Delaware and Financial Risk

Abstract

I argue that financial risk poses unique challenges that justify a differential application of corporate law oversight standards. The steps in my argument are as follows. First, I show how modern firms with significant exposure to financial risk are different in fundamental ways that matter crucially to the application of oversight standards. Second, I argue that, notwithstanding these differences, the major Delaware oversight cases were correctly decided, though the result might have been the opposite if complaints had been framed differently, with relevant and important facts. Third, I argue that the federal case involving the JPMorgan “London Whale” episode was wrongly decided. Unlike other scholars who have discussed director duties in the aftermath of the financial crisis, I am not arguing for any change in the oversight standards themselves. Instead, my argument is that Delaware law already provides ample support and justification for holding directors to a higher standard with respect to the oversight of financial risk. The complexities of financial risk pose unique challenges that the Delaware courts should take into account when assessing director oversight failures. Such an approach would not subject directors to unwarranted exposure for oversight failures, or have negative implications for business, and it would not change Delaware’s approach to cases that do not involve financial risk. The Delaware courts have demonstrated a capacity to respond to changes in the corporate contract, notably in Caremark itself, where Chancellor Allen recognized that the modern corporate practice of oversight had changed, and that the courts should change accordingly. Director oversight of financial risk is merely the most recent area in need of this kind of incremental judicial change. This chapter will appear in a forthcoming book, “The Corporate Contract in Changing Times,” co-edited by Professors Steven Davidoff Solomon and Randall Thomas.