Opinion ID: 2308640
Heading Depth: 1
Heading Rank: 22

Heading: Director Duty of Care and Board Presumption of Care

Text: The elements, formulation and application of the Delaware business judgment rule follow from the premise that shareholders of a public corporation delegate to their board of directors responsibility for managing the business enterprise. The General Assembly has codified that delegation of authority and mandate of management generally in 8 Del.C. § 141(a) and, specifically, in the context of a merger or sale of a company, in 8 Del.C. § 251. See Singer v. Magnavox, Del. Ch., 367 A.2d 1349 (1976), aff'd in part, rev'd in part, Del.Supr., 380 A.2d 969 (1977). The judicial presumption accorded director and board action which underlies the business judgment rule is of paramount significance in the context of a derivative action. Aronson, 473 A.2d at 812. As Aronson states, the presumption may only be invoked by directors who are found to be not only disinterested directors, but directors who have both adequately informed themselves before voting on the business transaction at hand and acted with the requisite care. There we also stated that, for the rule to apply and attach to a particular transaction, directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties. Id. at 812 (emphasis added). The duty of the directors of a company to act on an informed basis, as that term has been defined by this Court numerous times, forms the duty of care element of the business judgment rule. Duty of care and duty of loyalty are the traditional hallmarks of a fiduciary who endeavors to act in the service of a corporation and its stockholders. See Lutz, 171 A.2d 381. Each of these duties is of equal and independent significance. In decisional law of this Court applying the rule, preceding as well as following Van Gorkom, this Court has consistently given equal weight to the rule's requirements of duty of care and duty of loyalty. See Aronson, 473 A.2d at 814; Unocal, 493 A.2d at 955; Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985); Mills, 559 A.2d at 1280; Barkan v. Amsted Industries, Inc., Del.Supr., 567 A.2d 1279, 1286 (1989); Citron, 569 A.2d at 64. In those decisions we have defined a board's duty of care in a variety of settings. For example, we have stated that a director's duty of care requires a director to take an active and direct role in the context of a sale of a company from beginning to end. Citron, 569 A.2d at 66; Unocal, 493 A.2d at 954 (directors cannot be passive instrumentalities during merger proceedings). In a merger or sale, we have stated that the director's duty of care requires a director, before voting on a proposed plan of merger or sale, to inform himself and his fellow directors of all material information that is reasonably available to them. Aronson, 473 A.2d at 812. We have also stated that the rule is premised on a presumption that the directors have severally met their duties of loyalty ( see section IV supra ) and that the directors have collectively, as a board, met their duty of care. See Barkan, 567 A.2d at 1286; Moran, 500 A.2d at 1356. [36] Applying the rule, a trial court will not find a board to have breached its duty of care unless the directors individually and the board collectively have failed to inform themselves fully and in a deliberate manner before voting as a board upon a transaction as significant as a proposed merger or sale of the company. See Van Gorkom, 488 A.2d at 873; Aronson, 473 A.2d at 812. Only on such a judicial finding will a board lose the protection of the business judgment rule under the duty of care element and will a trial court be required to scrutinize the challenged transaction under an entire fairness standard of review. See, e.g., Van Gorkom, 488 A.2d at 893; Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 257, 271 (1989). The Chancellor held that the questions of due care ... need not be addressed in this case, because even if a lapse of care is assumed, plaintiff is not entitled to a judgment on this record.  Personal Liability Opinion at 6 (emphasis added). Having assumed that the Technicolor board was grossly negligent in failing to exercise due care, the court avoided the business judgment rule's rebuttal by adding to the rule a requirement of proof of injury. The court then found that requirement not met and, indeed, injury not provable due to its earlier finding of fair value for statutory appraisal purposes. In this manner, the court avoided having to determine whether the board had failed to satisfy its obligation to take reasonable steps in the sale of the enterprise to be adequately informed before it authorized the execution of the merger agreement. Personal Liability Opinion at 40. The court found authority for its requirement of proof of injury in a seventy-year-old decision that none of the parties had relied on or felt pertinent. The trial court ruled: because the board as a deliberative body was disinterested in the transaction and operating in good faith, plaintiff bears the burden to show that any such innocent, though regrettable, lapse was likely to have injured it. See, e.g., Barnes v. Andrews, 298 F. 614 (S.D.N.Y.1924). Personal Liability Opinion at 8. In the absence of plaintiff's proof of injury, the court held that defendants were entitled to judgment on all claims. The Chancellor concluded that the fatal weakness in plaintiff's case was plaintiff's failure to prove that it had been injured as a result of the defendant's negligence. The court put it this way: It is not the case, in my opinion, that in an arms-length, third party merger proof of a breach of the board's duty of care itself entitles plaintiff to judgment. Rather, in such a case, as in any case in which the gist of the claim is negligence, plaintiff bears the burden to establish that the negligence shown was the proximate cause of some injury to it and what that injury was. See Barnes v. Andrews, 298 F. 614, 616-18 (S.D.N.Y.1924); Cf. Virginia-Carolina Chemical Co. v. Ehrich, 230 F. 1005, 1013 (D.S.C.1916); Hathaway v. Huntley, Mass. Supr., [284 Mass. 587] 188 N.E. 616, 618-19 (1933). Personal Liability Opinion at 41 (underlining in original; italics added for emphasis). On appeal, Cinerama contends: (1) that the court's assumed findings of the defendant directors' gross negligence in breach of their duty of care brought the case squarely under the control of this Court's rulings in Van Gorkom and, in the context of a sale of the company, under Revlon; and (2) that the Chancellor erred as a matter of law in invoking the tort principles implemented in Barnes v. Andrews, S.D.N.Y., 298 F. 614, 616-18 (1924), to grant defendants judgment on the record before the court. Cinerama's contentions are well taken, factually supported by the record and correct as a matter of law. As defendants concede, this Court has never interposed, for purposes of the rule's rebuttal, a requirement that a shareholder asserting a claim of director breach of duty of care ( or duty of loyalty) must prove not only a breach of such duty, but that an injury has resulted from the breach and quantify that injury at that juncture of the case. No Delaware court has, until this case, imposed such a condition upon a shareholder plaintiff. That should not be surprising. The purpose of a trial court's application of an entire fairness standard of review to a challenged business transaction is simply to shift to the defendant directors the burden of demonstrating to the court the entire fairness of the transaction to the shareholder plaintiff, applying Weinberger and its progeny: Rosenblatt, 493 A.2d 929; Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840 (1987); and Mills, 559 A.2d 1261. Requiring a plaintiff to show injury through unfair price would effectively relieve director defendants found to have breached their duty of care of establishing the entire fairness of a challenged transaction. The Chancellor so ruled, notwithstanding finding from the record following trial that whether the Technicolor board exercised due care in approving the merger agreement was not simply a close question but one as to which he had grave doubts. Personal Liability Opinion at 5-6. The trial court's doubts were based on at least five explicit predicate findings on the issue of due care: (1) that the agreement was not preceded by a prudent search for alternatives, id. at 6; (2) that, given the terms of the merger and the circumstances, the directors had no reasonable basis to assume that a better offer from a third party could be expected to be made following the agreement's signing, id.; (3) that, although Kamerman had discussed Perelman's approach with several of the directors before the meeting, most of the directors had little or no knowledge of an impending sale of the company until they arrived at the meeting and only a few of them had any knowledge of the terms of the sale and of the required side agreements, id. at 12-13; (4) that Perelman did, probably, effectively lock-up the transaction on October 29 when he acquired rights to buy the Kamerman and Bjorkman shares (about eleven percent together) and acquired rights under the stock option agreement to purchase stock that would equal 18 percent of the company's outstanding stock after exercise given Technicolor's charter provision and Perelman's prior stock ownership of about five percent, id. at 49; and (5) that the board did not satisfy its obligation [under Revlon ] to take reasonable steps in the sale of the enterprise to be adequately informed before it authorized the execution of the merger agreement. Id. at 40. In addition, the Chancellor noted the relevance of Revlon in illuminat[ing] the scope of [the] board's due care obligations ... and implied that the Technicolor board's failure to auction the company evidenced a breach of their duty of care. [37] Id. We adopt, as clearly supported by the record, the Chancellor's presumed findings of the directors' failure to reach an informed decision in approving the sale of the company. We disagree with the Chancellor's imposition on Cinerama of an additional burden, for overcoming the rule, of proving that the board's gross negligence caused any monetary loss to Cinerama. We turn to the court's reformulation of the rule's requirements for imposition of an entire fairness standard of review of the challenged transaction. The question presented in this case is essentially the same as this Court was presented in Van Gorkom: whether the defendant directors, meeting as a board, satisfied the rule's presumption of board due care in meeting to consider for the first time a proposed sale of the company under terms negotiated exclusively by its chairman. We stated: In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 Del.C. § 251(b), along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. Van Gorkom, 488 A.2d at 873 (footnote omitted). See Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140 (1989).