Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a Standard of Review Problem

18 Pages Posted: 22 Nov 2014

See all articles by William T. Allen

William T. Allen

New York University School of Law; New York University (NYU) - Department of Finance

Jack B. Jacobs

Young Conaway Stargatt & Taylor, LLP

Leo Strine

University of Pennsylvania Carey Law School; Wachtell, Lipton, Rosen & Katz

Date Written: 2002

Abstract

In this commentary, the authors examine the role of Smith v. Van Gorkom as part of a continuum of Delaware judicial decisions that gives insufficient weight to the substantive policy judgments underlying the gross negligence standard of review that governs whether corporate directors should be found liable for breaching their duty of care. The gross negligence standard is consistent with Delaware's long-standing policy of deferring to business decisions made by well-motivated fiduciaries and limits the ability of judges to intervene in business decisions made by properly motivated directors. The authors argue that Van Gorkom and two of its important progeny run counter to Delaware public policies restricting the judicial enforcement of the duty of care to cases where directors have acted in a manner that represents an extreme departure from expected normative behavior, and, if damages are sought, have not been exculpated by the firm's certificate of incorporation. They conclude by proposing that to better align judicial decision-making with those public policies, courts should apply a true gross negligence liability standard, which would require plaintiffs to prove that a director caused quantifiable damage. The authors further propose that courts respect decisions by stockholders that insulate directors from liability for violating that standard.

Suggested Citation

Allen, William T. and Jacobs, Jack B. and Strine, Leo, Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a Standard of Review Problem (2002). Northwestern University Law Review, Vol. 96, P. 449, 2002, Available at SSRN: https://ssrn.com/abstract=2529133

William T. Allen

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-998-6327 (Phone)
212-995-4763 (Fax)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Jack B. Jacobs

Young Conaway Stargatt & Taylor, LLP ( email )

1000 North King Street
Wilmington, DE
302.571.6600 (Phone)

Leo Strine (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

Wachtell, Lipton, Rosen & Katz ( email )

51 W 52nd St
New York, NY 10019
United States
212-403-1178 (Phone)

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