A Modest Proposal For Fixing Delaware’s Broken Duty of Care

Abstract

Delaware’s requirement that corporate directors act within a range of conduct consistent with the “Duty of Care” needs fixing. Although on its face, the Duty of Care requirement forces corporate executives to acted with reasonable business judgment by imposing a fear of personal liability on the part of the executives, in reality, this fear is non-existent.

Delaware’s 102(b)(7) provision—which allows corporations to shield their executives from personal liability—is but one example of why this “fear” does not, in practicality, exist. In addition to the 102(b)(7), Delaware corporations often have Director and Officer—or “D&O”—insurance, providing an additional shield for the executives. Moreover, Delaware’s corporate law jurisprudence is greatly stacked in the officer’s favor. From the “business judgment rule” deference, to the requirement that a plaintiff show “gross negligence,” most of the law of Delaware makes imposing personal liability on the part of corporate executives a highly abnormal occurrence. (Of course, Delaware’s purpose for allowing this corporate latitude is to encourage reasonable risk taking.)

However, Delaware’s courts have shown that they could impose a different form of “punishment” on irresponsible executives, albeit non-monetary. Notwithstanding their lack of a finding of liability, many Delaware court opinions have weighed in on the poor judgment of the executive. The court first would explain why liability cannot be legally imposed, and then would critique the executive for exercising poor judgment. This form of criticism—known as “Judicial Commentary”—essentially imposes liability on the executive in the court of public opinion, and therefore minimizes the likelihood of future irresponsible behavior.