UK: Forecasting The Future: An Assessment Of The New Delaware General Corporations Law, Section 122(17)

Last Updated: 29 January 2007

Article by Jessica Mance*

This article first appeared in the Journal of Corporate Law Studies Vol 1, Pt 2, 449-484

A. Introduction

The State of Delaware has been referred to as "the incorporation capital of the world."1 It promotes itself as approaching corporate matters in an innovative fashion. On July 1, 2000 it adopted a host of amendments to the Delaware General Corporations Law under the banner "Embracing the 21st Century."2 Perhaps the least publicized of these was the addition of subsection (17) to section 122. The statute now reads:

"§122 Specific Powers
Every corporation created under this chapter shall have power to - …
(17) Renounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or one or more of its officers, directors or stockholders."

The lack of publicity of this amendment belies the import of its subject matter. The subsection deals with a formidable branch of the duty of loyalty of corporate fiduciaries: the corporate opportunity doctrine. The overarching question is whether a Delaware corporation may in any way waive that doctrine in advance, and to a significant extent the statutory answer is now yes. This article will explore what the amendment implies on paper (Part B), whether it is to be welcomed (Part C), and its likely reception in the courts (Part D).

B. The Formal Implications Of The Amendment

The first task is to specify the approach to corporate opportunity and its waiver that emerged in the Delaware case law and the DGCL3 prior to the passage of the amendment. The immediate impact of the amendment can then be gauged.

1. The relevant positions prior to passage of the amendment

(a) The general law of corporate opportunities in Delaware

A fiduciary is someone who undertakes to act for or on behalf of someone else in circumstances which give rise to a relationship of trust and confidence between the parties.4 The conventional model of corporate structure is one in which shareholders entrust directors to direct the management of the corporation to protect and enhance their investment. Like trustees, directors thus assume stewardship of a fund in which others are interested, and it is not surprising that courts of equity extended trustees’ fiduciary duties to directors as the corporate form developed in the eighteenth and nineteenth centuries.5 In 1832 a New York court stated that "the directors are the trustees or managing partners, and the stockholders are the cestui que trusts, and have a joint interest in all property and effects of the corporation. And no injury to the stockholders… sustained by a fraudulent breach of trust can, upon the general principles of equity, be suffered to pass without a remedy."6 It may be more in line with the typical present-day management structure of larger companies to say that senior managers, not all of whom are directors, manage the company while the board, comprising some senior managers and some non-executive directors who are not involved in the daily operations, devises strategy, decides upon major transactions and supervises management. Where senior management run the daily operations of the company, the relationship between them and the company may also be one of trust and confidence giving rise to fiduciary duties. Likewise, where a controlling shareholder exercises influence over corporate processes and property (including information), her power over the corporation and consequent power to affect other shareholders gives rise to a duty to act to advance their interests. Therefore the discussion of directors’ fiduciary duties that follows should be read as being relevant to senior managers and controlling shareholders.

The fundamental duty of a fiduciary is to be loyal to the person for whom, or on whose behalf, she acts. From this umbrella principle, the duty governing directors has been expressed in a duo of overlapping rules which are intended to preclude a fiduciary from being swayed in her actions by considerations of personal interest or the interests of third parties: directors cannot retain a benefit obtained by reason or use of their position (the ‘no-profit’ rule), and directors must not put themselves in a position where their duty to the company and their personal interest conflict (the ‘no-conflict’ rule).7 As the court noted in Guth v Loft, Inc: "Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests;… [a]n undivided and selfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest."8

A primary consequence of these principles is that directors refrain from self-dealing.9 Improper directorial conduct involves board approval of transactions to enhance personal financial gain of one or more directors who participate in the board approval. Where a director votes on a transaction involving such personal gain, she is an ‘interested’ director; at common law the transaction was voidable whether or not it was fair or approved by disinterested directors.10 Section 144 of the Delaware General Corporations Law is a ‘safe harbour’ statute which removes the common law disabilities:11 a self-dealing transaction is not voidable solely because it is interested, providing the transaction is adequately disclosed and approved by a majority of disinterested directors or shareholders, or that it is fair.12 The cases now seem to conclude that where there is no controlling shareholder in the transaction, such approval is sufficient to invoke the substantive legal rule that directors are not liable for corporate losses, so long as their action is disinterested, informed and a good faith attempt reasonably to advance corporate interests (the ‘business judgment rule’).13 Where there is a controlling shareholder in the transaction, the approval merely transfers the burden to the plaintiff to prove that the transaction falls short of ‘entirely fair’,14 which may be by a showing of unfair dealing or unfair price.15 In the absence of any (or any effective) approval, the directors are charged with proving that the transaction is entirely fair 16

A distinctive context in which substantive questions regarding the duty of loyalty may emerge is usurpation of corporate opportunities. Corporate fiduciaries may at times be confronted with a business opportunity, the taking of which may conflict with their duty of loyalty to the corporation. The general rule is that a director, officer or controlling shareholder may not appropriate an opportunity which rightfully belongs to the corporation. The obvious initial inquiry in such a situation is the question of recognition: whether the opportunity belongs to the corporation. Delaware law has tended to adopt the ‘line of business’ test as first crystallized by Guth v Loft, in particular in the passage which reads:

"if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself." 17

Later Delaware case law has clarified that the tests enunciated in Guth provide factors to be assessed, rather than conclusive elements, in deciding an individual case. In Broz v Cellular Information Systems, Inc18 the Delaware Supreme Court recognized that:

"the contours of this doctrine are well established. It is important to note, however, that the tests enunciated in Guth and subsequent cases provide guidelines to be considered by a reviewing court in balancing the equities of an individual case. No one factor is dispositive and all factors must be taken into account insofar as they are applicable... Hard and fast rules are not easily crafted to deal with such an array of complex situations."

Beyond the rule of recognition, Professors William Allen and Reinier Kraakman have identified two further questions that arise in the jurisprudence where a fiduciary pursues a business opportunity on her own account: whether there are nonetheless circumstances that permit the fiduciary properly to take a corporate opportunity; and what remedies can be used to rectify misappropriation of an opportunity.19 As regards the first question, it appears that the only sure defensive circumstance is fully informed consent on behalf of the company. In Thorpe v CERBCO Inc20 an offer to buy substantially all the assets of the company was presented to the controlling shareholder who was also a director. Under DGCL section 271, the sale of substantially all the assets of a company requires the consent of a majority of the outstanding stock of the selling corporation. The controlling shareholder relied on his ability to veto the sale to persuade the prospective purchaser to buy his shareholding instead. The court found that despite the practical unavailability to the corporation of the opportunity to sell its assets because of the shareholder’s veto under section 271, the director breached the duty of loyalty by effectively pursuing the opportunity for himself without informing the company of the opportunity. This seems to imply that mere ‘unavailability’ is not a defence by itself. Rather, the attempt to argue unavailability in defence to a charge of usurpation is likely to be valid only where there can be said to have been a good faith decision on the part of disinterested directors not to pursue the opportunity. This would embrace all such situations as where individuals within the company would have blocked the assumption of the opportunity by the company,21 where the opposite contracting party would not have given the opportunity to the company,22 or where the opportunity is not open to the company due to a legal disability.23 The consequence is that "there may be situations in which a profit must be disgorged, although not gained at the expense of the company."24

The existence of dual rules against self-dealing (prima facie subject to entire fairness review) and usurpation of a corporate opportunity (per se improper unless ratified) protects different companies to different extents. Take first the situation of a solvent company approaching liquidation. The self-dealing rule will guarantee fair maintenance of the company’s worth: this is essential to preserve the company’s remaining value for expectant creditors and shareholders, even though the company evidently is not looking for further expansion and hence the opportunity doctrine is of little use. It follows that (if legally permissible) such a company could renounce even the totality of conceivable future opportunities with minimal adverse effect. In juxtaposition, one could posit a fledgling high-tech start-up. The company will have little material wealth to benefit from the protection of the self-dealing rule, but the opportunity doctrine provides a shield against improper usurpation by management of incoming opportunities, the presence or absence of which for the corporation could make or break its future.

(b) The issue of waiver

Prior to section 122(17), the DGCL was at best equivocal on the issue of whether a corporation may opt out of all or any aspects of the duty of loyalty. Section 102(b)(1) provides that the certificate of incorporation may include "any provision creating, defining, limiting and regulating the powers of the directors, and the stockholders…; if such provisions are not contrary to the laws of this State." Section 242(a) permits amendment "in any and as many respects as may be desired; so long as its certificate of incorporation as amended would contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation filed at the time of the filing of the amendment." Once within the ambit of the duty of loyalty, section 102(b) makes it clear that a director cannot be relieved of liability:

"The certificate of incorporation may also contain any or all of the following matters:…
(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for such monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director:
(i) For any breach of the director’s duty of loyalty to the corporation or its stockholders…"25

However section 102(b) still leaves open whether the corporation may, on incorporation, circumscribe the conduct which generates liability under the duty of loyalty in the first place. As often with fiduciary doctrine, it appears that the statute relied on the case law to establish the ground rules.

The case law was regretfully no more clear. In Sterling v Mayflower Hotel26 the Delaware Supreme Court enforced a charter provision that permitted counting interested directors towards a quorum and approved opt-outs that do not violate statute or "public policy settled by the common law". More particularly, in Kaplan v Fenton27 the court held that the board’s rejection of a similar offer to that appropriated by the defendant director could preclude liability. The logical implication would seem to be that the board, or others authorized to act on behalf of the company, can also choose explicitly to reject in advance certain offers with shared characteristics.

However a permissive approach has not been representative of recent case law. In Irwin v West End Development Company28 a charter provision stating that directors were ‘hereby relieved from any liability that might otherwise arise by reason of his contracting with the corporation for the benefit of himself or any firm or corporation in which he may in any way be interested’ was held not to validate unfair director compensation. Most pertinent is Siegman v Tri-Star Pictures,29 where the Delaware Supreme Court suggested that a charter provision allocating business opportunities was inconsistent with section 102(7)(b)’s prohibition on limitations of personal liability for directors for breach of the duty of loyalty.

It may be observed that Siegman was only a motion to dismiss and so strictly holds no more than that under some possible construction or operation, the charter provision arguably could contradict section 102(b)(7). The court itself reserved a "comprehensive or definitive declaration of the validity of that provision of the certificate… until a later procedural stage where the merits may be explored in greater depth than was done here."30 Theodore Moskowitz and Walter Effross have drawn from this reservation that: "[The] court implied that a corporation might amend its certificate of incorporation to eliminate or limit directorial liability when a breach of the duty of loyalty occurs, in contrast to section 102(b)(7) of the Delaware Code."31 However a preceding sentence of the court’s opinion is in conflict with the conclusion they draw. In that sentence the court states that "at least one scenario could plausibly be constructed where [the clause] would eliminate or limit the liability of directors for breach of their fiduciary duty of loyalty, a result proscribed by section 102(b)(7)." This sentence contains a categorical assumption: the court presupposes that section 102(b)(7) proscribes any modification of the duty of loyalty.

Though directly on point, Siegman did not settle the law. A plausible alternative analysis continued to be that such a charter provision merely extracts the named opportunity from the class of opportunities that would trigger the duty of loyalty in the first place. The Siegman opinion did not address this argument at all. Further, a series of subsequent cases involving conflicting claims between two classes of stock upheld certain contractual provisions that modify fiduciary duties. Typical in this line of cases is HB Korenvaes Investments, LP v Marriott Corporation,32 which involved a strategic corporate restructuring that adversely affected the value of the preferred stock. Marriott Corporation was to be split into two separate, publicly held corporations. The split was to be effected by conveying a majority of the corporation’s cash-generating assets to a wholly owned subsidiary of the issuer and distributing the stock of the new subsidiary to the current common shareholders of the corporation. The preferred stock was entitled to 8.25% cumulative dividends and was convertible at the option of the holder into common stock. Marriott announced that it would suspend paying dividends on the preferred stock after consummation of the distribution, and that dividends would initially be payable on the distributed stock in an amount equal to the then-current dividends on Marriott’s common stock. The court, assuming that the transaction was for the benefit of the common stock only, held that the transaction did not violate the fiduciary duty owed to preferred stockholders, on the basis that the preferential rights of the preferred stockholders were limited to the express anti-dilution protection. Moore Business Forms, Inc v Cordant Holdings Corporation33 is in a similar vein. In that case, the issuer had outstanding a class of preferred stock redeemable at its option, at a price per share to be determined through an appraisal by one of eight named accounting firms. The complaint alleged that the issuer "improperly selected [the accounting firm] to value the preferred stock, …unfairly excluded [the plaintiff] from participating in the appraisal, and …as a result improperly selected a flawed valuation methodology that grossly undervalued the preferred stock." The court held that the fiduciary duties owed to holders of preferred stock did not extend to this circumstance. The rights in question were contractual, and the plaintiff could not prevail by asserting that the defendant’s actions violated fiduciary duties owed to the plaintiff. Royce Barondes34 has noted as a potential limitation on these cases that they "address circumstances in which the duty being extinguished resulted in granting directors greater freedom to promote the interest of shareholders": both cases involve conflicts between holders of common stock and preferred stock, in which the holders of the preferred stock were unsuccessful. They did not involve conflicts between directors and the corporation or its stockholders. However in US West Inc v Time Warner35 the Chancery Court noted broadly:

"There is modernly great flexibility in the corporate form. The corporate charter may… particularize director and officers’ duties. Thus, there is no reason why corporate charters cannot contain provisions dealing with corporate opportunities or dealing with the ability of officers or directors to compete with the corporation."

The uncertainty over the validity of waiver was particularly rife in the context of dot.com spin-offs.36 The very nature of the creation of a dot.com business involves frequent occasions on which a business opportunity can at least conceptually be allocated to either the parent or the dot.com entity. The situation is commonly dealt with by an elaborate advance allocation of opportunities in the certificate or other constituent documents of the dot.com entity. These schemes typically focus on the principal occupation of the person to whom the opportunity was first presented. Where the person first receiving the opportunity is principally employed by the parent, the opportunity will be allocated to the parent, and vice versa for the subsidiary. Where the overlap in officers and employees is major, the schemes tend to allocate most opportunities to the parent. Yet prior to the passage of subsection (17), it was unclear whether such allocations would be respected and whether they would insulate directors and officers from claims based on breach of the duty of loyalty.

In conclusion, prior to the passage of the amendment, it was far from easy to identify the rules applicable to waiver of the corporate opportunity doctrine. The statute was ambivalent, or depended on case law which was itself unclear. The most direct judicial treatment of the issue was negative, but was by no means comprehensive in its analysis and had been followed by indications of a more liberal approach. In addition, optimism about the validity of waiver seemed to persist in practice - hence the continued inclusion of advance allocations of opportunity in the dot.com industry. The situation cried out for clarification.

2. The impact of the amendment

(a) Its immediate import for corporations

At a minimum, the subsection eliminates doubt about the validity of an advance corporate renunciation of interest in enumerated business opportunities in the original charter or by board resolution, and hence charter and contract provisions that determine how such opportunities are to be distributed among fiduciary personnel and related entities. Directors, officers and fiduciary stockholders are then free to develop such opportunities for themselves, under a shield from claims for breach of the duty of loyalty. In theory the provision thus removes a hamper from the reliability of agreements and reduces costs by reducing uncertainty, as discussed in Part C.37 In practice much will depend on the attitude to the renunciation taken by the courts, as Part D suggests.

(b) Its comparison with existing techniques to insulate directors and officers from the effect of fiduciary liability

Renunciation under section 122(17) is the newest technique for insulating fiduciaries from the risk of liability under certain fiduciary duties. There were already three such techniques available under Delaware law: liability limitation provisions under section 102(b), indemnification provisions under section 145(a)-(f), and director and officer insurance under section 145(f). The statute as written does not allow liability limitation or indemnification for acts in breach of the duty of loyalty (see section 102(b)(7)38 and sections 145(a), (b)39). Even leaving this aside, there are structural differences between the broad effect of renunciation under section 122(17) and the effects of provisions validly adopted pursuant to the three previous techniques. This section will examine the distinctions from the perspective of persons who may be shielded by the various techniques.

Limited liability provisions pursuant to section 102(b) are subject to four constraints. First, the Delaware model applies only to directors and not to officers or other employees or agents.40 If a Delaware director is also an officer, she can still be held personally liable for her actions as officer, a status not protected by the statute.41 In addition, a court has narrowly construed section 102(b), holding that it does not permit elimination of liability that would be owed by persons such as those aiding or abetting a violation.42 Second, liability limitation provisions protect directors only from shareholder suits.43 Third, liability limitation provisions eliminate personal liability only for monetary damages, leaving open the possibility of an injunction. Fourth, the provisions must be adopted by the corporation in its charter, either originally or by amendment.44 Renunciation pursuant to section 122(17) is more or equally generous in each of these characteristics. It is more generous in that any fiduciary who would otherwise be subject to the corporate opportunity doctrine is relieved, irrespective of her position or the identity of the complainant or the remedy sought. This is because the company renounces its interest in the opportunity itself, without reference to the identity of the persons who may subsequently seek to pursue the opportunity or the persons who may challenge that taking or how the challenge is presented. Renunciation is equally generous as liability limitation in that there are two routes to both techniques for insulation. Liability limitation can be achieved in the original charter or by charter amendment. Although a renunciation cannot be effected under section 122(17) by charter amendment (the phrase "certification of incorporation" is understood to refer only to the original charter45), it can be achieved "by action of the board of directors." Under Delaware law, charter amendment may appear to boast a safeguard for shareholders that board action does not, because charter amendment requires the consent of a majority of the outstanding stock entitled to vote.46 Yet managerial manipulation of, and collective action problems in, the amendment process in the modern large corporation may blur if not nullify the efficacy of this requirement.47 Therefore the distinction with board action will often be nominal.

DGCL sections 145(a)-(f) authorizes corporations to commit to reimburse any director, officer, employee or agent reasonable expenses for losses of any sort arising from any actual or threatened judicial proceeding or investigation in the case of a successful defence and in some instances in the case of an adverse judgment in a lawsuit. Indemnification rights are equivalent to renunciation in the scope of persons who may be insulated, but unlike renunciation they do not relieve those persons from the liability itself and in any event typically cover only legal expenses. The defendant still suffers from the other consequences of being sued, such as loss of time and of reputational capital in the market for their managerial services. An additional flaw in protection by indemnification is that smaller corporations may not have the resources to indemnify their directors. Michael Mitchell has written that "the ability to provide indemnity does not solve the problems of the directors of smaller and less capitalized corporations because those corporations often will be unable to afford the promised indemnity."48

Insurance also pales by comparison with the extinction of duty achieved by renunciation. An initial obstacle is cost: one would expect that insurance for directors against such a nebulous risk as liability under the opportunity doctrine would be prohibitively expensive for many companies. Even where insurance has been obtained, there is the concern that the insurance policy may not be enforceable as a matter of public policy to the extent that it purports to insure against liability for a breach of the duty of loyalty.49 In addition, coverage under directors and officers’ insurance customarily excludes claims brought by or on behalf of the corporation, and hence claims for breach of the duty of loyalty arising from shareholder derivative actions. Kraakman, Park and Shavell reason that because shareholder lawsuits are typically settled before a trial, these latter concerns do not prevent payments being made, and directors may still be able to obtain a high degree of confidence that they will not be subject to personal liability.50 Yet Joseph Monteleone and Nicholas Conca note that insurers have recently endeavoured to remedy such ‘backdoor’ cover by providing in policies that the parties agree to use their best efforts to negotiate a reasonable allocation of amounts where a claim presents matters that are covered by insurance only in part.51 Moreover there are other reasons why insurance is less effective from the directors’ perspective than renunciation. Besides policy limitations, the monetary threat for directors is unlikely wholly to be eliminated by insurance: most director and officer liability insurance policies include a deductible payable by the director (unless she may be indemnified by the corporation for this amount). Further, as above, the director still suffers from the non-monetary consequences of being sued.

In conclusion, even leaving aside the explicit non-applicability of the existing techniques to the duty of loyalty, the very way in which renunciation operates offers a much broader and more secure release from liability for directors than liability limitation, indemnification or insurance can be designed to provide.

(c) Its comparison to the §5.09 American Law Institute’s Principles of Corporate Governance

In 1994 the American Law Institute revised its "Principles of Corporate Governance". The Principles are proposed laws, proffered to the legislatures of the states for adoption as state law. They may be implemented by state judicial decision except to the extent that statute provides to the contrary. Paragraph 5.09 of the Principles now reads:

"§5.09 Effect of a Standard of the Corporation
If a director [§1.13] or senior executive [§1.33] acts in reliance upon a standard of the corporation [§1.36] that authorizes a director or senior executive to:…

"(c) take advantage of a specified type of corporate opportunity of which the director or senior executive becomes aware other than (i) in connection with the performance of directorial or executive functions, or (ii) under circumstances that should reasonably lead the director or senior executive to believe that the person [§1.28] offering the opportunity expected it to be offered to the corporation, or (iii) through the use of corporate information or property;…

"and the standard was authorized in advance by disinterested directors [§1.15] or disinterested shareholders [§1.16], following disclosure concerning the effect of the standard and of the type of transaction or conduct intended to be covered by the standard, then the standard is to be deemed equivalent to an authorization of the action in advance by disinterested directors or shareholders under §§5.02 (Transactions with the Corporation), 5.03 (Compensation of Directors and Senior Executives), 5.04 (Use by a Director or Senior Executive of Corporate Property, Material Non-Public Corporate Information, or Corporate Position), 5.05 (Taking of Corporate Opportunities by Directors or Senior Executives), or 5.06 (Competition with the Corporation), as the case may be."

DGCL section 122(17) and ALI52 §5.09 are similar in the role which they give to consensual variation of the default rules of corporate opportunity: both permit the establishment in advance of certain arrangements that permit fiduciaries to engage in otherwise impermissible conduct with the same effect as if the act had been subject to individualized ratification. However ALI §5.09 and the accompanying Comment53 make several points of emphasis that are not necessarily applicable to DGCL section 122(17).

First, §5.09 seems to stress that the standard must be adopted by directors or shareholders who are disinterested at the time they approve the standard. The Comment elaborates that "if the directors or shareholders who approve a standard are themselves eligible to benefit from the standard, the standard will not be deemed to have been adopted by disinterested directors or shareholders insofar as it is available to the directors or shareholders who have approved the standard." Subsection (17) contemplates no such disqualification in its reference to "action by the board of directors." The policy implications of this difference are explored in Part C.3(a).

Second, the Comment asserts that "continuing acquiescence by disinterested directors in a standard adopted by interested directors and known to the disinterested directors may amount to authorization of the standard." The express stipulation in subsection (17) of "[the] certificate of incorporation or … action of the board of directors" (emphasis added) as the source of a valid renunciation precludes such informal action pursuant to the Delaware statute.

Third, the Comment to §5.09 suggests that the corporate community should in its own interest establish certain limits on the availability and maintenance of the standard, in particular that:

"In adopting a standard of the corporation, the board of directors, board committee, or shareholders who take action should place reasonable limits on the availability of the standard, so that the directors or shareholders will not substantially abandon oversight with respect to [such] transactions. In addition, as a matter of corporate practice such a standard should provide reasonable requirements for periodic advice to the board, committee, or shareholders who adopted the standard as to use of the standard."

The Comment then mentions a potentially ensnaring limitation on the operation of a §5.09 standard:

"[R]eliance may not be placed on a standard where it is clear that it is not reasonable to do so. For example, a compensation plan that was reasonable when originally adopted may no longer be relied upon when as a result of the passage of time it is clear that it is delivering excessive bonuses."54

There are no equivalent suggestions in subsection (17). Further, it is argued in Part D.1 below that courts should not read any substantive limitations into renunciations.

Last but by no means least, the tone of the final clause of §5.09, as expounded in the Comment, mandates a need for predictability of operation of the standard to an extent that is not explicitly required of a waiver pursuant to subsection (17). The final clause of §5.09 speaks of "disclosure concerning the effect of the standard and of the type of transaction or conduct intended to be covered by the standard…" The Comment adds:

"Directors must use due care in providing that a standard sets reasonably well-defined limits on the type of benefit that may be granted, so that the directors or shareholders adopting the standard will have a reasonable sense of the transaction or conduct that they have authorized."

The Comment goes on to demand that disclosure should be such that directors or shareholders adopting the standard can exercise the same informed judgment that they would be expected to exercise if an individual transaction were presented to them for approval. The only analogous requirement in subsection (17) is that the renunciation is of "specified business opportunities or specified classes or categories of business opportunities". In contrast to the ALI Comment, it is much hoped that the language of subsection (17) will not induce the courts to insist on a level of specificity equivalent to that applied to the pre-existing corporate ability to ratify individual usurpations of an opportunity pursuant to DGCL section 144. If that were the case, the statutory reference to ‘class or category’ would be worthless. Consequently the ability to have recourse to subsection (17) would be much undermined. Charles Hansen notes this consequence in his guide to the ALI Project in the conclusion that: "because each standard must apply solely to specific, well-defined conflicts of interest to be effective, and because the instances in which a corporation can, as a practical matter, define such conflicts in advance are limited, it is expected that §5.09 will have minimal application."55 The preferred interpretations of "specified" and "classes or categories" are discussed in Part D.1 below.

(d) Its position within the doctrinal framework of corporate opportunities

Subsection (17) could be interpreted in either of two ways. The first is that a charter provision or board resolution pursuant to the subsection supplies a ‘circumstance’ that permits a fiduciary properly to take a corporate opportunity.56 It can thus be understood as a defence which a director may offer to a charge of misappropriation. However there are two reasons why this interpretation is inappropriate. First, the depiction of the subsection as a defence would clash with two attributes of existing case law: the court’s traditional reluctance to extend defensive matters beyond authorized consent, as in Thorpe v CERBCO Inc;57 and the court’s adherence to absolute corporate entitlement to corporate opportunities, as in Siegman v Tri-Star Pictures.58 Secondly, such an interpretation could be vulnerable to unpredictable ‘equitable’ distinctions prompted by the notion of defence. A more satisfactory construction is that the subsection extracts the named opportunity from the category of opportunities which the corporation may claim in the first place. This is the analysis suggested in the legislative synopsis: "[Section 122(17)] permits the corporation to determine in advance whether a specified business opportunity or class or category of opportunities is a corporate opportunity."59

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Footnotes

*LLM Student at Harvard Law School, 2000-1. I would like to thank Professor John Coates for his many invaluable comments on an earlier draft.

1 EM McNally and JH Small, "Alternative Entities: The Multiple Choices Available in Delaware" (1994) 14 Delaware Lawyer 27, 27.

2 The Corporate Edge: Newsletter of the Delaware Division of Corporations (Fall 2000).

3 Delaware General Corporations Law.

4 See generally on fiduciary duties PD Finn, Fiduciary Obligations (Sydney, Law Books, 1977); AJ Oakley, Constructive Trusts (London, Sweet & Maxwell, 3rd ed, 1997), ch 3; R Goff & J Jones, The Law of Restitution (London, Sweet & Maxwell, 5th ed, 1998), ch 33; RP Meagher, WMC Gummow, JRF Lehane, Equity Doctrine and Remedies (Sydney, Butterworths, 3rd ed, 1992), ch 5; LS Sealy, "The Fiduciary Relationship’ (1962) CLJ 69; LS Sealy, "The Director as Trustee" (1967) CLJ 83.

5 See the description of the evolution of fiduciary duties in WT Allen and R Kraakman, Essays, Cases & Materials on Corporations (Harvard Law School, Printing & Publishing Services, 2000), ch 8.2; and Prunty, "The Shareholder’s Derivative Suit: Notes on Its Derivation" (1957) 32 New York University Law Review 980.

6 Robinson v Smith 3 Paige Ch Rp 222 (NY 1832). The fact that the case stems from New York should not be alarming: Delaware had not yet established its hegemony of corporate law.

7 See for example Bray v Ford [1896] AC 44, HL per Lord Hershell; Chan v Zacharia (1983-4) 154 CLR 178, Aus H Ct, 198-9 per Deane J; PD Finn, supra n 4; RP Meagher, WMC Gummow, JRF Lehane, supra n 4.

8 23 Del Ch 255; 5 A 2d 503, 510 (Del 1939).

9 See DS Ruder, "Duty of Loyalty - A Law Professor’s Status Report" (1985) 40 Business Lawyer 1383, 1386.

10 See H Marsh jr, "Are Directors Trustees? Conflict of Interest and Corporate Morality" (1966) 22 Business Lawyer 35.

11 That the statute does not conclusively validate the transaction is clarified by Flieger v Lawrence 361 A 2d 218 (Del 1976).

12 Delaware Code Annotated Title 8 §144 (a).

13 In Re Wheelabrator Technologies, Inc 663 A 2d 1194 (Del Ch 1995), Cooke v Oolie 2000 Del Ch LEXIS 89 (24 May 2000).

14 Kahn v Lynch Communications Systems, Inc 638 A 2d 1110 (Del 1994).

15 Weinberger v UOP 457 A 2d 701, 711 (Del 1983).

16 Kahn v Lynch, supra n 14.

17 Supra n 8.

18 663 A 2d 1180 (Del Ch 1995), rev’d 673 A 2d 148 (Del 1996).

19 WT Allen and R Kraakman, supra n 5, ch 9.

20 676 A 2d 436, 444-5 (Del 1996).

21 As in Thorpe v CERBCO itself.

22 As in Industrial Development Consultants v Cooley (1972) 2 All ER 162.

23 Canadian Aero Service Ltd v O’Malley (1973) 40 DLR 371, Can SC, 390 per Laskin J.

24 Ibid, 391.

25 8 Del C §102(b)(7), introduced in July 1986.

26 93 A 2d 107 (Del 1952).

27 278 A 2d 834, 836 (Del 1971).

28 342 F Supp 687, 701 (D Colo 1972), aff’d in part, rev’d in part 481 F 2d 34 133 (1973).

29 CA No 9477 (Del Ch 5 May 1989, revised 30 May 1989).

30 Ibid, 236.

31 TD Moskowitz and WA Effross, "Turning Back the Tide of Director and Officer Liability" (1993) 23 Seton Hall Law Review 897, 916.

32 CA No 12922, 1993 Del Ch LEXIS 90 (Del Ch 9 June 1993).

33 CA No 13911, 1995 Del Ch LEXIS 134 (Del Ch 15 May 1996).

34 R de R Barondes, "Fiduciary Duties of Officers and Directors of Distressed Corporations" 7 George Mason Law Review 45.

35 CA No 14555 (Del Ch 6 June 1996), slip op, 48-49.

36 See the discussion in CM Nathan, "Structuring Dot.Com Spin-Offs, Equity Carve Outs and Joint Ventures" 1213 Practising Law Institute / Corporations 85, 102.

37 See also HN Butler and LE Ribstein, "Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians" (1990) 65 Washington Law Review 1, 67 (arguing that: "A statute is not necessary to validate a private contract, although it may reduce costs by providing a standard form or reducing uncertainty as to validity of the provision created by prior case law.")

38 See supra n 25 and accompanying text.

39 The prospective indemnee must have "acted in good faith and in a manner such person reasonably believed to have been in or not opposed to the best interests of the corporation": 8 Del C §145(a).

40 Contrast the models in Louisiana, Maryland, Nevada and New Jersey, which authorize a corporation to adopt a charter that may protect an officer as well as a director from personal liability.

41 As noted by DA Oesterle, "The Effect of Statutes Limiting Directors’ Due Care Liability on Hostile Takeover Defences" (1989) 24 Wake Forest Law Review 31, 33 n 8.

42 In Brandt v Hicks, Muse & Co. (In re Healthco International, Inc.) 208 BR 288, 308-9 (Bankr D Mass 1997), the court stated: "The statute’s exemption from liability for lack of care extends only to directors. Section 102(b)(7) [of the Delaware General Corporations Law] purports to grant no protection to third parties who aid and abet directors in the violation of their obligations of either care or loyalty."

43 According to a Wyatt Company Survey cited in Y Brook and RKS Rao, "Shareholder Wealth Effects of Directors’ Liability Provisions" (1994) 29 Journal of Financial and Quantitative Analysis 481, 484, 47% of all claims against directors and officers are filed by shareholders.

44 Delaware’s statute is thus a ‘charter option’ statute, as has subsequently been adopted by at least thirty other states. Contrast the second type of liability limitation statute, which is ‘self-executing’ and does not require shareholder approval (as in Indiana, Ohio, Florida, Wisconsin and Maine).

45 CS Bigler, "2000 Amendments to the Delaware General Corporations Law" (2000) Vol 14 No 8 Insights.

46 8 Del C §242(b)(1).

47As described by JN Gordon in his argument for mandatory fiduciary duties in "Freedom and Constraint in Corporate Law" (1989) 89 Columbia Law Review 1549, 1573-1585.

48 MW Mitchell, "Comment, North Carolina's Statutory Limitation on Directors' Liability" (1989) 24 Wake Forest Law Review 117, 120.

49 R Kraakman et al, "When Are Shareholder Suits in Shareholder Interests?" (1994) 82 Georgetown Law Journal 1733, 1745 n 33.

50 Ibid, citing R Romano "The Shareholder Suit: Litigation without Foundation" (1991) 7 Journal of Law and Economics 55, 84.

51 JP Monteleone and NJ Conca, "Directors and Officers Indemnification and Liability Insurance: An Overview of Legal and Practical Issues" (1996) 51 Business Lawyer 573, 618.

52 American Law Institute, Principles of Corporate Governance.

53 Ibid, Analysis and Recommendations §5.09 (1994).

54 The comment refers to Rogers v Hill 289 US 582, 52 S Ct 731, 77 L Ed 1385 (1933).

55 C Hansen, Guide to the ALI Corporate Governance Project (ALI, 1995), 77.

56 This expression is borrowed from Allen and Kraakman’s analysis. See infra, Part B.1(a).

57 See supra n 20 and accompanying text.

58 See supra n 29 and accompanying text.

59 8 Del C §122(17).

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