Academic

Steve Bainbridge on Section 102(b)(7)

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Steve Bainbridge has a long and important post on Section 102(b)(7) of the Delaware General Corporation Law. Steve is responding to my most recent post on Ryan v. Lyondell, in which I argued, "The problem with the decision is that [the defendants] can?t get a lawsuit like this dismissed." An excerpt from Steve's post:

I think Gordon?s got an excellent point. Ever since the Delaware supreme court held in Emerald Partners v. Berlin, 726 A.2d 1215, 1223-24 (Del. 1999), that a § 102(b)(7) provision is an affirmative defense, thereby imposing on defendant directors the burden of proving that they are entitled to exculpation under the statute, a § 102(b)(7) provision rarely entitles directors to a dismissal during the motions stage of the case. The legislative history of section 102(b)(7) is scant and thus does not allow confidence on this issue.

Regardless of whose fault the present state of the law is, however, the present state is most unfortunate. Because 102(b)(7) cannot reliably be invoked to result in a dismissal at the motions stage, plaintiffs will usually get to discovery, which some might call a fishing expedition, and the settlement value of shareholder claims will go up.

The time has come for the Delaware legislature to revisit the issues raised by section 102(b)(7). First, there is the broad issue of freedom of contract. Delaware has been a leader in allowing contractual limitations on fiduciary duty liability in public uncorporations such as LLCs. The legislature needs to start thinking about the extent to which those legal developments should carry over into the corporation law. Section 102(b)(7) would be a great place to start. In my view, it should be permissible for the articles to create a liability limitation provision that would entitle directors to get the case dismissed at the motions stage absent particularized allegations about a very narrow range of misconduct.

Second, although certainty and predictability long have been hallmarks of Delaware law, section 102(b)(7) was a botch job from the outset that has been made worse through judicial interpretation. It now wholly lacks certainy.... A coherent liability limitation provision would make clear whether it is intended to come into play pre- or post-trial, and identify with specificity the kinds of director misconduct for which monetary liability may still be recovered.

Ok, that was actually quite a bit of his post, but it was too good to cut. I agree with Steve that the time has come to revisit Section 102(b)(7). For his idea about fixing the problem, go read the rest ...

Full post as published by Conglomerate on August 19, 2008 (boomark / email).