Director’s Duty Of Care In American Corporate Law

There is no duty of care or diligence in Chinese Corporate Act until the revision of the Corporate Act in2005. The newly introduced duty of diligence has caused many puzzles. For example, is this duty the same thing as duty of care? Is this duty actionable? What is the proper standard of liability? All of these puzzles are unsettled due to the lack of theoretical understanding.The duty of care has common law origin in Anglo-American corporate law. To conduct a study from both historical and theoretical perspectives can help us to understand this doctrine and apply it in practice correctly, although there are many divergences in legal tradition and judicial system in two countries. With this aim, this paper makes a macro-study on director’s duty of care.Besides the Introduction and the Conclusion, this paper consists of five chapters.The Introduction briefly discusses the topic and objectives of this study, the current state of this study in China and America, the theoretical and practical value and methodology of the research.The first Chapter examines the duty of care from a historical perspective. Earlier cases focus on duty of diligence, while duty of care is just a late appearance. The concept of "diligence" is sufficiently subsumed within the concept of "care". When performing decision-making function and oversight function, directors are bound to use the amount care ordinary prudent person in like position would use in similar circumstances. But in practice, the duty of care is weakened by the business judgment rule. The standard of liability has shifted from ordinary negligence to gross negligence. Furthermore, the liability is not result-oriented but process-oriented. The duty of care has experienced difficult codification from the1970s in Model Business Corporation Act. The main controversy is the relationship between the duty of care and business judgment rule. In1998, the MBCA introduced bifurcated standards, standard of conduct and standard of liability.The second Chapter surveys different meanings of the business judgment rule. It can be grouped into three categories. The first category is regarded as tautological statement. The leading example comes from MBCA, that is,"a person who so performs his duties shall have no liability by reason of being or having been a director of the corporation". The second category is a special standard of liability. There are three standards altogether, good faith standard, gross negligence standard and the process-versus-substance distinction. The third category is abstention doctrine, which grasped the essence the business judgment rule.The third Chapter uses theories of firm to explain the business judgment rule. There three theories of firm. Nexus of contracting theory lacks insiders and presumes the corporate contracts are complete. The transaction costs theory explains the boundary between the market and the firm. According this theory, firm is the response to incomplete contract and the employees are brought into the firm. Property rights theory is a complementary theory to the transaction costs theory. It explains for why employees would follow the orders of the owners. The transaction costs theory and property rights theory provides a solid foundation for the business judgment rule. The duty of care is largely a self-enforcing rule. When the transaction is midstream transaction, the courts stay away. But when the firm enters the final period, judicial review is needed.The forth Chapter examines the group decision-making theory to support the business judgment rule. The directors are the visible hands within the coiporation. The board has three characteristics. First, directors are not executives but decision makers. Second, directors perform their functions through group decision-making. Third, the board is the supreme decision-maker and monitor. But "who watch watchers"? Group decision-making can resolve this dilemma. In this context, judicial intervention is not necessary. This is the essence of the business judgment rule.The fifth Chapter discusses the points of standard of conduct for duty of care. The bifurcated standards of standard of conduct and standard of review is the theoretical foundation for the1998revision of MBCA. According to professor Eisenberg, the more demanding standard of conduct in corporation law is neither meaningless nor merely aspirational. Rather, they are legal rules intended to control behavior. But the codification makes the standard of review more clear which makes the objective of revision fail. The standard of conduct of duty of care makes sense if put into social context. Duty of care should best be treated as social norms. Case law is the best way to articulate this social norm. At the same time, trust theory provides a new perspective to explain the presumption of informed and the process-oriented review.The conclusion part summarizes the understanding of director’s duty of care and makes some comments on the relevant provisions in Chinese Corporate Law.