last revised: 11 Sep 2014

See all articles by Yoram Danziger

Yoram Danziger

Government of the State of Israel - Supreme Court of Israel

Omri Rachum-Twaig

Tel Aviv University - Buchmann Faculty of Law ; Federman Cyber Security Research Center, Hebrew University of Jerusalem

Date Written: February 27, 2014

Abstract

Directors' duty of care is a years-long fact. Ever since the leading case of City Equitable Fire insurance Co Ltd, Re, UK courts submitted that directors of a company bear a duty of a certain degree of due care towards the company. This duty was, however, an undemanding one since the standard of due care was subjective and therefore the duty was seldom breached. After a line of case law shifting the paradigm towards a more objective standard, Section 174 of the Companies Act 2006 codified the objective/subjective standard of due care. However, in the absence of sufficient case law regarding the statutory duty of care, many questions relating to the judicial application of the objective standard of care remain unanswered. Thus, it may be wise to turn to other jurisdictions in order to portray the possible development of objective standards of directors' duty of care.

In this article, we will first list the critiques that were raised regarding the duty of care post Van Gorkom. These critiques were mainly based upon the lack of business-economic justifications for the existence of the directors' duty of care that, as was argued, causes more damage than benefits to the shareholders. Then, we will show the development of the case law and legislation post Van Gorkom and discuss the critiques that were raised in their light. We will examine the significant case law post Van Gorkom and show that Delaware courts granted damages to plaintiffs only where the breach of the duty of care was accompanied by a breach of a fiduciary duty, such as the duty of loyalty, on the directors' part. We will then present the second generation of critiques of the existence of an independent duty of care and will show that they are based upon the fact that, de facto, the duty of care does not exist as an independent cause and that most companies embrace ex ante or ex post limitations of the duty as it concerns their directors.

Next, we will present the directors' duty of care as it was applied by Israeli courts for many years, basing significantly on UK case law. We will show that although the duty was examined, to begin with, according to principles of tort law, over the years, starting in 2006, Israeli courts gradually embraced the Busniess Judgement Rule (BJR) as a significant tool to examine the negligence of directors. In light of this development, we will examine whether the use of the duty of care as an independent cause was narrowed in Israeli courts as well. We argue that the acceptance of the BJR in Israeli case law caused a similar phenomenon to that of Delaware, according to which the duty of care is no longer examined independently of the breach of the other fiduciary duty and that courts only find its breach when it is accompanied by a breach of such duty.

Finally, we ask to revisit the diverse critiques of the directors' duty of care – pre and post Van Gorkom. We argue that the combination of the business-economic critiques and the pragmatic-legal ones justify the reevaluation of the justifications for an independent duty of care. In fact, it may be that the duty's existence is not efficient for the company and its shareholders and that other fiduciary duties fulfill its original goals in a more predictable, stable and efficient manner.

Keywords: Duty of Care, Business Judgement Rule, Directors' liability, Entire fairness

Suggested Citation

Danziger, Yoram and Rachum-Twaig, Omri, Re-evaluating the Justifications for the Existence of an Independent Duty of Care (February 27, 2014). 35 The Company Lawyer 265 (2014) , Available at SSRN: https://ssrn.com/abstract=2436905

Yoram Danziger

Government of the State of Israel - Supreme Court of Israel

Israel

Omri Rachum-Twaig (Contact Author)

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

Federman Cyber Security Research Center, Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

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