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| | | Smith v. Van Gorkom | |
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< | In 1985, in Smith v. Van Gorkom, a major case in Delaware corporate law, the Delaware Supreme Court found that directors could be held personally liable if they act on an uniformed basis.https://casetext.com/case/smith-v-van-gorkom Given the magnitude of the transaction, directors had the obligation to ask questions and to make themselves informed. By not doing so, they violated their duty of care by being uninformed, and could not hide behind the business judgment rule. | >
> | In 1985, in Smith v. Van Gorkom, a major case in Delaware corporate law, the Delaware Supreme Court found that directors could be held personally liable if they act on an uniformed basis. Given the magnitude of the transaction, directors had the obligation to ask questions and to make themselves informed. By not doing so, they violated their duty of care by being uninformed, and could not hide behind the business judgment rule. | | | This holding was rather controversial because it created incentives to avoid serving on boards. Indeed, before Van Gorkom, there were virtually no cases of director liability for breach of duty of care because, from a shareholder's perspective, one would not want their directors to be liable for the full cost of a misstep. If they were, directors would never do anything risky, and thus nothing profitable. Shareholders could always diversify their risk, perhaps through holding a diverse portfolio. What they did not want was their directors acting like their surgeons. | | | Corporations now face the issue that anything typed cannot be destroyed. Historically, when notes were taken during a board meeting, they could always be shredded or otherwise destroyed. Yet today, due to modern technology, even if a director deletes something they have typed, or versions up a document, that original can likely still be found and recovered. Corporations and their directors must now contend with the increased liability for directors that results from the fact that any electronic record from notes to text messages could be revealed.
The Privacy Problem | |
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< | The privacy issue is significant enough that major law firms have published guidance on their websites for directors. Yet, even these firms have not been able to produce any sort of elegant solution to protecting directors' privacy. Instead, the guidance boils down to advising against sending emails and text messages discussing material matters, and scheduling calls and meetings for substantive matters. Perhaps most poignant, one article on Skadden's website suggests the following: A good rule of thumb, before texting or emailing, is to ask, "Would you want to read this in a newspaper?" https://www.skadden.com/insights/publications/2021/10/the-informed-board/this-isnt-your-grandparents-books-and-records#:~:text=Section%20220%20of%20the%20Delaware,by%20the%20board%20or%20management. | >
> | The privacy issue is significant enough that major law firms have published guidance on their websites for directors. Yet, even these firms have not been able to produce any sort of elegant solution to protecting directors' privacy. Instead, the guidance boils down to advising against sending emails and text messages discussing material matters, and scheduling calls and meetings for substantive matters. Perhaps most poignant, one article on Skadden's website suggests the following: A good rule of thumb, before texting or emailing, is to ask, "Would you want to read this in a newspaper?" | | | | |
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< | Directors today would do well to remember Melvin Gross v. Biogen Inc., which limited the plaintiff to inspecting "board-level materials" on the grounds that "[t]hese documents and communications will enable Plaintiff to assess the extent to which Board members were made aware of the alleged wrongdoing and to evaluate how the Board members responded to the Investigation."https://casetext.com/case/gross-v-biogen-inc In essence, Section 220 claims are subject to some restraints and will not guarantee access to corporate records, emails, and texts if the formal board-level materials exists, are available, and would satisfy a plaintiff's "proper purpose" demand. So, if directors can refrain from conducting business over email, text, and other informal channels, their electronic communications will not be subject to inspection. | >
> | Directors today would do well to remember Melvin Gross v. Biogen Inc., which limited the plaintiff to inspecting "board-level materials" on the grounds that "[t]hese documents and communications will enable Plaintiff to assess the extent to which Board members were made aware of the alleged wrongdoing and to evaluate how the Board members responded to the investigation." In essence, Section 220 claims are subject to some restraints and will not guarantee access to corporate records, emails, and texts if the formal board-level materials exists, are available, and would satisfy a plaintiff's "proper purpose" demand. So, if directors can refrain from conducting business over email, text, and other informal channels, their electronic communications will not be subject to inspection. | | | "Just don't do it" is of course easier said than done in today's hyper-connected world. Business is conducted through texts and emails, imprudent as it may be. And, while directors may sacrifice practicality for the sake of privacy and avoid emails discussing sensitive matters, they will be hard pressed to avoid keyboards altogether. Even if someone were to delete an improper comment, sentence, or entire document typed on a laptop for example, those words will still be recoverable and thus theoretically subject to a Section 220 claim. | |
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< | As noted by David Katz, in order for a board to function properly and fulfill its role, directors must be able to express their thoughts and opinions freely without fear that they will be made public.https://corpgov.law.harvard.edu/2014/01/23/boardroom-confidentiality-under-focus/ If they cannot (and indeed they cannot for Section 220 provides the legal hook with which to access materials computers prevent from being completely private), then either boards will cease to function effectively, people will be less likely to serve as directors, or those who do will be subject to increased liability. | >
> | As noted by David Katz, in order for a board to function properly and fulfill its role, directors must be able to express their thoughts and opinions freely without fear that they will be made public. If they cannot (and indeed they cannot for Section 220 provides the legal hook with which to access materials computers prevent from being completely private), then either boards will cease to function effectively, people will be less likely to serve as directors, or those who do will be subject to increased liability. | | |
Rather than scattering URLs through the text, Ro, you should make those links, so that the reader can easily get to your sources with a click, but doesn't have normal reading disturbed with URl punctuation. See TextFormattingRules if you need to remember how. |
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