Court Opinion

ID: 9852977
Source: CourtListenerOpinion
Date Created: 2023-09-24 05:40:32.217003+00
Date Added: 2024-06-11T09:22:38.883284
License: Public Domain

ANDERSON, PAUL H., Justice
(concurring).
I agree with the court’s rejection of the rule set forth in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.1981). I also agree that the Minnesota business judgment rule requires the proponent of an SLC recommendation to establish that the SLC was independent, utilized sound investigative procedures, and acted in good faith. But I write separately to voice my concern that, by adopting the rule set forth in Auerbach v. Bennett, 47 N.Y.2d 619, 419 *562N.Y.S.2d 920, 393 N.E.2d 994 (1979), we have endorsed a rule under which judicial deference might be given to SLC recommendations that are, on their face, wholly irrational. This result is particularly problematic, given that such a rule conflicts with the language of Minn.Stat. § 302A.251 (2006), codifying the business judgment liability rule.
Several courts — our court included— have observed that the business judgment rule does not shelter decisions that are irrational or unreasonable,1 i.e., wholly without a rational underlying business purpose. See Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (Minn.2003) (‘“The business judgment rule is a presumption protecting conduct by directors that can be attributed to any rational business purpose’ ”) (quoting Dennis J. Block, et al., The Business Judgment Rule: Fiduciary Duties of Corporate Directors 18 (5th ed.1998) (emphasis added)); id. (noting that business judgment rule does not protect a director’s “abuse of discretion”);2 Brehm v. Eisner, 746 A.2d 244, 264 (Del.2000) (“Irrationality is the outer limit of the business judgment rule.” (footnote omitted)); see also Joy v. North, 692 F.2d 880, 886 (2d Cir.1982); Cramer v. Gen. Tel. & Elees. Corp., 582 F.2d 259, 275 (3d Cir. 1978); Long v. Lampton, 324 Ark. 511, 922 S.W.2d 692, 699 (1996); Katz v. Chevron Corp., 22 Cal.App.4th 1352, 27 Cal.Rptr.2d 681, 689 (1994); Willens v. 2720 Wis. Ave. Coop. Ass’n, Inc., 844 A.2d 1126, 1137 (D.C.2004). A number of academic commentators have also concluded that objectively irrational decisions should not be sheltered by the business judgment rule. See, e.g., David Millon, Redefining Corporate Law, 24 Ind. L.Rev. 223, 253 (1991) (“An obvious example of objectively irrational behavior not entitled to business judgment rule protection would be a decision that, at the expense of the corporation’s shareholders, conferred a benefit on some third party not legitimately entitled to management’s largesse.”); David Rosenberg, Galactic Stupidity and the Business Judgment Rule, 32 J. Corp. L. 301, 322 (2007) (“Courts will not often impose liability for the galactic stupidity of directors, but the possibility must at least exist, or the duty of good faith dissolves completely....”).
As one court has explained, review for irrationality is another means by which a court may ensure that the decision under scrutiny was made in good faith. See Brehm, 746 A.2d at 264 (“Irrationality ... may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule.”).3 *563Most importantly, two courts that have considered this matter have determined that the business judgment rule does not mandate judicial deference to objectively unreasonable SLC recommendations. See Houle v. Low, 407 Mass. 810, 556 N.E.2d 51, 59 (1990) (“The judge must determine, on the basis of the evidence presented, whether the committee reached a reasonable and principled decision.”); House v. Estate of Edmondson, 245 S.W.3d 372, 382 (Tenn.2008) (stating that courts must take into consideration “the soundness of the committee’s conclusions and recommendations”).
This rationality requirement is reflected in the language of Minn.Stat. § 302A.251, which, as the majority concedes, “inform[s] our understanding of the business judgment rule as it applies to the decision of an SLC to settle a derivative action.” Ante. Under section 302A.251, a director may take advantage of the business judgment rule only if he or she has acted “in good faith, in a manner [he or she] reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Minn.Stat. § 302A.251, subd. 1. Notably, section 302A.251 expands significantly upon the language of its predecessor, which required only that directors act “in good faith, and with that diligence and care which ordinarily prudent men would exercise under similar circumstances in like positions.” Minn.Stat. § 301.31 (1980); see also Minn.Stat. Ann. § 302A.251, Reporter’s Note — 1981 at 353 (West 2004) (Reporter to the Minnesota Task Force on Corporate Law) (stating that the business judgment rule “is made a three-part rule by [section 302A.251’s] addition of the words ‘in a manner the director reasonably believes to be in the best interests of the corporation’ ”).4
One could argue that section 302A.251 contains no rationality requirement, but only provides additional language to clarify the meaning of “good faith.” Under such an interpretation, section 302A.251 would set forth a requirement of good faith, only to restate that requirement in alternative language before setting forth an additional requirement of due care. But the legislature has defined “good faith” as “honesty in fact in the conduct of the act or transaction concerned.” Minn.Stat. § 302A.011, subd. 13 (2006). Thus, the statute’s good faith requirement is entirely unlike its reasonableness requirement; the former sets forth the particular state of mind required of a corporate director, while the latter mandates that any decision be reasonable. Further, if “good faith” and “reasonably believes” were to mean essentially the same thing, a substantial part of section 302A.251 would be superfluous. To interpret those words synonymously would in essence treat the statute as only requiring that the director believe his actions to be in the best interests of the corporation, rather than “reasonably believe[ ]” them to be so. Such an interpretation conflicts with our canons of statutory construction, under which “a statute is to be construed as a whole so as to harmonize and give effect to all its parts, and where possible, no word, phrase, or sentence will be held superfluous, void, or insignificant.” Anderson v. Comm’r of Taxation, 253 Minn. 528, 533, 93 N.W.2d 523, 528 (1958); see also Minn. Stat. § 645.16 (2006) (“Every law shall be *564construed, if possible, to give effect to all its provisions.”).
The language of section 302A.251 is particularly relevant to our analysis of the federal district court’s certified question, given that the legislature has specifically made this section applicable to SLC members. See Minn.Stat. § 302A.241, subd. 7 (2006) (deeming committee members “directors for purposes of section! ] 302A.251”); cf. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 327-28 (1987) (relying on a statute concerning director conflicts as an “expression of legislative intent” regarding North Carolina business judgment rule). The Minnesota legislature considered it significant that SLC members’ actions be reasonable in light of the corporation’s best interests. In fact, the legislature considered reasonableness to be of such significance that it made it impossible for an SLC member to seek shelter under the business judgment liability rule if he could not have reasonably thought his actions to be in the corporation’s best interests.
Naturally, then, one would expect the Minnesota business judgment rule to require that a similar showing of reasonableness be made before any deference will be accorded to the recommendation of a properly-constituted SLC. After all, Auerbach itself is premised on the very notion that corporate litigation decisions should be treated no differently than any other decisions normally shielded by the business judgment rule. See Auerbach, 419 N.Y.S.2d 920, 393 N.E.2d at 1000-01 (noting similarity between litigation decisions and other “questions of corporate policy and management”). Yet, without explanation, the majority requires a lesser showing on the part of an SLC seeking judicial deference to a decision not to pursue derivative litigation than would be required of a corporate director defending, or seeking deference to, the exact same decision. The majority does so despite the legislature’s unmistakable intent that, generally, the business judgments of directors and SLC members receive identical treatment from the courts. See Minn.Stat. § 302A.241, subd. 7.5 While I agree that concerns about an SLC’s structural bias are inadequate to justify an expansion of the business judgment rule, those concerns are more than sufficient to counsel against the majority’s excision of an entire element from the business judgment rule.
Based upon the language of section 302A.251, I conclude that the Minnesota business judgment rule requires a greater level of scrutiny than is contemplated in Auerbach, though not the limitless review permitted in Zapata. Rather, it appears that section 302A.251 calls for a middle ground between these competing standards — a middle ground under which a court, after evaluating an SLC’s independence, investigative methods, and good *565faith, must determine whether the SLC’s recommendation. can be attributed to any rational business purpose. By allowing such limited scrutiny of the reasonableness of an SLC recommendation, we will avoid an unnecessary (and inexplicable) divergence between the business judgment rule applied to an SLC recommendation and the business judgment liability rule codified in section 302A.251. More importantly, we will address the concerns that likely motivated the court in Zapata, without encroaching upon the rightful authority of directors to manage corporate affairs. See John. D. Donovan, Jr., Derivative Litigation and the Business Judgment Rule in Massachusetts: Houle v. Low, 34 Boston Bar.J. 22, 26 (1990) (noting that the reasonableness review adopted in Houle may cause courts to “more appropriately balance the interests of necessary scrutiny against the avoidance of second-guessing”). Under the standard I propose, facially unreasonable recommendations — likely a central concern of the Zapata court — will receive no judicial deference. At the same time, an SLC will retain the ability to choose from a wide variety of recommendations in any given set of circumstances— the recommendation need only be reasonable, and a court would have no authority to insist upon one reasonable recommendation over another.6
Of course, if the rationality of an SLC’s recommendation is to be adequately evaluated, a court must take into account what support the SLC’s report provides for that recommendation. Without some indication or explanation of what the SLC relied upon in reaching its recommendation, it would be impossible for a court to determine the rationality of that recommendation. As a result, any evaluation of the rationality of an SLC recommendation must take into account the grounds the SLC provides in support of its recommendation.
Lastly, it appears necessary to point out that, unlike review under the second step of Zapata, it would be relatively rare for rationality review to result in the rejection of an SLC’s recommendation, given the unlikelihood of an irrational result stemming from a methodologically sound investigation conducted independently and in good faith. A court applying this element of the business judgment rule has no leeway, as it would under Zapata, to interfere merely on the basis of a disagreement with the SLC on matters of business judgment.7 If the SLC’s recommendation is reasonably in the best interests of the corporation, the court may not decline to grant deference to that recommendation unless another element of the business judgment rule has not been met.8 As a result, this rationality requirement will affect only *566those eases in which the other elements of the business judgment rule somehow fail to catch a manipulation of the SLC process. In most cases, rationality review will simply affirm the results of a court’s analysis of the SLC’s independence, investigative procedures, and good faith. Just the same, I conclude that it would be improvident to excise this element of the business judgment rule, which goes far to address Zapata’s structural bias concerns without intruding on the wide discretion to be afforded to an SLC.
Because I believe that the Minnesota business judgment rule requires a court to consider the reasonableness of an SLC’s recommendation as well as the SLC’s independence, investigative methods, and good faith, and I only concur in the court’s resolution of the certified question.

. I utilize the synonymous terms "irrational” and "unreasonable” interchangeably, with no particular significance ascribed to the use of one term over the other.

. The term "abuse of discretion” is generally used in this context to describe " ‘a decision that is so removed from the realm of reason or so unreasonable as to fall outside the permissible realm of sound discretion.’ ” Block, et al., supra, at 85 (quoting Proposed Model Bus. Corp. Act. § 8.30 Official Comment, 53 Bus. Law. 157, 164 (1997)).

. Any analysis of a decisionmaker's good faith, by its very nature, will necessitate scrutiny of the decision’s rationality. Cf. S. Samuel Arsht, The Business Judgment Rule Revisited, 8 Hofstra L.Rev. 93, 122 (1979) ("This [rationality] limitation to the business judgment rule is, perhaps, not a limitation at all, but simply an application of the fundamental principle behind the rule.”). Because a deci-sionmaker's good faith is a state of mind, see Minn.Stat. § 302A.011, subd. 13 (2006) (defining good faith as "honesty in fact in the conduct of the act or transaction concerned”), of which direct evidence will typically be lacking, good faith will usually have to be ascertained by means of indirect evidence. Evidence particularly indicative of a decisionmaker’s state of mind would be the relationship (or lack thereof) of the decision *563to the facts on which the decisionmaker purports to base the decision.

. The relevant language of section 302A.251 appears to have largely escaped the attention of the parties who submitted briefs on this matter, and was not addressed in our opinion in Janssen.

. My conclusion is not, as the majority would imply, premised on a mistaken belief that section' 302A.251 is "controlling." Ante. Rather, it is based upon the simple fact that the application of two radically different business judgment rules — one in the context of liability assessments, the other in the context of SLC recommendations — creates a unnecessary inconsistency in Minnesota law. In fact, the failure to apply a reasonableness requirement to an SLC’s recommendations may lead to unfortunate results. Under the rule articulated by the majority, an unreasonable SLC recommendation may receive deference under the business judgment rule, while still exposing the members of the SLC to personal liability under section 302A.251, which explicitly requires a showing of reasonableness. It is unlikely that the legislature intended such contradictory results to stem from the application of its statutory scheme. Cf. Minn. Stat. § 645.16(6) (stating that, when interpreting a statute, the courts are to take into account "the consequences of a particular interpretation’ ’).

. See Arsht, supra, at 122 ("An honest error in judgment is allowed. But a judgment that cannot be sustained on some rational basis falls outside the protection of the business judgment rule; the transaction’s results may often belie the honest, good faith exercise of judgment.”).

. See Arsht, supra, at 126 (“In conducting its own analysis of the reasonableness of the directors’ business judgment, the court does not attempt to decide whether it agrees with the directors’ judgment. The court determines only whether there is a reasonable basis for the directors’ decision.”). Put another way, a court may only decline to give deference to a decision "so blatantly imprudent that it is inexplicable, in the sense that no well-motivated and minimally informed person could have made it.” William T. Allen, et al., Realigning the Standard of Review of Director Due Care With Delaware Public Policy: A Critique of Wan Gorkom and its Progeny as a Standard of Review Problem, 96 Nw. U.L.Rev. 449, 452 (2002) (footnote omitted).

.The majority appears to be concerned that any analysis of the reasonableness of an SLC recommendation will pose the same dangers as the Zapata approach. Such concern may be based upon the mistaken belief that a court conducting rationality review has broad dis*566cretion to substitute its own judgment for that of an SLC. As I make clear, however, rationality review is limited in scope. See supra note 7 and accompanying text. Properly understood, rationality review would not implicate the majority’s key concerns — rationality review would not require the application of unclear standards on review, would not intrude on the directors’ rights to manage the corporation, gives no leeway for a court to impose its biases upon the SLC, does not take into account such nebulous concerns as “matters of ... public policy,’’ and creates little uncertainty as to which SLC recommendations will receive deference from the courts. Moreover, for a court to recognize the utter irrationality of an SLC recommendation, only to defer to that decision anyway, would itself " 'inevitably fuel[ ][the] disrespect for the courts’ ’’ about which the majority is rightfully concerned. Ante (quoting Franklin A. Gevurtz, Who Represents the Corporation? In Search of A Better Method for Detennining the Corporate Interest in Derivative Suits, 46 U. Pitt. L.Rev. 265, 305 (1985)).