Opinion ID: 1934995
Heading Depth: 1
Heading Rank: 17

Heading: Enhanced Judicial Scrutiny

Text: The business judgment rule applies to the conduct of directors in the context of a takeover. See Pogostin v. Rice, Del.Supr., 480 A.2d 619 (1984); Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984). [10] Accord Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 41-42 (1994). The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Aronson v. Lewis, 473 A.2d at 812. [11] An application of the traditional business judgment rule places the burden on the party challenging the [board's] decision to establish facts rebutting the presumption. Id. If the business judgment rule is not rebutted, a court will not substitute its judgment for that of the board if the [board's] decision can be `attributed to any rational business purpose.' Unocal, 493 A.2d at 954 (citation omitted). In Unocal, this Court reaffirmed the application of the business judgment rule in the context of a hostile battle for control of a Delaware corporation where board action is taken to the exclusion of, or in limitation upon, a valid stockholder vote. Stroud v. Grace, 606 A.2d at 82. This Court has recognized that directors are often confronted with an `inherent conflict of interest' during contests for corporate control `[b]ecause of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders.' Id. (quoting Unocal, 493 A.2d at 954). Consequently, in such situations, before the board is accorded the protection of the business judgment rule, and that rule's concomitant placement of the burden to rebut its presumption on the plaintiff, the board must carry its own initial two-part burden: First, a reasonableness test, which is satisfied by a demonstration that the board of directors had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, and Second, a proportionality test, which is satisfied by a demonstration that the board of directors' defensive response was reasonable in relation to the threat posed. Unocal, 493 A.2d at 955. See also Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346, 1356 (1985). The common law pronouncement in Unocal of enhanced judicial scrutiny, as a threshold or condition precedent to an application of the traditional business judgment rule, is now well known. [12] The enhanced judicial scrutiny mandated by Unocal is not intended to lead to a structured, mechanistic, mathematical exercise. [13] Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140, 1153 (1990). Conversely, it is not intended to be an abstract theory. Id. The Unocal standard is a flexible paradigm that jurists can apply to the myriad of fact scenarios that confront corporate boards. Id.