Opinion ID: 2315915
Heading Depth: 1
Heading Rank: 3

Heading: Claims and Defenses

Text: Initially, we will review the Court of Chancery's examination of the nature of the shareholder plaintiffs' claims and the possible defenses thereto, in the context of the legal and factual circumstances presented. The proponents of the Settlement argued that the business judgment rule could undoubtedly have been invoked successfully by the defendants as a complete defense to the shareholder plaintiffs' claims. The business judgment rule creates 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 corporation.' Polk v. Good, 507 A.2d at 536 (quoting Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984)). The Objectors presented several alternative arguments in support of their contention that the shareholder plaintiffs would have been able to rebut the defense based on the protection which the presumption of the business judgment rule provides. Each of those arguments was based, at least in part, upon this Court's decision in Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985). First, the Objectors submitted that the business judgment rule would probably not protect the actions of the Special Committee because the independence of the Special Committee was questionable. In support of that argument, the Objectors assert that at least four members of the Special Committee had close ties to Dr. Hammer and personal business dealings with him. [24] After examining the record, the Court of Chancery found that the Objectors had not established any facts that the Special Committee had any self-interest in the transaction either from a personal financial interest or from a motive for entrenchment in office. See Grobow v. Perot, Del.Supr., 539 A.2d 180, 188 (1988). The Court of Chancery also concluded that there was no evidence in the record indicating that any of the members of the Special Committee were in fact dominated by Dr. Hammer or anyone else. Second, in a related argument, the Objectors argued that the presumption of the business judgment rule would have been overcome because the Special Committee proceeded initially without retaining independent legal counsel. In fact, that was a concern identified by the Court of Chancery in its July 19, 1989 opinion. However, in approving the Settlement, the Court of Chancery noted that the Special Committee had retained independent counsel, and subsequently, and for the first time, formally approved the challenged charitable contributions. Thus, the Court of Chancery specifically found that the Special Committee had the advice of independent legal counsel before it finally approved the Museum proposal. In this appeal, with respect to the aforementioned finding, the Objectors submit that the Court of Chancery's eventual approval of the Settlement was based upon its mistaken belief that a major judicial concern, i.e., the failure of the Special Committee to retain independent counsel prior to its formal approval of the Museum proposal, had been rectified. In particular, the Objectors contend that the Special Committee formally approved the Museum proposal at its July 20, 1989 meeting. The parties all agree that the Special Committee retained its independent legal counsel on August 4, 1989. Therefore, the Objectors argue that the Court of Chancery's conclusion that the business judgment rule would apply was based upon an erroneous premise. In response to that argument by the Objectors, the proponents of the Settlement submit the record reflects that the Special Committee reviewed and ratified all of its prior action on September 20, 1989, after retaining independent legal counsel. Accordingly, the proponents of the Settlement contend that, whether the September 20, 1989 action by the Special Committee is characterized as the first final approval of the Museum proposal or as a re-approval of its action taken on July 20, 1989, the Special Committee's ultimate decision to proceed with the Museum proposal was based upon the advice of independent counsel. The Objectors' third argument in the Court of Chancery, challenging the viability of the business judgment rule as a successful defense, was based upon Van Gorkom and contended that the Special Committee and other directors were grossly negligent in failing to inform themselves of all material information reasonably available to them. [25] Thus, the Objectors argued that even if, arguendo, the Special Committee was itself independent and formally approved the Museum proposal after its retention of independent legal counsel, such approval would not have cured the Special Committee's prior failure to exercise due care. The Court of Chancery found the record showed that the Special Committee had given due consideration to the Museum proposal and rejected the Objectors' argument to the contrary. See generally Smith v. Van Gorkom, Del. Supr., 488 A.2d 858 (1985). The Court of Chancery carefully considered each of the Objectors' arguments in response to the merits of the suggested business judgment rule defense. It concluded that if the Sullivan action proceeded, it was highly probable in deciding a motion to dismiss, a motion for summary judgment, or a post-trial motion, the actions of the Special Committee would be protected by the presumption of propriety afforded by the business judgment rule. Specifically, the Court of Chancery concluded that it would have been decided that the Special Committee, comprised of Occidental's outside directors, was independent and made an informed decision to approve the charitable donation to the Museum proposal. These conclusions by the Court of Chancery are supported by the record and are the product of an orderly and logical deductive process. Barkan v. Amsted Industries Inc., Del.Supr., 567 A.2d 1279, 1284 (1989); Nottingham Partners v. Dana, 564 A.2d at 1102; Polk v. Good, 507 A.2d at 536; cf. Rome v. Archer, 197 A.2d at 54. Following its analysis and conclusion that the business judgment rule would have been applicable to any judicial examination of the Special Committee's actions, the Court of Chancery considered the shareholder plaintiffs' claim that the Board and the Special Committee's approval of the charitable donation to the Museum proposal constituted a waste of Occidental's corporate assets. In doing so, it recognized that charitable donations by Delaware corporations are expressly authorized by 8 Del.C. § 122(9). It also recognized that although § 122(9) places no limitations on the size of a charitable corporate gift, that section has been construed to authorize any reasonable corporate gift of a charitable or educational nature. Theodora Holding Corp. v. Henderson, Del.Ch., 257 A.2d 398, 405 (1969). Thus, the Court of Chancery concluded that the test to be applied in examining the merits of a claim alleging corporate waste is that of reasonableness, a test in which the provisions of the Internal Revenue Code pertaining to charitable gifts by corporations furnish a helpful guide. Id. We agree with that conclusion. The Objectors argued that Occidental's charitable contribution to the Museum proposal was unreasonable and a waste of corporate assets because it was excessive. [26] The Court of Chancery recognized that not every charitable gift constitutes a valid corporate action. Nevertheless, the Court of Chancery concluded, given the net worth of Occidental, its annual net income before taxes, and the tax benefits to Occidental, that the gift to the Museum was within the range of reasonableness established in Theodora Holding Corp. v. Henderson, Del.Ch., 257 A.2d 398, 405 (1969). Therefore, the Court of Chancery found that it was reasonably probable that plaintiffs would fail on their claim of waste. That finding is supported by the record and is the product of an orderly and logical deductive process. Barkan v. Amsted Industries Inc., 567 A.2d at 1284; Nottingham Partners v. Dana, 564 A.2d at 1102; Polk v. Good, 507 A.2d at 536; cf. Rome v. Archer, 197 A.2d at 54.