2.02(b)(4) or Not 2.02(b)(4): That Is the Question

By Vaaler, Bryn R. | Law and Contemporary Problems, Winter 2011 | Go to article overview

2.02(b)(4) or Not 2.02(b)(4): That Is the Question


Vaaler, Bryn R., Law and Contemporary Problems


INTRODUCTION

For sixty years, the Model Business Corporation Act (MBCA) has been the product of careful study and improvement by the American Bar Association (ABA) Committee on Corporate Laws. (1) That careful improvement has, of course, been informed by corporate-law developments--both statutory and case law--in Delaware. (2) Some revisions to the MBCA have come about a few paces behind their Delaware analogs? In a number of noteworthy instances, this has enabled the Committee on Corporate Laws to bring to bear perspective permitting the MBCA, at least in theory, to anticipate issues that have contributed to legal uncertainty in Delaware and to avoid those issues by taking a different, more-directive and bright-line approach to statutory drafting. (4)

This is an important attribute in a corporation statute that serves as a model for states that do not have, and never will have, the volume of corporate litigation and the resulting breadth, depth, and pace of corporate-case-law developments as does Delaware. (5)

One concrete example of this phenomenon can be seen by comparing the charter-option director-exculpation provision in section 102(b)(7) of the Delaware General Corporation Law (DGCL) to that adopted a few years later in section 2.02(b)(4) of the MBCA. (6) The exclusions to permissible exculpation in the Delaware provision are potentially broad and anchored in concepts like "good faith," "duty of loyalty," and "improper personal benefit." (7) The MBCA exclusions eschew references to "good faith" and "duty of loyalty," and instead focus on "the amount of a financial benefit received by a director to which the director is not entitled" and "intentional infliction of harm on the corporation or its shareholders." (8)

The problem with broad exclusions anchored in baggage-laden, yet vague, terms like "good faith" and "duty of loyalty" is that such terms are malleable? This has been evident over the last decade as Delaware courts have gone through confusing gyrations in defining when, in the face of a section 102(b)(7) exculpation provision, disinterested directors who have not obtained an improper benefit may nevertheless be liable for damages because alleged failings in oversight or decision-making constitute not just a breach of the duty of care, but a non-exculpable breach of "good faith" or the "duty of loyalty." (10)

After years of wandering in the wilderness, the Delaware courts have now made it relatively clear that only in the most extreme circumstances will a disinterested director who receives no persona! benefit be found to have breached his or her duty of loyalty for lack of good faith as a result of a failure of oversight or a bad decision. (11) On the way to that conclusion, however, there was troubling uncertainty, and some confusing law was made. (12) If section 2.02(b)(4) had been the applicable statutory authority, there would have been no need for this flailing about. (13)

As a tribute to the MBCA, this article briefly recaps the development of charter-option provisions, the recent threat to their crucial role in Delaware, and how the MBCA approach should make it unnecessary for other states to go through the same travail.

II

DEVELOPMENT OF CHARTER-OPTION PROVISIONS

The Delaware Supreme Court's decision in January 1985 in Smith v. Van Gorkom (14)--that disinterested directors of Trans Union Corporation were not protected by the business-judgment rule in their decision to sell the company and could, therefore, be personally liable for millions of dollars in damages-sent shock waves through the corporate world." Faced with the fear of a mass exodus of qualified directors from the boardrooms of Delaware corporations, the Delaware legislature adopted section 102(b)(7) of the DGCL within eighteen months, authorizing charter provisions exculpating directors prospectively from liability for monetary damages to the corporation or its stockholders for breach of fiduciary duty. …

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