Opinion ID: 2558869
Heading Depth: 1
Heading Rank: 6

Heading: The Appeal and Reconsideration

Text: Plaintiff appealed and, in an unpublished, per curiam opinion, the Appellate Division affirmed the Chancery Court's rulings in respect of the 2005 Plan. After first acknowledging the limited scope of appellate review of non-jury trial judgments, the panel turned to the substance of Seidman's claims. It rejected Seidman's arguments attacking the merits of defendants' actions. It started its analysis by noting that New Jersey courts presume that a board of directors' decisions are proper and in the best interest of the corporation, unless the challenging shareholder(s) can show a breach of the board's fiduciary duties of care, loyalty, or good faith. (citations omitted). It explained: Under the business judgment rule, there is a rebuttable presumption that good faith decisions based on reasonable business knowledge by a board of directors are not actionable by those who have an interest in the business entity. The rule protects a board of directors from being questioned or second-guessed on conduct of corporate affairs, except in instances of fraud, self-dealing, or unconscionable conduct; it exists to promote and protect the full and free exercise of the power of management given to the directors. Stated differently, bad judgment, without bad faith, does not ordinarily make officers individually liable. The rule places the initial burden on the person challenging a corporate decision to demonstrate self-dealing on the part of the decision-maker(s), or any other disabling factor. If the challenger sustains that initial burden, then the presumption of the rule is rebutted, and the burden of proof shifts to the defendant or defendants to show that the transaction was, in fact, fair to the corporation. [ (citations, internal quotation marks and editing marks omitted).] Focusing on Seidman's challenge to the stock option grants and restricted stock awards made under the 2005 Plan, the panel agreed with the Chancery Court's analysis and conclusions. Quoting Gottlieb v. Heyden Chem. Corp., 91 A. 2d 57, 58 (Del. 1952), it observed: [W]here board members vote themselves stock options and do not obtain stockholder ratification, they are deemed to be interested in the transaction and are not entitled to the presumption of the business judgment rule; they themselves have assumed the burden of clearly proving their utmost good faith and the most scrupulous inherent fairness of the bargain. Where there is stockholder ratification, however, the burden of proof is shifted to the objector. [ (internal quotation marks omitted).] It noted further that, when the challenged acts have been ratified by the stockholders, the court will look into the transaction only far enough to see whether the terms are so unequal as to amount to waste, or whether, on the other hand, the question is such a close one as to call for the exercise of what is commonly called business judgment. (citation and internal quotation marks omitted). It stated the rule clearly: it is axiomatic in such cases that the courts will not substitute their own business judgment for that exercised in good faith by the stockholders. (citation, internal quotation marks and editing marks omitted). Applying those standards, the panel reasoned that because the directors awarded themselves stock and stock options, they were clearly interested in the transaction[, but b]ecause the awards were made pursuant to a shareholder approved plan, however, the burden shifted to the plaintiffs. [Seidman] failed to meet this burden. There is no evidence showing self-dealing on the part [of] the directors, or any other disabling factor, necessary to rebut the business judgment rule. [Seidman] failed to demonstrate that the directors breached their duty of care, or were otherwise unconscionable. [ (citations and internal quotation marks omitted).] The panel also rejected Seidman's parallel claim of corporate waste in respect of allocations made under the 2005 Plan. It noted that [c]orporate waste is an `extreme test, very rarely satisfied by a shareholder plaintiff.' (quoting Zupnick v. Goizueta, 698 A. 2d 384, 387 (Del.Ch. 1997)). Relying on the same passage from Lewis, supra, 699 A. 2d at 336, on which the Chancery Court also relied, it observed that `[d]irectors are guilty of corporate waste, only when they authorize an exchange that is so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.' (quoting Glazer v. Zapata Corp., 658 A. 2d 176, 183 (Del.Ch.1993)). It remarked that `a board's decision on executive compensation is entitled to great deference' and that `[i]t is the essence of business judgment for a board to determine if a particular individual warrant[s] large amounts of money, whether in the form of current salary or severance provisions.' (quoting Brehm, supra, 746 A. 2d at 263). It concluded that the record shows that the directors' actions were not tainted by self-interest, and the plan was properly ratified by the shareholders. Akin to the Chancery Court's determination, it concluded that plaintiffs have failed to meet the burden of showing `that no person of ordinary business judgment could be expected to entertain the view that the consideration furnished was a fair exchange for the options conferred.' (quoting Eliasberg, supra, 23 N.J.Super. at 449, 92 A. 2d 862). Dissatisfied, Seidman moved for reconsideration of the Appellate Division's judgment; that motion was denied. Seidman sought certification only with respect to plaintiffs' claim for relief based on the approval by the interested [d]irectors of allegedly excessive awards of shares of stock and stock options for themselves under [t]he 2005 Plan. That petition was granted, Seidman v. Clifton Sav. Bank, S.L.A., 203 N.J. 92, 999 A. 2d 461 (2010), and the parties were granted leave to file supplemental briefs.