Function over form: A reassessment of standards of review in Delaware corporation law

One of the most profound transformations in Delaware corporation law since 1985 has been the development of new standards of judicial review, as well as novel applications of existing standards. Although the result of these developments has been positive, the developments have also, in some instances, become dysfunctional in the sense that their articulation and/or application has not adequately taken into account the policies underlying the standards and thus has failed to advance the core values of corporation law. In this Article, the authors explore these post-1985 doctrinal problems in five separate areas: (i) the review standard misapplied in duty of care cases; (ii) the improper linkage of the duty of care to entire fairness review; (iii) the failure of courts to defer to effective intra-corporate fairness procedures; (iv) the unnecessary linkage of the intermediate "reasonableness" standard of review to the business judgment and entire fairness standards; and (v) the "compelling justification" test and the unnecessary proliferation of review standards. The authors conclude that some doctrinal reformulation is needed in these areas to make the existing standards of review truly functional, i.e., adequately aligned with their underlying policy purpose so as to provide directors with incentives to act in order to advance corporate and shareholder interests, and simplified and rationalized to make the standards useful tools for judicial decisionmaking. The authors propose three basic reformulated review standards that would achieve these goals.