Revisiting Director Liability: The Unimportance of Being Earnest

Abstract:     
It has been twenty years since director liability to corporate shareholders for fiduciary duty breaches took a dramatic turn away from its historical and balanced negligence-based foundation. The 1985 Delaware Supreme Court case of Smith v. Van Gorkom was the opening salvo in the skirmish that erupted into an all-out war against shareholder primacy in favor of director protection. Soon after Van Gorkom was decided, naïve legislatures across the nation acceded to the corporate defense bar's demands for obscenely-protective statutes to insulate directors from any responsibility for corporate management failures. This paper does three things: (1) Demonstrate that Smith v. Van Gorkom was really just a typical case, decided in a way that was consistent with prior cases, that was blown out of proportion by the corporate defense bar, (2) expose the flaws of the poorly justified and haphazardly drafted statutes adopted in response to Van Gorkom and intended to insulate directors from liability, such as Del. Gen. Corp. Law § 102(b)(7), and (3) make the case for returning director liability for fiduciary breaches to its historical place in corporate governance. As recent corporate failures have shown, it is time to start asking: If directors are not going to be responsible for corporate disasters, then who?

Keywords: director liability, fiduciary duties, corporate governance

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