Corporations Question Regarding Caremark Duty

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random5483
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Corporations Question Regarding Caremark Duty

Postby random5483 » Mon May 07, 2012 2:04 am

I know this question is likely silly, but a classmate confused me with his argument about the Caremark duty.

Can a DGCL Section 102(b)(7) provision limit director liability for failure to monitor (Caremark duty). Based on my understanding, the Caremark duty falls under duty of loyalty (especially after the clarification provided post Caremark), and thus a 102(b)(7) provision will not limit director liability under Caremark. I am fairly certain that a violation of the Caremark duty is a violation of the fiduciary duty of loyalty and not the fiduciary duty of care. Could someone please confirm?


Thanks.

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dailygrind
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Re: Corporations Question Regarding Caremark Duty

Postby dailygrind » Mon May 07, 2012 2:58 am

Full disclosure: I took this course a year ago.

I believe duty to monitor arises out of duty of care, see, e.g. Francis v. United Jersey Bank. But by Stone v. Ritter the duty to monitor has been cut down so much that almost the only way that a director could be liable would be abandonment of duty, e.g. they set up a reporting system and consciously disregard it, which is a breach of good faith and not waivable by 102(b)(7) (see Disney). However, if they fail to set up a reporting system, it looks a lot more like a duty of care problem (e.g. Francis), though it could go either way, I think. With a small corporation, a failure to set up a reporting system seems like it could just be negligence. In a huge corporation, failure to set up a reporting system seems more like abandonment of duty.

Geist13
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Re: Corporations Question Regarding Caremark Duty

Postby Geist13 » Mon May 07, 2012 3:07 am

it actually doesn't matter. 102(b)(7) says you can't eliminate liability for both duty of loyalty and good faith. If Caremark falls within the duty of loyalty, then you can't eliminate liability for it. If, on the other hand, it falls within the scope of the duty of care, then liability still can't be eliminated because the "good faith" mentioned in 102(b)(7) is the duty of care kind of good faith (and Caremark is about good faith, whether care good faith or loyalty good faith).

The 102(b)(7) question is the same regardless of whether Caremark is care or loyalty.

random5483
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Re: Corporations Question Regarding Caremark Duty

Postby random5483 » Mon May 07, 2012 3:53 am

Thanks to both of you for the informative responses.

MoltenWings
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Re: Corporations Question Regarding Caremark Duty

Postby MoltenWings » Mon May 07, 2012 9:34 am

This has confused my understanding of good faith. Can someone explain to me how good faith/bad faith relates to duty of care and duty of loyalty?
Specifically, what are the standard of the three?

Geist13
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Re: Corporations Question Regarding Caremark Duty

Postby Geist13 » Mon May 07, 2012 11:56 am

MoltenWings wrote:This has confused my understanding of good faith. Can someone explain to me how good faith/bad faith relates to duty of care and duty of loyalty?
Specifically, what are the standard of the three?


The short answer is that its unclear. Some cases make it sound like good faith is its own independent fiduciary duty. But I think that's pretty widely recognized as incorrect. Good faith always been an aspect of due care. See Van Gorkam: "The rule itself [BJR] is a presumption that in making a business decision, the directors of a corporation acted on an informed basis; in good faith; and in the honest belief that the action taken was in the best interests of the company."

However, Stone v. Ritter makes clear the Caremark claims, which are grounded in good faith more than anything, are part of the duty of loyalty. See Stone v. Ritter which defines the duty of loyalty type of good faith as: "Intentional dereliction of duty, a conscious disregard for one's responsibilities, is an appropriate standard for determining whether fiduciaries have acted in good faith. Deliberate indifference and inaction in the face of a duty to act is conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct."

There are two upshots here: First, the two standards of good faith are slightly different. Van Gorkam is a gross negligence standard while stone v. ritter and caremark claims are more of a recklessness standard. So even though they are both called good faith/bad faith, they require different levels of "culpability." Second, 102(b)(7), which allows a corporation to limit director liability says that a corporation cannot eliminate liability for duty of care or violations of good faith. Thus, corporations cannot eliminate liability for either type of good faith.

That's how I have made sense of it anyway. It's a bit of a clusterfuck.

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frank galvin
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Re: Corporations Question Regarding Caremark Duty

Postby frank galvin » Mon May 07, 2012 12:11 pm

Doesn't 102(b)(7) allow for the elimination of the duty of care? This is significant because if Caremark was brought under the DOC it could be protected, but since Caremark now resides in the DOL and Good Faith territory, it cannot be limited by 102(b)(7). I think that was part of Ritter's motivation, to take Caremark out of the auspices of limited DOC.

Geist13
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Re: Corporations Question Regarding Caremark Duty

Postby Geist13 » Mon May 07, 2012 12:52 pm

frank galvin wrote:Doesn't 102(b)(7) allow for the elimination of the duty of care? This is significant because if Caremark was brought under the DOC it could be protected, but since Caremark now resides in the DOL and Good Faith territory, it cannot be limited by 102(b)(7). I think that was part of Ritter's motivation, to take Caremark out of the auspices of limited DOC.


As I was taught it, yes it allows corporations to eliminate the duty of care. HOWEVER, one of the exceptions is "good faith." And there is some question of what this reference to "good faith" means. My professor has indicated that it should be read in light of the the Van Gorkam & Gagliaridi expressions of the business judgment rule, both of which explicitly reference good faith. So if you're in the duty of care area, and you somehow manage to rebut the BJR's presumption of good faith (which you won't be able to do, but you might as well give it the old college try), you get around the business judgment rule AND 102b7 prevents the company from eliminating "acts and omissions not in good faith." Basically, then, if you're dealing with duty of care, ALWAYS plead that the act amounts to bad faith. If you don't 102(b)(7) is going to fuck you in the unlikely event that you can get around the BJR because you haven't plead a violation that the company can't simply eliminate liability for.

Caution: I'm not expecting to do well in this class, so maybe this is all a big joke.

edit: think about this this way. If "good faith" were just caremark and duty of loyalty, then 102(b)(7) would be explicitly redundant. It is limited by duty of loyalty and good faith separately. If good faith is just always duty of loyalty, it would be superfluous. Moreover, 102(b)(7), and its references to duty of loyalty, good faith, and "knowing violations of the law" seems to be expressly invoking the three categories of good faith violations that the court examines in ritter. Remember in Ritter they identify three kinds of good faith : knowing violation, grossly negligent, OR recklessness and they go on to hold that the Recklessness kind is situated squarely within the duty of loyalty as a caremark violation.




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