Opinion ID: 1497598
Heading Depth: 1
Heading Rank: 5

Heading: business judgment rebutted evidentiary burden shifts entire fairness standard applies

Text: The business judgment rule operates as both a procedural guide for litigants and a substantive rule of law. Cede II, 634 A.2d at 360 (quoting Citron v. Fairchild Camera & Instrument Corp., Del.Supr., 569 A.2d 53, 64 (1989) (emphasis added)); see Unitrin, Inc. v. American Gen. Corp., Del.Supr., 651 A.2d 1361 (1995). As a procedural guide the business judgment presumption is a rule of evidence that places the initial burden of proof on the plaintiff. In Cede II, this Court described the rule's evidentiary, or procedural, operation as follows: If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. See, e.g., [ Citron v. Fairchild Camera & Instrument Corp., 569 A.2d at 64; Smith v. Van Gorkom, 488 A.2d at 872]; see also 8 Del.C. § 141(a). If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the entire fairness of the transaction to the shareholder plaintiff. Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1376 (1993); [ Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1989)]; Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710 (1983). Cede II, 634 A.2d at 361. Burden shifting does not create per se liability on the part of the directors. Id. at 371. Rather, it is a procedure by which Delaware courts of equity determine under what standard of review director liability is to be judged. Id. In remanding this case for review under the entire fairness standard, this Court expressly acknowledged that its holding in Cede II did not establish liability. Id.; accord Nixon v. Blackwell, Del. Supr., 626 A.2d 1366, 1381 (1993). Where, as in this case, the presumption of the business judgment rule has been rebutted, the board of directors' action is examined under the entire fairness standard. Unitrin, Inc. v. American Gen. Corp., 651 A.2d at 1371 n. 7 (collecting cases). This Court has described the dual aspects of entire fairness, as follows: The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock.... However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness. Weinberger v. UOP, Inc., 457 A.2d at 711. Thus, the entire fairness standard requires the board of directors to establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price. Cede II, 634 A.2d at 361. In this case, because the contested action is the sale of a company, the fair price aspect of an entire fairness analysis requires the board of directors to demonstrate that the price offered was the highest value reasonably available under the circumstances. Id. Because the decision that the procedural presumption of the business judgment rule has been rebutted does not establish substantive liability under the entire fairness standard, such a ruling does not necessarily present an insurmountable obstacle for a board of directors to overcome. Thus, an initial judicial determination that a given breach of a board's fiduciary duties has rebutted the presumption of the business judgment rule does not preclude a subsequent judicial determination that the board action was entirely fair, and is, therefore, not outcome-determinative per se. [8] Id. at 371; accord Nixon v. Blackwell, 626 A.2d at 1381. To avoid substantive liability, notwithstanding the quantum of adverse evidence that has defeated the business judgment rule's protective procedural presumption, the board will have to demonstrate entire fairness by presenting evidence of the cumulative manner by which it otherwise discharged all of its fiduciary duties. Although the procedural decision to shift the evidentiary burden to the board of directors to show entire fairness does not create liability per se, the aspect of fair dealing to which Weinberger devoted the most attention  disclosure  has a unique position in a substantive entire fairness analysis. See, e.g., In re Tri-Star Pictures, Inc. Litig., Del.Supr., 634 A.2d 319, 331-32 (1993); Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 937 (1985). A combination of the fiduciary duties of care and loyalty [9] gives rise to the requirement that a director disclose to shareholders all material facts bearing upon a merger vote.... [10] Zirn v. VLI Corp., Del.Supr., 621 A.2d 773, 778 (1993). Moreover, in Delaware, existing law and policy have evolved into a virtual per se rule of [awarding] damages for breach of the fiduciary duty of disclosure. [11] In re Tri-Star Pictures, Inc. Litig., 634 A.2d at 333.