Because the vast majority of U.S. publicly traded companies are incorporated in Delaware, legal developments in Delaware have a particularly important impact on legal standards governing corporate conduct in the U.S. Delaware law is particularly influential with respect to the responsibilities and potential liability exposures of corporate directors. In a series of recent opinions written by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court has, according to an October 22, 2015 memo from the Skadden law firm (here) “reaffirmed Delaware’s deference to the business judgment of disinterested corporate decision-makers and restored important protections for directors that had been weakened by prior court decisions.”
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A Guide to Directors’ Duties and Liabilities in Europe
One of the vestiges of the global financial crisis is that company directors and officers now face more scrutiny than ever. This scrutiny, in turn, has led to a greater liability exposure for corporate officials, as well. This increased scrutiny and amplified liability exposure applies not only in the U.S., but in other countries, including, in particular, in Europe, according to a recent report. The report, issued earlier this week by the European Confederation of Directors’ Associations (ecoDa) in conjunction with AIG and entitled “Guide to Directors’ Duties and Liabilities” (here) examines the risks facing directors of European countries and highlights the specific risks in a number of countries. As the report details, the nature of directors’ duties and liabilities and the manner in which they are enforced can be affected by the differences in legal environments and board structures across Europe. The report also discusses the role of D&O insurance in helping to address these risks. The October 5, 2015 press release from ecoDa about the report’s publication can be found here.
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Thinking About Directors’ Duties and Directors’ Liabilities
When the U.S. Department of Justice recently announced a renewed emphasis on the prosecution of individual directors and officers in instances of corporate misconduct, it raised the possibility that in the future we could see increased numbers of corporate officials prosecuted and convicted for actions they took as representatives of their company. There are times when popular sentiment rallies in favor of the prosecution of corporate officials – as, for example, was the case during and after the recent global financial crisis. And while there have been instances in the U.S. where corporate officials have in fact been convicted for criminal misconduct, it has been rare. I suspect that even under the new guidelines it will be only the unusual or egregious cases that will involve criminal prosecutions of individuals.
Of course, it is not preordained that criminal prosecutions of corporate individuals should be rare. In fact, there are places now where criminal prosecutions of corporate officials are more common. One of those places is China, as discussed in Steve Dickinson’s September 26, 2015 China Law Blog post entitled “China Company Directors and China Criminal Liability” (here). Dickinson’s discussion of these issues raises some interesting questions about the role of criminal law in policing director misconduct.
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A Look at the Modern Business Judgement Rule
Under time-honored standards, and as developed over time by Delaware’s court, the business judgment rule is, as is often stated, a “presumption that in making a business decision, the directors of a company have acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation.” However, as discussed in an interesting paper, in more recent times, courts have had to consider these principles in more troubling contexts, such as takeover battles or controlling shareholder transactions. As a result the courts have developed what BYU Law Professor D. Gordon Smith in his August 6, 2015 post on the CLS Blue Sky Blog (here) calls “the Modern Business Judgment Rule.” A longer version of Professor Smith’s paper can be found here.
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Insolvent Company Directors’ Duties to Creditors Under Delaware Law
A question that frequently recurs is whether or not directors of insolvent companies have fiduciary duties to creditors. Creditors often attempt to argue that as companies move into the “zone of insolvency,” directors’ duties move from the company’s shareholders to the company’s creditors. While courts have discredited this theory, creditors nevertheless seek to raise this
To Whom Are Directors’ Duties Owed?
It is generally understood that corporate directors act in a fiduciary role in performing their board duties. But to whom do directors owe their fiduciary duties? That was the question asked in a November 8, 2013 decision from the North Carolina Supreme Court, in which the Court reversed a trial verdict and post trial motion