Opinion ID: 1461887
Heading Depth: 1
Heading Rank: 5

Heading: Use of Corporate Funds to Facilitate Panic's Payment of Settlements

Text: The plaintiff's second primary contention is that the board's decision to use corporate funds to facilitate Panic's payment of the $3.5 million settlement of a paternity suit was not a valid exercise of business judgment. [35] Although it is unclear from the briefs whether the plaintiff's claim is based on corporate waste or bad faith by the board, we find that the well-pleaded facts in the complaint do not support either theory. [36] For the sake of simplicity, we analyze the plaintiff's claims under the corporate waste standard. A board's decisions do not constitute corporate waste unless they are exceptionally one-sided. [37] Accordingly, we have defined waste to mean an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. [38] As a practical matter, a stockholder plaintiff must generally show that the board irrationally squander[ed] corporate assets  for example, where the challenged transaction served no corporate purpose or where the corporation received no consideration at all. [39] Under this standard, a corporate waste claim must fail if there is any substantial consideration received by the corporation, and ... there is a good faith judgment that in the circumstances the transaction is worthwhile. [40] This is so even if the transaction appears, with hindsight, to be unreasonably risky to a reviewing court. As we have observed, courts are ill-fitted to attempt to weigh the `adequacy' of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk. [41] Thus, absent some reasonable doubt that the ICN board proceeded based on a good faith assessment of the corporation's best interests, the board's decisions are entitled to deference under the business judgment rule. [42] In the present case, the plaintiff alleges that the board guaranteed a $3.5 million bank loan to Panic and deposited $3.6 million in an account at the bank as collateral for the guarantee. Panic, in turn, gave ICN as collateral 150,000 options on ICN stock at a strike price of about $15  which, as the plaintiff concedes, are valuable. Even assuming that this arrangement constitutes an outright loan by the board, Panic provided valuable consideration for the loan in the form of his stock options. Moreover, there is no allegation that the board waived ICN's legal rights in the event that ICN was called upon to pay out under the guarantee. The terms of the loan and the guarantee are not so inadequate or one-sided as to cast a reasonable doubt on the board's decision to approve them. We therefore conclude that the particularized facts on the face of the complaint, both individually and collectively, are legally insufficient to create a reasonable doubt that the board's decisions were the product of a valid exercise of business judgment. Accordingly, the Court of Chancery properly dismissed the plaintiff's complaint for failure to show that demand was excused under the second prong of Aronson. [43]