A Summary of the 28th Annual Francis G. Pileggi Distinguished Lecture in Law “Unsettled and Unsettling Issues in Corporate Law”

On November 9, 2012, the Delaware Journal of Corporate Law, with the Institute, hosted the 28th Annual Francis G. Pileggi Distinguished Lecture in Law. This year’s lecturer was Professor Lyman P.Q. Johnson. Professor Johnson has taught at Washington and Lee University School of Law since 1985—holding the Robert O. Bentley Professorship since 1995—and beginning in 2008, he was appointed to the faculty of the University of St. Thomas School of Law in Minneapolis, where he currently serves as the LeJeune Distinguished Chair in Law. Professor Johnson’s lecture was titled Unsettled and Unsettling Issues in Corporate Law. The lecture revisited two fundamental issues in corporate law: (1) the central role of the business judgment rule (BJR) in fiduciary litigation, and (2) whether there is a mandated corporate purpose. The majority of the lecture was devoted to the former issue, but Professor Johnson discusses both issues in great detail in his forthcoming article that will be published in Volume 38 of the Delaware Journal of Corporate Law.

Following an introduction by Delaware Supreme Court Justice Henry duPont Ridgely, the lecture began with Professor Johnson acknowledging that the law surrounding the BJR is “seemingly settled,” in that it is clear that the rule applies to directors. He went on to note, however, that it is less clear whether the BJR applies to officers or controlling shareholders. Professor Johnson continued by discussing how this deeply entrenched rule has evolved over the last three decades through the decisions in Sinclair (1971), Aronson (1984), and Cede (1991). The professor argued that it is inappropriate to adhere to a rule of law simply because it has been used for a long period and has proposed a rethinking of the BJR, ultimately arguing that the rule is unnecessary and should be deemphasized.

Professor Johnson articulates six reasons in support of this thesis. First, he argues that the BJR is under inclusive, so it should not serve as a “unified vessel.” Further to this point, he stated that fiduciary duties are broader in scope, and therefore are the more appropriate focus. Second, he asserts that the BJR is a maxim of historical accident that grafted the duty of care into the BJR framework. Professor Johnson believes that this fiduciary duty should be showcased, not engrafted with the BJR. Third, the professor contends that emphasizing fiduciary duties over the BJR still provides ample deference to the directors. To this end, he argues that there is no need for an Aronson or Sinclair presumption because ample deference and business latitude remains by maintaining the gross negligence standard. Fourth, he believes that elevating the focus to fiduciary duties streamlines the analysis and rationales with other areas of law; he cited, for example, agency law where you would only need to ask two questions: (1) did a fiduciary duty exist?, and (2) if so, was that duty breached? Fifth, Professor Johnson asserts that emphasizing the BJR “hinders optimal conduct” through depriving directors of having an affirmative duty because the rule presumes that the director complied with his or her fiduciary duties. Sixth, and perhaps closely tied to his fourth point, he argues that elevating fiduciary duties over the BJR will facilitate a better understanding of corporate law for those who do not specialize in the subject matter, i.e. law students and many out-of-state practitioners who practice Delaware corporate law.

To put it modestly, some of those in attendance were a bit taken aback by Professor Johnson’s proposal, particularly the part relating to removing the presumption afforded by the BJR. One attendee of note, former-Vice Chancellor Stephen Lamb, expressed concern that denying directors the presumption will increase the number of meritless suits, and then proceeded to ask if the professor had considered this effect, and if so, whether a heightened pleading standard would be an appropriate solution. Professor Johnson acknowledged that he did not take into account these considerations, but stated that he will consider the implication before his forthcoming article goes to press. The Institute’s director, Professor Lawrence Hamermesh, also asked Professor Johnson what, if any, past decisions would have a different outcome under his proposed model that elevates fiduciary duties over the BJR. Professor Johnson responded that he could not think of a case where the result would be altered; however, the process to reach the result would be more streamlined under his proposed approach.

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