Monday, December 9, 2019
This post is dedicated to the students in my Business Associations class, who took their final exam this morning.
Two weeks ago, reflecting on Francis v. United Jersey Bank, 432 A. 2d 814 (N.J. 1981), I asked for commentary on the following question: "How would the Francis case be pleaded, proven, and decided as a breach of duty action under Delaware law?" That post generated some commentary--both online and in private messages to me. In this post, I forward an analysis and a related request for commentary.
A number of commentators (including BLPB co-blogger Doug Moll in the online comments to my post) posited that a Caremark oversight claim may be the appropriate claim, and that the cause of action would be for a breach of the duty of care. I find the latter part of that answer contestable. Here is my analysis.
I begin by agreeing that Mrs. Pritchard's abdication of responsibility constitutes a failure to exercise oversight. Under the Delaware Supreme Court's decision in Stone v. Ritter, I understand that claim to be Caremark claim. ("Caremark articulates the necessary conditions for assessing director oversight liability.") I think many, if not most, are also in agreement on this.
Here is where there may be some divergence. Also relying on Stone, I understand that Caremark claim as a breach of the duty of loyalty, founded on a failure to act in good faith. ("[B]ecause a showing of bad faith conduct . . . is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.") This makes sense to me because of the Delaware Supreme Court's opinion in Brehm v. Eisner, in which it circumscribes the duty of care. ("Due care in the decisionmaking context is process due care only.")
However, Brehm (as evidenced in the immediately preceding parenthetical quote) addressed the duty of care under Delaware law in a decision-making context. Francis was largely a case about the absence of decision making. Moreover, the Brehm court's view on a substantive duty of care are rooted in the contradiction of that doctrine with the business judgment rule. ("As for the plaintiffs' contention that the directors failed to exercise 'substantive due care,' we should note that such a concept is foreign to the business judgment rule. Courts do not measure, weigh or quantify directors' judgments.") So, Brehm's wisdom on the duty of care under Delaware law may be inapplicable to facts like those in Francis, since the business judgment rule is inapplicable because the board did not engage in decision making.
Nevertheless, Stone seems to erect barriers to a duty of care claim for oversight like that presented in the Francis case. BLPB co-blogger Anne Tucker voiced this concern in a 2010 article in the Delaware Journal of Corporate Law
Exculpatory provisions that eliminate liability for negligence and gross negligence (i.e., the duty of care), combined with the assumption of the duty of good faith under the liability standard for the duty of loyalty, narrow the standard of liability for director oversight. The result is while directors have three fiduciary duties-the duties of care, good faith, and loyalty-the three standards of conduct are essentially collapsed into one actionable standard: the duty of loyalty.
Anne Tucker Nees, Who's the Boss? Unmasking Oversight Liability Within the Corporate Power Puzzle, 35 Del. J. Corp. L. 199, 224–25 (2010). Lyman Johnson similarly had commented, seven years earlier (and before the Stone case was decided) that
care has been rendered a “small” notion in corporate law. It largely refers to the manner in which directors are to act. It is a process-oriented duty to act “with care.” Having confined care to that narrow chamber, the other meanings of care as found in the phrases “take care of” (the corporation) and “care for” (the corporation) remain fully available for infusion into corporate law through an expansive duty of loyalty.
Lyman Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28 Del. J. Corp. L. 27, 72 (2003). Others also have written about this.
Based on the foregoing, I conclude that a duty of care cause of action is not available in Delaware for an oversight claim like that raised in Francis. Delaware's duty of care comprises the duty to fully inform oneself of material information reasonably available under Smith v. Van Gorkom. As a result, an oversight claim based on facts like those in Francis is a claim for a breach of the duty of loyalty as described in Stone.
Agree? Disagree? Provide analyses and, if possible, relevant decisional law.