Stephen J. Lubben and Alana Darnell
The concerns that animated the Delaware Supreme Court’s decision in Smith v. Van Gorkom– inattentive directors failing the shareholders at a critical juncture in afirm’s life-could have led, even after the Delaware legislature enacted section 102(b)(7), to the development of a duty of care jurisprudence based on nonmonetary remedies. Instead, the Delaware Supreme Court developed a new law of transactions, built around banner cases such as Unocal and Revlon.
Now, two decades later, two key questions are asked: First, is there any duty of care left in Delaware? And, if the answer to the first question is no, is that a bad thing?
The first question is answered by tracing the waning of the duty of care: a rule that now requires little more of a director than a ritualistic consideration of relevant data. Today, after the director engages in this ritual, her decision will not violate the duty. In short, the classic duty of care no longer exists in Delaware.
But the Delaware courts clearly are not about to countenance every business decision, no matter how incoherent or ill-advised. So, they struggle to fit cases into either the loyalty or transactional model, even when these tools are ill suited to the task. No better example of this trend exists than the Delaware Supreme Court’s decision in Omnicare, Inc. v. NCS Healthcare, Inc., where the court struggled to apply Unocal’s entrenchment-based structure to deal protection devices in a friendly stock-for-stock merger.
Because we argue that Omnicare could have been better addressed under a classic duty of care analysis-no reasonable director would have agreed to totally lock up the deal-the second question is answered in the affirmative. There is a role, albeit a limited, narrow role, for the courts to review and question some decisions, even in the absence of loyalty or transactional concerns.
Thus, this article highlights a subtle, and even unintended consequence of Delaware’s increasing reliance on the loyalty and transactional duties. While the result may be the same regardless of which tool the courts use, attempts to fit classic duty of care cases under other headings-perhaps in a misguided attempt to avoid section 102(b)(7)-only muddle the development of a coherent analytical framework. This article argues for a reinvigoration of the classic duty of care analysis to preserve the distinct roles played by the director’s fiduciary duties.