Opinion ID: 1947768
Heading Depth: 2
Heading Rank: 3

Heading: Enhanced Judicial Scrutiny of a Sale or Change of Control Transaction

Text: Board action in the circumstances presented here is subject to enhanced scrutiny. Such scrutiny is mandated by: (a) the threatened diminution of the current stockholders' voting power; (b) the fact that an asset belonging to public stockholders (a control premium) is being sold and may never be available again; and (c) the traditional concern of Delaware courts for actions which impair or impede stockholder voting rights (see supra note 11). In Macmillan, this Court held: When Revlon duties devolve upon directors, this Court will continue to exact an enhanced judicial scrutiny at the threshold, as in Unocal, before the normal presumptions of the business judgment rule will apply. [15] 559 A.2d at 1288. The Macmillan decision articulates a specific two-part test for analyzing board action where competing bidders are not treated equally: [16] In the face of disparate treatment, the trial court must first examine whether the directors properly perceived that shareholder interests were enhanced. In any event the board's action must be reasonable in relation to the advantage sought to be achieved, or conversely, to the threat which a particular bid allegedly poses to stockholder interests. Id. See also Roberts v. General Instrument Corp., Del.Ch., C.A. No. 11639, 1990 WL 118356, Allen, C. (Aug. 13, 1990), reprinted at 16 Del.J.Corp.L. 1540, 1554 (This enhanced test requires a judicial judgment of reasonableness in the circumstances.). The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors' action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably. Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions, [17] a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. See Unocal, 493 A.2d at 955-56; Macmillan, 559 A.2d at 1288; Nixon, 626 A.2d at 1378.