Director Compliance with Elusive Fiduciary Duties in a Climate of Corporate Governance Reform

Fordham Journal of Corporate & Financial Law, Apr 2018

Nadelle Grossman

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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 - 2007 Article 1 Reform Copyright c 2007 by the authors. Fordham Journal of Corporate & Financial Law is produced by The Berkeley Electronic Press (bepress). Nadelle Grossman∗ 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 I. INTRODUCTION 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 management. 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 cautious). 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 II. 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 corporate law.14 But if Delaware corporate law is considered the national corporate law, 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 boardroom activity. 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 remove directors). 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 follows: 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 (Del. 1984) . 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 held liable.41 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 (Del. 2001) (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 benefit. DEL. CODE ANN. tit. 8, § 102(b)(7) (2005). 44. Id. 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 statutorily precluded.47 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 (Del. 1984) . 52. Id. 53. Id. 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. 55. 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 interpreted conflict.71 Allis-Chalmers narrowly to eliminate any perceived 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 stockholders.76 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 (Del. 1989) . 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 charter provision.85 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 stockholder suits.97 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 (Del. 1984) . 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 independent.107 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 accompanying text. 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 phase.332 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 party transaction. 333. Chandler et al., supra note 21, at 998. 334. See id. 335. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) . 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. 337. Id. 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. 344. Id. 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 loyalty context. 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 independence). 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 to dismiss.357 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 360. Id. 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. 369. Id. 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 961. 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 allocated). 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 stockholder). 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 board). 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 transaction.390 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 the Reform. 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 derelict.404 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.”). 404. See Disney IV, 2005 Del. Ch. LEXIS 113, at *4-5, aff’d C.A. No. 15452, 2006 Del. LEXIS 307 (Del. 2006) . 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 faith. 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 stockholders. 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. Id. 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. VI. CONCLUSION 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 ).

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Nadelle Grossman. Director Compliance with Elusive Fiduciary Duties in a Climate of Corporate Governance Reform, Fordham Journal of Corporate & Financial Law, 2018,