In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation

What if half your directors are conflicted, but the deal is legitimately a great deal for the company? Do you have to pass up the deal just because the directors are conflicted?

There are a few ways to get around the conflict. First, you could just try your hand at entire fairness review. Do the deal and hope for the best when folks sue. But advising a client to "hope for the best"  is a sure way to never get hired again. Clients pay you to help the avoid risky litigation.

Better advice is to form a special committee. A special committee is an ad hoc board committee called for some special purpose, like a transaction or litigation. Special committees are often used to avoid conflicts. If the committee is independent, and the committee is empowered and authorized to make the final decision, then the court will consider only the conflicts of the directors on the special committee. This makes sense. If Biker Bob doesn't take part in the decision, any conflicts Bob has shouldn't taint the decision.

In the case below, a shareholder alleges various conflicts in the course of a merger. The board used a special committee, so case turns on whether the directors sitting on a special committee were conflicted. Specifically, the court analyzes what it means to be "beholden." The court considers their relationship with Martha Stewart, who is alleged to have had a financial interest in the transaction.