Opinion ID: 2381868
Heading Depth: 2
Heading Rank: 2

Heading: Director Due Care

Text: Having concluded that plaintiffs have failed to plead a claim of financial interest or entrenchment sufficient to excuse presuit demand, we examine the complaints as amended to determine whether they raise a reasonable doubt that the directors exercised proper business judgment in the transaction. By proper business judgment we mean both substantive due care (purchase terms), see Saxe v. Brady, Del.Ch., 184 A.2d 602, 610 (1962), and procedural due care (an informed decision), see Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872-73 (1985). With regard to the nature of the transactions and the terms of repurchase, especially price, plaintiffs allege that the premium paid Perot constituted a prima facie waste of GM's assets. Plaintiffs argue that the transaction, on its face, was so egregious as to be afforded no presumption of business judgment protection. In rejecting this contention, the Vice Chancellor reasoned that, apart from the hush-mail provision, the transaction must be viewed as any other repurchase by a corporation, at a premium over market, of its own stock held by a single dissident shareholder or shareholder group at odds with management, [which] have repeatedly been upheld as valid exercises of business judgment. See Polk v. Good, Del.Supr., 507 A.2d 531 (1986); Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964); Edelman v. Phillips Petroleum Co., Del.Ch., Civil Action No. 7899, Walsh, V.C. (February 12, 1985) [Available on WESTLAW, 1985 WL 11534]; Lewis v. Daum, Del.Ch., Civil Action No. 6733, Brown, C. (May 24, 1984) [Available on WESTLAW, 1984 WL 8223]; Kaplan v. Goldsamt, Del.Ch., 380 A.2d 556 (1977); Kors v. Carey, Del.Ch., 158 A.2d 136 (1960). Grobow, 526 A.2d at 927. We agree with this analysis. The law of Delaware is well established that, in the absence of evidence of fraud or unfairness, a corporation's repurchase of its capital stock at a premium over market from a dissident shareholder is entitled to the protection of the business judgment rule. (See Polk, 507 A.2d at 536-37, for this Court's most recent statement of this principle.) We have already determined that plaintiffs have not stated a claim of financial interest or entrenchment as the compelling motive for the repurchase, and it is equally clear that the complaints as amended do not allege a claim of fraud. They allege, at most, a claim of waste based on the assertion that GM's Board paid such a premium for the Perot holdings as to shock the conscience of the ordinary person. Thus, the issue becomes whether the complaints state a claim of waste of assets, i.e., whether what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid. Saxe, 184 A.2d at 610. By way of reinforcing their claim of waste, plaintiffs seize upon the hush-mail feature of the repurchase as being the motivating reason for the giant premium approved by the GM Board. Plaintiffs then argue that buying the silence of a dissident within management constitutes an invalid business purpose. Ergo, plaintiffs argue that a claim of waste of corporate assets evidencing lack of director due care has been well pleaded. The Vice Chancellor was not persuaded by this reasoning to reach such a conclusion and neither are we. Plaintiffs' assertions by way of argument go well beyond their factual allegations, and it is the latter which are controlling. Plaintiffs' complaints as amended fail to plead with particularity any facts supporting a conclusion that the primary or motivating purpose of the Board's payment of a giant premium for the Perot holdings was to buy Perot's silence rather than simply to buy him out and remove him from GM's management team. To the contrary, plaintiffs themselves state in their complaints as amended several legitimate business purposes for the GM Board's decision to sever its relationship with Perot: (1) the Board's determination that it would be in GM's best interest to retain control over its wholly-owned subsidiary, EDS; and (2) the decision to rid itself of the principal cause of the growing internal policy dispute over EDS' management and direction. The defendant directors also defend the liquidated damage clause in the repurchase agreement as serving a legitimate purpose of protecting GM's contractual rights by, in effect, providing a forfeiture clause should Perot breach that portion of his agreement. Defendants argue that such a damage clause is not unusual and, indeed, would be expected to be found in contractual commitments of this nature. Such a clause strengthens the likelihood of compliance and, in the event of breach, puts an agreed dollar value on the breach, intended to avoid disagreement (or litigation) over the loss and measure of damages attributable to the breach. A failure to anticipate a breach and to stipulate the monetary consequences to GM might well be considered a costly oversight. See E. Farnsworth, Contracts § 12.18, at 896 (1982). In addition to regaining control over the management affairs of EDS, GM also secured, through the complex repurchase agreement, significant covenants from Perot, of which the hush-mail provision was but one of many features and multiple considerations of the repurchase. Quite aside from whatever consideration could be attributed to buying Perot's silence, GM's Board received for the $742.8 million paid: all the class E stock and contingent notes of Perot and his fellow EDS directors; Perot's covenant not to compete or hire EDS employees; his promise not to purchase GM stock or engage in proxy contests; Perot's agreement to stay out of and away from GM's and EDS' affairs, plus the liquidated damages provision should Perot breach his no-criticism covenant. Plaintiffs' effort to quantify the size of the premium paid by GM is flawed, as we have already noted, by their inability to place a dollar value on the various promises made by Perot, particularly his covenant not to compete with EDS or to attempt to hire away EDS employees. ( See supra notes 2, 4, and 7.) Thus, viewing the transaction in its entirety, we must agree with the Court of Chancery that plaintiffs have failed to plead with particularity facts sufficient to create a reasonable doubt that the substantive terms of the repurchase fall within the protection of the business judgment rule. See Polk, 507 A.2d at 536-37. Finally, we turn to the other aspect of director due care, whether plaintiffs have pleaded facts which would support a reasonable belief that the GM Board acted with gross negligence, i.e., that it was uninformed in critical respects in negotiating the terms of the repurchase. See Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (1985). On this remaining issue, plaintiffs assert that GM's Board failed to exercise due care and to reach an informed business judgment due to the absence of arms-length negotiations between the Board and Perot and the absence of appropriate board deliberation. Approval of a transaction by a majority of independent, disinterested directors almost always bolsters a presumption that the business judgment rule attaches to transactions approved by a board of directors that are later attacked on grounds of lack of due care. In such cases, a heavy burden falls on a plaintiff to avoid presuit demand. Cf. Polk, 507 A.2d at 537 (1986); Unocal, 493 A.2d at 955. This principle of law clearly applies in this case. To support their allegation of lack of procedural due care, plaintiffs point principally to the lack of negotiations between Perot and GM and the speed with which the Perot repurchase was submitted to and approved by GM's Board of Directors. However, we find plaintiffs' complaints as amended (a) to contradict these assertions and (b) otherwise to be lacking in averments essential to raise a reasonable doubt that the GM Board failed to exercise due care. The complaints implicitly concede that the repurchase agreement was the subject of give and take negotiations and was conducted at arms length. Plaintiffs also expressly concede that the Board did not supinely accede to all of Perot's demands because all of his demands were not included in the final agreement. See Grobow, 526 A.2d at 919 n. 5 and 926. Furthermore, plaintiffs recount that the repurchase proposal was first submitted to a Special Review Committee, consisting (presumably) of three outside directors and thereafter to the full Board. The complaints as amended, however, contain no allegations raising directly or by inference a reasonable doubt either that the Committee served a purposeful role in the review of the repurchase proposal or that the full Board reached an informed decision. On the contrary, it is clear from the record before us that the GM directors had been living with the internal dispute for months and had been considering a buy-out of Perot's interests for a number of weeks. Viewing plaintiffs' assertions of lack of director due care against the well-pleaded facts, we conclude that the complaints as amended lack essential requirements for stating a claim of waste premised on failure of the directors to exercise due care. See Smith v. Van Gorkom, 488 A.2d at 873; Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119, 124 (1971). By way of illustration, plaintiffs do not allege that the Committee failed to: (i) give thorough and diligent consideration to all relevant facts; (ii) review carefully the negotiations leading to the proposed agreement; (iii) consult with and consider the views of investment bankers, accountants, and counsel; or (iv) report its findings and analysis to the full Board. With respect to Board deliberation, plaintiffs do not allege that the Board failed to: (i) inform themselves of available critical information before approving the transaction; (ii) consider expert opinion; (iii) provide all Board members with adequate and timely notice of the repurchase before the full Board meeting and of its purpose; or (iv) inquire adequately into the reasons for or terms of repurchase (though plaintiffs allege the Board did not ask Perot himself questions). Finally, it should be emphasized that plaintiffs do not allege that the GM directors, and in particular its outside directors, were dominated or controlled by GM's management or other Board members or by any other party. Aronson, 473 A.2d 815, 816. Thus, we find plaintiffs' assertion that the GM Board failed to exercise due care to be insufficient to avoid presuit demand because such assertion is not to be found in well-pleaded supporting allegations of the complaints.