Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a Standard of Review Problem

Abstract

In this commentary, the authors examine the role of Smith v. Van Gorkom as part of a continuum of Delaware judicial decisions that gives insufficient weight to the substantive policy judgments underlying the gross negligence standard of review that governs whether corporate directors should be found liable for breaching their duty of care. The gross negligence standard is consistent with Delaware's long-standing policy of deferring to business decisions made by well-motivated fiduciaries and limits the ability of judges to intervene in business decisions made by properly motivated directors. The authors argue that Van Gorkom and two of its important progeny run counter to Delaware public policies restricting the judicial enforcement of the duty of care to cases where directors have acted in a manner that represents an extreme departure from expected normative behavior, and, if damages are sought, have not been exculpated by the firm's certificate of incorporation. They conclude by proposing that to better align judicial decision-making with those public policies, courts should apply a true gross negligence liability standard, which would require plaintiffs to prove that a director caused quantifiable damage. The authors further propose that courts respect decisions by stockholders that insulate directors from liability for violating that standard.