Nature of Case
Summary of Principal Holdings
This appeal from final judgment of the Court of Chancery encompasses consolidated suits: a first-filed Delaware statutory appraisal proceeding (the "appraisal action"), and a later-filed shareholders' individual suit for rescissory damages for "fraud" and unfair dealing (the "personal liability action") brought by plaintiffs, Cinerama, Inc. ("Cinerama"), a New York corporation, and Cede & Co. ("Cede"), the owner of record. The actions stem from a 1982-83 cash-out merger in which Technicolor, Incorporated ("Technicolor"), a Delaware corporation, was acquired by MacAndrews & Forbes Group, Incorporated ("MAF"), a Delaware corporation, through a merger with Macanfor Corporation ("Macanfor"), a wholly-owned subsidiary of MAF.
Plaintiff Cinerama was at all times the owner of 201,200 shares of the common stock of Technicolor, representing 4.405 percent of the total shares outstanding. Cinerama did not tender its stock in the first leg of the MAF acquisition commencing November 4, 1982; and Cinerama dissented from the second stage merger, which was completed on January 24, 1983. After dissenting, Cinerama, in March 1983, petitioned the Court of Chancery for appraisal of its shares pursuant to 8 Del.C. § 262. In pretrial discovery during the appraisal proceedings, Cinerama obtained testimony leading it to believe that director misconduct had occurred in the sale of the company. In January 1986, Cinerama filed a second suit in the Court of Chancery
The defendants in the personal liability action moved to dismiss the action, arguing that Cinerama had no standing to pursue such a claim after petitioning for appraisal of its shares. The Chancellor denied the motion but ruled that after discovery was completed, Cinerama would have to elect which cause of action it wished to pursue. Cinerama filed an interlocutory appeal to this Court and we reversed. Cede & Co. v. Technicolor, Inc., Del.Supr., 542 A.2d 1182 (1988) ("Cede I"). In Cede I this Court found the Chancellor to have committed legal error in requiring plaintiff to make an election of remedies before trial. We held that the plaintiff shareholder was entitled to pursue concurrently, through trial, its appraisal action and its personal liability action. We then remanded the case for trial of the consolidated appraisal and personal liability actions.
Following an extended trial and after further discovery, the Chancellor elected to decide first the appraisal suit. The court did so notwithstanding this Court's implicit instruction in Cede I. 542 A.2d at 1189, 1191.
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Addressing the Personal Liability Opinion, we find no merit in Cinerama's direct claims for rescissory damages. We also find no error in the Chancellor's use of a materiality standard to define duty of loyalty. We find error in his reliance on a reasonable person analysis, but decline to resolve the loyalty issue on the present record. Neither the parties nor the trial court has addressed the relevance and legal effect of Technicolor's charter requirement of director unanimity (for sale of the company to be accomplished by less than ninety-five percent share vote on the merger) upon the trial court's presumed finding of the "material" disloyalty of directors Fred Sullivan and Arthur Ryan. The court has also not addressed the relevance and effect of the interested-director provisions of 8 Del.C. § 144 upon: (1) the business judgment rule's requirement of director loyalty; (2) Technicolor's charter requirement; and (3) Cinerama's claim for rescissory damages, assuming it prevails under an entire fairness standard of review of the merger.
We also conclude that the trial court has erred as a matter of law in reformulating the business judgment rule's elements for finding director breach of duty of care in the context of an arms-length, third-party transaction lacking evidence of director bad faith or director self-dealing. The Chancellor has erroneously imposed on Cinerama, for purposes of rebutting the rule, a burden of proof of
Our determination of the personal liability action renders moot Cinerama's appeal of the Appraisal Opinion and the issues raised therein. See Cede I.
In 1970 Technicolor was a corporation with a long and prominent history in the film/audio-visual industries. Technicolor's core business for over thirty years had been the processing of film for Hollywood movies through facilities in the United States, England and Italy. In its field, Technicolor was the most prominent of a handful of companies. Notwithstanding Technicolor's dominance within its field, the company, by the late seventies, decreased in competitiveness. Its major film processing laboratory was, in the words of Morton Kamerman ("Kamerman"), its Chief Executive Officer and Board Chairman,
In response, Technicolor's Chief Executive Officer initiated efforts to reduce costs at Technicolor's film laboratories and to eliminate other inefficiencies. Through Kamerman's initiative, in the late seventies Technicolor's market share and earnings improved. However, by the early eighties, Technicolor's increase in market share had leveled off and the company's core business earnings had stagnated. Kamerman concluded that Technicolor's principal business, theatrical film processing, did not offer sufficient long-term growth for Technicolor, even though it still represented more than fifty percent of Technicolor's net income.
Kamerman proposed that Technicolor enter the field of rapid processing of consumer film by establishing a network of stores across the country offering one-hour development of film, with quality service at competitive prices. The business, named "One Hour Photo" ("OHP"), would require Technicolor to open approximately one thousand stores over the next five years and to invest about $150 million. In May 1981, Technicolor's Board of Directors approved Kamerman's plan. The following month Technicolor announced its ambitious venture with considerable fanfare. On the date of its OHP announcement, Technicolor's stock had risen to a high of $22.13.
In the months that followed, Technicolor fell behind on its schedule for OHP store openings and the relatively few stores that did open reported operating losses. At a time when Technicolor's film processing business was facing stiff competition and had lost one of its major film production clients to a competitor, OHP came to be viewed as a drain on Technicolor's resources. Technicolor's other major divisions were experiencing mixed if not disappointing results.
As of August 1982, Technicolor had opened only twenty-one of a planned fifty OHP retail stores; and its Board was anticipating a $5.2 million operating loss for OHP in fiscal 1983. Notwithstanding, Kamerman remained committed to OHP. In the company's Annual Report, issued September 7, 1982, Kamerman reported, "We remain optimistic that the One Hour Photo business represents a significant growth opportunity for the Company." In contrast, for the fiscal year ending June 1982, Technicolor's September financial statements reported an eighty percent decline of consolidated net income — from $17.073 million in fiscal 1981 to $3.445 million in 1982. Senior management of Technicolor attributed the decline not only to write-offs for losses in Technicolor's proposed sale of its Gold Key and Audio-Visual divisions, but to profit decline in Technicolor's core business, film processing. By September 1982, Technicolor's stock had reached a new low of $8.37 after falling by the end of June to $10.37 a share.
B. Prelude to Negotiations
In the late summer of 1982, Perelman of MAF concluded that Technicolor would be an attractive candidate for takeover by MAF. MAF was a small company, roughly half the size of Technicolor; its market capitalization was forty percent that of Technicolor's, and its revenues were substantially less than Technicolor's. After several bids for other companies had been thwarted, Perelman targeted Technicolor for takeover. Perelman's interest in Technicolor was not then known to any of Technicolor's management.
Perelman was aware of the financial constraints imposed upon MAF by its lender banks. Perelman's lender banks had gone on record as being opposed to financing a hostile bid.
Perelman learned that Michael Tarnopol ("Tarnopol"), a Managing Director at Bear, Stearns & Co. ("Bear Stearns"), had a longstanding business relationship with Fred Sullivan ("Sullivan"), one of Technicolor's directors. Perelman apparently asked Tarnopol to seek Sullivan's assistance in making contact with Technicolor's management. On September 10, 1982, Tarnopol informed Sullivan that Perelman and MAF were interested
Sullivan did not divulge his conversation with Tarnopol or his planned meeting with Perelman to any of his fellow Technicolor board members. On the following Monday, September 13, Sullivan instructed his secretary to call his stockbroker and place a purchase order for ten thousand shares of Technicolor stock at the market.
On September 17, Sullivan met with Tarnopol and Perelman. Perelman told Sullivan that he was interested in acquiring Technicolor through a one hundred percent stock acquisition. Perelman told Sullivan that he would pay about $15 per share. Sullivan replied that he did not believe Kamerman would be interested in selling Technicolor at that price, but agreed to take the matter up with him. Perelman informed Sullivan that MAF was intent on purchasing up to five percent of Technicolor's stock in the open market. In fact, MAF had, since September 10, 1982, been purchasing Technicolor stock at market. By September 23, MAF had acquired 186,500 shares of Technicolor, representing approximately 3.7 percent of Technicolor's outstanding stock.
Sullivan did not inform any of his fellow directors of the meeting with Perelman until a week later when, on September 24th, he informed Kamerman of: Tarnopol's initial call; his September 17 meeting with Perelman; and Perelman's interest in acquiring Technicolor. Sullivan suggested that Kamerman meet with Perelman, and Kamerman agreed to do so. Sullivan did not inform Kamerman of Perelman's intent to acquire Technicolor stock or that he, Sullivan, had recently increased his holdings in Technicolor stock.
Perelman agreed to meet with Kamerman on October 4th in Los Angeles. Neither Kamerman nor Sullivan informed any of their fellow officers and directors of Technicolor of their scheduled meeting with Perelman or of Perelman's interest in acquiring Technicolor.
Prior to the October 4th meeting, Perelman again contacted Sullivan and requested to meet with him at Perelman's offices. The parties met, purportedly for Sullivan to assist Perelman in preparing for his coming meeting with Kamerman.
On October 4, Kamerman and Perelman met for the first time at Technicolor's offices in Los Angeles. Sullivan was the only other director or officer of Technicolor present. In the course of the meeting, Perelman informed Kamerman that MAF would be willing to pay $20 per share to acquire Technicolor. Kamerman reacted negatively to the figure of $20, and countered that he would not consider the sale of the company or submitting the matter to his board at a price below $25 a share. Other subjects discussed apparently included: the effect an MAF acquisition of Technicolor would have on Kamerman's employment contract with Technicolor; whether Kamerman and Sullivan would continue as directors of Technicolor; the importance to Perelman of obtaining from Kamerman and Guy M. Bjorkman ("Bjorkman"), Technicolor's two largest stockholders, binding options to purchase their and
Kamerman also met with two of his senior officers, Technicolor's General Counsel, John Oliphant ("Oliphant"), and its Treasurer, Wayne Powitzky ("Powitzky"), for advice on: the tax consequences to Kamerman of a possible sale of Technicolor and of his Technicolor holdings; a sale's impact on his employment contract; the possibility of his joining MAF's board; and the effect a sale would have on his Technicolor stock option rights.
Kamerman also talked with Bjorkman and George Lewis ("Lewis"), two of Technicolor's directors. Lewis was Kamerman's tax attorney and Bjorkman was Technicolor's largest stockholder
Kamerman did not inform Technicolor's President and Chief Operating Officer, Arthur Ryan ("Ryan"), also a director of Technicolor, of his meeting with Perelman. Kamerman and Ryan had a strained personal relationship. However, Martin Davis ("Davis"), a senior executive at Gulf & Western, had informed Ryan of Sullivan's New York meeting with Perelman and Kamerman's apparent willingness to consider a sale of Technicolor to Perelman. Davis was a mutual friend of Perelman and Ryan. Ryan and Davis also discussed the possibility of Ryan's future employment at Technicolor.
On October 12, Perelman met with Kamerman in Los Angeles for a second time. MAF's Chief Financial Officer and Powitzky also attended the meeting. The meeting's principal purposes were: (1) to allow MAF's Chief Financial Officer to review Technicolor financial data; and (2) to give Perelman a tour of Technicolor's Los Angeles facilities. Other subjects included: Perelman's request for commitments from Technicolor's senior management (other than Ryan) to remain after the merger; an offer to Kamerman and Sullivan of seats on MAF's board of directors after the acquisition was completed; and the mechanics of structuring the merger. Price was apparently not discussed. By the end of this meeting, Kamerman and Perelman had reached substantial agreement on all matters discussed except price and financing. Kamerman, without consulting with any of his fellow officers or directors, then retained Goldman Sachs ("Goldman") as Technicolor's investment banker and Meredith M. Brown ("Brown"), a senior partner at the New York law firm of Debevoise & Plimpton, as its outside legal counsel.
Two days after his second meeting in Los Angeles, Kamerman told Jonathan Isham ("Isham"), a fellow director and a member of Technicolor's Executive Committee, to stand ready to attend a special meeting of the board of Technicolor, which might be called within the next several weeks. Isham, retired, was a frequent traveler.
Kamerman and Perelman continued to confer after their second Los Angeles meeting on key issues. Kamerman's concerns were: (1) MAF's ability to obtain necessary financing; (2) Perelman's commitment to go through with the acquisition; and (3) whether Technicolor could "opt out." Kamerman and Bjorkman also wanted assurances from Perelman that whatever price they received for their shares would be the highest price paid by MAF for any shares of Technicolor purchased by MAF during the course of the merger.
Perelman's objective was a series of agreements that would give Technicolor no "out." Through individual stock purchase agreements with Kamerman and Bjorkman and their spouses, MAF would acquire eleven percent of Technicolor's outstanding stock. MAF, through an option from Technicolor,
In further one-on-one private meetings and negotiations between Kamerman and Perelman, they agreed that, if the deal closed, Sullivan should receive a "finder's fee" of $150,000 for his role in introducing the parties. The amount of the fee had been suggested by Bear Stearns and was originally to have been paid by Bear Stearns.
On October 18 Brown and a project team from Goldman flew to Los Angeles to meet with Kamerman and senior management of Technicolor. The team consisted of a Goldman vice president, John Golden, and two junior associates. Kamerman briefed the Goldman team on his negotiations with Perelman and provided them with background information on Technicolor. Kamerman instructed the team that he wanted a report back in three days giving a preliminary view on whether Perelman's offering price of $20 per share was worth pursuing and a fairness opinion based on a price range of $20-22 per share. Kamerman also made it clear to the Goldman team that their contacts with Technicolor were to be limited to three officers of the company — Kamerman, Oliphant and Powitzky — and no one else without Kamerman's approval.
Kamerman also barred the Goldman team from meeting with any of the operating heads of the Technicolor divisions and from visiting any of the Technicolor facilities. Defendants admit that until the October 29 special board meeting of Technicolor, Goldman representatives had not had access to any of Technicolor's senior officers or directors except Kamerman, Oliphant and Powitzky.
Following the meeting, Brown discussed with Kamerman the advisability of Technicolor's issuing a press release reporting MAF's negotiations to acquire the company. The parties vigorously dispute the details of the discussions. Brown testified that, before the meeting, he had drafted a proposed press release, noting the pros and cons of issuing one at that time. Brown stated that he favored release but Kamerman did not; and no press release was issued. The court found that Brown had advised that a release was not required because negotiations were not sufficiently "mature."
Back in New York, Goldman put together a valuation package; and three days later, on October 21, Goldman told Kamerman by telephone that a price of $20-$22 was worth pursuing. However, Goldman also suggested that Kamerman consider other possible purchasers for Technicolor. Goldman prepared an LBO model which included both an analysis
Goldman performed no other financial study concerning Technicolor's sale to MAF, except a fairness opinion for presentation at Technicolor's board meeting of October 29. Goldman also revised its October 21 LBO analysis for presentation to the board on October 29.
On October 27, six days after Kamerman's receipt of Goldman Sachs' fairness opinion, he and Perelman reached an agreement on price by telephone.
That evening Kamerman instructed Technicolor's general counsel, Oliphant, to prepare a notice for the calling of a special meeting of the Board of Directors of Technicolor for New York City at 10:00 a.m., two days later, Friday, October 29. Technicolor requested the New York Stock Exchange to halt trading in its stock. The notice of special meeting did not disclose the meeting's purpose and only a few of the directors received notice of the meeting before Thursday, the 28th.
All nine directors of Technicolor attended the meeting. Three of the directors — Lewis, Isham and Bjorkman — as previously noted, had only limited knowledge of the proposed sale of the company. Bjorkman's and Lewis' knowledge of the terms of the transaction was limited to what Kamerman had told them individually in advance of the meeting. Three other directors of Technicolor, Charles S. Simone ("Simone"), William R. Frye ("Frye") (who had formerly headed Technicolor's Consumer Processing Division), and Richard M. Blanco ("Blanco") (who was also Chief Executive Officer of Technicolor's Government Services Division), were told nothing of Technicolor's sale prior to the meeting.
Ryan, though also President and Chief Operating Officer, knew little except what he had learned indirectly from Davis of Gulf & Western.
The Technicolor board convened on October 29 to consider MAF's proposal. Kamerman told the board of Bear Stearns' contact on behalf of MAF and then outlined the history of his negotiations with Perelman. Kamerman stated that he had received an offer from Perelman of $20 a share, that he had countered with $25 and that he, on October 27, had agreed to a sale price of $23 per share. Kamerman counseled the board that $23 was "good" because it was ten times "core" earnings of between $2.30 and $2.50 a share. Kamerman recommended that MAF's $23 per share offer be accepted in view of the present market value of Technicolor's shares. He stated that they should assume a loss of $1 per share on the One Hour Photo business. He believed that Technicolor's depressed share price rendered the company vulnerable for a takeover. Kamerman stated that accepting $23 a share was "advisable rather than shooting dice" on the prospects of Technicolor's One Hour Photo venture.
Kamerman then explained the basic structure of the transaction: a tender offer by MAF at $23 per share for all the outstanding shares of common stock of Technicolor and a second-step merger with the remaining outstanding shares converted into $23 per share, with Technicolor becoming a wholly owned
Kamerman also outlined the terms of his proposed employment contract with MAF and stated that Technicolor would pay Sullivan a finder's fee of $150,000. He explained that he and Sullivan therefore had a financial interest in the proposed transaction.
Kamerman then turned the meeting over to Technicolor's outside counsel, Brown. Brown did not know that Sullivan, Bjorkman, Lewis and Isham had limited knowledge of the proposed sale and that Blanco, Simone and Frye had no substantial prior knowledge of the sale. Brown explained the structure of the proposed transaction, summarized the terms of the proposed merger, and reviewed the key documents involved.
Goldman then made an oral presentation, based on a 78-page "board book,"
After these briefings several directors suggested pushing Perelman for more money but were advised that Perelman would go no higher. One director, Simone, suggested that Kamerman solicit other offers. Board consensus appeared to be that "a bird in the hand was better than a bigger one in the bush," and it ultimately rejected Simone's suggestion.
According to the minutes of the meeting, and the trial court so found, the board unanimously approved the Agreement and Plan of Merger with MAF and recommended to the stockholders of Technicolor the acceptance of the offer of $23 per share. The board also unanimously recommended repeal of the supermajority provision of the Certificate of Incorporation. The board approved the Stock Option Agreement, Sullivan's finder's fee and Kamerman's new employment contract.
Immediately following the meeting, Technicolor issued a press release announcing the terms and conditions of the acquisition.
C. The Merger
In November 1982, Technicolor filed a 14D-9 and a 13D with the Securities and Exchange Commission in which the board recommended that the shareholders tender their shares to MAF and MAF commenced an all-cash tender offer of $23 per share to the shareholders of Technicolor. By December 3, 1982, MAF had acquired 3,754,181 shares, or 82.19 percent, of Technicolor; the tender offer was closed on November 30, 1982.
In December 1982, the board of Technicolor notified its stockholders of a special shareholders meeting on January 24, 1983, and distributed proxy statements. Attached to the proxy statement was Goldman's written fairness opinion dated November 19, 1982.
III. APPLICATION OF THE BUSINESS JUDGMENT RULE
The pivotal question in this case is whether the Technicolor board's decision of October 29 to approve the plan of merger with MAF was protected by the business judgment rule or should be subject to judicial review for its entire fairness.
Principal Rulings Below/Issues on Appeal
Duty of Loyalty
Addressing first the rule's requirement of director duty of loyalty, the Chancellor found that "the Board as a whole" had not breached its collective duty of loyalty, notwithstanding the court's finding that at least one director, Sullivan, if not a second director, Ryan, had breached his duty of loyalty.
Duty of Care
Turning to the duty of care element of the rule, the court ruled that it was not sufficient for Cinerama to prove that the defendant directors had collectively, as a board, breached their duty of care. Cinerama was required to prove that it had suffered a monetary loss from such breach and to quantify that loss. The court expressed "grave doubts" that the Technicolor board "as a whole" had met that duty in approving the terms of the merger/sale of the company. The court, in effect, read into the business judgment presumption of due care the legal maxim that proof of negligence without proof of injury is not actionable. The court also reasoned that a judicial finding of director good faith and loyalty in a third-party, arms-length transaction should minimize the consequences of a board's found failure to exercise due care in a sale of a company. The Chancellor's rationale for subordinating the due care element of the business judgment rule, as applied to an arms-length, third-party transaction, was a belief that the rule, unless modified, would lead to draconian results. The Chancellor left no doubt that he was referring to this Court's decision in Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985). He stated, "In all, plaintiff contends that this case presents a compelling case for another administration of the discipline applied by the Delaware Supreme
Issues on Appeal
This case raises at least three fundamental issues implicating the precepts and elements of the Delaware business judgment rule. Those issues are: (1) whether the Chancellor's formation and application of the duty of loyalty standard as applied to a claim of director self-interest or lack of independence is correct as a matter of law; (2) whether, assuming the Chancellor's formulation is correct as a matter of law, it supports the Chancellor's finding of no breach of the duty of loyalty in this case; and (3) whether a plaintiff should be required to establish injury from a proven claim of board lack of due care to rebut the rule for breach of the duty of care.
Cinerama asserts that the Chancellor has committed fundamental errors of law in his formulation and application of the business judgment rule's requirements of director duty of loyalty and duty of care. Cinerama first contends that the Chancellor has placed upon a shareholder plaintiff burdens of proof for breach of duty of loyalty
Defendants concede the novelty of the Chancellor's reformulation of the rule's duty of care elements for rebutting a business judgment standard of judicial review to require a shareholder plaintiff to establish harm or loss.
Defendants assert that the Chancellor's reformulation of the duty of loyalty element of the rule to require a director's interest to be "material" to be disabling is not new law, but simply different terminology. Defendants urge affirmance of all other issues appealed. By cross-appeal, defendants assert that the Chancellor's factual findings of the directors' breach of their duty of care are clearly erroneous. As stated above, and explained below, we find reversible error with respect to both director duty of loyalty and duty of care. Defendants' cross-appeal is without merit.
Standard and Scope of Review
The principal issues raised involve the formulation and application of the duty of loyalty and duty of care standard of the business judgment rule. The formulation of the duty of loyalty and duty of care involves questions of law which are, of course, subject to de novo review by this Court. Kahn v. Household Acquisition Corp., Del.Supr., 591 A.2d 166, 175-76 (1991); Waggoner v. Laster, Del.Supr., 581 A.2d 1127, 1132 (1990); Fiduciary Trust Co. v. Fiduciary Trust Co., Del. Supr., 445 A.2d 927, 930 (1982). Assuming a correct formulation of the rule's elements, the trial court's findings upon application of the duty of loyalty or duty of care, being "fact dominated," are, on appeal, entitled to substantial deference unless clearly erroneous or not the product of a logical and deductive reasoning process. Citron v. Fairchild Camera & Instrument Corp., Del.Supr., 569 A.2d 53, 64 (1989); see also Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972).
Underlying Precepts and Elements of the Delaware Business Judgment Rule
Our starting point is the fundamental principle of Delaware law that the business and affairs of a corporation are managed by or under the direction of its board of directors. 8 Del.C. § 141(a). In exercising these powers, directors are charged with an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interests of its shareholders. Guth v. Loft, Inc., Del.Supr., 5 A.2d 503, 510 (1939); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984); Van Gorkom, 488 A.2d at 872; Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261, 1280 (1988).
The business judgment rule is an extension of these basic principles. The rule operates to preclude a court from imposing itself unreasonably on the business and affairs of a corporation. See Mills, 559 A.2d at 1279; Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 954 (1985); Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971); A.C. Acquisitions Corp. v. Anderson, Clayton & Co., Del.Ch., 519 A.2d 103, 111 (1986). The rule, though formulated many years ago, was most recently restated by this Court as follows:
Citron, 569 A.2d at 64 (applying the rule to a third-party sale of a company free of self-dealing); see also Unocal, 493 A.2d at 954.
Under the entire fairness standard of judicial review, the defendant directors must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price. Nixon, 626 A.2d at 1376; Mills, 559 A.2d at 1279; Weinberger, 457 A.2d at 710. Further, in the review of a transaction involving a sale of a company, the directors have the burden of establishing that the price offered was the highest value reasonably available under the circumstances. Mills, 559 A.2d at 1288; see also Citron, 569 A.2d at 67-68 (board should obtain best available transaction for shareholders) (citing Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986)).
IV. DIRECTOR DUTY OF LOYALTY/BOARD DUTY OF LOYALTY
Presumption of Loyalty/Duty of Loyalty
This Court has traditionally and consistently defined the duty of loyalty of officers and directors to their corporation and its shareholders in broad and unyielding terms:
Guth, 5 A.2d at 510; see also Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1345 (1987). Essentially, the duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson, 473 A.2d at 812.
We have generally defined a director as being independent only when the director's decision is based entirely on the corporate merits of the transaction and is not influenced by personal or extraneous considerations. See Aronson, 473 A.2d at 816; see also Pogostin, 480 A.2d at 624. By contrast, a director who receives a substantial benefit from supporting a transaction cannot be objectively viewed as disinterested or independent. See Folk, Delaware General Corporation Law § 141.2 at 141:33. This principle necessarily constrains our review of the Court of Chancery's duty of loyalty formulation.
The Chancellor's Formulation of Cinerama's Burden of Proof of Director Self-Interest
The Chancellor concluded that a plaintiff's burden of proof of a director's self-interest in an arms-length third-party transaction should be greater than in a classic self-dealing transaction where a director or directors stand on both sides of a transaction. Absent evidence of self-dealing, the court ruled that evidence of any personal or special benefit accruing to a director in an otherwise arms-length transaction does not establish a lack of independence sufficient to rebut the business judgment rule unless the director's self-interest is also found to be "material." The Chancellor then defined a director's self-interest in a third-party transaction as not material unless sufficient to create a reasonable probability: (1) that the independence of judgment of a "reasonable person" in the director's position would be affected; and (2) that such director's individual self-interest would have affected the collective decision of the board.
Applying this two-part standard, the Chancellor found Cinerama's evidence of director self-interest sufficient to meet the first part of the materiality test only as to Director Sullivan, and possibly Director Ryan, but, as to each, to fail the second requirement. The court concluded that Sullivan's or Ryan's material self-interests did not taint the board's overall independence.
When a Director's Duty of Independence is Breached for Purposes of Rebutting the Rule
The question presented is whether the Chancellor's formulation of a director's duty of independence, in terms of the quantum of evidence required to rebut the business judgment rule's presumption of director loyalty, is consistent with Delaware case precedent.
Regrettably, defendants have not provided the Court with persuasive case precedent in Delaware or elsewhere that supports the trial court's rulings. Nor has either party considered relevant Delaware statutory law. As a consequence, we decline to address certain issues raised by the parties on the ground that they are not ripe for appellate disposition.
The Chancellor's Requirement that a Director's Self-Interest Must Be Material
The Chancellor articulated a two-part test for finding a self-interest significant enough
We know of no Delaware decisional law which reflects this formulation or application of our business judgment rule's presumption of director loyalty as applied to a challenged third-party transaction; and the parties have not cited any authority supportive of the Chancellor's rationale. In addition, the parties have failed to examine crucial issues regarding: (1) whether the Chancellor's formulation of the second part of the materiality test is consistent with the principles underlying Delaware law; and (2) whether the Chancellor correctly applied such formulation in this case. Accordingly, while we affirm the materiality test's first part as a restatement of established Delaware law, we must remand to the Court of Chancery certain unresolved issues, later defined, regarding the Chancellor's formulation and application of the materiality test's second part.
The First Part of the Chancellor's Materiality Test: Proof of Interest Material to Individual Director(s) Independence
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
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.
The Second Part of the Chancellor's Materiality Test: Proof of Interest Material to the Independence of Entire Board
The Chancellor ruled that, for purposes of rebutting the business judgment rule, any found director self-interest affecting director independence must also be found to have tainted, influenced or otherwise undermined the board's deliberative process. The Chancellor formulated the second part of the materiality test by stating:
Personal Liability Opinion at 23-24 (emphasis added). It is unclear to us under this formulation precisely what a shareholder plaintiff would have to prove to demonstrate a reasonable likelihood of lack of board independence.
Largely without explanation, the Court of Chancery concluded that Sullivan's finder's fee, while materially affecting his own independent business judgment, was not a material interest affecting the transaction overall because the board had approved the transaction after Sullivan's interest had been disclosed. Section 144(a) may arguably sustain this finding. See Fliegler, 361 A.2d at 222. Unfortunately, neither the court below nor the parties have brought section 144(a) into their reasoning or analysis.
There also remains a further significant issue that neither the parties nor the court below has addressed; that is, the relevance of Technicolor's charter requirement of director unanimity to the consequence of a finding of director self-interest. Technicolor's charter requires director unanimity for approval of a sale of the company to be ratified by less than ninety-five percent of the issued and outstanding shares of the corporation. Article Tenth of Technicolor's charter provides in pertinent part:
Here, the supermajority provision of the Technicolor certificate of incorporation apparently represented one facet of a takeover defense designed to ensure that its board would not enter into a merger or sale of the company without the disinterested and independent vote of each voting director.
The question becomes whether, in light of Technicolor's charter requirement of director unanimity, the Chancellor's finding of board approval of the sale of Technicolor by an "overwhelming" vote of disinterested directors was sufficient to support a finding that the board had met its duty of loyalty. We decline to address this question in the first instance and until the implications of section 144(a) are addressed by the court below. We remand this question for decision by the Court of Chancery, subject to the following observations.
If unanimity is required, will one director's self-interest or lack of independence violate the requirement? Do the provisions of section 144 override a charter requirement of unanimity?
Those issues requiring resolution on remand relating to the duty of loyalty are: (1) the precise standard of proof required under the second part of the materiality standard (see note 32 supra); (2) the legitimacy of such a standard under Delaware law and the relevance of section 144(a); (3) the effect of the unanimity requirement in Technicolor's charter on the duty of loyalty standard controlling this case; and (4) the consequence of an affirmance of the decision below finding no breach of the duty of disclosure on the question of director self-interest.
V. DIRECTOR AND BOARD DUTY OF CARE
Independent of our rulings under section IV, we find the Chancellor's restatement of the duty of care requirement of the rule and a shareholder plaintiff's burden of proof for rebuttal thereof, in the context of a good faith, arms-length sale of the company, to be erroneous as a matter of law. We adopt the court's presumed findings that the defendant directors were grossly negligent in failing to reach an informed decision when they approved the agreement of merger, and to have thereby breached their duty of care. Those findings are fully supported by the record. The formulation and application of the duty of care element of the rule, as applied to a third-party transaction, is explicated in Van Gorkom.
We think it patently clear that the question presented is not one of first impression, as the court below appears to have assumed. Applying controlling precedent of this Court, we hold that the record evidence establishes that Cinerama met its burden of proof for overcoming the rule's presumption of board duty of care in approving the sale of the company to MAF. The Chancellor's restatement of the rule — to require Cinerama to prove a proximate cause relationship between the Technicolor board's presumed breach of its duty of care and the shareholder's resultant loss — is contrary to well-established Delaware precedent, irreconcilable with Van Gorkom, and contrary to the tenets of Unocal and Revlon, Inc. v. MacAndrews & Forbes Holdings, Del.Supr., 506 A.2d 173 (1986). More importantly, we think the court's restatement of the rule would lead to most unfortunate results, detrimental to goals of heightened and enlightened standards for corporate governance of Delaware corporations.
We also find the court to have committed error under Weinberger in apparently capping Cinerama's recoverable loss under an entire fairness standard of review at the fair value of a share of Technicolor stock on the date of approval of the merger. Under Weinberger's entire fairness standard of review, a party may have a legally cognizable injury regardless of whether the tender offer and cash-out price is greater than the stock's fair value as determined for statutory appraisal purposes. See Weinberger, 457 A.2d at 714; Rabkin v. Philip A. Hunt Chemical Corp., Del.Supr., 498 A.2d 1099, 1104 (1985) (appraisal not exclusive remedy).
Director Duty of Care and Board Presumption of Care
The elements, formulation and application of the Delaware business judgment rule follow from the premise that shareholders of a public corporation delegate to their board of directors responsibility for managing the business enterprise. The General Assembly has codified that delegation of authority and mandate of management generally in 8 Del.C. § 141(a) and, specifically, in the context of a merger or sale of a company, in 8 Del.C. § 251. See Singer v. Magnavox, Del. Ch., 367 A.2d 1349 (1976), aff'd in part, rev'd in part, Del.Supr., 380 A.2d 969 (1977).
The judicial presumption accorded director and board action which underlies the business judgment rule is "of paramount significance in the context of a derivative action." Aronson, 473 A.2d at 812. As Aronson states, the presumption may only be invoked by directors who are found to be not only "disinterested" directors, but directors who have both adequately informed themselves before voting on the business transaction at hand and acted with the requisite care. There we also stated that, for the rule to apply and attach to a particular transaction, directors "have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties." Id. at 812 (emphasis added).
The duty of the directors of a company to act on an informed basis, as that term has been defined by this Court numerous times, forms the duty of care element of the business judgment rule. Duty of care and duty of loyalty are the traditional hallmarks of a fiduciary who endeavors to act in the service of a corporation and its stockholders. See Lutz, 171 A.2d 381. Each of these duties is of equal and independent significance.
In decisional law of this Court applying the rule, preceding as well as following Van Gorkom, this Court has consistently given equal weight to the rule's requirements of duty of care and duty of loyalty. See Aronson, 473
We have also stated that the rule is premised on a presumption that the directors have severally met their duties of loyalty (see section IV supra) and that the directors have collectively, as a board, met their duty of care. See Barkan, 567 A.2d at 1286; Moran, 500 A.2d at 1356.
Applying the rule, a trial court will not find a board to have breached its duty of care unless the directors individually and the board collectively have failed to inform themselves fully and in a deliberate manner before voting as a board upon a transaction as significant as a proposed merger or sale of the company. See Van Gorkom, 488 A.2d at 873; Aronson, 473 A.2d at 812. Only on such a judicial finding will a board lose the protection of the business judgment rule under the duty of care element and will a trial court be required to scrutinize the challenged transaction under an entire fairness standard of review. See, e.g., Van Gorkom, 488 A.2d at 893; Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 257, 271 (1989).
The Chancellor held that "the questions of due care ... need not be addressed in this case, because even if a lapse of care is assumed, plaintiff is not entitled to a judgment on this record." Personal Liability Opinion at 6 (emphasis added). Having assumed that the Technicolor board was grossly negligent in failing to exercise due care, the court avoided the business judgment rule's rebuttal by adding to the rule a requirement of proof of injury. The court then found that requirement not met and, indeed, injury not provable due to its earlier finding of fair value for statutory appraisal purposes. In this manner, the court avoided having to determine whether the board had failed to "satisfy its obligation to take reasonable steps in the sale of the enterprise to be adequately informed before it authorized the execution of the merger agreement." Personal Liability Opinion at 40.
The court found authority for its requirement of proof of injury in a seventy-year-old decision that none of the parties had relied on or felt pertinent. The trial court ruled:
Personal Liability Opinion at 8. In the absence of plaintiff's proof of injury, the court held that defendants were entitled to judgment "on all claims." The Chancellor concluded that the "fatal weakness in plaintiff's case" was plaintiff's failure to prove that it had been injured as a result of the defendant's negligence. The court put it this way:
Personal Liability Opinion at 41 (underlining in original; italics added for emphasis).
On appeal, Cinerama contends: (1) that the court's assumed findings of the defendant directors' gross negligence in breach of their duty of care brought the case squarely under the control of this Court's rulings in Van Gorkom and, in the context of a sale of the company, under Revlon; and (2) that the Chancellor erred as a matter of law in invoking the tort principles implemented in Barnes v. Andrews, S.D.N.Y., 298 F. 614, 616-18 (1924), to grant defendants judgment on the record before the court. Cinerama's contentions are well taken, factually supported by the record and correct as a matter of law.
As defendants concede, this Court has never interposed, for purposes of the rule's rebuttal, a requirement that a shareholder asserting a claim of director breach of duty of care (or duty of loyalty) must prove not only a breach of such duty, but that an injury has resulted from the breach and quantify that injury at that juncture of the case. No Delaware court has, until this case, imposed such a condition upon a shareholder plaintiff. That should not be surprising. The purpose of a trial court's application of an entire fairness standard of review to a challenged business transaction is simply to shift to the defendant directors the burden of demonstrating to the court the entire fairness of the transaction to the shareholder plaintiff, applying Weinberger and its progeny: Rosenblatt, 493 A.2d 929; Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840 (1987); and Mills, 559 A.2d 1261. Requiring a plaintiff to show injury through unfair price would effectively relieve director defendants found to have breached their duty of care of establishing the entire fairness of a challenged transaction.
The Chancellor so ruled, notwithstanding finding from the record following trial that whether the Technicolor board exercised due care in approving the merger agreement was not simply a "close question" but one as to which he had "grave doubts." Personal Liability Opinion at 5-6. The trial court's doubts were based on at least five explicit predicate findings on the issue of due care: (1) that the agreement was not preceded by a "prudent search for alternatives," id. at 6; (2) that, given the terms of the merger and the circumstances, the directors had no reasonable basis to assume that a better offer from a third party could be expected to be made following the agreement's signing, id.; (3) that, although Kamerman had discussed Perelman's "approach" with several of the directors before the meeting, most of the directors had little or no knowledge of an impending sale of the company until they arrived at the meeting and only a few of them had any knowledge of the terms of the sale and of the required side agreements, id. at 12-13; (4) that Perelman "did, probably, effectively lock-up the transaction on October 29 when he acquired rights to buy the Kamerman and Bjorkman shares (about eleven percent together) and acquired rights under the stock option agreement to purchase stock that would equal 18 percent of the company's outstanding stock after exercise" given Technicolor's charter provision and Perelman's prior stock ownership of about five percent, id. at 49; and (5) that the board did not "satisfy its obligation [under Revlon] to take reasonable steps in the sale of the enterprise to be adequately informed before it authorized the execution of the merger agreement." Id. at 40. In addition, the Chancellor noted the relevance of Revlon in "illuminat[ing] the scope of [the] board's due care obligations ..." and implied that the Technicolor board's failure to auction the company evidenced a breach of their duty of care.
We adopt, as clearly supported by the record, the Chancellor's presumed findings of the directors' failure to reach an informed
The question presented in this case is essentially the same as this Court was presented in Van Gorkom: whether the defendant directors, meeting as a board, satisfied the rule's presumption of board due care in meeting to consider for the first time a proposed sale of the company under terms negotiated exclusively by its chairman. We stated:
Van Gorkom, 488 A.2d at 873 (footnote omitted). See Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140 (1989).
The Chancellor's Enlargement of the Rule to Require Cinerama to Prove Resultant Injury from the Board's Presumed Failure to Exercise Due Care
The trial court's presumed findings of fact of board breach of duty of care clearly brought the case under the controlling principles of Van Gorkom and its holding that the defendant board's breach of its duty of care required the transaction to be reviewed for its entire fairness. The Chancellor, without stating any reasons for finding Van Gorkom not to be controlling, chose instead to adopt the actionable negligence principles of Barnes. Personal Liability Opinion at 41-43.
The Chancellor's reliance on Barnes is misguided.
This Court has consistently held that the breach of the duty of care, without any requirement of proof of injury, is sufficient to rebut the business judgment rule. See Mills, 559 A.2d at 1280-81; Van Gorkom, 488 A.2d at 893. In Van Gorkom, we held that although there was no breach of the duty of loyalty, the failure of the members of the board to adequately inform themselves represented a breach of the duty of care, which of itself was sufficient to rebut the presumption of the business judgment rule. Van Gorkom, 488 A.2d 858. A breach of either the duty of loyalty or the duty of care rebuts the presumption that the directors have acted in the best interests of the shareholders, and requires the directors to prove that the transaction was entirely fair. Id. at 893; Shamrock Holdings, 559 A.2d at 271. Cinerama clearly met its burden of proof for the purpose of rebutting the rule's presumption by showing that the defendant directors of Technicolor failed to inform themselves fully concerning all material information reasonably available prior to approving the merger agreement. Our basis for this conclusion is the Chancellor's own findings, enumerated above.
In sum, we find the Court of Chancery to have committed fundamental error in rewriting the Delaware business judgment rule's requirement of due care. The court has erroneously subordinated the due care element of the rule to the duty of loyalty element. The court has then injected into the duty of care element a burden of proof of resultant injury or loss. In this regard, we emphasize that the measure of any recoverable loss by Cinerama under an entire fairness standard of review is not necessarily limited to the difference between the price offered and the "true" value as determined under appraisal proceedings. Under Weinberger, the Chancellor may "fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages." 457 A.2d at 714. The Chancellor may incorporate elements of rescissory damages into his determination of fair price, if he considers such elements: (1) susceptible to proof; and (2) appropriate under the circumstances. Id. Thus, we must reverse and remand the case to the trial court with directions to apply the entire fairness standard of review to the challenged transaction. See, e.g., Van Gorkom, 488 A.2d 858; Shamrock Holdings, 559 A.2d 257.
VI. REMAINING ISSUES ON APPEAL
Cinerama asserts four remaining claims: (1) that the merger was void ab initio; (2) that MAF and Perelman, after becoming majority shareholders of Technicolor, failed to satisfy their burden of proving the transaction's entire fairness; (3) that the Chancellor should be required to determine the appropriateness of rescissory damages for the defendants' breach of their duty of loyalty or duty of care; and (4) that the Chancellor committed legal error in failing to find defendants to have breached their duty of disclosure to Technicolor's shareholders. As to Cinerama's first three contentions, we find them to be lacking in merit; but we find arguable merit, requiring remand, as to the fourth contention.
Cinerama first contends that because Director Simone voted against the merger, the Technicolor board's less-than-unanimous approval of the merger did not satisfy the unanimity requirement of Technicolor's charter.
Cinerama next argues that MAF and Perelman breached their fiduciary duties owed Cinerama after becoming the majority shareholder of Technicolor. The Chancellor rejected Cinerama's contention. Finding that neither of the defendants had dominated Technicolor's board, the court concluded that defendant Perelman had not "assume[d] the duties of care and loyalty of a director of the corporation." Personal Liability Opinion at 46. Hence, defendants were not required to establish the transaction's entire fairness to Cinerama. We find the issue to be a mixed question of fact and law, that the court's findings are supported by the record and that its conclusions are not erroneous as a matter of law.
Cinerama's third argument is premised on certain statements in Cede I that proof of breach of fiduciary duty may entitle Cinerama to rescissory damages. In Cede I, we observed, "if it is determined that the merger should not have occurred due to fraud, breach of fiduciary duty, or other wrongdoing on the part of the defendants, then Cinerama's appraisal action will be rendered moot and Cinerama will be entitled to receive rescissory damages." Cede I, 542 A.2d at 1191. Our statement was overbroad. We did not intend thereby to overrule established Delaware law conditioning a recovery of rescissory damages on a defendant's failure to meet its burden of showing the entire fairness of the transaction. See section IV supra.
Lastly, Cinerama challenges the trial court's findings that the Technicolor defendant directors did not breach their duty of disclosure owed the shareholders. On appeal, Cinerama reiterates its claim below that defendants breached their duty of disclosure in their filings in connection with the tender offer and in their proxy solicitation in connection with the merger. Delaware corporations have a fiduciary duty to disclose completely all available material information when obtaining shareholder approval. Stroud v. Grace, Del.Supr., 606 A.2d 75, 84 (1992). The Chancellor appropriately ruled that Cinerama retained the burden of proof of showing that the alleged nondisclosures were material, as defined under Rosenblatt, 493 A.2d at 944-45. Furthermore, the record supports the trial court's finding that "the bulk of [the directors'] alleged nondisclosures are plainly not material" and that Cinerama's other contentions regarding disclosure had "no basis in fact." Personal Liability Opinion at 55-56. However, we find that we must remand for further consideration of the Chancellor's purported findings with respect to the lack of materiality of Ryan's apparently undisclosed self-interest.
As to the latter issue, the Chancellor concluded that the directors' failure to disclose Ryan's self-interest to Technicolor's shareholders did not constitute a breach of their duty of disclosure. The Chancellor acknowledged, tacitly, if not explicitly, that Ryan had not disclosed his presumed self-interest to the board. Notwithstanding, the court's decision may be construed as holding that Ryan's undisclosed self-interest was rendered immaterial by the Technicolor board's unanimous approval of the transaction. Our review of this issue raises a mixed question of fact and law requiring deference to the factfinder. See Kahn, 591 A.2d at 171. Our concern lies in the soundness of the assumed proposition. It is unclear whether the trial court's finding of immateriality was premised on its reasoning that a given director's material self-interest, though undisclosed, may be found to be immaterial, depending on the vote of the board as a whole. However, the decision below may also be read as being premised upon a traditional analysis regarding the hypothetical effect of a failure to disclose a material fact upon a reasonable shareholder's "total mix" of information through a Rosenblatt analysis. 493 A.2d at 944-45; TSC Industries, Inc. v. Northway,
We find no error in the Chancellor's reformulation of a materiality test for determining director self-interest. We find error in the trial court's adoption of the reasonable person standard. We decline to determine the correctness of the second part of the court's materiality test, for the reasons stated. We remand that issue to the trial court to consider the relevance and effect of section 144(a) on such standard as well as the effect of Technicolor's charter requirement of director unanimity as applied to this transaction. We reverse the trial court's restatement of the duty of care element of the rule. We find the Chancellor to have erred as a matter of law in requiring a plaintiff shareholder to show injury to rebut the business judgment presumption of care; and, on remand, we instruct the court to review the transaction for entire fairness under Weinberger. We affirm the Chancellor's rulings on Cinerama's remaining claims, but remand for clarification by the Chancellor of his ruling on duty of disclosure as to Director Ryan's presumed material self-interest.
* * *
Affirmed in part; Reversed in part; Remanded for further proceedings consistent with this decision, with jurisdiction reserved only as to the duty of disclosure.
Upon Return from Remand For Clarification of Ruling on Duty of Disclosure
On November 12, 1993, this Court, after issuing its opinion dated October 22, 1993, remanded this case to the Court of Chancery for determination of a limited issue, with jurisdiction retained only as to that issue. We requested the Court of Chancery to clarify the basis for its ruling that the Technicolor board's failure to disclose to its shareholders the self-interest of director Arthur Ryan did not constitute a breach of the defendant directors' duty of disclosure. We requested clarification of the Court of Chancery's reasoning for finding immaterial Ryan's failure to disclose his self-interest in the transaction to his fellow board members before their vote at the October 29, 1982 meeting.
The Court of Chancery, by its January 7, 1994 memorandum response to this Court, establishes that the court employed the materiality analysis standard of Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 944-45 (1985), in making its finding. We conclude that the court's disclosure ruling is the product of a logical and deductive reasoning process and sustainable as a matter of law. We therefore affirm the court's finding that the defendant directors did not breach their duty of disclosure to the Technicolor shareholders in failing to disclose Ryan's material self-interest in the transaction.
Under one hypothesis, materiality would be established if the director's financial interest "create[s] a reasonable probability that the independence of the judgment of a reasonable person in such circumstances could be affected to the detriment of the shareholders generally." Personal Liability Opinion at 36 (emphasis added).
Another hypothesis, considerably more stringent, is illustrated only by example. The court describes a situation where two directors, constituting a majority of the board, approve a lock-up sale of a public company in a transaction which ensures the directors a doubling of salary. The Chancellor concludes, without explanation, that the self-interest of a majority of the directors would be immaterial and that the transaction would be protected by the business judgment presumption. The example implies that self-interest material to a majority of directors may nevertheless be immaterial to the decision-making process of the board as a whole under the second part of the court's materiality test. It is unclear what a shareholder plaintiff's burden would be to meet the second part of the court's test.
(a) No contract or transaction between a corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:
Barkan, 567 A.2d at 1286, citing Mills, 559 A.2d at 1286-88.
In Moran, this Court stated:
Moran, 500 A.2d at 1356, citing Aronson, 473 A.2d at 812.
Personal Liability Opinion at 39-40 (footnote omitted) (citations omitted).
Barnes, 298 F. at 616 (emphasis added).