Reliance on Experts from a Corporate Law Perspective

Article excerpt

In discharging their duty of care, directors of corporations are not expected to independently investigate all parameters affecting a decision they are about to make. In fact, statutory provisions encourage or sometimes require directors to seek the advice of experts, such as auditors, lawyers, investment bankers, and tax specialists. In this Article, emphasis is placed on Section 141(e) of the Delaware General Corporation Law, according to which directors are entitled to rely on the advice of such experts as long as they believe that the advice was within the expert's professional competence, the expert was selected with reasonable care, and reliance is in good faith. Apart from systematizing the elements of this rule, as they were interpreted by a significant number of court decisions, this Article sheds light on the interaction of the reliance defense with basic concepts of Delaware corporate law, mainly the business judgment rule, as well as good faith, after Caremark. This Article does not examine whether directors will be eventually held liable (which, besides, is rarely the case in Delaware due to the business judgment presumption, exculpatory clauses, and insurance and indemnification provisions), but solely whether the additional defense of Section 141(e) should apply or not.

INTRODUCTION: PSYCHOLOGY OF DECISION-MAKERS AND CORPORATE LAW

Decision-making is often a painful process. Decision-makers face various challenges, ranging from lack of factual data or incapacity to critically assess the available data to an unwillingness to undertake responsibility or personal conflicts of interest. Many challenges appear in periods of uncertainty, such as during financial and other crises. In such periods, decision-makers would feel extremely relieved if somebody else could bear the burden and offer an answer to whatever dilemma they are facing. They would feel even more comfortable if they knew that relying on this advice would remove the burden of responsibility, in case the advice proves to be wrong.1

To be sure, feeling more secure is not per se harmful. However, turning the decision-making process into a process of uncritical adoption of a thirdparty's view could seriously distort the intellectual element involved in this process. Even if the advice is sound, decision-makers may not be able to oversee the implementation of their decision in the future and will fail to adjust their strategy in the absence of the advisor. In fact, a relatively recent empirical experiment examined the neurobiological processes of making financial decisions with and without expert advice, especially under conditions of enhanced uncertainty.2 It showed that areas of the brain responsible for making value judgments, accessible through Magnetic Resonance Imaging ("MRI") technology, were clearly less active when such advice was received. This result was not affected by the fact that the financial advisor's suggestions were very conservative and, thus, could not lead to maximum earnings.3 The researchers did not examine what caused this behavior; however, one could speculate that the feeling of safety, created by the presence of the (perceived) authority, coupled with the surrounding conditions of uncertainty, and sometimes the laziness of decision-makers, led them to offload the responsibility for making financial decisions. A similar experiment, concentrating on brain activities when choosing and changing financial advisors, concluded that detecting errors of advisors is more likely when the recipients of the advice consider changing their advisors.4 According to the researchers, in the absence of such circumstances, recipients observe more the personal characteristics of the advisors, and less the numerical realities.

The most prominent personal characteristic of the advisors is their ability to convey trust. This seemed to be the case, for instance, with the relationship of members of various Wisconsin school boards and David W. …