Delaware's Duty of Care

66 Pages Posted: 6 Apr 2005  

Stephen J. Lubben

Seton Hall University - School of Law

Alana J. Darnell

US District Court of New Jersey

Multiple version iconThere are 2 versions of this paper

Date Written: April 4, 2005

Abstract

The concerns that animated the Delaware supreme court's decision in Smith v. Van Gorkom - inattentive directors failing the shareholders at a critical juncture in a firm's life - could have lead, even after the legislature enacted Section 102(b)(7), to the development of a duty of care jurisprudence based on non-monetary remedies. Instead, the Delaware supreme court developed a new law of transactions, built around banner cases such as Unocal and Revlon.

Now, two decades latter, we ask two key questions: First, is there any duty of care left in Delaware? And, if the answer to the first question is no, is that a bad thing?

We answer the first question by tracing the waning of the duty of care: a rule that now requires little more of a director than a ritualistic consideration of relevant data. Today, after the director engages in this ritual, her decision will not violate the duty. In short, the classic duty of care no longer exists in Delaware.

But the Delaware courts clearly are not about to countenance every business decision, no matter how incoherent or ill-advised. So, they struggle to fit cases into either the loyalty or transactional model, even when these tools are ill suited to the task. No better example of this trend exists than the Delaware supreme court's decision in Omnicare, Inc. v. NCS Healthcare, Inc., where the court struggled to apply Unocal's entrenchment-based structure to deal protection devices in a friendly stock for stock merger.

Because we argue that Omnicare could have been better addressed under a classic duty of care analysis - no reasonable director would have agreed to totally lock up the deal - we answer our second question in the affirmative. There is a role, albeit a limited, narrow role, for the courts to review and question some decisions, even in the absence of loyalty or transactional concerns.

Thus, we use this paper to highlight a subtle, and even unintended consequence of Delaware's increasing reliance on the loyalty and transactional duties. While the result may be the same regardless of which tool the courts use, attempts to fit classic duty of care cases under other headings - perhaps in a misguided attempt to avoid Section 102(b)(7) - only muddle the development of a coherent analytical framework. In this paper, we argue for a reinvigoration of the classic duty of care analysis to preserve the distinct roles played by the director's fiduciary duties.

Keywords: Delaware, duty of care, corporate law, directors, Smith v. Van Gorkom, Omnicare

Suggested Citation

Lubben, Stephen J. and Darnell, Alana J., Delaware's Duty of Care (April 4, 2005). Seton Hall Public Law Research Paper No. 32. Available at SSRN: https://ssrn.com/abstract=698223 or http://dx.doi.org/10.2139/ssrn.698223

Stephen J. Lubben (Contact Author)

Seton Hall University - School of Law ( email )

One Newark Center
Newark, NJ 07102-5210
United States
973-642-8857 (Phone)

Alana J. Darnell

US District Court of New Jersey

Martin Luther King Building
50 Walnut Street, 4th floor
Newark, NJ 07101
United States

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