Wrongful Omissions by Corporate Directors: Stone v. Ritter and Adapting the Process Model of the Delaware Business Judgment Rule

Abstract

The question of when corporate directors should be liable for their wrongful omissions (not deliberate decisions not to act but unconsidered failures to act) seems to present intractable problems for the law. Because the business judgment rule focuses on the process leading up to the board's decision, when the claim is that the board breached its duty merely by omitting to act, there is no process prior to the omission for the court to evaluate. Moreover, determining whether an omission was wrongful involves determining what the board should have known about the operations of the corporation, and this involves business judgment concerning how much information it is efficient to gather. In Stone v. Ritter, the Delaware Supreme Court side-stepped these issues by relying solely on a standard of subjective wrongdoing: Under Stone, directors are liable for omissions only if they consciously knew they were violating their duties; there is no inquiry into what directors should have known, only whether they knew that they did not know what they thought they should. The premise of this article is that it is in fact possible to evaluate director omissions under a process-based standard by separating the problem of determining what directors should know into two parts: an ex ante determination by the board of directors itself concerning what directors should know about the business of the corporation and an ex post determination by courts as to whether directors have lived up to this standard. This is a process-based standard that is in accord with the policy justifications underlying the business judgment rule, restores an objective component to the review of allegedly wrongful director omissions, and is more protective of shareholder interests than the rule in Stone.

Keywords: directors, omissions, defalcations, business judgment rule