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Copyright (c) 1987 Texas Law Review
Texas Law Review

Note: The Limitation of Directors' Liability: A Proposal for Legislative Reform. *

* The author wishes to thank Professors Barbara Aldave and Leon Lebowitz for their valuable comments on and criticisms of earlier drafts of this Note.

December, 1987

66 Tex. L. Rev. 411


R. Link Newcomb


I. Introduction

As courts have broadened directors' liability for violations of the duty of care, directors have chosen to escape potential liability by resigning from their boards. Their flight has forced corporations to search for qualified board members who are willing to incur the increased risks of office. In response, state legislatures have rushed to adopt legislation designed to protect both directors and shareholders. To avail themselves of this protection, the boards of directors often must take certain steps that may require shareholder approval. Shareholders, however, may be unaware of the full effects of their decision. As a result, further reform is called for to assure the continued existence of the director's duty of care over the coming years.

This Note analyzes recent developments in directors' liability and proposes a statute that balances the interests of shareholders and directors. Part II describes the current crisis in directors' liability, and Part III analyzes the legal standards that govern judicial review of directors' decisions. Part IV discusses the directors' interest in immediate legislative action. After reviewing the relevant issues for legislative reform, Part V critically surveys the abundance of reform enacted by various state legislatures. Finally, this Note proposes a model statute that allows shareholders to limit directors' damages, but that also establishes a floor for these damage limitations. This proposal attempts to balance the interests of directors and shareholders and resolve the directors' liability crisis.

II. The Recent Crisis in Directors' Liability

With its decision in Smith ...
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