DealLawyers.com Blog

Sure, you probably think I have it pretty good – but sitting around in my pajamas trying to come up with things for you to read with your first cup of coffee every morning isn’t as easy as you might think.  That’s why the Chancery Court’s Xura decision has been such a godsend for me!  I’ve already blogged twice about it, but it’s proving to be the gift that keeps on giving.

The latest take on Xura is in this recent blog from “The Conference Board” authored by several Cleary Gottlieb lawyers. The blog points out that Xura touches on one of corporate law’s great open questions – the extent to which the business judgment rule applies to officers. Here’s an excerpt:

In a footnote to the Xura opinion, Vice Chancellor Joseph R. Slights indicated his presumption that “the business judgment rule applies to Tartavull as CEO,” but acknowledged that “this point is not settled in our law and that there is a lively debate among members of the academy regarding whether corporate officers may avail themselves of business judgment rule protection.”

Vice Chancellor Slights cited a number of law review articles suggesting, alternatively, that (i) executive conduct should be protected by the business judgment rule and (ii) executive conduct should be evaluated under a negligence paradigm based on agency principles.

In advising non-director officers about conduct that could give rise to fiduciary claims, it is certainly prudent to routinely advise that they take steps – e.g., ensuring that they act with due care, not in a conflicted context and in good faith – to meet the conditions of the business judgment rule. However, practitioners should also keep in mind that there may be a question whether officers will be entitled to business judgment rule protection, at least in certain contexts.

The blog goes on to suggest that the BJR should apply to officers.  In particular, it points to the Delaware Supreme Court’s decision in Gantler v. Stephens (Del. Sup.; 1/09) as supporting application of the BJR to officers. In that case, the Court acknowledged that Section 102(b)(7) of the DGCL – which permits companies to include exculpatory provisions in their certificate of incorporation protecting directors against duty of care claims – doesn’t apply to corporate officers. But the Court also said that it would be “legislatively possible” for Section 102(b)(7) to be extended to officers.

The memo seizes on this latter statement and suggests that “if officers were not shielded from liability through the business judgment rule, and instead were subject to liability for ordinary negligence, it would make little sense to apply Section 102(b)(7) to exculpate them from liability for duty of care claims, which require a higher showing of gross negligence.”

– John Jenkins