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From Graham to Stone: The Evolution of Director Liability

For nearly 50 years, legal standards for assessing the personal liability of corporate directors have been evolving in Delaware courts. A series of cases beginning in 1963 have been refining the basic premise that directors have an affirmative duty to exercise good faith in overseeing corporate operations.

Graham v. Allis-Chalmers, 188 A.2d 125 (Del. 1963): The court refused to hold directors personally responsible for failing to prevent antitrust violations, saying, “there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.”

Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984): The court applied the “business-judgment rule,” which generally states directors can’t be held personally liable for making poor business decisions provided that they have acted on an informed basis and in good faith. Aronson also established the duty of care, saying directors are not protected by the business-judgment rule when they are “conscious of the fact that they were not doing their jobs.”

In re Caremark Int’l Inc. Deriv. Litig,. 698 A.2d 959, 971 (Del. Ch. 1996): Court held that “a sustained or systematic failure” is a necessary condition to establish director liability. The Chancery Court’s decision has frequently been cited in subsequent cases, but had limited value as a binding precedent.

Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003): Established the director’s duty of loyalty – i.e., to act “in the good faith belief that her actions are in the corporation’s best interest.”

In re The Walt Disney Co. Deriv. Litig., 906 A.2d 27, 63 (Del. 2006): In the heavily publicized Michael Eisner golden-parachute case, the court clarified directors’ duty of care, specifically their requirement in business decisions to consider “all material information reasonably available.”

Stone v. Ritter, 911 A.2d 362 (Del. 2006): The Delaware Supreme Court formalized the Caremark standard, requiring proof of bad faith to establish directors’ personal liability, and clarified that directors’ duty of good faith is a sub-category of their fiduciary duty of loyalty to the corporation.

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Featured Articles :

• Caremark Standard Set in Stone
  Shareholders often use the courts to attempt to hold directors personally responsible for all kinds of corporate problems.

• From Graham to Stone: The Evolution of Director Liability
  A series of cases beginning in 1963 have been refining the basic premise that directors have an affirmative duty to exercise good faith in overseeing corporate operations.

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