Duty of Care: Directors and officers of a corporation, in making all decisions in their

capacities as corporate fiduciaries, must act in the same manner as a reasonably prudent
person in their position would.
 Courts will generally adjudge lawsuits against director and officer actions to meet
the duty of care under the Business Judgment Rule:
o Courts will not second guess the business judgment of corporate managers
and will find the duty of care has been met so long as the fiduciary
executed a (1) reasonably informed; (2) good faith; (3) rational
judgment made in the best interest of the corporation; (4) without the
presence of a conflict of interest (self-dealing)
 Burden of proof lies with P to prove that this standard has not been
met
 If P meets the burden, D can still meet the duty of care by showing
entire fairness, meaning that both a fair process was used to
reach the decision and that decision produced a substantively fair
outcome for the corporation’s shareholders.
o Under BJR, a director or officer acting in good faith is only liable for
gross negligence of worse
 The standard for good faith requires a subjective belief that the
determination is in the best interests of the company (In re El
Paso)
 Standard for fiduciary bad faith (In re Walt Disney):
 Intentional, dereliction of duty, a conscious disregard for
one’s responsibilities

Duty of Loyalty: Directors and officers of a corporation, in making all decisions in their
capacities as corporate fiduciaries, must act without personal economic conflict.
 Burden is on directors to show the good faith of the transaction, and the inherent
fairness to the corporation (Bayer)
 Duty of loyalty can be breached by making a self-interested transaction or
taking a corporate opportunity
o Self-dealing occurs when the parent, by virtue of its dominations of the
subsidiary, causes the subsidiary to act in such a way that the parent
receives something from the subsidiary to the exclusion of, and the
detriment to, the minority stockholders of the subsidiary
 Intrinsic Fairness Test must be applied where there is self-
dealing
 Puts the burden on the majority shareholder to show that
the transaction was objectively fair (Sinclair)
 Shareholder ratification of an interested director shifts the
burden of proof to P to demonstrate that the terms of the
transaction are so unequal as to amount to a gift or waste of
corporate assets. This does not relieve D of its first burden
(see Fliegler)
o Corporate opportunity (Broz, in re eBay)
  Line of business: Is the opportunity within the same line of
business as the corporation?
 Interest or expectancy: Is this particular thing that the company is
interested in and looking for? (Stricter of the two standards)
 A conflict of interest takes us out of the business judgment rule and brings us to
the entire fairness standard (interested majority shareholder transaction)
o Intrinsic fairness standard involves interested director transactions (but
see Benihana, where interested director transaction was protected by
DGCL § 144a))
 Both of these standards are the same with the burden on D to prove
entire fairness
 But see Wheelabrator, where BJR applied to a transaction
between an interested director and a corporation, but was approved
by a majority of disinterested, informed shareholders/directors
 Burden of proof is on the party attacking the transaction
 DICTA: Transactions between corporation and controlling
shareholder calls for the entire fairness standard with
burden of proof on P
 According to Kahn, BJR applies to a transaction between controlling shareholder
and a corporation, if and only if:
o (1) The controller conditions the procession of the transaction on the
approval of both a special committee and a majority of the minority
stockholders;
o (2) The special committee is independent;
o (3) The special committee is empowered to freely select its own advisors
and to say no definitively;
o (4) The special committee meets its duty of care in negotiating a fair price;
o (5) The vote of the minority is informed; and
o (6) There is no coercion of the minority

MERGERS:

Weinberger: cash out-merger

1. First, the plaintiff in a suit challenging a cash-out merger must allege specific
facts of fraud, misrepresentation, or other items of misconduct to demonstrate
the unfairness of the merger terms to the minority.
2. The ultimate burden of proof is on the majority shareholder to show by a
preponderance of the evidence that the transaction was fair
3. However, where corporate action has been approved by an informed vote of a
majority of the minority shareholders, the burden entirely shifts to the plaintiff
to show that the transaction was unfair to the minority
a. (In Weinberger, the majority of the minority was uninformed, so burden
stayed with D)
4. But in all this, the burden clearly remains on those relying on the vote (the
majority shareholders) to show that they completely disclosed material info
Coggins: freeze-out merger
 When a controlling stockholder/corporate director chooses to eliminate public
ownership, it is the case that a judge should examine with closest scrutiny the
motives and behaviors of the controlling stockholder
o A controlling stockholder who is also a director standing on both sides
of the transaction bears the burden of showing:
 (1) The transaction does not violate fiduciary obligations;
 (2) The elimination of public ownership was in furtherance of a
business purpose; and
 (3) The transaction was fair considering the totality of the
circumstances

TAKEOVERS:

In UNOCAL, the Delaware Supreme Court established the enhanced scrutiny test,
which is applied to a target board's decision-making process when a takeover is
occurring, to determine if the business judgment rule will apply to their decisions.
 BASELINE TEST TO SEE IF WE CAN GET TO BJR:
o Judicial determination regarding the adequacy of the decision-making
process employed by the directors, including the information on which the
directors based their decision
o A judicial examination of the reasonableness of the directors’ action in
light of the circumstances then existing
 Directors have the burden of proving:
 (1) They were adequately informed;
 (2) There was a legitimate business interest at stake; and
 (3) They acted reasonably
 This case implicates two circumstances where this enhanced
scrutiny standard is applied:
 (1) The approval of a transaction resulting in a sale of
control, and
 (2) The adoption of defensive measures in response to a
threat to corporate control

Unocal: Board’s defensive tactic must be reasonable in relation to the threat posed
 D must prove two things before BJR will be applied to its decision:
o (1) There were reasonable grounds to believe there was a danger to
corporate policy and effectiveness; and
o (2) The defensive measures used were reasonably related to the threat
imposed
 See Paramount v. Time and Omnicare

Revlon: Board’s duty is to get the best possible price for the shareholders
 Burden is on the directors to show they had a reasonable ground for believing there
was a danger to corporate policy and effectiveness
o Satisfied by a showing of good faith and reasonable investigation
  See QVC and Lyondell

Omnicare:
1. Enhanced Judicial Scrutiny – To withstand, Board must establish that (i) they
had reasonable grounds for believing that a danger to a corporate policy and
effectiveness existed, (ii) they acted in good faith (iii) after conducting a
reasonable investigation. Also, they must prove:
a. Defensive Device Not Preclusive or Coercive – and were within a
“range of reasonable responses” to the perceived threat
i. Preclusive if (i) inhibits stockholders from their right to receive
all tender offers, or (ii) precludes a bidder from seeking control by
fundamentally restricting proxy contests.
ii. Coercive – Response is coercive if “it is aimed at forcing upon
stockholders a management-sponsored alternative to a hostile
takeover.
2. Also failed because the agreement prevented board from fulfilling its fiduciary
duties to minority shareholders when Omnicare presented a superior offer.
Discharging fiduciary duty through an agreement is invalid and unenforceable.
a. By failing to include a fiduciary out clause, the board disabled itself from
exercising its own fiduciary obligations at a time when the board’s own
judgment is most important (receipt of subsequent offer)