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CALIFORNIA CORPORATE & SECURITIES LAW

Officers And The Business Judgment Rule

Last weekend, I attended a symposium at the UCLA School of Law entitled “Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law”.  The event, organized by ever erudite Professor Stephen Bainbridge, featured presentations by leading scholars and practitioners from around the country.  I was therefore surprised when the discussion turned to whether Delaware applies the business judgment rule to officers.  It seemed to me that this may be the wrong question entirely.  A more challenging question is whether Delaware law applies at all.

The Delaware General Corporation Law itself says nothing about the fiduciary duties of officers or the application of the business judgment rule.  I pointed out that officers are agents and as such their responsibilities should be determined by choice of law principles applicable to agents.  Under Section 291 of the Restatement (Second) Conflict of Laws, the rights and duties of a principal and agent toward each other are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the parties and the transaction under the principles stated in Section 6 of the Restatement.  Section 6 requires a court, subject to constitutional restrictions, to follow the statutory directive of its own state on choice of law.  California Corporations Code Section 2116 explicitly provides that the law of the jurisdiction of incorporation applies to the duties of directors.  Conspicuously absent is any mention of officers.  If there is no statutory directive, then Section 6 lists the following seven factors as relevant to the choice of law:  (a) the needs of the interstate and international systems,  (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.

California, moreover, has enacted a comprehensive Labor Code that includes numerous provisions defining the obligations of an employee to his or her employer.  For example, Labor Code Section 2854 establishes a statutory standard of care: “One who, for a good consideration, agrees to serve another, shall perform the service, and shall use ordinary care and diligence therein, so long as he is thus employed.”  Section 2865 imposes liability on an employee who is guilty of a culpable degree of negligence for the damage thereby caused to the employer.  The California Civil Code also includes numerous provisions governing the agency relationship.  Cal. Civ. Code §§ 2295 – 2400.

The question of applicable law may be further muddied by the existence of contractual choice of law provisions.  These may be found in employment agreements (which often will define “cause”), plan documents, award agreements, indemnification agreements, among others.  These choice of law provisions may or may not be consistent.  For example, an employment agreement may specify California law while an equity award plan may state that it is governed by Delaware law. In some cases, moreover, it may not be possible to contract out of certain local law provisions.

Given all of this, what is the basis for assuming that Delaware law necessarily defines the fiduciary duties of officers of Delaware corporations?

California delenda est?

I recently received an e-mail inviting me to attend a conference entitled “Carbon Free California“.  As an erstwhile student of organic chemistry (essentially the study of carbon compounds), I wondered “are these people serious?”.  Carbon inheres in all living things.  It is the very substance of life.  A carbon free California would mean absolutely no living thing (animal or vegetable). In fact, the state would need to be scrubbed free of the remains of everything that once lived here.  I doubt that is what these conferees had in mind.  Perhaps a more felicitous title is in order.

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