The “Long Goodbye” to Duty of Care as a Real Basis for Director Liability in M&A: The Legacy of Chancellor Allen

by Dorsey & Whitney · March 12, 2020

The fiduciary duty of care has become more aspirational than a real legal basis for potential director liability in M&A in the Age of DGCL Section 102(b)(7), Corwin v. KKR Financial Holdings LLC (Del. 2015) and In re Volcano Corp. Stockholders Litigation (Del. Ch. 2016). At the 32^nd Annual Tulane Corporate Law Institute in New Orleans on Thursday and Friday, March 5 and 6, 2020, a panel led by former Delaware Chief Justice Leo Strine (and including former Delaware Supreme Court Justice Jack Jacobs, Wachtell’s Ted Mirvis and Morris Nichols’s Gil Sparks) observed that the current state of Delaware law on this point traces its roots back to former Chancellor William T. Allen’s antipathy to the notorious Smith v. Van Gorkom (Del. 1985) decision and his “audacious” (Strine’s word) opinion in In re Caremark Int’l Deriv. Litigation (Del. Ch. 1996), in which he held that a breach of duty of care in the oversight context required bad faith on the part of directors to result in liability, essentially making duty of care, at least in the oversight context, a subsidiary of duty of loyalty (without the necessity of showing improper benefit inuring to the directors), as was eventually recognized by the Delaware Supreme Court in Stone v. Ritter (Del. 2006). In the shadow of Van Gorkom and Revlon (Del. 1986), it took decades for the Delaware courts to confirm in Corwin and Volcano that the barrier for director liability for duty of care breach in M&A decision-making – at least with respect to transactions that have been approved by fully-informed, disinterested stockholders – went beyond even the bad faith standard for monetary liability in DGCL Section 102(b)(7) to an essentially “irrebuttable” subsidiary region of the duty of loyalty involving “waste.”

For more interesting updates and insights from the 2020 Tulane Institute, see Tulane Law Professor Ann Lipton’s “A Few Notes from Tulane’s 32nd Annual Corporate Law Institute.”