Opinion ID: 2308640
Heading Depth: 1
Heading Rank: 19

Heading: The First Part of the Chancellor's Materiality Test: Proof of Interest Material to Individual Director(s) Independence

Text: Cinerama argues that the Chancellor's restatement of the requirements of director self-interest for purposes of rebutting the business judgment rule's presumption of director duty of independence is erroneous as a matter of law. Cinerama contends that one director's receipt of any tangible benefit not shared by the stockholders generally is sufficient to overcome the business judgment presumption of director and board independence. Cinerama thereby relies upon certain statements of this Court in Aronson and Pogostin, which we find to be taken out of context and selectively applied. In Aronson, this Court stated that a shareholder plaintiff, to establish a breach of duty of loyalty, must present evidence that the director either was on both sides of the transaction or derive[d] any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally. Aronson, 473 A.2d at 812 (citations omitted) (emphasis added). Thus, Aronson's qualification that the personal financial benefit must rise to the level of self-dealing is consistent with, and in fact supports, the Chancellor's formulation. Cinerama also misreads this Court's statement in Pogostin that [d]irectorial interest exists whenever ... a director ... has received, or is entitled to receive, personal financial benefit from the challenged transaction that is not equally shared by the stockholders. 480 A.2d at 624 (emphasis added). Cinerama misunderstands Pogostin. Nothing we said there suggests that one director's self-interest, or even an act of disloyalty by that director, so infects the entire process that the board itself is deprived of the benefit of the business judgment rule. This Court has never held that one director's colorable interest in a challenged transaction is sufficient, without more, to deprive a board of the protection of the business judgment rule presumption of loyalty. Provided that the terms of 8 Del.C. § 144 are met, self-interest, alone, is not a disqualifying factor even for a director. To disqualify a director, for rule rebuttal purposes, there must be evidence of disloyalty. See Citron, 569 A.2d at 65-66; Unocal, 493 A.2d at 958; Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964). Examples of such misconduct include, but certainly are not limited to, the motives of entrenchment, see Gilbert, 575 A.2d at 1146, Polk v. Good, Del.Supr., 507 A.2d 531, 536-37 (1986), Unocal, 493 A.2d at 954-56; fraud upon the corporation or the board, see Mills, 559 A.2d at 1283; abdication of directorial duty, see Lutz v. Boas, Del.Ch., 171 A.2d 381, 395-96 (1961); or the sale of one's vote. Neither Aronson nor Pogostin can be fairly read to support Cinerama's thesis that a finding of one director's possession of a disqualifying self-interest is sufficient, without more, to rebut the business judgment presumption of director/board loyalty; and no Delaware decisional law of this Court supports such a result. This Court has generally and consistently refrained from adopting a bright-line rule for determining when a director's breach of duty of independence through self-interest translates into evidence sufficient to rebut the business judgment presumption accorded board action. We agree with defendants that the question of when director self-interest translates into board disloyalty is a fact-dominated question, the answer to which will necessarily vary from case to case. See Citron, 569 A.2d at 64; Grobow v. Perot, Del.Supr., 539 A.2d 180, 186 (1988). A trial court must have flexibility in determining whether an officer's or director's interest in a challenged board-approved transaction is sufficiently material to find the director to have breached his duty of loyalty and to have infected the board's decision. Therefore, we reject Cinerama's contention that any found director self-interest, standing alone and without evidence of disloyalty, is sufficient to rebut the presumption of loyalty of our business judgment rule. Cinerama also takes exception to the Chancellor's use of a reasonable person standard for determining the materiality of a given director's self-interest in a challenged corporate transaction. We agree that the Chancellor's use of the reasonable person standard is unhelpful and, indeed, confusing. [31] Therefore, we reject its use in resolving whether evidence of director self-interest is sufficient to rebut the rule.