Dec. 3 (Westlaw Journals) – The business-judgment-rule shield has grown so big and deferential to directors that it tips the balance of corporate power away from shareholders and lets board members sidestep their fiduciary duty, a law professor warned Delaware's bench and bar at a Nov. 9 seminar. 

Addressing lawyers, judges and academics at the 28th Annual Francis G. Pileggi Distinguished Lecture in Law at the Hotel du Pont in Wilmington, Del., Washington and Lee University law professor Lyman Johnson acknowledged that "it might seem like legal sacrilege" to suggest that a cornerstone of Delaware law like the business judgment rule must be downsized so directors can be held to a higher standard of duty. 

That rule was meant to protect directors from nuisance suits by opportunistic shareholders, but recent interpretations that drastically decreased director accountability have mutated it, Johnson said.  

The lecture series on cutting-edge legal topics is presented by the Widener University School of Law and Wilmington's venerable Pileggi family as a way to keep lawyers up to speed on emerging issues. 

Johnson said Delaware now has an opportunity to simplify and rebalance its corporate law governing the standards of conduct for directors, officers and controlling shareholders, which Johnson called a “patchwork” of rules. 

Delaware law clearly gives the decisions of directors the benefit of the doubt under the business judgment rule, but that umbrella does not shelter officers and controlling shareholders, and some corporate law specialists want to officially extend its protection to those groups, Johnson said. 

Instead, the state's bench and bar should press the Delaware Legislature to change the standard for all three groups, he advised. 

In Delaware and states that follow its lead, shareholders suing in the name of the company must pass a threshold test to avoid dismissal: They must show that the challenged directors' decision does not merit business judgment protection because the board members lacked independence or objectivity. 

"The business judgment rule presupposes that the directors behaved well" and puts the initial burden of proof on the plaintiff shareholder to support allegations that the directors were self-interested, incompetent or dominated by a CEO or controlling shareholder, Johnson said. 

Otherwise, even plaintiffs that might have substantive claims cannot survive a motion to dismiss and begin discovery, he explained. 

The professor said the court should do away with this initial hurdle and instead craft a test that simply examines whether the plaintiff has support for his charges that the directors or officers breached their duty of care in reaching the challenged decision. 

"We have to elevate fiduciary duty above the business judgment rule," Johnson said. 

Lawyers, judges and academics in the audience expressed doubts about the practicality of the proposal. 

Paul Regan, a professor of corporate law at Widener law school, said that without the deference of the business judgment rule, there would be no way to efficiently separate the wheat from the chaff in shareholder suits.   

If the courts are flooded with shareholder suits, Regan asked, "What happens to the balance of board and shareholder power, then?" 

In response, Johnson suggested that a threshold test could be devised to replace the previous motion-to-dismiss hurdle, but without the director favoritism of the business judgment rule. 

Delaware Supreme Court Justice Henry duPont Ridgely said that without the business judgment rule, which gives directors' decisions the benefit of the doubt even if things turn out badly, directors would always play it safe. 

"What about risk-taking," which is necessary to grow any business, he asked. 

Johnson said the crux of fiduciary duty has to be redefined as loyalty to the corporation rather than to any one constituency such as shareholders, creditors, employees or the community. 

He said his proposed standard would protect officers and directors as long as they were trying to better the bottom line of the company rather than their own bottom line or that of their friends. 

Many in the audience voiced doubts about how Johnson’s “duty to the corporation” standard could be made to fit into centuries of law and case law that makes directors responsible primarily to shareholders. 

"Are we asking directors to serve two masters?" Widener law professor Lawrence Hamermesh asked. 

(Reporting by Frank Reynolds, Westlaw Journal Corporate Officers & Directors Liability)