Equity Ownership and the Duty of Care: Convergence, Revolution, or Evolution?

Posted: 25 May 2000

See all articles by R. Franklin Balotti

R. Franklin Balotti

Richards, Layton & Finger

Charles M. Elson

University of Delaware - John L. Weinberg Center for Corporate Governance

J. Travis Laster

Richards, Layton & Finger, P.A.

Abstract

The fiduciary duty of care is one of the pillars of Delaware corporate law. Under the traditional corporate model, courts police the duty of care by examining the process directors followed in rendering a decision. This model has weaknesses, including the ease with which an adequate record may be constructed and the lack of any necessary connection between procedural rituals and optimal decision making. A viable and compelling alternative would be for a court to consider whether the directors who made the decision also were substantial stockholders. If so, then the directors' enlightened self-interest should have operated to ensure that the decision reached was the best option available. Courts therefore could adopt a rebuttable presumption that directors who also are substantial stockholders have acted with due care. Three lines of authority are converging in support of such a presumption. Rather than a revolutionary change, such a presumption would represent an evolutionary development in the analysis of directors' fiduciary duties.

Suggested Citation

Balotti, R. Franklin and Elson, Charles M. and Laster, J. Travis, Equity Ownership and the Duty of Care: Convergence, Revolution, or Evolution?. Available at SSRN: https://ssrn.com/abstract=223493

R. Franklin Balotti (Contact Author)

Richards, Layton & Finger ( email )

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Charles M. Elson

University of Delaware - John L. Weinberg Center for Corporate Governance ( email )

Alfred Lerner Hall, Room 104
Newark, DE 19716
United States
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J. Travis Laster

Richards, Layton & Finger, P.A. ( email )

One Rodney Square
Wilmington, DE 19899
United States
302-658-6541 (Phone)
302-658-6548 (Fax)

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