In re Caremark Intern. Inc. Derivative Litigation, 698 A.2d 959 (1996)
© 2016 Thomson Reuters. No claim to original U.S. Government Works.
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(1986). On an application of this kind, this Court attempts to protect the best interests of the corporation and its absent
shareholders all of whom will *967 be barred from future litigation on these claims if the settlement is approved. The
parties proposing the settlement bear the burden of persuading the court that it is in fact fair and reasonable. Fins v.
Pearlman, Del.Supr., 424 A.2d 305 (1980).
B. Directors' Duties To Monitor Corporate Operations
The complaint charges the director defendants with breach of their duty of attention or care in connection with the on-
going operation of the corporation's business. The claim is that the directors allowed a situation to develop and continue
which exposed the corporation to enormous legal liability and that in so doing they violated a duty to be active monitors
of corporate performance. The complaint thus does not charge either director self-dealing or the more difficult loyalty-
type problems arising from cases of suspect director motivation, such as entrenchment or sale of control contexts.
14
The theory here advanced is possibly the most difficult theory in corporation law upon which a plaintiff might hope to
win a judgment. The good policy reasons why it is so difficult to charge directors with responsibility for corporate losses
for an alleged breach of care, where there is no conflict of interest or no facts suggesting suspect motivation involved,
were recently described in Gagliardi v. TriFoods Int'l, Inc., Del.Ch., 683 A.2d 1049, 1051 (1996) (1996 Del.Ch. LEXIS
87 at p. 20).
14
See Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 711 (1983) (entire fairness test when financial conflict of interest
involved); Unitrin, Inc. v. American General Corp., Del.Supr., 651 A.2d 1361, 1372 (1995) (intermediate standard of review
when “defensive” acts taken); Paramount Communications, Inc. v. QVC Network, Del.Supr., 637 A.2d 34, 45 (1994)
(intermediate test when corporate control transferred).
[6] [7] 1. Potential liability for directoral decisions: Director liability for a breach of the duty to exercise appropriate
attention may, in theory, arise in two distinct contexts. First, such liability may be said to follow from a board decision
that results in a loss because that decision was ill advised or “negligent”. Second, liability to the corporation for a loss
may be said to arise from an unconsidered failure of the board to act in circumstances in which due attention would,
arguably, have prevented the loss. See generally Veasey & Seitz, The Business Judgment Rule in the Revised Model Act ...
63 TEXAS L.REV. 1483 (1985). The first class of cases will typically be subject to review under the director-protective
business judgment rule, assuming the decision made was the product of a process that was either deliberately considered
in good faith or was otherwise rational. See Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984); Gagliardi v. TriFoods
Int'l, Inc., Del.Ch., 683 A.2d 1049 (1996). What should be understood, but may not widely be understood by courts or
commentators who are not often required to face such questions,
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is that compliance with a director's duty of care can
never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate
loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury
considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through
“stupid” to “egregious” or “irrational”, provides no ground for director liability, so long as the court determines that
the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ
a different rule—one that permitted an “objective” evaluation of the decision—would expose directors to substantive
second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests.
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Thus,
the business *968 judgment rule is process oriented and informed by a deep respect for all good faith board decisions.
15
See American Law Institute, Principles of Corporate Governance § 4.01(c) (to qualify for business judgment treatment a
director must “rationally” believe that the decision is in the best interests of the corporation).
16
The vocabulary of negligence while often employed, e.g., Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984) is not well-suited
to judicial review of board attentiveness, see, e.g., Joy v. North, 692 F.2d 880, 885–6 (2d Cir.1982), especially if one attempts to
look to the substance of the decision as any evidence of possible “negligence.” Where review of board functioning is involved,
courts leave behind as a relevant point of reference the decisions of the hypothetical “reasonable person”, who typically
supplies the test for negligence liability. It is doubtful that we want business men and women to be encouraged to make