Opinion ID: 2308640
Heading Depth: 1
Heading Rank: 20

Heading: The Second Part of the Chancellor's Materiality Test: Proof of Interest Material to the Independence of Entire Board

Text: The Chancellor ruled that, for purposes of rebutting the business judgment rule, any found director self-interest affecting director independence must also be found to have tainted, influenced or otherwise undermined the board's deliberative process. The Chancellor formulated the second part of the materiality test by stating: The preliminary or threshold question of independence is factual: is any differing financial interest sufficient to create a reasonable likelihood, considering all of the circumstances, that it actually affected the directo rs ' actions to the corporation's detriment? In some instances an arguable or an established personal financial benefit may, when viewed in context, be found to be immaterial in fact to the exercise of a judgment motivated entirely to achieve the best available result for the corporation and (in the sale context) for its shareholders. Personal Liability Opinion at 23-24 (emphasis added). It is unclear to us under this formulation precisely what a shareholder plaintiff would have to prove to demonstrate a reasonable likelihood of lack of board independence. [32] Beyond the question of burden of proof, we find the Chancellor's requirement that a director's self-interest translate into board self-interest to be an apparent borrowing of precepts embodied in 8 Del.C. § 144(a). Enacted in 1967, section 144(a) codified judicially acknowledged principles of corporate governance to provide a limited safe harbor for corporate boards to prevent director conflicts of interest from voiding corporate action. 56 Del.Laws, ch. 50 (1967); see Beard v. Elster, Del.Supr., 160 A.2d 731, 738 (1960) (presection 144(a) case applying principles embodied in section 144(a)); Folk, The Delaware General Corporation Law § 144.4 at 144:6 n. 11 (analogizing section 144(a) and pre-enactment law); Michael P. Dooley, Two Models of Corporate Governance, 47 Bus. Law 461, 489 n. 96 (1992) (section 144(a) viewed as a codification of common law). At the very least, section 144(a) protects corporate actions from invalidation on grounds of director self-interest if such self-interest is: (1) disclosed to and approved by a majority of disinterested directors; (2) disclosed to and approved by the shareholders; or (3) the contract or transaction is found to be fair as to the corporation. [33] 8 Del.C. § 144(a)(1), (2) and (3); Folk, The Delaware General Corporation Law § 144:5. Section 144(a)(1) appears to be a legislative mandate that, under such circumstances, an approving vote of a majority of informed and disinterested directors shall remove any taint of director or directors' self-interest in a transaction. See Fliegler v. Lawrence, Del.Supr., 361 A.2d 218, 222 (1976). Largely without explanation, the Court of Chancery concluded that Sullivan's finder's fee, while materially affecting his own independent business judgment, was not a material interest affecting the transaction overall because the board had approved the transaction after Sullivan's interest had been disclosed. Section 144(a) may arguably sustain this finding. See Fliegler, 361 A.2d at 222. Unfortunately, neither the court below nor the parties have brought section 144(a) into their reasoning or analysis. There also remains a further significant issue that neither the parties nor the court below has addressed; that is, the relevance of Technicolor's charter requirement of director unanimity to the consequence of a finding of director self-interest. Technicolor's charter requires director unanimity for approval of a sale of the company to be ratified by less than ninety-five percent of the issued and outstanding shares of the corporation. Article Tenth of Technicolor's charter provides in pertinent part: (2) The affirmative vote of the holders of at least ninety-five per cent ... of the outstanding shares of capital stock of the Corporation entitled to vote ... shall be required for the adoption or authorization of a ... [merger] ...       (5) No amendment to the ... [charter] ... shall amend, alter, change or repeal any of the provisions of this Article Tenth, unless the amendment ... shall receive the affirmative vote of the holders of at least ninety-five per cent ... of the outstanding shares of capital stock of the Corporation entitled to vote ...; provided that this paragraph 5 shall not apply to ... any amendment ... unanimously recommended to the stockholders by the Board of Directors of the Corporation.... Here, the supermajority provision of the Technicolor certificate of incorporation apparently represented one facet of a takeover defense designed to ensure that its board would not enter into a merger or sale of the company without the disinterested and independent vote of each voting director. The question becomes whether, in light of Technicolor's charter requirement of director unanimity, the Chancellor's finding of board approval of the sale of Technicolor by an overwhelming vote of disinterested directors was sufficient to support a finding that the board had met its duty of loyalty. We decline to address this question in the first instance and until the implications of section 144(a) are addressed by the court below. We remand this question for decision by the Court of Chancery, subject to the following observations. If unanimity is required, will one director's self-interest or lack of independence violate the requirement? Do the provisions of section 144 override a charter requirement of unanimity? [34] Does full disclosure of a director's interest to an otherwise disinterested board satisfy Technicolor's unanimity requirement? [35] Those issues requiring resolution on remand relating to the duty of loyalty are: (1) the precise standard of proof required under the second part of the materiality standard ( see note 32 supra ); (2) the legitimacy of such a standard under Delaware law and the relevance of section 144(a); (3) the effect of the unanimity requirement in Technicolor's charter on the duty of loyalty standard controlling this case; and (4) the consequence of an affirmance of the decision below finding no breach of the duty of disclosure on the question of director self-interest.