page_title: United States corporate law
section_title: Duty of care
hierarchical_section_title: United States corporate law / Directors' duties / Duty of care
caption_attribution_description: English: New York Stock Exchange This is an image of a place or building that is listed on the National Register of Historic Places in the United States of America. Its reference number is 78001877
context_page_description: United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance rights, found mostly in the Securities Act of 1933 and the Securities and Exchange Act of 1934, as amended by laws like the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. The US Constitution was interpreted by the US Supreme Court to allow corporations to incorporate in the state of their choice, regardless of where their headquarters are. Over the 20th century, most major corporations incorporated under the Delaware General Corporation Law, which offered lower corporate taxes, fewer shareholder rights against directors, and developed a specialized court and legal profession. Nevada has done the same. Twenty-four states follow the Model Business Corporation Act, while New York and California are important due to their size.
context_section_description: The duty of care that is owed by all people performing services for others is, in principle, also applicable to directors of corporations. Generally speaking, the duty of care requires an objective standard of diligence and skill when people perform services, which could be expected from a reasonable person in a similar position (e.g. auditors must act "with the care and caution proper to their calling", and builders must perform their work in line with "industry standards"). In a 1742 decision of the English Court of Chancery, The Charitable Corporation v Sutton, the directors of the Charitable Corporation, which gave out small loans to the needy, were held liable for failing to keep procedures in place that would have prevented three officers defrauding the corporation of a vast sum of money. Lord Hardwicke, noting that a director's office was of a "mixed nature", partly "of the nature of a public office" and partly like "agents" employed in "trust", held that the directors were liable. Though they were not to be judged with hindsight, Lord Hardwicke said he could "never determine that frauds of this kind are out of the reach of courts of law or equity, for an intolerable grievance would follow from such a determination." Many states have similarly maintained an objective baseline duty of care for corporate directors, while acknowledging different levels of care can be expected from directors of small or large corporations, and from directors with executive or non-executive roles on the board. However, in Delaware, as in a number of other states, the existence of a duty of care has become increasingly uncertain.
  In 1985, the Delaware Supreme Court passed one of its most debated judgments, Smith v Van Gorkom. The directors of TransUnion, including Jerome W. Van Gorkom, were sued by the shareholders for failing to adequately research the corporation's value, before approving a sale price of $55 per share to the Marmon Group. The Court held that to be a protected business judgment, "the directors of a corporation [must have] acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Failing to act on an informed basis, if it caused loss, would amount to gross negligence, and here the directors were liable. The decision triggered a panic among corporate boards which believed they would be exposed to massive liability, and insurance firms who feared rising costs of providing directors and officers liability insurance to corporate boards. In response to lobbying, the Delaware General Corporation Law was amended to insert a new §102(b)(7). This allowed corporations to give directors immunity from liability for breach of the duty of care in their charter. However, for those corporations which did not introduce liability waivers, the courts subsequently proceeded to reduce the duty of care outright. In 1996, In re Caremark International Inc. Derivative Litigation required "an utter failure to attempt to assure a reasonable information and reporting system exists", and in 2003 In re Walt Disney Derivative Litigation went further. Chancellor Chandler held directors could only be liable for showing "reckless indifference to or a deliberate disregard of the whole body of stockholders" through actions that are "without the bounds of reason". In one of the cases that came out of the financial crisis of 2007–2008, the same line of reasoning was deployed in In re Citigroup Inc Shareholder Derivative Litigation. Chancellor Chandler, confirming his previous opinions in Re Walt Disney and the dicta of Re Caremark, held that the directors of Citigroup could not be liable for failing to have a warning system in place to guard against potential losses from sub-prime mortgage debt. Although there had been several indications of the significant risks, and Citigroup's practices along with its competitors were argued to have contributed to crashing the international economy, Chancellor Chandler held that "plaintiffs would ultimately have to prove bad faith conduct by the di
caption: In Ultramares Corporation v Touche,[143] a case concerning Touche, Niven & Company (now Deloitte) across from the NYSE,[144] Cardozo CJ held that the ordinary duty of care applicable to professionals performing services requires people to act "with the care and caution proper to their calling".
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