Court of Law and Court of Public Opinion
Symbolic Regulation of the Corporate Management Duty of Care
In In re Walt Disney Co. Derivative Litigation the Delaware court exonerated the defendants for their handling of the Ovitz Affair, and yet condemned them. It is a classic example of how a court of law can make law without making law. By an obiter dictum, the Chancellor established the facts of the case and footnoted the sources much like a treatise or a casebook, recounted the general principles of the law, used strong words to describe the defendants’ behavior, delved into the moral and business judgment of the defendants, and assisted the market in judging and enforcing its best practices. The Disney decision is a political masterpiece. (1) It pleases management because it sets a legal standard that is admittedly lower than the market “best practices” standard and issues a judgment for the defendants. As to the duty of care, the court elevates market morals above legal morals. (2) It pleases the Delaware Bar and perhaps members of other bars, as well as the shareholders’ advocates, because it lowers the standard of demand requirement and opens the door to class actions. Hence it does not reduce the number of cases against management. (3) It discloses and documents aspects of internal management, including the personalities and behavior of the actors, thus inviting critics, public opinion and the media to supervise management and influence management’s business judgment. It maintains the courts’ “hands off” approach and low standard of negligence in evaluating the business judgment of management and board of directors. (4) It allows the courts to establish the facts and offer their opinion without serious threat of being overruled by higher courts or the legislature. (5) The decision shifts the burden of chastising management in cases such as Disney to the market and the media. All in 120 pages. The issue is whether this is a good way to go about resolving situations such as Disney. I conclude that it is. Unlike criminal cases, in which the Court of Public Opinion may prejudice the jury, the Court of Public Opinion is more suitable than the Court of Law to judge excesses by corporate directors and management so long as those do not amount to violations of trust and honesty (the duty of loyalty).
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Frankel, Tamar, "Court of Law and Court of Public Opinion: Symbiotic Regulation of the Corporate Management Duty of Care" (February 5, 2007). Boston Univ. School of Law Working Paper No. 07-03 Available at this site and at SSRN: http://ssrn.com/abstract=961357
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