Opinion ID: 1059739
Heading Depth: 1
Heading Rank: 3

Heading: director's discharge of duties

Text: In his first two assignments of error, Willard contends that the circuit court erred by ruling that A.S. and Rose Mary, as the only remaining directors of Moneta, did not have a duty to maximize the price received for the sale of Moneta's assets and by concluding that they discharged their duties in accordance with the provisions of Code § 13.1-690. Willard asks us to judge the directors' decision to sell Moneta's assets to Capps by the test articulated in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1986). The Revlon court held that the duty of a board of directors changed from one of preserving the corporate entity to the maximization of the company's value at a sale for the stockholders' benefit when it becomes apparent that the sale of the company is inevitable. Id. at 182. The directors' role [in that instance] change[s] from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company. Id. In addressing these issues, the circuit court found that A.S. and Rose Mary were not liable under Code § 13.1-690 because [t]he evidence ... clearly demonstrate[d] that defendants A.S. Cappellari and Rose Mary Cappellari, as directors of [Moneta], engaged in an informed decision making process that ... produce[d] a defensible business decision. The court stated that § 13.1-690 does not require a director to maximize profits by accepting the highest bid when selling the assets of a corporation. Instead, a director is required to act in accordance with `his good faith business judgment of the best interests of the corporation.' The court further concluded that [a] director may consider not only the quantity of an offer to purchase assets, but the quality of the offer. We agree. The General Assembly has mandated the standard by which to evaluate a director's discharge of duties in Virginia. The applicable statute is Code § 13.1-690: A. A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation. B. Unless he has knowledge or information concerning the matter in question that makes reliance unwarranted, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by: 1. One or more officers or employees of the corporation whom the director believes, in good faith, to be reliable and competent in the matters presented; 2. Legal counsel, public accountants, or other persons as to matters the director believes, in good faith, are within the person's professional or expert competence; or 3. A committee of the board of directors of which he is not a member if the director believes, in good faith, that the committee merits confidence. C. A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section. D. A person alleging a violation of this section has the burden of proving the violation. Code § 13.1-690(A) does not abrogate the common law duties of a director. It does, however, set the standard by which a director is to discharge those duties. If a director acts in accordance with that standard, Code § 13.1-690(C) provides a safe harbor that shields a director from liability for any action taken as a director, and for failure to take action. Commonwealth Transp. Comm'r v. Matyiko, 253 Va. 1, 6, 481 S.E.2d 468, 470 (1997). In adopting Code § 13.1-690, the General Assembly rejected § 8.30 of the Revised Model Business Corporation Act (RMBCA). WLR Foods, Inc. v. Tyson Foods, Inc., 65 F.3d 1172, 1185 (4th Cir.1995), cert. denied, 516 U.S. 1117, 116 S.Ct. 921, 133 L.Ed.2d 850 (1996); The Revision of Chapters 1 and 2 of Title 13.1 of the Code of Virginia, Report of the Virginia Code Commission to the Governor and the General Assembly of Virginia, H. Doc. No. 13, at 48-49 (1985). That provision of the RMBCA requires a director to discharge the duties of the office in good faith, with the care that an ordinary prudent person in similar circumstances would exercise, and in a manner reasonably believed to be in the best interests of the corporation. The contrast between the provisions of Code § 13.1-690 and those contained in § 8.30 of the RMBCA convinces us that, in Virginia, a director's discharge of duties is not measured by what a reasonable person would do in similar circumstances or by the rationality of the ultimate decision. Instead, a director must act in accordance with his/ her good faith business judgment of what is in the best interests of the corporation. Thus, the Revlon test is not applicable in Virginia. Accordingly, we conclude that A.S. and Rose Mary were entitled to consider the quantity and quality of the offers to purchase Moneta's assets. [9] Contrary to Willard's argument, they were not required to accept an offer merely because it maximized the purchase price. Such a rule would mean that only one offer, among many, was in the best interests of the corporation. That result would erode the deference afforded a director's discharge of duties under Code § 13.1-690. Turning to the facts of the present case, we agree with the circuit court's judgment that A.S. and Rose Mary engaged in an informed decision-making process. Pursuant to Code § 13.1-690(B), a director can rely on information and opinions from, inter alia, legal counsel, accountants, and other experts unless the director has knowledge that such reliance is unwarranted. Thus, a director may use an informed decision-making process in discharging the duties of the office as long as the director does so in good faith. See WLR Foods, 65 F.3d at 1185. When a director resorts to such a process, the ultimate decision must still reflect the director's good faith business judgment of the best interests of the corporation in order to receive the benefit of the safe harbor afforded in Code § 13.1-690(C). A.S. testified that, when he received the first Asset Purchase Agreement, he compared the amount of the purchase price with a report dated July 15, 1996, from James T. Shepherd, a certified public accountant. [10] Shepherd had estimated that the value of Moneta was $2,008,300. However, that amount included $240,900 for marketable securities that were not to be sold to Capps. Shepherd also did not include any discounts for marketability or minority interests. A.S. also testified that he looked at the balance sheets for Moneta and concluded that the amount of the offer approximated the total amount of the stockholders' equity. So, before the special meeting of the directors on November 19, A.S. and Rose Mary had had the benefit of this information along with the Player report. By the time the stockholders met on December 20, they had received Dr. Lynch's report in which he opined that the offer from Capps was fair to the corporation. Other factors were also relevant to the directors' discharge of their duties with regard to the sale of Moneta's assets. Willard first indicated that he was not interested in purchasing the assets, but then he made an offer that expired three days later. He did not submit his second offer until one day before the stockholders' special meeting. Furthermore, in Willard's second offer, he requested an additional 30 days in which to review the financial records of Moneta in more detail so that he could determine if an even higher purchase price was warranted. Thus, A.S. and Rose Mary were justified in their fear that the value of Moneta's assets would decline significantly if they waited and David opened his new business during those 30 days. A.S. and Rose Mary were obliged to consider this potential consequence. Even Willard had acknowledged the adverse impact that David's new business would have on the value of Moneta's assets. [11] Thus, we conclude that A.S. and Rose Mary, in their capacities as directors, acted in good faith and used their business judgment by pursuing a course to achieve the result that they considered to be in the best interests of Moneta. They discharged their duties in accordance with Code § 13.1-690 and are, therefore, protected by the safe harbor afforded under subsection C of that statutory provision. [12]