At Least Somewhat Exaggerated: How Reports of the Death of Delaware’s Duty of Care Don’t Tell the Whole Story
Citation: 103 Geo L.J. 1387 (2015)
In 1985, corporate law underwent a sea-change as the Delaware Supreme Court in Smith v. Van Gorkom found that the directors of Trans Union violated their duty of care when they sold the company to takeover specialist Jay Pritzker for $55 per share—a $17 premium over the prevailing market share price. The next year, Delaware’s legislature swiftly responded to the business community’s newfound anxiety over the threat of personal liability for breaches of the duty of care by passing section 102(b)(7) of Delaware’s General Corporation Law. The new law allows a corporation to insert a provision into its charter exculpating directors for monetary damages in connection with a breach of their fiduciary duty of care. Boards, fearing another Van Gorkom, leapt into action, almost uniformly ensuring their charters had an exculpation provision. The legislature’s enactment of section 102(b)(7) alarmed many academics. One scholar, for instance, has argued that the passage of section 102(b)(7) shows that Delaware’s duty of care is dead and that, more broadly, legislatures have been willing to emasculate corporate law in order to appease powerful directors. Another has similarly asserted that Delaware’s action began the “evisceration” of the duty of care.
This Note probes the truth of such claims. It finds that Delaware’s duty of care continues to live on to this day and, in certain respects, is of greater legal consequence than before Van Gorkom. Part I will discuss the duty of care in Delaware through 1986 and show that section 102(b)(7) merely gave legislative sanction to long-standing judicial reluctance to award monetary damages for breaches of the duty of care. Part II will provide a brief overview of the theory that, since passage of section 102(b)(7), the duty of care has become a dead letter in Delaware corporate law. Part III will rebut those theories by pointing to four strands of Delaware corporate law in which the duty of care is of continued significance.