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Court of Chancery Defines Unreasonable

Posted In Fiduciary Duty

Venhill Limited Partnership v. Hillman, C.A. 1866-VCS (Del. Ch. June 3, 2008)

For a director of a Delaware corporation to be guilty of gross negligence, her conduct must be so unreasonable that no one could have made the same decision. Unless the decision under review is this bad, it will be protected by the business judgment rule. This gross negligence rarely happens and it is thus difficult to find decisions that illustrate the type of conduct that meets this test. In fact, in this decision the defendant had a conflict of interest and thus the business judgment rule did not apply for that reason.

However, the Court went to great length to point out that the investment decisions under review did also exceed the gross negligence standard. This explanation provides an insight into what sort of decision-making is a breach of fiduciary duty. For example, in this case the investment was in a company that did not have a business plan, was continuously losing money, and was generally in such poor shape that no one but the hapless defendant would have lent it money. In short, it was gross negligence to make the loans and the defendant was liable for them as a result.

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