Opinion ID: 703999
Heading Depth: 2
Heading Rank: 3

Heading: The Business Judgment Statute

Text: 37 In its next assignment of error, Tyson challenges the district court's finding that the Virginia Business Judgment Statute, Va.Code Ann. Sec. 13.1-690 ( Sec. 690), allows an inquiry only into the processes employed by corporate directors in making their decisions regarding a takeover, and not into the substance of those decisions. Pursuant to that interpretation, the district court denied Tyson access during discovery to the substantive content of the materials used by the WLR Board in responding to Tyson's takeover attempt.
38 Tyson first challenges the district court's finding that Sec. 690 applies to Tyson's claims against the directors on the WLR Board. Tyson argues that in certain situations, the statutory standard for judging director activity in Virginia embodied in Sec. 690 should be abandoned in favor of the Virginia common law standard of duty of loyalty. Tyson claims that two such situations existed in the instant case: (1) a conflict of interest was present on the target board of directors, and (2) the directors were sued for an injunction rather than for damages. The district judge rejected Tyson's arguments, finding that Sec. 690 provides the exclusive standard by which director actions are measured in Virginia in a case such as the instant one. We agree. 39 The Virginia Code contains a statutory standard of care for directors, which applies to all aspects of a Board's actions in responding to a tender offer. For example, the Code expressly provides that actions of directors with respect to issuing rights or options for the purchase of shares of a corporation are subject to review under the standard articulated in Sec. 690. See Va.Code Ann. Sec. 13.1-646(B). Similarly, the Code provides that conduct concerning affiliated transactions, see id. Sec. 13.1-727.1, as well as transactions involved in control share acquisitions, see id. Sec. 13.1-728.9, are subject to Sec. 690. In other words, actions taken by directors in responding to tender offers are explicitly made subject to Sec. 690 standards by the Virginia Code, thereby foreclosing reliance on common law. See Higgins v. Bowdoin, 238 Va. 134, 140, 380 S.E.2d 904, 908 (1989) (holding that a statute that applied to a certain set of circumstances supplanted the contrary common law in that situation). 40 Further, Tyson has not provided us with any convincing reasons for which Sec. 690 should not apply in the instant case. Tyson's first argument, that a conflict of interest was present on the WLR Board which should preclude the application of Sec. 690 to Tyson's claims and allow recourse to the common law, is without merit. Virginia law contains a statutory provision which addresses director conflicts of interest arising from hostile takeover situations. See Va.Code Ann. Sec. 13.1-691; see also Izadpanah v. Boeing Joint Venture, 243 Va. 81, 83, 412 S.E.2d 708, 709 (1992). The Virginia Code provides: 41 A. A conflict of interests transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect personal interest.... 42 .... 43 B. For the purposes of this section, a director of the corporation has an indirect personal interest in a transaction if: 44 1. Another entity in which he has a material financial interest or in which he is a general partner is a party to the transaction; or 45 2. Another entity of which he is a director, officer or trustee is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation. 46 Va.Code Ann. Sec. 13.1-691. Tyson has failed to show that any WLR Board member had a conflict of interest as defined in Sec. 13.1-691, and even if Tyson could prove such a conflict, Tyson's claim would be governed by the statutory standard in Sec. 13.1-691, not by Virginia common law. Tyson's attempt to escape from the statutory standard of care for directors is simply unavailing in the face of the statutory scheme in Virginia. 47 We also reject Tyson's second argument, that Sec. 690 does not apply when directors are sued for injunctions. Section 690 states that [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. Va.Code Ann. Sec. 13.1-690(C). Tyson claims that the purpose of Sec. 690 is to protect directors only from personal liability, and argues that it would be more appropriate to resort to common law standards to assess director behavior in injunctive actions. However, Sec. 690 by its terms establishes standards of conduct for the director of a corporation in discharg[ing] his duties as a director; the provision does not merely shield from liability a director who has complied with the standard, once he is sued. It is clear from the language of the statute that the articulated standard is meant not only to provide a way in which to assess a director's personal liability, but also to establish a benchmark against which a director's actions shall be measured in other contexts. See Daniel T. Murphy, The New Virginia Stock Corporation Act: A Primer, 20 U. Rich. L.Rev. 67, 107 (1985). In addition, the references to Sec. 690 in the provisions of the Virginia Code dealing with various aspects of tender offers are pervasive. In the face of the clear language of the statute dictating the broad application of Sec. 690, Tyson has pointed to no Virginia law to support its contention that Sec. 690 does not apply to injunctive actions against corporate directors. We therefore find that Sec. 690 applies to director behavior in actions such as the instant one. 48 Virginia has provided for a statutory standard to govern the duty of directors in tender offer situations. Tyson has failed to convince us that there is any reason not to use that standard in the instant case. We find that the district court was correct in deciding that, in the Commonwealth of Virginia, the actions of directors in tender offer situations such as the instant one must be examined under Sec. 690.
49 We next turn to Tyson's challenge to the district court's limitation of discovery under Federal Rule of Civil Procedure 26. The district court denied Tyson access to the information and recommendations that were given to the WLR Board by its advisors, pursuant to the court's finding that, under the applicable Virginia law, the information sought to be discovered by Tyson was not reasonably calculated to lead to the discovery of admissible evidence and was therefore not discoverable under Federal Rule of Civil Procedure 26(b)(1). To the extent that the district court's decision rests on issues of statutory interpretation, we review the court's decision de novo, see C.G. Willis, Inc. v. The Spica, 6 F.3d 193, 196 (4th Cir.1993) (citing McDermott Int'l, Inc. v. Wilander, 498 U.S. 337, 356, 111 S.Ct. 807, 818, 112 L.Ed.2d 866 (1991)); however, we review only for abuse of discretion the district court's rulings regarding the scope of discovery, see Ardrey v. United Parcel Service, 798 F.2d 679, 682 (4th Cir.1986), cert. denied, 480 U.S. 934, 107 S.Ct. 1575, 94 L.Ed.2d 766 (1987). 50 Federal Rule of Civil Procedure 26 provides, in relevant part: 51 (b) Discovery Scope and Limits. Unless otherwise limited by order of the court in accordance with these rules, the scope of discovery is as follows: 52 (1) In General. Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. The information sought need not be admissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence. 53 Fed.R.Civ.P. 26. Thus, under Rule 26, even information that is not admissible at trial is discoverable, as long as it is relevant to the subject matter involved in the pending action. Id. (b)(1). The parties in the instant case agree that relevance under Rule 26 must be determined by reference to the substantive law which forms the basis of their claims and defenses. 54 The district court made its discovery rulings pursuant to its interpretation of the Virginia Business Judgment Statute, Va.Code Ann. Sec. 13.1-690. Section 690 provides as follows: 55 Sec. 13.1-690. General standards of conduct for director.--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. 56 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: 57 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; 58 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 59 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. 60 (emphasis added). The district court held that under the standard articulated in Sec. 690, only the good faith business judgment of the directors was at issue in Tyson's claims, and the rationality vel non of the decision ultimately reached by the WLR Board was not relevant. The district court thus permitted Tyson to inquire into the procedures followed by the WLR directors during their investigation of Tyson's offer that indicated whether or not they were considering the offer in good faith, but did not allow Tyson access to the actual substantive information that was used by the directors in making their decision regarding the offer. 61 We find that the district court did not abuse its discretion in limiting discovery in the instant case. First, it is clear from the language of Sec. 690 that the actions of a director are to be judged by his or her good faith in performing corporate duties, and not by the substantive merit of the director's decisions themselves. Tyson concedes that good faith is the relevant standard under Sec. 690. However, according to Tyson, although Sec. 690 itself does not focus on whether a director's decision is substantively correct, knowledge of the substantive content of the information that was available to the director is necessary in order to determine whether the decision was made in good faith. Tyson claims that a litigant cannot prove a director's lack of good faith without having access to all of the information on which the director relied. 62 In essence, Tyson hopes to prove lack of good faith in the instant case by showing that, based upon the substantive information received by the WLR Board, the Board should have reached a different result. However, that argument imports an aspect into the Virginia standard of director conduct that is not part of Virginia law. It reduces, and nearly eliminates, the ability to rely, in good faith, on experts. Whether a different person would have come to a different conclusion given the information that a director had before him is simply irrelevant to the determination of whether a director in Virginia has acted in good faith in fulfilling his corporate duties. 63 In fact, it is precisely such a comparison between a director and the hypothetical reasonable person that the Virginia legislature explicitly chose to reject when it enacted Sec. 690. The Model Business Corporation Act (the Model Act), which embodies the traditional formulation of the business judgment rule, provides that: 64 (a) A director shall discharge his duties as a director, including his duties as a member of a committee: 65
66 (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and 67 (3) in a manner he reasonably believes to be in the best interests of the corporation. 68 Model Act Sec. 8.30. The business judgment rule contained in the Model Act, like Sec. 690, is based upon a director's good faith. By referring to an ordinarily prudent person and the director's reasonabl[e] belie[f] concerning the corporation's best interests, however, the Model Act makes clear that one of the ways in which a litigant may prove that a director did not exercise good faith is by showing that a director's decision is irrational, i.e., that the decision does not comport with what a reasonable person would do under similar circumstances. 69 Section 690, however, contains no reference to the reasonable person. In fact, the Virginia legislature expressly chose to reject the Model Act standard: 70 [Section 690], especially subsection A, is significantly different from the Model Act's treatment of the same subject in Sec. 8.30.... 71 .... 72 The term reasonable is intentionally not used in the standard. It thereby eliminates comparison of the conduct in question with the idealized standard and removes the question of how great a deviation from this idealized standard is acceptable. 73 Virginia Corporation Law with Commentaries and Rules 197-98 (1992 ed.) (Joint Bar Committee Commentary); see also Murphy, 20 U. Rich. L.Rev. at 108 (Under Sec. 690, [t]he trier of fact need only find good faith and determine whether the conduct in question was a product of the director's own business judgment of what is in the best interest of the corporation. The director's conduct or decision is not to be analyzed in the context of whether a reasonable man would have acted similarly.); id. (The statute ... may ... protect the utterly inept, but well-meaning, good faith director.). Directors' actions in Virginia are not to be judged for their reasonableness, and we, like the district court, reject Tyson's attempt to inject such a standard into Virginia law. We thus hold that the district court did not abuse its discretion in denying Tyson permission to discover the substantive content of the recommendations made to the WLR Board, because pursuant to the governing Virginia law, that information was not relevant under Federal Rule of Civil Procedure 26(b)(1). 3 74 In addition, we do not believe that the district court's ruling restricting discovery prevented Tyson from being able to determine whether the actions of the Board in the instant case were in good faith. As the district judge stated, 75 [t]he means of addressing good faith for Tyson must be in keeping with the procedural thrust of the statute. Neither the statute nor the Magistrate Judge's order would necessarily preclude, for instance, inquiry into the identity and qualifications of any sources of information or advice sought which bear on the decision reached, the circumstances surrounding selection of these sources, the general topics (but not the substance) of the information sought or imparted, whether advice was actually given, whether it was followed, and if not, what sources of information and advice were consulted to reach the decision in issue. In short, the statute permits inquiry into the procedural indicia of whether the directors resorted in good faith to an informed decisionmaking process. 76 WLR Foods, Inc. v. Tyson Foods, Inc., 857 F.Supp. 492, 494 (W.D.Va.1994). Tyson was given access to various records bearing on the way in which the WLR Board made decisions. The redacted copies of Board meetings, while they do not reveal the substantive advice given to the Board, make clear the subjects that were discussed at the Board meetings. Tyson knew when advisors were hired, and who those advisors were. Tyson discovered which issues the WLR Board considered in determining whether to reject Tyson's offer. In sum, under the district court's interpretation of Sec. 690, Tyson was given an opportunity to determine whether the WLR Board had acted in good faith. 77 The case of Sandberg v. Virginia Bankshares, Inc., 891 F.2d 1112 (4th Cir.1989), rev'd on other grounds, 501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991), does not, as Tyson contends, dictate a contrary result. In Sandberg, we upheld a jury verdict finding that certain directors, in approving a merger, had failed to act in good faith under Sec. 690. The bank in that case retained no independent investment advisor in order to assess a fair value for its stock, and merely issued a two-sentence statement recommending acceptance of an offer. See id. at 1117. Although the directors had consulted an investment consultant and relied on an executive committee, we stated that 78 [t]he case against the directors is that they merely rubberstamped everything placed before them by Bankshares. The evidence fully supports a view that the directors exercised no independent judgment whatsoever with regard to the interests of the minority stockholders and consequently, was sufficient to support the jury's finding of lack of good faith. 79 Id. at 1123. 80 Tyson argues that if the court in Sandberg had restricted the jury's inquiry to the processes by which the directors made their decision, the jury would not have been able to make a finding that the directors had merely rubberstamped the information before them. However, as we stated above, we do not believe that it would be impossible for a jury to find that directors had merely rubberstamped a proposal if the jury had access to information regarding the advisors consulted by the directors, their qualifications, how they were selected, the general topics on which they advised, and whether the advice was followed. Thus, contrary to Tyson's assertions, access to the type of information that would be made available under our interpretation of Sec. 690 also would have permitted a finding of lack of good faith in Sandberg. 81 We find the district court's decision limiting discovery in the instant case to be a sound one under Virginia law. Knowledge of the substantive advice given to the WLR Board was not reasonably calculated to lead to a determination regarding good faith as defined in Sec. 690, and the district court acted within its discretion in limiting Tyson's access to that information.
82 Finally, Tyson attacks the factual findings of the district court on the issue of the WLR Board's good faith in rejecting Tyson's takeover offer. We reverse such findings only if clearly erroneous. Diamond Star Bldg. Corp. v. Freed, 30 F.3d 503, 506 (4th Cir.1994). 83 Tyson asserts that, based on the evidence presented in the instant case, i.e., even considering only the processes employed by the WLR Board in considering Tyson's offer, the district court clearly erred in finding that the WLR directors did not breach their duty of good faith to the shareholders by rejecting Tyson's offer and adopting defensive measures. Tyson claims that its offer was rejected as early as the first time that Don Tyson communicated with WLR director Keeler. Yet, although Keeler stated that WLR was not for sale when he was first approached by Don Tyson, WLR's management said at the same time that it would listen to Tyson's proposal. In fact, the WLR Board repeatedly acknowledged that although it had not put the company up for sale and did not wish to sell, the Board was required to consider Tyson's offer. WLR simply did not, as Tyson contends, reject the offer before considering the matter with the help of experts. The WLR Board had several extended meetings regarding Tyson's takeover offer and spent time and financial resources on gathering information from informed advisors, who Tyson does not argue were unreliable or incompetent. The district court found, based on an examination of the record, that the WLR Board had acted in good faith, and we are not inclined to reverse its finding.