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8 Bus. Law. Update 1 (1987-1988)

handle is hein.journals/buslwme8 and id is 1 raw text is: Director Liability
New York Enacts Second Statute; California

Proposal Pending
The last three years have witnessed
dramatic developments in the courts, in
insurance markets, and in state legisla-
tures on liability of corporate directors,
particularly derivative suit liability. The
first of these developments was the deci-
sion of the Delaware Supreme Court in
Smith v. Van Gorkom, 488 A.2d 858
(Del. 1985), holding directors of Trans
Union liabile to shareholders in damages
for gross negligence in failing to give
adequate consideration to, and in ap-
proving too hastily, the terms of a pro-
posed cash-out merger based on a pre-
mium for the corporation's stock of al-
most 50 percent above the market. The
negative impact of Smith v. Van Gorkom
on the market for insurance against di-
rectors' and officers' liability was com-
pounded by two other developments:
the increase in litigation challenging
management defensive tactics in re-
sponding to hostile takeovers and the
practice of naming directors and officers
as individual defendants in massive toxic
or environmental tort litigation.
Directors' increased vulnerability to
claims for monetary damages led to ef-
forts across the country to amend corpo-
rate statutes to reduce that vulnerability.
The pioneering venture was by the In-
diana legislature. In April 1986, as part
of an extensive revision of its corporation
law, that legislature adopted a provision
to the effect that a director will not be
liable for breach of, or failure to per-
form, a duty unless the breach or failure
:onstitutes willful misconduct or reck-
lessness. Ind. Bus. Corp. Law, ch. 35,
§ 1 (e).
This pattern of direct statutory exclu-
3ion of damage liability for negligence
:ordinary or gross) was later followed

in Ohio, where a November 1986 statute
precluded damages liability for acts or
omissions not shown by clear and con-
vincing evidence to have been under-
taken with deliberate intent to cause in-
jury to the corporation or undertaken
with reckless disregard for the best
interests of the corporation. Ohio Gen.
Corp. Law § 1701.59. This enactment
was part of a general package of legisla-
tion including antitakeover provisions
responsive to Sir James Goldsmith's at-
tempt to acquire Goodyear.
Missouri appears to have pioneered a
secondary statutory pattern. Earlier in
1986, that state had amended its corpo-
ration statute to permit shareholder-ap-
proved indemnification of director or
officer liability (including amounts paid
in settlement) except liability based on
conduct finally adjudged to have been
knowingly fraudulent, deliberately dis-
honest or willful misconduct. Mo. Gen.
& Bus. Corp. Law 351.355, §§ 2, 7. This
indemnity provision appears to apply to
derivative suits as well as to third-party
claims even though the indemnity tech-
nique has been criticized as circular in
Continued on page 2

September/October 1987
Volume 8 Number 1
Section of Corporation,
Bandng and Business Law
Members Approve New
Section Name
Prince Metternich once said, Cling to
that which is old, for that which is old is
good. Lowell, however, advised that
New occasions teach new duties; Time
makes ancient good uncouth; They must
upward still, and onward, who would
keep abreast of Truth. Rejecting Met-
ternich and heeding Lowell, the mem-
bers of the Section, in a closely divided
vote during the ABA Annual Meeting in
San Francisco, approved the recom-
mendation of the Council to change the
name of the Section to The Section of
Business Law.
Under the ABA by-laws, this change
of name does not become effective until
notice has been published in the ABA
Journal and the change is thereafter ap-
proved by the House of Delegates. That
vote is expected to take place at the Feb-
ruary 1988 meeting of the House. So
when we gather at the Section's 1988
spring meeting in Philadelphia on March
24-27, we will be sporting our new name.
Section mossbacks can take solace in the
old adage that a rose by any other name
smells as sweet.

INSIDE
Decision changes spousal cosigner rules in community
property states                                   3
Recent Decisions Affect Lenders                   4
Sporkin Speaks Out at Securities Program          7

Section Promotes Tort Law Reform

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