Corporate Governance

Fiduciary Duties of Officers and Directors: Gantler v. Stephens (A Final Comment)(Part 9)

By J. Robert Brown

We are examining the recent decision by the Delaware Supreme Court in Gantler v. Stephens.

Ganlter was mostly a victory for shareholders.  The Court may be signaling that it is easing up on the standards for establishing director independence and certainly opted for an approach to shareholder ratification that was less extreme than what the Chancery Court was suggesting.

The case, however, demonstrates a number of serious problems with Delaware jurisprudence.  First, in the area of director independence, the case should have forced the Supreme Court to reexamine its categorical rule that director fees do not result in a loss of independence.  The Court studiously avoided this, unwilling to open the door of challenges in this area.

Second, the Court still insisted that the standard for determining when the business judgment rule would be set aside was whenever a majority of directors had a conflict of interest.  In other words, the Court refused to examine the impact of a single director on the board with a conflict of interest.  As was discussed at length in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty, the approach effectively applied the all but insurmountable business judgment rule to transactions where the conflict of interest is involved in the decision making process.  This is of course utterly inconsistent with the historical application of the business judgment rule, a standard that made challenges to board behavior difficult but only applied where there were no conflicts of interest. 

Finally, the case illustrates severe problems with the stock exchange definition of independence.  The stock exchanges purport to require that boards have compensation committees and that the committees consist entirely of independent directors.  This case demonstrates that the definition of independence is either too weak to protect shareholders or inadequately enforced.

Primary materials from the Chancery Court can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 16, 2009 (boomark / email).