33 Pages Posted: 13 Sep 2006
This article assesses the recent Disney decisions, and argues that on the facts presented, the decision was probably correct. However, the court squandered an opportunity: to develop and articulate an appropriate doctrinal approach for the issues the case presented. The case was an excellent opportunity for courts to provide some means to constrain executive compensation, and more generally to address problems caused by "structural bias," the cozy relationship directors may have with officers (and, less often, controlling shareholders). In such cases, there is no breach of the duty of loyalty as that duty has been articulated. However, the duty of care rubric doesn't seem properly applicable either. What the directors have done isn't to simply be careless; rather, they seem to have gone through some motions of decision making when their decision was, given their ties to the officers, a foregone conclusion. The court created space for a separate doctrine of good faith, but it provided little guidance as to how that doctrine might work, even in cases like Disney itself. We suggest an extension of the duty of good faith that could provide a bit more bite. Plaintiffs should be allowed to demonstrate bad faith with a two-part showing: (1) the decision occurred within an environment of structural bias, and (2) influenced by that structural bias, the directors were grossly negligent in making the decision. Even if a court were to follow our suggestion, most cases would turn out as they historically have, with defendant victories. But we think that articulation by the courts of a doctrine contemplating more scrutiny for decisions made in an environment of structural bias may help fuel a Caremark-like shift in norms and practices, directed by a combination of legal and extra-legal forces.
Keywords: good faith, structural bias, fiduciary duty, executive compensation
Suggested Citation: Suggested Citation
Hill, Claire A. and McDonnell, Brett, Disney, Good Faith, and Structural Bias. Journal of Corporation Law, Vol. 32, No. 4, Summer 2007; Minnesota Legal Studies Research Paper No. 06-46. Available at SSRN: https://ssrn.com/abstract=929488