Professor Ko Chen-En (left) invited Justice Randy J. Holland of the United States supreme court to the NTU EMBA programs to provide instructions for the course of corporate governance and enterprise development.

On October 28, 2017, the NTU EMBA programs had Randy J. Holland, a former Delaware justice of supreme court of the United States for the course of corporate governance and enterprise development. In the class, Justice Holland discussed with the students on the board of directors’ responsibility and business judging rules enacted by the company law of the state of Delaware. Case studies were given in the discussions. Professor Ko did the translation for Justice Holland and brought up cases of Taiwan for exchange of ideas.

Just retired in April 2016, Justice Randy J. Holland was the youngest and longest serving justice of the Delaware supreme court. Before serving the supreme court, Holland was a partner of Morris, Nichols, Arsht & Tunnel LLP, a Delaware law firm.

In the beginning of the class, Justice Holland introduced the Delaware company law’s business judging rules, and reviewed some real judicial cases of the U.S. He explained how the court made final verdicts by the law. The Delaware company law stipulates separate control and ownership, where Section 141 (a) stipulates that it shall be the board directors other than the stockholders to govern the corporate business and affairs. The Delaware court also uses the tempered law with equity to determine whether the board of directors executes its rights of corporate governance, and undertakes the fiduciary duty for the company and shareholders


 

Section141 (a) of the Delaware Company Law

Litigations of corporate lawsuits usually involve shareholders suspicious of decisions made by the board of directors, which allegedly cause financial losses, and thus solicit claim for damages. Even though the board of directors does fulfill the fiduciary duty, it’s not necessarily that all the decisions can meet expectations. As a result, the Delaware company law takes the business judging rules to protect the board of directors, allowing it to fully and freely execute its rights of corporate governance, and at the same time safeguard shareholders’ reasonable expectations.

 

The premise of business judging rules lies in the fact that prior to decisions, the board of directors must have adequate information and with goodwill believing that their acts are in line with the maximum benefits of the company and its shareholders. Therefore, the fiduciary duty comes with three connotations (elements): due care, loyalty, and good faith.

 

Based on the business judging rules, the initial burden of proof falls upon the plaintiff, and to overrule the assumption of business judgment, the shareholders must be able to prove that one of the three essences is violated. If the overrule stands, the burden of proof falls upon the defendant (board of directors), and then the board of director’s act shall be examined to see whether it is conformable to the standard of full fairness.

 

Delaware Company Law Section 102 (b)(7)

This section was enacted after the 1986 Smith v. Van Gorkom case, allowing shareholders to accommodate disclaimer in the corporate charter, so that the board of directors does not need to undertake the financial liability on occasions of violation of the “due care” element of the fiduciary duty, yet the “loyalty” and “good faith” elements still count.

 

However, such a disclaimer is applicable to the board of directors only, not for the corporate employees in general. Justice Holland emphasized that without the article of this section, it would be very difficult for companies to recruit top directors. After the enactment of this article, more than 90% of the Delaware companies had the disclaimer accommodated in their corporate charters. This has made substantial impact in a good way ever since. Now, for shareholders to accuse board of directors of violating fiduciary duty as a whole, they must claim alleged violation of “loyalty” or lack of “good faith” on the corporate directors.

 

Due Care, Loyalty, and Good Faith (Fiduciary Duty)

To ensure the applicability of the business judging rules, the board of directors shall comprehend all critical information and fulfill the duty of “due car”. Meanwhile, the applicable standard for “due care” corresponds to critical negligence, which once ruled will require the corporate directors to be fully responsible for the damages. To have full information required, the board of directors shall rely on professional advice by hiring professional, independent counselors and certified public accountants, so as to be protected under the business judging rules.

 

Justice Holland took the Van Gorlom case to elaborate. In this case, the board of directors of Trans Union violated the “due care” obligations in a merger. Only the inside directors were aware of the merger, while other directors did not know about the deal until one day before the decision deadline. Since the decision was made under insufficient acknowledgement, making the business judging rules not applicable, the supreme court ruling of penalty on the board of directors was made.

 

With the 1996 Disney case, Justice Holland gave three instances of lack of “good faith”.

(1) The trustee acted on purpose not for the benefits of the company.

(2) The trustee intentionally violated applicable laws.

(3) The trustee was aware of the obligations, yet deliberately not to fulfill them.

 

In the 2006 Stone case, the supreme court ruled that in lack of warning, “good faith” should be measured by whether the directors’ behavior was based on reasonable information and whether there existed a notification system, instead of post judgment of the irreversible result caused by the employees’ behavior.

Professor Ko Chen-En discussed with Justice Randy J. Holland on Taiwan’s cases

Discussions on Taiwan’s cases and future statute enactment

In the latter half of the course, professors in the class raised Taiwan’s judicial cases for discussion with Justice Holland. They agreed that in a corporate merger deal, the board of directors shall exercise the due care of a good administrator to fairly evaluate whether the price is appropriate, and yet the good or bad out of the merger may be perceived differently by the directors and shareholders, and this is the time the business judging rules come to the scene for a verdict.

 

The Mega Bank’s money laundry scandal was also discussed. The bank’s New York branch violated the U.S. “Bank Secrecy Act” and “Anti-Money Laundry Law”, but when the report was sent to the Taipei head office, the board of directors didn’t take active action and, as a result, was ruled a fine of US$180 million (about NT$5.7 billion) by the New York Department of Financial Service (DFS), a record high overseas fine on a home bank.

 

Justice Holland argued that if the bank already had an established regulatory control and the board of directors believed the internal control mechanism was in normal conditions without any warning raised, then the bank could have justified the situation and defended for itself. Holland also mentioned that it is the practice in the U.S. to take the business judging rules to determine whether individual directors violate the obligations of due care, loyalty, and good faith. However, the current practice exercised in Taiwan treats independent directors and inside directors on the same ground.

 

For the past decade, Taiwan has taken a more rigid structure of the company law, unlike the U.S. taking judgments based on past cases. Therefore, the President of Judicial Yuan and Ministry of Justice of Taiwan regularly exchange ideas with Justice Holland through the Taiwan Corporate Governance Association, in hopes to make the commercial law more suitable for Taiwan’s economic and trading flexibility.


On behalf of NTU, Professor Ko Chen-En (second from the right) thanked Justice Randy J. Holland