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Judge Posner on Delaware Corporate Law

By Francis G.X. Pileggi

In CDX Liquidating Trust v. Venrock Associates, No.10-1953 (7th Cir. March 29, 2011), read opinion here, Judge Richard Posner, a reknowned member of the U.S. Court of Appeals for the 7th Circuit , writes a decision for that Court which analyzes an applies the following aspects of Delaware corporate law in a case which involved claims that directors, who were designees of lenders and preferred shareholders, breached their fiduciary duties in connection with the sale of the company and the terms of the debt which they structured for the company.

• The burden of proof the directors in this case had to demonstrate entire fairness; and
• How that burden interfaced with  the traditional concept of causation in torts (i.e.,  the connection between breach and damages);
• DGCL Section 144(a) and the distinction between the "protection" that statute might afford an agreement between an interested or conflicted director and his corporation--as compared to the separate claim that may be brought against that conflicted director for breach of duty. That is, disclosure of the conflict may insulate the agreement from attack, but does not, per se, protect the director from a claim for breach of  fiduciary duty, as described by Judge Posner.
• Aiding and abetting claims against the lenders whose board-designess were the directors whose decisions were being challenged.

This opinion is more notable than it might otherwise be because Judge Posner, in addition to his judicial opinions, is perhaps the most prolific and widely published federal jurist in the country, having written about  30 books on myriad law and non-law topics, and  about 300 articles, as well as co-authoring a blog with a Nobel laureate in economics. Many of Judge Posner's writings, other than his judicial opinions, involve the intersection of law and economics. One of his recent works, here, addressed the socio-economic and political aspects of the recent efforts in some states to limit the power of public-employee unions. Thanks and a hat tip to nationally respected Chicago lawyer Steve Jakubowski for sending this opinion to me.

Supplement: Professor Larry Ribstein links to this post and provides scholarly analysis here. Readers of these pages know the good professor as a leading authority on alternative entities (what he calls  "uncorporations"), and he uses this decision to make the following argument:

More broadly, the incredible uncertainty and complexity inherent in this type of case is an argument for the modern "uncorporate" approach, which favors waiver of all fiduciary duties, including the duty of loyalty, and leaving these issues for custom determination in the agreement.

Full post as published by Delaware Corporate and Commercial Litigation Blog on March 30, 2011 (boomark / email).