Court Opinion

ID: 6759480
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:30:06.383342+00
Date Added: 2024-06-11T16:02:33.301965
License: Public Domain

Wright, J.,
dissenting. I concur in Justice Holmes’ dissent, but must add a number of additional observations. I concur in the syllabus law of this case but I feel that the majority’s misapplication of the law to the facts is a travesty. I am troubled by the prospect of serious damage to the fabric of corporate law which will surely result from the majority’s opinion. Even a casual observer is aware of the growing crisis facing corporations in recruiting capable women and men to manage corporate affairs. The majority’s decision will exacerbate this problem.
I
The Delaware business judgment rule provides that a board of directors’ decision will not be disturbed absent a specific showing of a breach of fiduciary duty such as self-dealing, interest, domination, or lack of good faith. A hallmark of the business judgment rule is that a court will not substitute its judgment for that of a board if the latter’s decision can be “attributed to any rational business purpose.” Sinclair Oil Corp. v. Levien (Del. 1971), 280 A. 2d 717, 720. The party challenging the director’s decision bears the burden of rebutting the presumption that the decision was a proper exercise of business judgment by the board. The majority is clearly in error when it states: “However, when the justification of a particular transaction is at issue, such as in the case at bar, the language of the cases suggests a standard of judicial review whereby the court must weigh the objective reasonableness of the business decision.” This is just plain wrong. Under Delaware law, an inquiry into the “intrinsic fairness” of a particular transaction is not appropriate until the court makes a threshold determination that the claimant has made a particularized showing of interest, domination, or lack of good faith.
In the leading case of Aronson v. Lewis (Del. 1984), 473 A. 2d 805, the court discussed the availability, function and operation of the business judgment rule, including the standard by which director conduct is judged. At page 810, the court cited with approval the following:
“[']*** To properly allege domination of the Board, particularly domination based on ownership of less than a majority of the corporation’s stock, in order to excuse pre-suit demand, [the complaint] must allege ownership plus other facts evidencing control to demonstrate that the Board could not have exercised its independent business judgment^’]”
Quoting from Kaplan v. Centrex Corp. (Del. Ch. 1971), 284 A. 2d 119, the Aronson court stated, “ ‘[s]tock ownership alone, at least when it amounts to less than a majority, is not sufficient proof of domination or *44control.’ ” Id. at 815. Moreover, the court stated, “in the demand context even proof of majority ownership of a company does not strip the directors of the presumptions of independence, and that their acts have been taken in good faith and in the best interests of the corporation. There must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person.” Id. Further, the court stated that “it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director. It is the care, attention, and sense of individual responsibility to the performance of one’s duty, not the method of election, that generally touches on independence. We conclude that in the demand-futile context a plaintiff charging domination and control of one or more directors must allege particularized facts manifesting ‘a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persons) doing the controlling.’ ” Id. at 816. (Citing Kaplan, supra, at 123.) Under Delaware case law, this need for particularity is critical in determining whether the inference of domination or interest is sufficiently substantiated.7
Appellants fail to show how the particular business affiliations between Modell and Berick, or Modell and Wallack.were so influential as to prevent them from basing their decisions on the best interests of the corporation. All the record shows regarding the claim of domination against Berick was that his firm, one of Cleveland’s most respected law firms, performed legal services for the Browns. Courts have long recognized the appropriateness of having lawyers — including lawyers who receive legal fees from the corporation — sit on boards of directors. If such circumstances disqualify a director, the personnel of a great many, if not most, American corporations would have to be reconstituted. As stated in Piccard v. Sperry Corp. (S.D.N.Y. 1943), 48 F. Supp. 465, 469, affirmed (C.A. 2, 1946), 152 F. 2d 462, certiorari denied (1946), 328 U.S. 845 (applying Delaware law):
“The widespread practice of having corporate attorneys and employees on boards of directors does indicate a fairly universal acceptance by the bar of the proposition that such relationships do not disqualify.”
The record regarding Nate Wallack, who passed away in January *451984, shows only that he was an employee of the Browns. The mere fact that he worked for the Browns does not indicate that he was dominated by Modell, nor that he lacked the “care, attention and sense of individual responsibility” required to make an independent decision. See Aronson, supra, at 816. See, also, Blish v. Thompson Automatic Arms Corp. (Del. 1948), 64 A. 2d 581, 606; Kaufman v. Beal (Feb. 25, 1983), Del. Ch. Civil No. 6485, at 11 (“Nor does the mere * * * serving as an officer of a corporation demonstrate control or domination.” [Emphasis added.]). Based on these counsel and employee relationships, the majority has held that Modell dominated the board. The mere existence of such business affiliations has been determined to be insufficient to establish domination. Maldonado v. Flynn (C.A. 2, 1979), 597 F. 2d 789, 794 (applying Delaware law); Abramson v. Nytronics, Inc. (S.D.N.Y. 1970), 312 F. Supp. 519, 532 (applying Delaware law); Kors v. Carey (Del. Ch. 1960), 158 A. 2d 136, 142-143. Cf. In re General Tire & Rubber Co. Securities Litigation (C.A. 6, 1984), 726 F. 2d 1075, 1084, certiorari denied (1984), 83 L. Ed. 2d 120 (applying Ohio law).
Appellants essentially claim that Modell is a majority shareholder and a member of the board of directors for the Browns, and that other board members agreed with him in approving the acquisition. The presumption of propriety afforded by the business judgment rule is not overcome just because a board, not otherwise disqualified, approves a transaction benefiting a stockholder who holds a substantial interest in the corporation. Domination cannot be manufactured; it must be drawn from the facts presented. There is no presumption that directors are controlled; the issue is instead intensely factual. There is a presumption, however, that directors act in good faith and in the best interests of the corporation. Warshaw v. Calhoun (Del. 1966), 221 A. 2d 487, 492-493; Prince v. Bensinger (Del. Ch. 1968), 244 A. 2d 89, 94. In its rush to judgment, the majority has contorted the meaning of “domination” of a director and has classified all “inside” directors and all “outside” directors who serve as attorneys to the corporation as potential defendants in any contested corporate reorganization or acquisition.
II
Appellants have not alleged that any director other than Modell was financially interested in the challenged transaction. Modell abstained from voting on the proposed acquisition; therefore, any interest on his part could not support appellants’ cause of action. There is simply no way to support a holding that any of the directors who participated in the transaction had an “interest” in the outcome of the transaction. Appellants never pleaded this theory in their original complaint or their amended complaint. The first time that this theory was proposed was in the findings of fact presented by appellants so late in the proceeding as to preclude it from being the subject of argument or consideration. A finding of interest is simp*46ly impossible on the basis of this record. Further, appellant Robert Gries’ own admissions and pleadings belied a finding of interest, because he testified that the redemption of the CSC stock was not dependent on the Browns’ later acquisition of CSC.
In an effort to show interest, the majority intimates that Berick and Wallack stood on both sides of the transaction. The majority’s position is manifestly untenable. Neither of these directors stood on both sides of the transaction, because at the time of the vote on the proposed acquisition on March 16, 1982, Berick was no longer a shareholder of CSC. There is no substantial evidence in the record that Wallack was ever a shareholder in CSC. In the absence of divided interests, the judgment of the majority stockholders and a board of directors is presumed to be made in good faith and inspired by a bona fide purpose. Greene v. Dunhill Internatl., Inc. (Del. Ch. 1968), 249 A. 2d 427.
The redemption was final and irrevocable on March 2, 1982. Robert Gries admitted on cross-examination that the redemption was not conditioned on or dependent upon the later purchase by the Browns. Indeed, appellants’ receipt of $408,000 from the redemption is proof that the proceeds were in no way tied to an affirmative vote on the acquisition. If one thing is clear, it is that directors are only “interested” if it has been demonstrated that they would have received financial gain from the challenged transaction. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986), 506 A. 2d 173, quoting Cheff v. Mathes (Del. 1964), 199 A. 2d 548, 554; Pogostin v. Rice, supra. The record is devoid of any evidence on this point. The trial court’s conclusion that there was “interest” is clearly erroneous and was properly reversed by the court of appeals.
As analyzed in depth by Justice Douglas’ dissent, the majority’s discussion of the intrinsic fairness of the acquisition merely parrots the posture of the trial judge and entirely disregards the sale for $6,000,000.1 conclude that, because the transaction was accomplished as a result of the exercise of independent business judgment, the court of appeals’ decision should be affirmed.
Douglas, J., concurs in the foregoing dissenting opinion.

 See Pogostin v. Rice (Del. 1984), 480 A. 2d 619 (It is the plaintiff’s burden to allege with particularity that the improper motive in a given set of circumstances, i.e., perpetuation of self in office or otherwise in control, was the sole or primary purpose of the wrongdoer’s conduct.); Bergstein v. Texas Internatl. Co. (Del. Ch. 1982), 453 A. 2d 467 (The allegations of interest or domination must be supported by specific factual allegations.); see, also, Kaplan v. Centex Corp. (Del. Ch. 1971), 284 A. 2d 119; Chasin v. Gluck (Del. Ch. 1971), 282 A. 2d 188; Puma v. Marriott (Del. 1971), 283 A. 2d 693; Mayer v. Adams (Del. Ch. 1961), 167 A. 2d 729, affirmed (1961), 174 A. 2d 313.