Stone v. Ritter (Del. 2006)

The business judgment rule, as authoritatively stated in Aronson and applied in Disney, should provide comfort to directors and officers even in the absence of a 102(b)(7) waiver (which does not cover officers). For a long time, however, directors and officers might have been worried by the following passage from Aronson:

“However, it should be noted that the business judgment rule operates only in the context of director action. Technically speaking, it has no role where directors have either abdicated their functions, or absent a conscious decision, failed to act.”

Aronson v. Lewis, 473 A.2d 805, at 813 (Del. 1984).
To be sure, Aronson continued that “a conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule” and acknowledged in a footnote to the quoted paragraph that “questions of director liability in such cases have [nevertheless] been adjudicated upon concepts of business judgment” (emphasis added). Doubts remained, however, and were only amplified by Chancellor Allen’s famous 1996 Caremark decision, which mused that the absence of a reporting system could give rise to liability. Stone addressed this question.

1. What is the rule of Stone: what is the liability standard for oversight failures?
2. How does the rule compare to the business judgment rule – is it more or less lenient for defendants, doctrinally speaking?
3. Do you think the doctrinal difference matters in practice?
4. What is the role of DGCL 102(b)(7) in this case?