Director Compliance with Elusive Fiduciary Duties in a Climate of Corporate Governance Reform
FORDHAM JOURNAL OF
CORPORATE & FINANCIAL LAW
Fordham Journal of Corporate & Financial Law
Copyright c 2007 by the authors. Fordham Journal of Corporate & Financial Law is produced
by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/jcfl
Senior Associate, Fulbright & Jaworski L.L.P., Houston, Texas, and soon to be
Assistant Professor at Marquette University Law School. The author would like to
thank Kristina Chandler and Seth Wexler for their valuable suggestions and helpful
insights in the preparation of this paper. The author would also like to thank Brendan
Daly for his love and support through the research and writing process.
TABLE OF CONTENTS
INTRODUCTION ........................................................................... 395
TRADITIONAL NOTIONS OF FIDUCIARY DUTIES........................... 400
A. Duty of Care ......................................................................... 402
B. Duty of Loyalty..................................................................... 407
C. Duty of Candor/Disclosure ................................................... 408
D. Duty of Good Faith............................................................... 409
E. Demand Futility and the Special Litigation Committee........ 410
HOW DOES A DIRECTOR DISCHARGE HER EVER-ELUSIVE FIDUCIARY DUTIES? ................................................................... 460 CONCLUSION .............................................................................. 465 2007
In the wake of accounting abuses at Enron, WorldCom, Adelphia,
Qwest, Global Crossing and Tyco, to name a few, “corporate
governance” has become a household phrase. These massive corporate
scandals cast a bright, public spotlight on the failures of directors to act
as the eyes and ears of stockholders who elected them.1 Yet the very
role of a board of directors in the system of corporate governance is to
oversee a corporation’s business and affairs, including its management,
because numerous dispersed stockholders cannot effectively perform
that function on their own.2 Thus when management fraud and
misconduct burgeon, it is presumed that the public is justified in
pointing a finger at directors for having inadequately supervised
But if directors incurred liability for every misstep they took, or bad
decision they made, it would indeed be rare to find a person willing to
serve as a director.3 The balance between holding directors accountable
for their failures, yet encouraging them to serve and make risky and
potentially value-creating business decisions, is delicate.4 Corporate
governance, the framework that defines the relationship between a
corporation and its officers, directors and stockholders,5 determines this
balance by setting standards for director conduct and liability.
The framework for corporate governance is derived primarily from
state law.6 Under the internal affairs doctrine, the laws of the state of
incorporation govern the internal affairs of corporations incorporated
therein.7 To maintain board accountability in the corporate governance
framework, directors owe fiduciary duties to the stockholders who elect
them.8 In Delaware, where the majority of U.S. corporations are
3. See William T. Allen et al., Function Over Form: A Reassessment of Standards
of Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1296 (2001)
(commenting that given the limited investment in publicly held firms directors are
typically willing to make, any risk of director liability would dwarf the incentives for
assuming the role); Bernard Black et al., Outside Director Liability, 58 STAN. L. REV.
1055, 1059 (2006) (noting that beyond some level of liability risk, qualified people may
decide to not serve as directors and those who do serve may become excessively
4. See Melvin Aron Eisenberg, The Divergence of Standards of Conduct and
Standards of Review in Corporate Law, 62 FORDHAM L. REV. 437, 444 (1993) (“It is
often in the interests of shareholders that directors or officers choose the riskier of two
alternative decisions, because the expected value of a more risky decision may be
greater than the expected value of the less risky decision.”).
5. THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION 800 (2005); Robert
B. Thompson et al., Securities Fraud as Corporate Governance: Reflections upon
Federalism, 56 VAND. L. REV. 859, 864 (2003).
6. CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 78 (1987); Bus.
Roundtable v. Sec. Exch. Comm’n, 905 F.2d 406, 408 (D.C. Cir. 1990); see Lyman
P.Q. Johnson, Corporate Compliance Symposium: The Audit Committee’s Ethical and
Legal Responsibilities: The State Law Perspective, 47 S. TEX. L. REV. 27, 29 (2005)
(“States, not the federal government, traditionally have regulated corporate
governance.”); Lyman P.Q. Johnson et al., The Sarbanes-Oxley Act and Fiduciary
Duties, 30 WM. MITCHELL L. REV. 1149, 1992 (2004).
7. Edgar v. MITE Corp., 457 U.S. 624, 645 (1982); Cort v. Ash, 422 U.S. 66, 84
(1975); see Brown, supra note 1, at 322-23; Marcel Kahan et al., Symbiotic Federalism
and the Structure of Corporate Law, 58 VAND. L. REV. 1573, 1585-86 (2005).
8. See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993) (“In
exercising these powers [to manage the business and affairs of the corporation],
directors are charged with an unyielding fiduciary duty to protect the interests of the
corporation and to act in the best interests of its shareholders.”); William A. Klein et al.,
BUSINESS ORGANIZATIONS AND FINANCE 131 (8th ed. 2002); Lisa M. Fairfax, Spare the
incorporated,9 the hallmark fiduciary duties are the duties of care and
loyalty.10 These two also involve a duty of candor to the corporation’s
stockholders.11 These duties are discussed in Part II. Part II also
explores a Delaware corporation’s director’s duty to act in good faith,
explaining the intersection between the duty to act in good faith and the
hallmark fiduciary duties of care and loyalty. Procedural mechanisms
also play an important role in this analysis and can effectively determine
the outcome of a fiduciary duty derivative suit. These mechanisms, as
they relate to the Delaware fiduciary duty analysis, are presented in Part
The discussion in Part II focuses on Delaware law not only because
Delaware is the state of incorporation for most U.S. corporations,12 but
also because Delaware law often serves as a guide to courts in other
jurisdictions in establishing their own fiduciary duty case law.13 For that
reason, Delaware law is often thought of as supplying the national
But if Delaware corporate law is considered the national corporate
the Sarbanes-Oxley Act of 2002
15 is perhaps best described as its
smash sequel. Congress enacted The Sarbanes-Oxley Act (SOX), in
July of 2002, largely in response to Enron and other major accounting
scandals that had shaken public confidence in the integrity of
management’s financial and accounting practices and the ability of
gatekeepers16 to detect and prevent those wrongful practices.17 In a
departure from the historic, limited role of federal securities laws in
corporate governance, SOX codifies a host of responsibilities for
directors of public companies and specifies various qualifications for
board and committee service.18 Part III begins by reviewing the historic
role of federal securities laws in corporate governance. Part III then
turns to SOX and assesses those provisions of SOX that seem to fall
squarely under the umbrella of corporate governance.
In conjunction with the passage of SOX, and largely at the behest of
the Securities and Exchange Commission (the Commission), national
securities exchanges and associations, which are self-regulatory
associations (SROs), imposed new corporate governance standards on
companies with securities listed on those exchanges. Part III
summarizes those corporate governance listing standards relating to
board composition and conduct, and explains how they relate to SOX.
By implementing corporate governance reform at the federal level,
Congress has delivered a message that the balance between director
accountability and enfranchisement must be tipped towards the former.
Yet Congress did not include a mechanism for stockholders to enforce
SOX’s corporate governance mandates under federal securities laws, nor
has SOX expressly preempted state law as the primary source of the
15. Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified as amended in scattered
sections of 11 U.S.C., 15 U.S.C., 18 U.S.C. and 29 U.S.C.).
16. “Gatekeepers” refers to outside directors, external auditors and external
counsel, as they are the primary outsiders who serve as a check on management.
17. See Hamilton, Crisis, supra note 1, at 45 (noting that President Bush and the
Republican-controlled House of Representatives recognized that the mood of America
with respect to corporate governance changed radically after major accounting scandals
at Enron, WorldCom, Adelphia, Tyco, Global Crossing, Qwest, Xerox, Rite Aid,
ImClone and Merck, among others, and that an immediate legislative response was
viewed as essential).
18. See discussion infra Part III. A “public company” refers to a company with a
class of securities traded on a national stock exchange or with a class of securities
having more than 500 record holders and with more than one million dollars in total
assets. See 15 U.S.C. §§ 781(a), 781(g) (2000); 17 C.F.R. 240.12g-1 (2002).
corporate governance system.19 Thus, any right to enforce those
mandates is expected to come from state fiduciary duty law, the primary
avenue available to stockholders to enforce directors’ duties.20 As Part
IV presents, several recent court decisions reflect an increased focus on
directors’ oversight responsibilities after the passage of SOX, suggesting
that the courts are starting to incorporate, post-Reform, new expectations
of directors into fiduciary duty law. While not uprooting the
components or function of fiduciary duties, these cases indicate a
refocusing of existing fiduciary duty law to bring about increased
oversight by independent directors with financial experience. Part IV
also explains how these duties may continue to shift, with the eyes of
corporate America, Delaware judges and wary stockholders, on
By refocusing fiduciary duty law, Delaware courts seem to be
carrying out the SOX corporate governance mandates and the SRO
corporate governance listing standards (together referred to as the
Reform), at the state law level. But unlike the rules-based Reform,
fiduciary duty law is standards based.21 This means that state fiduciary
duty law develops as cases come before the Delaware judiciary. This
allows state fiduciary duty law to be flexible and adaptive in response to
changing norms.22 But particularly important in a climate of corporate
change, it also provides some uncertainty as to what is required to
satisfy a director’s fiduciary duties. With the shifting of indefinite
standards of director conduct, how does a director know whether she has
satisfied her fiduciary duties? That is undoubtedly the question directors
are asking themselves. Part V suggests how directors might comply
with their evolving fiduciary duties.
19. See Brown, supra note 1, at 375 (arguing that SOX does not alter the fiduciary
standards applicable to officers and directors or to improve the procedural mechanism
used to supplant substantive review); Johnson et al., supra note 6, at 1150 (arguing that
SOX only modestly preempts fiduciary duties and noting that SOX does not contain an
enforcement mechanism available to stockholders). See also discussion infra Part III.D.
20. See Brown, supra note 1, at 375.
21. Johnson et al., supra note 6, at 1151; Kahan et al., supra note 7, at 1598; see
also William B. Chandler III et al.., Views From the Bench: The New Federalism of the
American Corporate Governance System: Preliminary Reflections of Two Residents of
One Small State, 152 U. PA. L. REV. 953, 960 (2003) (noting that the Reform is
proscriptive while fiduciary law is enabling).
22. Kahan et al., supra note 7, at 1598 (noting the flexible and highly fact-intensive
nature of Delaware judge-made law).
II. TRADITIONAL NOTIONS OF FIDUCIARY DUTIES
Directors, as representatives elected to represent the interests of
stockholders, owe fiduciary duties to those stockholders because they act
on behalf of those stockholders.23 In Delaware, the hallmark fiduciary
duties of directors are of care and loyalty.24 These duties are discussed
in Parts II.A and II.B below. Parts II.C and II.D review two other duties
which have traditionally been subsumed in the duties of care and
loyalty—the duty of disclosure and the duty to act in good faith.25
Stockholders can enforce directors’ fiduciary duties through either a
direct suit on behalf of that stockholder, where there is damage personal
to that stockholder, or through a derivative suit to enforce the directors’
duties on behalf of the corporation.26 The risk associated with allowing
a stockholder to sue on behalf of a corporation is that quality directors
may be hesitant to serve or make aggressive business decisions for fear
of facing litigation over a “bad” decision.27 To address that risk, and the
risk of courts second-guessing board decisions, Delaware courts
presume that in making a business decision, directors acted in good
23. See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993); Fairfax,
supra note 8; but see infra note 33 (challenging the ability of stockholders to elect and
24. See Cede & Co., 634 A.2d at 367; In re Gaylord Container Corp. S’holder
Litig., 753 A.2d 462, 476 (Del. Ch. 2000).
25. Stockholders can also seek to hold directors liable for committing corporate
waste. Directors are liable for committing corporate waste where they approve “an
exchange that is so one sided that no business person of ordinary, sound judgment could
conclude that the corporation has received adequate consideration.” In re Walt Disney
Co. Derivative Litig., 731 A.2d 342, 362 (Del. Ch. 1998), aff’d in part, rev’d in part sub
nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000) [hereinafter Disney I]. Proving waste
is exceptionally difficult. According to the Delaware Supreme Court, recovery under
the waste doctrine is “confined to unconscionable cases where directors irrationally
squander or give away corporate assets.” Brehm, 746 A.2d at 263. Because waste is
exceptionally difficult to prove and seems to play a limited role in the Delaware courts’
fiduciary duty analyses, it is not discussed further herein. See Jaclyn J. Janssen, In re
Walt Disney Company Derivative Litigation: Why Stockholders Should Not Put Too
Much Faith in the Duty of Good Faith to Enhance Director Accountability, 2004 WIS.
L. REV. 1573, 1597 (2004) (noting that Delaware judges are reluctant to undertake a
substantive review under the waste doctrine).
26. See DEL. CT. CH. R. 23.1 (2005).
27. See generally, Eisenberg, supra note 4 (arguing that business decisions are
necessarily made on the basis of incomplete information and in the face of obvious risk,
so that a range of decisions is reasonable).
faith, on a fully informed basis, and in an honest belief that the action
taken was in the best interest of the corporation.28 This presumption is
referred to as the business judgment rule.29 Stockholders challenging
director action can overcome that presumption only by showing that the
board either breached its duty of loyalty, duty of care, or duty of good
faith.30 If a plaintiff successfully rebuts the business judgment rule, the
burden then shifts to the defendant directors to prove that the transaction
was fair to the stockholders.31 This requires a showing that the
transaction was the product of fair dealing and fair price.32 Of course, if
stockholders are unhappy with board decisions, they can either vote the
board members out of office at the next election or sell their stock.33
Delaware also has several other procedural barriers that protect directors
from stockholder derivative suits for unwise or bad decisions. Those
procedures are discussed below in Part II.E.
A. Duty of Care
1. Business Decision Context
The business and affairs of a Delaware corporation are managed by
or under its board of directors.34 The duty of care requires that directors
inform themselves of all material information reasonably available
before voting on a transaction.35 A board can retain consultants or other
advisors in becoming informed, and is protected in relying on
statements, information and reports furnished by those advisors, so long
as it does so in good faith, and selected the advisors with reasonable
care.36 Under the business judgment rule, a board that has approved a
specific action will be presumed to have acted in good faith, on a fully
informed basis, and in an honest belief that the action taken was in the
best interest of the corporation.37 To rebut that presumption, and to
establish that a board breached its duty of care, a plaintiff must prove
that the board failed to inform itself of all material information
reasonably available and that failure amounted to gross negligence.38
One of the most significant duty of care cases in the last thirty years
is Smith v. Van Gorkom.39 In Van Gorkom, the Delaware Supreme
Court held that the board of Trans Union had breached its duty of care in
approving a merger at a meeting called on one day’s notice and without
34. DEL. CODE ANN. tit. 8, § 141(a) (2005).
35. Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).
36. Section 141(e) of the Delaware General Corporation Law (DGCL), provides as
A member of the board of directors, or a member of any committee designated by the
board of directors, shall, in the performance of such member’s duties, be fully
protected in relying in good faith upon the records of the corporation and upon such
information, opinions, reports or statements presented to the corporation by any of the
corporation’s officers or employees, or committees of the board of directors, or by any
other person as to matters the member reasonably believes are within such other
person’s professional or expert competence and who has been selected with
reasonable care by or on behalf of the corporation.
DEL. CODE ANN. tit. 8, § 141(e) (2005).
37. Cede & Co., 634 A.2d at 360; Aronson v. Lewis, 473 A.2d 805, 812
38. Aronson, 473 A.2d at 812.
39. 488 A.2d 858 (Del. 1985); Brown, supra note 1, at 340 (arguing that Van
Gorkom is the only significant Delaware Supreme Court case in the last thirty years
which has resulted in the inapplicability of the business judgment rule and the
imposition of liability on directors of a public company for breach of the duty of care).
having received any information as to the merger other than a statement
by the chairman that the merger price was fair.40 The board of Trans
Union was not entitled to the benefit of the business judgment rule
presumption because of its failure to act on an informed basis, and was
Van Gorkom gave directors a wake up call; it made them realize the
possibility of personal liability for their board service. The Delaware
legislature reacted a year later by enacting Section 102(b)(7) of the
Delaware General Corporation Law (DGCL).42 Under Section
102(b)(7), a corporation may waive monetary damages arising from a
director’s breach of the duty of care by including a charter provision to
that effect.43 But no director may be relieved or “exculpated” from
liability where she is found to have acted in bad faith, breached her duty
of loyalty, or to have knowingly violated law or engaged in
misconduct.44 As a result, directors of Delaware corporations are
generally not liable for breaching their duty of care, unless exculpation
is precluded by one of the noted exceptions in Section 102(b)(7).45
Under Section 145(a) of the DGCL, a corporation may indemnify a
director for any liability arising out of her service as a director, but only
for actions in good faith which she reasonably believed were in, or not
40. Van Gorkom, 488 A.2d at 867-69, 881, 884.
41. Id. at 884.
42. Emerald Partners v. Berlin, 787 A.2d 85, 90
(noting that the
Delaware legislature enacted Section 102(b)(7) of the DGCL the year after Van Gorkom
was decided); Cinerama, Inc. v Technicolor, Inc., 663 A.2d 1156, 1166 n.18 (Del.
1995) (noting that Section 102(b)(7) of the DGCL was a legislative response to the
Delaware Supreme Court’s liability holding in Van Gorkom).
43. Section 102(b)(7) of the DGCL provides as follows:
(b) In addition to the matters required to be set forth in the certificate of incorporation
by subsection (a) of this section, the certificate of incorporation may also contain any
or all of the following matters: . . . (7) A provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director’s duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this
title; or (iv) for any transaction from which the director derived an improper personal
DEL. CODE ANN. tit. 8, § 102(b)(7) (2005).
45. Id.; see also Black et al., supra note 3, at 1060 (noting that Van Gorkom is the
only case where outside directors made out-of-pocket payments after a trial).
opposed to, the best interest of the corporation.46 While indemnification
under Section 145 does not absolve a director from liability as in the
case of a Section 102(b)(7) charter provision, it does permit a director to
be made whole for any loss or damages incurred as a result of a
fiduciary duty suit against her, so long as indemnification is not
Considering the business judgment rule presumption, and in light of
the prevalence of exculpatory charter provisions, it is not surprising that
no Delaware court since Van Gorkom has premised director liability
solely on a breach of the duty of care.48 This has led several
commentators to conclude that the fiduciary duty of care exists only as
an aspirational and unenforceable standard.49
2. Oversight Context
Even when not faced with a business decision, a board must
oversee the business and affairs of the corporation on which it serves
under Section 141(a) of the DGCL.50 The board’s exercise of this
oversight function is not entitled to the benefit of the business judgment
rule presumption because there is no business decision to presume
correct.51 Thus the business judgment rule does not apply where a board
abdicates its responsibility to oversee a corporation’s business and
affairs, or where it fails to act absent a conscious decision to not act.52
In the alternative, where a board consciously decides to not act, this
choice does in fact amount to a business decision.53
One of the first duty of care cases in the oversight context was
Graham v. Allis Chalmers.54 In this case, several stockholders of
Allis46. See DEL. CODE ANN. tit. 8, §145(a) (2005).
47. Indemnification is only meaningful where the corporation is solvent and can
make good on its indemnity undertaking. See Black et al., supra note 3, at 1083-84.
48. Klein et al., supra note 8, at 157; Black et al., supra note 3, at 1060.
49. Jones, supra note 9, at 648 (citing Klein et al., supra note 8, at 151-54); see
also Thompson et al., supra note 5, at 866 (commenting that absent violations of
loyalty, good faith or some intent to harm the corporation or its stockholders, directors
are exculpated from liability for a breach of their fiduciary duty of care).
50. See DEL. CODE ANN. tit. 8, § 141(a) (2005).
51. Aronson v. Lewis, 473 A.2d 805, 813
54. Graham v. Allis Chalmers, 188 A.2d 125, 127 (Del. 1963). In Allis Chalmers,
Chalmers sued four convicted employees and the directors, seeking to
recover fines paid by the company for violating antitrust laws.55 Though
the defendant directors proved that they did not know about the
violations, the plaintiffs argued that the directors should have known
about the violations as they should have put a system in place designed
to bring any antitrust activity to their attention.56 The Delaware
Supreme Court did not buy this argument, holding that “absent cause for
suspicion there is no duty upon the directors to install and operate a
corporate system of espionage to ferret out wrongdoing which they have
no reason to suspect exists.”57 Applying this principle, the court found
that the Allis-Chalmers directors did not breach their duty of care, for as
soon as they had grounds to suspect that employees were engaging in
anticompetitive activities, they acted promptly to end those activities and
to prevent them from recurring.58
Perhaps the most significant oversight case, decided nearly thirty
years after Allis Chalmers, is In re Caremark International Inc.
Derivative Litigation.59 In Caremark, Caremark was assessed fines for
violating an anti-referral payments law prohibiting health care providers
from paying any form of remuneration to doctors or hospitals to induce
the referral of Medicare or Medicaid patients.60 Caremark was found to
have violated the law despite its adoption and implementation of a guide
specifying the types of contracts it was able to enter into with physicians
and hospitals under the anti-referral law, and its implementation of an
internal audit plan to audit compliance with that guide.61 Several
stockholders brought a derivative suit against Caremark’s directors,
alleging that they breached their duty of care by failing to detect and
Allis-Chalmers Manufacturing Company and four of its employees were convicted for
violating federal antitrust laws and were assessed fines for these violations. Id.
56. Id. at 127, 130.
57. Id. at 130.
58. Id. at 130-31.
59. In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch.
1996). In Caremark, the Chancery Court was asked to approve the terms of a
settlement as “fair and reasonable” under Chancery Court Rule 23.1. Id. at 960. But
the court took the opportunity of the settlement order to expound on the duty of care in
the oversight context.
60. Id. at 961-62.
61. Id. at 962-63.
prevent Caremark’s illegal activities.62
In its decision, the Delaware Chancery Court distinguished the duty
of care in the context of a board decision from the context of
unconsidered inaction.63 In the board decision context, the duty of care
requires that the board decision be the product of a good faith effort by
the directors to be informed and to exercise judgment.64 According to
the Chancery Court, this inquiry looks to the process employed and not
the substance of the board decision.65 But where a board is not
considering any decision, compliance with its duty of care requires that
the board ensure that the corporation functions within the law to achieve
its purpose.66 In performing this function, the court cautioned that a
board needs to consider the organizational sentencing guidelines, which
may result in significant sanctions on corporations for misdeeds.67
Moreover, a board needs relevant and timely information to satisfy this
oversight role.68 To be reasonably informed under this duty, a board
must determine, in its good faith judgment,
[t]hat information and reporting systems exist in the organization
that are reasonably designed to provide to senior management and to
the board itself timely, accurate information sufficient to allow
management and the board, each within its scope, to reach informed
judgments concerning both the corporation’s compliance with law
and its business performance.69
But “only a sustained or systematic failure of the board to exercise
oversight—such as an utter failure to attempt to assure a reasonable
information and reporting system exits [sic]—will establish the lack of
good faith that is a necessary condition to liability.”70 While the
Caremark obligation to establish a reporting system appears to
contradict the Delaware Supreme Court’s holding in Allis-Chalmers,
relieving directors from the duty to install and operate a “corporate
system of espionage to ferret out wrongdoing,” the Chancery Court
B. Duty of Loyalty
The fiduciary duty of loyalty mandates that a director exercise
undivided and unselfish loyalty to the corporation on whose board he
serves, and that he place the best interests of the corporation and its
stockholders ahead of any interest of his own, any officer, or any
controlling stockholder not shared by the other stockholders.72 Classic
examples of director self-dealing involve either a director appearing on
both sides of a transaction or a director receiving a personal benefit from
a transaction not received by the corporation’s stockholders.73 The
business judgment rule presumption applies to a board’s decision,
notwithstanding that the transaction being approved is an interested
party transaction.74 But Delaware courts are given flexibility in
determining whether a director’s interest in a transaction is sufficiently
material so as to constitute a breach of the duty of loyalty, and thus not
entitled to the protection of the business judgment rule.75 Where a
plaintiff demonstrates a breach of this duty, the burden shifts to the
defendant directors to prove that the transaction is fair to the
To avoid the need for a court determination of the fairness of every
challenged interested party transaction, there is a mechanism in
Delaware to remove the “interested director cloud.”77 This mechanism,
codified in Section 144(a) of the DGCL, provides that a transaction in
which a director is interested is not void, or voidable, if either a majority
of disinterested directors or a majority of stockholders, in good faith,
authorizes the transaction after full disclosure.78 For this purpose, a
71. See id. at 969.
72. Cede & Co. v. United Technicolor, 634 A.2d 345, 361 (Del. 1993); Guth v.
Loft, 5 A.2d 503, 510 (Del. 1939).
73. Cede & Co., 634 A.2d at 362.
74. Id. at 363.
75. Id. at 364.
76. Id. at 361; Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1279
77. Cede & Co., 634 A.2d at 365-66.
78. DEL. CODE ANN. tit. 8, § 144(a) (2005). Section 144(a) of the DGCL does not
preclude an interested director from being involved in the decision-making process in
director is considered disinterested if he does not appear on both sides of
a transaction, nor expects to derive a material personal financial benefit
from the transaction.79 Where either a majority of disinterested directors
or a majority of stockholders approves in good faith an interested party
transaction, a court will apply the business judgment rule to the decision
to enter into that transaction.80
C. Duty of Candor/Disclosure
The duty of candor mandates that directors disclose all available
material information to stockholders when obtaining their approval.81
Omitted information is “material” if a reasonable stockholder would
consider it important in deciding how to vote.82 To prove a breach of
the duty of candor outside of the context of an interested party
transaction, a stockholder must show that the information omitted from a
stockholder solicitation was material and reasonably available, and a
reasonable stockholder would consider that information important in
deciding how to vote.83 A director will only be required to pay damages
for a breach of the duty of candor where the breach impaired the
economic or voting rights of stockholders, and even then may be liable
for only nominal damages.84 Moreover, a board that breaches its duty of
candor is entitled to exculpation under a Section 102(b)(7) exculpatory
In the context of an interested party transaction, the duty of candor
mandates that directors not use superior information or knowledge to
mislead stockholders voting on the transaction.86 According to the
Delaware Supreme Court, this duty is one of the “elementary principles
of fair dealing.”87 Where stockholders are not provided with all material
information reasonably available when approving an interested party
transaction, that approval is ineffective under Section 144(a) of the
DGCL for purposes of removing the interested party taint.88 Thus, the
board must prove the fairness of the transaction though it may be
difficult to prove fair dealing in light of the omitted disclosure.89
This broad duty of candor is quite different from the disclosure
mandates of federal securities laws, laws enumerating in detail what
must be disclosed to stockholders of public companies.90 But Delaware
courts have historically looked to federal securities law disclosure
standards in shaping the state fiduciary duty of disclosure.91
D. Duty of Good Faith
Delaware courts have at times referred to a “triad” of fiduciary
duties, encompassing the duties of care, loyalty and good faith.92 But
Delaware courts have traditionally not held that a separate duty of good
faith exists.93 They also have not clearly defined what good faith means
beyond stating that it involves the need to act in the best interests of the
stockholders.94 In one case, the Delaware Chancery Court held that bad
faith may be inferred where a decision is so far beyond the bounds of
reasonable judgment it seems essentially inexplicable on any ground
other than bad faith.95 This formulation of bad faith seems to allow an
inference of a bad faith mental state when, in looking at the substance of
a decision, a court cannot find any other basis for that decision. Still,
this formulation does not explain what bad faith means, or when a bad
decision will lead to an inference of bad faith. On the other hand, the
Delaware Chancery Court’s formulation of bad faith in Caremark leads
to an inference of bad faith where there is an “utter failure to attempt to
assure a reasonable information and reporting system exists [sic].”96
This formulation focuses on the process employed by the board when
determining bad faith, inferring a bad faith mental state where an
inadequate information-gathering process is employed. According to
some commentators, a lack of clarity in defining and interpreting good
faith has prevented it from traditionally commanding attention in
E. Demand Futility and the Special Litigation Committee
Delaware law provides that a stockholder may commence a
derivative suit to enforce a cause of action on behalf of a corporation.98
Where a stockholder intends to bring a derivative action to enforce a
director’s breach of a fiduciary duty, Delaware Chancery Rule 23.1
requires that the stockholder first make demand on the board to proceed
with that cause of action.99 This demand requirement reveals that even
in the face of litigation, the board retains power to oversee corporate
affairs.100 But this demand requirement is dispensed with where it
(equating good faith with loyalty); Orman v. Cullman, 794 A.2d 5, 14 n.3 (Del. Ch.
2002) (“[T]he duty to act in ‘good faith’ is merely a subset of a director’s duty of
loyalty . . . .”); In re Gaylord Container Corp. S’holder Litig., 753 A.2d 462, 476 (Del.
Ch. 2000) (explaining that good faith is a “fresh” way to refer to the duty of loyalty).
95. In re J.P. Stevens & Co. S’holder Litig., 542 A.2d 770, 780-81 (Del. Ch. 1988).
96. See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch.
1996) (describing bad faith in the oversight context).
97. Dunn, supra note 93, at 545; see also Janssen, supra note 25, at 1583 (arguing
that conflicting approaches to the duty of good faith made it an ambiguous concept).
98. DEL. CT. CH. R. 23.1 (2006); Aronson v. Lewis, 473 A.2d 805, 811
99. Aronson, 473 A.2d at 811.
100. Zapata Corp. v. Maldonado, 430 A.2d 779, 785-86 (Del. 1981).
would be futile.101 The rationale behind this demand futility exception is
to save stockholders the expense and delay of making a demand likely to
result in a tainted exercise of authority by the board.102 To show
demand futility, a plaintiff must create a reasonable doubt that the
directors are disinterested and independent, or that the challenged
transaction was the product of a valid exercise of business judgment.103
Traditionally, to prove a director’s non-independence in the context
of demand futility, a plaintiff must show that the director’s decision was
based on extraneous considerations rather than the corporate merits of
the matter before the board.104 This is generally shown where a director
is dominated or controlled by an interested party.105 A director is
interested when he will receive a personal financial benefit from a
transaction not shared by the stockholders, or where a corporate decision
will have a materially detrimental impact on him but not on the
corporation or its stockholders.106 The possible threat of liability as a
result of a director having approved a challenged transaction is generally
insufficient to show that the director either is interested or not
Even where demand is excused, the board retains the right to make
decisions regarding corporate litigation.108 Thus a board has the power
financial projections, voted to approve the merger.297
After the transaction closed, the minority stockholders sued
Emerging Communications’ directors, claiming that the members of the
special committee breached their fiduciary duties of loyalty and good
faith by approving the transaction.298 As in Disney, the Chancery Court
performed a director-by-director analysis to determine whether any of
the directors had breached their fiduciary duties.299 One director,
Salvatore Muoio, was a principal of an investment-advising firm, and
had significant experience in telecommunications-sector financial
matters.300 The Chancery Court determined that, because of Muoio’s
experience, he knew, or should have known, the intrinsic value of
Emerging Communications, and that the merger price was unfair.301
Thus the court determined that Muoio was not able, in good faith, to rely
on the financial consultant’s fairness opinion in establishing his exercise
of business judgment.302 The court further reasoned that because Muoio
approved the transaction, he either did so to advance his own
selfinterest or had consciously and intentionally disregarded his
responsibilities; in either case, amounting to a breach of the duty of
loyalty or an act of bad faith.303 The court criticized Muoio for not
advocating to the board to reject the price offered, or go on record as
rejecting the price, as his expertise should have led him to conclude that
the proposed merger price was not fair.304
The Reform calls for increased financial expertise on the audit
committee.305 Presumably reflecting what has become a standard
practice, private companies have also been including directors with
financial expertise on their boards.306 Under Commission rules, being
297. Id. at *34-35, *132-34.
298. Id. at *35-36.
299. Id. at *140.
300. Id. at *143.
301. Id. at *143-44.
302. Id. at *144-45. The Chancery Court presumably determined that Muoio could
not rely on the opinion under Section 141(e) of the DGCL. Id.
303. Id. at *145-47. The court did not distinguish the duty of loyalty from the duty
of good faith. Id.
304. Id. at *144.
305. See supra Part III.C.
306. See Foley & Lardner Study, supra note 206 (finding that close to 70% of the
responding private companies added or intended to add a financial expert on the audit
committee following the Reform).
labeled an audit committee financial expert does not expose that director
to liability as an expert under federal securities laws.307 However, as
Emerging Communications reveals, a director with financial expertise
might not be justified in relying on a financial advisor’s report or
opinion under Section 141(e) of the DGCL to establish his business
judgment if his own expertise should have caused him to question that
report or opinion.308 This also pertains to a director’s ability to rely on
information furnished by, or a statement made by, an officer where the
director has reason to doubt that information or statement.309 In
Emerging Communications, the court did not focus on what Muoio
actually knew, but looked to what he should have known based on his
training and experience, in determining how Muoio’s conduct fell short.
In this way, training and experience seem to raise the expected level of
conduct for directors, regardless of personal competence.310 This might
impose an obligation, at least on accounting and financial experts, to
keep apprised of developments in the accounting industry at the risk of
falling below the standard of conduct a court expects from directors with
such experience and training. In this way, a director’s specialized
knowledge and background, sought and encouraged under the Reform,
may impose additional responsibilities on that director and expose him
to potential liability in the fiduciary duty context.311
B. Director Independence Post-Reform
1. Duty of Loyalty
The shift in fiduciary duties post-Reform is also apparent in the
analysis of director independence. The best way to demonstrate this
307. Section 407 Release, supra note 171, § II.A.5.
308. See Lawrence E. Mitchell, The Sarbanes-Oxley Act and the Reinvention of
Corporate Governance?, 48 VILL. L. REV. 1189, 1199 (2003) (predicting that the audit
committee financial expert’s increased access to information will heighten his legal
responsibilities despite assurances from the Commission).
309. See supra note 36 and accompanying text.
310. Johnson, supra note 6, at 33 (“A director with special accounting skills or
training may not be warranted in relying in a situation where an untrained director
might be warranted in relying. Likewise, one or more directors with information
unknown to other directors may not be able to rely as broadly as other directors.”).
311. Id. at 51 (noting that a director with special skills, background or expertise may
have greater responsibility whether or not he is designated as an expert).
shift, initially in the duty of loyalty context, is by way of example.
FSC, a sulfur company, and MOXY, an oil and gas exploration
company, were sister corporations spun off from the same company.312
In 1998, the boards of both FMS and MOXY decided that the two
siblings would benefit from being reunited, and so considered merging
the two.313 Each corporation formed a special committee to negotiate
the terms of the merger.314 After some negotiations, the two special
committees arrived at an agreement as to the terms of the merger.315
Each committee then submitted the merger proposal to, and received
approval from, its respective board.316 The stockholders of both
companies subsequently approved the merger.317 After consummation
of the merger, the stockholders of FSC sued the former FSC directors,
alleging that they had breached their fiduciary duties by approving the
merger with MOXY.318
According to the plaintiffs, the five former FSC directors not on the
special committee were interested in the transaction with MOXY.319
Thus, the board’s approval of the merger did not cleanse the transaction
under Section 144(a) of the DGCL, and the board was not entitled to the
protection of the business judgment rule.320 The lower court found that
the pleadings called into question whether a majority of the directors
was interested.321 But the defendant directors’ motion to dismiss was
granted because the complaint did not establish that those interests
“impugned” the special committee’s deliberations or negotiations.322 On
appeal, the Delaware Supreme Court reversed.323 According to the
court, the plaintiffs were entitled, at the pleading stage, to the inference
that a majority of the directors was not independent or disinterested.324
The defendant directors had the burden of proving that the merger was
approved by a committee of disinterested directors, acting
independently, with real bargaining power to negotiate the terms of the
merger.325 Because they did not meet this burden, their motion to
dismiss was denied.326
By placing the burden of proving independence on the directors, the
Delaware Supreme Court has indicated that independence is not
presumed, and must be affirmatively established.327 Plaintiffs then have
the opportunity to discredit that evidence, not only by revealing ties
between an interested party and special committee members, but also, a
la Krasner, by showing how the mere presence of an interested party in
the board approval process impugned that process.
The Delaware courts seem to have become more sensitive to the
potential for bias associated with an interested party transaction,
particularly in the current climate of skepticism towards directors.
Consequently, in a cleansing board approval setting, directors would be
wise to consider factors that might compromise independent approval up
front, or risk having a court decide after the fact that the approval
process did not remove the interested party taint, thereby giving the
court the opportunity to review the substance of the transaction for
fairness.328 It is in this way that an independence inquiry might unlock a
duty of loyalty case for a plaintiff.
In the context of an interested party transaction, raising the bar on
independence is consistent with the Reform’s policy of eliminating
competing personal interests.329 It may also reflect the Delaware courts’
increased skepticism as to the cleansing power of the independent
324. Id. at 284.
325. Id. at 284-85.
326. Id. at 286.
327. Jones, supra note 9, at 657-59.
328. Orman v. Cullman, 794 A.2d 5, 21 (Del. Ch. 2002) (quoting Kahn v. Lynch
Comm. Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994)) (noting that a determination that
entire fairness is the appropriate standard of review is of critical importance to a case
and normally will preclude dismissal of a complaint on a motion to dismiss).
329. See SENATE REPORT, supra note 134, at Title III.A. (opining that many recent
failures have been attributed to close ties between audit committee members and
management); Campos, supra note 164, at 529; see also supra note 164 and
director approval process.330 As Vice Chancellor Strine has indicated, a
stockholder vote based on full information creates a greater appearance
of fairness than independent director approval because the stockholders
have the chance to protect themselves, and are not forced to rely on the
skills and integrity of the board.331 Perhaps stockholder solicitation will
become a more attractive option in Delaware as increasing difficulty in
establishing a valid cleansing board approval under Section 144(a) of the
DGCL could lead to more proceedings beyond the motion to dismiss
Still, Vice Chancellors Chandler and Strine have been careful to
note that failing to satisfy the heightened independence inquiry does not
determine whether a conflict of interest, for which an interested director
may be liable, exists.333 But if that interest prevents a director from
being impartial, it may be relevant to a court determining whether a
director acted with the necessary state of mind for a breach of the duty
of loyalty, such as bad faith.334
2. Demand Futility and the SLC
Independence again comes into play where a stockholder has
commenced a derivative suit and alleges that demand is futile, due to the
fact that either the directors are not disinterested or independent, or that
the challenged transaction was not the product of a valid exercise of
business judgment.335 A director has traditionally not been viewed as
independent in this context if her decision is based on extraneous
330. Strine, supra note 33, at 1399 (“The parade of Enron executives and directors
who went before the Congress to plead guilty to ignorance about key financial issues is
arguably difficult to reconcile with the ideal of paternalistic and all-knowing directors
acting as the faithful market intermediaries for the stockholders.”).
331. Id. at 1401. But cf. Eisenberg, supra note 4, at 456, with Eisenberg, supra note
4, at 456 (making the counterpoint that it is hard to be confident that stockholders who
are sent proxy statements that include a proposal for their consideration will study and
fully understand the relevant issues).
332. The NASD rules require that all related party transactions be approved by the
listed company’s audit committee or comparable body. See NASDAQ Manual, supra
note 152, § 4350(h). Thus, a stockholder ratification would not cleanse an interested
333. Chandler et al., supra note 21, at 998.
334. See id.
335. Aronson v. Lewis, 473 A.2d 805, 812
considerations rather than the corporate merits of the matter before the
board.336 Delaware courts have generally focused on whether a director
is dominated or controlled by an interested party when determining if
her decision was based on extraneous considerations.337
The Delaware Chancery Court recently confirmed the notion that a
director’s consideration of extraneous considerations shows a lack of
independence in Beam ex rel Martha Stewart Living Omnimedia, Inc. v.
Stewart.338 In Beam, a stockholder of Martha Stewart Living
Omnimedia (MSLO) alleged that Martha Stewart breached her fiduciary
duties to MSLO by selling shares of ImClone and making public
statements detrimental to MSLO regarding the sale.339 The stockholder
did not make demand on the board of MSLO, arguing that demand
would have been futile.340 The Chancery Court easily determined that
Stewart was not independent for purposes of demand futility, as she was
the subject of the litigation giving rise to the demand requirement.341
The court also determined that MSLO’s chief operating officer, also on
the board, was not independent because Stewart was MSLO’s senior
executive, and thus had the ability to affect her employment and
compensation.342 The court then turned to the outside directors; the fact
that Stewart controlled 94% of MSLO, and had the power to elect and
remove directors, was not dispositive of those directors’
independence.343 Instead, the court considered whether remaining on
the board of MSLO was material to each outside director, such that each
director was unable to consider demand without factoring in this
extraneous consideration.344 The Chancery Court ruled that the
plaintiff’s complaint did not establish a lack of director independence, as
it failed to present evidence that any of the outside directors had
336. Id. at 815.
338. Beam ex rel Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961,
977 (Del. Ch. 2003).
339. Id. at 977.
340. Id. at 976. The Chancery Court applied the Rales test for demand futility
because the challenged action was the sale by Stewart of her shares in ImClone and her
associated public statements—it was not based on a decision by the board of MSLO.
Id. at 977 (citing Rales v. Blasband, 634 A.2d 927 (Del. 1993)).
341. Id. at 977.
342. Id. at 977-78.
343. Id. at 978.
previously followed Stewart’s will or recommendations without
independent investigation.345 The court acknowledged that some
professional or personal friendships may raise reasonable doubt as to
director independence,346 but the pleadings in this case did not create
that doubt as to any of the outside directors.347
While not performing a detailed analysis of the MSLO board’s
independence in Beam, presumably due to a lack of facts in the
pleadings to enable this analysis, the court did not focus solely on
notions of domination and control in its analysis, the traditional focus of
the independence inquiry in the demand futility context.348
Nevertheless, this case seems to illustrate the consequence of deficient
pleadings, rather than serving as a guide as to independence.
Admittedly, the Chancery Court gave substantial weight to its seemingly
sua sponte determination that the reputations of two directors prevented
them from making a decision that gave undue consideration to their
relationships with Stewart. But again, that determination may have
resulted from deficient pleadings, leaving the Chancery Court to make
logical leaps as to the various factors affecting independence. At a
minimum, Beam does suggest that in determining demand futility, the
Delaware courts may be shifting the independence inquiry from a
question of control to a more contextual inquiry, as seen in the duty of
The Delaware courts have given clearer guidance on the nature of
independence in the derivative suit context, where an action has been
commenced, and a board has formed a SLC to decide whether to dismiss
345. Id. at 978-79.
346. Id. at 979.
347. Id. at 979-81. The Chancery Court found that Stewart’s long-standing
friendship with two directors did not compromise their independence, as the court was
persuaded that those directors would not harm their reputations by failing to fulfill their
fiduciary duties. Id. at 980. However, the court chastised the plaintiff for not having
used the “tools at hand” to obtain more facts on those friendships, and instead relying
on general, conclusory statements. Id. at 981-82. But see California Pub. Employees’
Ret. Sys. v. Coulter, 2002 WL 31888343, at *9 (Del. Ch. 2002) (holding that while
personal friendships, without more, outside business relationships, without more, and
approving of or acquiescing in the challenged transaction, without more, are each
insufficient to raise a reasonable doubt as to a director’s ability to exercise independent
business judgment, they can, taken together, create a reasonable doubt as to
348. See supra Part II.E.
the suit.349 Another virtual trip to the Delaware courts will help explain.
In 2001, four Oracle directors sold shares in Oracle allegedly on the
basis of material non-public information.350 The non-public information
related to “bugs” with an important new Oracle program, as well as
declining sales of other products.351 This information revealed that the
earnings projections Oracle had provided to the market were no longer
accurate.352 Plaintiffs, stockholders in Oracle, sued the four defendant
directors, alleging they breached their duty of loyalty in
misappropriating insider information, and using it as the basis for
making stock trades.353 Plaintiffs also sued the other Oracle directors,
alleging that they had breached their duty of oversight by not correcting
the misleading information in the market about Oracle’s performance in
such a way so as to amount to bad faith.354
The Oracle board formed a SLC with two tenured Stanford
professors to investigate whether dismissing the suit was in Oracle’s best
interest.355 The SLC performed an extensive inquiry into the plaintiffs’
complaint, with significant involvement from its independent external
counsel.356 Based on these investigations, the SLC determined that
proceeding with the lawsuit was not in Oracle’s best interest, and moved
Relying on Zapata v. Maldonado, the Chancery Court placed the
burden on the SLC members to prove that: they were independent, acted
in good faith, and had a reasonable basis for their recommendation to
dismiss the suit.358 The two SLC members argued that they were
independent because they did not receive compensation from Oracle
other than as directors, and were in fact willing to return their fees for
serving as SLC members if that was necessary to preserve their
independence.359 Further, the SLC members were not on Oracle’s board
at the time of the alleged wrongdoing, and in their view, did not have
any material ties with the defendant directors.360 But a number of ties
between the SLC members and the defendant directors emerged during
discovery.361 Specifically, it was discovered that one of the defendant
directors had taught one of the SLC members while at Stanford, and was
also on a Stanford policy committee with that same SLC member.362
Another director personally made and directed, through a charitable
institution, substantial donations to two organizations at Stanford with
which one of the SLC members was affiliated.363 A third defendant, the
CEO of Oracle, was the sole director of a charitable institution that had
made substantial donations to Stanford.364 The CEO had also caused
Oracle to make donations to Stanford, and was considering establishing
a $170 million scholarship program through Stanford at the time of the
challenged stock trades.365 The SLC members argued that these ties did
not impair their independence, as they were both tenured professors who
were not susceptible to professional punishment for making decisions
adverse to the defendant directors.366 Additionally, their positions did
not depend on their fund-raising efforts.367
The Chancery Court recognized that existing jurisprudence
concerning the determination of independence focused on questions of
domination and control.368 But, in the court’s view, “an emphasis on
‘domination and control’ would serve only to fetishize much-parroted
language, at the cost of denuding the independence inquiry of its
intellectual integrity.”369 Recognizing that humans are not solely
motivated by economic considerations, the court viewed independence
contextually, looking to whether either SLC member was, for any
substantial reason, incapable of making a decision with only the best
interests of the corporation in mind.370 The court took notice of the new
361. In re Oracle Derivative Litig., 824 A.2d at 929.
362. Id. at 931.
363. Id. at 931-32.
364. Id. at 932.
365. Id. at 933.
366. Id. at 935-36.
367. Id. at 936.
368. Id. at 937.
370. Id. at 937-39.
definition of independence created under the Reform;371 while
disfavoring the use of blanket labels in defining independence, the court
supported the proposition recognized in the Reform that independence
depends on the particular circumstances.372
Using this contextual approach, the Chancery Court found that the
SLC had not proven the absence of a material fact regarding its
members’ independence, as its report did not even mention the Stanford
ties between the SLC members and the defendant directors.373 For the
court, the significant question was whether a person in a SLC member’s
position would find it difficult to assess a defendant director’s conduct
without pondering his own association with that director and their
mutual affiliations.374 A SLC member would not be considered
independent of the director if that SLC member was unable to decide
without that association “be[ing] on the[ir] mind.”375
One of the reasons for the court’s careful scrutiny of independence
in Oracle is the extraordinary importance, and difficulty, facing SLC
members who must decide whether to accuse a fellow director of
misconduct with less than full board support.376 While this might
explain why the Chancery Court found director independence in Beam
but not in Oracle, it seems to be as difficult to decide whether to sue a
director in the first instance as to decide to proceed with a suit against
her. Perhaps a better explanation is that the plaintiffs in Beam had the
burden of proving the lack of board independence, whereas the directors
in Oracle had the burden of establishing their independence. Viewed
this way, the allocation of the burden of proof may have a strong bearing
on the nature and outcome of the independence inquiry.377 Moreover, if,
371. Id. at 940 n.62.
372. Id. Vice Chancellors Chandler and Strine have noted that there is a great deal
of harmony between the sentiments of the Reform and Delaware case law as to the
independent director concept, particularly to the extent that the Reform recognizes the
independence-compromising effects of consultant contracts, familial ties and other
factors. See Chandler et al., supra note 21, at 960-61. Hence in the Vice Chancellors’
view, the Reform may have the virtue of simplifying some aspects of corporate
litigation, as it gives clear guidance as to what does not amount to independence. Id. at
373. In re Oracle Derivative Litig., 824 A.2d at 942-43.
374. See id. at 943.
375. See id.
376. See id. at 921, 940.
377. See Davis, supra note 168, at 1315 (arguing that the Chancery Court’s
as Vice Chancellor Strine has suggested, the heightened judicial scrutiny
on independence seen in Oracle reflects heightened pressure from
plaintiffs to presume that any tie with an interested director precludes a
finding of independence, at least at the pleading stage, perhaps plaintiffs
in other contexts will demand the same level of searching inquiry and
skepticism, arguing that extraneous considerations should never be a
factor in board decisions.378
The contextual and sensitive nature of the independence inquiries
seen in Oracle and Krasner give the Delaware courts a significant
amount of discretion in determining the point at which a director’s
relationships, whether personal, familial, charitable or other,
compromise his independence. This might enable courts to find
independence only where “the court feels that it can trust the
directors.”379 Perhaps courts will be more willing to trust directors in
less tumultuous times, when not faced with widespread skepticism as to
directors’ ability to effectively and neutrally monitor management.
3. Independence—Where Delaware Law and the Reform Meet
The Delaware trend towards scrutinizing a broad range of factors
bearing on independence is consistent with the Reform’s call for greater
director independence, particularly from management.380 This emphasis
on independence, in both the context of board and committee
outcome-determinative characterization of independence in Beam suggests that the
court accepts some variance as a practical consequence of how the burden of proof is
378. See Strine, supra note 33, at 1383.
379. See id. at 1385 (referring to statements made by former Chief Justice Veasey).
380. Chandler et al., supra note 21, at 961 n.15 (“Delaware law recognizes that
charitable relationships between a director and another constituent of the corporation (or
the corporation itself) should be considered as factors in determining whether the
director’s independence has been compromised.”); Veasey, Access to Justice, supra
note 254, at 14 (noting that the independence concepts under the Reform are not
inconsistent with Delaware case law, though are somewhat more explicit). According
to Vice Chancellors Chandler and Strine, “For the most part, it should be the case that
satisfaction of the new Exchange Rule independence standards will enable a director, at
least as a prima facie matter, to be labeled as ‘independent.’” Chandler et al., supra
note 21, at 988. But see Brown, supra note 1, at 372 (indicating that SOX does not alter
state law cases characterizing a director as independent, even though he has
longstanding business and personal ties to the chief executive officer).
composition under the Reform, and in the context of the board’s exercise
of its duties under state fiduciary duty law, is not surprising following
the discovery of widespread accounting abuses that unquestioning,
passive boards largely missed because of their close ties to
management.381 It also likely addresses the skepticism of judges as to
whether there is such a thing as an “independent director,” given the
heavy role management plays in selecting directors, the fact that
independent directors are usually managers of other corporations, and
the social affinities that exist between directors and managers.382
Despite the trend in Delaware towards harmonizing the
independence determination in the fiduciary duty analysis with the
Reform’s rules on independence, members of the Delaware judiciary
have indicated that they do not agree with, and do not intend to follow,
the Reform’s classification as non-independent directors who own, or
are affiliated with a person who owns, a substantial but non-controlling
block of stock.383 According to Vice Chancellors Chandler and Strine,
this “is contrary to much good thinking in academia and in Delaware
decision law, both of which have taken the view that independent
directors who have a substantial stake as common stockholders in the
company’s success are better motivated to diligently and faithfully
oversee management.”384 This observation is especially relevant in the
current environment, where stockholders are increasingly demanding to
have their nominees placed on the board.
Critics of the heightened independence mandate argue that
independence does not always lead to improved firm performance.385
However, independence likely eliminates or reduces competing personal
381. See Campos, supra note 164, at 540-41 (agreeing with Vice Chancellor Strine’s
message in Oracle that in determining independence, it is important to look not only to
specific requirements that exist (for example, through the NYSE and NASDAQ listing
standards) but also to carefully consider any sort of relationship that could be deemed to
impair independence); see also supra note 1 and accompanying text.
382. See Strine, supra note 33, at 1374-75.
383. Chandler et al., supra note 21, at 989-96 (challenging the preclusion of a
finding of independence under SOX where a director owns or is affiliated with a
384. Id. at 992; see also Usha Rodrigues, Let the Money Do the Governing: The
Case for Reuniting Ownership and Control, 9 STAN. J.L. BUS. & FIN. 254, 256 (2004)
(promoting inclusion of one stockholder nominee independent of management on the
385. Bhagat et al., supra note 167; see Davis, supra note 168, at 1340.
interests that might “be on the mind” of a director when making a
business decision. This, in turn, likely gives stockholders a greater sense
of impartiality, important in an environment when the corporate parade
of evils has been seemingly commanded by conflicted, passive directors.
C. Duty of Candor/Disclosure Post-Reform
In Emerging Communications, presented above, the Delaware
Chancery Court found that the directors of Emerging Communications
had breached their duty of disclosure to the stockholders by failing to
provide current financial projections of Emerging Communications that
reflected its true value.386 Thus, the stockholders’ approval was
ineffective under Section 144(a) of the DGCL.387 While the Chancery
Court acknowledged that projections were not required to be provided to
the stockholders as a matter of course, the fact that they had been
provided to Prosser, the sole stockholder of Innovative Communications,
meant that they had to be provided to all stockholders, and the failure to
do so was a material omission.388 The Chancery Court also found that
the proxy material was materially misleading in that it suggested that the
members of the special committee were independent when in fact they
were not, and in stating that the special committee comprised a majority
of the board, although it did not.389 For that reason, along with others
cited, the court found that the merger price was not the product of fair
dealing, and the defendant directors had not proven the fairness of the
As section B presented, Delaware’s standard of independence is
changing as stockholders expect and demand directors with more pluck
who are independent from, and who are willing to question,
management. As Emerging Communications shows, this emphasis
emerges again in the stockholder solicitation context, where directors
must, under their duty of candor, disclose to stockholders any
relationship that might bear on the board’s independent approval of an
interested party transaction. This again reveals the Delaware courts’
386. In re Emerging Commc’ns Inc. S’holders Litig., No. 16415, 2004 Del. Ch.
LEXIS 70, at *131-32 (Del. Ch. 2004).
387. See discussion supra Parts II.B, II.C.
388. In re Emerging Commc’ns, 2004 Del. Ch. LEXIS 70, at *134.
389. Id. at *135.
390. Id. at *116-37.
emphasis on the need to assure stockholders of the integrity and fairness
of board processes through independence.
While Delaware’s duty of candor does not derive from compliance
with specific disclosure obligations under federal securities laws,
Delaware courts have given deference to federal disclosure standards in
shaping the state fiduciary duty of candor.391 Consequently, a violation
of any of the new SOX disclosure obligations placed on public
companies may give rise to a state law fiduciary duty of candor claim, or
may eliminate the cleansing effect of stockholder approval of an
interested party transaction and also prove the absence of fairness.
Perhaps more significant, as companies implement enhanced
information and reporting systems, they generate mountains of
additional information about internal processes, plans, procedures and
the like. Much of this is reported to the audit committee. This greatly
expands the definition of information that is “reasonably available” and
that may need to be provided to stockholders when soliciting their
approval. Further, public companies must periodically report the
information generated by these enhanced systems to their stockholders.
This disclosure may significantly increase the types of fiduciary duty
claims that stockholders are able prove.
D. Are We There Yet?
While directors may take some comfort from the fact that their
fiduciary duties have not been turned inside-out and upside-down amidst
the ambitious corporate governance reform, the changes that have
occurred in the short time since the Reform took effect are notable.
Most importantly, Delaware courts seem poised to employ good faith
through the duty of loyalty to enforce directors’ discharge of their
oversight responsibilities.392 As Stone demonstrates, directors who
intentionally or consciously disregard those responsibilities may be held
liable as a result of breaching their duty of loyalty. As Disney instructs,
even a director who jumps over the minimum standard of conduct hurdle
can still face protracted litigation and court reprimand for sub-par
conduct. This is particularly significant, as directors have an increasing
391. See discussion supra Part II.C.
392. Janssen, supra note 25, at 1593 (suggesting that the failure of care, loyalty and
waste claims has led to enforcement of the duty of good faith).
number of oversight responsibilities to discharge.393
Director independence is a corollary to the duty of oversight, aimed
at enhancing directors’ ability to perform their responsibilities without
associations that can compromise their impartiality or effectiveness.
Toward that end, the Delaware courts have been scrutinizing a broad
range of factors that might impair independence, supported by the
Reform’s expansive list of factors precluding a finding of independence.
The consequence of a broader independence inquiry, as Oracle and
Krasner show, is that it allows stockholders to throw more challenges to
director independence at the court, increasing the chances that one of
those challenges will stick. Those cases also seem to cast a wider net on
what directors must consider and investigate where they have the burden
of establishing their independence. Directors can take some comfort
from the message of members of the Delaware judiciary that the lack of
independence does not equate to being interested for purposes of the
duty of loyalty. However, the two concepts converge where a majority
of independent directors approves an interested party transaction, yet the
directors are not able to establish their independence at trial, as in
Krasner. The result is the application of the fairness standard of review;
a standard allowing a court to review the substance of a transaction for
fairness, often resulting in a different outcome than where a court defers
to the directors’ exercise of business judgment.394 Independence might
also overlap with good faith to the extent that a non-independent
director’s approval of an interested party transaction is used to prove
that the director acted with bad faith or without fully investigating
whether she was in fact independent, in conscious disregard of her duty
to do so.
That is not to say that the Delaware courts “have lurched into a new
and menacing direction that should cause panic in the boardroom.”395
393. See E. Norman Veasey, A Perspective on Liability Risks to Directors in Light
of Current Events, 19 INSIGHTS: CORP. & SEC. L. ADVISOR 9, 11 (2005) [hereinafter,
Veasey, Perspective] (“The evolution of director expectations occurs not only because
courts must decide only the cases before them, but also because business norms and
mores change as well over time.”).
394. See supra note 328 and accompanying text.
395. According to the former Chief Justice of the Delaware Supreme Court, E.
Norman Veasey, Caremark made clear that the expectation is that the board will
implement modern governance norms, including effective law compliance programs.
Veasey, Perspective, supra note 393, at 13.
But current Delaware case law suggests that the standards directors are
judged by are evolving, as perhaps they should, to meet changing
demands and the evolving corporate governance mandates reflected in
So how does a director satisfy her evolving fiduciary duty? That is
the topic of Part V.
V. HOW DOES A DIRECTOR DISCHARGE HER
EVER-ELUSIVE FIDUCIARY DUTIES?
Being a director of a corporation is not an easy task—nor one to be
taken lightly. That is particularly true in an environment where the
corporate governance scale has been tipping towards increasing
directors’ oversight responsibilities and making them accountable to
stockholders.396 The corporate governance scale may have needed an
adjustment after the bursting of the dot-com and telecom bubbles
because directors in many instances had failed to serve as an effective
check on management’s practices of engaging in short-term market
manipulations to increase the price of stock,397 and to introduce a
healthy dose of skepticism into the boardroom.
The biggest and most immediate adjustment to the corporate
governance scale originated with the Reform. By mandating specific
oversight duties audit committee directors must perform and
qualifications directors must have, the Reform does not leave much
room to question what, at a minimum, is expected from directors along
these lines. That might explain why directors of companies not subject
to the Reform are also implementing Reform-style governance
practices,398 for they too understand that the bar has been raised and that
more is expected of them.
While the Reform increased the expected level of director conduct,
Delaware courts have been adjusting the standard of review for that
conduct.399 Prior to the enactment of the Reform, Delaware courts did
396. See discussion supra Parts III-IV.
397. See Coffee, supra note 128, at 298 (arguing that there was an incentive to
inflate the price of stock by premature revenue recognition, enabling management to
bail out in the short-term by exercising options and immediately selling their stock).
398. See discussion supra Part IV.
399. A standard of review is a test that a court applies when it reviews an actor’s
conduct to determine whether or not to impose liability or grant injunctive relief.
not generally provide stockholders with a remedy for directors’
oversight lapses, whether or not involving a business decision, absent a
conflict of interest.400 But by shifting their focus to good faith, and
performing the fiduciary duty analysis using that standard, the Delaware
courts have indicated a willingness and way to enforce directors’
oversight responsibilities through personal liability. Just as the
Delaware courts use the business judgment rule to implement a policy of
judicial deference to business decisions,401 so too has good faith become
a tool by which those courts have started to implement a policy of giving
more careful scrutiny and attention to ordinary business decisions and
oversight responsibilities. Thus, as the standard of conduct requires
directors to perform an increased number of oversight duties, the
standard of review has shifted closer, exposing a director to an increased
risk of personal liability for failing to perform his duties in good faith.
That is not to say that there has been a wild swing in fiduciary duty law
following the Reform. The fact that the directors of both Disney and
AmSouth were not adjudged liable seems to demonstrate the continuing
trend in Delaware towards director absolution. However, cases such as
Disney and Stone, where the Delaware courts gave substantial attention
to the performance by the directors of their routine duties and measured
the board failures by a standard of liability that is coming more into
focus, suggest a new direction for the Delaware courts.
Moreover, personal liability for oversight failures is not the only
land mine directors may encounter; as in Disney, directors may face
years of litigation even where their conduct does not amount to bad
faith. Further still, also seen in Disney, directors face the risk of court
rebuke for failing to employ best practices. For directors, who are often
esteemed members of society,402 this type of public rebuke can seriously
harm their reputations and impair their business prospects.
Eisenberg, supra note 4, at 437. A standard of conduct provides how an actor should
conduct a given activity or play a given role. Id. Often the standard of review and
standard of conduct diverge, for example, in the case of the duty of care, where
Delaware courts expect directors to employ best practices, yet give deference to their
business decisions under the business judgment rule. Id. at 443.
400. See discussion supra Part II.
401. Allen et al., supra note 3, at 1294-95.
402. See Lynn A. Stout, On the Proper Motives of Corporate Directors (Or, Why
You Don’t Want to Invite Homo Economicus to Join Your Board), 28 DEL. J. CORP. L. 1,
4 (2003) (noting that directors are generally successful professionals).
Delaware courts have also been able to more closely align standards
of review with changing standards of conduct by expanding the scope of
the independence review. A decision made by a SLC comprised of
independent, disinterested directors prevents a court from hearing the
merits of a case. Independent board approval also prevents a court from
reviewing an interested party transaction for fairness. In both cases,
where the independence of directors involved in the approval process is
questioned, a court has broad discretion, given the contextual
factspecific nature of the independence inquiry, to determine whether that
lack of independence impugned the approval process. Where a court
finds that the approval process has been impugned, the court may review
the transaction and determine whether it satisfies the applicable standard
of review.403 Thus, by giving more teeth to the independence inquiry,
the courts have increased the likelihood that they will review director
conduct and, in the case of interested party transactions, that they will
review the fairness of those transactions.
Though the standard of review appears to be approaching the
heightened standard of post-Reform conduct, the two still appear to be
on separate planes. As Chancellor Chandler has noted,
Delaware law does not—indeed, the common law cannot—hold
fiduciaries liable for a failure to comply with the aspirational ideal of
best practices, any more than a common-law court deciding a
medical malpractice dispute can impose a standard of liability based
on ideal—rather than competent or standard-medical treatment
practices, lest the average medical practitioner be found inevitably
Though the Delaware courts have not expounded on what amounts
to best practices, they have been quick to note conduct that does not
measure up. For instance in Disney IV, the Delaware Chancery Court
pointed out numerous instances where the directors’ conduct fell short of
403. Veasey, Perspective, supra note 393, at 10 (“[T]here are some court cases
where directors may be held personally accountable. But they are not, in my opinion, a
menacing trend and are explainable as law and business mores and expectations of
directors’ processes continue to evolve.”); but see id. at 11 (“The fact that the standards
of review applied by Delaware courts to the standards of director conduct has resulted
in some findings of wrongdoing is primarily a function of intensified judicial focus on
process and improved pleadings by plaintiffs’ lawyers.”).
Disney IV, 2005
Del. Ch. LEXIS 113, at *4-5, aff’d C.A. No. 15452, 2006
Del. LEXIS 307
best practices.405 Similarly, in Disney V, the Delaware Supreme Court
repeatedly rebuked the directors for failing to comply with best
practices. This suggests that compliance with best practices may be a
director’s insurance policy against the risks that he will be held liable for
having breached his fiduciary duties, or that he will be rebuked for
failing to employ best practices. It may also prevent a director from
facing time-consuming litigation, as his conduct will at least be on the
same plane as stockholders’ expectations.
Compliance with good corporate practices, somewhere above bad
faith but falling short of best practices, may or may not preclude a
director from being reprimanded by a court or involved in protracted
litigation. It is not clear from Disney how short the Disney directors’
conduct fell from aspirational practices. Still, their conduct was
sufficient for them to avoid personal liability. As former Chief Justice
Veasey has previously noted, “Good corporate practices, when
genuinely used, in my view, would perforce and simultaneously lead
directors to act in good faith.”406 In this way, compliance with good
corporate practices seems to serve as an insurance policy against the risk
of liability for a breach of the duty of loyalty for actions taken in bad
Because the Delaware courts have not been clear as to what
amounts to good or best practices, it is difficult to know both where the
line between the two is drawn and the differences between them. In
fact, there may still be more layers between good practices and bad faith,
such as competent practices or adequate practices. But even without
fully understanding all of the levels of conduct that might fall between
the two, it seems clear that the Delaware courts intend to encourage best
practices, and are willing to use available tools, short of imposing
liability, to bring about the employment of those practices.407
405. See, e.g., id. at *191 (“By virtue of his Machiavellian (and imperial) nature as
CEO . . . Eisner to a large extent is responsible for the failings in process that infected
and handicapped the board’s decision making abilities.”).
406. Veasey, Counseling Directors, supra note 141, at 1456; see also Hamilton et
al., supra note 2, at 25 (stating that ideals of good corporate governance practices that
go beyond the minimal legal requirements are desirable, tend to benefit stockholders,
and can usually help directors avoid liability).
407. This is consistent with Professor Eisenberg’s view that standards of conduct
(such as best practices) are “safe” rules and standards of review (such as good faith) are
“risky” rules. See Eisenberg, supra note 4, at 464. According to Professor Eisenberg, a
So what amounts to best corporate practices? Not surprisingly, it
depends. Specifically, what amounts to best practices will invariably
depend on the circumstances408 and will vary by company, depending on
factors such as industry,409 number of stockholders410 and size.411 As
Vice Chancellors Chandler and Strine have noted, “there must be room
[in fiduciary law] for creativity and innovation and that the law must
accommodate the diversity that exists in corporate America.”412 Perhaps
the fact that best practices are as amorphous as good faith will allow the
Delaware courts to draw an imaginary line between them, allowing any
director who conforms his conduct to a standard of conduct knows that he is safe from
liability, whereas a director who relies only on the standard of review that is less
demanding is at risk that the standard of review will be deemed inapplicable and
liability will be imposed under the standard of conduct. Id. Some studies indicate that
there is a positive relationship between good corporate governance and firm value.
BNA Inc., 3 Corporate Accountability Report 57 (2005) (referring to empirical
evidence that shows that there is a link between returns and governance). If there is
indeed a positive correlation, implementing good corporate practices can be rationalized
not only as a liability avoidance measure, but also as a value creation measure for
408. Allen et al., supra note 3, at 1294. Allen notes reasons why courts have had
trouble defining precise guidelines:
[T]he almost infinite potential variation in the fact patterns calling for director
decisions, the disparate time frames within which different boards may be required to
act, and the divergent skills and information needed to make particular business
decisions, usually make it impossible for courts to articulate ex ante precise guidelines
for appropriate fiduciary action in future cases.
409. For example, best practices for a high-tech company with a complicated
business plan would be different than for a company that manufactures widgets.
410. Generally speaking, the more dispersed and passive the stockholder base, the
more stockholders rely on directors to oversee management. See Jonathan R. Macey,
Efficient Capital Markets, Corporate Disclosure, and Enron, 89 CORNELL L. REV. 394,
401 (2004) (noting that diverse share ownership limits stockholders’ involvement in
corporate governance); John F. Olson et al., Composing a Balanced and Effective Board
to Meet New Governance Mandates, 59 BUS. LAW. 421, 429 (2004) (noting the
tradeoff between corporate control by stockholders and liquidity).
411. Aulana Peters, Sarbanes-Oxley Act of 2002, Congress’ Response to Corporate
Scandals: Will The New Rules Guarantee “Good” Governance and Avoid Future
Scandals?, 28 NOVA L. REV. 283, 284, 292 (2004) (noting that it is open for debate
what constitutes good corporate governance and that no one set of governance rules fit
all firms and situations).
412. Chandler et al., supra note 21, at 978. The downside to variable good corporate
governance practices is that it is difficult to know what they are.
wave of corporate governance reform to erase the line and the Delaware
courts to redraw it. The Reform has indeed shifted the line, with many
former best practices now constituting a statutory minimum that must be
implemented to comply with fiduciary duties. Still, the Delaware
courts’ adherence to the doctrine of stare decisis, and the slow evolution
of decisional law, should give directors the opportunity—at least
directors who are paying attention to their duties—to understand and
adjust their conduct to meet evolving expectations.
While competent, good, or best corporate practices vary from
circumstance to circumstance, from company to company, and from
time to time, the one common denominator is the need for directors to
act in the best interest of stockholders. That seems to be the common
trend found under the new duties and legal mandates under the Reform
and state fiduciary duty law. Federal securities laws, SRO rules,
organizational sentencing guidelines and state corporate law are all
geared towards encouraging a corporate culture of wanting to do the
right thing—though they differ on how to bring that about.413 The
approach taken by the Reform—of enumerating specific responsibilities
currently viewed as desirable by stockholders—seems to be bringing
about conduct that gives the appearance of directors acting with the best
interests of the stockholders in mind. However, that approach may not
be sustainable in the long term, as stockholders’ expectations continue to
shift to reflect the continually evolving nature of business. Delaware’s
duty of good faith may be more appropriately suited for the task, as it
affords courts, in an environment where stockholders’ expectations are
continually evolving, the opportunity to look to the entire process
employed by directors as a proxy for the directors’ good faith state of
mind.414 Yet it remains to be seen how, and to what extent, Delaware
and other state courts can and will use good faith through the duty of
413. See Johnson, supra note 6, at 39 (arguing that commentary from Delaware
judges as well as remarks made by Chancellor Chandler in Disney IV “suggest that the
key issue with respect to analyzing good faith is whether the director’s motivation and
purpose was to advance the corporation’s interest”).
414. See Johnson et al., supra note 6, at 1194 (suggesting that the broad, ill-defined
fiduciary duties in Delaware accord wide latitude to directors, which is highly
functional given the strong process dimension to fiduciary analysis).
loyalty to bring about the “do the right thing” mindset.
But even with a standards-based approach, the method of
encouraging best practices continues to focus on the disciplining stick
and not the rewarding carrot. Perhaps a better approach is to make
directors want to do the right thing. Directors might be encouraged to
uphold high ethical business standards, not out of fear of facing possible
stockholder derivative suits or court reprimand, but because they are
rewarded for acting honestly and ethically, possibly through a financial
bonus or positive corporate disclosure. This will be more effective if all
corporations implement a similar incentive system, as stockholders will
then be able to compare directors’ performance from corporation to
corporation. Ultimately, while the threat of liability might be sufficient
to prevent a director from engaging in certain practices, it may make
more sense to encourage aspirational conduct by inspiring directors to
engage in honest and ethical conduct.
AS SOURCES OF CORPORATE GOVERNANCE ................................ 412
A. Historic Role of Securities Laws and SRO Listing Standards ............................................................................. 412
B. The Enactment of SOX and SRO Corporate Governance Listing Standards................................................................. 414
C. Provisions of SOX and SRO Rules Affecting Corporate Governance.......................................................................... 418
D. SOX and SRO Rules Step into the Ring with Fiduciary Duties................................................................................... 428
AGAINST THE BACKDROP OF THE REFORM.................................. 430
A. The Duties of Care and Good Faith Revisited PostReform................................................................................. 431
B. Director Independence Post-Reform..................................... 446
C. Duty of Candor/Disclosure Post-Reform .............................. 457
D. Are We There Yet? ............................................................... 458 1 . J. Robert Brown , Jr., The Irrelevance of State Corporate Law in the
Governance of Public Companies , 38 U. RICH. L. REV . 317 , 358 ( 2004 ) (arguing that
Crisis in Corporate Governance: 2002 Style, 40 HOUS. L. REV. 1 , 37 ( 2003 ) [hereinafter
American Bar Association Task Force on Corporate Responsibility 1 , 3 - 7 ( 2002 )).
in Organizations , 3 WYO. L. REV. 387 , 402 - 05 , 441 - 44 , 475 - 78 ( 2003 ) (referring to the
current and former Tyco employees) . 2. See JAMES HAMILTON ET AL., RESPONSIBILITIES OF CORPORATE OFFICERS AND
DIRECTORS UNDER FEDERAL SECURITIES LAWS 28 ( 2005 ). 28 . Cede & Co., 634 A. 2d at 360 (citing Aronson v . Lewis , 473 A.2d 805 , 812
(Del . 1984 )). 29 . Id .; Aronson, 473 A.2d at 812 . 30. Cede & Co., 634 A.2d at 361; Emerald Partners v. Berlin, 787 A.2d 85 , 91
(Del . 2001 ) ; but see discussion infra Part II.D as to the duty of good faith . 31. Cede & Co., 634 A.2d at 361; Mills Acquisition Co. v. MacMillan, Inc., 559
A. 2d 1261 , 1279 ( Del . 1989 ). 32 . Cede & Co., 634 A.2d at 361 . 33. The ability of stockholders of public companies to vote directors out of office
Ballot vs . Required Majority Board Independence , 2005 ILL. L. REV. 521 , 528 ( 2005 )
supra note 21 , at 999 ( “As of now, incumbent slates are able to spend their companies'
the Enron Debacle , 57 BUS. LAW. 1371 , 1377 ( 2002 ) (arguing that the nominating
management's candidates over candidates nominated by stockholders ). 86 . Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261 , 1283 ( Del . 1989 ). 87 . Id . 88 . See DEL . CODE ANN. tit. 8, § 144(a) ( 2005 ) ; see also discussion supra Part II .B. 89 . Cede & Co. v. Technicolor, Inc., 634 A.2d 345 , 366 ( Del . 1993 ). 90 . The federal securities law disclosure regime is discussed infra in Part III. 91. See Rosenblatt v . Getty Oil Co., 493 A.2d 929, 944 (Del . 1985 ) (adopting
federal materiality standard) . 92 . See , e.g., Emerald Partners v. Berlin, 787 A.2d 85 , 90 ( Del . 2001 ); Cede & Co.,
634 A.2d at 361; McMullin v . Beran , 765 A.2d 910 , 917 ( Del . 2000 ). 93 . Tara L. Dunn , The Developing Theory of Good Faith in Director Conduct: Are
Disney IV ?, 83 DENV. U. L. REV. 531 , 545 ( 2005 ) (“Case law demonstrates the courts'
the duty of care, or a component of the duty of loyalty .”); see Janssen, supra note 25 , at
1581 (noting the debate among Delaware judges as to whether a distinct duty of good
faith exists); see , e.g., Cede & Co., 634 A.2d at 361 , 367 (referring to the “triad” of
traditional hallmark fiduciary duties) . 94 . See , e.g., Barkan v . Amsted Industries, Inc., 567 A.2d 1279, 1286 (Del . 1989 )
101. DEL. CT. CH. R. 23.1 ( 2006 ). 102 . Zapata Corp., 430 A.2d at 786 . 103. Aronson , 473 A.2d at 814. A court will not apply the Aronson test for demand
v. Blasband, 634 A.2d 927 , 933 - 34 ( Del . 1993 ). In those cases, a court will examine
disinterested business judgment in responding to a demand . Id. at 934. 104. Rales, 634 A.2d at 936; Aronson, 473 A.2d at 816. 105. Rales, 634 A.2d at 936; Aronson, 473 A.2d at 815. 106. Rales, 634 A.2d at 936. 107. Aronson, 473 A.2d at 815 . In contrast, where a plaintiff establishes that a board
demand. Carmody v. Toll Bros ., Inc., 723 A.2d 1180 , 1189 ( Del. Ch . 1998 ). See also
Grobow v . Perot , 526 A.2d 914 , 923 n. 12 ( Del. Ch . 1987 ) (acknowledging that under
establish a director's interest) . 108 . Zapata Corp. v. Maldonado, 430 A.2d 779 , 786 ( Del . 1981 ).