Opinion ID: 1497598
Heading Depth: 1
Heading Rank: 9

Heading: Materiality Standard and Legitimacy

Text: This Court asked the Court of Chancery to resolve two issues relating to the second part [20] of the director interest materiality test: (1) the precise standard of proof required; and (2) the legitimacy of such a standard under Delaware law and the relevance of Section 144(a). Cede II, 634 A.2d at 366. The Court of Chancery began by acknowledging that this Court's rejection of the objective reasonable director formulation required it to apply a different standard upon remand for determining when an individual director's financial interest is material, before it addressed the remanded question of board independence. [21] The Court of Chancery reasoned that the logical alternative was a subjective actual person standard. We agree. The subjective standard is consistent with this Court's observation, in Cede II, that requiring a shareholder plaintiff to show the materiality of a director's self-interest to the given director's independence was a restatement of established Delaware law. Id. at 363 (emphasis added). The Court of Chancery stated that [u]nder such a test of materiality [it] would be required to determine not how or whether a reasonable person in the same or similar circumstances ... would be affected by a financial interest of the same sort as present in the case, but whether this director in fact was or would likely be affected. Cinerama, 663 A.2d at 1151. Thus, the actual person test requires an independent judicial determination regarding the materiality of the  given  director's self-interest. Applying the actual person test, the Court of Chancery examined the record for evidence that any of the allegedly conflicted directors had some special characteristic that [made] him... especially susceptible to or immune to opportunities for self-enrichment or ... evidence that [any of such directors] in fact behaved differently in this instance than one would expect a reasonable person in the same or similar circumstances to act. Id. at 1151. Cinerama contended on remand, and continues to contend in this appeal, that five of Technicolor's nine directors were disabled by conflicts of interest. The Court of Chancery, however, found every director, except Sullivan, to be free of any material conflict: I have already stated my conclusion that with the exception of Mr. Sullivan, and potentially Mr. Ryan, none of the other Technicolor directors labored under a conflict of interest which would have been material to a reasonable person. On this remand I further conclude here that there is no persuasive evidence that any of the directors were, in fact, materially influenced in their negotiations by any self-interest they may have had. Id. at 1150. The Court of Chancery concluded that, with respect to each of the corporate directors treated in this court's opinion; analysis of actual interference with the directors' good faith judgment seeking the shareholders' best benefit does not produce a different result than does the `reasonable person' analysis. Id. at 1152 (emphasis added). Thus, after applying the enhanced scrutiny required by the subjective actual person standard, the Court of Chancery reached the same determinations regarding the materiality of the alleged individual director self-interests as it had previously by applying the objective reasonable person standard. [22] Id. Those conclusions, as to each director, are supported by the record. The Court of Chancery then addressed the remanded issue of board independence. The Court of Chancery framed the issue as follows: Has the presence of the found material self-interest of one or more directors on the board that acted upon a transaction so infected or affected the deliberative process of the board as to disarm the board of its presumption of regularity and respect and cast upon the directors the burden (and the heightened risks ...) of the entire fairness form of judicial review. Id. at 1153; see In re Tri-Star Pictures, Inc. Litig., Del.Supr., 634 A.2d 319 (1993); Rales v. Blasband, Del.Supr., 634 A.2d 927 (1993). The Court of Chancery assumed that if actual self-interest is present and affects a majority of directors approving a transaction, the entire fairness standard applies. The Court of Chancery concluded that a material interest of one or more directors less than a majority of those voting would rebut the application of the business judgment rule if the plaintiff proved that the interested director controls or dominates the board as a whole or [that] the interested director fail[ed] to disclose his interest in the transaction to the board and a reasonable board member would have regarded the existence of the material interest as a significant fact in the evaluation of the proposed transaction. Cinerama, 663 A.2d at 1153. We hold that the Court of Chancery's conclusion is correct, as a matter of law. Thus, we affirm its ruling on the effect of director material self-interest as it was related to the requirement of board independence. The Court of Chancery then framed and answered the loyalty issues with respect to the procedural question of whether the evidentiary presumption of the business judgment rule had been rebutted and, therefore, the entire fairness standard applied. In this case, that particular question was moot because this Court had already held in Cede II that the entire fairness standard applied to the Technicolor sale. The Court of Chancery's findings concerning loyalty, however, have probative value within the substantive entire fairness analysis. The Court of Chancery's materiality formulation, as well as its application, are consistent with Delaware's procedural and substantive law.