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Abstract:
Over the past decade, the doctrine of good faith provided the central front in battles over directors’ fiduciary duties under Delaware law. Good faith played that role accidentally, through the Delaware legislature’s historically arbitrary determination that directors’ violations of good faith cannot be exculpated via charter amendment. Whether the duty of good faith was violated was – and is – often the operative question for determining director liability. In its most recent iteration, a director’s “conscious disregard of duties” will violate the duty of good faith and, consequently, will be non-exculpable. If robustly applied, the conscious disregard standard threatened to swallow up the kind of duty of care claims that are expressly exculpable under most Delaware firms’ charters. If applied more too restrictively, as the Delaware Supreme Court recently did in Ryan v. Lyondell Chemical Co., the conscious disregard standard would cease to be meaningful. Given the uncertainty surrounding the value of these competing considerations, this Article contends that any attempt to calibrate the proper application of “conscious disregard” was bound to err in one direction or the other. Instead, the optimal solution would have been for (1) courts to ensure the advantages of targeted culpability determinations through a robust version of the conscious disregard standard and (2) the legislature to permit firms to precommit and opt out of that standard. Although the Supreme Court’s recent decision may have effectively foreclosed this path by reducing the pressure on the legislature to act, the story of “good faith” serves as a reminder that mandatory rules in corporate law should be heavily scrutinized, else they lead to inefficient results, whether contemplated or not.

good faith, exculpation, due care, conscious disregard

Abstract:
Shareholders who wish to sue derivatively for breach of directors' fiduciary duties face significant obstacles. Chief among these is the requirement that they demand that the corporation's board pursue the action, unless such demand would be futile. The general test in Delaware for demand futility was set forth almost twenty-five years ago in Aronson v. Lewis. The second prong of that test asks whether the board decision underlying the complaint was the subject of a "valid business judgment." When Aronson was decided, this question served as a satisfactory proxy for the principle motivating the demand futility exception - the need to restrain board authority where the board is expected to be unable to make an impartial decision. If the original decision was not the product of a valid business judgment, directors would likely face personal liability from the derivative suit.

With the almost universal adoption of exculpatory charter provisions, however, a space has opened between the spirit of Aronson and its test. Under the second prong, claims based on directors' due care breaches will not require demand despite the fact that directors have no reason to fear personal liability. Judging demand to be futile in such cases improperly undercuts board authority over corporate litigation decisions. In addition, when combined with the different test for demand futility applied in cases of board non-action, Aronson's second prong provides directors with incentives to delegate more decisionmaking authority to committees and management than they might have otherwise. Accordingly, the longstanding Aronson test should be revised.

demand, demand futility, derivative litigation, Aronson, Rales, exculpation clause

Abstract:
Executive pay packages are increasingly subject to the criticism that they do not maximize shareholder wealth. Critics have sought a more active role for shareholders in determining compensation levels of executives at public companies. One manifestation of this movement is the recent promulgation of stock exchange rules requiring shareholder approval of equity compensation plans. This Article examines these rules and the most prominent academic criticism of executive compensation. It concludes that the rules do not provide satisfactory resolution for any side of the debate over executive compensation and should be revised accordingly.

Equity Compensation, Listing Standards, Managerial Power, Shareholder Approval