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along came Smith v. Van Gorkom,73 in which the Delaware Supreme Court held outside directors liable for “gross negligence” in approving a premium bid for their company’s shares, and the corporate world went into shock.74 Insurance premiums went up75 and there were sto- ries of mass resignations from the boards of publicly held corpora- tions.76 Even worse, at least from Delaware’s point of view, a number of corporate decision-makers started to consider reincorporating in other states.77

The Delaware Legislature could not do anything about the folly78 of its supreme court, but it could do something—or try to—about its consequences. In 1986, Delaware’s corporation statute was amended to permit the articles of incorporation to include a provision “elimi- nating or limiting the personal liability of a director . . . for monetary damages for breach of fiduciary duty . . . [except not] for any breach of the director’s duty of loyalty . . . [or] for acts or omissions not in

Ducks: New Trends in the Indemnification of Corporate Directors and Officers, 77 YALE L.J. 1078, 1099 (1969).

Again theoretically, the business judgment rule protected board decisions, not board non- decisions, and therefore did not apply to “oversight” cases in which the board (or one of its members) was charged with a failure of attention. However, those complaints were also re- jected, either for failure to prove causation, Barnes v. Andrews, 298 F. 614 (S.D.N.Y. 1924), or for failure to allege that the board was on notice of the need for attention, Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del. 1963).

Since the mid-1980s, the business judgment rule in Delaware has gone through a num- ber of contortions that have diminished its protectiveness. The process was sparked by an increase in hostile takeover attempts and the resistance of target boards, Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), then spread to negotiated acquisitions, Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993), and now, apparently, to executive com- pensation, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). A full discussion of the current state of the law is beyond the scope of this Article.

  • 73.

    488 A.2d 858 (Del. 1985).

  • 74.

    The reaction and response is reported in Robert W. Hamilton, Reliance and Li-

ability Standards for Outside Directors, 24 WAKE FOREST L. REV. 5 (1989).

75. The rise in premiums for D & O insurance was blamed on Van Gorkom, see, e.g., Dennis J. Block et al., Advising Directors on the D&O Insurance Crisis, 14 SEC. REG. L.J. 130 (1986), although a subsequent study suggests that other factors were at work. Roberta Romano, What Went Wrong With Directors’ and Officers’ Liability Insurance?, 14 DEL J. CORP. L. 1 (1989).

76. Laurie Baum & John A. Byrne, The Job Nobody Wants, BUS. WK., Sept. 8, 1986, at 56-61.

77. Delaware derives a very large proportion of its state budget from incorporation there. See supra note 1.

78. Smith v. Van Gorkom has been described as “one of the worst decisions in the his- tory of [Delaware] corporate law.” Daniel R. Fischel, The Business Judgment Rule and the Trans Union Case, 40 BUS. LAW. 1437, 1455 (1985). The Delaware Supreme Court has since come down with two more that are at least as bad, Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1989), and Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993), and one that may join them in infamy if it means what it appears to say, Em- erald Partners v. Berlin, 726 A.2d 1215 (Del. 1999). (A subsequent opinion suggests that it does, Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), although Chancellor Chandler has made a valiant attempt to distinguish it. Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002).)

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