Corporate Oversight and Disobedience

35 Pages Posted: 1 Nov 2019 Last revised: 23 Jan 2020

See all articles by Elizabeth Pollman

Elizabeth Pollman

Professor of Law; Co-Director, University of Pennsylvania Law School – Institute for Law and Economics

Date Written: October 23, 2019

Abstract

Over a decade has passed since landmark Delaware corporate law decisions on oversight responsibility, and only a small handful of cases have survived a motion to dismiss. Scholars have puzzled over what it means to have the potential for corporate accountability lodged within the duty of good faith, but almost never brought to fruition in terms of trial liability.

This article explores the public-regarding purpose of the obedience and oversight duties in corporate law and provides a descriptive account of how they are applied in practice. The Article argues that the fidelity to external law required by the duty of good faith largely serves a legitimizing role for corporate law. Expressing obligations of legal compliance and oversight within corporate law acknowledges societal interests in the rule of law and preserves the ability of courts to flexibly respond to particularly salient and egregious violations of public trust, should they arise, without upending case law developed over decades.

Further, this article examines the body of Delaware law concerning the oversight and obedience aspects of the duty of good faith and argues that they have become functionally linked. In practice to date, Delaware courts have prioritized giving directors broad latitude to take business risk by drawing a line at legal risk, despite the possibility that both types of activity could create social value or harm depending on the circumstances. Under current Delaware case law, courts have allowed Caremark claims to proceed where evidence exists to infer that the board utterly failed to implement a compliance monitoring system or that the directors engaged in disobedience by knowingly managing legal risk or flouting, violating, or ignoring the law. Bringing together these threads of discussion, this Article concludes that corporate law’s public-regarding commitment to the rule of law supports accountability in these instances of disobedience as well as more broadly when fiduciaries act with willful ignorance or an awareness that their efforts at compliance are insufficient.

Keywords: Caremark, Oversight, Fiduciary Duty, Good Faith, Loyalty, Stone v. Ritter, Marchand v. Barnhill, Compliance, Monitoring, Legal Obedience, Corporate Disobedience, Board of Directors, Corporate Law

JEL Classification: K20, K22, K23, K40, K42

Suggested Citation

Pollman, Elizabeth, Corporate Oversight and Disobedience (October 23, 2019). 72 Vand. L. Rev. 2013 (2019), Loyola Law School, Los Angeles Legal Studies Research Paper No. 2019-34, U of Penn, Inst for Law & Econ Research Paper No. 20-05, Available at SSRN: https://ssrn.com/abstract=3474337 or http://dx.doi.org/10.2139/ssrn.3474337

Elizabeth Pollman (Contact Author)

Professor of Law; Co-Director, University of Pennsylvania Law School – Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

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