Duty of Care (Corporations)
Directors and officers owe a duty of care to act on an informed basis and with the care that a person in a like position would reasonably believe appropriate under the circumstances. In Delaware, the standard is gross negligence (not ordinary negligence). The duty of care focuses on the process of decision-making, not the substantive outcome (which is protected by the business judgment rule).
Elements
A duty of care violation requires:
- Fiduciary capacity: defendant is a director or officer
- Failure of process: the fiduciary failed to act on an informed basis — i.e., did not adequately inform themselves before making the decision
- Gross negligence (Delaware standard): the failure rose to the level of gross negligence — reckless inattention, not merely imprudent judgment
Duty of care is a procedural duty. The substance of the business decision is shielded by the BJR; duty of care asks only whether the directors followed a reasonable process.
Oversight Duty (Caremark/Stone v. Ritter)
Directors may also violate the duty of care — or more precisely, the duty of good faith — through inaction:
- Failure to implement any system of oversight of employee conduct
- Ignoring red flags that should have triggered investigation
This branch of liability requires bad faith (Stone v. Ritter), making it functionally a duty of loyalty claim.
Exculpation — DGCL § 102(b)(7)
Delaware allows corporations to include a charter provision exculpating directors from personal liability for duty of care violations (but not bad faith, intentional misconduct, or knowing violation of law). As of 2022, this exculpation does not extend to officers.
Policy
- Fear of personal liability for business decisions would chill risk-taking and drive qualified persons away from director service
- Exculpation clauses balance protection against a race to the bottom; shareholders can opt out via charter
- The gross negligence standard is demanding — mere imprudence is insufficient — reflecting judicial deference to business decisions
- Officers are now exposed (post-2022 DGCL amendment) to reflect their more hands-on operational role
Key Cases
| Case | Rule |
|---|---|
| Smith v. Van Gorkom (Del. 1985) | Board approved merger without adequate information; gross negligence established; no BJR protection |
| In re Caremark International Inc. (Del. Ch. 1996) | Oversight duty; monitoring failures can expose directors to liability |
| Stone v. Ritter (Del. 2006) | Oversight liability = bad faith (not mere negligence); director must consciously disregard known duty |
| Francis v. United Jersey Bank (N.J. 1981) | Director who was ignorant of company’s business and failed to investigate liable for breach of duty of care |