Stephen Bainbridge and Larry Ribstein are two of the blawgosphere’s most insightful thinkers on corporate governance issues, and their their blawgs have contributed more to the understanding and appreciation of those and many related business law issues over the past couple of years than virtually any other resources on the Web of which I am aware. These two academics continued their generous contributions over the past week with a couple of timely pieces in regard to director liability and the business judgment rule that should be required reading for any director of a public company or any advisor of a director.
First, Professor Bainbridge used the oral argument in the Delaware Supreme Court in the Disney-Ovitz case to provide this timely refresher (blog post here) on the business judgment rule and its importance to good corporate governance. He plainly states the rule as it relates to directors:

The business judgment rule is corporate law’s central doctrine. It pervades every aspect of the state law of corporate governance; from negligence by directors, to self-dealing transactions, to termination of shareholder litigation and so on. Of particular relevance, it is the governing standard when shareholders complain that about allegedly excessive executive pay.
Corporate directors are subject to a fiduciary duty of care, which requires them to the sort of care that ordinarily careful and prudent people would use in similar circumstances. Because the corporate duty of care thus resembles the tort law concept of reasonable care, one might assume the duty of care is violated when directors act negligently. Yet, the one thing about the business judgment rule on which everyone agrees is that it insulates directors from liability for negligence.

Professor Bainbridge goes on to explain why this insulation from negligence liability is sound public policy, and then concludes:

Giving Michael Ovitz $140 million to go away after a mere 14 months on the job might not have been the smartest decision a board of directors made, but absent evidence that the board acted from conflicted interests, it is precisely the sort of decision that courts leave to the discretion of directors.

Which is precisely the principle around which Professor Ribstein crafted this remarkable post from last year that predicted the outcome of the Disney-Ovitz decision in the Delaware trial court.
Meanwhile, Professor Ribstein has recently co-authored a working paper with colleague Kelli A. Alces that addresses a troubling trend in business litigation over the past decade or so — i.e., creditors attempting to foist upon directors of financially-troubled companies a duty to creditors once a company reaches the amorphous “zone of insolvency.” The abstract of the paper addresses this trend head-on:

Despite many cases with seemingly contrary dicta, corporate directors of failing firms do not have special duties to creditors. This follows from the nature of fiduciary duties and of the business judgment rule. Under the business judgment rule, the directors have broad discretion to decide what to do and in whose interests to act. There is some authority for a limited creditor right to sue on behalf of the corporation to enforce this duty. However, any such right does not make the duty one owed to creditors. The creditors individually may sue the corporation for breach of specific contractual, tort and statutory duties, particularly on account of fraudulent conveyances. But the creditors are not owed general fiduciary protection even if they are subject to a special risk of abuse in failing firms.

Then, in this insightful post, Professor Ribstein applies the principles that he addresses in his paper to the insolvency and reorganization issues currently confronting GM’s directors and — in light of those difficult circumstances — concludes that GM’s directors need the benefit of the doubt provided by the business judgment rule more then ever:

It is to protect directors faced with such decisions [relating to GM’s possible insolvency] that we have the business judgment rule. The fact that the decisions only get harder in the ìzoneî is a good reason for not suspending the rule by requiring the board to make particular tradeoffs at this point.

Thus, in a business climate in which many companies are having difficulty finding qualified independent board members, the message from these two corporate governance experts to directors and their advisors is clear — embrace the tried-and-true business judgment rule. It remains not only the director’s best protection from incurring liability under the law, it is also the core principle upon which companies can continue to encourage good and smart people to contribute their talents as directors.