Directors’ Fiduciary Obligations: Delaware vs. California

Delaware: Paying Ovitz $130 million was not grossly negligent.

In Why are So Many Corporations Formed in Delaware?, I stated that Delaware law minimizes directors’ responsibility for decisions that have made. This post explains my point by comparing Delaware and California law regarding directors’ fiduciary obligations.

Directors’ Fiduciary Obligations – Similar Duty of Loyalty…

Directors’ fiduciary obligations are similar in Delaware and in California. Both states have the same duty of loyalty. A director’s duties must be performed in good faith and in a manner believed to be in the best interest of the corporation and its shareholders.

…But a Different Duty of Care

These two states differ, however, with respect to the director’s duty of care:

• California Corporations Code Section 309(a) states that the director’s duties must be discharged “with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (Emphasis added) In California, a director may be liable for violating the duty of care if she or he acts negligently. This includes, for example, failing to undertake reasonable inquiry.
• Delaware’s duty of care, which is based on case law rather than statute, is more lenient. A director will be liable only if s/he was grossly negligent in carrying out his/her duties. Example: Walt Disney Company’s directors approved a severance payment of $130 million to CEO Michael Ovitz after only 14 months on the job. In 2006, the Delaware Supreme Court decided that the company’s directors may have been negligent, but not grossly negligent.

Related post: Corporate Officers in California Need to Be More Careful than Directors

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
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