William T. Quillen (argued), Robert K. Payson, Peter M. Sieglaff, Potter, Anderson & Corroon, Wilmington; and Allan M. Pepper, Michael D. Braff, Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellants.

Joseph A. Rosenthal (argued), Morris & Rosenthal, P.A., Wilmington; and Irving Bizar, Pincus, Ohrenstein, Bizar, D'Alessandro & Solomon, New York City, for appellee.

Before McNEILLY, MOORE and CHRISTIE, JJ.

[807] MOORE, Justice:

In the wake of Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981), this Court left a crucial issue unanswered: when is a stockholder's demand upon a board of directors, to redress an alleged wrong to the corporation, excused as futile prior to the filing of a derivative suit? We granted this interlocutory appeal to the defendants, Meyers Parking System, Inc. (Meyers), a Delaware corporation, and its directors, to review the Court of Chancery's denial of their motion to dismiss this action, pursuant to Chancery Rule 23.1, for the [808] plaintiff's failure to make such a demand or otherwise demonstrate its futility.^[1] The Vice Chancellor ruled that plaintiff's allegations raised a "reasonable inference" that the directors' action was unprotected by the business judgment rule. Thus, the board could not have impartially considered and acted upon the demand. See Lewis v. Aronson, Del.Ch., 466 A.2d 375, 381 (1983).

We cannot agree with this formulation of the concept of demand futility. In our view demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. Because the plaintiff failed to make a demand, and to allege facts with particularity indicating that such demand would be futile, we reverse the Court of Chancery and remand with instructions that plaintiff be granted leave to amend the complaint.

I.

The issues of demand futility rest upon the allegations of the complaint. The plaintiff, Harry Lewis, is a stockholder of Meyers. The defendants are Meyers and its ten directors, some of whom are also company officers.

In 1979, Prudential Building Maintenance Corp. (Prudential) spun off its shares of Meyers to Prudential's stockholders. Prior thereto Meyers was a wholly owned subsidiary of Prudential. Meyers provides parking lot facilities and related services throughout the country. Its stock is actively traded over-the-counter.

This suit challenges certain transactions between Meyers and one of its directors, Leo Fink, who owns 47% of its outstanding stock. Plaintiff claims that these transactions were approved only because Fink personally selected each director and officer of Meyers.^[2]

Prior to January 1, 1981, Fink had an employment agreement with Prudential which provided that upon retirement he was to become a consultant to that company for ten years. This provision became operable when Fink retired in April 1980.^[3] Thereafter, Meyers agreed with Prudential to share Fink's consulting services and reimburse Prudential for 25% of the fees paid Fink. Under this arrangement Meyers paid Prudential $48,332 in 1980 and $45,832 in 1981.

On January 1, 1981, the defendants approved an employment agreement between Meyers and Fink for a five year term with provision for automatic renewal each year thereafter, indefinitely. Meyers agreed to pay Fink $150,000 per year, plus a bonus of 5% of its pre-tax profits over $2,400,000. Fink could terminate the contract at any time, but Meyers could do so only upon six months' notice. At termination, Fink was to become a consultant to Meyers and be paid $150,000 per year for the first three years, $125,000 for the next three years, and $100,000 thereafter for life. Death benefits were also included. Fink agreed to devote his best efforts and substantially his entire business time to advancing Meyers' interests. The agreement also provided [809] that Fink's compensation was not to be affected by any inability to perform services on Meyers' behalf. Fink was 75 years old when his employment agreement with Meyers was approved by the directors. There is no claim that he was, or is, in poor health.

Additionally, the Meyers board approved and made interest-free loans to Fink totalling $225,000. These loans were unpaid and outstanding as of August 1982 when the complaint was filed. At oral argument defendants' counsel represented that these loans had been repaid in full.

The complaint charges that these transactions had "no valid business purpose", and were a "waste of corporate assets" because the amounts to be paid are "grossly excessive", that Fink performs "no or little services", and because of his "advanced age" cannot be "expected to perform any such services". The plaintiff also charges that the existence of the Prudential consulting agreement with Fink prevents him from providing his "best efforts" on Meyers' behalf. Finally, it is alleged that the loans to Fink were in reality "additional compensation" without any "consideration" or "benefit" to Meyers.

The complaint alleged that no demand had been made on the Meyers board because:

13. ... such attempt would be futile for the following reasons:

(a) All of the directors in office are named as defendants herein and they have participated in, expressly approved and/or acquiesced in, and are personally liable for, the wrongs complained of herein.

(b) Defendant Fink, having selected each director, controls and dominates every member of the Board and every officer of Meyers.

(c) Institution of this action by present directors would require the defendant-directors to sue themselves, thereby placing the conduct of this action in hostile hands and preventing its effective prosecution.

Complaint, at ¶ 13.

The relief sought included the cancellation of the Meyers-Fink employment contract and an accounting by the directors, including Fink, for all damage sustained by Meyers and for all profits derived by the directors and Fink.

II.

Defendants moved to dismiss for plaintiff's failure to make demand on the Meyers board prior to suit, or to allege with factual particularity why demand is excused. See Del.Ch.Ct.R. 23.1, supra.

After recounting the allegations, the trial judge noted that the demand requirement of Rule 23.1 is a rule of substantive right designed to give a corporation the opportunity to rectify an alleged wrong without litigation, and to control any litigation which does arise. Lewis, 466 A.2d at 380. According to the Vice Chancellor, the test of futility is "whether the Board, at the time of the filing of the suit, could have impartially considered and acted upon the demand". Id. at 381.

As part of this formulation, the trial judge stated that interestedness is one factor affecting impartiality, and indicated that the business judgment rule is a potential defense to allegations of director interest, and hence, demand futility. Id. However, the court observed that to establish demand futility, a plaintiff need not allege that the challenged transaction could never be deemed a product of business judgment. Id. Rather, the Vice Chancellor maintained that a plaintiff "must only allege facts which, if true, show that there is a reasonable inference that the business judgment rule is not applicable for purposes of considering a pre-suit demand pursuant to Rule 23.1". Id. The court concluded that this transaction permitted such an inference. Id. at 384-86.

Upon these formulations, the Court of Chancery addressed the plaintiff's arguments [810] as to the futility of demand. Id. at 381-84. The trial judge correctly noted that futility is gauged by the circumstances existing at the commencement of a derivative suit. This disposed of plaintiff's argument that defendants' motion to dismiss established board hostility and the futility of demand. Id. at 381.

The Vice Chancellor then dealt with plaintiff's contention that Fink, as a 47% shareholder of Meyers, dominated and controlled each director, thereby making demand futile. Id. at 381-83. Plaintiff also argued that Fink's interest, when combined with the shareholdings of four other defendants, amounted to 57.5% of Meyers' outstanding shares. Id. at 381. After noting the presumptions under the business judgment rule that a board's actions are taken in good faith and in the best interests of the corporation, the Court of Chancery ruled that mere board approval of a transaction benefiting a substantial, but non-majority, shareholder will not overcome the presumption of propriety. Id. at 382. Specifically, the court observed that:

A plaintiff, to properly allege domination of the Board, particularly domination based on ownership of less than a majority of the corporation's stock, in order to excuse a pre-suit demand, must allege ownership plus other facts evidencing control to demonstrate that the Board could not have exercised its independent business judgment.

Id.

As to the combined 57.5% control claim, the court stated that there were no factual allegations regarding the alignment of the four directors with Fink, such as a claim that they were beneficiaries of the Meyers-Fink agreement. Id. at 382, 383. Because it was not alleged in the complaint, the court rejected plaintiff's argument that, as evidence of alignment with Fink, two of the directors have "similar" compensation agreements with Meyers. Id. at 383.

Turning to plaintiff's allegations of board approval, participation in, and/or acquiescence in the wrong, the trial court focused on the underlying transaction to determine whether the board's action was wrongful and not protected by the business judgment rule. Id. [citing Dann v. Chrysler, Del.Ch., 174 A.2d 696 (1961)]. The Vice Chancellor indicated that if the underlying transaction supported a reasonable inference that the business judgment rule did not apply, then the directors who approved the transaction were potentially liable for a breach of their fiduciary duty, and thus, could not impartially consider a stockholder's demand. Id.

The trial court then stated that board approval of the Meyers-Fink agreement, allowing Fink's consultant compensation to remain unaffected by his ability to perform any services, may have been a transaction wasteful on its face. Id. [citing Fidanque v. American Maracaibo Co., Del.Ch., 92 A.2d 311 (1952)]. Consequently, demand was excused as futile, because the Meyers' directors faced potential liability for waste and could not have impartially considered the demand. Id. at 384.

III.

The defendants make two arguments, one policy-oriented and the other, factual. First, they assert that the demand requirement embraces the policy that directors, rather than stockholders, manage the affairs of the corporation. They contend that this fundamental principle requires the strict construction and enforcement of Chancery Rule 23.1. Second, the defendants point to four of plaintiff's basic allegations and argue that they lack the factual particularity necessary to excuse demand. Concerning the allegation that Fink dominated and controlled the Meyers board, the defendants point to the absence of any facts explaining how he "selected each director". With respect to Fink's 47% stock interest, the defendants say that absent other facts this is insufficient to indicate domination and control. Regarding the claim of hostility to the plaintiff's suit, because defendants would have to sue themselves, the latter assert that this bootstrap argument ignores the possibility that the directors have other [811] alternatives, such as cancelling the challenged agreement. As for the allegation that directorial approval of the agreement excused demand, the defendants reply that such a claim is insufficient, because it would obviate the demand requirement in almost every case. The effect would be to subvert the managerial power of a board of directors. Finally, as to the provision guaranteeing Fink's compensation, even if he is unable to perform any services, the defendants contend that the trial court read this out of context. Based upon the foregoing, the defendants conclude that the plaintiff's allegations fall far short of the factual particularity required by Rule 23.1.

IV.

A.

A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation. 8 Del.C. § 141(a). Section 141(a) states in pertinent part:

"The business and affairs of a corporation organized under this chapter shall be managed by or under the direction of a board of directors except as may be otherwise provided in this chapter or in its certificate of incorporation."

8 Del.C. § 141(a) (Emphasis added). The existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.^[4]Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). Moreover, a stockholder is not powerless to challenge director action which results in harm to the corporation. The machinery of corporate democracy and the derivative suit are potent tools to redress the conduct of a torpid or unfaithful management. The derivative action developed in equity to enable shareholders to sue in the corporation's name where those in control of the company refused to assert a claim belonging to it. The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.

By its very nature the derivative action impinges on the managerial freedom of directors.^[5] Hence, the demand requirement of Chancery Rule 23.1 exists at the threshold, first to insure that a stockholder exhausts his intracorporate remedies, and [812] then to provide a safeguard against strike suits. Thus, by promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations.

In our view the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability. The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under Section 141(a). See Zapata Corp. v. Maldonado, 430 A.2d at 782. It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119, 124 (1971); Robinson v. Pittsburgh Oil Refinery Corp., Del.Ch., 126 A. 46 (1924). Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. See Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971).

The function of the business judgment rule is of paramount significance in the context of a derivative action. It comes into play in several ways — in addressing a demand, in the determination of demand futility, in efforts by independent disinterested directors to dismiss the action as inimical to the corporation's best interests, and generally, as a defense to the merits of the suit. However, in each of these circumstances there are certain common principles governing the application and operation of the rule.

First, its protections can only be claimed by disinterested directors whose conduct otherwise meets the tests of business judgment. From the standpoint of interest, this means that directors can neither appear on both sides of a transaction nor expect to derive 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. Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971); Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); David J. Greene & Co. v. Dunhill International, Inc., Del.Ch., 249 A.2d 427, 430 (1968). See also 8 Del.C. § 144. Thus, if such director interest is present, and the transaction is not approved by a majority consisting of the disinterested directors, then the business judgment rule has no application whatever in determining demand futility. See 8 Del.C. § 144(a)(1).

Second, to invoke the rule's protection 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. While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence.^[6] See Veasey & Manning, Codified Standard [813] — Safe Harbor or Uncharted Reef? 35 Bus.Law. 919, 928 (1980).

However, it should be noted that the business judgment rule operates only in the context of director action. Technically speaking, it has no role where directors have either abdicated their functions, or absent a conscious decision, failed to act.^[7] But it also follows that under applicable principles, a conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule.

The gap in our law, which we address today, arises from this Court's decision in Zapata Corp. v. Maldonado. There, the Court defined the limits of a board's managerial power granted by Section 141(a) and restricted application of the business judgment rule in a factual context similar to this action. Zapata Corp. v. Maldonado, 430 A.2d at 782-86, rev'g, Maldonado v. Flynn, Del.Ch., 413 A.2d 1251 (1980).

By way of background, this Court's review in Zapata was limited to whether an independent investigation committee of disinterested directors had the power to cause the derivative action to be dismissed. Preliminarily, it was noted in Zapata that "[d]irectors of Delaware corporations derive their managerial decision making power, which encompasses decisions whether to initiate, or refrain from entering, litigation, from 8 Del.C. § 141(a)". Zapata, 430 A.2d at 782 (footnotes omitted). In that context, this Court observed that the business judgment rule has no relevance to corporate decision making until after a decision has been made. Id. In Zapata, we stated that a shareholder does not possess an independent individual right to continue a derivative action. Moreover, where demand on a board has been made and refused, we apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand. Id. at 784 & n. 10. Unless the business judgment rule does not protect the refusal to sue, the shareholder lacks the legal managerial power to continue the derivative action, since that power is terminated by the refusal. Id. at 784. We also concluded that where demand is excused a shareholder possesses the ability to initiate a derivative action, but the right to prosecute it may be terminated upon the exercise of applicable standards of business judgment. Id. The thrust of Zapata is that in either the demand-refused or the demand-excused case, the board still retains its Section 141(a) managerial authority to make decisions regarding corporate litigation. Moreover, the board may delegate its managerial authority to a committee of independent disinterested directors. Id. at 786. See 8 Del.C. § 141(c). Thus, even in a demand-excused case, a board has the power to appoint a committee of one or more independent disinterested directors to determine whether the derivative action should be pursued or dismissal sought. Zapata, 430 A.2d at 786. Under Zapata, the Court of Chancery, in passing on a committee's motion to dismiss a derivative action in a demand excused case, must apply a two-step test. First, the court must inquire into the independence and good faith of the committee and review the reasonableness and good faith of the committee's investigation. Id. at 788. Second, the court must apply its own independent business judgment to decide whether the motion to dismiss should be granted. Id. at 789.

After Zapata numerous derivative suits were filed without prior demand upon boards of directors. The complaints in such actions all alleged that demand was excused because of board interest, approval or acquiescence in the wrongdoing. In any event, the Zapata demand-excused/demand-refused [814] bifurcation, has left a crucial issue unanswered: when is demand futile and, therefore, excused?

Delaware courts have addressed the issue of demand futility on several earlier occasions. See Sohland v. Baker, Del. Supr., 141 A. 277, 281-82 (1927); McKee v. Rogers, Del.Ch., 156 A. 191, 193 (1931); Miller v. Loft, Del.Ch., 153 A. 861, 862 (1931); Fleer v. Frank H. Fleer Corp., Del.Ch., 125 A. 411, 414 (1924); Harden v. Eastern States Public Service Co., Del.Ch., 122 A. 705, 707 (1923); Ellis v. Penn Beef Co., Del.Ch., 80 A. 666, 668 (1911). Cf. Mayer v. Adams, Del.Supr., 141 A.2d 458, 461 (1958) (minority demand on majority shareholders). The rule emerging from these decisions is that where officers and directors are under an influence which sterilizes their discretion, they cannot be considered proper persons to conduct litigation on behalf of the corporation. Thus, demand would be futile. See, e.g., McKee v. Rogers, Del.Ch., 156 A. 191, 192 (1931) (holding that where a defendant controlled the board of directors, "[i]t is manifest then that there can be no expectation that the corporation would sue him, and if it did, it can hardly be said that the prosecution of the suit would be entrusted to proper hands"). But see, e.g., Fleer v. Frank H. Fleer Corp., Del.Ch., 125 A. 411, 415 (1924) ("[w]here the demand if made would be directed to the particular individuals who themselves are the alleged wrongdoers and who therefore would be invited to sue themselves, the rule is settled that a demand and refusal is not requisite"); Miller v. Loft, Inc., Del.Ch., 153 A. 861, 862 (1931) ("if by reason of hostile interest or guilty participation in the wrongs complained of, the directors cannot be expected to institute suit, ... no demand upon them to institute suit is requisite").

However, those cases cannot be taken to mean that any board approval of a challenged transaction automatically connotes "hostile interest" and "guilty participation" by directors, or some other form of sterilizing influence upon them. Were that so, the demand requirements of our law would be meaningless, leaving the clear mandate of Chancery Rule 23.1 devoid of its purpose and substance.

The trial court correctly recognized that demand futility is inextricably bound to issues of business judgment, but stated the test to be based on allegations of fact, which, if true, "show that there is a reasonable inference" the business judgment rule is not applicable for purposes of a pre-suit demand. Lewis, 466 A.2d at 381.

The problem with this formulation is the concept of reasonable inferences to be drawn against a board of directors based on allegations in a complaint. As is clear from this case, and the conclusory allegations upon which the Vice Chancellor relied, demand futility becomes virtually automatic under such a test. Bearing in mind the presumptions with which director action is cloaked, we believe that the matter must be approached in a more balanced way.

Our view is that in determining demand futility the Court of Chancery in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board's approval thereof. As to the latter inquiry the court does not assume that the transaction is a wrong to the corporation requiring corrective steps by the board. Rather, the alleged wrong is substantively reviewed against the factual background alleged in the complaint. As to the former inquiry, directorial independence and disinterestedness, the court reviews the factual allegations to decide whether they raise a reasonable doubt, as a threshold matter, that the protections of the business judgment rule are available to the board. [815] Certainly, if this is an "interested" director transaction, such that the business judgment rule is inapplicable to the board majority approving the transaction, then the inquiry ceases. In that event futility of demand has been established by any objective or subjective standard.^[8]See, e.g., Bergstein v. Texas Internat'l Co., Del.Ch., 453 A.2d 467, 471 (1982) (because five of nine directors approved stock appreciation rights plan likely to benefit them, board was interested for demand purposes and demand held futile). This includes situations involving self-dealing directors. See Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971); Sterling v. Mayflower, Del.Supr., 93 A.2d 107 (1952); Trans World Airlines, Inc. v. Summa Corp., Del.Ch., 374 A.2d 5 (1977); David J. Greene & Co. v. Dunhill International, Inc., Del.Ch., 249 A.2d 427 (1968).

However, the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists. See Gimbel v. Signal Cos., Inc., Del.Ch., 316 A.2d 599, aff'd, Del.Supr., 316 A.2d 619 (1974); Cottrell v. Pawcatuck Co., Del.Supr., 128 A.2d 225 (1956). In sum the entire review is factual in nature. The Court of Chancery in the exercise of its sound discretion must be satisfied that a plaintiff has alleged facts with particularity which, taken as true, support a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. Only in that context is demand excused.

B.

Having outlined the legal framework within which these issues are to be determined, we consider plaintiff's claims of futility here: Fink's domination and control of the directors, board approval of the Fink-Meyers employment agreement, and board hostility to the plaintiff's derivative action due to the directors' status as defendants.

Plaintiff's claim that Fink dominates and controls the Meyers' board is based on: (1) Fink's 47% ownership of Meyers' outstanding stock, and (2) that he "personally selected" each Meyers director. Plaintiff also alleges that mere approval of the employment agreement illustrates Fink's domination and control of the board. In addition, plaintiff argued on appeal that 47% stock ownership, though less than a majority, constituted control given the large number of shares outstanding, 1,245,745.

Such contentions do not support any claim under Delaware law that these directors lack independence. In Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119 (1971), the Court of Chancery stated that "[s]tock ownership alone, at least when it amounts to less than a majority, is not sufficient proof of domination or control". Id. at 123. Moreover, in the demand context even proof of majority ownership of a company does not strip the directors of the presumptions of independence, and that their acts have been taken in good faith and in the best interests of the corporation. There must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person. See Mayer v. Adams, Del.Ch., 167 A.2d 729, 732, aff'd, Del.Supr., 174 A.2d 313 (1961). To date the principal decisions dealing [816] with the issue of control or domination arose only after a full trial on the merits. Thus, they are distinguishable in the demand context unless similar particularized facts are alleged to meet the test of Chancery Rule 23.1. See e.g., Kaplan, 284 A.2d at 123; Chasin v. Gluck, Del.Ch., 282 A.2d 188 (1971); Greene v. Allen, Del.Ch., 114 A.2d 916 (1955); Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225, 237 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939).

The requirement of director independence inhers in the conception and rationale of the business judgment rule. The presumption of propriety that flows from an exercise of business judgment is based in part on this unyielding precept. Independence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences. While directors may confer, debate, and resolve their differences through compromise, or by reasonable reliance upon the expertise of their colleagues and other qualified persons, the end result, nonetheless, must be that each director has brought his or her own informed business judgment to bear with specificity upon the corporate merits of the issues without regard for or succumbing to influences which convert an otherwise valid business decision into a faithless act.

Thus, it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director. It is the care, attention and sense of individual responsibility to the performance of one's duties, not the method of election, that generally touches on independence.

We conclude that in the demand-futile context a plaintiff charging domination and control of one or more directors must allege particularized facts manifesting "a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persons) doing the controlling". Kaplan, 284 A.2d at 123. The shorthand shibboleth of "dominated and controlled directors" is insufficient. In recognizing that Kaplan was decided after trial and full discovery, we stress that the plaintiff need only allege specific facts; he need not plead evidence. Otherwise, he would be forced to make allegations which may not comport with his duties under Chancery Rule 11.^[9]

Here, plaintiff has not alleged any facts sufficient to support a claim of control. The personal-selection-of-directors allegation stands alone, unsupported. At best it is a conclusion devoid of factual support. The causal link between Fink's control and approval of the employment agreement is alluded to, but nowhere specified. The director's approval, alone, does not establish control, even in the face of Fink's 47% stock ownership. See Kaplan v. Centex Corp., 284 A.2d at 122, 123. The claim that Fink is unlikely to perform any services under the agreement, because of his age, and his conflicting consultant work with Prudential, adds nothing to the control claim.^[10] Therefore, we cannot conclude that the [817] complaint factually particularizes any circumstances of control and domination to overcome the presumption of board independence, and thus render the demand futile.

C.

Turning to the board's approval of the Meyers-Fink employment agreement, plaintiff's argument is simple: all of the Meyers directors are named defendants, because they approved the wasteful agreement; if plaintiff prevails on the merits all the directors will be jointly and severally liable; therefore, the directors' interest in avoiding personal liability automatically and absolutely disqualifies them from passing on a shareholder's demand.

Such allegations are conclusory at best. In Delaware mere directorial approval of a transaction, absent particularized facts supporting a breach of fiduciary duty claim, or otherwise establishing the lack of independence or disinterestedness of a majority of the directors, is insufficient to excuse demand.^[11] Here, plaintiff's suit is premised on the notion that the Meyers-Fink employment agreement was a waste of corporate assets. So, the argument goes, by approving such waste the directors now face potential personal liability, thereby rendering futile any demand on them to bring suit. Unfortunately, plaintiff's claim falls in its initial premise. The complaint does not allege particularized facts indicating that the agreement is a waste of corporate assets. Indeed, the complaint as now drafted may not even state a cause of action, given the directors' broad corporate power to fix the compensation of officers.^[12]

In essence, the plaintiff alleged a lack of consideration flowing from Fink to Meyers, since the employment agreement provided that compensation was not contingent on Fink's ability to perform any services. The bare assertion that Fink performed "little or no services" was plaintiff's conclusion based solely on Fink's age and the existence of the Fink-Prudential employment agreement. As for Meyers' loans to Fink, beyond the bare allegation that they were made, the complaint does not allege facts indicating the wastefulness of such arrangements. Again, the mere existence of such loans, given the broad corporate powers conferred by Delaware law, does not even state a claim.^[13]

In sustaining plaintiff's claim of demand futility the trial court relied on Fidanque v. American Maracaibo Co., Del. Ch., 92 A.2d 311, 321 (1952), which held that a contract providing for payment of consulting fees to a retired president/director was a waste of corporate assets. Id. In Fidanque, the court found after trial that the contract and payments were in reality compensation for past services. Id. at 320. This was based upon facts not present here: the former president/director was a 70 year old stroke victim, neither the agreement nor the record spelled out his consulting duties at all, the consulting salary equalled the individual's salary when he was president and general manager of the corporation, and the contract was silent as to continued employment in the event that the retired president/director again became incapacitated and unable to perform his duties. Id. at 320-21. Contrasting the facts of Fidanque with the complaint here, it is apparent that plaintiff has not alleged [818] facts sufficient to render demand futile on a charge of corporate waste, and thus create a reasonable doubt that the board's action is protected by the business judgment rule. Cf. Beard v. Elster, Del.Supr., 160 A.2d 731 (1960); Lieberman v. Koppers Company Line, Inc., Del.Ch., 149 A.2d 756, aff'd, Lieberman v. Becker, Del.Supr., 155 A.2d 596 (1959).

D.

Plaintiff's final argument is the incantation that demand is excused because the directors otherwise would have to sue themselves, thereby placing the conduct of the litigation in hostile hands and preventing its effective prosecution. This bootstrap argument has been made to and dismissed by other courts. See, e.g., Lewis v. Graves, 701 F.2d 245, 248-49 (2d Cir.1983); Heit v. Baird, 567 F.2d 1157, 1162 (1st Cir. 1977); Lewis v. Anselmi, 564 F.Supp., 768, 772 (S.D.N.Y.1983). Its acceptance would effectively abrogate Rule 23.1 and weaken the managerial power of directors. Unless facts are alleged with particularity to overcome the presumptions of independence and a proper exercise of business judgment, in which case the directors could not be expected to sue themselves, a bare claim of this sort raises no legally cognizable issue under Delaware corporate law.

V.

In sum, we conclude that the plaintiff has failed to allege facts with particularity indicating that the Meyers directors were tainted by interest, lacked independence, or took action contrary to Meyers' best interests in order to create a reasonable doubt as to the applicability of the business judgment rule. Only in the presence of such a reasonable doubt may a demand be deemed futile. Hence, we reverse the Court of Chancery's denial of the motion to dismiss, and remand with instructions that plaintiff be granted leave to amend his complaint to bring it into compliance with Rule 23.1 based on the principles we have announced today.

* * *

REVERSED AND REMANDED.

[1] Chancery Rule 23.1, similar to Fed.R.Civ.P. 23.1, provides in pertinent part:

In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share of membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort. Del.Ch.Ct.R. 23.1 (Emphasis added).

[2] The Court of Chancery stated that Fink had been chief executive officer of Prudential prior to the spin-off and thereafter became chairman of Meyers' board. This was not alleged in the complaint. Lewis, 466 A.2d at 379.

[3] The trial court stated that Fink "changed his status with Prudential building from employee to consultant". Lewis, 466 A.2d at 379.

[4] The broad question of structuring the modern corporation in order to satisfy the twin objectives of managerial freedom of action and responsibility to shareholders has been extensively debated by commentators. See, e.g., Fischel, The Corporate Governance Movement, 35 Vand.L.Rev. 1259 (1982); Dickstein, Corporate Governance and the Shareholders' Derivative Action: Rules and Remedies for Implementing the Monitoring Model, 3 Cardozo L.Rev. 627 (1982); Haft, Business Decisions by the New Board: Behavioral Science and Corporate Law, 80 Mich.L.Rev. 1 (1981); Dent, The Revolution in Corporate Governance, The Monitoring Board, and The Director's Duty of Care, 61 B.U.L.Rev. 623 (1981); Moore, Corporate Officer & Director Liability: Is Corporate Behavior Beyond the Control of Our Legal System? 16 Capital U.L.Rev. 69 (1980); Jones, Corporate Governance: Who Controls the Large Corporation? 30 Hastings L.J. 1261 (1979); Small, The Evolving Role of the Director in Corporate Governance, 30 Hastings L.J. 1353 (1979).

[5] Like the broader question of corporate governance, the derivative suit, its value, and the methods employed by corporate boards to deal with it have received much attention by commentators. See, e.g., Brown, Shareholder Derivative Litigation and the Special Litigation Committee, 43 U.Pitt.L.Rev. 601 (1982); Coffee and Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform, 81 Colum.L.Rev. 261 (1981); Shnell, A Procedural Treatment of Derivative Suit Dismissals by Minority Directors, 609 Calif.L.Rev. 885 (1981); Dent, The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit? 75 N.W.U.L. Rev. 96 (1980); Jones, An Empirical Examination of the Incidence of Shareholder Derivative and Class Action Lawsuits, 1971-1978, 60 B.U. L.Rev. 306 (1980); Comment, The Demand and Standing Requirements in Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168 (1976); Dykstra, The Revival of the Derivative Suit, 116 U.Pa.L.Rev. 74 (1967); Note, Demand on Directors and Shareholders as a Prerequisite to a Derivative Suit, 73 Harv.L.Rev. 729 (1960).

[6] While the Delaware cases have not been precise in articulating the standard by which the exercise of business judgment is governed, a long line of Delaware cases holds that director liability is predicated on a standard which is less exacting than simple negligence. Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 722 (1971), rev'g, Del.Ch., 261 A.2d 911 (1969) ("fraud or gross overreaching"); Getty Oil Co. v. Skelly Oil Co., Del.Supr., 267 A.2d 883, 887 (1970), rev'g, Del.Ch., 255 A.2d 717 (1969) ("gross and palpable overreaching"); Warshaw v. Calhoun, Del.Supr., 221 A.2d 487, 492-93 (1966) ("bad faith ... or a gross abuse of discretion"); Moskowitz v. Bantrell, Del.Supr., 190 A.2d 749, 750 (1963) ("fraud or gross abuse of discretion"); Penn Mart Realty Co. v. Becker, Del.Ch., 298 A.2d 349, 351 (1972) ("directors may breach their fiduciary duty ... by being grossly negligent"); Kors v. Carey, Del.Ch., 158 A.2d 136, 140 (1960) ("fraud, misconduct or abuse of discretion"); Allaun v. Consolidated Oil Co., Del.Ch., 147 A. 257, 261 (1929) ("reckless indifference to or a deliberate disregard of the stockholders").

[7] Although questions of director liability in such cases have been adjudicated upon concepts of business judgment, they do not in actuality present issues of business judgment. See Graham v. Allis-Chalmers Manufacturing Co., Del.Supr., 188 A.2d 125 (1963); Kelly v. Bell, Del.Ch., 254 A.2d 62 (1969), aff'd, Del. Supr., 266 A.2d 878 (1970); Lutz v. Boas, Del. Ch., 171 A.2d 381 (1961). See also Arsht, Fiduciary Responsibilities of Directors, Officers & Key Employees, 4 Del.J.Corp.L. 652, 659 (1979).

[8] We recognize that drawing the line at a majority of the board may be an arguably arbitrary dividing point. Critics will charge that we are ignoring the structural bias common to corporate boards throughout America, as well as the other unseen socialization processes cutting against independent discussion and decisionmaking in the boardroom. The difficulty with structural bias in a demand futile case is simply one of establishing it in the complaint for purposes of Rule 23.1. We are satisfied that discretionary review by the Court of Chancery of complaints alleging specific facts pointing to bias on a particular board will be sufficient for determining demand futility.

[9] Chancery Rule 11 provides:

Every pleading of a party represented by an attorney shall be signed by at least 1 attorney of record in his individual name, whose address shall be stated. A party who is not represented by an attorney shall sign his pleading and state his address. Except when otherwise specifically provided by statute or rule, pleadings need not be verified or accompanied by affidavit. The signature of an attorney constitutes a certificate by him that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay. If a pleading is not signed or is signed with intent to defeat the purpose of this rule, it may be stricken as sham and false and the action may proceed as though the pleading had not been served. For a willful violation of this rule an attorney may be subjected to appropriate disciplinary action. Similar action may be taken if scandalous or indecent matter is inserted.

Del.Ch.Ct.R. 11.

[10] Plaintiff made no legal argument that the "best efforts" provision of the agreement prohibited dual consultant duties, thereby demonstrating that the contract's approval evidenced control or was otherwise wrongful.

[11] See also In re Kauffman Mutual Fund Actions, 479 F.2d 257, 265 (1st Cir.1973); Greenspun v. Del E. Webb, 634 F.2d 1204, 1210 (9th Cir.1980); Grossman v. Johnson, 674 F.2d 115, 124 (1st Cir.1982); Lewis v. Curtis, 671 F.2d 779, 785 (3d Cir.1982); Lewis v. Graves, 701 F.2d 245, 248 (2d Cir.1983).

[12] 8 Del.C. § 122(5) provides that "[e]very corporation created under this chapter shall have the power to appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation". 8 Del.C. § 122(5).

[13] Plaintiff's allegation ignores 8 Del.C. § 143 which expressly authorizes interest-free loans to "any officer or employee of the corporation... whenever, in the judgment of the directors, such loan ... may reasonably be expected to benefit the corporation." 8 Del.C. § 143.

William Prickett (argued) and James P. Dalle Pazze, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, and Ivan Irwin, Jr. and Brett A. Ringle, of Shank, Irwin, Conant & Williamson, Dallas, Tex., of counsel, for plaintiffs below, appellants.

Robert K. Payson (argued) and Peter M. Sieglaff of Potter, Anderson & Corroon, Wilmington, for individual defendants below, appellees.

Lewis S. Black, Jr., A. Gilchrist Sparks, III (argued) and Richard D. Allen, of Morris, Nichols, Arsht & Tunnell, Wilmington, for Trans Union Corp., Marmon Group, Inc., GL Corp. and New T. Co., defendants below, appellees.

Before HERRMANN, C.J., and McNEILLY, HORSEY, MOORE and CHRISTIE, JJ., constituting the Court en banc.

[863] HORSEY, Justice (for the majority):

This appeal from the Court of Chancery involves a class action brought by shareholders of the defendant Trans Union Corporation ("Trans Union" or "the Company"), originally seeking rescission of a cash-out merger of Trans Union into the defendant New T Company ("New T"), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. ("Marmon"). Alternate relief in the form of damages is sought against the defendant members of the Board of Directors of Trans Union, [864] New T, and Jay A. Pritzker and Robert A. Pritzker, owners of Marmon.^[1]

Following trial, the former Chancellor granted judgment for the defendant directors by unreported letter opinion dated July 6, 1982.^[2] Judgment was based on two findings: (1) that the Board of Directors had acted in an informed manner so as to be entitled to protection of the business judgment rule in approving the cash-out merger; and (2) that the shareholder vote approving the merger should not be set aside because the stockholders had been "fairly informed" by the Board of Directors before voting thereon. The plaintiffs appeal.

Speaking for the majority of the Court, we conclude that both rulings of the Court of Chancery are clearly erroneous. Therefore, we reverse and direct that judgment be entered in favor of the plaintiffs and against the defendant directors for the fair value of the plaintiffs' stockholdings in Trans Union, in accordance with Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983).^[3]

We hold: (1) that the Board's decision, reached September 20, 1980, to approve the proposed cash-out merger was not the product of an informed business judgment; (2) that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were ineffectual, both legally and factually; and (3) that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger.

I.

The nature of this case requires a detailed factual statement. The following facts are essentially uncontradicted:^[4]

-A-

Trans Union was a publicly-traded, diversified holding company, the principal earnings of which were generated by its railcar leasing business. During the period here involved, the Company had a cash flow of hundreds of millions of dollars annually. However, the Company had difficulty in generating sufficient taxable income to offset increasingly large investment tax credits (ITCs). Accelerated depreciation deductions had decreased available taxable income against which to offset accumulating ITCs. The Company took these deductions, despite their effect on usable ITCs, because the rental price in the railcar leasing market had already impounded the purported tax savings.

In the late 1970's, together with other capital-intensive firms, Trans Union lobbied in Congress to have ITCs refundable in cash to firms which could not fully utilize the credit. During the summer of 1980, defendant Jerome W. Van Gorkom, Trans Union's Chairman and Chief Executive Officer, [865] testified and lobbied in Congress for refundability of ITCs and against further accelerated depreciation. By the end of August, Van Gorkom was convinced that Congress would neither accept the refundability concept nor curtail further accelerated depreciation.

Beginning in the late 1960's, and continuing through the 1970's, Trans Union pursued a program of acquiring small companies in order to increase available taxable income. In July 1980, Trans Union Management prepared the annual revision of the Company's Five Year Forecast. This report was presented to the Board of Directors at its July, 1980 meeting. The report projected an annual income growth of about 20%. The report also concluded that Trans Union would have about $195 million in spare cash between 1980 and 1985, "with the surplus growing rapidly from 1982 onward." The report referred to the ITC situation as a "nagging problem" and, given that problem, the leasing company "would still appear to be constrained to a tax breakeven." The report then listed four alternative uses of the projected 1982-1985 equity surplus: (1) stock repurchase; (2) dividend increases; (3) a major acquisition program; and (4) combinations of the above. The sale of Trans Union was not among the alternatives. The report emphasized that, despite the overall surplus, the operation of the Company would consume all available equity for the next several years, and concluded: "As a result, we have sufficient time to fully develop our course of action."

-B-

On August 27, 1980, Van Gorkom met with Senior Management of Trans Union. Van Gorkom reported on his lobbying efforts in Washington and his desire to find a solution to the tax credit problem more permanent than a continued program of acquisitions. Various alternatives were suggested and discussed preliminarily, including the sale of Trans Union to a company with a large amount of taxable income.

Donald Romans, Chief Financial Officer of Trans Union, stated that his department had done a "very brief bit of work on the possibility of a leveraged buy-out." This work had been prompted by a media article which Romans had seen regarding a leveraged buy-out by management. The work consisted of a "preliminary study" of the cash which could be generated by the Company if it participated in a leveraged buyout. As Romans stated, this analysis "was very first and rough cut at seeing whether a cash flow would support what might be considered a high price for this type of transaction."

On September 5, at another Senior Management meeting which Van Gorkom attended, Romans again brought up the idea of a leveraged buy-out as a "possible strategic alternative" to the Company's acquisition program. Romans and Bruce S. Chelberg, President and Chief Operating Officer of Trans Union, had been working on the matter in preparation for the meeting. According to Romans: They did not "come up" with a price for the Company. They merely "ran the numbers" at $50 a share and at $60 a share with the "rough form" of their cash figures at the time. Their "figures indicated that $50 would be very easy to do but $60 would be very difficult to do under those figures." This work did not purport to establish a fair price for either the Company or 100% of the stock. It was intended to determine the cash flow needed to service the debt that would "probably" be incurred in a leveraged buyout, based on "rough calculations" without "any benefit of experts to identify what the limits were to that, and so forth." These computations were not considered extensive and no conclusion was reached.

At this meeting, Van Gorkom stated that he would be willing to take $55 per share for his own 75,000 shares. He vetoed the suggestion of a leveraged buy-out by Management, however, as involving a potential conflict of interest for Management. Van Gorkom, a certified public accountant and lawyer, had been an officer of Trans Union [866] for 24 years, its Chief Executive Officer for more than 17 years, and Chairman of its Board for 2 years. It is noteworthy in this connection that he was then approaching 65 years of age and mandatory retirement.

For several days following the September 5 meeting, Van Gorkom pondered the idea of a sale. He had participated in many acquisitions as a manager and director of Trans Union and as a director of other companies. He was familiar with acquisition procedures, valuation methods, and negotiations; and he privately considered the pros and cons of whether Trans Union should seek a privately or publicly-held purchaser.

Van Gorkom decided to meet with Jay A. Pritzker, a well-known corporate takeover specialist and a social acquaintance. However, rather than approaching Pritzker simply to determine his interest in acquiring Trans Union, Van Gorkom assembled a proposed per share price for sale of the Company and a financing structure by which to accomplish the sale. Van Gorkom did so without consulting either his Board or any members of Senior Management except one: Carl Peterson, Trans Union's Controller. Telling Peterson that he wanted no other person on his staff to know what he was doing, but without telling him why, Van Gorkom directed Peterson to calculate the feasibility of a leveraged buy-out at an assumed price per share of $55. Apart from the Company's historic stock market price,^[5] and Van Gorkom's long association with Trans Union, the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company.

Having thus chosen the $55 figure, based solely on the availability of a leveraged buy-out, Van Gorkom multiplied the price per share by the number of shares outstanding to reach a total value of the Company of $690 million. Van Gorkom told Peterson to use this $690 million figure and to assume a $200 million equity contribution by the buyer. Based on these assumptions, Van Gorkom directed Peterson to determine whether the debt portion of the purchase price could be paid off in five years or less if financed by Trans Union's cash flow as projected in the Five Year Forecast, and by the sale of certain weaker divisions identified in a study done for Trans Union by the Boston Consulting Group ("BCG study"). Peterson reported that, of the purchase price, approximately $50-80 million would remain outstanding after five years. Van Gorkom was disappointed, but decided to meet with Pritzker nevertheless.

Van Gorkom arranged a meeting with Pritzker at the latter's home on Saturday, September 13, 1980. Van Gorkom prefaced his presentation by stating to Pritzker: "Now as far as you are concerned, I can, I think, show how you can pay a substantial premium over the present stock price and pay off most of the loan in the first five years. * * * If you could pay $55 for this Company, here is a way in which I think it can be financed."

Van Gorkom then reviewed with Pritzker his calculations based upon his proposed price of $55 per share. Although Pritzker mentioned $50 as a more attractive figure, no other price was mentioned. However, Van Gorkom stated that to be sure that $55 was the best price obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating that his organization would serve as a "stalking horse" for an "auction contest" only if Trans Union would permit Pritzker to buy 1,750,000 shares of Trans Union stock at market price which Pritzker could then sell to any higher bidder. After further discussion on this point, Pritzker told Van Gorkom that he would give him a more definite reaction soon.

[867] On Monday, September 15, Pritzker advised Van Gorkom that he was interested in the $55 cash-out merger proposal and requested more information on Trans Union. Van Gorkom agreed to meet privately with Pritzker, accompanied by Peterson, Chelberg, and Michael Carpenter, Trans Union's consultant from the Boston Consulting Group. The meetings took place on September 16 and 17. Van Gorkom was "astounded that events were moving with such amazing rapidity."

On Thursday, September 18, Van Gorkom met again with Pritzker. At that time, Van Gorkom knew that Pritzker intended to make a cash-out merger offer at Van Gorkom's proposed $55 per share. Pritzker instructed his attorney, a merger and acquisition specialist, to begin drafting merger documents. There was no further discussion of the $55 price. However, the number of shares of Trans Union's treasury stock to be offered to Pritzker was negotiated down to one million shares; the price was set at $38-75 cents above the per share price at the close of the market on September 19. At this point, Pritzker insisted that the Trans Union Board act on his merger proposal within the next three days, stating to Van Gorkom: "We have to have a decision by no later than Sunday [evening, September 21] before the opening of the English stock exchange on Monday morning." Pritzker's lawyer was then instructed to draft the merger documents, to be reviewed by Van Gorkom's lawyer, "sometimes with discussion and sometimes not, in the haste to get it finished."

On Friday, September 19, Van Gorkom, Chelberg, and Pritzker consulted with Trans Union's lead bank regarding the financing of Pritzker's purchase of Trans Union. The bank indicated that it could form a syndicate of banks that would finance the transaction. On the same day, Van Gorkom retained James Brennan, Esquire, to advise Trans Union on the legal aspects of the merger. Van Gorkom did not consult with William Browder, a Vice-President and director of Trans Union and former head of its legal department, or with William Moore, then the head of Trans Union's legal staff.

On Friday, September 19, Van Gorkom called a special meeting of the Trans Union Board for noon the following day. He also called a meeting of the Company's Senior Management to convene at 11:00 a.m., prior to the meeting of the Board. No one, except Chelberg and Peterson, was told the purpose of the meetings. Van Gorkom did not invite Trans Union's investment banker, Salomon Brothers or its Chicago-based partner, to attend.

Of those present at the Senior Management meeting on September 20, only Chelberg and Peterson had prior knowledge of Pritzker's offer. Van Gorkom disclosed the offer and described its terms, but he furnished no copies of the proposed Merger Agreement. Romans announced that his department had done a second study which showed that, for a leveraged buy-out, the price range for Trans Union stock was between $55 and $65 per share. Van Gorkom neither saw the study nor asked Romans to make it available for the Board meeting.

Senior Management's reaction to the Pritzker proposal was completely negative. No member of Management, except Chelberg and Peterson, supported the proposal. Romans objected to the price as being too low;^[6] he was critical of the timing and suggested that consideration should be given to the adverse tax consequences of an all-cash deal for low-basis shareholders; and he took the position that the agreement to sell Pritzker one million newly-issued shares at market price would inhibit other offers, as would the prohibitions against soliciting bids and furnishing inside information [868] to other bidders. Romans argued that the Pritzker proposal was a "lock up" and amounted to "an agreed merger as opposed to an offer." Nevertheless, Van Gorkom proceeded to the Board meeting as scheduled without further delay.

Ten directors served on the Trans Union Board, five inside (defendants Bonser, O'Boyle, Browder, Chelberg, and Van Gorkom) and five outside (defendants Wallis, Johnson, Lanterman, Morgan and Reneker). All directors were present at the meeting, except O'Boyle who was ill. Of the outside directors, four were corporate chief executive officers and one was the former Dean of the University of Chicago Business School. None was an investment banker or trained financial analyst. All members of the Board were well informed about the Company and its operations as a going concern. They were familiar with the current financial condition of the Company, as well as operating and earnings projections reported in the recent Five Year Forecast. The Board generally received regular and detailed reports and was kept abreast of the accumulated investment tax credit and accelerated depreciation problem.

Van Gorkom began the Special Meeting of the Board with a twenty-minute oral presentation. Copies of the proposed Merger Agreement were delivered too late for study before or during the meeting.^[7] He reviewed the Company's ITC and depreciation problems and the efforts theretofore made to solve them. He discussed his initial meeting with Pritzker and his motivation in arranging that meeting. Van Gorkom did not disclose to the Board, however, the methodology by which he alone had arrived at the $55 figure, or the fact that he first proposed the $55 price in his negotiations with Pritzker.

Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would pay $55 in cash for all outstanding shares of Trans Union stock upon completion of which Trans Union would be merged into New T Company, a subsidiary wholly-owned by Pritzker and formed to implement the merger; for a period of 90 days, Trans Union could receive, but could not actively solicit, competing offers; the offer had to be acted on by the next evening, Sunday, September 21; Trans Union could only furnish to competing bidders published information, and not proprietary information; the offer was subject to Pritzker obtaining the necessary financing by October 10, 1980; if the financing contingency were met or waived by Pritzker, Trans Union was required to sell to Pritzker one million newly-issued shares of Trans Union at $38 per share.

Van Gorkom took the position that putting Trans Union "up for auction" through a 90-day market test would validate a decision by the Board that $55 was a fair price. He told the Board that the "free market will have an opportunity to judge whether $55 is a fair price." Van Gorkom framed the decision before the Board not as whether $55 per share was the highest price that could be obtained, but as whether the $55 price was a fair price that the stockholders should be given the opportunity to accept or reject.^[8]

Attorney Brennan advised the members of the Board that they might be sued if they failed to accept the offer and that a fairness opinion was not required as a matter of law.

Romans attended the meeting as chief financial officer of the Company. He told the Board that he had not been involved in the negotiations with Pritzker and knew nothing about the merger proposal until [869] the morning of the meeting; that his studies did not indicate either a fair price for the stock or a valuation of the Company; that he did not see his role as directly addressing the fairness issue; and that he and his people "were trying to search for ways to justify a price in connection with such a [leveraged buy-out] transaction, rather than to say what the shares are worth." Romans testified:

I told the Board that the study ran the numbers at 50 and 60, and then the subsequent study at 55 and 65, and that was not the same thing as saying that I have a valuation of the company at X dollars. But it was a way — a first step towards reaching that conclusion.

Romans told the Board that, in his opinion, $55 was "in the range of a fair price," but "at the beginning of the range."

Chelberg, Trans Union's President, supported Van Gorkom's presentation and representations. He testified that he "participated to make sure that the Board members collectively were clear on the details of the agreement or offer from Pritzker;" that he "participated in the discussion with Mr. Brennan, inquiring of him about the necessity for valuation opinions in spite of the way in which this particular offer was couched;" and that he was otherwise actively involved in supporting the positions being taken by Van Gorkom before the Board about "the necessity to act immediately on this offer," and about "the adequacy of the $55 and the question of how that would be tested."

The Board meeting of September 20 lasted about two hours. Based solely upon Van Gorkom's oral presentation, Chelberg's supporting representations, Romans' oral statement, Brennan's legal advice, and their knowledge of the market history of the Company's stock,^[9] the directors approved the proposed Merger Agreement. However, the Board later claimed to have attached two conditions to its acceptance: (1) that Trans Union reserved the right to accept any better offer that was made during the market test period; and (2) that Trans Union could share its proprietary information with any other potential bidders. While the Board now claims to have reserved the right to accept any better offer received after the announcement of the Pritzker agreement (even though the minutes of the meeting do not reflect this), it is undisputed that the Board did not reserve the right to actively solicit alternate offers.

The Merger Agreement was executed by Van Gorkom during the evening of September 20 at a formal social event that he hosted for the opening of the Chicago Lyric Opera. Neither he nor any other director read the agreement prior to its signing and delivery to Pritzker.

* * *

On Monday, September 22, the Company issued a press release announcing that Trans Union had entered into a "definitive" Merger Agreement with an affiliate of the Marmon Group, Inc., a Pritzker holding company. Within 10 days of the public announcement, dissent among Senior Management over the merger had become widespread. Faced with threatened resignations of key officers, Van Gorkom met with Pritzker who agreed to several modifications of the Agreement. Pritzker was willing to do so provided that Van Gorkom could persuade the dissidents to remain on the Company payroll for at least six months after consummation of the merger.

Van Gorkom reconvened the Board on October 8 and secured the directors' approval of the proposed amendments — sight unseen. The Board also authorized the employment of Salomon Brothers, its investment [870] banker, to solicit other offers for Trans Union during the proposed "market test" period.

The next day, October 9, Trans Union issued a press release announcing: (1) that Pritzker had obtained "the financing commitments necessary to consummate" the merger with Trans Union; (2) that Pritzker had acquired one million shares of Trans Union common stock at $38 per share; (3) that Trans Union was now permitted to actively seek other offers and had retained Salomon Brothers for that purpose; and (4) that if a more favorable offer were not received before February 1, 1981, Trans Union's shareholders would thereafter meet to vote on the Pritzker proposal.

It was not until the following day, October 10, that the actual amendments to the Merger Agreement were prepared by Pritzker and delivered to Van Gorkom for execution. As will be seen, the amendments were considerably at variance with Van Gorkom's representations of the amendments to the Board on October 8; and the amendments placed serious constraints on Trans Union's ability to negotiate a better deal and withdraw from the Pritzker agreement. Nevertheless, Van Gorkom proceeded to execute what became the October 10 amendments to the Merger Agreement without conferring further with the Board members and apparently without comprehending the actual implications of the amendments.

* * *

Salomon Brothers' efforts over a three-month period from October 21 to January 21 produced only one serious suitor for Trans Union — General Electric Credit Corporation ("GE Credit"), a subsidiary of the General Electric Company. However, GE Credit was unwilling to make an offer for Trans Union unless Trans Union first rescinded its Merger Agreement with Pritzker. When Pritzker refused, GE Credit terminated further discussions with Trans Union in early January.

In the meantime, in early December, the investment firm of Kohlberg, Kravis, Roberts & Co. ("KKR"), the only other concern to make a firm offer for Trans Union, withdrew its offer under circumstances hereinafter detailed.

On December 19, this litigation was commenced and, within four weeks, the plaintiffs had deposed eight of the ten directors of Trans Union, including Van Gorkom, Chelberg and Romans, its Chief Financial Officer. On January 21, Management's Proxy Statement for the February 10 shareholder meeting was mailed to Trans Union's stockholders. On January 26, Trans Union's Board met and, after a lengthy meeting, voted to proceed with the Pritzker merger. The Board also approved for mailing, "on or about January 27," a Supplement to its Proxy Statement. The Supplement purportedly set forth all information relevant to the Pritzker Merger Agreement, which had not been divulged in the first Proxy Statement.

* * *

On February 10, the stockholders of Trans Union approved the Pritzker merger proposal. Of the outstanding shares, 69.9% were voted in favor of the merger; 7.25% were voted against the merger; and 22.85% were not voted.

II.

We turn to the issue of the application of the business judgment rule to the September 20 meeting of the Board.

The Court of Chancery concluded from the evidence that the Board of Directors' approval of the Pritzker merger proposal fell within the protection of the business judgment rule. The Court found that the Board had given sufficient time and attention to the transaction, since the directors had considered the Pritzker proposal on three different occasions, on September 20, and on October 8, 1980 and finally on January 26, 1981. On that basis, the Court reasoned that the Board had acquired, over the four-month period, sufficient information to reach an informed business judgment [871] on the cash-out merger proposal. The Court ruled:

... that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently in determining on a course of action which they believed to be in the best interest of the stockholders of Trans Union.

The Court of Chancery made but one finding; i.e., that the Board's conduct over the entire period from September 20 through January 26, 1981 was not reckless or improvident, but informed. This ultimate conclusion was premised upon three subordinate findings, one explicit and two implied. The Court's explicit finding was that Trans Union's Board was "free to turn down the Pritzker proposal" not only on September 20 but also on October 8, 1980 and on January 26, 1981. The Court's implied, subordinate findings were: (1) that no legally binding agreement was reached by the parties until January 26; and (2) that if a higher offer were to be forthcoming, the market test would have produced it,^[10] and Trans Union would have been contractually free to accept such higher offer. However, the Court offered no factual basis or legal support for any of these findings; and the record compels contrary conclusions.

This Court's standard of review of the findings of fact reached by the Trial Court following full evidentiary hearing is as stated in Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972):

[In an appeal of this nature] this court has the authority to review the entire record and to make its own findings of fact in a proper case. In exercising our power of review, we have the duty to review the sufficiency of the evidence and to test the propriety of the findings below. We do not, however, ignore the findings made by the trial judge. If they are sufficiently supported by the record and are the product of an orderly and logical deductive process, in the exercise of judicial restraint we accept them, even though independently we might have reached opposite conclusions. It is only when the findings below are clearly wrong and the doing of justice requires their overturn that we are free to make contradictory findings of fact.

Applying that standard and governing principles of law to the record and the decision of the Trial Court, we conclude that the Court's ultimate finding that the Board's conduct was not "reckless or imprudent" is contrary to the record and not the product of a logical and deductive reasoning process.

The plaintiffs contend that the Court of Chancery erred as a matter of law by exonerating the defendant directors under the business judgment rule without first determining whether the rule's threshold condition of "due care and prudence" was satisfied. The plaintiffs assert that the Trial Court found the defendant directors to have reached an informed business judgment on the basis of "extraneous considerations and events that occurred after September 20, 1980." The defendants deny that the Trial Court committed legal error in relying upon post-September 20, 1980 events and the directors' later acquired knowledge. The defendants further submit that their decision to accept $55 per share was informed because: (1) they were "highly qualified;" (2) they were "well-informed;" and (3) they deliberated over the "proposal" not once but three times. On [872] essentially this evidence and under our standard of review, the defendants assert that affirmance is required. We must disagree.

Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in 8 Del.C. § 141(a), that the business and affairs of a Delaware corporation are managed by or under its board of directors.^[11]Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984); Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation and its shareholders. Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors. Zapata Corp. v. Maldonado, supra at 782. The rule itself "is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson, supra at 812. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one. Id.

The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves "prior to making a business decision, of all material information reasonably available to them." Id.^[12]

Under the business judgment rule there is no protection for directors who have made "an unintelligent or unadvised judgment." Mitchell v. Highland-Western Glass, Del.Ch., 167 A. 831, 833 (1933). A director's duty to inform himself in preparation for a decision derives from the fiduciary capacity in which he serves the corporation and its stockholders. Lutz v. Boas, Del.Ch., 171 A.2d 381 (1961). See Weinberger v. UOP, Inc., supra; Guth v. Loft, supra. Since a director is vested with the responsibility for the management of the affairs of the corporation, he must execute that duty with the recognition that he acts on behalf of others. Such obligation does not tolerate faithlessness or self-dealing. But fulfillment of the fiduciary function requires more than the mere absence of bad faith or fraud. Representation of the financial interests of others imposes on a director an affirmative duty to protect those interests and to proceed with a critical eye in assessing information of the type and under the circumstances present here. See Lutz v. Boas, supra; Guth v. Loft, supra at 510. Compare Donovan v. Cunningham, 5th Cir., 716 F.2d 1455, 1467 (1983); Doyle v. Union Insurance Company, Neb.Supr., 277 N.W.2d 36 (1979); Continental Securities Co. v. Belmont, N.Y. App., 99 N.E. 138, 141 (1912).

Thus, a director's duty to exercise an informed business judgment is in [873] the nature of a duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud, bad faith, or self-dealing, or proof thereof. Hence, it is presumed that the directors reached their business judgment in good faith, Allaun v. Consolidated Oil Co., Del. Ch., 147 A. 257 (1929), and considerations of motive are irrelevant to the issue before us.

The standard of care applicable to a director's duty of care has also been recently restated by this Court. In Aronson, supra, we stated:

While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence. (footnote omitted)

473 A.2d at 812.

We again confirm that view. We think the concept of gross negligence is also the proper standard for determining whether a business judgment reached by a board of directors was an informed one.^[13]

In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 Del.C. 251(b),^[14] along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. See Beard v. Elster, Del.Supr., 160 A.2d 731, 737 (1960). Only an agreement of merger satisfying the requirements of 8 Del.C. § 251(b) may be submitted to the shareholders under § 251(c). See generally Aronson v. Lewis, supra at 811-13; see also Pogostin v. Rice, supra.

It is against those standards that the conduct of the directors of Trans Union must be tested, as a matter of law and as a matter of fact, regarding their exercise of an informed business judgment in voting to approve the Pritzker merger proposal.

III.

The defendants argue that the determination of whether their decision to accept $55 per share for Trans Union represented an informed business judgment requires consideration, not only of that which they knew and learned on September 20, but also of that which they subsequently learned and did over the following four-month [874] period before the shareholders met to vote on the proposal in February, 1981. The defendants thereby seek to reduce the significance of their action on September 20 and to widen the time frame for determining whether their decision to accept the Pritzker proposal was an informed one. Thus, the defendants contend that what the directors did and learned subsequent to September 20 and through January 26, 1981, was properly taken into account by the Trial Court in determining whether the Board's judgment was an informed one. We disagree with this post hoc approach.

The issue of whether the directors reached an informed decision to "sell" the Company on September 20, 1980 must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the Pritzker merger proposal. This is not to say that the directors were precluded from altering their original plan of action, had they done so in an informed manner. What we do say is that the question of whether the directors reached an informed business judgment in agreeing to sell the Company, pursuant to the terms of the September 20 Agreement presents, in reality, two questions: (A) whether the directors reached an informed business judgment on September 20, 1980; and (B) if they did not, whether the directors' actions taken subsequent to September 20 were adequate to cure any infirmity in their action taken on September 20. We first consider the directors' September 20 action in terms of their reaching an informed business judgment.

-A-

On the record before us, we must conclude that the Board of Directors did not reach an informed business judgment on September 20, 1980 in voting to "sell" the Company for $55 per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as follows:

The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the "sale" of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the "sale" of the Company upon two hours' consideration, without prior notice, and without the exigency of a crisis or emergency.

As has been noted, the Board based its September 20 decision to approve the cash-out merger primarily on Van Gorkom's representations. None of the directors, other than Van Gorkom and Chelberg, had any prior knowledge that the purpose of the meeting was to propose a cash-out merger of Trans Union. No members of Senior Management were present, other than Chelberg, Romans and Peterson; and the latter two had only learned of the proposed sale an hour earlier. Both general counsel Moore and former general counsel Browder attended the meeting, but were equally uninformed as to the purpose of the meeting and the documents to be acted upon.

Without any documents before them concerning the proposed transaction, the members of the Board were required to rely entirely upon Van Gorkom's 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of $55 price per share for sale of the Company; and the Board had before it nothing more than Van Gorkom's statement of his understanding of the substance of an agreement which he admittedly had never read, nor which any member of the Board had ever seen.

Under 8 Del.C. § 141(e),^[15] "directors are fully protected in relying in [875] good faith on reports made by officers." Michelson v. Duncan, Del.Ch., 386 A.2d 1144, 1156 (1978); aff'd in part and rev'd in part on other grounds, Del.Supr., 407 A.2d 211 (1979). See also Graham v. Allis-Chalmers Mfg. Co., Del.Supr., 188 A.2d 125, 130 (1963); Prince v. Bensinger, Del. Ch., 244 A.2d 89, 94 (1968). The term "report" has been liberally construed to include reports of informal personal investigations by corporate officers, Cheff v. Mathes, Del.Supr., 199 A.2d 548, 556 (1964). However, there is no evidence that any "report," as defined under § 141(e), concerning the Pritzker proposal, was presented to the Board on September 20.^[16] Van Gorkom's oral presentation of his understanding of the terms of the proposed Merger Agreement, which he had not seen, and Romans' brief oral statement of his preliminary study regarding the feasibility of a leveraged buy-out of Trans Union do not qualify as § 141(e) "reports" for these reasons: The former lacked substance because Van Gorkom was basically uninformed as to the essential provisions of the very document about which he was talking. Romans' statement was irrelevant to the issues before the Board since it did not purport to be a valuation study. At a minimum for a report to enjoy the status conferred by § 141(e), it must be pertinent to the subject matter upon which a board is called to act, and otherwise be entitled to good faith, not blind, reliance. Considering all of the surrounding circumstances — hastily calling the meeting without prior notice of its subject matter, the proposed sale of the Company without any prior consideration of the issue or necessity therefor, the urgent time constraints imposed by Pritzker, and the total absence of any documentation whatsoever — the directors were duty bound to make reasonable inquiry of Van Gorkom and Romans, and if they had done so, the inadequacy of that upon which they now claim to have relied would have been apparent.

The defendants rely on the following factors to sustain the Trial Court's finding that the Board's decision was an informed one: (1) the magnitude of the premium or spread between the $55 Pritzker offering price and Trans Union's current market price of $38 per share; (2) the amendment of the Agreement as submitted on September 20 to permit the Board to accept any better offer during the "market test" period; (3) the collective experience and expertise of the Board's "inside" and "outside" directors;^[17] and (4) their reliance on Brennan's legal advice that the directors might be sued if they rejected the Pritzker proposal. We discuss each of these grounds seriatim:

(1)

A substantial premium may provide one reason to recommend a merger, but in the absence of other sound valuation information, the fact of a premium alone does not provide an adequate basis upon which to assess the fairness of an offering price. Here, the judgment reached as to the adequacy of the premium was based on a comparison between the historically depressed Trans Union market price and the amount of the Pritzker offer. Using market price as a basis for concluding that the premium adequately reflected the true value [876] of the Company was a clearly faulty, indeed fallacious, premise, as the defendants' own evidence demonstrates.

The record is clear that before September 20, Van Gorkom and other members of Trans Union's Board knew that the market had consistently undervalued the worth of Trans Union's stock, despite steady increases in the Company's operating income in the seven years preceding the merger. The Board related this occurrence in large part to Trans Union's inability to use its ITCs as previously noted. Van Gorkom testified that he did not believe the market price accurately reflected Trans Union's true worth; and several of the directors testified that, as a general rule, most chief executives think that the market undervalues their companies' stock. Yet, on September 20, Trans Union's Board apparently believed that the market stock price accurately reflected the value of the Company for the purpose of determining the adequacy of the premium for its sale.

In the Proxy Statement, however, the directors reversed their position. There, they stated that, although the earnings prospects for Trans Union were "excellent," they found no basis for believing that this would be reflected in future stock prices. With regard to past trading, the Board stated that the prices at which the Company's common stock had traded in recent years did not reflect the "inherent" value of the Company. But having referred to the "inherent" value of Trans Union, the directors ascribed no number to it. Moreover, nowhere did they disclose that they had no basis on which to fix "inherent" worth beyond an impressionistic reaction to the premium over market and an unsubstantiated belief that the value of the assets was "significantly greater" than book value. By their own admission they could not rely on the stock price as an accurate measure of value. Yet, also by their own admission, the Board members assumed that Trans Union's market price was adequate to serve as a basis upon which to assess the adequacy of the premium for purposes of the September 20 meeting.

The parties do not dispute that a publicly-traded stock price is solely a measure of the value of a minority position and, thus, market price represents only the value of a single share. Nevertheless, on September 20, the Board assessed the adequacy of the premium over market, offered by Pritzker, solely by comparing it with Trans Union's current and historical stock price. (See supra note 5 at 866.)

Indeed, as of September 20, the Board had no other information on which to base a determination of the intrinsic value of Trans Union as a going concern. As of September 20, the Board had made no evaluation of the Company designed to value the entire enterprise, nor had the Board ever previously considered selling the Company or consenting to a buy-out merger. Thus, the adequacy of a premium is indeterminate unless it is assessed in terms of other competent and sound valuation information that reflects the value of the particular business.

Despite the foregoing facts and circumstances, there was no call by the Board, either on September 20 or thereafter, for any valuation study or documentation of the $55 price per share as a measure of the fair value of the Company in a cash-out context. It is undisputed that the major asset of Trans Union was its cash flow. Yet, at no time did the Board call for a valuation study taking into account that highly significant element of the Company's assets.

We do not imply that an outside valuation study is essential to support an informed business judgment; nor do we state that fairness opinions by independent investment bankers are required as a matter of law. Often insiders familiar with the business of a going concern are in a better position than are outsiders to gather relevant information; and under appropriate circumstances, such directors may be fully protected in relying in good faith upon the valuation reports of their management. [877] See 8 Del.C. § 141(e). See also Cheff v. Mathes, supra.

Here, the record establishes that the Board did not request its Chief Financial Officer, Romans, to make any valuation study or review of the proposal to determine the adequacy of $55 per share for sale of the Company. On the record before us: The Board rested on Romans' elicited response that the $55 figure was within a "fair price range" within the context of a leveraged buy-out. No director sought any further information from Romans. No director asked him why he put $55 at the bottom of his range. No director asked Romans for any details as to his study, the reason why it had been undertaken or its depth. No director asked to see the study; and no director asked Romans whether Trans Union's finance department could do a fairness study within the remaining 36-hour^[18] period available under the Pritzker offer.

Had the Board, or any member, made an inquiry of Romans, he presumably would have responded as he testified: that his calculations were rough and preliminary; and, that the study was not designed to determine the fair value of the Company, but rather to assess the feasibility of a leveraged buy-out financed by the Company's projected cash flow, making certain assumptions as to the purchaser's borrowing needs. Romans would have presumably also informed the Board of his view, and the widespread view of Senior Management, that the timing of the offer was wrong and the offer inadequate.

The record also establishes that the Board accepted without scrutiny Van Gorkom's representation as to the fairness of the $55 price per share for sale of the Company — a subject that the Board had never previously considered. The Board thereby failed to discover that Van Gorkom had suggested the $55 price to Pritzker and, most crucially, that Van Gorkom had arrived at the $55 figure based on calculations designed solely to determine the feasibility of a leveraged buy-out.^[19] No questions were raised either as to the tax implications of a cash-out merger or how the price for the one million share option granted Pritzker was calculated.

We do not say that the Board of Directors was not entitled to give some credence to Van Gorkom's representation that $55 was an adequate or fair price. Under § 141(e), the directors were entitled to rely upon their chairman's opinion of value and adequacy, provided that such opinion was reached on a sound basis. Here, the issue is whether the directors informed themselves as to all information that was reasonably available to them. Had they done so, they would have learned of the source and derivation of the $55 price and could not reasonably have relied thereupon in good faith.

None of the directors, Management or outside, were investment bankers or financial analysts. Yet the Board did not consider recessing the meeting until a later hour that day (or requesting an extension of Pritzker's Sunday evening deadline) to give it time to elicit more information as to the sufficiency of the offer, either from [878] inside Management (in particular Romans) or from Trans Union's own investment banker, Salomon Brothers, whose Chicago specialist in merger and acquisitions was known to the Board and familiar with Trans Union's affairs.

Thus, the record compels the conclusion that on September 20 the Board lacked valuation information adequate to reach an informed business judgment as to the fairness of $55 per share for sale of the Company.^[20]

(2)

This brings us to the post-September 20 "market test" upon which the defendants ultimately rely to confirm the reasonableness of their September 20 decision to accept the Pritzker proposal. In this connection, the directors present a two-part argument: (a) that by making a "market test" of Pritzker's $55 per share offer a condition of their September 20 decision to accept his offer, they cannot be found to have acted impulsively or in an uninformed manner on September 20; and (b) that the adequacy of the $17 premium for sale of the Company was conclusively established over the following 90 to 120 days by the most reliable evidence available — the marketplace. Thus, the defendants impliedly contend that the "market test" eliminated the need for the Board to perform any other form of fairness test either on September 20, or thereafter.

Again, the facts of record do not support the defendants' argument. There is no evidence: (a) that the Merger Agreement was effectively amended to give the Board freedom to put Trans Union up for auction sale to the highest bidder; or (b) that a public auction was in fact permitted to occur. The minutes of the Board meeting make no reference to any of this. Indeed, the record compels the conclusion that the directors had no rational basis for expecting that a market test was attainable, given the terms of the Agreement as executed during the evening of September 20. We rely upon the following facts which are essentially uncontradicted:

The Merger Agreement, specifically identified as that originally presented to the Board on September 20, has never been produced by the defendants, notwithstanding the plaintiffs' several demands for production before as well as during trial. No acceptable explanation of this failure to produce documents has been given to either the Trial Court or this Court. Significantly, neither the defendants nor their counsel have made the affirmative representation that this critical document has been produced. Thus, the Court is deprived of the best evidence on which to judge the merits of the defendants' position as to the care and attention which they gave to the terms of the Agreement on September 20.

Van Gorkom states that the Agreement as submitted incorporated the ingredients for a market test by authorizing Trans Union to receive competing offers over the next 90-day period. However, he concedes that the Agreement barred Trans Union from actively soliciting such offers and from furnishing to interested parties any information about the Company other than that already in the public domain. Whether the original Agreement of September 20 went so far as to authorize Trans Union to receive competitive proposals is arguable. The defendants' unexplained failure to produce and identify the original Merger Agreement permits the logical inference that the instrument would not support their assertions in this regard. Wilmington Trust Co. v. General Motors Corp., Del.Supr., 51 A.2d 584, 593 (1947); II Wigmore on Evidence § 291 (3d ed. 1940). It is a well established principle that the production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse. Interstate Circuit v. United States, 306 U.S. [879] 208, 226, 59 S.Ct. 467, 474, 83 L.Ed. 610 (1939); Deberry v. State, Del.Supr., 457 A.2d 744, 754 (1983). Van Gorkom, conceding that he never read the Agreement, stated that he was relying upon his understanding that, under corporate law, directors always have an inherent right, as well as a fiduciary duty, to accept a better offer notwithstanding an existing contractual commitment by the Board. (See the discussion infra, part III B(3) at p. 55.)

The defendant directors assert that they "insisted" upon including two amendments to the Agreement, thereby permitting a market test: (1) to give Trans Union the right to accept a better offer; and (2) to reserve to Trans Union the right to distribute proprietary information on the Company to alternative bidders. Yet, the defendants concede that they did not seek to amend the Agreement to permit Trans Union to solicit competing offers.

Several of Trans Union's outside directors resolutely maintained that the Agreement as submitted was approved on the understanding that, "if we got a better deal, we had a right to take it." Director Johnson so testified; but he then added, "And if they didn't put that in the agreement, then the management did not carry out the conclusion of the Board. And I just don't know whether they did or not." The only clause in the Agreement as finally executed to which the defendants can point as "keeping the door open" is the following underlined statement found in subparagraph (a) of section 2.03 of the Merger Agreement as executed:

The Board of Directors shall recommend to the stockholders of Trans Union that they approve and adopt the Merger Agreement (`the stockholders' approval') and to use its best efforts to obtain the requisite votes therefor. GL acknowledges that Trans Union directors may have a competing fiduciary obligation to the shareholders under certain circumstances.

Clearly, this language on its face cannot be construed as incorporating either of the two "conditions" described above: either the right to accept a better offer or the right to distribute proprietary information to third parties. The logical witness for the defendants to call to confirm their construction of this clause of the Agreement would have been Trans Union's outside attorney, James Brennan. The defendants' failure, without explanation, to call this witness again permits the logical inference that his testimony would not have been helpful to them. The further fact that the directors adjourned, rather than recessed, the meeting without incorporating in the Agreement these important "conditions" further weakens the defendants' position. As has been noted, nothing in the Board's Minutes supports these claims. No reference to either of the so-called "conditions" or of Trans Union's reserved right to test the market appears in any notes of the Board meeting or in the Board Resolution accepting the Pritzker offer or in the Minutes of the meeting itself. That evening, in the midst of a formal party which he hosted for the opening of the Chicago Lyric Opera, Van Gorkom executed the Merger Agreement without he or any other member of the Board having read the instruments.

The defendants attempt to downplay the significance of the prohibition against Trans Union's actively soliciting competing offers by arguing that the directors "understood that the entire financial community would know that Trans Union was for sale upon the announcement of the Pritzker offer, and anyone desiring to make a better offer was free to do so." Yet, the press release issued on September 22, with the authorization of the Board, stated that Trans Union had entered into "definitive agreements" with the Pritzkers; and the press release did not even disclose Trans Union's limited right to receive and accept higher offers. Accompanying this press release was a further public announcement that Pritzker had been granted an option to purchase at any time one million shares of [880] Trans Union's capital stock at 75 cents above the then-current price per share.

Thus, notwithstanding what several of the outside directors later claimed to have "thought" occurred at the meeting, the record compels the conclusion that Trans Union's Board had no rational basis to conclude on September 20 or in the days immediately following, that the Board's acceptance of Pritzker's offer was conditioned on (1) a "market test" of the offer; and (2) the Board's right to withdraw from the Pritzker Agreement and accept any higher offer received before the shareholder meeting.

(3)

The directors' unfounded reliance on both the premium and the market test as the basis for accepting the Pritzker proposal undermines the defendants' remaining contention that the Board's collective experience and sophistication was a sufficient basis for finding that it reached its September 20 decision with informed, reasonable deliberation.^[21]Compare Gimbel v. Signal Companies, Inc., Del. Ch., 316 A.2d 599 (1974), aff'd per curiam, Del. Supr., 316 A.2d 619 (1974). There, the Court of Chancery preliminary enjoined a board's sale of stock of its wholly-owned subsidiary for an alleged grossly inadequate price. It did so based on a finding that the business judgment rule had been pierced for failure of management to give its board "the opportunity to make a reasonable and reasoned decision." 316 A.2d at 615. The Court there reached this result notwithstanding the board's sophistication and experience; the company's need of immediate cash; and the board's need to act promptly due to the impact of an energy crisis on the value of the underlying assets being sold — all of its subsidiary's oil and gas interests. The Court found those factors denoting competence to be outweighed by evidence of gross negligence; that management in effect sprang the deal on the board by negotiating the asset sale without informing the board; that the buyer intended to "force a quick decision" by the board; that the board meeting was called on only one-and-a-half days' notice; that its outside directors were not notified of the meeting's purpose; that during a meeting spanning "a couple of hours" a sale of assets worth $480 million was approved; and that the Board failed to obtain a current appraisal of its oil and gas interests. The analogy of Signal to the case at bar is significant.

(4)

Part of the defense is based on a claim that the directors relied on legal advice rendered at the September 20 meeting by James Brennan, Esquire, who was present at Van Gorkom's request. Unfortunately, Brennan did not appear and testify at trial even though his firm participated in the defense of this action. There is no contemporaneous evidence of the advice given by Brennan on September 20, only the later deposition and trial testimony of certain directors as to their recollections or understanding of what was said at the meeting. Since counsel did not testify, and the advice attributed to Brennan is hearsay received by the Trial Court over the plaintiffs' objections, we consider it only in the context of the directors' present claims. In fairness to counsel, we make no findings that the advice attributed to him was in fact given. We focus solely on the efficacy of the [881] defendants' claims, made months and years later, in an effort to extricate themselves from liability.

Several defendants testified that Brennan advised them that Delaware law did not require a fairness opinion or an outside valuation of the Company before the Board could act on the Pritzker proposal. If given, the advice was correct. However, that did not end the matter. Unless the directors had before them adequate information regarding the intrinsic value of the Company, upon which a proper exercise of business judgment could be made, mere advice of this type is meaningless; and, given this record of the defendants' failures, it constitutes no defense here.^[22]

* * *

We conclude that Trans Union's Board was grossly negligent in that it failed to act with informed reasonable deliberation in agreeing to the Pritzker merger proposal on September 20; and we further conclude that the Trial Court erred as a matter of law in failing to address that question before determining whether the directors' later conduct was sufficient to cure its initial error.

A second claim is that counsel advised the Board it would be subject to lawsuits if it rejected the $55 per share offer. It is, of course, a fact of corporate life that today when faced with difficult or sensitive issues, directors often are subject to suit, irrespective of the decisions they make. However, counsel's mere acknowledgement of this circumstance cannot be rationally translated into a justification for a board permitting itself to be stampeded into a patently unadvised act. While suit might result from the rejection of a merger or tender offer, Delaware law makes clear that a board acting within the ambit of the business judgment rule faces no ultimate liability. Pogostin v. Rice, supra. Thus, we cannot conclude that the mere threat of litigation, acknowledged by counsel, constitutes either legal advice or any valid basis upon which to pursue an uninformed course.

Since we conclude that Brennan's purported advice is of no consequence to the defense of this case, it is unnecessary for us to invoke the adverse inferences which may be attributable to one failing to appear at trial and testify.

-B-

We now examine the Board's post-September 20 conduct for the purpose of determining first, whether it was informed and not grossly negligent; and second, if informed, whether it was sufficient to legally rectify and cure the Board's derelictions of September 20.^[23]

(1)

First, as to the Board meeting of October 8: Its purpose arose in the aftermath of the September 20 meeting: (1) the September 22 press release announcing that Trans Union "had entered into definitive agreements to merge with an affiliate of Marmon Group, Inc.;" and (2) Senior Management's ensuing revolt.

Trans Union's press release stated:

FOR IMMEDIATE RELEASE:

CHICAGO, IL — Trans Union Corporation announced today that it had entered into definitive agreements to merge with an affiliate of The Marmon Group, Inc. in a transaction whereby Trans Union stockholders would receive $55 per share in cash for each Trans Union share held. The Marmon Group, Inc. is controlled by the Pritzker family of Chicago.

The merger is subject to approval by the stockholders of Trans Union at a special meeting expected to be held [882] sometime during December or early January.

Until October 10, 1980, the purchaser has the right to terminate the merger if financing that is satisfactory to the purchaser has not been obtained, but after that date there is no such right.

In a related transaction, Trans Union has agreed to sell to a designee of the purchaser one million newly-issued shares of Trans Union common stock at a cash price of $38 per share. Such shares will be issued only if the merger financing has been committed for no later than October 10, 1980, or if the purchaser elects to waive the merger financing condition. In addition, the New York Stock Exchange will be asked to approve the listing of the new shares pursuant to a listing application which Trans Union intends to file shortly.

Completing of the transaction is also subject to the preparation of a definitive proxy statement and making various filings and obtaining the approvals or consents of government agencies.

The press release made no reference to provisions allegedly reserving to the Board the rights to perform a "market test" and to withdraw from the Pritzker Agreement if Trans Union received a better offer before the shareholder meeting. The defendants also concede that Trans Union never made a subsequent public announcement stating that it had in fact reserved the right to accept alternate offers, the Agreement notwithstanding.

The public announcement of the Pritzker merger resulted in an "en masse" revolt of Trans Union's Senior Management. The head of Trans Union's tank car operations (its most profitable division) informed Van Gorkom that unless the merger were called off, fifteen key personnel would resign.

Instead of reconvening the Board, Van Gorkom again privately met with Pritzker, informed him of the developments, and sought his advice. Pritzker then made the following suggestions for overcoming Management's dissatisfaction: (1) that the Agreement be amended to permit Trans Union to solicit, as well as receive, higher offers; and (2) that the shareholder meeting be postponed from early January to February 10, 1981. In return, Pritzker asked Van Gorkom to obtain a commitment from Senior Management to remain at Trans Union for at least six months after the merger was consummated.

Van Gorkom then advised Senior Management that the Agreement would be amended to give Trans Union the right to solicit competing offers through January, 1981, if they would agree to remain with Trans Union. Senior Management was temporarily mollified; and Van Gorkom then called a special meeting of Trans Union's Board for October 8.

Thus, the primary purpose of the October 8 Board meeting was to amend the Merger Agreement, in a manner agreeable to Pritzker, to permit Trans Union to conduct a "market test."^[24] Van Gorkom understood that the proposed amendments were intended to give the Company an unfettered "right to openly solicit offers down through January 31." Van Gorkom presumably so represented the amendments to Trans Union's Board members on October 8. In a brief session, the directors approved Van Gorkom's oral presentation of the substance of the proposed amendments, [883] the terms of which were not reduced to writing until October 10. But rather than waiting to review the amendments, the Board again approved them sight unseen and adjourned, giving Van Gorkom authority to execute the papers when he received them.^[25]

Thus, the Court of Chancery's finding that the October 8 Board meeting was convened to reconsider the Pritzker "proposal" is clearly erroneous. Further, the consequence of the Board's faulty conduct on October 8, in approving amendments to the Agreement which had not even been drafted, will become apparent when the actual amendments to the Agreement are hereafter examined.

The next day, October 9, and before the Agreement was amended, Pritzker moved swiftly to off-set the proposed market test amendment. First, Pritzker informed Trans Union that he had completed arrangements for financing its acquisition and that the parties were thereby mutually bound to a firm purchase and sale arrangement. Second, Pritzker announced the exercise of his option to purchase one million shares of Trans Union's treasury stock at $38 per share — 75 cents above the current market price. Trans Union's Management responded the same day by issuing a press release announcing: (1) that all financing arrangements for Pritzker's acquisition of Trans Union had been completed; and (2) Pritzker's purchase of one million shares of Trans Union's treasury stock at $38 per share.

The next day, October 10, Pritzker delivered to Trans Union the proposed amendments to the September 20 Merger Agreement. Van Gorkom promptly proceeded to countersign all the instruments on behalf of Trans Union without reviewing the instruments to determine if they were consistent with the authority previously granted him by the Board. The amending documents were apparently not approved by Trans Union's Board until a much later date, December 2. The record does not affirmatively establish that Trans Union's directors ever read the October 10 amendments.^[26]

The October 10 amendments to the Merger Agreement did authorize Trans Union to solicit competing offers, but the amendments had more far-reaching effects. The most significant change was in the definition of the third-party "offer" available to Trans Union as a possible basis for withdrawal from its Merger Agreement with Pritzker. Under the October 10 amendments, a better offer was no longer sufficient to permit Trans Union's withdrawal. Trans Union was now permitted to terminate the Pritzker Agreement and abandon the merger only if, prior to February 10, 1981, Trans Union had either consummated a merger (or sale of assets) with a third party or had entered into a "definitive" merger agreement more favorable than Pritzker's and for a greater consideration — subject only to stockholder approval. Further, the "extension" of the market test period to February 10, 1981 was circumscribed by other amendments which required Trans Union to file its preliminary proxy statement on the Pritzker merger proposal by December 5, 1980 and use its best efforts to mail the statement to its shareholders by January 5, 1981. Thus, the market test period was effectively reduced, not extended. (See infra note 29 at 886.)

In our view, the record compels the conclusion that the directors' conduct on October [884] 8 exhibited the same deficiencies as did their conduct on September 20. The Board permitted its Merger Agreement with Pritzker to be amended in a manner it had neither authorized nor intended. The Court of Chancery, in its decision, over-looked the significance of the October 8-10 events and their relevance to the sufficiency of the directors' conduct. The Trial Court's letter opinion ignores: the October 10 amendments; the manner of their adoption; the effect of the October 9 press release and the October 10 amendments on the feasibility of a market test; and the ultimate question as to the reasonableness of the directors' reliance on a market test in recommending that the shareholders approve the Pritzker merger.

We conclude that the Board acted in a grossly negligent manner on October 8; and that Van Gorkom's representations on which the Board based its actions do not constitute "reports" under § 141(e) on which the directors could reasonably have relied. Further, the amended Merger Agreement imposed on Trans Union's acceptance of a third party offer conditions more onerous than those imposed on Trans Union's acceptance of Pritzker's offer on September 20. After October 10, Trans Union could accept from a third party a better offer only if it were incorporated in a definitive agreement between the parties, and not conditioned on financing or on any other contingency.

The October 9 press release, coupled with the October 10 amendments, had the clear effect of locking Trans Union's Board into the Pritzker Agreement. Pritzker had thereby foreclosed Trans Union's Board from negotiating any better "definitive" agreement over the remaining eight weeks before Trans Union was required to clear the Proxy Statement submitting the Pritzker proposal to its shareholders.

(2)

Next, as to the "curative" effects of the Board's post-September 20 conduct, we review in more detail the reaction of Van Gorkom to the KKR proposal and the results of the Board-sponsored "market test."

The KKR proposal was the first and only offer received subsequent to the Pritzker Merger Agreement. The offer resulted primarily from the efforts of Romans and other senior officers to propose an alternative to Pritzker's acquisition of Trans Union. In late September, Romans' group contacted KKR about the possibility of a leveraged buy-out by all members of Management, except Van Gorkom. By early October, Henry R. Kravis of KKR gave Romans written notice of KKR's "interest in making an offer to purchase 100%" of Trans Union's common stock.

Thereafter, and until early December, Romans' group worked with KKR to develop a proposal. It did so with Van Gorkom's knowledge and apparently grudging consent. On December 2, Kravis and Romans hand-delivered to Van Gorkom a formal letter-offer to purchase all of Trans Union's assets and to assume all of its liabilities for an aggregate cash consideration equivalent to $60 per share. The offer was contingent upon completing equity and bank financing of $650 million, which Kravis represented as 80% complete. The KKR letter made reference to discussions with major banks regarding the loan portion of the buy-out cost and stated that KKR was "confident that commitments for the bank financing * * * can be obtained within two or three weeks." The purchasing group was to include certain named key members of Trans Union's Senior Management, excluding Van Gorkom, and a major Canadian company. Kravis stated that they were willing to enter into a "definitive agreement" under terms and conditions "substantially the same" as those contained in Trans Union's agreement with Pritzker. The offer was addressed to Trans Union's Board of Directors and a meeting with the Board, scheduled for that afternoon, was requested.

Van Gorkom's reaction to the KKR proposal was completely negative; he did not view the offer as being firm because of its [885] financing condition. It was pointed out, to no avail, that Pritzker's offer had not only been similarly conditioned, but accepted on an expedited basis. Van Gorkom refused Kravis' request that Trans Union issue a press release announcing KKR's offer, on the ground that it might "chill" any other offer.^[27] Romans and Kravis left with the understanding that their proposal would be presented to Trans Union's Board that afternoon.

Within a matter of hours and shortly before the scheduled Board meeting, Kravis withdrew his letter-offer. He gave as his reason a sudden decision by the Chief Officer of Trans Union's rail car leasing operation to withdraw from the KKR purchasing group. Van Gorkom had spoken to that officer about his participation in the KKR proposal immediately after his meeting with Romans and Kravis. However, Van Gorkom denied any responsibility for the officer's change of mind.

At the Board meeting later that afternoon, Van Gorkom did not inform the directors of the KKR proposal because he considered it "dead." Van Gorkom did not contact KKR again until January 20, when faced with the realities of this lawsuit, he then attempted to reopen negotiations. KKR declined due to the imminence of the February 10 stockholder meeting.

GE Credit Corporation's interest in Trans Union did not develop until November; and it made no written proposal until mid-January. Even then, its proposal was not in the form of an offer. Had there been time to do so, GE Credit was prepared to offer between $2 and $5 per share above the $55 per share price which Pritzker offered. But GE Credit needed an additional 60 to 90 days; and it was unwilling to make a formal offer without a concession from Pritzker extending the February 10 "deadline" for Trans Union's stockholder meeting. As previously stated, Pritzker refused to grant such extension; and on January 21, GE Credit terminated further negotiations with Trans Union. Its stated reasons, among others, were its "unwillingness to become involved in a bidding contest with Pritzker in the absence of the willingness of [the Pritzker interests] to terminate the proposed $55 cash merger."

* * *

In the absence of any explicit finding by the Trial Court as to the reasonableness of Trans Union's directors' reliance on a market test and its feasibility, we may make our own findings based on the record. Our review of the record compels a finding that confirmation of the appropriateness of the Pritzker offer by an unfettered or free market test was virtually meaningless in the face of the terms and time limitations of Trans Union's Merger Agreement with Pritzker as amended October 10, 1980.

(3)

Finally, we turn to the Board's meeting of January 26, 1981. The defendant directors rely upon the action there taken to refute the contention that they did not reach an informed business judgment in approving the Pritzker merger. The defendants contend that the Trial Court correctly concluded that Trans Union's directors were, in effect, as "free to turn down the Pritzker proposal" on January 26, as they were on September 20.

Applying the appropriate standard of review set forth in Levitt v. Bouvier, supra, we conclude that the Trial Court's finding in this regard is neither supported by the record nor the product of an orderly and logical deductive process. Without disagreeing with the principle that a business decision by an originally uninformed board of directors may, under appropriate circumstances, be timely cured so as to become informed and deliberate, Muschel v. Western Union Corporation, Del. Ch., 310 [886] A.2d 904 (1973),^[28] we find that the record does not permit the defendants to invoke that principle in this case.

The Board's January 26 meeting was the first meeting following the filing of the plaintiffs' suit in mid-December and the last meeting before the previously-noticed shareholder meeting of February 10.^[29] All ten members of the Board and three outside attorneys attended the meeting. At that meeting the following facts, among other aspects of the Merger Agreement, were discussed:

(a) The fact that prior to September 20, 1980, no Board member or member of Senior Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible merger with Pritzker;

(b) The fact that the price of $55 per share had been suggested initially to Pritzker by Van Gorkom;

(c) The fact that the Board had not sought an independent fairness opinion;

(d) The fact that, at the September 20 Senior Management meeting, Romans and several members of Senior Management indicated both concern that the $55 per share price was inadequate and a belief that a higher price should and could be obtained;

(e) The fact that Romans had advised the Board at its meeting on September 20, that he and his department had prepared a study which indicated that the Company had a value in the range of $55 to $65 per share, and that he could not advise the Board that the $55 per share offer made by Pritzker was unfair.

The defendants characterize the Board's Minutes of the January 26 meeting as a "review" of the "entire sequence of events" from Van Gorkom's initiation of the negotiations on September 13 forward.^[30] The defendants also rely on the [887] testimony of several of the Board members at trial as confirming the Minutes.^[31] On the basis of this evidence, the defendants argue that whatever information the Board lacked to make a deliberate and informed judgment on September 20, or on October 8, was fully divulged to the entire Board on January 26. Hence, the argument goes, the Board's vote on January 26 to again "approve" the Pritzker merger must be found to have been an informed and deliberate judgment.

On the basis of this evidence, the defendants assert: (1) that the Trial Court was legally correct in widening the time frame for determining whether the defendants' approval of the Pritzker merger represented an informed business judgment to include the entire four-month period during which the Board considered the matter from September 20 through January 26; and (2) that, given this extensive evidence of the Board's further review and deliberations on January 26, this Court must affirm the Trial Court's conclusion that the Board's action was not reckless or improvident.

We cannot agree. We find the Trial Court to have erred, both as a matter of fact and as a matter of law, in relying on the action on January 26 to bring the defendants' conduct within the protection of the business judgment rule.

Johnson's testimony and the Board Minutes of January 26 are remarkably consistent. Both clearly indicate recognition that the question of the alternative courses of action, available to the Board on January 26 with respect to the Pritzker merger, was a legal question, presenting to the Board (after its review of the full record developed through pre-trial discovery) three options: (1) to "continue to recommend" the Pritzker merger; (2) to "recommend that [888] the stockholders vote against" the Pritzker merger; or (3) to take a noncommittal position on the merger and "simply leave the decision to [the] shareholders."

We must conclude from the foregoing that the Board was mistaken as a matter of law regarding its available courses of action on January 26, 1981. Options (2) and (3) were not viable or legally available to the Board under 8 Del.C. § 251(b). The Board could not remain committed to the Pritzker merger and yet recommend that its stockholders vote it down; nor could it take a neutral position and delegate to the stockholders the unadvised decision as to whether to accept or reject the merger. Under § 251(b), the Board had but two options: (1) to proceed with the merger and the stockholder meeting, with the Board's recommendation of approval; or (2) to rescind its agreement with Pritzker, withdraw its approval of the merger, and notify its stockholders that the proposed shareholder meeting was cancelled. There is no evidence that the Board gave any consideration to these, its only legally viable alternative courses of action.

But the second course of action would have clearly involved a substantial risk — that the Board would be faced with suit by Pritzker for breach of contract based on its September 20 agreement as amended October 10. As previously noted, under the terms of the October 10 amendment, the Board's only ground for release from its agreement with Pritzker was its entry into a more favorable definitive agreement to sell the Company to a third party. Thus, in reality, the Board was not "free to turn down the Pritzker proposal" as the Trial Court found. Indeed, short of negotiating a better agreement with a third party, the Board's only basis for release from the Pritzker Agreement without liability would have been to establish fundamental wrongdoing by Pritzker. Clearly, the Board was not "free" to withdraw from its agreement with Pritzker on January 26 by simply relying on its self-induced failure to have reached an informed business judgment at the time of its original agreement. See Wilmington Trust Company v. Coulter, Del.Supr., 200 A.2d 441, 453 (1964), aff'g Pennsylvania Company v. Wilmington Trust Company, Del.Ch., 186 A.2d 751 (1962).

Therefore, the Trial Court's conclusion that the Board reached an informed business judgment on January 26 in determining whether to turn down the Pritzker "proposal" on that day cannot be sustained.^[32] The Court's conclusion is not supported by the record; it is contrary to the provisions of § 251(b) and basic principles of contract law; and it is not the product of a logical and deductive reasoning process.

* * *

Upon the basis of the foregoing, we hold that the defendants' post-September conduct did not cure the deficiencies of their September 20 conduct; and that, accordingly, the Trial Court erred in according to the defendants the benefits of the business judgment rule.

IV.

Whether the directors of Trans Union should be treated as one or individually in terms of invoking the protection of the business judgment rule and the applicability of 8 Del.C. § 141(c) are questions which were not originally addressed by the parties in their briefing of this case. This resulted in a supplemental briefing and a second rehearing en banc on two basic questions: (a) whether one or more of the directors were deprived of the protection of the business judgment rule by evidence of an absence of good faith; and (b) whether one or more of the outside directors were [889] entitled to invoke the protection of 8 Del.C. § 141(e) by evidence of a reasonable, good faith reliance on "reports," including legal advice, rendered the Board by certain inside directors and the Board's special counsel, Brennan.

The parties' response, including reargument, has led the majority of the Court to conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified position, we are required to treat all of the directors as one as to whether they are entitled to the protection of the business judgment rule; and (2) that considerations of good faith, including the presumption that the directors acted in good faith, are irrelevant in determining the threshold issue of whether the directors as a Board exercised an informed business judgment. For the same reason, we must reject defense counsel's ad hominem argument for affirmance: that reversal may result in a multi-million dollar class award against the defendants for having made an allegedly uninformed business judgment in a transaction not involving any personal gain, self-dealing or claim of bad faith.

In their brief, the defendants similarly mistake the business judgment rule's application to this case by erroneously invoking presumptions of good faith and "wide discretion":

This is a case in which plaintiff challenged the exercise of business judgment by an independent Board of Directors. There were no allegations and no proof of fraud, bad faith, or self-dealing by the directors....

The business judgment rule, which was properly applied by the Chancellor, allows directors wide discretion in the matter of valuation and affords room for honest differences of opinion. In order to prevail, plaintiffs had the heavy burden of proving that the merger price was so grossly inadequate as to display itself as a badge of fraud. That is a burden which plaintiffs have not met.

However, plaintiffs have not claimed, nor did the Trial Court decide, that $55 was a grossly inadequate price per share for sale of the Company. That being so, the presumption that a board's judgment as to adequacy of price represents an honest exercise of business judgment (absent proof that the sale price was grossly inadequate) is irrelevant to the threshold question of whether an informed judgment was reached. Compare Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971); Kelly v. Bell, Del.Supr., 266 A.2d 878, 879 (1970); Cole v. National Cash Credit Association, Del.Ch., 156 A. 183 (1931); Allaun v. Consolidated Oil Co., supra; Allen Chemical & Dye Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486 (1923).

V.

The defendants ultimately rely on the stockholder vote of February 10 for exoneration. The defendants contend that the stockholders' "overwhelming" vote approving the Pritzker Merger Agreement had the legal effect of curing any failure of the Board to reach an informed business judgment in its approval of the merger.

The parties tacitly agree that a discovered failure of the Board to reach an informed business judgment in approving the merger constitutes a voidable, rather than a void, act. Hence, the merger can be sustained, notwithstanding the infirmity of the Board's action, if its approval by majority vote of the shareholders is found to have been based on an informed electorate. Cf. Michelson v. Duncan, Del.Supr., 407 A.2d 211 (1979), aff'g in part and rev'g in part, Del.Ch., 386 A.2d 1144 (1978). The disagreement between the parties arises over: (1) the Board's burden of disclosing to the shareholders all relevant and material information; and (2) the sufficiency of the evidence as to whether the Board satisfied that burden.

On this issue the Trial Court summarily concluded "that the stockholders of Trans Union were fairly informed as to the pending merger...." The Court provided no [890] supportive reasoning nor did the Court make any reference to the evidence of record.

The plaintiffs contend that the Court committed error by applying an erroneous disclosure standard of "adequacy" rather than "completeness" in determining the sufficiency of the Company's merger proxy materials. The plaintiffs also argue that the Board's proxy statements, both its original statement dated January 19 and its supplemental statement dated January 26, were incomplete in various material respects. Finally, the plaintiffs assert that Management's supplemental statement (mailed "on or about" January 27) was untimely either as a matter of law under 8 Del.C. § 251(c), or untimely as a matter of equity and the requirements of complete candor and fair disclosure.

The defendants deny that the Court committed legal or equitable error. On the question of the Board's burden of disclosure, the defendants state that there was no dispute at trial over the standard of disclosure required of the Board; but the defendants concede that the Board was required to disclose "all germane facts" which a reasonable shareholder would have considered important in deciding whether to approve the merger. Thus, the defendants argue that when the Trial Court speaks of finding the Company's shareholders to have been "fairly informed" by Management's proxy materials, the Court is speaking in terms of "complete candor" as required under Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978).

The settled rule in Delaware is that "where a majority of fully informed stockholders ratify action of even interested directors, an attack on the ratified transaction normally must fail." Gerlach v. Gillam, Del.Ch., 139 A.2d 591, 593 (1958). The question of whether shareholders have been fully informed such that their vote can be said to ratify director action, "turns on the fairness and completeness of the proxy materials submitted by the management to the ... shareholders." Michelson v. Duncan, supra at 220. As this Court stated in Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 59 (1952):

[T]he entire atmosphere is freshened and a new set of rules invoked where a formal approval has been given by a majority of independent, fully informed stockholders....

In Lynch v. Vickers Energy Corp., supra, this Court held that corporate directors owe to their stockholders a fiduciary duty to disclose all facts germane to the transaction at issue in an atmosphere of complete candor. We defined "germane" in the tender offer context as all "information such as a reasonable stockholder would consider important in deciding whether to sell or retain stock." Id. at 281. Accord Weinberger v. UOP, Inc., supra; Michelson v. Duncan, supra; Schreiber v. Pennzoil Corp., Del.Ch., 419 A.2d 952 (1980). In reality, "germane" means material facts.

Applying this standard to the record before us, we find that Trans Union's stockholders were not fully informed of all facts material to their vote on the Pritzker Merger and that the Trial Court's ruling to the contrary is clearly erroneous. We list the material deficiencies in the proxy materials:

(1) The fact that the Board had no reasonably adequate information indicative of the intrinsic value of the Company, other than a concededly depressed market price, was without question material to the shareholders voting on the merger. See Weinberger, supra at 709 (insiders' report that cash-out merger price up to $24 was good investment held material); Michelson, supra at 224 (alleged terms and intent of stock option plan held not germane); Schreiber, supra at 959 (management fee of $650,000 held germane).

Accordingly, the Board's lack of valuation information should have been disclosed. Instead, the directors cloaked the absence of such information in both the Proxy Statement and the Supplemental [891] Proxy Statement. Through artful drafting, noticeably absent at the September 20 meeting, both documents create the impression that the Board knew the intrinsic worth of the Company. In particular, the Original Proxy Statement contained the following:

[a]lthough the Board of Directors regards the intrinsic value of the Company's assets to be significantly greater than their book value ..., systematic liquidation of such a large and complex entity as Trans Union is simply not regarded as a feasible method of realizing its inherent value. Therefore, a business combination such as the merger would seem to be the only practicable way in which the stockholders could realize the value of the Company.

The Proxy stated further that "[i]n the view of the Board of Directors ..., the prices at which the Company's common stock has traded in recent years have not reflected the inherent value of the Company." What the Board failed to disclose to its stockholders was that the Board had not made any study of the intrinsic or inherent worth of the Company; nor had the Board even discussed the inherent value of the Company prior to approving the merger on September 20, or at either of the subsequent meetings on October 8 or January 26. Neither in its Original Proxy Statement nor in its Supplemental Proxy did the Board disclose that it had no information before it, beyond the premium-over-market and the price/earnings ratio, on which to determine the fair value of the Company as a whole.

(2) We find false and misleading the Board's characterization of the Romans report in the Supplemental Proxy Statement. The Supplemental Proxy stated:

At the September 20, 1980 meeting of the Board of Directors of Trans Union, Mr. Romans indicated that while he could not say that $55,00 per share was an unfair price, he had prepared a preliminary report which reflected that the value of the Company was in the range of $55.00 to $65.00 per share.

Nowhere does the Board disclose that Romans stated to the Board that his calculations were made in a "search for ways to justify a price in connection with" a leveraged buy-out transaction, "rather than to say what the shares are worth," and that he stated to the Board that his conclusion thus arrived at "was not the same thing as saying that I have a valuation of the Company at X dollars." Such information would have been material to a reasonable shareholder because it tended to invalidate the fairness of the merger price of $55. Furthermore, defendants again failed to disclose the absence of valuation information, but still made repeated reference to the "substantial premium."

(3) We find misleading the Board's references to the "substantial" premium offered. The Board gave as their primary reason in support of the merger the "substantial premium" shareholders would receive. But the Board did not disclose its failure to assess the premium offered in terms of other relevant valuation techniques, thereby rendering questionable its determination as to the substantiality of the premium over an admittedly depressed stock market price.

(4) We find the Board's recital in the Supplemental Proxy of certain events preceding the September 20 meeting to be incomplete and misleading. It is beyond dispute that a reasonable stockholder would have considered material the fact that Van Gorkom not only suggested the $55 price to Pritzker, but also that he chose the figure because it made feasible a leveraged buy-out. The directors disclosed that Van Gorkom suggested the $55 price to Pritzker. But the Board misled the shareholders when they described the basis of Van Gorkom's suggestion as follows:

Such suggestion was based, at least in part, on Mr. Van Gorkom's belief that loans could be obtained from institutional lenders (together with about a $200 million [892] equity contribution) which would justify the payment of such price, ...

Although by January 26, the directors knew the basis of the $55 figure, they did not disclose that Van Gorkom chose the $55 price because that figure would enable Pritzker to both finance the purchase of Trans Union through a leveraged buy-out and, within five years, substantially repay the loan out of the cash flow generated by the Company's operations.

(5) The Board's Supplemental Proxy Statement, mailed on or after January 27, added significant new matter, material to the proposal to be voted on February 10, which was not contained in the Original Proxy Statement. Some of this new matter was information which had only been disclosed to the Board on January 26; much was information known or reasonably available before January 21 but not revealed in the Original Proxy Statement. Yet, the stockholders were not informed of these facts. Included in the "new" matter first disclosed in the Supplemental Proxy Statement were the following:

(a) The fact that prior to September 20, 1980, no Board member or member of Senior Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible merger with Pritzker;

(b) The fact that the sale price of $55 per share had been suggested initially to Pritzker by Van Gorkom;

(c) The fact that the Board had not sought an independent fairness opinion;

(d) The fact that Romans and several members of Senior Management had indicated concern at the September 20 Senior Management meeting that the $55 per share price was inadequate and had stated that a higher price should and could be obtained; and

(e) The fact that Romans had advised the Board at its meeting on September 20 that he and his department had prepared a study which indicated that the Company had a value in the range of $55 to $65 per share, and that he could not advise the Board that the $55 per share offer which Pritzker made was unfair.

* * *

The parties differ over whether the notice requirements of 8 Del.C. § 251(c) apply to the mailing date of supplemental proxy material or that of the original proxy material.^[33] The Trial Court summarily disposed of the notice issue, stating it was "satisfied that the proxy material furnished to Trans Union stockholders ... fairly presented the question to be voted on at the February 10, 1981 meeting."

The defendants argue that the notice provisions of § 251(c) must be construed as requiring only that stockholders receive notice of the time, place, and purpose of a meeting to consider a merger at least 20 days prior to such meeting; and since the Original Proxy Statement was disseminated more than 20 days before the meeting, the defendants urge affirmance of the Trial Court's ruling as correct as a matter of statutory construction. Apparently, the question has not been addressed by either the Court of Chancery or this Court; and authority in other jurisdictions is limited. See Electronic Specialty Co. v. Int'l Controls Corp., 2d Cir., 409 F.2d 937, 944 (1969) (holding that a tender offeror's September 16, 1968 correction of a previous misstatement, combined with an offer of withdrawal running for eight days until September 24, 1968, was sufficient to cure past violations and eliminate any need for rescission); Nicholson File Co. v. H.K. Porter Co., D.R.I., 341 F.Supp. 508, 513-14 (1972), aff'd, 1st Cir., 482 F.2d 421 (1973) [893] (permitting correction of a material misstatement by a mailing to stockholders within seven days of a tender offer withdrawal date). Both Electronic and Nicholson are federal security cases not arising under 8 Del.C. § 251(c) and they are otherwise distinguishable from this case on their facts.

Since we have concluded that Management's Supplemental Proxy Statement does not meet the Delaware disclosure standard of "complete candor" under Lynch v. Vickers, supra, it is unnecessary for us to address the plaintiffs' legal argument as to the proper construction of § 251(c). However, we do find it advisable to express the view that, in an appropriate case, an otherwise candid proxy statement may be so untimely as to defeat its purpose of meeting the needs of a fully informed electorate.

In this case, the Board's ultimate disclosure as contained in the Supplemental Proxy Statement related either to information readily accessible to all of the directors if they had asked the right questions, or was information already at their disposal. In short, the information disclosed by the Supplemental Proxy Statement was information which the defendant directors knew or should have known at the time the first Proxy Statement was issued. The defendants simply failed in their original duty of knowing, sharing, and disclosing information that was material and reasonably available for their discovery. They compounded that failure by their continued lack of candor in the Supplemental Proxy Statement. While we need not decide the issue here, we are satisfied that, in an appropriate case, a completely candid but belated disclosure of information long known or readily available to a board could raise serious issues of inequitable conduct. Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971).

The burden must fall on defendants who claim ratification based on shareholder vote to establish that the shareholder approval resulted from a fully informed electorate. On the record before us, it is clear that the Board failed to meet that burden. Weinberger v. UOP, Inc., supra at 703; Michelson v. Duncan, supra.

* * *

For the foregoing reasons, we conclude that the director defendants breached their fiduciary duty of candor by their failure to make true and correct disclosures of all information they had, or should have had, material to the transaction submitted for stockholder approval.

VI.

To summarize: we hold that the directors of Trans Union breached their fiduciary duty to their stockholders (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger; and (2) by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer.

We hold, therefore, that the Trial Court committed reversible error in applying the business judgment rule in favor of the director defendants in this case.

On remand, the Court of Chancery shall conduct an evidentiary hearing to determine the fair value of the shares represented by the plaintiffs' class, based on the intrinsic value of Trans Union on September 20, 1980. Such valuation shall be made in accordance with Weinberger v. UOP, Inc., supra at 712-715. Thereafter, an award of damages may be entered to the extent that the fair value of Trans Union exceeds $55 per share.

* * *

REVERSED and REMANDED for proceedings consistent herewith.

McNEILLY, Justice, dissenting:

The majority opinion reads like an advocate's closing address to a hostile jury. And I say that not lightly. Throughout the [894] opinion great emphasis is directed only to the negative, with nothing more than lip service granted the positive aspects of this case. In my opinion Chancellor Marvel (retired) should have been affirmed. The Chancellor's opinion was the product of well reasoned conclusions, based upon a sound deductive process, clearly supported by the evidence and entitled to deference in this appeal. Because of my diametrical opposition to all evidentiary conclusions of the majority, I respectfully dissent.

It would serve no useful purpose, particularly at this late date, for me to dissent at great length. I restrain myself from doing so, but feel compelled to at least point out what I consider to be the most glaring deficiencies in the majority opinion. The majority has spoken and has effectively said that Trans Union's Directors have been the victims of a "fast shuffle" by Van Gorkom and Pritzker. That is the beginning of the majority's comedy of errors. The first and most important error made is the majority's assessment of the directors' knowledge of the affairs of Trans Union and their combined ability to act in this situation under the protection of the business judgment rule.

Trans Union's Board of Directors consisted of ten men, five of whom were "inside" directors and five of whom were "outside" directors. The "inside" directors were Van Gorkom, Chelberg, Bonser, William B. Browder, Senior Vice-President-Law, and Thomas P. O'Boyle, Senior Vice-President-Administration. At the time the merger was proposed the inside five directors had collectively been employed by the Company for 116 years and had 68 years of combined experience as directors. The "outside" directors were A.W. Wallis, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan and Robert W. Reneker. With the exception of Wallis, these were all chief executive officers of Chicago based corporations that were at least as large as Trans Union. The five "outside" directors had 78 years of combined experience as chief executive officers, and 53 years cumulative service as Trans Union directors.

The inside directors wear their badge of expertise in the corporate affairs of Trans Union on their sleeves. But what about the outsiders? Dr. Wallis is or was an economist and math statistician, a professor of economics at Yale University, dean of the graduate school of business at the University of Chicago, and Chancellor of the University of Rochester. Dr. Wallis had been on the Board of Trans Union since 1962. He also was on the Board of Bausch & Lomb, Kodak, Metropolitan Life Insurance Company, Standard Oil and others.

William B. Johnson is a University of Pennsylvania law graduate, President of Railway Express until 1966, Chairman and Chief Executive of I.C. Industries Holding Company, and member of Trans Union's Board since 1968.

Joseph Lanterman, a Certified Public Accountant, is or was President and Chief Executive of American Steel, on the Board of International Harvester, Peoples Energy, Illinois Bell Telephone, Harris Bank and Trust Company, Kemper Insurance Company and a director of Trans Union for four years.

Graham Morgan is achemist, was Chairman and Chief Executive Officer of U.S. Gypsum, and in the 17 and 18 years prior to the Trans Union transaction had been involved in 31 or 32 corporate takeovers.

Robert Reneker attended University of Chicago and Harvard Business Schools. He was President and Chief Executive of Swift and Company, director of Trans Union since 1971, and member of the Boards of seven other corporations including U.S. Gypsum and the Chicago Tribune.

Directors of this caliber are not ordinarily taken in by a "fast shuffle". I submit they were not taken into this multi-million dollar corporate transaction without being fully informed and aware of the state of the art as it pertained to the entire corporate panoroma of Trans Union. True, even [895] directors such as these, with their business acumen, interest and expertise, can go astray. I do not believe that to be the case here. These men knew Trans Union like the back of their hands and were more than well qualified to make on the spot informed business judgments concerning the affairs of Trans Union including a 100% sale of the corporation. Lest we forget, the corporate world of then and now operates on what is so aptly referred to as "the fast track". These men were at the time an integral part of that world, all professional business men, not intellectual figureheads.

The majority of this Court holds that the Board's decision, reached on September 20, 1980, to approve the merger was not the product of an informed business judgment, that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were legally and factually ineffectual, and that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger. I disagree.

At the time of the September 20, 1980 meeting the Board was acutely aware of Trans Union and its prospects. The problems created by accumulated investment tax credits and accelerated depreciation were discussed repeatedly at Board meetings, and all of the directors understood the problem thoroughly. Moreover, at the July, 1980 Board meeting the directors had reviewed Trans Union's newly prepared five-year forecast, and at the August, 1980 meeting Van Gorkom presented the results of a comprehensive study of Trans Union made by The Boston Consulting Group. This study was prepared over an 18 month period and consisted of a detailed analysis of all Trans Union subsidiaries, including competitiveness, profitability, cash throw-off, cash consumption, technical competence and future prospects for contribution to Trans Union's combined net income.

At the September 20 meeting Van Gorkom reviewed all aspects of the proposed transaction and repeated the explanation of the Pritzker offer he had earlier given to senior management. Having heard Van Gorkom's explanation of the Pritzker's offer, and Brennan's explanation of the merger documents the directors discussed the matter. Out of this discussion arose an insistence on the part of the directors that two modifications to the offer be made. First, they required that any potential competing bidder be given access to the same information concerning Trans Union that had been provided to the Pritzkers. Second, the merger documents were to be modified to reflect the fact that the directors could accept a better offer and would not be required to recommend the Pritzker offer if a better offer was made. The following language was inserted into the agreement:

"Within 30 days after the execution of this Agreement, TU shall call a meeting of its stockholders (the `Stockholder's Meeting') for the purpose of approving and adopting the Merger Agreement. The Board of Directors shall recommend to the stockholders of TU that they approve and adopt the Merger Agreement (the `Stockholders' Approval') and shall use its best efforts to obtain the requisite vote therefor; provided, however, that GL and NTC acknowledge that the Board of Directors of TU may have a competing fiduciary obligation to the Stockholders under certain circumstances." (Emphasis added)

While the language is not artfully drawn, the evidence is clear that the intention underlying that language was to make specific the right that the directors assumed they had, that is, to accept any offer that they thought was better, and not to recommend the Pritzker offer in the face of a better one. At the conclusion of the meeting, the proposed merger was approved.

At a subsequent meeting on October 8, 1981 the directors, with the consent of the Pritzkers, amended the Merger Agreement so as to establish the right of Trans Union to solicit as well as to receive higher bids, [896] although the Pritzkers insisted that their merger proposal be presented to the stockholders at the same time that the proposal of any third party was presented. A second amendment, which became effective on October 10, 1981, further provided that Trans Union might unilaterally terminate the proposed merger with the Pritzker company in the event that prior to February 10, 1981 there existed a definitive agreement with a third party for a merger, consolidation, sale of assets, or purchase or exchange of Trans Union stock which was more favorable for the stockholders of Trans Union than the Pritzker offer and which was conditioned upon receipt of stockholder approval and the absence of an injunction against its consummation.

Following the October 8 board meeting of Trans Union, the investment banking firm of Salomon Brothers was retained by the corporation to search for better offers than that of the Pritzkers, Salomon Brothers being charged with the responsibility of doing "whatever possible to see if there is a superior bid in the marketplace over a bid that is on the table for Trans Union". In undertaking such project, it was agreed that Salomon Brothers would be paid the amount of $500,000 to cover its expenses as well as a fee equal to 3/8ths of 1% of the aggregate fair market value of the consideration to be received by the company in the case of a merger or the like, which meant that in the event Salomon Brothers should find a buyer willing to pay a price of $56.00 a share instead of $55.00, such firm would receive a fee of roughly $2,650,000 plus disbursements.

As the first step in proceeding to carry out its commitment, Salomon Brothers had a brochure prepared, which set forth Trans Union's financial history, described the company's business in detail and set forth Trans Union's operating and financial projections. Salomon Brothers also prepared a list of over 150 companies which it believed might be suitable merger partners, and while four of such companies, namely, General Electric, Borg-Warner, Bendix, and Genstar, Ltd. showed some interest in such a merger, none made a firm proposal to Trans Union and only General Electric showed a sustained interest.^[1] As matters transpired, no firm offer which bettered the Pritzker offer of $55 per share was ever made.

On January 21, 1981 a proxy statement was sent to the shareholders of Trans Union advising them of a February 10, 1981 meeting in which the merger would be voted. On January 26, 1981 the directors held their regular meeting. At this meeting the Board discussed the instant merger as well as all events, including this litigation, surrounding it. At the conclusion of the meeting the Board unanimously voted to recommend to the stockholders that they approve the merger. Additionally, the directors reviewed and approved a Supplemental Proxy Statement which, among other things, advised the stockholders of what had occurred at the instant meeting and of the fact that General Electric had decided not to make an offer. On February 10, 1981 [897] the stockholders of Trans Union met pursuant to notice and voted overwhelmingly in favor of the Pritzker merger, 89% of the votes cast being in favor of it.

I have no quarrel with the majority's analysis of the business judgment rule. It is the application of that rule to these facts which is wrong. An overview of the entire record, rather than the limited view of bits and pieces which the majority has exploded like popcorn, convinces me that the directors made an informed business judgment which was buttressed by their test of the market.

At the time of the September 20 meeting the 10 members of Trans Union's Board of Directors were highly qualified and well informed about the affairs and prospects of Trans Union. These directors were acutely aware of the historical problems facing Trans Union which were caused by the tax laws. They had discussed these problems ad nauseam. In fact, within two months of the September 20 meeting the board had reviewed and discussed an outside study of the company done by The Boston Consulting Group and an internal five year forecast prepared by management. At the September 20 meeting Van Gorkom presented the Pritzker offer, and the board then heard from James Brennan, the company's counsel in this matter, who discussed the legal documents. Following this, the Board directed that certain changes be made in the merger documents. These changes made it clear that the Board was free to accept a better offer than Pritzker's if one was made. The above facts reveal that the Board did not act in a grossly negligent manner in informing themselves of the relevant and available facts before passing on the merger. To the contrary, this record reveals that the directors acted with the utmost care in informing themselves of the relevant and available facts before passing on the merger.

The majority finds that Trans Union stockholders were not fully informed and that the directors breached their fiduciary duty of complete candor to the stockholders required by Lynch v. Vickers Energy Corp., Del.Supr. 383 A.2d 278 (1978) [Lynch I], in that the proxy materials were deficient in five areas.

Here again is exploitation of the negative by the majority without giving credit to the positive. To respond to the conclusions of the majority would merely be unnecessary prolonged argument. But briefly what did the proxy materials disclose? The proxy material informed the shareholders that projections were furnished to potential purchasers and such projections indicated that Trans Union's net income might increase to approximately $153 million in 1985. That projection, what is almost three times the net income of $58,248,000 reported by Trans Union as its net income for December 31, 1979 confirmed the statement in the proxy materials that the "Board of Directors believes that, assuming reasonably favorable economic and financial conditions, the Company's prospects for future earnings growth are excellent." This material was certainly sufficient to place the Company's stockholders on notice that there was a reasonable basis to believe that the prospects for future earnings growth were excellent, and that the value of their stock was more than the stock market value of their shares reflected.

Overall, my review of the record leads me to conclude that the proxy materials adequately complied with Delaware law in informing the shareholders about the proposed transaction and the events surrounding it.

The majority suggests that the Supplemental Proxy Statement did not comply with the notice requirement of 8 Del.C. § 251(c) that notice of the time, place and purpose of a meeting to consider a merger must be sent to each shareholder of record at least 20 days prior to the date of the meeting. In the instant case an original proxy statement was mailed on January 18, 1981 giving notice of the time, place and purpose of the meeting. A Supplemental Proxy Statement was mailed January 26, 1981 in an effort to advise Trans Union's [898] shareholders as to what had occurred at the January 26, 1981 meeting, and that General Electric had decided not to make an offer. The shareholder meeting was held February 10, 1981 fifteen days after the Supplemental Proxy Statement had been sent.

All § 251(c) requires is that notice of the time, place and purpose of the meeting be given at least 20 days prior to the meeting. This was accomplished by the proxy statement mailed January 19, 1981. Nothing in § 251(c) prevents the supplementation of proxy materials within 20 days of the meeting. Indeed when additional information, which a reasonable shareholder would consider important in deciding how to vote, comes to light that information must be disclosed to stockholders in sufficient time for the stockholders to consider it. But nothing in § 251(c) requires this additional information to be disclosed at least 20 days prior to the meeting. To reach a contrary result would ignore the current practice and would discourage the supplementation of proxy materials in order to disclose the occurrence of intervening events. In my opinion, fifteen days in the instant case was a sufficient amount of time for the stockholders to receive and consider the information in the supplemental proxy statement.

CHRISTIE, Justice, dissenting:

I respectfully dissent.

Considering the standard and scope of our review under Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), I believe that the record taken as a whole supports a conclusion that the actions of the defendants are protected by the business judgment rule. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984). I also am satisfied that the record supports a conclusion that the defendants acted with the complete candor required by Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978). Under the circumstances I would affirm the judgment of the Court of Chancery.

ON MOTIONS FOR REARGUMENT

Following this Court's decision, Thomas P. O'Boyle, one of the director defendants, sought, and was granted, leave for change of counsel. Thereafter, the individual director defendants, other than O'Boyle, filed a motion for reargument and director O'Boyle, through newly-appearing counsel, then filed a separate motion for reargument. Plaintiffs have responded to the several motions and this matter has now been duly considered.

The Court, through its majority, finds no merit to either motion and concludes that both motions should be denied. We are not persuaded that any errors of law or fact have been made that merit reargument.

However, defendant O'Boyle's motion requires comment. Although O'Boyle continues to adopt his fellow directors' arguments, O'Boyle now asserts in the alternative that he has standing to take a position different from that of his fellow directors and that legal grounds exist for finding him not liable for the acts or omissions of his fellow directors. Specifically, O'Boyle makes a two-part argument: (1) that his undisputed absence due to illness from both the September 20 and the October 8 meetings of the directors of Trans Union entitles him to be relieved from personal liability for the failure of the other directors to exercise due care at those meetings, see Propp v. Sadacca, Del.Ch., 175 A.2d 33, 39 (1961), modified on other grounds, Bennett v. Propp, Del.Supr., 187 A.2d 405 (1962); and (2) that his attendance and participation in the January 26, 1981 Board meeting does not alter this result given this Court's precise findings of error committed at that meeting.

We reject defendant O'Boyle's new argument as to standing because not timely asserted. Our reasons are several. One, in connection with the supplemental briefing of this case in March, 1984, a special opportunity was afforded the individual defendants, [899] including O'Boyle, to present any factual or legal reasons why each or any of them should be individually treated. Thereafter, at argument before the Court on June 11, 1984, the following colloquy took place between this Court and counsel for the individual defendants at the outset of counsel's argument:

COUNSEL: I'll make the argument on behalf of the nine individual defendants against whom the plaintiffs seek more than $100,000,000 in damages. That is the ultimate issue in this case, whether or not nine honest, experienced businessmen should be subject to damages in a case where —

JUSTICE MOORE: Is there a distinction between Chelberg and Van Gorkom vis-a-vis the other defendants?

COUNSEL: No, sir.

JUSTICE MOORE: None whatsoever?

COUNSEL: I think not.

Two, in this Court's Opinion dated January 29, 1985, the Court relied on the individual defendants as having presented a unified defense. We stated:

The parties' response, including reargument, has led the majority of the Court to conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified position, we are required to treat all of the directors as one as to whether they are entitled to the protection of the business judgment rule...

Three, previously O'Boyle took the position that the Board's action taken January 26, 1981 — in which he fully participated — was determinative of virtually all issues. Now O'Boyle seeks to attribute no significance to his participation in the January 26 meeting. Nor does O'Boyle seek to explain his having given before the directors' meeting of October 8, 1980 his "consent to the transaction of such business as may come before the meeting."^[*] It is the view of the majority of the Court that O'Boyle's change of position following this Court's decision on the merits comes too late to be considered. He has clearly waived that right.

The Motions for Reargument of all defendants are denied.

McNEILLY and CHRISTIE, Justices, dissenting:

We do not disagree with the ruling as to the defendant O'Boyle, but we would have granted reargument on the other issues raised.

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[1] The plaintiff, Alden Smith, originally sought to enjoin the merger; but, following extensive discovery, the Trial Court denied the plaintiff's motion for preliminary injunction by unreported letter opinion dated February 3, 1981. On February 10, 1981, the proposed merger was approved by Trans Union's stockholders at a special meeting and the merger became effective on that date. Thereafter, John W. Gosselin was permitted to intervene as an additional plaintiff; and Smith and Gosselin were certified as representing a class consisting of all persons, other than defendants, who held shares of Trans Union common stock on all relevant dates. At the time of the merger, Smith owned 54,000 shares of Trans Union stock, Gosselin owned 23,600 shares, and members of Gosselin's family owned 20,000 shares.

[2] Following trial, and before decision by the Trial Court, the parties stipulated to the dismissal, with prejudice, of the Messrs. Pritzker as parties defendant. However, all references to defendants hereinafter are to the defendant directors of Trans Union, unless otherwise noted.

[3] It has been stipulated that plaintiffs sue on behalf of a class consisting of 10,537 shareholders (out of a total of 12,844) and that the class owned 12,734,404 out of 13,357,758 shares of Trans Union outstanding.

[4] More detailed statements of facts, consistent with this factual outline, appear in related portions of this Opinion.

[5] The common stock of Trans Union was traded on the New York Stock Exchange. Over the five year period from 1975 through 1979, Trans Union's stock had traded within a range of a high of $39½ and a low of $24¼. Its high and low range for 1980 through September 19 (the last trading day before announcement of the merger) was $38¼-$29½.

[6] Van Gorkom asked Romans to express his opinion as to the $55 price. Romans stated that he "thought the price was too low in relation to what he could derive for the company in a cash sale, particularly one which enabled us to realize the values of certain subsidiaries and independent entities."

[7] The record is not clear as to the terms of the Merger Agreement. The Agreement, as originally presented to the Board on September 20, was never produced by defendants despite demands by the plaintiffs. Nor is it clear that the directors were given an opportunity to study the Merger Agreement before voting on it. All that can be said is that Brennan had the Agreement before him during the meeting.

[8] In Van Gorkom's words: The "real decision" is whether to "let the stockholders decide it" which is "all you are being asked to decide today."

[9] The Trial Court stated the premium relationship of the $55 price to the market history of the Company's stock as follows:

* * * the merger price offered to the stockholders of Trans Union represented a premium of 62% over the average of the high and low prices at which Trans Union stock had traded in 1980, a premium of 48% over the last closing price, and a premium of 39% over the highest price at which the stock of Trans Union had traded any time during the prior six years.

[10] We refer to the underlined portion of the Court's ultimate conclusion (previously stated): "that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently...."

[11] 8 Del.C.§ 141 provides, in pertinent part:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

[12] See Kaplan v. Centex Corporation,Del.Ch., 284 A.2d 119, 124 (1971), where the Court stated:

Application of the [business judgment] rule of necessity depends upon a showing that informed directors did in fact make a business judgment authorizing the transaction under review. And, as the plaintiff argues, the difficulty here is that the evidence does not show that this was done. There were director-committee-officer references to the realignment but none of these singly or cumulative showed that the director judgment was brought to bear with specificity on the transactions.

[13] Compare Mitchell v. Highland-Western Glass, supra , where the Court posed the question as whether the board acted "so far without information that they can be said to have passed an unintelligent and unadvised judgment." 167 A. at 833. Compare also Gimbel v. Signal Companies, Inc., 316 A.2d 599, aff'd per curiam Del. Supr., 316 A.2d 619 (1974), where the Chancellor, after expressly reiterating the Highland-Western Glass standard, framed the question, "Or to put the question in its legal context, did the Signal directors act without the bounds of reason and recklessly in approving the price offer of Burmah?" Id.

[14] 8 Del.C.§ 251(b) provides in pertinent part:

(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. The agreement shall state: (1) the terms and conditions of the merger or consolidation; (2) the mode of carrying the same into effect; (3) such amendments or changes in the certificate of incorporation of the surviving corporation as are desired to be effected by the merger or consolidation, or, if no such amendments or changes are desired, a statement that the certificate of incorporation of one of the constituent corporations shall be the certificate of incorporation of the surviving or resulting corporation; (4) the manner of converting the shares of each of the constituent corporations... and (5) such other details or provisions as are deemed desirable.... The agreement so adopted shall be executed in accordance with section 103 of this title. Any of the terms of the agreement of merger or consolidation may be made dependent upon facts ascertainable outside of such agreement, provided that the manner in which such facts shall operate upon the terms of the agreement is clearly and expressly set forth in the agreement of merger or consolidation. (underlining added for emphasis)

[15] Section 141(e) provides in pertinent part:

A member of the board of directors ... shall, in the performance of his duties, be fully protected in relying in good faith upon the books of accounts or reports made to the corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the board of directors ..., or in relying in good faith upon other records of the corporation.

[16] In support of the defendants' argument that their judgment as to the adequacy of $55 per share was an informed one, the directors rely on the BCG study and the Five Year Forecast. However, no one even referred to either of these studies at the September 20 meeting; and it is conceded that these materials do not represent valuation studies. Hence, these documents do not constitute evidence as to whether the directors reached an informed judgment on September 20 that $55 per share was a fair value for sale of the Company.

[17] We reserve for discussion under Part III hereof, the defendants' contention that their judgment, reached on September 20, if not then informed became informed by virtue of their "review" of the Agreement on October 8 and January 26.

[18] Romans' department study was not made available to the Board until circulation of Trans Union's Supplementary Proxy Statement and the Board's meeting of January 26, 1981, on the eve of the shareholder meeting; and, as has been noted, the study has never been produced for inclusion in the record in this case.

[19] As of September 20 the directors did not know: that Van Gorkom had arrived at the $55 figure alone, and subjectively, as the figure to be used by Controller Peterson in creating a feasible structure for a leveraged buy-out by a prospective purchaser; that Van Gorkom had not sought advice, information or assistance from either inside or outside Trans Union directors as to the value of the Company as an entity or the fair price per share for 100% of its stock; that Van Gorkom had not consulted with the Company's investment bankers or other financial analysts; that Van Gorkom had not consulted with or confided in any officer or director of the Company except Chelberg; and that Van Gorkom had deliberately chosen to ignore the advice and opinion of the members of his Senior Management group regarding the adequacy of the $55 price.

[20] For a far more careful and reasoned approach taken by another board of directors faced with the pressures of a hostile tender offer, see Pogostin v. Rice, supra at 623-627.

[21] Trans Union's five "inside" directors had backgrounds in law and accounting, 116 years of collective employment by the Company and 68 years of combined experience on its Board. Trans Union's five "outside" directors included four chief executives of major corporations and an economist who was a former dean of a major school of business and chancellor of a university. The "outside" directors had 78 years of combined experience as chief executive officers of major corporations and 50 years of cumulative experience as directors of Trans Union. Thus, defendants argue that the Board was eminently qualified to reach an informed judgment on the proposed "sale" of Trans Union notwithstanding their lack of any advance notice of the proposal, the shortness of their deliberation, and their determination not to consult with their investment banker or to obtain a fairness opinion.

[22] Nonetheless, we are satisfied that in an appropriate factual context a proper exercise of business judgment may include, as one of its aspects, reasonable reliance upon the advice of counsel. This is wholly outside the statutory protections of 8 Del.C. § 141(e) involving reliance upon reports of officers, certain experts and books and records of the company.

[23] As will be seen, we do not reach the second question.

[24] As previously noted, the Board mistakenly thought that it had amended the September 20 draft agreement to include a market test.

A secondary purpose of the October 8 meeting was to obtain the Board's approval for Trans Union to employ its investment advisor, Salomon Brothers, for the limited purpose of assisting Management in the solicitation of other offers. Neither Management nor the Board then or thereafter requested Salomon Brothers to submit its opinion as to the fairness of Pritzker's $55 cash-out merger proposal or to value Trans Union as an entity.

There is no evidence of record that the October 8 meeting had any other purpose; and we also note that the Minutes of the October 8 Board meeting, including any notice of the meeting, are not part of the voluminous records of this case.

[25] We do not suggest that a board must read in haec verba every contract or legal document which it approves, but if it is to successfully absolve itself from charges of the type made here, there must be some credible contemporary evidence demonstrating that the directors knew what they were doing, and ensured that their purported action was given effect. That is the consistent failure which cast this Board upon its unredeemable course.

[26] There is no evidence of record that Trans Union's directors ever raised any objections, procedural or substantive, to the October 10 amendments or that any of them, including Van Gorkom, understood the opposite result of their intended effect — until it was too late.

[27] This was inconsistent with Van Gorkom's espousal of the September 22 press release following Trans Union's acceptance of Pritzker's proposal. Van Gorkom had then justified a press release as encouraging rather than chilling later offers.

[28] The defendants concede that Muschel is only illustrative of the proposition that a board may reconsider a prior decision and that it is otherwise factually distinguishable from this case.

[29] This was the meeting which, under the terms of the September 20 Agreement with Pritzker, was scheduled to be held January 10 and was later postponed to February 10 under the October 8-10 amendments. We refer to the document titled "Amendment to Supplemental Agreement" executed by the parties "as of" October 10, 1980. Under new Section 2.03(a) of Article A VI of the "Supplemental Agreement," the parties agreed, in part, as follows:

"The solicitation of such offers or proposals [i.e., `other offers that Trans Union might accept in lieu of the Merger Agreement'] by TU... shall not be deemed to constitute a breach of this Supplemental Agreement or the Merger Agreement provided that ... [Trans Union] shall not (1) delay promptly seeking all consents and approvals required hereunder ... [and] shall be deemed [in compliance] if it files its Preliminary Proxy Statement by December 5, 1980, uses its best efforts to mail its Proxy Statement by January 5, 1981 and holds a special meeting of its Stockholders on or prior to February 10, 1981 ...

* * * * * *

It is the present intention of the Board of Directors of TU to recommend the approval of the Merger Agreement to the Stockholders, unless another offer or proposal is made which in their opinion is more favorable to the Stockholders than the Merger Agreement."

[30] With regard to the Pritzker merger, the recently filed shareholders' suit to enjoin it, and relevant portions of the impending stockholder meeting of February 10, we set forth the Minutes in their entirety:

The Board then reviewed the necessity of issuing a Supplement to the Proxy Statement mailed to stockholders on January 21, 1981, for the special meeting of stockholders scheduled to be held on February 10, 1981, to vote on the proposed $55 cash merger with a subsidiary of GE Corporation. Among other things, the Board noted that subsequent to the printing of the Proxy Statement mailed to stockholders on January 21, 1981, General Electric Company had indicated that it would not be making an offer to acquire the Company. In addition, certain facts had been adduced in connection with pretrial discovery taken in connection with the lawsuit filed by Alden Smith in Delaware Chancery Court. After further discussion and review of a printer's proof copy of a proposed Supplement to the Proxy Statement which had been distributed to Directors the preceding day, upon motion duly made and seconded, the following resolution was unanimously adopted, each Director having been individually polled with respect thereto:

RESOLVED, that the Secretary of the Company be and he hereby is authorized and directed to mail to the stockholders a Supplement to Proxy Statement, substantially in the form of the proposed Supplement to Proxy Statement submitted to the Board at this meeting, with such changes therein and modifications thereof as he shall, with the advice and assistance of counsel, approve as being necessary, desirable, or appropriate.

The Board then reviewed and discussed at great length the entire sequence of events pertaining to the proposed $55 cash merger with a subsidiary of GE Corporation, beginning with the first discussion on September 13, 1980, between the Chairman and Mr. Jay Pritzker relative to a possible merger. Each of the Directors was involved in this discussion as well as counsel who had earlier joined the meeting. Following this review and discussion, such counsel advised the Directors that in light of their discussions, they could (a) continue to recommend to the stockholders that the latter vote in favor of the proposed merger, (b) recommend that the stockholders vote against the merger, or (c) take no position with respect to recommending the proposed merger and simply leave the decision to stockholders. After further discussion, it was moved, seconded, and unanimously voted that the Board of Directors continue to recommend that the stockholders vote in favor of the proposed merger, each Director being individually polled with respect to his vote.

[31] In particular, the defendants rely on the testimony of director Johnson on direct examination:

Q. Was there a regular meeting of the board of Trans Union on January 26, 1981?

A. Yes.

Q. And what was discussed at that meeting?

A. Everything relevant to this transaction.

You see, since the proxy statement of the 19th had been mailed, see, General Electric had advised that they weren't going to make a bid. It was concluded to suggest that the shareholders be advised of that, and that required a supplemental proxy statement, and that required authorization of the board, and that led to a total review from beginning to end of every aspect of the whole transaction and all relevant developments.

Since that was occurring and a supplemental statement was going to the shareholders, it also was obvious to me that there should be a review of the board's position again in the light of the whole record. And we went back from the beginning. Everything was examined and reviewed. Counsel were present. And the board was advised that we could recommend the Pritzker deal, we could submit it to the shareholders with no recommendation, or we could recommend against it.

The board voted to issue the supplemental statement to the shareholders. It voted unanimously — and this time we had a unanimous board, where one man was missing before — to recommend the Pritzker deal. Indeed, at that point there was no other deal. And, in truth, there never had been any other deal. And that's what transpired: a total review of the GE situation, KKR and everything else that was relevant.

[32] To the extent the Trial Court's ultimate conclusion to invoke the business judgment rule is based on other explicit criteria and supporting evidence (i.e., market value of Trans Union's stock, the business acumen of the Board members, the substantial premium over market and the availability of the market test to confirm the adequacy of the premium), we have previously discussed the insufficiency of such evidence.

[33] The pertinent provisions of 8 Del.C.§ 251(c) provide:

(c) The agreement required by subsection (b) shall be submitted to the stockholders of each constituent corporation at an annual or special meeting thereof for the purpose of acting on the agreement. Due notice of the time, place and purpose of the meeting shall be mailed to each holder of stock, whether voting or non-voting, of the corporation at his address as it appears on the records of the corporation, at least 20 days prior to the date of the meeting....

[1] Shortly after the announcement of the proposed merger in September senior members of Trans Union's management got in touch with KKR to discuss their possible participation in a leverage buyout scheme. On December 2, 1980 KKR through Henry Kravis actually made a bid of $60.00 per share for Trans Union stock on December 2, 1980 but the offer was withdrawn three hours after it was made because of complications arising out of negotiations with the Reichman family, extremely wealthy Canadians and a change of attitude toward the leveraged buyout scheme, by Jack Kruzenga, the member of senior management of Trans Union who most likely would have been President and Chief Operating Officer of the new company. Kruzenga was the President and Chief Operating Officer of the seven subsidiaries of Trans Union which constituted the backbone of Trans Union as shown through exhaustive studies and analysis of Trans Union's intrinsic value on the market place by the respected investment banking firm of Morgan Stanley. It is interesting to note that at no time during the market test period did any of the 150 corporations contacted by Salomon Brothers complain of the time frame or availability of corporate records in order to make an independent judgment of market value of 100% of Trans Union.

[*] We do not hereby determine that a director's execution of a waiver of notice of meeting and consent to the transaction of business constitutes an endorsement (or approval) by the absent director of any action taken at such a meeting.

Norman M. Monhait, Esquire (argued), of Rosenthal Monhait Gross & Goddess, P.A., Wilmington, Delaware; Of Counsel: Goodkind Labaton Rudoff & Sucharow LLP, New York, New York; Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, New York; Law Offices of Jeffrey S. Abraham, New York, New York; Hanzman Criden Korge Chaykin Ponce & Heise, P.A., Miami, Florida; Schubert & Reed, LLP, San Francisco, California; Cohn Lifland Pearlman Herrmann & Knopf, Saddle Brook, New Jersey, for Appellants.

William D. Johnston, Esquire (argued), John W. Shaw, Esquire, and Danielle B. Gibbs, Esquire, of Young, Conaway, Stargatt & Taylor, Wilmington, Delaware, for Appellees Royalty Acquisition Corp., Royalty Corp., and Knightsbridge Capital Corp.

A. Gilchrist Sparks, Esquire, Jon E. Abramczyk, Esquire (argued), and Jeffrey R. Wolters, Esquire, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, for Appellees George W. Townson, Richard O. Starbird, William J. Barrett, and Merle A. Johnston.

Stephen E. Jenkins, Esquire, of Ashby & Geddes, Wilmington, Delaware, Attorney for Appellee Hugh Hunter.

[1079] Before VEASEY, Chief Justice, WALSH, HOLLAND, BERGER, and STEELE, Justices, constituting the Court en Banc.

[1078] VEASEY, Chief Justice.

In this appeal, we affirm the holding of the Court of Chancery that allegations in the class action complaint challenging a merger do not support the plaintiff stockholders' claims alleging: (1) breaches of the target board's duty of loyalty or its disclosure duties; and (2) aiding and abetting or tortious interference by the acquiring corporation. We further affirm the granting of a motion to dismiss the plaintiffs' due care claim on the ground that the exculpatory provision in the charter of the target corporation authorized by 8 Del. C. § 102(b)(7), bars any claim for money damages against the director defendants based solely on the board's alleged breach of its duty of care. Accordingly, we affirm the judgment of the Court of Chancery dismissing the amended complaint.

With respect to the dismissal based on the exculpatory effect of the Section 102(b)(7) charter provision, we had an initial concern about the propriety of the trial court's consideration of the exculpatory charter provision on a Rule 12(b)(6) motion to dismiss because it is a matter outside the complaint. Although presentation of matters outside the pleadings required the court to convert the Defendants' motion to dismiss into a motion for summary judgment, the failure to do so was not reversible error. Because the plaintiffs do not contest the existence, terms, validity or authenticity of the Frederick's exculpatory charter provision, we hold that the charter provision was properly before the Court of Chancery, which correctly held that the plaintiffs' due care claim was barred. Accordingly, we affirm the judgment of the Court of Chancery.

Facts

Frederick's of Hollywood ("Frederick's") is a retailer of women's lingerie and apparel with its headquarters in Los Angeles, California.^[1] This case centers on the merger of Frederick's into Knightsbridge Capital Corporation ("Knightsbridge") under circumstances where it became a target in a bidding contest. Before the merger, Frederick's common stock was divided into Class A shares (each of which has one vote) and Class B shares (which have no vote). As of December 6, 1996,^[2] there were outstanding 2,995,309 Class A shares and 5,903,118 Class B shares. Two trusts created by the principal founders of Frederick's, Frederick and Harriet Mellinger (the "Trusts"), held a total of about 41% of the outstanding Class A voting shares and a total of about 51% of the outstanding Class B non-voting shares of Frederick's.^[3]

On June 14, 1996, the Frederick's board announced its decision to retain an investment bank, Janney Montgomery Scott, Inc. ("JMS"), to advise the board in its search for a suitable buyer for the company. In January 1997, JMS initiated talks [1080] with Knightsbridge.^[4] Four months later, in April 1997, Knightsbridge offered to purchase all of the outstanding shares of Frederick's for between $6.00 and $6.25 per share. At Knightsbridge's request, the Frederick's board granted Knightsbridge the exclusive right to conduct due diligence.

On June 13, 1997, the Frederick's board approved an offer from Knightsbridge to purchase all of Frederick's outstanding Class A and Class B shares for $6.14 per share in cash in a two-step merger transaction.^[5] The terms of the merger agreement signed by the Frederick's board prohibited the board from soliciting additional bids from third parties, but the agreement permitted the board to negotiate with third party bidders when the board's fiduciary duties required it to do so.^[6] The Frederick's board then sent to stockholders a Consent Solicitation Statement recommending that they approve the transaction, which was scheduled to close on August 27, 1997.

On August 21, 1997, Frederick's received a fully financed, unsolicited cash offer of $7.00 per share from a third party bidder, Milton Partners ("Milton"). Four days after the board received the Milton offer, Knightsbridge entered into an agreement to purchase all of the Frederick's shares held by the Trusts for $6.90 per share.^[7] Under the stock purchase agreement, the Trusts granted Knightsbridge a proxy to vote the Trusts' shares, but the Trusts had the right to terminate the agreement if the Frederick's board rejected the Knightsbridge offer in favor of a higher bid.^[8]

On August 27, 1997, the Frederick's board received a fully financed, unsolicited $7.75 cash offer from Veritas Capital Fund ("Veritas"). In light of these developments, the board postponed the Knightsbridge merger in order to arrange a meeting with the two new bidders. On September 2, 1997, the board sent a memorandum to Milton and Veritas outlining the conditions for participation in the bidding process. The memorandum required that the bidders each deposit $2.5 million in an escrow account and submit, before September 4, 1997, a marked-up merger agreement with the same basic terms as the Knightsbridge merger agreement. Veritas submitted a merger agreement and the $2.5 million escrow payment in accordance with these conditions. Milton [1081] did not.^[9]

On September 3, 1997, the Frederick's board met with representatives of Veritas to discuss the terms of the Veritas offer. According to the plaintiffs, the board asserts that, at this meeting, it orally informed Veritas that it was required to produce its "final, best offer" by September 4, 1997. The plaintiffs further allege that that board did not, in fact, inform Veritas of this requirement.

The same day that the board met with Veritas, Knightsbridge and the Trusts amended their stock purchase agreement to eliminate the Trusts' termination rights and other conditions on the sale of the Trusts' shares. On September 4, 1997, Knightsbridge exercised its rights under the agreement and purchased the Trusts' shares. Knightsbridge immediately informed the board of its acquisition of the Trusts' shares and repeated its intention to vote the shares against any competing third party bids.

One day after Knightsbridge acquired the Trusts' shares, the Frederick's board participated in a conference call with Veritas to discuss further the terms of the proposed merger. During this conference call, Veritas representatives suggested that, if the board elected to accept the Veritas offer, the board could issue an option to Veritas to purchase authorized but unissued Frederick's shares as a means to circumvent the 41% block of voting shares that Knightsbridge had acquired from the Trusts. Frederick's representatives also expressed some concern that Knightsbridge would sue the board if it decided to terminate the June 15, 1997 merger agreement. In response, Veritas agreed to indemnify the directors in the event of such litigation.

On September 6, 1997, Knightsbridge increased its bid to match the $7.75 Veritas offer, but on the condition that the board accept a variety of terms designed to restrict its ability to pursue superior offers.^[10] On the same day, the Frederick's board approved this agreement and effectively ended the bidding process. Two days later, Knightsbridge purchased additional Frederick's Class A shares on the open market, at an average price of $8.21 per share, thereby acquiring a majority of both classes of Frederick's shares.

On September 11, 1997, Veritas increased its cash offer to $9.00 per share. Relying on (1) the "no-talk" provision in the merger agreement, (2) Knightsbridge's stated intention to vote its shares against third party bids, and (3) Veritas' request for an option to dilute Knightsbridge's interest, the board rejected the revised Veritas bid. On September 18, 1997, the board amended its earlier Consent Solicitation Statement to include the events that had transpired since July 1997. The deadline for responses to the consent solicitation was September 29, 1997, the scheduled closing date for the merger.

Before the merger closed, the plaintiffs filed in the Court of Chancery the purported class action complaint that is the predecessor [1082] of the amended complaint before us. The plaintiffs also moved for a temporary restraining order enjoining the merger. The Court of Chancery denied the requested injunctive relief.^[11]

The plaintiffs then amended their complaint to include a class action claim for damages caused by the termination of the auction in favor of Knightsbridge and the rejection of the higher Veritas offer. The amended complaint alleged that the Frederick's board had breached its fiduciary duties in connection with the sale of the company and had misstated and omitted material information in the Consent Solicitation Statement. The plaintiffs also sued Knightsbridge, alleging that it aided and abetted the board's breach of fiduciary duties and it tortiously interfered with the stockholders' prospective business relations (that is, the $9.00 Veritas bid).

The Court of Chancery granted the directors' motion to dismiss the amended complaint under Chancery Rule 12(b)(6), concluding that: (1) the complaint did not support a claim of breach of the board's duty of loyalty, (2) the exculpatory provision in the Frederick's charter precluded money damages against the directors for any breach of the board's duty of care, and (3) any misstatements or omissions in the Consent Solicitation Statement were immaterial as a matter of law.^[12] The court also dismissed the claims against Knightsbridge, holding that the allegations in the amended complaint do not suggest complicity between Knightsbridge and the board and do not support the plaintiffs' argument that the $9.00 Veritas bid was a "valid business expectancy."^[13]

Standard of Review

We review de novo the dismissal by the Court of Chancery of a complaint under Rule 12(b)(6).^[14] The complaint ordinarily defines the universe of facts from which the trial court may draw in ruling on a motion to dismiss.^[15] Because a motion to dismiss under Chancery Rule 12(b)(6) must be decided without the benefit of a factual record, the Court of Chancery may not resolve material factual disputes; instead, the court is required to assume as true the well-pleaded allegations in the complaint.^[16] The trial court may dismiss a complaint under Rule 12(b)(6) only where the court determines with "reasonable certainty" that the plaintiff could prevail on [1083] no set of facts that may be inferred from the well-pleaded allegations in the complaint.^[17] This standard is based on the "notice pleading" requirement established in Ct. Ch. R. 8(e) and is "less stringent than the standard applied when evaluating whether a pre-suit demand has been excused in a stockholder derivative suit filed pursuant to Chancery Rule 23.1."^[18]

Of course, the trial court is not required to accept every strained interpretation of the allegations proposed by the plaintiff, but the plaintiff is entitled to all reasonable inferences that logically flow from the face of the complaint. Moreover, a claim may be dismissed if allegations in the complaint or in the exhibits incorporated into the complaint effectively negate the claim as a matter of law.^[19]

The Duty of Loyalty Claim

The central claim in the amended complaint is that the sale of Frederick's to Knightsbridge "constituted a breach of [the Frederick's board's] fiduciary obligation to maximize shareholder value" because the board did not "conduct an auction with a `level playing field'" as required by Revlon, Inc. v. MacAndrews & Forbes Holdings.^[20] The plaintiffs contend that this sort of allegation cannot be neatly divided into duty of care claims and duty of loyalty claims.

In our view, Revlon neither creates a new type of fiduciary duty in the sale-of-control context nor alters the nature of the fiduciary duties that generally apply. Rather, Revlon emphasizes that the board must perform its fiduciary duties in the service of a specific objective: maximizing the sale price of the enterprise.^[21] Although [1084] the Revlon doctrine imposes enhanced judicial scrutiny of certain transactions involving a sale of control, it does not eliminate the requirement that plaintiffs plead sufficient facts to support the underlying claims for a breach of fiduciary duties in conducting the sale.^[22] Accordingly, we proceed to analyze the amended complaint to determine whether it alleges sufficient facts to support a claim that the board breached any of its fiduciary duties.^[23]

The Court of Chancery concluded, and the plaintiffs do not appear to contest on appeal, that the amended complaint adequately alleges a conflict of interest with respect to only one of the directors who approved the Knightsbridge merger.^[24] The amended complaint does not allege that the lone conflicted director dominated the three other directors who approved the merger on September 6, 1997.^[25] The Court of Chancery therefore correctly held that the Knightsbridge merger was approved [1085] by a majority of disinterested directors.

The plaintiffs nevertheless argue that the amended complaint supports a claim that the directors breached their duty of loyalty by approving the Knightsbridge merger.^[26] The complaint alleges that "Frederick's representatives expressed concern that if Frederick's approved the [June 15, 1997] Merger Agreement in favor of a transaction with Veritas, Knightsbridge would sue Frederick's and its directors." The plaintiffs argue that this allegation supports a reasonable inference that the directors' individual interests in avoiding personal liability to Knightsbridge influenced their decision to approve the Knightsbridge merger.

Except in egregious cases, the threat of personal liability for approving a merger transaction does not in itself provide a sufficient basis to question the disinterestedness of directors because the risk of litigation is present whenever a board decides to sell the company.^[27] Moreover, even assuming arguendo that the threat of personal liability did raise some concerns about the disinterestedness of the directors, the amended complaint goes on to allege that Veritas agreed to indemnify the directors in the event that Knightsbridge sued them. This allegation undermines the plaintiffs' inference that the directors rejected the Veritas offer "to avoid becoming embroiled in litigation with Knightsbridge."^[28] We therefore conclude that the facts alleged in the complaint do not state a cognizable claim that the directors acted in their own personal interests rather than in the best interests of the stockholders when they approved the Knightsbridge merger.^[29]

The Disclosure Claims

The plaintiffs next argue that September 18, 1997 Consent Solicitation Statement for the Knightsbridge merger contained material omissions and misrepresentations. In particular, the amended complaint alleges that the board (1) falsely [1086] asserted that it orally informed Veritas of a September 4, 1997 deadline for its final offer, (2) failed to disclose the reason for the resignation of two directors just before the board approved the initial Knightsbridge offer in June 1997, and (3) failed to disclose that the board did not negotiate with Veritas concerning terms of the proposed dilutive option. The Court of Chancery concluded that the alleged misstatements and omissions were immaterial as a matter of law.^[30]

We begin by observing that the board's fiduciary duty of disclosure, like the board's duties under Revlon and its progeny, is not an independent duties but the application in a specific context of the board's fiduciary duties of care, good faith, and loyalty.^[31] Where the board issues a Consent Solicitation Statement in contemplation of stockholder action, the board is obligated "to disclose fully and fairly all material information within the board's control."^[32] In Arnold v. Society for Savings Bancorp, Inc., this Court adopted the following definition of materiality: "[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available."^[33]

Although materiality determinations under this standard are necessarily fact-intensive and do not generally lend themselves to dismissal on the pleadings,^[34] some statements or omissions may be immaterial as a matter of law.^[35] To survive a [1087] motion to dismiss, the plaintiffs "must provide some basis for a court to infer that the alleged violations were material. For example, a pleader must allege that facts are missing from the statement, identify those facts, state why they meet the materiality standard and how the omission caused injury."^[36]

In the present case, the amended complaint alleges that the board falsely asserted in the Consent Solicitation Statement that Veritas had been orally informed of the September 4, 1997 deadline for its "best, final offer." The amended complaint also alleges that Veritas' failure to comply with this requirement was among the reasons presented in the Consent Solicitation Statement for the board's decision to reject the Veritas offer. The plaintiffs maintain that this alleged misrepresentation is material because a stockholder's decision to ratify or reject a board decision is based, at least in part, on the board's stated rationale for its recommendation. The plaintiffs thus argue that a Frederick's stockholder would be more likely to ratify the board's decision to reject the Veritas bid if the board's decision was based on a good reason — that is, because the bid came too late.^[37]

The Court of Chancery found that this alleged misstatement was immaterial as a matter of law because the Consent Solicitation disclosed Veritas' later $9.00 offer.^[38] Since the stockholders were aware of the higher bid, the Court of Chancery concluded that the timeliness of the offer was irrelevant.

We agree with the Court of Chancery that the board's disclosure of the $9.00 bid renders immaterial as a matter of law any misstatement about the rationale of the Frederick's board for rejecting the bid. The importance that a stockholder ascribes to the availability of a higher bid in deciding whether to vote for or against a proposed merger is independent of the timeliness of the higher bid. Whether the bid was submitted on time or late would not "significantly alter" the stockholder's assessment of the attractiveness of the offer.^[39] Accordingly, we conclude that the [1088] board's misstatement could not have been material to the reasonable stockholder.

The amended complaint also alleges that the Consent Solicitation Statement failed to disclose the reasons for the resignation of two directors in June 1997, although that pleading does acknowledge that the fact of these resignations was disclosed. The allegation that two directors resigned from the board immediately before the board approved the Knightsbridge merger tends to support, for notice pleading purposes, a reasonable inference that the directors resigned as a result of a disagreement over corporate policy. Moreover, the resignation of board members and other key advisors based on a disagreement about corporate policy may, in some circumstances, be material information that must be disclosed to stockholders.^[40]

But the amended complaint does not allege — or present facts supporting an inference — that the board was aware of the reasons for the directors' resignations.^[41] Absent some indication that the directors informed the board of their reasons for leaving, the board did not have a duty to disclose its assumptions about why the directors resigned. We also note that the two directors resigned before the board approved the June 15, 1997 merger agreement with Knightsbridge — well before the Frederick's stockholders were asked to approve the September 1997 merger agreement. It thus requires a significant logical leap to suppose that reasonable stockholders would consider this information significant in the total mix of information available to them in September 1997.

Finally, the amended complaint alleges that the Consent Solicitation Statement did not disclose the fact that Veritas was prepared to negotiate the terms of the dilutive option that it had requested to circumvent Knightsbridge's voting power. Since the Consent Solicitation Statement indicated that the board relied on Veritas' request for a dilutive option in rejecting the bid, the plaintiffs argue, the board was obligated to disclose that the terms of the option were negotiable.

This argument is based on a misreading of the Consent Solicitation Statement. The Statement indicates that the board declined to pursue the $9.00 bid in part because of "the Board's continuing concern regarding the legality and practicality of issuing a dilutive option to [Veritas]." Thus, the board rejected the Veritas offer because the board was concerned about the legal validity of a dilutive option — regardless of the option's terms — and not because the terms of the option were non-negotiable.^[42] We therefore agree with [1089] conclusion of the Court of Chancery that the negotiability of the option terms was not relevant to the board's asserted concerns with the Veritas bid and would not be material to assessing the board's rationale for rejecting the bid.

The Due Care Claim

Having concluded that the complaint was properly dismissed under Chancery Rule 12(b)(6) for failure to state a claim on which relief may be granted on other fiduciary duty claims, we now turn to the due care claim. The primary due care issue is whether the board was grossly negligent, and therefore breached its duty of due care, in failing to implement a routine defensive strategy that could enable the board to negotiate for a higher bid or otherwise create a tactical advantage to enhance stockholder value.

In this case, that routine strategy would have been for the directors to use a poison pill to ward off Knightsbridge's advances and thus to prevent Knightsbridge from stopping the auction process. Had they done so, plaintiffs seem to allege that the directors could have preserved the appropriate options for an auction process designed to achieve the best value for the stockholders.

Construing the amended complaint most favorably to the plaintiffs, it can be read to allege that the board was grossly negligent in immediately accepting the Knightsbridge offer and agreeing to various restrictions on further negotiations without first determining whether Veritas would issue a counteroffer. Although the board had conducted a search for a buyer over one year, plaintiffs seem to contend that the board was imprudently hasty in agreeing to a restrictive merger agreement on the day it was proposed — particularly where other bidders had recently expressed interest.^[43] Although the board's haste, in itself, might not constitute a breach of the board's duty of care because the board had already conducted a lengthy sale process, the plaintiffs argue that the board's decision to accept allegedly extreme contractual restrictions impacted its ability to obtain a higher sale price. Recognizing that, at the end of the day, plaintiffs would have an uphill battle in overcoming the presumption of the business judgment rule,^[44] we must give plaintiffs the benefit of the doubt at this pleading stage to determine if they have stated a due care claim. Because of our ultimate decision, however, we need not finally decide this question in this case.

We assume, therefore, without deciding, that a claim for relief based on gross negligence during the board's auction process is stated by the inferences most favorable to plaintiffs that flow from these allegations. The issue then becomes whether the amended complaint may be dismissed upon a Rule 12(b)(6) motion by reason of the existence and the legal effect of the exculpatory provision of Article TWELFTH of Frederick's certificate of incorporation, adopted pursuant to 8 Del. C. § 102(b)(7). That provision would exempt directors from personal liability in damages with [1090] certain exceptions (e.g., breach of the duty of loyalty) that are not applicable here.^[45]

A. The Exculpatory Charter Provision Was Properly Before the Court of Chancery

The threshold inquiry is whether Article TWELFTH of the Frederick's certificate of incorporation was properly before the Court of Chancery. In their brief in support of their motion to dismiss in the Court of Chancery, the director defendants interposed the Section 102(b)(7) charter provision as a bar to plaintiffs' claims based on an alleged breach of the duty of care.^[46]

This provision, which appeared for the first time in the director defendants' brief in the Court of Chancery, was placed before the court without any authentication or supporting affidavit. The existence and authenticity of this provision was never questioned by plaintiffs, however. The trial court therefore tacitly accepted it as authentic without defendants formally asking the court to take judicial notice of its existence, which could easily be found in the public files in the Secretary of State's office and could properly be noticed judicially by the court.^[47]

Because the charter provision is not found within the four corners of the complaint, it is a "matter outside the pleading." Accordingly, on a Rule 12(b)(6) motion to dismiss, if

matters outside the pleading are presented to and not excluded by the Court the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given a reasonable opportunity to present all material made pertinent to such a motion by Rule 56.^[48]

Under Rule 56 in this context, there may be an opportunity for either side to submit affidavits or engage in discovery^[49] to explore the "matter outside the pleadings [that had been] ... presented to and not excluded by the Court."^[50]

[1091] Simply because a matter outside the pleading has been presented under Rule 12(b)(6) and thereby must be "treated as one for summary judgment" with "all parties ... given a reasonable opportunity to present all material made pertinent to such a motion by Rule 56,"^[51] it does not follow that the "floodgates of discovery" have to be opened. The Rule 56 opportunity to present affidavits or engage in discovery is not absolute. It is necessarily circumscribed by the discretion of the trial court in determining the scope of the "matters outside the pleading" that had been presented in connection with the Rule 12(b)(6) motion. Indeed, plaintiffs here do not contend that simply because defendants invoked the Section 102(b)(7) charter provision they are thereby invited to go on a fishing expedition. Accordingly, when matters outside the pleading — such as a Section 102(b)(7) charter provision — are presented, the trial court should carefully limit the discovery sought to a scope that is coextensive with the issue necessary to resolve the motion.^[52] Here, there was apparently no discovery issue.^[53]

When the issue is confined to the legal effect of a Section 102(b)(7) charter provision, it is difficult to envision what discovery would be implicated. To be sure, in a due care case where a Section 102(b)(7) charter provision is invoked, a plaintiff could theoretically contest the validity of the charter provision. In such a case, the plaintiff must have a proper basis^[54] to claim that the Section 102(b)(7) charter [1092] provision presented by the defendants on the Rule 12(b)(6) motion is not authentic, was improperly adopted by the stockholders, or the like.

Plaintiffs make no such claim here. Although plaintiffs contend that under Emerald Partners^[55] the burden is on the defendants to produce evidence to support a Section 102(b)(7) defense, they do not contest the existence or authenticity of Frederick's 102(b)(7) charter provision. There being no Rule 56 avenue of discovery or affidavits that would be relevant to the narrow issue before the trial court in this case, we conclude that the plaintiffs were not deprived of any important procedural right arising from the fact that the trial court considered Frederick's 102(b)(7) charter exculpation provision in connection with the Rule 12(b)(6) motion to dismiss. Although it would have been preferable for the trial court to have observed the precise provisions of the rules and to have expressly treated the motion as one for summary judgment once the Section 102(b)(7) charter provision was interposed by the director defendants, we find no reversible error in failing to do so. The provision was properly before the Court of Chancery in deciding on the director defendants' motion to dismiss.

As guidance for future cases, we observe that there are several methods available to the defense to raise and argue the applicability of the bar of a Section 102(b)(7) charter provision to a due care claim. The Section 102(b)(7) bar may be raised on a Rule 12(b)(6) motion to dismiss (with or without the filing of an answer), a motion for judgment on the pleadings (after filing an answer),^[56] or a motion for summary judgment (or partial summary judgment) under Rule 56 after an answer, with or without supporting affidavits.

In the case of a Rule 12(b)(6) motion, as here, if the Section 102(b)(7) charter provision is raised for the first time in the motion or brief in support of the motion, it is a matter outside the pleading. If not excluded by the court, the existence of such matter means that the motion will be converted, by clear force of the pleading rules, into a motion for summary judgment under Rule 56 and should be handled as we have noted above.

B. Application of Emerald Partners

We now address plaintiffs' argument that the trial court committed error, based on certain language in Emerald Partners,^[57] by barring their due care claims. Plaintiffs' arguments on this point are based on an erroneous premise, and our decision here is not inconsistent with Emerald Partners.

In Emerald Partners, we made two important points about the raising of Section 102(b)(7) charter provisions. First we said: "[T]he shield from liability provided by a certificate of incorporation provision adopted pursuant to 8 Del. C. § 102(b)(7) is in the nature of an affirmative defense."^[58] Second, we said:

[1093] [W]here the factual basis for a claim solely implicates a violation of the duty of care, this court has indicated that the protections of such a charter provision may properly be invoked and applied. Arnold v. Society for Savings Bancorp., Del.Supr., 650 A.2d 1270, 1288 (1994); Zirn v. VLI Corp., Del.Supr., 681 A.2d 1050, 1061 (1996).^[59]

Based on this language in Emerald Partners, plaintiffs make two arguments. First, they argue that the Court of Chancery in this case should not have dismissed their due care claims because these claims are intertwined with, and thus indistinguishable from, the duty of loyalty and bad faith claims.^[60] Second, plaintiffs contend that the Court of Chancery incorrectly assigned to them the burden of going forward with proof.

1. The Court of Chancery Properly Dismissed Claims Based Solely on the Duty of Care

Plaintiffs here, while not conceding that the Section 102(b)(7) charter provision may be considered on this Rule 12(b)(6) motion nevertheless, in effect, conceded in oral argument in the Court of Chancery and similarly in oral argument in this Court that if a complaint unambiguously and solely asserted only a due care claim, the complaint is dismissible once the corporation's Section 102(b)(7) provision is invoked.^[61] This concession is in line with our holding in Emerald Partners quoted above.

Plaintiffs contended vigorously, however, that the Section 102(b)(7) charter provision does not apply to bar their claims in this case because the amended complaint alleges breaches of the duty of loyalty and other claims that are not barred by the charter provision. As a result, plaintiffs maintain, this case cannot be boiled down solely to a due care case. They argue, in effect, that their complaint is sufficiently well-pleaded that — as a matter of law — the due care claims are so inextricably intertwined with loyalty and bad faith claims that Section 102(b)(7) is not a bar to recovery of damages against the directors.^[62]

[1094] We disagree. It is the plaintiffs who have a burden to set forth "a short and plain statement of the claim showing that the pleader is entitled to relief."^[63] The plaintiffs are entitled to all reasonable inferences flowing from their pleadings, but if those inferences do not support a valid legal claim, the complaint should be dismissed without the need for the defendants to file an answer and without proceeding with discovery. Here we have assumed, without deciding, that the amended complaint on its face states a due care claim. Because we have determined that the complaint fails properly to invoke loyalty and bad faith claims, we are left with only a due care claim. Defendants had the obligation to raise the bar of Section 102(b)(7) as a defense, and they did. As plaintiffs conceded in oral argument before this Court, if there is only an unambiguous, residual due care claim and nothing else — as a matter of law — then Section 102(b)(7) would bar the claim. Accordingly, the Court of Chancery did not err in dismissing the plaintiffs due care claim in this case.

2. The Court of Chancery Correctly Applied the Parties' Respective Burdens of Proof

Plaintiffs also assert that the trial court in the case before us incorrectly placed on plaintiffs a pleading burden to negate the elements of the 102(b)(7) charter provision. Plaintiffs argue that this ruling is inconsistent with the statement in Emerald Partners that "the shield from liability provided by a certificate of incorporation provision adopted pursuant to 8 Del. C. § 102(b)(7) is in the nature of an affirmative defense.... Defendants seeking exculpation under such a provision will normally bear the burden of establishing each of its elements."^[64]

The procedural posture here is quite different from that in Emerald Partners. There the Court stated that it was incorrect for the trial court to grant summary judgment on the record in that case because the defendants had the burden at trial of demonstrating good faith if they were invoking the statutory exculpation provision. In this case, we focus not on trial burdens, but only on pleading issues. A plaintiff must allege well-pleaded facts stating a claim on which relief may be granted. Had plaintiff alleged such well-pleaded facts supporting a breach of loyalty or bad faith claim, the Section 102(b)(7) charter provision would have been unavailing as to such claims, and this case would have gone forward.^[65]

But we have held that the amended complaint here does not allege a loyalty violation or other violation falling within the exceptions to the Section 102(b)(7) exculpation provision. Likewise, we have held that, even if the plaintiffs had stated a claim for gross negligence, such a well-pleaded claim is unavailing because defendants have brought forth the Section [1095] 102(b)(7) charter provision that bars such claims. This is the end of the case.

And rightly so, as a matter of the public policy of this State. Section 102(b)(7) was adopted^[66] by the Delaware General Assembly in 1986 following a directors and officers insurance liability crisis and the 1985 Delaware Supreme Court decision in Smith v. Van Gorkom.^[67] The purpose of this statute was to permit stockholders to adopt a provision in the certificate of incorporation to free directors of personal liability in damages for due care violations, but not duty of loyalty violations, bad faith claims and certain other conduct. Such a charter provision, when adopted, would not affect injunctive proceedings based on gross negligence.^[68] Once the statute was adopted, stockholders usually approved charter amendments containing these provisions because it freed up directors to take business risks without worrying about negligence lawsuits.^[69]

Our jurisprudence since the adoption of the statute has consistently stood for the proposition that a Section 102(b)(7) charter provision bars a claim that is found to state only a due care violation.^[70] Because we have assumed that the amended complaint here does state a due care claim, the exculpation afforded by the statute must affirmatively be raised by the defendant directors.^[71] The directors have done so in [1096] this case, and the Court of Chancery properly applied the Frederick's charter provision to dismiss the plaintiffs' due care claim.^[72]

The Aiding and Abetting Claim Against Knightsbridge

We next turn to the plaintiffs' claims relating to Knightsbridge's conduct during the auction process. They first argue that the trial court erred in dismissing their claim that Knightsbridge aided and abetted the board's alleged breach of its fiduciary duty — namely, the board's failure to obtain the highest price reasonably available during the auction. Specifically, the amended complaint alleges that Knightsbridge (1) initially misrepresented the nature of its interest in the Trusts' shares, (2) threatened to sue the board if it breached the June 1997 merger agreement, (3) demanded a hasty consummation of the September 1997 merger, and (4) conditioned the September 1997 offer on the board's acceptance of extremely restrictive contract terms.^[73] The Court of Chancery rejected these arguments because the negotiations between Knightsbridge and Frederick's were at arm's-length and because the facts alleged in the complaint do not indicate that Knightsbridge knowingly participated in any fiduciary breach by the board.^[74]

A third party may be liable for aiding and abetting a breach of a corporate fiduciary's duty to the stockholders if the third party "knowingly participates" in the breach.^[75] To survive a motion to dismiss, the complaint must allege facts that satisfy the four elements of an aiding and abetting claim: "(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary's duty, ... (3) knowing participation in that breach by the defendants," and (4) damages proximately caused by the breach.^[76]

In this case, we have concluded that the amended complaint does not adequately allege a duty of loyalty claim. But we have assumed, without deciding, that the amended complaint, construed most favorably to plaintiffs, alleges that the board's conduct was grossly negligent and constituted a breach of its duty of care.^[77] [1097] We must therefore determine whether the plaintiffs alleged facts supporting a reasonable inference that Knightsbridge "knowingly participated" in the board's due care breach.^[78]

Knowing participation in a board's fiduciary breach requires that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach.^[79] Under this standard, a bidder's attempts to reduce the sale price through arm's-length negotiations cannot give rise to liability for aiding and abetting,^[80] whereas a bidder may be liable to the target's stockholders if the bidder attempts to create or exploit conflicts of interest in the board.^[81] Similarly, a bidder may be liable to a target's stockholders for aiding and abetting a fiduciary breach by the target's board where the [1098] bidder and the board conspire in or agree to the fiduciary breach.^[82]

In the present case, the Court of Chancery concluded that the September 1997 merger agreement was the product of arm's-length negotiations and that arm's-length negotiations are inconsistent with participation in a fiduciary breach.^[83] The plaintiffs argue that this conclusion reflected impermissible fact-finding on a motion to dismiss, but there is no indication in the amended complaint that Knightsbridge participated in the board's decisions, conspired with board, or otherwise caused the board to make the decisions at issue.^[84] Moreover, there is no dispute that only one of the Frederick's directors who approved the merger had a conflict of interest, and that director did not dominate or control the others.

Although Knightsbridge's tactics here, as alleged, may have been somewhat suspect,^[85] we agree with the trial court's conclusion that the plaintiffs' aiding and abetting claim fails as a matter of law because the allegations in the complaint do not support an inference that Knightsbridge knowingly participated in a fiduciary breach.

[1099] The Tortious Interference Claim Against Knightsbridge

The plaintiffs' second claim against Knightsbridge alleges that Knightsbridge tortiously interfered with Frederick's stockholders' prospective opportunity to obtain a higher price for their shares from Veritas. The Court of Chancery dismissed this claim, holding that the plaintiffs did not have a valid business expectancy because there is "no lawful way that Frederick's could have circumvented Knightsbridge's power (and, as the majority stockholder, its right) to vote down any transaction it did not favor."^[86] Although we agree with the court's conclusion, our analysis differs slightly.

To survive dismissal, a claim for tortious interference with business relations must allege: "(a) the reasonable probability of a business opportunity, (b) the intentional interference by defendant with that opportunity, (c) proximate causation, and (d) damages."^[87] We apply these elements to a particular case "in light of a defendant's privilege to compete or protect his business interests in a fair and lawful manner."^[88] In this case, we conclude that the complaint does not support an inference that Knightsbridge's alleged interference proximately caused Frederick's stockholders to lose the expected benefit of the Veritas' bid.

The first element raises a timing question: At what point is the probability of the business opportunity measured? By holding that there was no "valid business expectancy" because the board did not have a duty to circumvent Knightsbridge's majority voting interest, the trial court implicitly assessed the likelihood of a superior bid at a point after Knightsbridge acquired its majority voting stake on September 9, 1997 and after Knightsbridge effectively gained control over the Trusts' shares on September 3, 1997.^[89]

We believe that the probability of the business opportunity must be assessed at the time of the alleged interference. In this case, the alleged interference — Knightsbridge's misrepresentation of its ownership rights and its litigation threats against the board — occurred before September 3, 1997.^[90] We therefore assume, without deciding, that the complaint alleges sufficient facts supporting an inference that, at the time of the alleged interference, Frederick's stockholders could reasonably expect to benefit from the possibility of a higher Veritas offer.^[91]

[1100] The next question is whether the amended complaint alleged sufficient well-pleaded facts to support an inference that Knightsbridge had interfered with the stockholders' expectancy. With respect to this element of the tortious interference claim, the trial court correctly concluded that Knightsbridge's valid acquisition of a majority stake in Frederick's does not constitute interference, and its threat to enforce its rights under the June 1997 merger agreement was lawful.^[92] But the amended complaint also alleges that Knightsbridge falsely asserted that it had "acquired" more than 40% of the voting stock in Frederick's and that its "approval is necessary before any transaction may be consummated." The amended complaint further alleges that Knightsbridge threatened to use its purported voting power to block competing bids. According to the plaintiffs, Knightsbridge deliberately misrepresented its voting interest in Frederick's as a means to prevent the board's acceptance of superior bids and to forestall the implementation of a poison pill defense. Although these allegations may support an inference that Knightsbridge intentionally interfered with the auction process, that is not the end of the inquiry.

The final question is whether the amended complaint adequately alleges that Knightsbridge's interference (that is, its misrepresentation) proximately caused Frederick's stockholders to lose the expected benefit of Veritas' superior bid. This question turns on whether Knightsbridge's misrepresentation could have caused the Frederick's board to reject Veritas' higher bid in favor of the lower Knightsbridge bid.^[93]

In some circumstances, Knightsbridge's alleged misrepresentation that it controlled more than 40% of the voting shares (combined with its expressed intent to block competing offers) could conceivably have influenced the board's decision to approve the Knightsbridge offer and to end the auction. But, in this case, Knightsbridge actually did acquire the Trusts' shares on September 4, 1997 — two days before the board accepted Knightsbridge's September 6 offer.

Since Knightsbridge effectively remedied its earlier misrepresentation well before the board acted, we conclude that the alleged misrepresentation could have had no effect on the board's decision to accept the Knightsbridge offer. Thus, in our view, the plaintiffs' tortious interference claim fails as a matter of law because the allegations in the amended complaint do not support an inference that Knightsbridge's misrepresentation proximately caused the board to accept the Knightsbridge offer and to reject the higher Veritas offer.

[1101] Conclusion

We have concluded that: (1) the amended complaint does not adequately allege a breach of the Frederick's board's duty of loyalty or its disclosure duty; (2) the exculpatory provision in the Frederick's charter operates to bar claims for money damages against the directors caused by the alleged breach of the board's duty of care; and (3) the amended complaint does not provide adequate support for the plaintiffs' claims against Knightsbridge for aiding and abetting a breach of fiduciary duty by the Frederick's board or for tortious interference with a prospective business opportunity. Accordingly, we affirm the judgment of the Court of Chancery dismissing the amended complaint against the Frederick's board and Knightsbridge.

[*] The Court heard argument in this matter on April 3, 2001 but postponed its final decision until the issuance of the mandate in Midland Food Services, LLC v. Castle Hill Holdings V, LLC, Del.Supr., No. 509, 1999, 2001 WL 760862, Veasey, C.J. (June 15, 2001) (ORDER), on July 3, 2001, due to any possible relevance Midland might have on the Rule 12(b)(6) issue in this case (discussed infra at pages 1080-1095).

[1] These facts are drawn exclusively from the allegations in the plaintiffs' Consolidated Amended Class Action Complaint, filed in the Court of Chancery on October 29, 1997.

[2] The amended complaint refers to the number of outstanding shares on this date without explaining the significance of the date.

[3] In July 1997, The Frederick N. Mellinger Trust owned 820,193 Class A shares and 1,579,386 Class B shares. The Harriet R. Mellinger Trust owned 463,066 Class A shares and 1,579,718 Class B shares. Hugh Hunter, one of the director defendants in this case, was co-trustee of the Trusts and thus had authority to vote the Class A shares held by the Trusts.

[4] For the sake of simplicity, we follow the parties' convention and refer collectively to defendants Knightsbridge Capital Corporation, Royalty Acquisition Corp., and Royalty Corporation as "Knightsbridge."

[5] Shortly before the board approved the merger on June 13, 1997, two directors, Sylvan Lefcor and Morton Fields, resigned from the board. The remaining five directors approved the merger agreement unanimously.

[6] In the event that the Frederick's board terminated the merger agreement in order to accept a superior proposal by a third party bidder, the agreement entitled Knightsbridge to liquidated damages of $1.8 million.

[7] As noted earlier, the Trusts held about 40% of the Class A shares and 50% of the Class B shares. Knightsbridge also extended its $6.90 offer price to all outstanding Frederick's shares.

[8] On August 28, 1997, shortly after signing the stock purchase agreement, Knightsbridge sent a letter to the Frederick's board to inform it that Knightsbridge had "acquired" the Trusts' shares and that it would "not vote in favor of" any competing third party bids. That letter did not mention the Trusts' right to terminate the agreement in favor of a higher offer. Knightsbridge also sent a letter to the Frederick's board on September 1, 1997 restating its intention to consummate the merger on September 3, 1997 under the terms of the original merger agreement.

[9] Milton apparently discontinued its efforts to acquire Frederick's after Veritas submitted its higher bid.

[10] The terms included: a provision prohibiting any Frederick's representative from speaking to third party bidders concerning the acquisition of the company (the "no-talk" provision); a termination fee of $4.5 million (about 7% of the value of the transaction); the appointment of a non-voting Knightsbridge observer at Frederick's board meetings; and an obligation to grant Knightsbridge any stock option that Frederick's granted to a competing bidder. The revised merger agreement did not expressly permit the Frederick's board to pursue negotiations with third parties where its fiduciary duties required it to do so.

[11] See In re Frederick's of Hollywood, Inc. Shareholders Litigation, Del. Ch., C.A. No. 15944 (Sept. 29, 1997) (ORDER).

[12] See In re Frederick's of Hollywood, Inc. Shareholders Litigation, Del. Ch., C.A. No. 15944 (July 9, 1998) (July 1998 Mem. Op.).

[13] See In re Frederick's of Hollywood, Inc. Shareholders Litigation, Del. Ch., C.A. No. 15944 (Jan. 31, 2000) (January 2000 Mem. Op.).

[14] McMullin v. Beran, Del.Supr., 765 A.2d 910, 916 (2000).

[15] See In re Santa Fe Pacific Corp. Shareholder Litigation, Del.Supr., 669 A.2d 59, 68 (1995) ("Generally, matters outside the pleadings should not be considered in ruling on a motion to dismiss"); see also Goldman v. Belden, 2nd Cir., 754 F.2d 1059, 1065 (1985) ("[A] Rule 12(b)(6) motion is addressed to the face of the pleading.").

[16] See Solomon v. Pathe Communications Corp., 672 A.2d 35, 38 (1996); cf. Vanderbilt Income and Growth Associates, L.L.C. v. Arvida/JMB Managers, Inc., Del.Supr., 691 A.2d 609, 613 (1996) ("On a motion to dismiss for failure to state a claim, a trial court cannot choose between two differing reasonable interpretations of ambiguous documents."). In this context, "well-pleaded allegations" include specific allegations of fact and conclusions supported by specific allegations of fact. See Solomon, 672 A.2d at 38 (quoting In re Tri-Star Pictures, Inc., Litig., Del.Supr., 634 A.2d 319, 326 (1993)).

[17] See Solomon, 672 A.2d at 38 ("[A] motion to dismiss ... requires the court to determine with `reasonable certainty' that a plaintiff could prevail on no set of facts that can be inferred from the pleadings.") (citing Grobow v. Perot, Del.Supr., 539 A.2d 180, 187 n. 6 (1988); Rabkin v. Philip A. Hunt Chemical Corp., Del.Supr., 498 A.2d 1099, 1104 (1985)); see also Vanderbilt, 691 A.2d at 612 ("This Court, like the trial court, must determine whether it appears with reasonable certainty that, under any set of facts which could be proven to support the claim, the plaintiffs would not be entitled to relief.").

[18] Solomon, 672 A.2d at 38; see also Brehm v. Eisner, Del.Supr., 746 A.2d 244, 253-54 (2000).

[19] See, e.g., R.J.R. Services, Inc. v. Aetna Cas. and Sur. Co., 7th Cir., 895 F.2d 279, 281 (1989) ("However, we are not obliged to ignore any facts set forth in the complaint that undermine the plaintiff's claim ....") (citation omitted); Slaney v. Int'l Amateur Athletic Fed'n, 7th Cir., 244 F.3d 580, 597 (2001) (same); Associated Builders, Inc. v. Alabama Power Co., 5th Cir., 505 F.2d 97, 100 (1974) ("If the appended document, to be treated as part of the complaint for all purposes under Rule 10(c), Fed.R.Civ.P., reveals facts which foreclose recovery as a matter of law, dismissal is appropriate."); Gant v. Wallingford Bd. of Educ., 2nd Cir., 69 F.3d 669, 674 (1995) (same); cf. Quiller v. Barclays American/Credit, Inc., 11th Cir., 727 F.2d 1067, 1069 (1984) ("Nevertheless, a complaint may be dismissed under Rule 12(b)(6) when its own allegations indicate the existence of an affirmative defense, so long as the defense clearly appears on the face of the complaint."); Jablon v. Dean Witter & Co., 9th Cir., 614 F.2d 677, 682 (1980) ("If the running of the statute [of limitations] is apparent on the face of the complaint, the defense may be raised by a motion to dismiss.").

[20] Del.Supr., 506 A.2d 173, 182-83 (1986).

[21] See Revlon, 506 A.2d at 182-83; Paramount Communications Inc. v. QVC Network, Inc., 637 A.2d 34, 43 (1994) ("The directors' fiduciary duties in a sale of control context are those which generally attach. In short, `the directors must act in accordance with their fundamental duties of care and loyalty.'") (citation omitted); id. at 44 ("In the sale of control context, the directors must focus on one primary objective — to secure the transaction offering the best value reasonably available for the stockholders — and they must exercise their fiduciary duties to further that end."); Barkan v. Amsted Indus. Inc., Del. Supr., 567 A.2d 1279, 1286 (1989) ("[T]he basic teaching of [Revlon and Unocal] is simply that directors must act in accordance with their fundamental duties of care and loyalty."); (citing Uncoal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985); Mills Acquisition Co. v. Macmillan. Inc., Del.Supr., 559 A.2d 1261, 1288 (1989) ("Beyond [getting the highest value reasonably attainable for the shareholders], there are no special and distinct `Revlon duties.'"); see also In re Lukens Inc. Shareholders Litigation, Del. Ch., 757 A.2d 720, 730-31 (1999) ("`Revlon duties' refer only to a director's performance of his or her duties of care, good faith and loyalty in the unique factual circumstance of a sale of control over the corporate enterprise.").

[22] The plaintiffs cite our decision in Levy v. Stern, Del.Supr., No. 211, 1996, 1996 WL 742818, Walsh, J. (Dec. 20, 1996) (ORDER), for the proposition that plaintiffs alleging a breach of the board's duties under Revlon are entitled to develop a factual record to determine the reasons for the board's action. The plaintiffs contend that, without a factual record on the rationale for board decisions, they have insufficient information to determine whether the board breached its duty of loyalty or its duty of care. As the plaintiffs concede, however, Levy merely holds that, before the trial court may rule a motion for summary judgment on the substantive merits of the plaintiffs' claims, plaintiffs must have a meaningful opportunity to conduct discovery on the information held by the defendants. See Levy, Order at ¶¶ 11-14. Levy does not entitle plaintiffs to discovery where they fail to identify and plead specific violations of the board's duties of care, good faith and loyalty.

[23] See McMullin, 765 A.2d at 917 (citing Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 663 A.2d 1156, 1162 (1995)).

[24] See January 2000 Mem. Op. at 17-18. In particular, the complaint alleges that the Knightsbridge merger agreement provided for several cash payments to George Townson, who was the CEO, President, and Chairman of Frederick's during the relevant period. The personal benefits allegedly received by Townson as a result of the Knightsbridge merger included: (1) a payment of $.05 for each "under water" option held by Townson with an exercise price below the merger price, (2) a severance payment of $750,000 upon consummation of the merger, and (3) a payment of $250,000 on the date of the merger and sixteen quarterly payments of $100,000 under a non-compete and consulting agreement. The complaint also alleges that William Barrett, who was a Frederick's director and a vice president of JMS, the firm's financial advisor, had an interest in the merger transaction. Specifically, the complaint alleges that Barrett's firm received a $2 million fee upon consummation of the Knightsbridge merger. But because Barrett's firm was entitled to receive a fee upon the consummation of any merger and because the fee was proportional to the sale price, the Court of Chancery correctly concluded that the complaint was insufficient to establish a disabling conflict with respect to Barrett. See January 2000 Mem. Op. at 17-18.

[25] See id. at 17. Although five directors approved the original merger agreement on June 15, 1997, one of those directors, Hugh Hunter, retired before the board approved the final merger agreement in September 1997.

[26] Although the plaintiffs raised this argument in their briefs before the Court of Chancery, the court did not dispose of this argument in its January 2000 opinion.

[27] See Aronson v. Lewis, Del.Supr., 473 A.2d 805, 815 (1984) ("[T]he mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists."). But see Revlon, 506 A.2d at 185 ("[W]hen a board ends an intense bidding contest on an insubstantial basis, and where a significant by-product of that action is to protect the directors against a perceived threat of personal liability for consequences stemming from the adoption of previous defensive measures, the action cannot withstand the enhanced scrutiny which Unocal requires of director conduct.").

[28] The plaintiffs argue that this conclusion requires an impermissible weighing of facts on a motion to dismiss. But, assuming the truth of the allegations in the complaint, Veritas' alleged agreement to indemnify the directors in the event that Knightsbridge sued them essentially eliminates any concerns that the directors' decision to approve the Knightsbridge merger was motivated by a fear of personal liability. Cf. cases cited supra note 19.

[29] In their supplemental brief, the plaintiffs also suggest that the board may have rejected the Veritas offer based on: (1) the interested director's desire to consummate the Knightsbridge deal, (2) a desire to benefit the Trusts with a quick deal, (3) "dislike" of Veritas, or (4) a personal desire to complete the sale process. These inferences, however, find no support in the allegations in the complaint. As a consequence, they are not a proper basis on which to conclude that the board breached its duty of loyalty and good faith.

[30] See January 2000 Mem. Op. at 19-21.

[31] See Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 663 A.2d 1156, 1163 (1995) ("A combination of the fiduciary duties of care and loyalty gives rise to the requirement that `a director disclose to shareholders all material facts bearing upon a merger vote....'") (footnote and citation omitted); see also Stroud v. Grace, Del.Supr., 606 A.2d 75, 84-88 (1992) (observing that the duty of candor "represents nothing more than the well-recognized proposition that directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action"); cf. Arnold v. Society for Sav. Bancorp. Inc., Del.Supr., 650 A.2d 1270, 1287 (1994)("[C]laims alleging disclosure violations that do not otherwise fall within any exception are protected by Section 102(b)(7) and any certificate of incorporation provision ... adopted pursuant thereto.").

[32] Stroud, 606 A.2d at 84-85; see also Arnold, 650 A.2d at 1277 (discussing the disclosure rule in Stroud). We have further held "that directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances." Malone v. Brincat, Del.Supr., 722 A.2d 5, 9 (1998).

[33] 650 A.2d at 1277 (quoting TSC Indus. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)); see also Zirn v. VLI Corp., Del. Supr., 621 A.2d 773, 778 (1993) ("`While it need not be shown that an omission or distortion would have made an investor change his overall view of a proposed transaction, it must be shown that the fact in question would have been relevant to him.'") (quoting Barkan, 567 A.2d at 1289).

[34] See Branson v. Exide Electronics Corp., Del.Supr., No. 457, 1992, 1994 WL 164084, Holland, J. (April 25, 1994) (ORDER), Order at ¶ 10 ("Whether or not a statement or omission in an offering prospectus was material is a question of fact that generally cannot be resolved on a motion to dismiss, but rather it must be determined after the development of an evidentiary record.").

[35] See, e.g., Sanders v. Devine, Del. Ch., C.A. No. 14679, 1997 WL 599539, Lamb, V.C. (Sept. 24, 1997) (Mem.Op.) ("When viewed in light of the clear and repeated disclosure about the possibility of a cash-out merger, the alleged omissions ... are immaterial as a matter of law."): Herd v. Major Realty Corp., Del. Ch., C.A. No. 10707, 1990 WL 212307, Chandler, V.C. (Dec. 21, 1990) ("[I]n light of the fact that Major's real estate assets have a total appraisal value of close to $190 million, the inclusion or exclusion of 1.07 acres is immaterial as a matter of law."); In re Wheelabrator Technologies Inc. Shareholders Litigation, Del. Ch., C.A. No. 11495, Jacobs, V.C. (Sept. 1, 1992) (finding various disclosure claims immaterial as a matter of law).

[36] Loudon v. Archer-Daniels-Midland Co., Del.Supr., 700 A.2d 135, 142 (1997).

[37] The plaintiffs also suggest that the misstatement is material because a more accurate statement of the events surrounding the board's rejection of Veritas' bid would have indicated that the auction "process is flawed." We do not find this argument persuasive. Although, as a general matter, "directors who disclose such a recommendation [must] also disclose such information about the background of the transaction, the process followed by them to maximize value in the sale, and their reason for approving the transaction," see Matador Capital Management Corp. v. BRC Holdings, Inc., Del. Ch., 729 A.2d 280, 295 (1998), some details of the auction process may be immaterial as a matter of law under the circumstances. We also note that the alleged misstatement here is far less serious than those in McMullin, such as the failure to disclose other potential bidders' interest in purchasing the firm and failure to disclose the actions of the majority stockholder to prevent sale the sale of the company to another bidder. See McMullin, 765 A.2d at 926.

[38] See January 2000 Mem. Op. at 19-20.

[39] In deciding to ignore the $9.00 Veritas bid, the board also relied on several other circumstances, including the fact that Knightsbridge vowed to vote its 41% interest against any other bids and the fact that a dilutive option could be required to secure ratification of a merger with a third party. These additional rationales for the board's decision make it even less likely that the perceived timeliness of the bid "significantly altered the `total mix' of information made available."

[40] For example, SEC regulations require the disclosure of an auditor's resignation within five days because an auditor's resignation is important "in bringing to light disagreements or difficulties concerning management policies or practices that may be material to an investment decision with regard to the registrant's securities." Fed. Securities L. Rptr. (CCH) ¶ 72,434 (1989).

[41] The plaintiffs argue that "the only reasonable inference from the Complaint is that after years of board service together with the individual defendants, [the two directors who resigned] would have conveyed to at least some of the individual defendants some reason for their resignations." We do not find this argument convincing. The complaint alleges that the directors who resigned served on the board for a total of forty years, but their mere presence on the board — even for an extended period — is an insufficient factual basis from which to infer that the two directors actually explained their resignation to the other members of the board.

[42] See January 2000 Mem. Op. at 20-21. On a motion to dismiss, we, like the Court of Chancery, may consider the language of the Consent Solicitation referenced in the complaint because the "the operative facts relating to such a claim perforce depend upon the language of the [document]." In re Santa Fe Pacific Corp. Shareholder Litigation, Del. Supr., 669 A.2d 59, 69-70 (1995).

[43] Relatedly, the plaintiffs also argue that the board breached its fiduciary duties by favoring Knightsbridge over Veritas in the bidding process.

[44] See Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984) (discussing the "function and operation of the business judgment rule, including the standards by which director conduct is judged"), overruled on other grounds by Brehm v. Eisner, Del.Supr., 746 A.2d 244, 253-54 (2000).

[45]Article TWELFTH provides:

TWELFTH. A director of this Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction for which the director derived an improper personal benefit.

[46]The motion of defendant directors under Rule 12(b)(6) did not mention the Frederick's charter and simply stated:

Defendants George W. Townson, Richard O. Starbird, William J. Barrett and Merle A. Johnston, ... pursuant to Court of Chancery Rule 12(b)(6), hereby move to dismiss the Consolidated Amended Class Action Complaint. The grounds for this motion will be set forth in the briefs to be filed in support of the motion in accordance with a briefing schedule to be agreed upon by the parties.

[47] SeeDelaware Rules of Evidence (D.R.E.) Rule 201, which provides:

Rule 201. Judicial notice of adjudicative facts.

* * *

A judicially noticed fact must be one not subject to reasonable dispute in that it is... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.

* * *

A party is entitled upon timely request to an opportunity to be heard as to the propriety of taking judicial notice and the tenor of the matter noticed. In the absence of prior notification, the request may be made after judicial notice has been taken.

[48] Chancery Rule 12(b).

[49] See Chancery Rule 56(c).

[50] Chancery Rule 12(b).

[51] Chancery Rule 12(b).

[52] See Chancery Rule 26(c); cf. Vanderbilt Income and Growth Associates, Del.Supr., 691 A.2d 609, 610 (1996) (even if the truth of documents outside the pleadings are relied on to support a Rule 12(b)(6) motion, thereby converting the motion to one for summary judgment under Rule 56, discovery if necessary may be limited.); Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 787-88 (1981) (characterizing a motion to terminate a derivative action in a demand excused case as a "hybrid summary judgment motion for dismissal" and finding that "[l]imited discovery may be ordered to facilitate" inquiries into the independence and good faith of the special committee that seeks dismissal of the derivative action); Kaplan v. Wyatt, Del. Ch., 484 A.2d 501, 507 (1984) ("[T]he type and extent of any discovery [authorized by Zapata] in a particular case [into the good faith and independence of the litigation committee] is a matter left to the discretion of the Court and may be undertaken only if first authorized by the Court."), aff'd, Del.Supr., 499 A.2d 1184 (1985); Wood v. Best, Del. Ch., C.A. No. 16281, 1999 WL 743482, Chandler, C. (Sept. 7, 1999) ("I advised counsel that I would treat defendants' motion to dismiss as a motion for summary judgment. And because of the possible factual dispute over whether some (or all) of the plaintiffs `voluntarily' accepted the merger consideration, I granted plaintiffs leave to take or provide limited discovery on that discrete factual issue."); Avacus Partners, L.P. v. Brian, Del. Ch., C.A. No. 11001, 1989 WL 120392, Allen, C. (Oct. 5, 1989) (Mem.Op.), Mem. Op. at 2 ("[W]hen courts grant discovery under Rule 56(f), such discovery is normally limited in scope.") (citing First Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 298, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968)).

[53] Cf. Midland Food Services, LLC v. Castle Hill Holdings V, LLC, Del.Supr., No. 509, 1999, 2001 WL 760862, Veasey, C.J. (June 15, 2001) (ORDER) ("To the extent that appellants had claimed on appeal that the Vice Chancellor improperly considered matters outside the pleadings on a motion to dismiss under Chancery Rule 12(b)(6), we find that appellants expressly acquiesced in the consideration of the questioned matters and abandoned their initial contention that these matters could not be considered on a motion to dismiss.").

[54] See Chancery Rule 11(c) (attorney signing a pleading or other paper represents to the Court, inter alia, that the legal claims are not frivolous and the factual claims are believed in good faith to have evidentiary support).

[55] Del.Supr., 726 A.2d 1215 (1999).

[56] Chancery Rule 12(c). Under this Rule, the charter provision could be asserted in and attached to the answer. The Court may or may not order a full or partial reply to the answer, which reply would optimally focus on the Section 102(b)(7) charter provision. See Chancery Rule 7(a). This would probably be the best practice to employ in these situations. But in some cases, filing an answer to a long and prolix complaint might be onerous. Cf. Brehm v. Eisner, Del.Supr., 746 A.2d 244, 249 (2000) ("The Complaint, consisting of 88 pages and 285 paragraphs, is a pastiche of prolix invective ... [and] serve[s] no purpose other than to complicate the work of reviewing courts.").

[57] 726 A.2d at 1223-24.

[58] Id. at 1223.

[59] Id. at 1224.

[60] Cf. McMullin, 765 A.2d at 922-26 (analyzing separately several related claims alleging breaches of the board's duty of care, duty of loyalty, and disclosure duties).

[61]The exchange before this Court proceeded as follows:

Justice Walsh: [I]f it's clear from your complaint that you have pleaded only duty of care claims, then it seems to me that the court, appropriately under the motion to dismiss, would apply the charter provisions, assuming that the motion to dismiss was based on that.

Mr. Monhait: I agree with that, your Honor. I am not disputing that....

The Chief Justice: But the [Court of Chancery] says here at page 16 of its opinion that the plaintiffs misread Emerald Partners. The Court has interpreted the language as not precluding a 12(b)(6) dismissal that the directors breached their fiduciary duty of care on the basis of an exculpatory provision so long as the dismissal on that ground does not prevent the plaintiff from well-pleaded allegations that they breached their duty of loyalty. And then the court said, under this reading of Emerald Partners, where a complaint alleges actionable disloyalty, the burden will shift to the defendants to show the immunizing effect of the charter. But where the complaint alleges only breaches of the duty of care then the claim may be dismissed at the pleading stage. You do not contest, you do not disagree with that statement in that paragraph....

Mr. Monhait: I do not Your Honor. I made a broader argument in the Court of Chancery, and Vice Chancellor Jacobs was responding to that. And I have narrowed that today.

[62] Cf. McMullin, 765 A.2d at 922-926.

[63] Chancery Rule 8(a).

[64] Emerald Partners, 726 A.2d at 1223-24.

[65] See McMullin, 765 A.2d at 926 ("We also note ... that such [exculpatory] provisions cannot provide protection for directors who breach their duty of loyalty."). Plaintiffs are therefore not required, as the plaintiffs suggest, "to plead facts negating the elements of a § 102(b)(7) defense." Rather, plaintiffs must plead facts supporting a claim that is not barred by the exculpatory charter provision — for example, a claim for a breach of the board's duty of good faith or loyalty. If the plaintiff were to establish by proof at trial a prima facie case of a loyalty violation, defendants would then have the burden to establish entire fairness. See Cede v. Technicolor, Del. Supr., 634 A.2d 345 (1993).

[66] 65 Del. Laws ch. 289.

[67] Del.Supr., 488 A.2d 858 (1985) (holding that directors may be personally liable in monetary damages for gross negligence in the process of decisionmaking).

[68] See R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations & Business Organizations, 1-11, 1-12 (3d ed.1998) (setting forth the Comment that accompanied the legislation explaining its purposes and effect); see also E. Norman Veasey, Jesse A. Finkelstein and C. Stephen Bigler, Delaware Supports Directors with a Three-Legged Stool of Limited Liability, Indemnification and Insurance,42 Bus. Law, 399-404 (1987):

While courts have traditionally expressed deference to the judgment of directors, the directors' views and actions have not uniformly been outcome-determinative. Flaws in the directors' decisionmaking processes have often resulted in their decisions blowing up in their faces.

* * *

No doubt every director of a public company is painfully aware of the celebrated damage case of Smith v. Van Gorkom, where directors were found personally liable in damages for gross negligence in hastily approving a merger transaction.

* * *

Delaware has adopted new legislation modifying indemnification rights and allowing a certificate of incorporation to contain a provision limiting or eliminating the personal monetary liability of directors in certain circumstances.

* * *

Section 102(b)(7) is not, and was not intended to be, a panacea for directors.

In addition, new section 102(b)(7) does not eliminate the duty of care that is properly imposed upon directors.

* * *

While section 102(b)(7) may not be a panacea, it provides a layer of protection for directors by allowing stockholders to dramatically reduce the type of situations in which a director's personal wealth is put "on the line." Thus, the "the first leg" of support afforded directors under the Delaware statutory scheme is a reduction in the overall sphere of liability to which a director is otherwise exposed in acting in his capacity as such. The other two "legs" of support — indemnification rights and insurance — operate within this reduced sphere of liability.

[69] See E. Norman Veasey, Economic Rationale for Judicial Decisionmaking in Corporate Law, 53 Bus. Law. 681, 693-94 (1998).

[70] See, e.g., Emerald Partners, 726 A.2d at 1224; Arnold v. Society for Savings Bancorp., Del.Supr., 650 A.2d 1270, 1288 (1994); Zirn v. VLI Corp., Del.Supr., 681 A.2d 1050, 1061 (1996).

[71] Although an exculpatory charter provision is "in the nature of an affirmative defense" under Emerald Partners, the board is not required to disprove claims based on alleged breaches of the duty of loyalty to gain the protection of the provision with respect to due care claims. Rather, proving the existence of a valid exculpatory provision in the corporate charter entitles directors to dismissal of any claims for money damages against them that are based solely on alleged breaches of the board's duty of care.

[72] Accord In Re Lukens, Inc. Shareholders Litigation, Del. Ch., 757 A.2d 720, aff'd sub nom. Walker v. Lukens, Inc., Del. Supr., No. 623, 1999, 2000 WL 1152467, Berger, J. (July 27, 2000) (ORDER).

[73] See July 1998 Mem. Op. at 8-9. The terms of the Knightsbridge offer are summarized supra note 10.

[74] See July 1998 Mem. Op. at 9-10.

[75] Gilbert v. El Paso Co., Del. Ch., 490 A.2d 1050, 1057 (1984) ("It is well settled that a third party who knowingly participates in the breach of a fiduciary's duty becomes liable to the beneficiaries of the trust relationship.") (citations omitted); Laventhol, Krekstein, Horwath and Horwath v. Tuckman, Del.Supr., 372 A.2d 168, 170-71 (1976) ("[P]ersons who knowingly join a fiduciary in an enterprise which constitutes a breach of his fiduciary duty of trust are jointly and severally liable for any injury which results.") (citing Jackson v. Smith, 254 U.S. 586, 41 S.Ct. 200, 65 L.Ed. 418 (1921)).

[76] Penn Mart Realty Co. v. Becker, Del. Ch., 298 A.2d 349, 351 (1972); see also Weinberger v. Rio Grande Industries, Inc., Del. Ch., 519 A.2d 116, 131 (1986) (same); Gilbert, 490 A.2d at 1057 (same).

[77] In the corporate context, "[d]irector liability for breaching the duty of care `is predicated upon concepts of gross negligence.'" McMullin, 765 A.2d at 921 (quoting Aronson, 473 A.2d at 812).

[78] We express no view on the question whether a third party may "knowingly participate" in or give substantial assistance to a board's grossly negligent conduct or whether a third party may be liable for aiding and abetting only if the board's breach is intentional. Compare Greenfield v. Tele-Communications, Del. Ch., C.A. No. 9814, 1989 WL 48738, Allen, C. (May 10, 1989) ("But where the charge is conspiracy or knowing participation with a breaching fiduciary, some facts must be alleged that would tend to establish, at a minimum, knowledge by the third party that the fiduciary was endeavoring to breach his duty....") (emphasis added) with Restatement (Second) of Torts § 876 cmt. b (1977) ("If the encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is himself a tortfeasor and is responsible for the consequences of the other's act. This is true both when the act done is an intended trespass ... and when it is merely a negligent act....") and People v. Abbott, N.Y.App. Div., 84 A.D.2d 11, 445 N.Y.S.2d 344, 347 (1981) ("`[G]iving assistance or encouragement to one it is known will thereby engage in conduct dangerous to life should suffice for accomplice liability as to crimes defined in terms of recklessness or negligence.'") (quoting Lafave & Scott, Criminal Law, § 64 at 511).

[79] See Greenfield, Mem. Op. at *3; Assoc. Imports v. ASG Indus., Inc., Del. Ch., C.A. No. 5953, 1984 WL 19833, Duffy, J. (June 20, 1984) ("[K]nowledge and intentional complicity therein by Eberstadt [the third party] of the breach by Hubbard [the fiduciary] are essential."), aff'd sub. nom Hubbard v. Assoc. Imports, Inc., Del.Supr., 497 A.2d 787 (July 16, 1985) (ORDER). The court in Greenfield also observed: "It may be that some circumstances will arise in which the terms of the negotiated transaction themselves are so suspect as to permit, if proven, an inference of knowledge of an intended breach of trust." See Greenfield, Mem. Op. at *3.

[80] See Tomczak v. Morton Thiokol, Inc., Del. Ch., C.A. No. 7861, 1990 WL 42607, Hartnett, V.C. (April 5, 1990) ("Although Dow's purchases certainly had the effect of putting economic pressure on Morton Thiokol, what Dow essentially did was to simply pursue arm's-length negotiations with Morton Thiokol through their respective investment bankers in an effort to obtain Texize at the best price that it could."); Weinberger v. United Fin. Corp. of Cal., Del. Ch., C.A. No. 5915, 1983 WL 20290, Hartnett, V.C. (Oct. 13, 1983) (refusing to impose liability on offeror in a tender offer who negotiated with target at arm's-length to obtain the best price possible).

[81] Gilbert, 490 A.2d at 1058 ("[A]lthough an offeror may attempt to obtain the lowest possible price for stock through arm's-length negotiations with the target's board, it may not knowingly participate in the target board's breach of fiduciary duty by extracting terms which require the opposite party to prefer its interests at the expense of its shareholders."); Zirn v. VLI Corp., Del. Ch., C.A. No. 9488, 1989 WL 79963, Hartnett, V.C. (July 17, 1989) ("It can therefore be reasonably inferred that American Home was aware of the VLI directors' conflict [of interest] when it negotiated the Revised Agreement with the directors of VLI and, therefore, it was possible that American Home may have been afforded some advantage because of it."); Gilbert, 490 A.2d at 1057 ("By agreeing to purchase them from El Paso's directors, Burlington is chargeable with knowledge that El Paso's directors were preferring their interests to certain of its shareholders who had already tendered.").

[82] See Rio Grande Ind., 519 A.2d at 131 (asserting that civil conspiracy is "sometimes called `aiding and abetting'" and holding that the complaint did not allege facts supporting an inference that the third party "played any role" in the defendant directors' decision not to disclose information); Gilbert, 490 A.2d at 1058 (denying motion for summary judgment on civil conspiracy claim because a third party bidder "may not knowingly participate in the target board's breach of fiduciary duty by extracting terms which require the opposite party to prefer its interests at the expense of its shareholders"). Although there is a distinction between civil conspiracy and aiding and abetting, we do not find that distinction meaningful here. Compare Gilbert, 490 A.2d at 1057 ("It is well settled that a third party who knowingly participates in the breach of a fiduciary's duty becomes liable to the beneficiaries of the trust relationship.") with Nicolet v. Nutt. Inc., Del.Supr., 525 A.2d 146, 149-150 (1987) (defining a civil conspiracy as: "(1) A confederation or combination of two or more persons; (2) An unlawful act done in furtherance of the conspiracy; and (3) Actual damage.") (citing McLaughlin v. Copeland, D.Del., 455 F.Supp. 749, 752 (1978) aff'd, 3rd Cir., 595 F.2d 1213 (1979)).

[83] See July 1998 Mem. Op. at 10-11. It is worth noting that some courts have held that a complaint need not allege the absence of arm's-length negotiations. See Penn Mart, 298 A.2d at 351 (rejecting the argument "that the plaintiff must allege either that `the ... negotiations were not conducted at arms length (or) that IDS exerted an influence over the directors sufficient to infect their action with vitiating conflict of interest'"); In re Shoe-Town, Inc. Stockholders Litig., Del. Ch., C.A. No. 9483, 1990 WL 13475, Chandler, V.C. (Feb. 12, 1990) ("A plaintiff does not have to allege that negotiations were not conducted at arms-length or that the nonfiduciary exerted an influence over the directors.").

[84] Cf. Repairman's Service Corp. v. Nat'l Intergroup., Inc., Del. Ch., C.A. No. 7811, 1985 WL 11540, Walsh, V.C. (Mar. 15, 1985) (denying aiding and abetting claim because "there was intensive arm's-length bargaining between the parties with demands made and concessions granted on both sides" and "no indication in this record that the Bergen defendants conspired with their National counterparts to breach a duty owed to National shareholders with respect to the fashioning of the merger agreement or in the preparation or issuance of the prospectus"); In re Shoe-Town. Inc. Stockholders Litigation, Del. Ch., Consol. C.A. No. 9483, 1990 WL 13475, Chandler, C. (Feb. 12, 1990) (rejecting aiding and abetting claim because "[t]he complaint describes classic arms-length bargaining, not knowing participation in the breach of a fiduciary duty").

[85] Knightsbridge's conduct in the present case was, at best, on the borderline. As discussed in more detail below, we find particularly disturbing the allegation that Knightsbridge characterized its stock purchase agreement with the Trusts as an `acquisition' in its August 28, 1997 letter to the Frederick's board, despite the fact that Knightsbridge had only a conditional right to vote the Trusts' shares.

[86] July 1998 Mem. Op. at 14.

[87] DeBonaventura v. Nationwide Mut. Ins. Co., Del.Supr., 428 A.2d 1151, 1153 (1981) (citations omitted).

[88] Id.

[89] As the Court of Chancery observed, if the probability of the business opportunity is measured at this point, the plaintiffs' claim fails because, even if the Frederick's board issued a dilutive option to circumvent Knightsbridge's interest, the September 1997 merger agreement required the Frederick's board to grant Knightsbridge any option offered to third parties. This provision effectively precludes any expectation that Veritas' $9.00 per share offer could succeed after the board signed the merger agreement with Knightsbridge.

[90] Knightsbridge sent the letter including the alleged misrepresentation of its interests in the Trusts' shares on August 28, 1997. Knightsbridge sent other letters demanding consummation of the merger at $6.90 per share and threatening litigation against Frederick's on September 1 and 2, 1997.

[91] For example, the complaint alleges that Veritas pursued negotiations with Frederick's on September 3 and 5, that Veritas submitted a draft agreement on September 5, 1997, and that Veritas submitted a higher bid on September 11, 1997. In addition, the June 1997 merger agreement included a "fiduciary out" permitting the board to consider superior offers by third parties.

[92] See Bershad v. Curtiss-Wright Corp., Del. Supr., 535 A.2d 840, 845 (1987) ("Stockholders in Delaware corporations have a right to control and vote their shares in their own interest. They are limited only by any fiduciary duty owed to other stockholders. It is not objectionable that their motives may be for personal profit, or determined by whim or caprice, so long as they violate no duty owed other shareholders.") (citations omitted); see also July 1998 Mem. Op. at 15 (citing Bershad, 535 A.2d at 845; Emerson Radio Corp. v. Int'l Jensen Inc., Del. Ch. C.A. Nos. 15130 & 14992, 1996 WL 483086, Jacobs, V.C. (1996); Thorpe by Castleman v. CERBCO. Inc., Del.Supr., 676 A.2d 436, 444 (1996)).

[93] The Court of Chancery found the complaint lacking in part because it failed to allege that Knightsbridge "induced or caused the board of Frederick's to breach its fiduciary duties ...." July 1998 Mem. Op. at 15. The presence or absence of a breach of fiduciary duty is not relevant to this analysis because a fiduciary breach is not required to show intentional interference or causation of damages. 

[1175] Donald J. Wolfe, Jr., Esquire, Kevin R. Shannon, Esquire, Christopher N. Kelly, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, for Defendants Below-Appellants Michael Enright, Christopher Codeanne, James A. Harper, Michael Heffernan and Laura Shawver; Kurt Heyman, Esquire, Dawn Kurtz Crompton, Esquire, Proctor Heyman LLP, Wilmington, Delaware, for Defendants Below-Appellants Craig A. Collard and Robert M. Stephan; Anthony M. Candido, Esquire (Argued), Robert C. Myers, Esquire, John P. Alexander, Esquire, Clifford Chance U.S. LLP, New York, New York, for Defendants Below-Appellants in In re Cornerstone Therapeutics Inc. Stockholder Litigation.

Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire, Gina M. Serra, Esquire, Jeremy J. Riley, Esquire, Rigrodsky & Long, P.A., Wilmington, Delaware; J. Brandon Walker, Esquire, Melissa A. Fortunato, Esquire, Kirby McInerney LLP, New York, New York; Shane Rowley, Esquire, Levi & Korsinsky LLP, New York, New York; Chet B. Waldmann, Esquire (Argued), Joshua H. Saltzman, Esquire, Wolf Popper LLP, New York, New York, for Plaintiffs Below-Appellants Edwin Myruski, James Parker, Daniel Blaschak, and David Julier, in In re Cornerstone Therapeutics Inc. Stockholder Litigation.

S. Mark Hurd, Esquire (Argued), Matthew R. Clark, Esquire, Thomas P. Will, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Robert H. Pees, Esquire, Akin Gump Strauss Hauer & Field LLP, New York, New York, for Defendants Below-Appellants Raymond Leal, Yaoguo Pan, and Xiaosong Hu.

Seth D. Rigrodsky, Esquire (Argued), Brian D. Long, Esquire, Gina M. Serra, Esquire, Jeremy J. Riley, Esquire, Rigrodsky & Long, P.A., Wilmington, Delaware; Donald J. Enright, Esquire, Levi & Korinsky LLP, Washington, DC; Gustavo F. Bruckner, Esquire, Ofer Ganot, Esquire, Pomerantz LLP, New York, New York, for Plaintiffs Below-Appellees Phillip Meeks, Ernesto Rodriguez, and Alan Hall.

Before STRINE, Chief Justice; HOLLAND and VAUGHN, Justices; and BUTLER and CLARK, Judges.^[1]

STRINE, Chief Justice:

I. INTRODUCTION

These appeals were scheduled for argument on the same day because they turn on a single legal question: in an action for damages against corporate fiduciaries, where the plaintiff challenges an interested transaction that is presumptively subject to entire fairness review, must the plaintiff plead a non-exculpated claim against the disinterested, independent directors to survive a motion to dismiss by those directors?^[2] We answer that question in the affirmative. A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct—be it Revlon,^[3] [1176] Unocal,^[4] the entire fairness standard, or the business judgment rule.

The Court of Chancery in both of these cases denied the defendants' motions to dismiss because it read the precedent of this Court to require doing so, regardless of the exculpatory provision in each company's certificate of incorporation. Under the Court of Chancery's analysis, even if the plaintiffs could not plead a non-exculpated claim against any particular director, as long as the underlying transaction was subject to the entire fairness standard of review, and the plaintiffs were therefore able to state non-exculpated claims against the interested parties and their affiliates, all of the directors were required to remain defendants until the end of litigation. The Court of Chancery was reluctant to embrace that result but felt that it was the reading most faithful to our precedent.

In this decision, we hold that even if a plaintiff has pled facts that, if true, would require the transaction to be subject to the entire fairness standard of review, and the interested parties to face a claim for breach of their duty of loyalty, the independent directors do not automatically have to remain defendants. When the independent directors are protected by an exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated claim against them, those directors are entitled to have the claims against them dismissed, in keeping with this Court's opinion in Malpiede v. Townson^[5] and cases following that decision.^[6] Accordingly, we remand both of these cases to allow the Court of Chancery to determine if the plaintiffs have sufficiently pled non-exculpated claims against the independent directors.

II. BACKGROUND

These appeals both involve damages actions by stockholder plaintiffs arising out of mergers in which the controlling stockholder, who had representatives on the board of directors, acquired the remainder of the shares that it did not own in a Delaware public corporation.^[7] Both mergers [1177] were negotiated by special committees of independent directors, were ultimately approved by a majority of the minority stockholders, and were at substantial premiums to the pre-announcement market price.^[8] Nonetheless, the plaintiffs filed suit in the Court of Chancery in each case, contending that the directors had breached their fiduciary duty by approving transactions that were unfair to the minority stockholders.

In both appeals, it is undisputed that the companies did not follow the process established in Kahn v. M & F Worldwide Corporation as a safe harbor to invoke the business judgment rule in the context of a self-interested transaction.^[9] Thus, the entire fairness standard presumptively applied, although the burden of persuasion on that issue might ultimately rest with the plaintiffs.^[10] In both cases, the defendant directors were insulated from liability for monetary damages for breaches of the fiduciary duty of care by an exculpatory charter provision adopted in accordance with 8 Del. C. § 102(b)(7). Despite that provision, the plaintiffs in each case not only sued the controlling stockholders and their affiliated directors, but also sued the independent directors who had negotiated and approved the mergers.

In the first of these cases to be decided, In re Cornerstone Therapeutics Inc. Stockholder Litigation, the independent director defendants moved to dismiss on the grounds that the plaintiffs had failed to plead any non-exculpated claim against them.^[11] The independent directors argued that although the entire fairness standard applied to the Court of Chancery's review of the underlying transaction, and thus the controlling stockholder and its affiliated directors were at risk of being found liable for breaches of the duty of loyalty, the plaintiffs still bore the burden to plead non-exculpated claims against the independent directors.^[12] The independent directors noted that this Court held in Malpiede v. Townson that, in the analogous context of review under the Revlon standard, plaintiffs seeking damages must plead non-exculpated claims against each individual director or risk dismissal.^[13] The [1178] independent directors also pointed out that in a number of cases, including several affirmed by this Court, the Court of Chancery dismissed claims against independent directors when the plaintiffs failed to plead non-exculpated claims for breaches of fiduciary duty, notwithstanding the applicability of entire fairness review to the transaction.^[14]

In response, the plaintiffs argued that the Court of Chancery could not grant the independent directors' motion to dismiss, regardless of whether they had sufficiently pled non-exculpated claims.^[15] Under their reading of language in two of the four decisions issued by this Court in the extensive Emerald Partners litigation,^[16] the plaintiffs contended that they could defeat the independent directors' motions to dismiss solely by establishing that the underlying transaction was subject to the entire fairness standard.^[17] In the first of the two relevant Emerald Partners decisions ("Emerald I"), this Court determined that the plaintiffs had sufficiently pled duty of loyalty claims against the disinterested directors that were "intertwined" with their duty of care claims.^[18] In the second of the two decisions ("Emerald II"), this Court stated that "when entire fairness is the applicable standard of judicial review, a determination that the director defendants are exculpated from paying monetary damages can be made only after the basis for their liability has been decided," on a fully-developed factual record.^[19] The Cornerstone plaintiffs argued that this language in Emerald II should be read broadly to require the court to deny independent directors' motions to dismiss whenever the applicable standard of review [1179] is entire fairness.^[20] Although the Court of Chancery suggested that it believed that the defendants' view of the law was the preferable one,^[21] it nonetheless concluded that it was bound to deny the motion because its reading of the Emerald II decision was the one advocated by the plaintiffs.^[22]

In In re Zhongpin Stockholders Litigation, the independent director defendants also argued that the claims against them should be dismissed because the plaintiffs had failed to plead any non-exculpated claims.^[23] The Court of Chancery in Zhongpin deferred to Cornerstone's interpretation of precedent^[24] and held that the claims against the independent directors survived their motion to dismiss "regardless of whether the Complaint state[d] a non-exculpated claim" because the transaction was subject to entire fairness review.^[25]

In each case, the Court of Chancery did not analyze the plaintiffs' duty of loyalty claims against the independent directors because it determined that it was required to deny their motions to dismiss regardless of whether such claims had been sufficiently pled.^[26] But, recognizing the important and uncertain issue of corporate law at stake, the Court of Chancery in each case recommended certification of an interlocutory appeal to this Court to determine whether its reading of precedent was correct.

III. ANALYSIS

In answering the legal question raised by these appeals, we acknowledge that the body of law relevant to these disputes presents a debate between two competing but colorable views of the law. These cases thus exemplify a benefit of careful employment of the interlocutory appeal process: to enable this Court to clarify precedent that could arguably be read in two different ways before litigants incur avoidable costs.

We now resolve the question presented by these cases by determining that plaintiffs must plead a non-exculpated claim for breach of fiduciary duty against an independent director protected by an exculpatory charter provision, or that director will be entitled to be dismissed from the suit. That rule applies regardless of the underlying standard of review for the transaction. When a director is protected by an exculpatory charter provision, a plaintiff can survive a motion to dismiss by that director defendant by pleading facts supporting a rational inference that the [1180] director harbored self-interest adverse to the stockholders' interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith.^[27] But the mere fact that a plaintiff is able to plead facts supporting the application of the entire fairness standard to the transaction, and can thus state a duty of loyalty claim against the interested fiduciaries, does not relieve the plaintiff of the responsibility to plead a non-exculpated claim against each director who moves for dismissal.^[28]

No doubt, the invocation of the entire fairness standard has a powerful pro-plaintiff effect against interested parties.^[29] When that standard is invoked at the pleading stage, the plaintiffs will be able to survive a motion to dismiss by interested parties regardless of the presence of an exculpatory charter provision because their conflicts of interest support a pleading-stage [1181] inference of disloyalty.^[30] Indeed, as to the interested party itself, a finding of unfairness after trial will subject it to liability for breach of the duty of loyalty regardless of its subjective bad faith.^[31]

The stringency of after-the-fact entire fairness review by the court intentionally puts strong pressure on the interested party and its affiliates to deal fairly before-the-fact when negotiating an interested transaction. To accomplish this, the burden of proving entire fairness in an interested merger falls on the "the controlling or dominating shareholder proponent of the transaction."^[32] But applying the entire fairness standard against interested parties does not relieve plaintiffs seeking damages of the obligation to plead non-exculpated claims against each of the defendant directors.^[33]

In Malpiede, this Court analyzed the effect of a Section 102(b)(7) provision on a due care claim against directors who approved a transaction which the plaintiffs argued should be subject to review under the Revlon standard. This Court noted that although "plaintiffs are entitled to all reasonable inferences flowing from their pleadings, ... if those inferences do not support a valid legal claim, the complaint should be dismissed."^[34] Because a director will only be liable for monetary damages if she has breached a non-exculpated duty, a plaintiff who pleads only a due care claim against that director has not set forth any grounds for relief. In such a case, "as a matter of law [] then Section 102(b)(7) would bar the claim."^[35]

[1182] Nevertheless, the plaintiffs in each of these cases contend that their exculpated claims against the independent directors cannot be dismissed solely because the transaction at issue is subject to entire fairness review. The plaintiffs argue that they should be entitled to an automatic inference that a director facilitating an interested transaction is disloyal because the possibility of conflicted loyalties is heightened in controller transactions, and the facts that give rise to a duty of loyalty breach may be unknowable at the pleading stage.^[36] But there are several problems with such an inference: to require independent directors to remain defendants solely because the plaintiffs stated a non-exculpated claim against the controller and its affiliates would be inconsistent with Delaware law and would also increase costs for disinterested directors, corporations, and stockholders, without providing a corresponding benefit.

First, this Court and the Court of Chancery have emphasized that each director has a right to be considered individually when the directors face claims for damages in a suit challenging board action.^[37] And under Delaware corporate law, that individualized consideration does not start with the assumption that each director was disloyal; rather, "independent [1183] directors are presumed to be motivated to do their duty with fidelity."^[38] Thus, in Aronson v. Lewis, this Court emphasized that the mere fact that a director serves on the board of a corporation with a controlling stockholder does not automatically make that director not independent.^[39] This Court has similarly refused to presume that an independent director is not entitled to the protection of the business judgment rule solely because the controlling stockholder may itself be subject to liability for breach of the duty of loyalty if the transaction was not entirely fair to the minority stockholders.^[40]

Adopting the plaintiffs' approach would not only be inconsistent with these basic tenets of Delaware law, it would likely create more harm than benefit for minority stockholders in practice.^[41] Our common law of corporations has rightly emphasized [1184] the need for independent directors to be willing to say no to interested transactions proposed by controlling stockholders.^[42] For that reason, our law has long inquired into the practical negotiating power given to independent directors in conflicted transactions.^[43] Although it is wise for our law to focus on whether the independent directors can say no, it does not follow that it is prudent to create an invariable rule that any independent director who says yes to an interested transaction subject to entire fairness review must remain as a defendant until the end of the litigation, regardless of the absence of any evidence suggesting that the director acted for an improper motive.

For more than a generation, our law has recognized that the negotiating efforts of independent directors can help to secure transactions with controlling stockholders that are favorable to the minority.^[44] Indeed, respected scholars have found evidence that interested transactions subject to special committee approval are often priced on terms that are attractive to minority stockholders.^[45] We decline to adopt an approach that would create incentives for independent directors to avoid serving as special committee members, or to reject transactions solely because their role in negotiating on behalf of the stockholders would cause them to remain as defendants until the end of any litigation challenging the transaction.^[46]

[1185] As is well understood, the fear that directors who faced personal liability for potentially value-maximizing business decisions might be dissuaded from making such decisions is why Section 102(b)(7) was adopted in the first place. As this Court explained in Malpiede, "Section 102(b)(7) was adopted by the Delaware General Assembly in 1986 following a directors and officers insurance liability crisis and the 1985 Delaware Supreme Court decision in Smith v. Van Gorkom."^[47] Because of that "crisis," the General Assembly feared that directors would not be willing to make decisions that would benefit stockholders if they faced personal liability for making them. The purpose of Section 102(b)(7) was to "free[] up directors to take business risks without worrying about negligence lawsuits."^[48] Establishing a rule that all directors must remain as parties in litigation involving a transaction with a controlling stockholder would thus reduce the benefits that the General Assembly anticipated in adopting Section 102(b)(7).

We understand that the plaintiffs, and certain members of the Court of Chancery, have read the decisions this Court issued in the complex circumstances of the Emerald Partners litigation to support a different conclusion than we reach here. But the Court in Emerald Partners was focused on a separate question; namely, whether courts can consider the effect of a Section 102(b)(7) provision before trial when the plaintiffs have pled facts supporting the inference not only that each director breached not just his duty of care, but also his duty of loyalty, when the applicable standard of review of the underlying transaction is entire fairness.^[49] In that circumstance, the Court held that the [1186] determination of whether any failure of the putatively independent directors was the result of disloyalty or a lapse in care was best determined after a trial, because the substantive fairness inquiry would shed light on why the directors acted as they did.^[50] The sentence in Emerald II that the plaintiffs claim is dispositive here must be understood in that context, as referring to a case where there was a viable, non-exculpated loyalty claim against each putatively independent director. The Emerald Partners litigation thus did not answer the specific question at issue in these appeals, whether the application of the entire fairness standard requires the Court of Chancery to deny a motion to dismiss by independent directors even when the plaintiffs may not have sufficiently pled a non-exculpated claim against those directors. Indeed, much of the language in the Emerald Partners decisions issued by this Court is consistent with the answer we reach here. For example, this Court observed in Emerald II that:

The rationale of Malpiede constitutes judicial cognizance of a practical reality: unless there is a violation of the duty of loyalty or the duty of good faith, a trial on the issue of entire fairness is unnecessary because a Section 102(b)(7) provision will exculpate director defendants from paying monetary damages that are exclusively attributable to a violation of the duty of care. The effect of our holding in Malpiede is that, in actions against the directors of Delaware corporations with a Section 102(b)(7) charter provision, a shareholder's complaint must allege well-pled facts that, if true, implicate breaches of loyalty or good faith.^[51]

Thus, to the extent that other isolated statements in Emerald Partners could be interpreted as inconsistent with the result we reach today, we clarify that the Emerald Partners decisions should be read in their case-specific context and not for the broad proposition that the plaintiffs advocate. The reading of the Emerald Partners decisions we embrace is also the one adopted by the Court of Chancery itself in DiRienzo v. Lichtenstein.^[52] In that case, the Court of Chancery recognized that the Emerald Partners decisions had to be read in the context of their facts, where there was sufficient record evidence to attribute any lack of effectiveness in the putatively independent directors' handling of the transaction to either a breach of the duty of loyalty (e.g., as the result of bad faith) or a lack of care. The Court of Chancery thus observed that "the directors in Emerald Partners were precluded from relying on a 102(b)(7) charter provision by virtue of their conduct, not because the transaction was subject to entire fairness review for other reasons."^[53] In other words, DiRienzo interpreted the Emerald Partners decisions as standing for the mundane proposition that a defendant cannot obtain dismissal on the basis of an exculpatory provision when there is evidence that he committed a non-exculpated breach of fiduciary duty.^[54]

Thus, when a complaint pleads facts creating an inference that seemingly [1187] independent directors approved a conflicted transaction for improper reasons, and thus, those directors may have breached their duty of loyalty, the pro-plaintiff inferences that must be drawn on a motion to dismiss counsels for resolution of that question of fact only after discovery.^[55] By contrast, when the plaintiffs have pled no facts to support an inference that any of the independent directors breached their duty of loyalty, fidelity to the purpose of Section 102(b)(7) requires dismissal of the complaint against those directors. Accordingly, we reverse the judgments of the Court of Chancery denying the independent directors' motions to dismiss, and remand each case for the Court of Chancery to determine if the plaintiffs have sufficiently pled facts suggesting that the independent directors committed a non-exculpated breach of their fiduciary duty.

[1] Sitting by designation under Del. Const. art. IV, § 12.

[2] We have consolidated these appeals for the purpose of issuing one consistent answer to the single question they pose.

[3] See Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1986).

[4] See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985).

[5] See Malpiede v. Townson, 780 A.2d 1075, 1094 (Del.2001).

[6] See, e.g., In re Morton's Rest. Grp., Inc. S'holders Litig., 74 A.3d 656 (Del. Ch.2013); see also DiRienzo v. Lichtenstein, 2013 WL 5503034 (Del. Ch. Sept. 30, 2013); In re S. Peru Copper Corp. S'holder Derivative Litig., 52 A.3d 761 (Del. Ch.2011), aff'd sub nom., Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del.2012).

[7] These cases are In re Zhongpin Inc. S'holders Litig. and In re Cornerstone Therapeutics Inc. S'holder Litig. In Zhongpin, Xianfu Zhu, the controlling stockholder, CEO and Chairman of the Board of Zhongpin Inc., a publicly-traded Delaware corporation engaged in meat and food processing, purchased the out-standing shares he did not own through a going-private merger that closed on June 27, 2013. Before the merger, Zhu owned only 17.3% of the company, but the Court of Chancery determined that the plaintiffs had raised an inference that Zhu held a controlling interest because of his level of control over the management and operations of the company. 2014 WL 6735457, *8 (Del. Ch. Nov. 26, 2014) [hereinafter Zhongpin]. In Cornerstone, Chiesi Farmaceutici S.p.A., a privately-held drug maker headquartered in Parma, Italy, acquired all of the stock that it did not own in Cornerstone Therapeutics Inc., a public Delaware pharmaceutical company. Before the merger, Chiesi was the beneficial owner of 65.4% of Cornerstone common stock. 2014 WL 4418169, *2 (Del. Ch. Sept. 10, 2014) [hereinafter Cornerstone]. For purposes of these appeals, none of the parties in either case dispute the Court of Chancery's determination that the entire fairness standard of review presumptively applies because the going-private transaction at issue involved a controlling stockholder. Nothing in this opinion should be construed as our own evaluation of these issues. Rather, we simply accept that this is the premise on which the common question presented to us in these appeals rests.

[8] Zhu acquired the remaining Zhongpin stock for $13.50 per share in cash, a 47% premium over the closing price of the company's stock the day before the announcement of Zhu's proposal. See App. to Zhongpin Opening Br. at 63. Chiesi acquired the remaining Cornerstone stock it did not own for $9.50 per share in cash, a 78% premium over the closing price on the date that Chiesi delivered its offer letter to the board. See App. to Cornerstone Opening Br. at 89.

[9] 88 A.3d 635, 644 (Del.2014) ("We hold that business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.").

[10] See id. at 653-54; see also Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110 (Del.1994).

[11] Cornerstone, 2014 WL 4418169, at *5.

[12] See id.

[13] 780 A.2d 1075, 1083-84 (Del.2001) ("Although the Revlon doctrine imposes enhanced judicial scrutiny of certain transactions involving a sale of control, it does not eliminate the requirement that plaintiffs plead sufficient facts to support the underlying claims for a breach of fiduciary duties in conducting the sale."); id. at 1094 ("The plaintiffs are entitled to all reasonable inferences flowing from their pleadings, but if those inferences do not support a valid legal claim, the complaint should be dismissed without the need for the defendants to file an answer and without proceeding with discovery. Here we have assumed, without deciding, that the amended complaint on its face states a due care claim. Because we have determined that the complaint fails properly to invoke loyalty and bad faith claims, we are left with only a due care claim. Defendants had the obligation to raise the bar of Section 102(b)(7) as a defense, and they did. As plaintiffs conceded in oral argument before this Court, if there is only an unambiguous, residual due care claim and nothing else—as a matter of law—then Section 102(b)(7) would bar the claim. Accordingly, the Court of Chancery did not err in dismissing the plaintiffs due care claim in this case.").

[14] See, e.g., DiRienzo v. Lichtenstein, 2013 WL 5503034 (Del. Ch. Sept. 30, 2013); In re S. Peru Copper Corp. S'holder Derivative Litig., 52 A.3d 761 (Del. Ch.2011), aff'd sub nom., Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del.2012); In re Frederick's of Hollywood, Inc., 2000 WL 130630 (Del. Ch.2000), aff'd sub nom., Malpiede v. Townson, 780 A.2d 1075 (Del. 2001); In re Lukens Inc. S'holders Litig., 757 A.2d 720 (Del. Ch.1999); In re Gen. Motors Class H S'holders Litig., 734 A.2d 611 (Del. Ch.1999).

[15] Cornerstone, 2014 WL 4418169, at *6.

[16] See Emerald Partners v. Berlin, 840 A.2d 641 (Del.2003); Emerald Partners v. Berlin, 787 A.2d 85 (Del.2001) [hereinafter Emerald II]; Emerald Partners v. Berlin, 726 A.2d 1215 (Del.1999) [hereinafter Emerald I]; Emerald Partners v. Berlin, 552 A.2d 482 (Del. 1988).

[17] See Cornerstone, 2014 WL 4418169, at *6.

[18] Emerald I, 726 A.2d at 1218. The Court found the following facts alleged by the plaintiffs to be relevant in determining that the defendants' motion for summary judgment should be denied: "i) [the inside directors'] improper participation in the deliberations of the `non-affiliated' directors; ii) [the controlling director's] improper contact with [the investment advisor,] Bear Stearns; iii) the complete lack of negotiation of the exchange ratio; iv) the utter disregard for the committee process; and v) the failure to seek an updated fairness opinion." Id. at 1220 n. 5 (internal quotation marks omitted).

[19] Emerald II, 787 A.2d at 94.

[20] See Cornerstone, 2014 WL 4418169, at *6.

[21] See id. at *10 ("There is much, in my view, to recommend [a particularized] pleading requirement [for independent directors]. It is consistent with our treatment of directors alleged to have breached duties in non-controller-dominated transactions, where the requirement of specific pleading of non-exculpated breaches of duty allows management of the corporation to proceed unaffected by frivolous litigation and protects the directors' ability to pursue appropriate levels of risk without fear of liability, so long as their actions are consistent with the duty of loyalty.").

[22] See id. at *12.

[23] See App. to Zhongpin Opening Br. at 541 (Oral Arg't Defs.' Mot. to Dismiss, July 24, 2014).

[24] See Zhongpin, 2014 WL 6735457, at *12 ("Although In re Cornerstone questioned the merit of forcing disinterested directors to face the same pleading standard as interested fiduciaries in cases subject to entire fairness, the Court's examination of precedent left it with no other choice.").

[25] Id.

[26] See Zhongpin, 2014 WL 6735457, at *12; Cornerstone, 2014 WL 4418169, at *12.

[27] See, e.g., Malpiede, 780 A.2d 1075, 1094 (Del.2001) (holding that on a motion to dismiss, "[a] plaintiff must allege well-pleaded facts stating a claim on which relief may be granted. Had plaintiff alleged such well-pleaded facts supporting a breach of loyalty or bad faith claim, the Section 102(b)(7) charter provision would have been unavailing as to such claims, and this case would have gone forward"); Orman v. Cullman, 794 A.2d 5 (Del. Ch.2002).

[28] See Malpiede, 780 A.2d at 1094; see also Emerald II, 787 A.2d at 92 (citing Malpiede with approval for the proposition that "unless there is a violation of the duty of loyalty or the duty of good faith, a trial on the issue of entire fairness is unnecessary because a Section 102(b)(7) provision will exculpate director defendants from paying monetary damages that are exclusively attributable to a violation of the duty of care"); Emerald I, 726 A.2d at 1224 ("Nonetheless, where the factual basis for a claim solely implicates a violation of the duty of care, this Court has indicated that the protections of such a [Section 102(b)(7)] charter provision may properly be invoked and applied."); Arnold v. Soc'y for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994); Wayne Cnty. Employees' Ret. Sys. v. Corti, 2009 WL 2219260 (Del. Ch. July 24, 2009), aff'd, 996 A.2d 795 (Del.2010) (granting defendants' motion to dismiss when plaintiffs failed to state a non-exculpated claim against the director defendants for breach of fiduciary duty); In re Lukens Inc. S'holders Litig., 757 A.2d 720, 734 (Del. Ch.1999), aff'd sub nom., Walker v. Lukens, Inc., 757 A.2d 1278 (Del.2000) (same).

[29] See, e.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del.1989) (internal citations omitted) (quoting AC Acquisitions v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch.1986)) ("Obviously, application of the correct analytical framework is essential to a proper review of challenges to the decision-making processes of a corporate board. [B]ecause the effect of the proper invocation of the business judgment rule is so powerful and the standard of entire fairness so exacting, the determination of the appropriate standard of judicial review frequently is determinative of the outcome of derivative litigation."); In re Trados Inc. S'holder Litig., 73 A.3d 17, 44 (Del. Ch.2013) ("Entire fairness, Delaware's most onerous standard, applies when the board labors under actual conflicts of interest. Once entire fairness applies, the defendants must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price. Not even an honest belief that the transaction was entirely fair will be sufficient to establish entire fairness. Rather, the transaction itself must be objectively fair, independent of the board's beliefs.") (internal citations and quotation marks omitted); Edward P. Welch, et al., Mergers & Acquisitions Deal Litigation Under Delaware Corporation Law § 4.02[A][2] (2014) ("The applicable standard of review can have nearly dispositive consequences in deal litigation alleging a breach of fiduciary duty. When a decision is made by a majority of well-informed, disinterested, and independent directors, that decision is generally protected by the deferential business judgment rule.... When the business judgment rule is overcome, and/or when a controlling stockholder stands on both sides of a challenged transaction, the courts may apply the more rigorous entire fairness standard of review.").

[30] See, e.g., Gantler v. Stephens, 965 A.2d 695 (Del.2009) (holding that the plaintiffs had "alleged specific conduct from which a duty of loyalty violation can reasonably be inferred," and thus, finding that the Court of Chancery had erred in dismissing the relevant counts against the defendant directors); Kahn v. Lynch Commc'ns Syst., Inc., 638 A.2d 1110, 1115 (Del.1994).

[31] See, e.g., Venhill Ltd. P'ship v. Hillman, 2008 WL 2270488, at *22 (Del. Ch. June 3, 2008) ("As I understand it, only the self-dealing director would be subject to damages liability for the gap between a fair price and the deal price without an inquiry into his subjective state of mind. Why? Because under the traditional operation of the entire fairness standard, the self-dealing director would have breached his duty of loyalty if the transaction was unfair, regardless of whether he acted in subjective good faith. After all, that is the central insight of the entire fairness test, which is that when a fiduciary self-deals he might unfairly advantage himself even if he is subjectively attempting to avoid doing so."); In re PNB Holding Co. S'holders Litig., 2006 WL 2403999, *22 n. 117 (Del. Ch. Aug. 18, 2006) ("I perceive no basis in this trial record to conclude that the PNB directors intended to deal unfairly with the departing PNB stockholders; that is, that they in bad faith sought to underpay in the Merger.... In other words, although I find for structural reasons that the directors owed a duty of fair treatment to the departing minority, and fell short of meeting that duty, I do not find that they fell short out of bad faith.").

[32] Lynch, 638 A.2d at 1117 (citing Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983)); see also Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 110 (Del.1952) ("Since [the interested party] stand[s] on both sides of the transaction, they bear the burden of establishing its entire fairness, and it must pass the test of careful scrutiny by the courts.").

[33] We focus here on damages because that is the issue before us. The entire fairness doctrine also has a potent effect in cases where equitable relief, such as rescission, is a viable remedy, but the existence of a Section 102(b)(7) charter provision might not have the same case-dispositive effect under those circumstances. See, e.g., London v. Tyrrell, 2010 WL 877528, at *18 (Del. Ch. Mar. 11, 2010) ("Delaware law permits a suit seeking rescission to go forward despite a § 102(b)(7) provision protecting directors against monetary judgments.").

[34] Malpiede, 780 A.2d 1075, 1094 (Del.2001).

[35] Id.; see also In re Synthes, Inc. S'holder Litig., 50 A.3d 1022, 1032 (Del. Ch.2012) ("Because the directors on the Board are protected by the § 102(b)(7) provision exculpating them for personal liability stemming from a breach of the duty of care, the complaint must be dismissed against the directors unless the plaintiffs have successfully pled non-exculpated claims for breach of the duty of loyalty against them.").

[36] See Cornerstone, 2014 WL 4418169, at *11; Zhongpin Opening Br. at 21-22.

[37] See, e.g., McMullin v. Beran, 765 A.2d 910, 923 (Del.2000) ("In assessing director independence, Delaware courts apply a subjective `actual person' standard to determine whether a `given' director was likely to be affected in the same or similar circumstances."); Smith v. Van Gorkom, 488 A.2d 858, 899 (Del.1985) (denying motion for reargument brought by individual directors complaining that their individual responsibility was not considered by the Court, but only because those directors had made no effort earlier in the case to present a defense distinct from the rest of the board, even though "a special opportunity was afforded the individual defendants... to present any factual or legal reasons why each or any of them should be individually treated" at oral argument); Chen v. Howard-Anderson, 87 A.3d 648, 677 (Del. Ch.2014) (quoting In re Emerging Commc'ns S'holders Litig., 2004 WL 1305745, at *38 (Del. Ch. May 3, 2004) ("The liability of the directors must be determined on an individual basis because the nature of their breach of duty (if any), and whether they are exculpated from liability for that breach, can vary for each director.")); In re S. Peru Copper Corp. S'holder Derivative Litig., 52 A.3d 761, 787 n. 72 (Del. Ch.2011) ("The entire fairness standard ill suits the inquiry whether disinterested directors who approve a self-dealing transaction and are protected by an exculpatory charter provision authorized by 8 Del. C. § 102(b)(7) can be held liable for breach of fiduciary duties. Unless there are facts suggesting that the directors consciously approved an unfair transaction, the bad faith preference for some other interest than that of the company and the stockholders that is critical to disloyalty is absent. The fact that the transaction is found to be unfair is of course relevant, but hardly sufficient, to that separate, individualized inquiry."), aff'd sub nom., Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del.2012); Steinman v. Levine, 2002 WL 31761252, *15 n. 81 (Del. Ch. Nov. 27, 2002) (holding that a plaintiff "is required to identify specific acts of individual defendants... for his claim to survive"), aff'd, 822 A.2d 397 (Del.2003); Shandler v. DLJ Merchant Banking, Inc., 2010 WL 2929654, *12 (Del. Ch. July 26, 2010) (assessing allegations against directors separately to determine whether the complaint stated a non-exculpated claim for relief); 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1248 (3d ed. 2015) ("[I]n order to state a claim for relief, actions brought against multiple defendants must clearly specify the claims with which each individual defendant is charged.").

[38] In re MFW S'holders Litig., 67 A.3d 496, 528 (Del. Ch.2013) ("Although it is possible that there are independent directors who have little regard for their duties or for being perceived by their company's stockholders (and the larger network of institutional investors) as being effective at protecting public stockholders, the court thinks they are likely to be exceptional, and certainly our Supreme Court's jurisprudence does not embrace such a skeptical view."), aff'd sub nom., Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del.2014); see also Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048 (Del.2004) ("[D]irectors are entitled to a presumption that they were faithful to their fiduciary duties."); Aronson v. Lewis, 473 A.2d 805, 815 (Del.1984); Robinson v. Pittsburgh Oil Ref. Corp., 126 A. 46, 48 (Del. Ch.1924) ("[T]he sale in question must be examined with the presumption in its favor that the directors who negotiated it honestly believed that they were securing terms and conditions which were expedient and for the corporation's best interests.").

[39] See, e.g., Aronson, 473 A.2d at 815 ("[E]ven proof of majority ownership of a company does not strip the directors of the presumptions of independence, and that their acts have been taken in good faith and in the best interests of the corporation. There must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person.").

[40] See S. Peru, 52 A.3d at 785 (Del. Ch.2011) (determining, after trial, that the controller and its affiliated directors were liable for damages because the interested transaction at issue was not entirely fair to the minority stockholders, even though the independent directors had properly been dismissed on summary judgment "because the plaintiff had failed to present evidence supporting a non-exculpated breach of their fiduciary duty of loyalty"); see also Aronson, 473 A.2d at 816 (holding "that in the demand-futile context a plaintiff charging domination and control of one or more directors must allege particularized facts," i.e., specific facts that each director was violating their duty of loyalty, to rebut the protection of the business judgment rule).

[41] It also seems unlikely that the rule we embrace today will create any problem of under-compensation for minority stockholders who challenge controller transactions. Interested fiduciaries, often the proverbial deep-pocketed defendants, will continue to be required to prove that the transaction was entirely fair to the minority stockholders, because the plaintiffs' well-pled claims against the interested parties in a controller transaction cannot be dismissed before trial, regardless of whether the independent directors remain as defendants. And if plaintiffs do not have sufficient evidence to plead non-exculpated claims against the independent directors at the pleading stage, they may bring such claims later. Because most transactions are brought immediately after—or even before—the announcement of the challenged, but still typically unconsummated, transaction, plaintiffs will usually have ample time to bring well-pled claims that the independent directors breached their duty of loyalty within the three-year statute of limitations period. See 10 Del. C. § 8106; see also Elliott J. Weiss & Lawrence J. White, File Early, Then Free Ride: How Delaware Law (Mis)shapes Shareholder Class Actions, 57 VAND. L. REV. 1797, 1827 (2004) (finding that the large majority of transactions are challenged within two days of announcement and before consummation).

[42] See, e.g., In re MFW S'holders Litig., 67 A.3d at 518 ("To the extent that the fundamental rule is that a special committee should be given standard-influencing effect if it replicates arm's-length bargaining, that test is met if the committee is independent, can hire its own advisors, has a sufficient mandate to negotiate and the power to say no, and meets its duty of care."); see also Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1119 (Del. 1994) (quoting In re First Boston, Inc. S'holders Litig., 1990 WL 78836, at *15-16 (Del. Ch. June 7, 1990)) ("The power to say no is a significant power. It is the duty of directors serving on [an independent] committee to approve only a transaction that is in the best interests of the public shareholders, to say no to any transaction that is not fair to those shareholders and is not the best transaction available.").

[43] E.g., Kahn v. Tremont Corp., 694 A.2d 422, 429 (Del.1997).

[44] Weinberger v. UOP, Inc., 457 A.2d 701, 709 n. 7 (Del.1983) ("Although perfection is not possible, or expected, the result here could have been entirely different if UOP had appointed an independent negotiating committee of its outside directors to deal with Signal at arm's length.").

[45] See, e.g., Thomas W. Bates, Michael L. Lemmon, & James S. Linck, Shareholder Wealth Effects and Bid Negotiation in Freeze-out Deals: Are Minority Shareholders Left Out in the Cold?, 81 J. FIN. ECON. 681, 706 (2006) (reporting evidence to support the hypothesis that "active board representation and implicit legal recourse" benefit stockholders in the tender offer context); Guhan Subramanian, Fixing Freezeouts, 115 YALE L.J. 2, 25 (2005) (discussing the role of "vigorous bargaining" by special committees in increasing premiums for minority stockholders in merger freezeouts, compared to tender offer freezeouts effected without special committees); James F. Cotter, Anil Shivdasani, & Marc Zenner, Do Independent Directors Enhance Target Shareholder Wealth During Tender Offers?, 43 J. OF FIN. ECON. 195 (1997) (finding that, in the context of a tender offer, the presence of an independent board increases the tender offer bid premium and overall stockholder gains).

[46] Such an approach might also provide incentives for a controlling stockholder to proceed by means of a tender offer to the minority stockholders, and thus potentially avoid the need to actively negotiate with a special committee. See generally In re Siliconix Inc. S'holders Litig., 2001 WL 716787 (Del. Ch. June 19, 2001) (holding, under its reading of Solomon v. Pathe Commc'ns Corp., 672 A.2d 35 (Del.1996), and other similar cases, that a going-private tender transaction made by way of a tender offer is not subject to entire fairness review); but see In re Cox Commc'ns, Inc. S'holders Litig., 879 A.2d 604, 646 (Del. Ch.2005) (suggesting that the equitable standard to review fiduciary conduct in the context of tender offer transactions should, if possible, be aligned with the equitable standard of review for controller-going-private transactions consummated by merger). Empirical evidence exists suggesting that going-private tender offers are priced less favorably to stockholders than interested-party transactions negotiated and approved by special committees of independent directors. See Guhan Subramanian, Post-Siliconix Freeze-Outs: Theory and Evidence, 36 J. LEGAL STUD. 1 (2007) (reporting, based on a database of all freeze-outs of Delaware targets executed in the four years after the Court of Chancery decided Siliconix, that controlling stockholders pay less, on average, to minority stockholders in tender offer freeze-outs than in merger freeze-outs).

[47] 780 A.2d 1075, 1095 (Del.2001) (citing Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)).

[48] Id.; see also Prod. Res. Grp., LLC v. NCT Grp., Inc., 863 A.2d 772, 777 (Del. Ch.2004) ("One of the primary purposes of § 102(b)(7) is to encourage directors to undertake risky, but potentially value-maximizing, business strategies, so long as they do so in good faith.").

[49] In the Emerald Partners litigation, the plaintiffs brought a derivative and class action suit following the corporation's merger with its controlling stockholder, alleging that the merger was not entirely fair and that the defendant directors violated disclosure rules. The defendants did not move to dismiss, but moved for summary judgment after discovery. The Court of Chancery granted that motion, concluding that the plaintiff's allegations supported a duty of care violation at most, and that the company's Section 102(b)(7) charter provision exculpated the defendants from liability. See Emerald Partners v. Berlin, 1995 WL 600881, *1 (Del. Ch. Sept. 22, 1995). This Court reversed, holding that several issues remained that implicated the independent directors' duty of loyalty, including the plaintiff's claim that the directors had misrepresented that negotiations were arm's-length in the proxy statement. See Emerald I, 726 A.2d at 1223. Because "the entire fairness and disclosure claims under [those] circumstances were intertwined," the defendants could not invoke § 102(b)(7) at that stage of the proceedings. Id. In other words, this Court found that the plaintiffs had successfully shown that issues of fact remained that implicated the independent directors' duty of loyalty, and because those issues were not separable from the factual issues about whether the transaction was fair, the independent directors' motion for summary judgment was properly denied.

[50] See Emerald I, 726 A.2d at 1218.

[51] Emerald II, 787 A.2d at 92.

[52] 2013 WL 5503034 (Del. Ch. Sept. 30, 2013), appeal refused, 80 A.3d 959 (Del.2013).

[53] Id. at *11.

[54] We note this, not to fault those who read the complicated Emerald Partners decisions differently than we now do or DiRienzo did, but to emphasize that our ultimate duty is to give those cases the most reasonable reading we can, based on their full context. See In re MFW S'holders Litig., 67 A.3d 496, 524 (Del. 2013) ("Admittedly, there is broad language in each of these decisions, and in some other cases, that can be read to control the question asked in this case. But this, like all judicial language, needs to be read in full context, as our Supreme Court itself has emphasized."), aff'd sub nom., Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del.2014).

[55] By parity of reasoning, if after discovery, there is evidence from which a fact-finder could conclude that the independent directors breached their duty of loyalty, a trial is necessary to determine the directors' liability.

Bruce L. Silverstein, Martin S. Lessner, Kathaleen St. J. McCormick, Kristen Salvatore DePalma, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; William B. Wachtel, John H. Reichman, Elliot Silverman, WACHTEL & MASYR, LLP, New York, New York; Attorneys for Gila Dweck, Kevin Taxin, Bruce Fine, Success Apparel LLC, and Premium Apparel Brands LLC.

Kurt M. Heyman, Patricia L. Enerio, Dominick T. Gattuso, Melissa N. Donimirski, Meghan A. Adams, Dawn K. Crompton, PROCTOR HEYMAN LLP, Wilmington, Delaware; Attorneys for Albert Nasser and Kids International Corporation.

MEMORANDUM OPINION

LASTER, Vice Chancellor.

In 2005, after thirteen years in business together, Gila Dweck and Albert Nasser parted ways. Their messy split spawned nearly seven years of litigation.

Before the split, Dweck was the CEO, a director, and 30% stockholder in Kids International Corporation ("Kids"). Both before and after the split, Nasser was the Chairman and controlling stockholder of Kids. Dweck and Nasser accused each other of breaching their fiduciary duties, and Nasser asserted third-party claims for breach of fiduciary duty against Dweck's colleagues Kevin Taxin, Kids' President, and Bruce Fine, Kids' CFO and corporate secretary. Both factions appended traditional tort claims to their core breach-of-fiduciary-duty theories.

In this post-trial decision, I find that Dweck and Taxin breached their fiduciary duties to Kids by establishing competing companies that usurped Kids' corporate opportunities and converted Kids' resources to the point of literally using Kids' own employees, office space, letters of credit, customer relationships, and goodwill to conduct their operations. Dweck further breached her fiduciary duties by causing Kids to reimburse her for hundreds of thousands of dollars of personal expenses. Fine breached his fiduciary duties by abdicating his responsibility to review Dweck's expenses and signing off on them wholesale. In the months leading up to the final split, Dweck, Taxin, and Fine again breached their duties by transferring Kids' customer relationships and business expectancies to their competing companies, packing up Kids' documents and other property and moving them to the competing companies, and organizing a mass employee departure that left Kids crippled. Dweck, Taxin, and Fine are liable to Kids for the damages caused by their breaches of duty. I do not reach the duplicative non-fiduciary claims.

By contrast, I largely reject Dweck's breach of fiduciary duty claims against Nasser. Nevertheless, Nasser failed to carry his burden of proving that it was entirely fair for Kids to pay him a consulting fee that compensated him equally with Dweck when he performed no work for Kids. Nasser is liable to Kids for those fees. Dweck also established her entitlement to an accounting from Nasser for $3,076,400 of the $18,312,555 in cash that Kids had on hand at the time of the split. I again do not reach the duplicative non-fiduciary claims.

I. FACTUAL BACKGROUND

This case was tried on July 11-15, 2011. The parties introduced approximately 930 exhibits, submitted deposition testimony from twenty-three fact witnesses, and adduced live testimony from six fact witnesses and three expert witnesses. The parties joined issue over the authenticity of important documents, debated whether key conversations actually took place, and disputed whether critical agreements were reached. Even allowing for the frailties of human memory and subjective perception, I cannot reconcile the conflicting accounts.

Each of the party-witnesses exhibited credibility problems under cross-examination. Dweck's testimony was particularly suspect. She repeatedly contradicted her deposition testimony, responded evasively, and suffered convenient failures of memory. On several occasions, she appeared to have invented entirely new accounts for trial. Most notably, despite overwhelming evidence to the contrary, Dweck denied having any ownership interest in cash payments made by Kids to certain foreign entities. By contrast, the most credible witness at trial was Amnon Shiboleth, a member of the New York and Tel Aviv bars who acted as corporate counsel to Kids. Having weighed the parties' testimony, evaluated their demeanor, and considered the evidence as a whole, I make the following factual findings.

A. The Dabah Family Business

Morris Dabah had three sons: Haim, Ezra, and Isaac.^[1] Morris and his sons founded the Gitano Group, a large, multi-division apparel wholesaler.

Morris' fourth and youngest child was a daughter: Gila Dweck. While still in college, Dweck began working at Gitano as a receptionist. After graduating, Dweck joined the childrenswear division, known as EJ Gitano, as a salesperson. She rose rapidly through the ranks to become President of EJ Gitano.

In 1993, Haim and Isaac pleaded guilty to criminal violations of United States customs regulations and spent time under house arrest. Wal-Mart, Gitano's largest customer, refused to continue selling Gitano's lines of clothing. Gitano defaulted on its debt and teetered on the verge of bankruptcy.

In the debacle, Dweck saw opportunity. She suggested to Haim that they purchase EJ Gitano. It was profitable, and Dweck thought the existing pipeline of orders made the purchase "essentially risk free." Tr. 448.

But there was a problem. Because of Gitano's default, its lender had the right to veto any sale of assets, and the bank would not approve a sale of EJ Gitano to the Dabah family. Dweck needed a third party.

Enter Albert Nasser, a successful entrepreneur with numerous holdings in the apparel sector. Nasser was a cousin of Dweck's mother, and despite maintaining his primary residence in Switzerland, he moved within the same tightly-knit New York community as the Dabah family. Even before Isaac arranged a formal introduction, Dweck knew of Nasser "through family acquaintances and family functions, weddings, bar mitzvahs." Tr. 347.

B. The Formation Of Kids

In September 1993, Dweck, Haim, and Nasser purchased the assets of EJ Gitano. The basic deal was straightforward. Nasser agreed to provide 100% of the funding, comprising $8.2 million for acquisition financing plus $1 million in start-up capital. In return, Nasser originally would own 100% of the new company's equity. Once Nasser received payments equal to his original investment plus 10% interest, Nasser would transfer 50% of the equity to Dweck and Haim. Nasser would serve as Chairman of the Board; Dweck and Haim would be in charge of day-to-day management.

Shiboleth implemented the basic concept in a complex manner. Kids was formed under Delaware law and designated for tax purposes as a Subchapter S Corporation. A corporation that qualifies under this section of the tax code is treated as a pass-through entity for tax purposes, so Kids' profits would be attributed pro rata to Kids stockholders (originally only Nasser) regardless of whether any dividends were paid. To minimize the amount of taxes that Kids stockholders would pay domestically, Shiboleth designed a structure that would allow Kids to send large amounts of money out of the United States free of tax, while at the same time generating deductible business expenses to reduce Kids' profits.

Under the resulting structure, a New York Subchapter S Corporation named RAJN Corporation ("RAJN") made a $1 million capital contribution to Kids in return for 100% of Kids' common stock. RAJN was and remains wholly owned by trusts organized for the benefit of Nasser's children.

Next, Woodsford Business S.A. ("Woodsford") loaned Kids $4 million at an interest rate of 13.5%. Woodsford is the investment arm of Ninwieneched, a Liechtenstein trust whose beneficiaries are Nasser's yet unborn great-grandchildren. Woodsford did not loan Kids money directly. Rather, Woodsford loaned the funds to Maubi Investment N.V. ("Maubi"), a Netherlands Antilles corporation. Maubi in turn made the loan to Kids (the "Maubi Loan"). Using the capital from RAJN and the loan from Maubi, Kids purchased all of the assets of EJ Gitano, other than its trademarks.

EJ Gitano's trademarks were acquired separately. For this part of the transaction, Woodsford advanced $4.2 million to Hocalar B.V. ("Hocalar"), a Netherlands corporation. Hocalar then paid the money to Gitano for a perpetual license to the Gitano trademarks. Hocalar immediately sub-licensed the trademarks to Kids in return for a 5% royalty on Kids' sales of Gitano products (the "License Agreement"). To take advantage of favorable tax treaties, Hocalar later transferred its rights to a Hungarian company, Good Fortune Holdings, R.T. ("Good Fortune"), and Good Fortune subsequently transferred its rights to Heckbert 14Kft. I refer to Hocalar, Heckbert, and Good Fortune collectively as the "Foreign Licensors."

By means of this structure, Kids could send $540,000 out of the United States annually, tax free, in the form of interest-only payments on the Maubi Loan. At the same time, Kids could claim the payments as deductible business expenditures, thereby lowering the taxable profits attributed to Kids stockholders. Not surprisingly, Kids never made any principal payments on the Maubi Loan until after Dweck and Nasser parted ways and litigation ensued. Until that time, the loan remained outstanding so that interest payments could leave the United States each year.

The structure likewise enabled Kids to send 5% of its sales of Gitano products out of the United States, tax free, through royalty payments under the License Agreement, while again claiming these payments as deductible business expenses that lowered Kids' taxable profits. Because Kids' annual sales quickly grew to over $100 million, the License Agreement became the primary means by which payments left the country. Consistent with the License Agreement's true purposes of funneling money out of the United States and generating tax deductions, the License Agreement did not terminate when Kids stopped selling Gitano-branded products in 1996. Instead, the scope of the License Agreement expanded to a 5% royalty on all sales of Kids products. In other words, just when Kids no longer needed the Gitano trademarks and could forego paying any royalties at all, Kids agreed instead to pay a 5% royalty on all sales. Kids eventually terminated the License Agreement in 2000 for a payment of $5.5 million to the Foreign Licensors. Kids paid off this amount, plus interest, over time.

Notably, for the tax-avoidance structure to work, it was critical that Nasser, Dweck, and Haim not appear to control any of the companies receiving funds from Kids. The intermediary companies—Maubi and the Foreign Licensors—were therefore structured to avoid indicia of control. Maubi and the Foreign Licensors are each owned and controlled by Henk Keilman, a resident of Holland and professional acquaintance of Shiboleth. As compensation for providing the intermediary entities, Keilman's firm receives 7% of all amounts that the intermediaries receive. Originally, all of the funds received by Maubi and the Foreign Licensors, net of the 7% paid to Keilman's firm, were passed on to Woodsford. Later, after the Nasser-Dweck split, Keilman refused to pay out any funds without joint instructions from both Nasser and Dweck. To circumvent Keilman, Nasser caused Kids to wire funds directly to Woodsford.

C. Dweck Builds Kids' Business.

Kids was profitable from day one. Although the transaction closed at the end of September 1993, the sale was effective as of June and included EJ Gitano's substantial order base from the pre-closing period. Nasser agreed to indemnify EJ Gitano's lender for its letters of credit, which enabled Kids to take the profits on the existing orders. The new company continued selling Gitano-branded products, primarily jeans. Kids also continued as a major supplier of private label (non-branded) childrenswear for Wal-Mart, which originally comprised approximately 90-95% of Kids' business. In the private label business, a retailer like Wal-Mart outsources to a manufacturer like Kids the work of producing a house brand owned by Wal-Mart and sold only in Wal-Mart's stores. The retailer-specific nature of private label (non-branded) business distinguishes it from branded business, where a particular brand (such as Gitano) is sold through multiple retailers.

In 1994, Taxin joined Kids as Vice President of Sales and Merchandising. He previously worked at Gitano as a sales executive for nearly a decade, but left the company in 1992. Taxin expanded Kids' business dramatically. He had strong ties to Target and K-Mart, which he used to win new private label business for Kids. He expanded Kids' existing relationship with Wal-Mart and established relationships with other discount retailers such as Hills and Ames. With Taxin on board, Kids' sales increased by a factor of five over a four-year period.

Because of its significant sales, Kids was able to distribute substantial amounts via the License Agreement in addition to the interest-only payments on the Maubi Loan. By 1998, Nasser had received back his original investment plus 10% interest, and it was time for Dweck and Haim to receive equity in Kids. Dweck and Haim were issued 45% of Kids' outstanding equity, paid for out of the corporation's retained earnings. The original deal had been 50%, but it turned out that Nasser had issued a warrant to Shiboleth for 5% of the equity as compensation for his role in setting up Kids. Dweck and Haim acquiesced to the new arrangement, and Nasser left it to Dweck and Haim to divvy up their shares. Dweck received 27.5% of Kids' stock, which she held individually and through trusts for the benefit of her children. Haim received the remaining 17.5%. Around the same time, Taxin was promoted to President of Kids.

Dweck testified at trial that at some point in 1998, after she received her stock, she complained to Nasser that Kids had not yet paid off the Maubi Loan and was continuing to make interest-only payments. Dweck also testified at trial that she thought once Nasser had been repaid and she and Haim became stockholders, Kids would distribute its profits in the United States. Dweck claimed that she never understood that Kids had been set up to funnel money tax-free out of the United States, that she was not financially sophisticated, and that Nasser handled everything.

I reject Dweck's testimony. It seems true that when Shiboleth originally set up Kids in September 1993, Dweck was not aware of the details. Sadly for Dweck, her husband had cancer and passed away a month later, she had two small children, and she understandably deferred to Shiboleth and Haim to handle the financial and legal aspects of the transaction. But Dweck testified that Haim described the deal to her "a month or two" later. Tr. 341. She also testified that Nasser explained the structure to her. Tr. 367. Dweck knew that when Nasser was paid back, she would receive stock in Kids, and I am confident that she quickly became educated about the Maubi Loan, the payments to the Foreign Licensors, and their efficacy in channeling money out of the country while generating tax deductions for Kids. Dweck is an intelligent, savvy woman. Granting that she would not have been able to cite the particular tax code sections or explain the nuances of the attribution rules, she certainly got the gist. Fine testified that beginning in 1995, he regularly prepared schedules showing the total payments to Maubi and the Foreign Licensors and reviewed them with Nasser and Dweck.

Even crediting Dweck's testimony that she only realized the purpose of the structure in 1998 and raised it with Nasser, Dweck agreed at that point to leave the structure in place and take her share of the tax-free profits. From then on, Dweck closely tracked her share of the "pot," as she and Nasser called the overseas payments, and she was consistently credited with her percentage share of those payments. To the extent Dweck complained from time to time, she only complained about whether she was getting her full share. She questioned, for example, why deductions were taken for Keilman's 7% fee. She never complained about the overarching scheme.

From 1998 until 2001, Dweck was credited with 27.5% of the overseas payments. In 2001, Dweck and Nasser repurchased the 5% of Kids' stock from the Shiboleth warrant. They split the 5%, and from that point on Dweck was credited with 30% of the overseas payments. The balance was credited to Woodsford.

Dweck even took distributions from the "pot." In 1999, Dweck repatriated $1.5 million through a loan from Nelux, a Netherlands entity owned by Keilman. She has not made payments on the loan. In a November 2001 memo to Nasser, Dweck noted that her share of the "pot" then amounted to $1,662,100 and that she should be paid that amount. A 2004 accounting showed that Dweck had received $126,000 out of $489,250.28 due her from the "pot" for that year. It is possible that Dweck took additional distributions, but the record on repatriation is understandably spotty and incomplete.

Still other evidence confirms Dweck's knowledge of the foreign payments, participation in the scheme, and beneficial ownership of her share of the funds. In early 2005, as their disputes were coming to a boil, Dweck jointly determined with Nasser that Kids would pay $5.2 million to the Foreign Licensors, and Dweck personally delivered the check to Nasser in Geneva. In 2007, two years into this litigation, Dweck declined on the advice of counsel to sign a letter for Kids' auditors in which she would have represented that neither she nor her children (i) were directly or indirectly related to either the nominal or beneficial owners of Maubi or the Foreign Licensors, or (ii) had any direct or indirect interest in the royalty or interest payments to Maubi or the Foreign Licensors. The logical inference is that Dweck and her counsel realized she could not truthfully make the representations. Likewise, Dweck has discussed with her counsel how to resolve any tax problems that she might face as a result of the payments Kids made to Maubi and the Foreign Licensors.

At trial, Dweck refused to admit that she had an interest in the funds that Kids sent overseas. She would admit only that it was "possible." Tr. 639-40.

D. Dweck Forms Success To Gain A Bigger Share Of The Profits.

With Kids enjoying continued success under her management, Dweck began to feel exploited. Despite receiving stock in 1998, Dweck believed she was doing all of the work for less than a third of the profits. To Dweck's further frustration, Nasser decided in 1996 that Kids was a de facto partnership, that partners should not receive salaries, and that Dweck's salary as Kids' CEO should be deemed a distribution of profits. Believing he should receive a similar distribution, Nasser directed that Kids pay him a proportionate amount, grossed up for his greater stock ownership, and make catch-up distributions for the earlier years that he had missed. RAJN received the payments as "consulting fees," even though Nasser never rendered any services to Kids in return. When Dweck's salary increased, Nasser's "consulting fees" increased proportionately.

Dweck felt she should own a percentage of Kids equity that more fairly represented her responsibility for Kids' success. She complained to Nasser and Haim, but to no avail. Nasser would not give Dweck any more equity, nor would he sell her any of his shares. Even though Haim stopped working actively for Kids in 1995, he declined to part with any of his stock. The 2.5% bump from purchasing half of the Shiboleth option in 2001 did not come close to satisfying Dweck.

Unable to gain a greater share of Kids' profits, Dweck decided to bypass Kids by starting a new company into which she would channel "new opportunities." Tr. 461. As she admitted on cross-examination, she decided to compete "because it was [her] only way to . . . receive more income." Tr. 469.

In October 2001, Dweck formed Success Apparel LLC ("Success"), a New York limited liability company, to operate as a wholesaler of children's clothing. The impetus to form Success came from Taxin, who also had grown dissatisfied with his remuneration. Taxin felt that he was primarily responsible for Kids' success and deserved a share of Kids' profits. He asked Dweck repeatedly for equity, but she consistently turned him down on the grounds that Nasser "only takes in family." Tr. 259. When the President of Bugle Boy, Mary Gleason, offered Taxin the opportunity to purchase the Bugle Boy license in 2001, Taxin decided he was "only interested in doing the opportunity with [Dweck], not Kids . . . ." Tr. 258. Taxin made the decision despite meeting with Gleason in his capacity as President of Kids, and even though Gleason did not restrict the opportunity or indicate that Kids could not pursue it. Taxin discussed the matter with Dweck, and they decided to take it for themselves. Dweck granted Taxin a 20% membership interest in Success and retained 80% for herself.

From 2001 until 2005, Success operated out of Kids' premises using Kids' employees. Success drew on Kids' letters of credit, sold products under Kids' vendor agreements, used Kids' vendor numbers, and capitalized on Kids' relationships. Ostensibly to compensate Kids, Dweck decided that Success would pay an administrative fee equal to 1% of total sales. Dweck selected the 1% figure unilaterally without disclosure to or consultation with Nasser. The only mention of the fee was an opaque entry on Kids' financial statements entitled "Due from affiliates." See, e.g., JX 783. The identity of the affiliates was not specified, and Fine never discussed it with Nasser. The 1% fee appears to have been grossly inadequate.

Success also reimbursed Kids for the salaries of certain employees (but not for their benefits) and for a portion of Kids' rent. The only employees were those Dweck deemed to be working exclusively for Success. Dweck admitted that most Kids employees performed some work for Success. No effort was made to compensate Kids for their services. Taxin estimated at trial that he spent approximately 20% of his time on Success, which likely was a self-interestedly conservative figure. Numerous other Kids employees performed work for Success without reimbursement, including Pauline Pei, Mark Simonetti, Stanley Bernstein, Joseph Ezraty, Steve Golub, Leah Justice, and Kim Epps. Taxin estimated (doubtless conservatively) that these employees spent approximately 10-20% of their time on Success. Success also used Kids' overseas quality control inspectors and internal quality control employees. The rental reimbursements further illustrate the inadequacy of Success' payments to Kids. In 2004, for example, Dweck's companies reimbursed Kids for rent of $14,594. In 2005, after obtaining space of its own, Dweck's companies paid $437,689 for rent.

In its first three years of operation, Success signed license agreements to manufacture and distribute a number of brands, including Bugle Boy, Everlast, and John Deere. In the pitches to obtain the licenses, Success used marketing materials that listed the logos of Kids and Success side by side, cited industry awards won by Kids, and touted Kids' lengthy record in the apparel business. This resulted in confusion amongst the licensors. John Deere originally drafted their license agreement with Kids as the licensee, and the document was only changed to name Success at Dweck's request. The draft agreement for a license to the Mack brand was also prepared in Kids' name. A press release issued by Everlast described its licensee as "Success Apparel Group LLC, also known as Kids International . . . ." JX 531.

Inside Kids' offices, Success and Kids operated so seamlessly that many of the Kids employees who routinely worked for Success never suspected that Success was a separate company or had different ownership from Kids. Kids and Success used the same showroom and displayed their brands in the same space. There were no references to Success, and nothing suggested that the brands were not all owned by Kids. The only name on the door was Kids.

E. Dweck Forms Premium.

In June 2004, Dweck founded Premium Apparel Brands LLC ("Premium"), a New York limited liability company. Like Success, Premium was a clothing wholesaler, operated out of Kids' premises, and used Kids' employees and resources. Dweck owned 100% of Premium and served as its CEO. Taxin had no equity stake in Premium.

Dweck founded Premium to serve as licensee and manufacturer for the Gloria Vanderbilt brand. When Dweck originally negotiated the Gloria Vanderbilt license, the owner of the brand, Jones Apparel, understood that the license could be with Kids. Dweck switched the agreement to Premium.

F. Dweck Charges Personal Expenses To Kids.

Not content with her compensation from Kids and the profits from her parasitic companies, Dweck billed Kids for a luxurious lifestyle. Between 2002 and 2005, Dweck charged at least $466,948 in expenses to Kids. At trial, she admitted that at least $171,966 was for personal expenses, including Club Med vacations and assorted luxury goods from Armani, Prada, Gucci, and Bergdorf Goodman. Dweck could not determine whether another $170,400 was for business or personal expenses. She asserted that the remaining $124,582 was for legitimate business expenses. During the same period, Dweck was being paid $850,000 to $1.3 million per year in salary.

Fine countersigned each reimbursement check. Fine admitted at trial that part of his responsibilities included reviewing and signing off on expense reimbursements. He further admitted that he knew Dweck was seeking reimbursements for personal expenditures. Fine nevertheless signed off on Dweck's reimbursements without conducting any review.

G. Nasser Becomes Concerned.

During 2004, Kids stopped sending Nasser quarterly financial reports. Nasser repeatedly requested the reports, but Dweck and Fine ignored him. In November 2004, Lidia Lozovsky, a secretary at Kids who worked for Nasser, Dweck, and Fine, mentioned to Nasser that Dweck appeared to be handling a Gloria Vanderbilt line. In December, Lozovsky warned Nasser in stronger terms that there was "something going on" at Kids and that "there were other companies" operating out of Kids' offices. Tr. 807.

To get a handle on what was going on, Nasser had Shiboleth notice formal meetings of the board and stockholders for January 5, 2005. They were the first formal meetings in Kids' history. In advance of the meetings, Dweck and Fine told Nasser that Kids would book $115 million in sales for 2004. Days later, they lowered the sales figure to $95 million. During the January 5 board meeting, Dweck and Fine revealed that the actual sales figure was $72 million, a decline of roughly $18 million from the previous year. Nasser testified that after hearing the sales figure, "everybody looked at each other. And we knew that something [was] wrong because we were not told the truth at the beginning." Tr. 705.

Because of his growing suspicions, Nasser came to the January 5 meetings ready to take action. Nasser elected Lozovsky and his nephew, Itzhak Djemal, as directors of Kids. He appointed Djemal to the position of Vice Chairman and gave him authority equal to Dweck's: Djemal would handle production and corporate finances while Dweck would handle sales and design. Nasser privately tasked Djemal with uncovering what was going on at Kids.

Dweck was extremely unhappy with Djemal's appointment. She "knew [she] couldn't work for him or with him." Tr. 433. She decided that either she would buy out Nasser or leave Kids. Nasser refused to sell, so Dweck prepared to leave.

Dweck promptly met with Taxin and discussed the prospect of leaving Kids. With Taxin and Fine's assistance, she located separate office space for Success and Premium. More importantly, Dweck and Taxin organized a campaign to divert Kids' future orders to Success. Over the next three months, Kids employees carried out the campaign by contacting Kids' customers on behalf of Success.

The order cycle for a private label manufacturer takes approximately four to six months. It begins with a manufacturer like Kids designing and presenting samples to a retailer like Target for sale during a future season. If the retailer decides to proceed with a specific product, then a few weeks later the manufacturer receives a "commit" specifying the quantity, size, color, and other purchase details. The manufacturer starts production when the commit is obtained, but the order does not become final and binding until months later, five to seven days before shipment, when the manufacturer issues an electronic data information form to the retailer.

In early 2005, Kids was working to fill orders for the Fall 2005 season and had started product development and design work for the Holiday 2005 and Spring 2006 seasons. At the direction of Dweck and Taxin, Kids employees systematically switched the vendor information and customer contacts from Kids to Success, thereby ensuring that when the orders came in, they came to Success. Taxin instructed Paul Cohn, the Kids salesperson for Wal-Mart, to switch the Wal-Mart orders. Taxin instructed Pat Zobel, the Kids salesperson for Target, to switch the Target orders. At the time he gave these instructions, Taxin was President of Kids. Taxin also communicated directly with Wal-Mart and Target about switching purchases from Kids to Success.

H. The March 11, 2005 Meetings

Despite active resistance from Dweck, Djemal soon found evidence that Dweck was operating her own businesses from Kids' premises. When pressed for information, Dweck admitted it but insisted that she had Nasser's permission. Djemal reported his findings to Nasser.

Because Dweck disputed whether the January meetings were properly noticed, Nasser had Shiboleth notice a second round of board and stockholder meetings for March 11, 2005. The agenda for the stockholder meeting included confirming the identity of Kids' directors. The agenda for the board meeting included confirming the identity of Kids' officers. Going into the meeting, Nasser expected Dweck to continue as a director and CEO. Nasser did not know that Dweck already was preparing to leave.

Shiboleth noticed the meetings to be held at Kids' offices. After arriving at Kids, Nasser and Shiboleth were asked to wait in a conference room. Samples for Gloria Vanderbilt and other brands handled by Success and Premium covered the walls. Meanwhile, Haim, Dweck, and Dweck's counsel, Barry Slotnick, showed up at Shiboleth's office. After learning that Nasser and Shiboleth were at Kids, Dweck told Nasser and Shiboleth that they would be right over. She then instructed one of her employees to remove the samples. As Nasser and Shiboleth waited, an employee entered and removed the samples without explanation. It was a less-than-adroit maneuver, but consistent with Dweck's efforts to conceal her activities.

When the stockholder meeting convened, Shiboleth proposed that Dweck stand for re-election as a director. Dweck's lawyer, Slotnick, then announced that Dweck could not serve as a director because she had a conflict of interest as a result of operating competing businesses. Nasser and Shiboleth were nonplussed. Shiboleth assumed Slotnick made a mistake, so he suggested that he and Dweck consult privately. When they returned after fifteen minutes, Slotnick reiterated that Dweck declined to serve as a director because of a potential claim of a conflict of interest from selling competitive product from Kids' premises. All eyes turned to Dweck, who admitted that she was selling "overlapping product" from Kids' premises. Tr. 567. Nasser and Shiboleth were shocked: it was the first time Dweck had indicated that she was competing with Kids from Kids' premises. During the board meeting convened immediately after the stockholder meeting, Nasser observed that Dweck should not be an officer if she declined to serve as a director. The board formally elected a slate of officers that excluded Dweck, with Djemal as President and CEO.

I. Dweck, Taxin, And Fine Destroy Kids' Business.

Although no longer employed by Kids after the March 11 meetings, Dweck worked out of Kids' offices until April 11, 2005. Dweck and Taxin continued their campaign to divert Kids' business to Success, and they succeeded in transferring all of the Wal-Mart and Target business from the Holiday 2005 season onward. Kids did not receive any orders after May 2005.

Dweck and Taxin also arranged for Kids' employees to join Success. In early May 2005, Dweck and Taxin met with Kids' managers to inform them that Dweck would be operating her own companies separately from Kids and to offer them positions at her companies. Dweck told the managers to make the same offer to the employees under their supervision. She indicated that if they chose to accept her offer, "they would receive word to pack shortly." JX 636. Taxin later met with Kids' managers, reiterated the plan to leave Kids, and promised them jobs at Success. Fine met with at least one Kids employee and offered him a job at Success.

On May 17, 2005, Taxin informed the employees that May 18 was departure day. In the early morning of May 18, Kids employees began loading a moving truck with roughly 100 boxes of Kids' documents and materials. Fine supervised the process and attempted to conceal the move from Nasser and Djemal. Nasser, however, was tipped by a Kids employee the day before, and he arranged for Djemal and Lozovsky to arrive early at Kids' offices. Lozovsky found the move already underway and Kids' materials loaded in the moving truck. Lozovsky called Nasser, who demanded to speak to the driver. Fine took the phone, claimed that he was a driver named "Gregory," and listened while Nasser threatened to summon the police. Djemal arrived at Kids' offices just in time to stop the truck. He could not stop many of the former employees from taking boxes with them. A computer consultant whom Djemal hired later determined that a number of the hard drives from Kids' computers had been wiped clean.

As part of the May 18 mass departure, Taxin resigned to join Dweck at Success. Fine remained at Kids until May 25, 2005, when he too joined Dweck.

While Fine was overseeing the move and mass departure, Dweck and Taxin met with key Wal-Mart managers at Success' new offices. After Dweck explained the situation, the Wal-Mart managers expressed concern about their Fall 2005 orders. Dweck and Taxin assured the Wal-Mart managers that there would be no issues.

On May 20, Dweck and Taxin flew to Wal-Mart's headquarters in Bentonville, Arkansas to meet with more senior Wal-Mart managers. After the meeting, Wal-Mart recognized Success as its existing supplier and no longer recognized Kids. Dweck and Taxin then met with Target managers and achieved the same transition.

To protect their customer relationships, Dweck and Taxin made sure that a handful of employees remained at Kids to fill the Fall 2005 orders. Dweck and Taxin oversaw their efforts, effectively running Kids from afar. Kids received the profits on the Fall 2005 orders. Beginning with the Holiday 2005 and Spring 2006 seasons, Success took all of the orders and profits for itself. The employees who remained at Kids were offered jobs at Success once the Fall 2005 orders were completed.

J. Nasser And Djemal Fail To Revive Kids.

Having lost nearly all its employees and with its pipeline diverted to Success, Kids had to start over from scratch. Djemal began hiring new employees and attempted to solicit orders from the retail giants that had been Kids' customer base. He immediately encountered difficulties. The Hong Kong factory that Kids relied on for samples was working for Success and would not return his calls. The manufacturing facilities Kids used also would not respond. When Djemal visited Wal-Mart headquarters with a new line of samples, Wal-Mart told him that Success was the recognized supplier and that Djemal would have to reestablish Kids as a new vendor. When he met with Target, the representative told Djemal that she only gave him an appointment because "`I thought you were Success.'" Tr. 1081.

After failing for over a year to restart Kids' business, Nasser and Djemal began to search for alternatives. With more than $18 million in cash or cash equivalents, Kids had resources. Nasser and Djemal eventually settled on a joint venture with Seabreeze Apparel, a division of a company owned by Nasser. As the controlling shareholder of both entities, Nasser set the terms for the joint venture.

Under the joint venture agreement executed on July 15, 2006, Seabreeze contributed all of its pending orders and existing inventory to the joint venture. Seabreeze received its costs in producing and shipping the inventory plus a 25% markup, with any further profits divided equally between Seabreeze and Kids. The joint venture agreement was later amended to require Kids to purchase outright Seabreeze's existing inventory at cost plus 25%, which Djemal testified was consistent with industry standards. The joint venture generated a modest profit of $356,808 before it was shut down effective December 31, 2008.

K. Nasser Pays Off The Maubi Loan.

After the split with Dweck, Kids continued making interest payments on the Maubi Loan. In November 2008, before shuttering Kids' operations, Nasser caused Kids to wire more than $8.3 million overseas to pay off the Maubi Loan. But rather than paying Maubi, Kids sent the funds to Woodsford. Nasser made the switch because after learning of Nasser and Dweck's dispute, Keilman refused to distribute any funds without joint instructions. Paying Woodsford directly also allowed Nasser to avoid Keilman's 7% deduction. Woodsford continues to hold the $8.3 million, and Nasser agrees that Dweck is entitled to her 30%. Keilman holds roughly $7 million for distribution, subject to his 7% service charge. Again, Nasser agrees that Dweck is entitled to her 30%.

Since the end of 2008, Kids has not engaged actively in business. It has served primarily as a litigation vehicle for the parties' competing derivative claims. Kids and its principals are currently being audited by the Internal Revenue Service.

II. LEGAL ANALYSIS

Nasser alleges that Dweck, Taxin, and Fine breached their fiduciary duties by usurping Kids' corporate opportunities. Nasser also contends that Dweck and Fine breached their fiduciary duties by charging Dweck's personal expenses to Kids. Nasser re-styles the allegations supporting the fiduciary breaches as claims for (i) misappropriation of Kids' trade secrets, (ii) deceptive trade practices, (iii) tortious interference with Kids' prospective business relations, and (iv) conversion. Nasser seeks damages equal to Kids' purported going-concern value at the time of the split, which his expert values at between $70.8 million and $458.2 million.

Dweck claims primarily that Nasser breached his fiduciary duties by causing Kids to make payments to Maubi and the Foreign Licensors, taking unearned consulting fees through RAJN, and engaging in post-split activities such as the Seabreeze joint venture. Dweck contends that Nasser should pay $25.4 million in damages to Kids and account for an additional $21 million.

A. Success And Premium

Dweck and Taxin formed Success and Premium, took Kids' business opportunities for their new entities, competed directly with Kids, ran their businesses out of Kids' premises, used Kids' employees, and appropriated Kids' resources. In doing so, Dweck and Taxin breached their duty of loyalty to Kids.

1. The Nature Of The Breach

"The essence of a duty of loyalty claim is the assertion that a corporate officer or director has misused power over corporate property or processes in order to benefit himself rather than advance corporate purposes." Steiner v. Meyerson, 1995 WL 441999, at *2 (Del. Ch. July 19, 1995) (Allen, C.). "At the core of the fiduciary duty is the notion of loyalty—the equitable requirement that, with respect to the property subject to the duty, a fiduciary always must act in a good faith effort to advance the interests of his beneficiary." US W., Inc. v. Time Warner Inc., 1996 WL 307445, at *21 (Del. Ch. June 6, 1996) (Allen, C.). "Most basically, the duty of loyalty proscribes a fiduciary from any means of misappropriation of assets entrusted to his management and supervision." Id. "The doctrine of corporate opportunity represents . . . one species of the broad fiduciary duties assumed by a corporate director or officer." Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 154 (Del. 1996). The doctrine "holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation." Id. at 154-55.

Dweck was a director and officer of Kids. Taxin was an officer of Kids. In these capacities, they owed a duty of loyalty to Kids. Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009). Dweck and Taxin breached their duty of loyalty by diverting what they decided were "new opportunities" to Success and Premium, including license agreements with Bugle Boy, Everlast, John Deere, and Gloria Vanderbilt, Wal-Mart private label business, and Target direct import business. Kids was a profitable enterprise with the financial capability to exploit each of these opportunities. Indeed, Dweck and Taxin used Kids' personnel and resources to pursue each opportunity, demonstrating that Kids just as easily could have pursued the opportunities in its own name. After appropriating the opportunities, Dweck and Taxin operated Success and Premium as if the companies were divisions of Kids, but kept the resulting profits for themselves. By doing so, Dweck and Taxin placed themselves "in a position inimicable to [their] duties to [Kids]." Broz, 673 A.2d at 155.

Dweck and Taxin's conduct bears a striking resemblance to the continuing exploitation of corporate resources in Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939), the seminal corporate opportunity case in Delaware jurisprudence. In Guth, a director and the President of Loft Incorporated, Charles Guth, appropriated for himself the opportunity to purchase the secret formula and trademark for Pepsi-Cola from then-bankrupt National Pepsi-Cola Company. Guth, 5 A.2d at 505-06. Guth then operated Pepsi-Cola as a division of Loft, secretly using its employees and resources but keeping all the profits for himself. Id. at 507. The Delaware Supreme Court agreed that Guth breached his duty of loyalty and affirmed that Guth was required to disgorge all profits and equity from the venture to Loft. Id. at 515. Like Guth, Dweck and Taxin established a competing company into which they channeled new opportunities, then used Kids' "materials, credit, executives and employees as [they] willed." Id. at 506.

2. The Line Of Business Defense

To defend their actions, Dweck and Taxin tried to distinguish between the private label clothing business and the branded clothing business, then argued that Kids only operated in the private label business. Supposedly this distinction left them free to take the branded business. To the contrary, Kids had an interest in the branded business.

When determining whether a corporation has an interest in a line of business, the nature of the corporation's business should be broadly interpreted. "[L]atitude should be allowed for development and expansion. To deny this would be to deny the history of industrial development." Id. at 514; see Fliegler v. Lawrence, 361 A.2d 218, 220 (Del. 1976) (holding that antimony mine was corporate opportunity for corporation engaged in gold and silver mining).

Although Kids primarily operated in the private label business, Kids easily and readily could have expanded into the branded business. If Dweck and Taxin had felt they were getting a fair share of Kids' profits, then Kids doubtless would have done so. Kids faced significant pressure in its private label business as major retailers tried to cut out the middleman and deal directly with overseas suppliers. Moving into the branded business would have been a natural and prudent response to the threat.

It is abundantly clear that Kids could have capitalized on each of the branded opportunities taken by Success and Premium. At trial, Taxin conceded that Kids could have handled the Bugle Boy and John Deere business. Moreover, Success and Premium did not in fact limit themselves to branded opportunities; they also appropriated private label opportunities. When Wal-Mart approached Kids about manufacturing men's clothing for the Wal-Mart private label called No Boundaries, Dweck and Taxin decided it was a "new opportunity" in which Kids had no expectancy. Manufacturing Wal-Mart private label brands had long been Kids' core business, and Kids had manufactured No Boundaries girls' clothing since 2000. At trial, Taxin admitted that Kids could have taken this opportunity. Success also manufactured clothing for the Wal-Mart private label lines Faded Glory and Pure Playaz. When Target offered Kids the opportunity to engage in "direct importing," a process by which a company would have clothing manufactured overseas and shipped directly to Target, Dweck and Taxin again decided to take the opportunity for Success. Taxin obtained the opportunity while visiting Target's headquarters as Kids' President on a business trip for Kids. At trial, Taxin admitted that Kids could have handled the Target direct business. At post-trial argument, Dweck conceded that Success should not have taken the Target direct opportunity.

3. The Consent Defense

As their next defense, Dweck and her colleagues claimed that Nasser gave Dweck permission to compete. According to Dweck, she approached Nasser before forming Success and disclosed that she was planning to start a company that would compete with Kids. In her direct testimony, she claimed to remember "very vividly" a meeting with Nasser in February 2002, at his offices, when she sat with him at "a little round table by the window." Tr. 409. She asserted that she brought with her an unsigned, draft letter dated February 22, 2002, that she allegedly prepared, then decided not to send, then chose to use as a list of discussion points when meeting with Nasser in person. She supposedly "went to [Nasser] and discussed every single point." Tr. 410. She recalled telling Nasser that "I'm not motivated to kill myself, continue to work, you know, so many hours a day and weekends, and therefore I would take any new opportunities outside of Kids." Tr. 461. She asserted that Nasser encouraged her to start her own business, declaring "`I'm not standing in your way for improving yourself.'" Tr. 495. According to Dweck, this statement gave her the go-ahead to use Kids' employees and Kids' resources to run a business out of Kids' offices that competed directly with Kids.

Dweck's trial testimony conflicted with her sworn interrogatory response, in which she averred that the February 22 letter was sent to Nasser on or about February 25 and that she could not recall the method of transmittal. The interrogatory response did not mention anything about a face-to-face meeting with Nasser. On cross-examination, Dweck admitted that at the time she drafted the letter, Nasser was out of the country, likely in Tel Aviv. She admitted never discussing with Nasser what new opportunities she might pursue. She admitted never suggesting to Nasser that she would take opportunities from Wal-Mart or Target, Kids' largest customers. She admitted never mentioning that her business would operate from Kids' premises, use Kids' resources, or compete with Kids.

Nasser did not recall any meeting or conversation with Dweck. Instead, he remembered a call from Shiboleth, who told him that Dweck wanted to start her own business. After Nasser expressed concern that Dweck's new venture would compete with Kids, Shiboleth assured him that Dweck planned to operate in the upscale department store market. This would have differentiated Dweck's new company from Kids, which sold almost exclusively to discount retailers. Having been assured that Dweck's business would not compete with Kids, Nasser offered to help Dweck and told Shiboleth to advise her on how to set up the business. Taxin's trial testimony comported with Nasser's account. Taxin testified that when he asked Dweck whether she had disclosed their plan to start a new company to Nasser, Dweck answered that Nasser told her "it's fine, so long as you're not competing with me." Tr. 261. Fine similarly understood that Dweck and Nasser had a conversation in which Nasser generally expressed support for Dweck pursuing her own business. Fine could not say that Nasser knew Success and Premium were competing with Kids or using Kids' employees and resources. Fine never discussed these facts with Nasser.

Having considered the witnesses' testimony and demeanor, I reject Dweck's version of events. I do not believe Dweck ever disclosed to Nasser that she intended to compete directly with Kids and use Kids' employees and resources. I rather believe that she initially conveyed to Shiboleth in consciously vague terms that she was thinking about starting a distinct and separate apparel business. Shiboleth relayed the message to Nasser, who expressed his support so long as Dweck did not compete with Kids, and he suggested that Shiboleth help her on that basis. Nothing about the work that Shiboleth's firm performed for Dweck would have given the firm any reason to suspect that Dweck would be competing directly with Kids and using Kids' employees and resources.

To the extent that Dweck subsequently had conversations with Nasser and Shiboleth, I find that she continued to be intentionally vague about her business and never gave them reason to believe that she was using Kids' employees and resources to compete directly with Kids. I reject as inauthentic the unsigned February letter and do not believe it was ever sent or its contents ever communicated to Nasser. Rather, I think that it was a draft that Dweck located during discovery, regarded as helpful, and used to shape her testimony.

Nasser never consented to Dweck competing directly with Kids, using Kids' employees and resources, and operating out of Kids' premises. In a real sense, that was not competition at all. It was conversion and theft. Regardless, Dweck and Taxin cannot rely on Nasser's purported consent to justify their conduct.

4. The Stockholder Agreement Defense

For yet another defense, Dweck and Taxin contended that Nasser agreed in substance to allow Dweck to compete as evidenced by drafts of a Kids stockholders' agreement. In total, eight iterations of the proposed stockholders' agreement were drafted by Shiboleth's law firm. Each draft contained a clause that would have granted the parties broad latitude to take corporate opportunities that otherwise belonged to Kids. The parties called it the "free-for-all" provision. Tr. 353.

Nasser never signed the agreement or approved any of the drafts. Nasser testified and Shiboleth credibly confirmed that Nasser rejected the free-for-all provision for Kids because he depended on Dweck's management. Dweck conceded on cross-examination that "Albert said he wasn't willing to sign" the stockholders' agreement. Tr. 394. Dweck elsewhere testified that she later sought an employment agreement in part because she and Nasser never agreed on the stockholders' agreement. In short, Nasser and Dweck never had a meeting of the minds over the stockholders' agreement. The free-for-all provision never became effective, and Dweck cannot rely on it to justify her conduct. I therefore need not reach the complex legal issues that the provision would raise.

5. The Essential Childrenswear Defense

As their final defense, Dweck relied on the operating agreement of Essential Childrenswear ("Essential"), a company formed by Nasser, Dweck, and Haim in 1998. The Essential operating agreement contained a free-for-all provision, which stated:

Any Member and any of their respective affiliates may engage in or possess any interest in other business ventures of any kind, independently or with others, including but not limited to any business similar in nature to or competitive with the business of [Essential]. The fact that a Member or any of their respective affiliates may encounter business opportunities and may take advantage of such opportunities himself and/or herself and/or itself or introduce such opportunities to entities in which he/she/it has or has not any interest, shall not subject such Member or affiliate to liability to [Essential] or any of the other Members on account of the lost opportunity. Neither [Essential] nor any Member shall have any right by virtue of this Agreement or otherwise in or to such ventures, or to the income or profits derived therefrom, and the pursuit of such ventures, even though competitive with the business of [Essential], shall not be deemed wrongful or improper. . . . [Essential] and each Member hereby waives all right or remedy against the Members with respect to any damage, injury, lost profits or revenue as a result of any competitive business activities on the part of any Member.

JX 13 at 5. Dweck contended that this provision authorized her to compete with Kids because (i) Dweck and Nasser were Members of Essential, (ii) Kids, Success, and Premium were among "their respective affiliates," and (iii) "[t]he fact that a Member or any of their respective affiliates may encounter business opportunities and may take advantage of such opportunities himself and/or herself and/or itself or introduce such opportunities to entities in which he/she/it has or has not any interest, shall not subject such Member or affiliate to liability to [Essential] or any of the other Members on account of the lost opportunity."

I cannot agree. Under Dweck's reading, the company-specific language in the Essential agreement would eliminate broadly the duty of loyalty for all other business entities formed by the same parties. But contrary to Dweck's reading, the Essential provision does not unambiguously extend to any opportunities belonging to another entity such as Kids, nor does it excuse the taking of that entity's opportunities by its fiduciaries. The far more reasonable reading is that the provision addressed Essential's opportunities and the taking of those opportunities by Essential's Members.

"[A] contract is ambiguous . . . when the provision[] in controversy [is] reasonably or fairly susceptible of different interpretations or may have two or more different meanings." Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996) (quoting Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)). Assuming for purposes of analysis that Dweck advanced a reasonable interpretation, the evidentiary record comes down decidedly against Dweck's position.

"It is a familiar rule that when a contract is ambiguous, a construction given to it by the acts and conduct of the parties with knowledge of its terms, before any controversy has arisen as to its meaning, is entitled to great weight, and will, when reasonable, be adopted and enforced by the courts." Radio Corp. of Am. v. Phila. Storage Battery Co., 6 A.2d 329, 340 (Del. 1939). The evidentiary record reflects that before this litigation, the parties did not believe that the Essential free-for-all provision granted Dweck the right to compete with Kids. Dweck repeatedly sought to have Nasser sign the Kids stockholders' agreement, each draft of which contained a functionally identical free-for-all provision. Nasser refused to sign the draft agreements, specifically objecting to the free-for-all provision. Before founding Success and taking the Bugle Boy opportunity, Dweck sought Nasser's consent (albeit in a vague and ambiguous manner). She received approval only after assuring Shiboleth that her new business would not compete with Kids. If the Essential agreement operated as Dweck now contends, then she had no reason to seek Nasser's consent.

Having considered the parties' contentions in light of the evidentiary record, I find that the scope of the Essential free-for-all provision was limited to corporate opportunities in which Essential had an interest or expectancy. The Essential free-for-all provision did not allow individuals who happened to be Essential Members to usurp Kids' corporate opportunities that came to them in their capacities as Kids fiduciaries.

6. The Remedy

As damages for usurping Kids' corporate opportunities, Dweck, Taxin, Success, and Premium are jointly and severally liable to Kids for the lost profits Kids would have generated from business diverted to Success and Premium. The time period covered by the lost profits award runs from the founding of those entities through May 18, 2005, the date of the split. Nasser's expert quantified the lost profits through the end of 2004 at $9,022,825, and Dweck did not dispute the calculation. Accordingly, Dweck, Taxin, Success, and Premium are jointly and severally liable to Kids for this amount. In addition, Dweck, Taxin, Success, and Premium must provide an accounting of and are jointly and severally liable to Kids for profits generated between January 1, 2005 and May 18, 2005.

Dweck, Taxin, Success, and Premium also are jointly and severally liable for profits generated by Success and Premium after May 18, 2005 for the duration of the license agreements then in effect, including any rights of renewal or extension. If Dweck and Taxin had been faithful fiduciaries, those license agreements would have been in Kids' name, and Kids could have continued to perform under the agreements together with any renewals or extensions contemplated by the then-existing contracts.

As of May 18, 2005, Success and Premium had signed license agreements for Bugle Boy, Everlast, John Deere, and Gloria Vanderbilt. The Bugle Boy agreement expired on June 30, 2005 and was not renewed. The initial terms of the Everlast, John Deere, and Gloria Vanderbilt licenses expired on December 31, 2006, October 31, 2007, and December 31, 2007, respectively. The John Deere and Gloria Vanderbilt license agreements each contained renewal rights for one additional three-year term. The Everlast license agreement contained renewal options for two three-year terms. The profits from these license agreements and any others that Success or Premium entered into prior to May 18, 2005 are awarded to Kids.

Because the record does not contain evidence sufficient to quantify the amounts, Dweck, Taxin, Success, and Premium shall account to Kids for all profits earned by Success and Premium on these licenses and any others that Success or Premium entered into prior to May 18, 2005.

B. The Mass Departure And The Taking Of Kids' Property And Business Expectancies

Dweck, Taxin, and Fine breached their fiduciary duties by directing Kids employees to transfer Kids' expected orders and customer accounts to Success, taking Kids' property and files, and arranging a mass employee departure on May 18, 2005. "A breach of fiduciary duty occurs when a fiduciary commits an unfair, fraudulent, or wrongful act, including . . . misuse of confidential information, solicitation of employer's customers before cessation of employment, conspiracy to bring about mass resignation of an employer's key employees, or usurpation of the employer's business opportunity." Beard Research, Inc. v. Kates, 8 A.3d 573, 602 (Del. Ch. 2010). Dweck cannot limit her liability by citing the termination of her relationship with Kids on March 11. Before that point, Dweck breached her own duties as a fiduciary. After that point, Dweck actively conspired with Taxin and Fine, thereby aiding and abetting Taxin and Fine's breaches of fiduciary duty.

As a remedy, Nasser seeks damages equal to Kids' value as a going concern as of May 18, 2005, which Nasser's expert calculated as $70.8 million to $458.2 million. This measure is far too high and inconsistent with the business reality that Dweck and Taxin were key employees, Kids depended upon them, and they were not bound by any restrictive covenants. Kids' principal customers, including Wal-Mart and Target, had ties to Dweck and Taxin, not Kids. Dweck and Taxin could have departed from Kids at any time and taken the bulk of Kids' goodwill and going concern value with them. As an entity distinct from Dweck and Taxin, Kids had minimal (if any) goodwill or going-concern value.

If Dweck and Taxin had left Kids legitimately, they likely would have competed successfully with Kids and won its non-branded business. But for their fiduciary breaches, however, Dweck and Taxin would have had to start from scratch after leaving Kids. In that alternative universe, Kids would have had an intact employee base, access to its records, and a much better shot at preserving some element of its relationships with Wal-Mart and Target. Dweck and Taxin likely would have captured the non-branded business eventually, but it would have taken time.

In my view, Kids' remedy for the departure-related breaches of fiduciary duty should be limited to the damages Kids suffered over and above where Kids would have been had Dweck and Taxin resigned in an appropriate manner. To approximate this loss, I award Kids the profits generated by Success in its non-branded business for the Holiday 2005 and Spring 2006 seasons. In May 2005, Kids was hard at work on the Fall 2005 season and had started preparing for the Holiday 2005 and Spring 2006 seasons. Kids' designers already had been traveling and shopping internationally to develop ideas for the Spring 2006 season, and they had a good understanding about what Wal-Mart and Target's Spring 2006 needs would be. During their departure from Kids, Dweck and Taxin took this business. I award it to Kids and hold Dweck, Taxin, Success, and Premium liable for the profits that Success and Premium earned from these seasons.

Fine is jointly and severally liable with Dweck and Taxin for the Holiday 2005 and Spring 2006 profits. Contrary to Djemal's directives, Fine provided substantial assistance to Dweck and refused to keep Djemal informed about his activities. Fine reported regularly to Dweck about the status of Kids' business and helped Dweck find new premises for Success. Fine helped organize the mass employee departure and oversaw the attempted removal of Kids' property, going so far as to misrepresent to Nasser that he was "Gregory," the driver of the moving truck. As a critical participant in the wrongdoing surrounding Dweck and Taxin's departure from Kids, Fine is jointly and severally liable for the remedy. Accordingly, Dweck, Taxin, Fine, Success, and Premium shall account for and pay over to Kids all profits generated from the Holiday 2005 and Spring 2006 orders.

C. Dweck's Personal Expenses

Between 2002 and 2005, Dweck caused Kids to reimburse her $466,948 in personal and business expenses. Dweck conceded that $171,966 were personal expenses that she wrongfully charged to Kids. She claimed she could not determine whether $170,400 were business or personal, but nevertheless asserted that she should not be ordered to repay that amount to Kids. She testified that $124,582 corresponded to legitimate Kids' business expenses.

Under Delaware law, fiduciaries have a duty to account to their beneficiaries for their disposition of all assets that they manage in a fiduciary capacity. That duty carries with it the burden of proving that the disposition was proper. . . . [I]ncluded within the duty to account is a duty to maintain records that will discharge the fiduciaries' burden, and . . . if that duty is not observed, every presumption will be made against the fiduciaries.

Technicorp Int'l II, Inc. v. Johnston, 2000 WL 713750, at *2 (Del. Ch. May 31, 2000). "If corporate fiduciaries divert corporate assets to themselves for non-corporate purposes, they are liable for the amounts wrongfully diverted." Id. at *45.

As a Kids fiduciary, Dweck bore the burden at trial of proving that the challenged expenses were legitimate. Dweck failed to meet her burden. Instead, Dweck testified that she "didn't think Mr. Nasser would mind." Tr. 519. She later explained: "I felt that [the expense reimbursement] was part of, really, part of my compensation. In retrospect, I'm sorry I did it and I made a mistake." Tr. 521.

Dweck accordingly is liable to Kids for a total of $342,366 in expenses, comprising both the $171,966 of admittedly personal expenses and the $170,400 of indeterminate expenses. Nasser did not meaningfully challenge Dweck's assertion that $124,582 in expenses were legitimate, and I accept Dweck's testimony on this issue.

Fine is jointly and severally liable for the amounts due. As Kids' CFO, Fine owed fiduciary duties to Kids. From 2002 through 2005, Fine co-signed for the reimbursement of Dweck's personal expenses. He admitted at trial that he did not perform any review of Dweck's expenses before co-signing her reimbursement checks. He simply signed off.

Because Fine was not personally interested in Dweck's expense reimbursements, he can be held liable for a breach of the duty of loyalty only if he consciously facilitated wrongful action by another for a purpose other than advancing the best interests of the corporation. Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *11-12 (Del. Ch. July 12, 2010). When a fiduciary "fail[s] to act in the face of a known duty to act, thereby demonstrating a conscious disregard for [his] responsibilities, [he] breach[es] [his] duty of loyalty by failing to discharge that fiduciary obligation in good faith." Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (footnote omitted)). Fine facilitated Dweck's wrongful conduct by consciously abdicating his duty to review her expenses. Reviewing and approving expenditures was part of his job, yet he knowingly chose not to do it.

Fine's actions differ in kind from the expense-reviewing officer's conduct in Kuttner, where this Court declined to hold the officer liable. There, Hampshire Group Limited brought breach of fiduciary duty claims against Roger Clark, the company's former Vice President of Finance and Principal Accounting Officer, for improperly signing off on expense reimbursements for Ludwig Kuttner, the company's free-spending former CEO. Facing impending changes in the accounting rules, Kuttner submitted a backlog of more than $1 million in reimbursement requests from 1989 to 2002. Id. at *15. Clark had to review the mountain of paper. Id. at *14. Although Clark successfully weeded out the vast majority of Kuttner's personal expenses, several slipped through. Id. at *16. In its post-trial decision, the Court primarily faulted Hampshire's board of directors, finding that "[f]or over a decade, the Hampshire board knew that Kuttner was not complying with corporate policies and had a large backlog of unsubmitted expense reports." Id. at *13. Because of "the board's own torpor and lack of will," Clark was forced to conduct the expense review under severe time pressure. Id. at *20. The Court found that the amounts of the overlooked expenditures were de minimis and regarded it as understandable that Clark might have missed the challenged items. Id. at 18. The Court therefore could not "conclude that [Clark] acted in bad faith or in a grossly negligent manner." Id. at *20.

Fine's situation was different. He did not face a huge backlog, nor was he under time pressure. He had the opportunity to review Dweck's expenses on a periodic basis. He simply chose not to. Although some of Dweck's personal expenses were de minimis, Fine regularly signed off on thousands of dollars of personal expenditures without considering their validity or asking any questions. By doing so, Fine acted in bad faith. He and Dweck are therefore jointly and severally liable for $342,366.

D. Other Claims Against Dweck, Taxin, And Fine

Nasser pursued other, non-fiduciary tort claims against Dweck, Taxin, and Fine, including (i) misappropriation of trade secrets, (ii) deceptive trade practices, (iii) tortious interference with prospective business relations, and (iv) conversion. Because the tort claims arise from the same conduct as the fiduciary breaches, they are subsumed in the fiduciary analysis. The remedies I have imposed address the resulting harms and do so more completely by deploying the flexible and expansive remedial powers afforded by equity. I therefore do not reach the non-fiduciary tort claims.

E. The Overseas Payments

Dweck advanced a range of claims based on the overseas payments to Maubi and the Foreign Licensors. I will not address the legality of the tax structure. Shiboleth is a sophisticated international lawyer who believed that the structure was legal. The Internal Revenue Service is currently auditing Kids and its principals, and the propriety of the structure is best addressed in that forum.

In this case, the parties dispute who owns the overseas funds, whether the amounts must be repaid to Kids, and whether Nasser is liable to Dweck for some or all of the monies. Assuming that the structure is legal, I can perceive no reason under Delaware law why the owners of a closely held Delaware corporation could not agree to capitalize an entity using the structure Shiboleth designed. Equally important, Dweck cannot assert any causes of action relating to the payments. First, she acquiesced to them. Second, she was not harmed by them because she beneficially owns her pro rata share of the funds.

"Under Delaware law, acquiescence occurs `where a complainant has full knowledge of his rights and the material facts and (1) remains inactive for a considerable time; or (2) freely does what amounts to recognition of the complained of act; or (3) acts in a manner inconsistent with the subsequent repudiation, which leads the other party to believe the act has been approved.'" DiRienzo v. Steel P'rs Hldgs. L.P., 2009 WL 4652944, at *7 (Del. Ch. Dec. 8, 2009) (quoting Cantor Fitzgerald, L.P. v. Cantor, 2000 WL 307370, at *24 (Del. Ch. Mar. 13, 2000)). Assuming for purposes of discussion that Nasser and Shiboleth originally set up a wrongful scheme, Dweck agreed to it. She went along until 1998 and personally benefited after that. Her actions constitute classic acquiescence, barring her from challenging the overseas payments.

Equally important, as among Dweck, Nasser, and Kids, Dweck cannot claim any harm from the overseas payments. The trial record established that Dweck beneficially owns her pro rata share of the funds, comprising 30% of the $8.3 million held by Woodsford and 30% of the roughly $7 million held by Keilman, net of his fees. Nasser conceded both points and made clear that Woodsford would send Dweck her share and issue instructions jointly with Dweck to Keilman. Dweck can obtain her portion of these overseas funds at any time. She cannot claim a wrong or obtain a remedy with respect to monies that she currently owns and can access.

F. The Consulting Fees To RAJN

Dweck next claims that Nasser breached his fiduciary duties by ordering Kids to pay "consulting fees" to RAJN. These payments began in 1996 and were made each year until 2008. Dweck's challenges to the pre-2002 payments are barred by laches.

"Laches is an equitable principle that operates to prevent the enforcement of a claim in equity where a plaintiff has delayed unreasonably in bringing suit to the detriment of the defendant or third parties." Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery §11.06, at 11-61 (2010). "[T]he following factors [are] important in determining whether a party is guilty of laches: (1) knowledge of a claim, (2) unreasonable delay, (3) change of position on the part of those affected by the plaintiff's nonaction, and (4) the intervention of rights of those affected." Id. §11.06[b], at 11-62 to -63.

Dweck knew of the RAJN payments since 1996, but did not challenge them until May 2005. "[T]hree years is the measuring rod for the facial timeliness of claims for breach of fiduciary duty . . . ." Teachers' Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 665 (Del. Ch. 2006) (citing 10 Del. C. § 8106). Although a damages claim arising from wrongful conduct of a fiduciary that occurred outside the three-year period is presumptively time-barred, a plaintiff may nevertheless challenge a decision to continue the wrongful conduct if the decision was made in the three years before the filing of the complaint. Id. at 666.

In Aidinoff, the plaintiff challenged the defendants' decision to perform under an allegedly unfair contract. Id. Although the contract was first entered into more than twenty years earlier, it contained a termination provision that gave the defendants "the business option of choosing not to continue that relationship annually . . . ." Id. Because the contract could be freely terminated on an annual basis, the plaintiff's claim was not time-barred as to renewals within three years of the complaint. Id. at 667.

Like the defendants in Aidinoff, Nasser could have discontinued the RAJN payments at any time. Each payment represented a discrete decision to perpetuate an unfair course of conduct. Each payment is therefore evaluated separately for laches. That doctrine bars any challenge to payments made more than three years before Dweck filed her complaint. Challenges to later payments are not time-barred.

The payments to RAJN were interested transactions between a corporation and its controlling shareholder, so Nasser bore the burden of demonstrating their entire fairness to Kids. See Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994). Neither Nasser nor his entity, RAJN, rendered any services to Kids that would have justified the consulting fees, and Nasser did not proffer any creditable explanation as to how they were fair to Kids. Nasser therefore failed to carry his burden and is liable to Kids for the consulting fees paid to RAJN from May 2002 onward. The total amount due is $3,864,583. JX 884, Ex. A

G. Nasser's Appointment Of Djemal As Kids' CEO

Dweck claims that Nasser breached his fiduciary duty by appointing his nephew, Djemal, as CEO at the March 11, 2005 board meeting. Assuming for purposes of discussion that appointing Djemal was an interested transaction that should be reviewed for entire fairness, Nasser carried his burden of proof.

The evidence at trial established that Nasser was shocked by Dweck's admission at the March 11 stockholder meeting that she was competing from Kids' premises and by her subsequent refusal to serve on Kids' board of directors. Nasser had not groomed a successor. Given Dweck's central role in the day-to-day affairs of the company, Nasser needed to fill her position immediately. With more than forty years experience in the apparel industry, Djemal was a qualified candidate. Under the circumstances, Nasser's appointment of Djemal as Kids' CEO was entirely fair to Kids and did not constitute a breach of fiduciary duty. For similar reasons, hiring Djemal was not an act of waste.

H. The Seabreeze Joint Venture

Dweck challenged Nasser and Djemal's decision to enter into the Seabreeze joint venture as a breach of fiduciary duty. Because Nasser controlled both Kids and Seabreeze, the joint venture is subject to entire fairness review. Lynch, 638 A.2d at 1115.

As controller of both entities, Nasser unilaterally set the terms of the joint venture. The venture nevertheless was profitable for Kids, netting $356,808 over two years. Although I initially was skeptical of the economic terms, Nasser and Djemal offered evidence at trial that the terms comported with industry standards. Dweck offered no evidence to the contrary. Based on the evidence presented, I find that Nasser carried his burden by demonstrating that the terms of the Seabreeze joint venture were entirely fair to Kids.

I. The $3,076,400 In Cash

Kids had $18,312,555 of cash or cash equivalents on its balance sheet as of March 31, 2005. By the time Nasser shut the company down, Kids only had $832,414 remaining. Much of the difference was accounted for at trial: $8,346,211 went to Woodsford; $3,830,537 went for legal fees; $1,258,718 went to RAJN for consulting fees; $968,275 went to Djemal for services rendered to Kids. The remainder, $3,076,400, has not been accounted for.

Dweck sought a full accounting. Such a remedy would be overbroad. Nevertheless, given Nasser's history of insider transactions and the gap in the evidentiary record, Nasser is ordered to account to Kids for the unidentified $3,076,400. Whether any further remedy is warranted must await the completion of the accounting.

J. Kids' Payments For Attorneys' Fees

At trial and in her post-trial briefs, Dweck belatedly challenged Kids' payment of Nasser's, Djemal's, and its own legal fees in this litigation. She cited the fact of payment and the amounts incurred, but did not articulate how the payments might be wrongful.

Dweck named Kids as a defendant, not simply a nominal defendant, forcing Kids to retain counsel. Nasser and Djemal possessed the right to mandatory advancements under Article Sixth of Kids' Certificate of Incorporation. See JX 932. Dweck did not offer any reason why their advancement rights would not have been triggered when she sued them in their covered capacities for breaches of fiduciary duty. On the current record, the payments for legal fees appear proper.

K. Fee Shifting

Each side asked me to shift fees under the bad faith exception to the American Rule. Each side litigated vigorously. Each side has been found to have engaged in conduct for which liability has been imposed. Although Dweck's striking breaches of the duty of loyalty and her frequently non-creditable testimony came closest to qualifying under the bad faith exception, the case as a whole does not warrant fee shifting.

III. CONCLUSION

Dweck, Taxin, Fine, and Nasser are liable to Kids as set forth herein. For purposes of the accountings ordered herein, profit shall be measured as gross profit less selling, general, and administrative expenses. See JX 179, Ex. J. Pre-judgment interest is due on all amounts at the legal rate, compounded quarterly. The parties will confer regarding the additional proceedings required by this opinion and submit an implementing order.

[1] First names are used for clarity and without suggesting familiarity or intending disrespect.

William Prickett (argued), John H. Small, and George H. Seitz, III, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, for plaintiff.

A. Gilchrist Sparks, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant UOP, Inc.

Robert K. Payson and Peter M. Sieglaff, of Potter, Anderson & Corroon, Wilmington, and Alan N. Halkett (argued) of Latham & Watkins, Los Angeles, Cal., for defendant The Signal Companies, Inc.

Before HERRMANN, C.J., McNEILLY, QUILLEN, HORSEY and MOORE, JJ., constituting the Court en Banc.

[702] MOORE, Justice:

This post-trial appeal was reheard en banc from a decision of the Court of Chancery.^[1] [703] It was brought by the class action plaintiff below, a former shareholder of UOP, Inc., who challenged the elimination of UOP's minority shareholders by a cash-out merger between UOP and its majority owner, The Signal Companies, Inc.^[2] Originally, the defendants in this action were Signal, UOP, certain officers and directors of those companies, and UOP's investment banker, Lehman Brothers Kuhn Loeb, Inc.^[3] The present Chancellor held that the terms of the merger were fair to the plaintiff and the other minority shareholders of UOP. Accordingly, he entered judgment in favor of the defendants.

Numerous points were raised by the parties, but we address only the following questions presented by the trial court's opinion:

1) The plaintiff's duty to plead sufficient facts demonstrating the unfairness of the challenged merger;

2) The burden of proof upon the parties where the merger has been approved by the purportedly informed vote of a majority of the minority shareholders;

3) The fairness of the merger in terms of adequacy of the defendants' disclosures to the minority shareholders;

4) The fairness of the merger in terms of adequacy of the price paid for the minority shares and the remedy appropriate to that issue; and

5) The continued force and effect of Singer v. Magnavox Co., Del.Supr., 380 A.2d 969, 980 (1977), and its progeny.

In ruling for the defendants, the Chancellor re-stated his earlier conclusion that the plaintiff in a suit challenging a cash-out merger must allege specific acts of fraud, misrepresentation, or other items of misconduct to demonstrate the unfairness of the merger terms to the minority.^[4] We approve this rule and affirm it.

The Chancellor also held that even though the ultimate burden of proof is on the majority shareholder to show by a preponderance of the evidence that the transaction is fair, it is first the burden of the plaintiff attacking the merger to demonstrate some basis for invoking the fairness obligation. We agree with that principle. However, where corporate action has been approved by an informed vote of a majority of the minority shareholders, we conclude that the burden entirely shifts to the plaintiff to show that the transaction was unfair to the minority. See, e.g., Michelson v. Duncan, Del.Supr., 407 A.2d 211, 224 (1979). But in all this, the burden clearly remains on those relying on the vote to show that they completely disclosed all material facts relevant to the transaction.

Here, the record does not support a conclusion that the minority stockholder vote was an informed one. Material information, necessary to acquaint those shareholders with the bargaining positions of Signal and UOP, was withheld under circumstances amounting to a breach of fiduciary duty. We therefore conclude that this merger does not meet the test of fairness, at least as we address that concept, and no burden thus shifted to the plaintiff by reason of the minority shareholder vote. Accordingly, we reverse and remand for further proceedings consistent herewith.

In considering the nature of the remedy available under our law to minority shareholders in a cash-out merger, we believe that it is, and hereafter should be, an appraisal under 8 Del.C. § 262 as hereinafter construed. We therefore overrule Lynch v. Vickers Energy Corp., Del.Supr., [704] 429 A.2d 497 (1981) (Lynch II) to the extent that it purports to limit a stockholder's monetary relief to a specific damage formula. See Lynch II, 429 A.2d at 507-08 (McNeilly & Quillen, JJ., dissenting). But to give full effect to section 262 within the framework of the General Corporation Law we adopt a more liberal, less rigid and stylized, approach to the valuation process than has heretofore been permitted by our courts. While the present state of these proceedings does not admit the plaintiff to the appraisal remedy per se, the practical effect of the remedy we do grant him will be co-extensive with the liberalized valuation and appraisal methods we herein approve for cases coming after this decision.

Our treatment of these matters has necessarily led us to a reconsideration of the business purpose rule announced in the trilogy of Singer v. Magnavox Co., supra; Tanzer v. International General Industries, Inc., Del.Supr., 379 A.2d 1121 (1977); and Roland International Corp. v. Najjar, Del.Supr., 407 A.2d 1032 (1979). For the reasons hereafter set forth we consider that the business purpose requirement of these cases is no longer the law of Delaware.

I.

The facts found by the trial court, pertinent to the issues before us, are supported by the record, and we draw from them as set out in the Chancellor's opinion.^[5]

Signal is a diversified, technically based company operating through various subsidiaries. Its stock is publicly traded on the New York, Philadelphia and Pacific Stock Exchanges. UOP, formerly known as Universal Oil Products Company, was a diversified industrial company engaged in various lines of business, including petroleum and petro-chemical services and related products, construction, fabricated metal products, transportation equipment products, chemicals and plastics, and other products and services including land development, lumber products and waste disposal. Its stock was publicly held and listed on the New York Stock Exchange.

In 1974 Signal sold one of its wholly-owned subsidiaries for $420,000,000 in cash. See Gimbel v. Signal Companies, Inc., Del. Ch., 316 A.2d 599, aff'd, Del.Supr., 316 A.2d 619 (1974). While looking to invest this cash surplus, Signal became interested in UOP as a possible acquisition. Friendly negotiations ensued, and Signal proposed to acquire a controlling interest in UOP at a price of $19 per share. UOP's representatives sought $25 per share. In the arm's length bargaining that followed, an understanding was reached whereby Signal agreed to purchase from UOP 1,500,000 shares of UOP's authorized but unissued stock at $21 per share.

This purchase was contingent upon Signal making a successful cash tender offer for 4,300,000 publicly held shares of UOP, also at a price of $21 per share. This combined method of acquisition permitted Signal to acquire 5,800,000 shares of stock, representing 50.5% of UOP's outstanding shares. The UOP board of directors advised the company's shareholders that it had no objection to Signal's tender offer at that price. Immediately before the announcement of the tender offer, UOP's common stock had been trading on the New York Stock Exchange at a fraction under $14 per share.

The negotiations between Signal and UOP occurred during April 1975, and the resulting tender offer was greatly oversubscribed. However, Signal limited its total purchase of the tendered shares so that, when coupled with the stock bought from UOP, it had achieved its goal of becoming a 50.5% shareholder of UOP.

Although UOP's board consisted of thirteen directors, Signal nominated and elected only six. Of these, five were either directors or employees of Signal. The sixth, a partner in the banking firm of Lazard Freres & Co., had been one of Signal's representatives in the negotiations and bargaining with UOP concerning the tender offer and purchase price of the UOP shares.

[705] However, the president and chief executive officer of UOP retired during 1975, and Signal caused him to be replaced by James V. Crawford, a long-time employee and senior executive vice president of one of Signal's wholly-owned subsidiaries. Crawford succeeded his predecessor on UOP's board of directors and also was made a director of Signal.

By the end of 1977 Signal basically was unsuccessful in finding other suitable investment candidates for its excess cash, and by February 1978 considered that it had no other realistic acquisitions available to it on a friendly basis. Once again its attention turned to UOP.

The trial court found that at the instigation of certain Signal management personnel, including William W. Walkup, its board chairman, and Forrest N. Shumway, its president, a feasibility study was made concerning the possible acquisition of the balance of UOP's outstanding shares. This study was performed by two Signal officers, Charles S. Arledge, vice president (director of planning), and Andrew J. Chitiea, senior vice president (chief financial officer). Messrs. Walkup, Shumway, Arledge and Chitiea were all directors of UOP in addition to their membership on the Signal board.

Arledge and Chitiea concluded that it would be a good investment for Signal to acquire the remaining 49.5% of UOP shares at any price up to $24 each. Their report was discussed between Walkup and Shumway who, along with Arledge, Chitiea and Brewster L. Arms, internal counsel for Signal, constituted Signal's senior management. In particular, they talked about the proper price to be paid if the acquisition was pursued, purportedly keeping in mind that as UOP's majority shareholder, Signal owed a fiduciary responsibility to both its own stockholders as well as to UOP's minority. It was ultimately agreed that a meeting of Signal's executive committee would be called to propose that Signal acquire the remaining outstanding stock of UOP through a cash-out merger in the range of $20 to $21 per share.

The executive committee meeting was set for February 28, 1978. As a courtesy, UOP's president, Crawford, was invited to attend, although he was not a member of Signal's executive committee. On his arrival, and prior to the meeting, Crawford was asked to meet privately with Walkup and Shumway. He was then told of Signal's plan to acquire full ownership of UOP and was asked for his reaction to the proposed price range of $20 to $21 per share. Crawford said he thought such a price would be "generous", and that it was certainly one which should be submitted to UOP's minority shareholders for their ultimate consideration. He stated, however, that Signal's 100% ownership could cause internal problems at UOP. He believed that employees would have to be given some assurance of their future place in a fully-owned Signal subsidiary. Otherwise, he feared the departure of essential personnel. Also, many of UOP's key employees had stock option incentive programs which would be wiped out by a merger. Crawford therefore urged that some adjustment would have to be made, such as providing a comparable incentive in Signal's shares, if after the merger he was to maintain his quality of personnel and efficiency at UOP.

Thus, Crawford voiced no objection to the $20 to $21 price range, nor did he suggest that Signal should consider paying more than $21 per share for the minority interests. Later, at the executive committee meeting the same factors were discussed, with Crawford repeating the position he earlier took with Walkup and Shumway. Also considered was the 1975 tender offer and the fact that it had been greatly oversubscribed at $21 per share. For many reasons, Signal's management concluded that the acquisition of UOP's minority shares provided the solution to a number of its business problems.

Thus, it was the consensus that a price of $20 to $21 per share would be fair to both Signal and the minority shareholders of UOP. Signal's executive committee authorized [706] its management "to negotiate" with UOP "for a cash acquisition of the minority ownership in UOP, Inc., with the intention of presenting a proposal to [Signal's] board of directors ... on March 6, 1978". Immediately after this February 28, 1978 meeting, Signal issued a press release stating:

The Signal Companies, Inc. and UOP, Inc. are conducting negotiations for the acquisition for cash by Signal of the 49.5 per cent of UOP which it does not presently own, announced Forrest N. Shumway, president and chief executive officer of Signal, and James V. Crawford, UOP president.

Price and other terms of the proposed transaction have not yet been finalized and would be subject to approval of the boards of directors of Signal and UOP, scheduled to meet early next week, the stockholders of UOP and certain federal agencies.

The announcement also referred to the fact that the closing price of UOP's common stock on that day was $14.50 per share.

Two days later, on March 2, 1978, Signal issued a second press release stating that its management would recommend a price in the range of $20 to $21 per share for UOP's 49.5% minority interest. This announcement referred to Signal's earlier statement that "negotiations" were being conducted for the acquisition of the minority shares.

Between Tuesday, February 28, 1978 and Monday, March 6, 1978, a total of four business days, Crawford spoke by telephone with all of UOP's non-Signal, i.e., outside, directors. Also during that period, Crawford retained Lehman Brothers to render a fairness opinion as to the price offered the minority for its stock. He gave two reasons for this choice. First, the time schedule between the announcement and the board meetings was short (by then only three business days) and since Lehman Brothers had been acting as UOP's investment banker for many years, Crawford felt that it would be in the best position to respond on such brief notice. Second, James W. Glanville, a long-time director of UOP and a partner in Lehman Brothers, had acted as a financial advisor to UOP for many years. Crawford believed that Glanville's familiarity with UOP, as a member of its board, would also be of assistance in enabling Lehman Brothers to render a fairness opinion within the existing time constraints.

Crawford telephoned Glanville, who gave his assurance that Lehman Brothers had no conflicts that would prevent it from accepting the task. Glanville's immediate personal reaction was that a price of $20 to $21 would certainly be fair, since it represented almost a 50% premium over UOP's market price. Glanville sought a $250,000 fee for Lehman Brothers' services, but Crawford thought this too much. After further discussions Glanville finally agreed that Lehman Brothers would render its fairness opinion for $150,000.

During this period Crawford also had several telephone contacts with Signal officials. In only one of them, however, was the price of the shares discussed. In a conversation with Walkup, Crawford advised that as a result of his communications with UOP's non-Signal directors, it was his feeling that the price would have to be the top of the proposed range, or $21 per share, if the approval of UOP's outside directors was to be obtained. But again, he did not seek any price higher than $21.

Glanville assembled a three-man Lehman Brothers team to do the work on the fairness opinion. These persons examined relevant documents and information concerning UOP, including its annual reports and its Securities and Exchange Commission filings from 1973 through 1976, as well as its audited financial statements for 1977, its interim reports to shareholders, and its recent and historical market prices and trading volumes. In addition, on Friday, March 3, 1978, two members of the Lehman Brothers team flew to UOP's headquarters in Des Plaines, Illinois, to perform a "due diligence" visit, during the course of which they interviewed Crawford as well as UOP's general counsel, its chief financial officer, and other key executives and personnel.

[707] As a result, the Lehman Brothers team concluded that "the price of either $20 or $21 would be a fair price for the remaining shares of UOP". They telephoned this impression to Glanville, who was spending the weekend in Vermont.

On Monday morning, March 6, 1978, Glanville and the senior member of the Lehman Brothers team flew to Des Plaines to attend the scheduled UOP directors meeting. Glanville looked over the assembled information during the flight. The two had with them the draft of a "fairness opinion letter" in which the price had been left blank. Either during or immediately prior to the directors' meeting, the two-page "fairness opinion letter" was typed in final form and the price of $21 per share was inserted.

On March 6, 1978, both the Signal and UOP boards were convened to consider the proposed merger. Telephone communications were maintained between the two meetings. Walkup, Signal's board chairman, and also a UOP director, attended UOP's meeting with Crawford in order to present Signal's position and answer any questions that UOP's non-Signal directors might have. Arledge and Chitiea, along with Signal's other designees on UOP's board, participated by conference telephone. All of UOP's outside directors attended the meeting either in person or by conference telephone.

First, Signal's board unanimously adopted a resolution authorizing Signal to propose to UOP a cash merger of $21 per share as outlined in a certain merger agreement and other supporting documents. This proposal required that the merger be approved by a majority of UOP's outstanding minority shares voting at the stockholders meeting at which the merger would be considered, and that the minority shares voting in favor of the merger, when coupled with Signal's 50.5% interest would have to comprise at least two-thirds of all UOP shares. Otherwise the proposed merger would be deemed disapproved.

UOP's board then considered the proposal. Copies of the agreement were delivered to the directors in attendance, and other copies had been forwarded earlier to the directors participating by telephone. They also had before them UOP financial data for 1974-1977, UOP's most recent financial statements, market price information, and budget projections for 1978. In addition they had Lehman Brothers' hurriedly prepared fairness opinion letter finding the price of $21 to be fair. Glanville, the Lehman Brothers partner, and UOP director, commented on the information that had gone into preparation of the letter.

Signal also suggests that the Arledge-Chitiea feasibility study, indicating that a price of up to $24 per share would be a "good investment" for Signal, was discussed at the UOP directors' meeting. The Chancellor made no such finding, and our independent review of the record, detailed infra, satisfies us by a preponderance of the evidence that there was no discussion of this document at UOP's board meeting. Furthermore, it is clear beyond peradventure that nothing in that report was ever disclosed to UOP's minority shareholders prior to their approval of the merger.

After consideration of Signal's proposal, Walkup and Crawford left the meeting to permit a free and uninhibited exchange between UOP's non-Signal directors. Upon their return a resolution to accept Signal's offer was then proposed and adopted. While Signal's men on UOP's board participated in various aspects of the meeting, they abstained from voting. However, the minutes show that each of them "if voting would have voted yes".

On March 7, 1978, UOP sent a letter to its shareholders advising them of the action taken by UOP's board with respect to Signal's offer. This document pointed out, among other things, that on February 28, 1978 "both companies had announced negotiations were being conducted".

Despite the swift board action of the two companies, the merger was not submitted to UOP's shareholders until their annual [708] meeting on May 26, 1978. In the notice of that meeting and proxy statement sent to shareholders in May, UOP's management and board urged that the merger be approved. The proxy statement also advised:

The price was determined after discussions between James V. Crawford, a director of Signal and Chief Executive Officer of UOP, and officers of Signal which took place during meetings on February 28, 1978, and in the course of several subsequent telephone conversations. (Emphasis added.)

In the original draft of the proxy statement the word "negotiations" had been used rather than "discussions". However, when the Securities and Exchange Commission sought details of the "negotiations" as part of its review of these materials, the term was deleted and the word "discussions" was substituted. The proxy statement indicated that the vote of UOP's board in approving the merger had been unanimous. It also advised the shareholders that Lehman Brothers had given its opinion that the merger price of $21 per share was fair to UOP's minority. However, it did not disclose the hurried method by which this conclusion was reached.

As of the record date of UOP's annual meeting, there were 11,488,302 shares of UOP common stock outstanding, 5,688,302 of which were owned by the minority. At the meeting only 56%, or 3,208,652, of the minority shares were voted. Of these, 2,953,812, or 51.9% of the total minority, voted for the merger, and 254,840 voted against it. When Signal's stock was added to the minority shares voting in favor, a total of 76.2% of UOP's outstanding shares approved the merger while only 2.2% opposed it.

By its terms the merger became effective on May 26, 1978, and each share of UOP's stock held by the minority was automatically converted into a right to receive $21 cash.

II.

A.

A primary issue mandating reversal is the preparation by two UOP directors, Arledge and Chitiea, of their feasibility study for the exclusive use and benefit of Signal. This document was of obvious significance to both Signal and UOP. Using UOP data, it described the advantages to Signal of ousting the minority at a price range of $21-$24 per share. Mr. Arledge, one of the authors, outlined the benefits to Signal:^[6]

Purpose Of The Merger

1) Provides an outstanding investment opportunity for Signal — (Better than any recent acquisition we have seen.)

2) Increases Signal's earnings.

3) Facilitates the flow of resources between Signal and its subsidiaries — (Big factor — works both ways.)

4) Provides cost savings potential for Signal and UOP.

5) Improves the percentage of Signal's `operating earnings' as opposed to `holding company earnings'.

6) Simplifies the understanding of Signal.

7) Facilitates technological exchange among Signal's subsidiaries.

8) Eliminates potential conflicts of interest.

Having written those words, solely for the use of Signal, it is clear from the record that neither Arledge nor Chitiea shared this report with their fellow directors of UOP. We are satisfied that no one else did either. This conduct hardly meets the fiduciary standards applicable to such a transaction. While Mr. Walkup, Signal's chairman of the board and a UOP director, attended the March 6, 1978 UOP board meeting and testified at trial that he had discussed the Arledge-Chitiea report with the UOP directors at this meeting, the record does not support this assertion. Perhaps it is the result of some confusion on Mr. Walkup's [709] part. In any event Mr. Shumway, Signal's president, testified that he made sure the Signal outside directors had this report prior to the March 6, 1978 Signal board meeting, but he did not testify that the Arledge-Chitiea report was also sent to UOP's outside directors.

Mr. Crawford, UOP's president, could not recall that any documents, other than a draft of the merger agreement, were sent to UOP's directors before the March 6, 1978 UOP meeting. Mr. Chitiea, an author of the report, testified that it was made available to Signal's directors, but to his knowledge it was not circulated to the outside directors of UOP. He specifically testified that he "didn't share" that information with the outside directors of UOP with whom he served.

None of UOP's outside directors who testified stated that they had seen this document. The minutes of the UOP board meeting do not identify the Arledge-Chitiea report as having been delivered to UOP's outside directors. This is particularly significant since the minutes describe in considerable detail the materials that actually were distributed. While these minutes recite Mr. Walkup's presentation of the Signal offer, they do not mention the Arledge-Chitiea report or any disclosure that Signal considered a price of up to $24 to be a good investment. If Mr. Walkup had in fact provided such important information to UOP's outside directors, it is logical to assume that these carefully drafted minutes would disclose it. The post-trial briefs of Signal and UOP contain a thorough description of the documents purportedly available to their boards at the March 6, 1978, meetings. Although the Arledge-Chitiea report is specifically identified as being available to the Signal directors, there is no mention of it being among the documents submitted to the UOP board. Even when queried at a prior oral argument before this Court, counsel for Signal did not claim that the Arledge-Chitiea report had been disclosed to UOP's outside directors. Instead, he chose to belittle its contents. This was the same approach taken before us at the last oral argument.

Actually, it appears that a three-page summary of figures was given to all UOP directors. Its first page is identical to one page of the Arledge-Chitiea report, but this dealt with nothing more than a justification of the $21 price. Significantly, the contents of this three-page summary are what the minutes reflect Mr. Walkup told the UOP board. However, nothing contained in either the minutes or this three-page summary reflects Signal's study regarding the $24 price.

The Arledge-Chitiea report speaks for itself in supporting the Chancellor's finding that a price of up to $24 was a "good investment" for Signal. It shows that a return on the investment at $21 would be 15.7% versus 15.5% at $24 per share. This was a difference of only two-tenths of one percent, while it meant over $17,000,000 to the minority. Under such circumstances, paying UOP's minority shareholders $24 would have had relatively little long-term effect on Signal, and the Chancellor's findings concerning the benefit to Signal, even at a price of $24, were obviously correct. Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972).

Certainly, this was a matter of material significance to UOP and its shareholders. Since the study was prepared by two UOP directors, using UOP information for the exclusive benefit of Signal, and nothing whatever was done to disclose it to the outside UOP directors or the minority shareholders, a question of breach of fiduciary duty arises. This problem occurs because there were common Signal-UOP directors participating, at least to some extent, in the UOP board's decision-making processes without full disclosure of the conflicts they faced.^[7]

[710] B.

In assessing this situation, the Court of Chancery was required to:

examine what information defendants had and to measure it against what they gave to the minority stockholders, in a context in which `complete candor' is required. In other words, the limited function of the Court was to determine whether defendants had disclosed all information in their possession germane to the transaction in issue. And by `germane' we mean, for present purposes, information such as a reasonable shareholder would consider important in deciding whether to sell or retain stock.

* * * * * *

... Completeness, not adequacy, is both the norm and the mandate under present circumstances.

Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278, 281 (1977) (Lynch I). This is merely stating in another way the long-existing principle of Delaware law that these Signal designated directors on UOP's board still owed UOP and its shareholders an uncompromising duty of loyalty. The classic language of Guth v. Loft, Inc., Del.Supr., 5 A.2d 503, 510 (1939), requires no embellishment:

A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.

Given the absence of any attempt to structure this transaction on an arm's length basis, Signal cannot escape the effects of the conflicts it faced, particularly when its designees on UOP's board did not totally abstain from participation in the matter. There is no "safe harbor" for such divided loyalties in Delaware. When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain. Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 57-58 (1952). The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts. Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 110 (1952); Bastian v. Bourns, Inc., Del.Ch., 256 A.2d 680, 681 (1969), aff'd, Del.Supr., 278 A.2d 467 (1970); David J. Greene & Co. v. Dunhill International Inc., Del.Ch., 249 A.2d 427, 431 (1968).

There is no dilution of this obligation where one holds dual or multiple directorships, as in a parent-subsidiary context. Levien v. Sinclair Oil Corp., Del.Ch., 261 A.2d 911, 915 (1969). Thus, individuals who act in a dual capacity as directors of two corporations, one of whom is parent and the other subsidiary, owe the same duty of good management to both corporations, and in the absence of an independent negotiating [711] structure (see note 7, supra), or the directors' total abstention from any participation in the matter, this duty is to be exercised in light of what is best for both companies. Warshaw v. Calhoun, Del. Supr., 221 A.2d 487, 492 (1966). The record demonstrates that Signal has not met this obligation.

C.

The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock. Moore, The "Interested" Director or Officer Transaction, 4 Del.J. Corp.L. 674, 676 (1979); Nathan & Shapiro, Legal Standard of Fairness of Merger Terms Under Delaware Law, 2 Del.J. Corp.L. 44, 46-47 (1977). See Tri-Continental Corp. v. Battye, Del.Supr., 74 A.2d 71, 72 (1950); 8 Del.C. § 262(h). However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness. However, in a non-fraudulent transaction we recognize that price may be the preponderant consideration outweighing other features of the merger. Here, we address the two basic aspects of fairness separately because we find reversible error as to both.

D.

Part of fair dealing is the obvious duty of candor required by Lynch I, supra. Moreover, one possessing superior knowledge may not mislead any stockholder by use of corporate information to which the latter is not privy. Lank v. Steiner, Del. Supr., 224 A.2d 242, 244 (1966). Delaware has long imposed this duty even upon persons who are not corporate officers or directors, but who nonetheless are privy to matters of interest or significance to their company. Brophy v. Cities Service Co., Del. Ch., 70 A.2d 5, 7 (1949). With the well-established Delaware law on the subject, and the Court of Chancery's findings of fact here, it is inevitable that the obvious conflicts posed by Arledge and Chitiea's preparation of their "feasibility study", derived from UOP information, for the sole use and benefit of Signal, cannot pass muster.

The Arledge-Chitiea report is but one aspect of the element of fair dealing. How did this merger evolve? It is clear that it was entirely initiated by Signal. The serious time constraints under which the principals acted were all set by Signal. It had not found a suitable outlet for its excess cash and considered UOP a desirable investment, particularly since it was now in a position to acquire the whole company for itself. For whatever reasons, and they were only Signal's, the entire transaction was presented to and approved by UOP's board within four business days. Standing alone, this is not necessarily indicative of any lack of fairness by a majority shareholder. It was what occurred, or more properly, what did not occur, during this brief period that makes the time constraints imposed by Signal relevant to the issue of fairness.

The structure of the transaction, again, was Signal's doing. So far as negotiations were concerned, it is clear that they were modest at best. Crawford, Signal's man at UOP, never really talked price with Signal, except to accede to its management's statements on the subject, and to convey to Signal the UOP outside directors' view that as between the $20-$21 range under consideration, it would have to be $21. The latter is not a surprising outcome, but hardly arm's length negotiations. Only the protection of benefits for UOP's key employees and the issue of Lehman Brothers' fee approached any concept of bargaining.

[712] As we have noted, the matter of disclosure to the UOP directors was wholly flawed by the conflicts of interest raised by the Arledge-Chitiea report. All of those conflicts were resolved by Signal in its own favor without divulging any aspect of them to UOP.

This cannot but undermine a conclusion that this merger meets any reasonable test of fairness. The outside UOP directors lacked one material piece of information generated by two of their colleagues, but shared only with Signal. True, the UOP board had the Lehman Brothers' fairness opinion, but that firm has been blamed by the plaintiff for the hurried task it performed, when more properly the responsibility for this lies with Signal. There was no disclosure of the circumstances surrounding the rather cursory preparation of the Lehman Brothers' fairness opinion. Instead, the impression was given UOP's minority that a careful study had been made, when in fact speed was the hallmark, and Mr. Glanville, Lehman's partner in charge of the matter, and also a UOP director, having spent the weekend in Vermont, brought a draft of the "fairness opinion letter" to the UOP directors' meeting on March 6, 1978 with the price left blank. We can only conclude from the record that the rush imposed on Lehman Brothers by Signal's timetable contributed to the difficulties under which this investment banking firm attempted to perform its responsibilities. Yet, none of this was disclosed to UOP's minority.

Finally, the minority stockholders were denied the critical information that Signal considered a price of $24 to be a good investment. Since this would have meant over $17,000,000 more to the minority, we cannot conclude that the shareholder vote was an informed one. Under the circumstances, an approval by a majority of the minority was meaningless. Lynch I, 383 A.2d at 279, 281; Cahall v. Lofland, Del.Ch., 114 A. 224 (1921).

Given these particulars and the Delaware law on the subject, the record does not establish that this transaction satisfies any reasonable concept of fair dealing, and the Chancellor's findings in that regard must be reversed.

E.

Turning to the matter of price, plaintiff also challenges its fairness. His evidence was that on the date the merger was approved the stock was worth at least $26 per share. In support, he offered the testimony of a chartered investment analyst who used two basic approaches to valuation: a comparative analysis of the premium paid over market in ten other tender offer-merger combinations, and a discounted cash flow analysis.

In this breach of fiduciary duty case, the Chancellor perceived that the approach to valuation was the same as that in an appraisal proceeding. Consistent with precedent, he rejected plaintiff's method of proof and accepted defendants' evidence of value as being in accord with practice under prior case law. This means that the so-called "Delaware block" or weighted average method was employed wherein the elements of value, i.e., assets, market price, earnings, etc., were assigned a particular weight and the resulting amounts added to determine the value per share. This procedure has been in use for decades. See In re General Realty & Utilities Corp., Del.Ch., 52 A.2d 6, 14-15 (1947). However, to the extent it excludes other generally accepted techniques used in the financial community and the courts, it is now clearly outmoded. It is time we recognize this in appraisal and other stock valuation proceedings and bring our law current on the subject.

While the Chancellor rejected plaintiff's discounted cash flow method of valuing UOP's stock, as not corresponding with "either logic or the existing law" (426 A.2d at 1360), it is significant that this was essentially the focus, i.e., earnings potential of UOP, of Messrs. Arledge and Chitiea in their evaluation of the merger. Accordingly, the standard "Delaware block" or weighted average method of valuation, formerly [713] employed in appraisal and other stock valuation cases, shall no longer exclusively control such proceedings. We believe that a more liberal approach must include proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court, subject only to our interpretation of 8 Del.C. § 262(h), infra. See also D.R.E. 702-05. This will obviate the very structured and mechanistic procedure that has heretofore governed such matters. See Jacques Coe & Co. v. Minneapolis-Moline Co., Del.Ch., 75 A.2d 244, 247 (1950); Tri-Continental Corp. v. Battye, Del.Ch., 66 A.2d 910, 917-18 (1949); In re General Realty and Utilities Corp., supra.

Fair price obviously requires consideration of all relevant factors involving the value of a company. This has long been the law of Delaware as stated in Tri-Continental Corp., 74 A.2d at 72:

The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents this true or intrinsic value, the appraiser and the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value. Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholders' interest, but must be considered by the agency fixing the value. (Emphasis added.)

This is not only in accord with the realities of present day affairs, but it is thoroughly consonant with the purpose and intent of our statutory law. Under 8 Del.C. § 262(h), the Court of Chancery:

shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors ... (Emphasis added)

See also Bell v. Kirby Lumber Corp., Del. Supr., 413 A.2d 137, 150-51 (1980) (Quillen, J., concurring).

It is significant that section 262 now mandates the determination of "fair" value based upon "all relevant factors". Only the speculative elements of value that may arise from the "accomplishment or expectation" of the merger are excluded. We take this to be a very narrow exception to the appraisal process, designed to eliminate use of pro forma data and projections of a speculative variety relating to the completion of a merger. But elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered. When the trial court deems it appropriate, fair value also includes any damages, resulting from the taking, which the stockholders sustain as a class. If that was not the case, then the obligation to consider "all relevant factors" in the valuation process would be eroded. We are supported in this view not only by Tri-Continental Corp., 74 A.2d at 72, but also by the evolutionary amendments to section 262.

Prior to an amendment in 1976, the earlier relevant provision of section 262 stated:

(f) The appraiser shall determine the value of the stock of the stockholders ... The Court shall by its decree determine the value of the stock of the stockholders entitled to payment therefor ...

The first references to "fair" value occurred in a 1976 amendment to section 262(f), which provided:

[714] (f) ... the Court shall appraise the shares, determining their fair value exclusively of any element of value arising from the accomplishment or expectation of the merger....

It was not until the 1981 amendment to section 262 that the reference to "fair value" was repeatedly emphasized and the statutory mandate that the Court "take into account all relevant factors" appeared [section 262(h)]. Clearly, there is a legislative intent to fully compensate shareholders for whatever their loss may be, subject only to the narrow limitation that one can not take speculative effects of the merger into account.

Although the Chancellor received the plaintiff's evidence, his opinion indicates that the use of it was precluded because of past Delaware practice. While we do not suggest a monetary result one way or the other, we do think the plaintiff's evidence should be part of the factual mix and weighed as such. Until the $21 price is measured on remand by the valuation standards mandated by Delaware law, there can be no finding at the present stage of these proceedings that the price is fair. Given the lack of any candid disclosure of the material facts surrounding establishment of the $21 price, the majority of the minority vote, approving the merger, is meaningless.

The plaintiff has not sought an appraisal, but rescissory damages of the type contemplated by Lynch v. Vickers Energy Corp., Del.Supr., 429 A.2d 497, 505-06 (1981) (Lynch II). In view of the approach to valuation that we announce today, we see no basis in our law for Lynch II's exclusive monetary formula for relief. On remand the plaintiff will be permitted to test the fairness of the $21 price by the standards we herein establish, in conformity with the principle applicable to an appraisal — that fair value be determined by taking "into account all relevant factors" [see 8 Del.C. § 262(h), supra]. In our view this includes the elements of rescissory damages if the Chancellor considers them susceptible of proof and a remedy appropriate to all the issues of fairness before him. To the extent that Lynch II, 429 A.2d at 505-06, purports to limit the Chancellor's discretion to a single remedial formula for monetary damages in a cash-out merger, it is overruled.

While a plaintiff's monetary remedy ordinarily should be confined to the more liberalized appraisal proceeding herein established, we do not intend any limitation on the historic powers of the Chancellor to grant such other relief as the facts of a particular case may dictate. The appraisal remedy we approve may not be adequate in certain cases, particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved. Cole v. National Cash Credit Association, Del.Ch., 156 A. 183, 187 (1931). Under such circumstances, the Chancellor's powers are complete to fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages. Since it is apparent that this long completed transaction is too involved to undo, and in view of the Chancellor's discretion, the award, if any, should be in the form of monetary damages based upon entire fairness standards, i.e., fair dealing and fair price.

Obviously, there are other litigants, like the plaintiff, who abjured an appraisal and whose rights to challenge the element of fair value must be preserved.^[8] Accordingly, the quasi-appraisal remedy we grant the plaintiff here will apply only to: (1) this case; (2) any case now pending on appeal to this Court; (3) any case now pending in the Court of Chancery which has not yet been appealed but which may be eligible for direct appeal to this Court; (4) any case challenging a cash-out merger, the effective date of which is on or before February 1, 1983; and (5) any proposed merger to be [715] presented at a shareholders' meeting, the notification of which is mailed to the stockholders on or before February 23, 1983. Thereafter, the provisions of 8 Del.C. § 262, as herein construed, respecting the scope of an appraisal and the means for perfecting the same, shall govern the financial remedy available to minority shareholders in a cash-out merger. Thus, we return to the well established principles of Stauffer v. Standard Brands, Inc., Del.Supr., 187 A.2d 78 (1962) and David J. Greene & Co. v. Schenley Industries, Inc., Del.Ch., 281 A.2d 30 (1971), mandating a stockholder's recourse to the basic remedy of an appraisal.

III.

Finally, we address the matter of business purpose. The defendants contend that the purpose of this merger was not a proper subject of inquiry by the trial court. The plaintiff says that no valid purpose existed — the entire transaction was a mere subterfuge designed to eliminate the minority. The Chancellor ruled otherwise, but in so doing he clearly circumscribed the thrust and effect of Singer. Weinberger v. UOP, 426 A.2d at 1342-43, 1348-50. This has led to the thoroughly sound observation that the business purpose test "may be ... virtually interpreted out of existence, as it was in Weinberger".^[9]

The requirement of a business purpose is new to our law of mergers and was a departure from prior case law. See Stauffer v. Standard Brands, Inc., supra; David J. Greene & Co. v. Schenley Industries, Inc., supra.

In view of the fairness test which has long been applicable to parent-subsidiary mergers, Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 109-10 (1952), the expanded appraisal remedy now available to shareholders, and the broad discretion of the Chancellor to fashion such relief as the facts of a given case may dictate, we do not believe that any additional meaningful protection is afforded minority shareholders by the business purpose requirement of the trilogy of Singer, Tanzer,^[10]Najjar,^[11] and their progeny. Accordingly, such requirement shall no longer be of any force or effect.

The judgment of the Court of Chancery, finding both the circumstances of the merger and the price paid the minority shareholders to be fair, is reversed. The matter is remanded for further proceedings consistent herewith. Upon remand the plaintiff's post-trial motion to enlarge the class should be granted.

* * * * * *

REVERSED AND REMANDED.

[1] Accordingly, this Court's February 9, 1982 opinion is withdrawn.

[2] For the opinion of the trial court see Weinberger v. UOP, Inc., Del.Ch., 426 A.2d 1333 (1981).

[3] Shortly before the last oral argument, the plaintiff dismissed Lehman Brothers from the action. Thus, we do not deal with the issues raised by the plaintiff's claims against this defendant.

[4] In a pre-trial ruling the Chancellor ordered the complaint dismissed for failure to state a cause of action. See Weinberger v. UOP, Inc., Del.Ch., 409 A.2d 1262 (1979).

[5] Weinberger v. UOP, Inc., Del.Ch., 426 A.2d 1333, 1335-40 (1981).

[6] The parentheses indicate certain handwritten comments of Mr. Arledge.

[7] Although perfection is not possible, or expected, the result here could have been entirely different if UOP had appointed an independent negotiating committee of its outside directors to deal with Signal at arm's length. See, e.g., Harriman v. E.I. duPont de Nemours & Co., 411 F.Supp. 133 (D.Del.1975). Since fairness in this context can be equated to conduct by a theoretical, wholly independent, board of directors acting upon the matter before them, it is unfortunate that this course apparently was neither considered nor pursued. Johnston v. Greene, Del.Supr., 121 A.2d 919, 925 (1956). Particularly in a parent-subsidiary context, a showing that the action taken was as though each of the contending parties had in fact exerted its bargaining power against the other at arm's length is strong evidence that the transaction meets the test of fairness. Getty Oil Co. v. Skelly Oil Co., Del.Supr., 267 A.2d 883, 886 (1970); Puma v. Marriott, Del.Ch., 283 A.2d 693, 696 (1971).

[8] Under 8 Del.C. § 262(a), (d) & (e), a stockholder is required to act within certain time periods to perfect the right to an appraisal.

[9] Weiss, The Law of Take Out Mergers: A Historical Perspective, 56 N.Y.U.L.Rev. 624, 671, n. 300 (1981).

[10] Tanzer v. International General Industries, Inc., Del.Supr., 379 A.2d 1121, 1124-25 (1977).

[11] Roland International Corp. v. Najjar, Del. Supr., 407 A.2d 1032, 1036 (1979).

Henry M. Canby, of Richards, Layton & Finger, Wilmington, and Paul W. Williams, Floyd Abrams and Eugene R. Scheiman of Cahill, Gordon, Sonnett, Reindel & Ohl, New York City, for appellant.

Richard F. Corroon, Robert K. Payson, of Potter, Anderson & Corroon, Leroy A. Brill of Bayard, Brill & Handelman, Wilmington, and J. Lincoln Morris, Edward S. Cowen and Pollock & Singer, New York City, for appellee.

WOLCOTT, C. J., CAREY, J., and CHRISTIE, Judge, sitting.

[719] WOLCOTT, Chief Justice.

This is an appeal by the defendant, Sinclair Oil Corporation (hereafter Sinclair), from an order of the Court of Chancery, 261 A.2d 911 in a derivative action requiring Sinclair to account for damages sustained by its subsidiary, Sinclair Venezuelan Oil Company (hereafter Sinven), organized by Sinclair for the purpose of operating in Venezuela, as a result of dividends paid by Sinven, the denial to Sinven of industrial development, and a breach of contract between Sinclair's wholly-owned subsidiary, Sinclair International Oil Company, and Sinven.

Sinclair, operating primarily as a holding company, is in the business of exploring for oil and of producing and marketing crude oil and oil products. At all times relevant to this litigation, it owned about 97% of Sinven's stock. The plaintiff owns about 3000 of 120,000 publicly held shares of Sinven. Sinven, incorporated in 1922, has been engaged in petroleum operations primarily in Venezuela and since 1959 has operated exclusively in Venezuela.

Sinclair nominates all members of Sinven's board of directors. The Chancellor found as a fact that the directors were not independent of Sinclair. Almost without exception, they were officers, directors, or employees of corporations in the Sinclair complex. By reason of Sinclair's domination, it is clear that Sinclair owed Sinven a fiduciary duty. Getty Oil Company v. Skelly Oil Co., 267 A.2d 883 (Del.Supr. 1970); Cottrell v. Pawcatuck Co., 35 Del. Ch. 309, 116 A.2d 787 (1955). Sinclair concedes this.

The Chancellor held that because of Sinclair's fiduciary duty and its control over Sinven, its relationship with Sinven must meet the test of intrinsic fairness. The [720] standard of intrinsic fairness involves both a high degree of fairness and a shift in the burden of proof. Under this standard the burden is on Sinclair to prove, subject to careful judicial scrutiny, that its transactions with Sinven were objectively fair. Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503 (1939); Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107, 38 A. L.R.2d 425 (Del.Supr.1952); Getty Oil Co. v. Skelly Oil Co., supra.

Sinclair argues that the transactions between it and Sinven should be tested, not by the test of intrinsic fairness with the accompanying shift of the burden of proof, but by the business judgment rule under which a court will not interfere with the judgment of a board of directors unless there is a showing of gross and palpable overreaching. Meyerson v. El Paso Natural Gas Co., 246 A.2d 789 (Del.Ch. 1967). A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose. A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.

We think, however, that Sinclair's argument in this respect is misconceived. When the situation involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting shifting of the burden of proof, is applied. Sterling v. Mayflower Hotel Corp., supra; David J. Greene & Co. v. Dunhill International, Inc., 249 A.2d 427 (Del.Ch.1968); Bastian v. Bourns, Inc., 256 A.2d 680 (Del.Ch.1969) aff'd. Per Curiam (unreported) (Del.Supr.1970). The basic situation for the application of the rule is the one in which the parent has received a benefit to the exclusion and at the expense of the subsidiary.

Recently, this court dealt with the question of fairness in parent-subsidiary dealings in Getty Oil Co. v. Skelly Oil Co., supra. In that case, both parent and subsidiary were in the business of refining and marketing crude oil and crude oil products. The Oil Import Board ruled that the subsidiary, because it was controlled by the parent, was no longer entitled to a separate allocation of imported crude oil. The subsidiary then contended that it had a right to share the quota of crude oil allotted to the parent. We ruled that the business judgment standard should be applied to determine this contention. Although the subsidiary suffered a loss through the administration of the oil import quotas, the parent gained nothing. The parent's quota was derived solely from its own past use. The past use of the subsidiary did not cause an increase in the parent's quota. Nor did the parent usurp a quota of the subsidiary. Since the parent received nothing from the subsidiary to the exclusion of the minority stockholders of the subsidiary, there was no self-dealing. Therefore, the business judgment standard was properly applied.

A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings. However, this alone will not evoke the intrinsic fairness standard. This standard will be applied only when the fiduciary duty is accompanied by self-dealing — the situation when a parent is on both sides of a transaction with its subsidiary. Self-dealing occurs when the parent, by virtue of its domination 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 detriment to, the minority stockholders of the subsidiary.

We turn now to the facts. The plaintiff argues that, from 1960 through 1966, Sinclair caused Sinven to pay out such excessive dividends that the industrial development of Sinven was effectively prevented, and it became in reality a corporation in dissolution.

From 1960 through 1966, Sinven paid out $108,000,000 in dividends ($38,000,000 [721] in excess of Sinven's earnings during the same period). The Chancellor held that Sinclair caused these dividends to be paid during a period when it had a need for large amounts of cash. Although the dividends paid exceeded earnings, the plaintiff concedes that the payments were made in compliance with 8 Del.C. § 170, authorizing payment of dividends out of surplus or net profits. However, the plaintiff attacks these dividends on the ground that they resulted from an improper motive — Sinclair's need for cash. The Chancellor, applying the intrinsic fairness standard, held that Sinclair did not sustain its burden of proving that these dividends were intrinsically fair to the minority stockholders of Sinven.

Since it is admitted that the dividends were paid in strict compliance with 8 Del.C. § 170, the alleged excessiveness of the payments alone would not state a cause of action. Nevertheless, compliance with the applicable statute may not, under all circumstances, justify all dividend payments. If a plaintiff can meet his burden of proving that a dividend cannot be grounded on any reasonable business objective, then the courts can and will interfere with the board's decision to pay the dividend.

Sinclair contends that it is improper to apply the intrinsic fairness standard to dividend payments even when the board which voted for the dividends is completely dominated. In support of this contention, Sinclair relies heavily on American District Telegraph Co. [ADT] v. Grinnell Corp., (N.Y.Sup.Ct.1969) aff'd. 33 A.D.2d 769, 306 N.Y.S.2d 209 (1969). Plaintiffs were minority stockholders of ADT, a subsidiary of Grinnell. The plaintiffs alleged that Grinnell, realizing that it would soon have to sell its ADT stock because of a pending anti-trust action, caused ADT to pay excessive dividends. Because the dividend payments conformed with applicable statutory law, and the plaintiffs could not prove an abuse of discretion, the court ruled that the complaint did not state a cause of action. Other decisions seem to support Sinclair's contention. In Metropolitan Casualty Ins. Co. v. First State Bank of Temple, 54 S.W.2d 358 (Tex.Civ.App.1932), rev'd. on other grounds, 79 S.W.2d 835 (Sup.Ct. 1935), the court held that a majority of interested directors does not void a declaration of dividends because all directors, by necessity, are interested in and benefited by a dividend declaration. See, also, Schwartz v. Kahn, 183 Misc. 252, 50 N.Y.S. 2d 931 (1944); Weinberger v. Quinn, 264 A.D. 405, 35 N.Y.S.2d 567 (1942).

We do not accept the argument that the intrinsic fairness test can never be applied to a dividend declaration by a dominated board, although a dividend declaration by a dominated board will not inevitably demand the application of the intrinsic fairness standard. Moskowitz v. Bantrell, 41 Del.Ch. 177, 190 A.2d 749 (Del.Supr. 1963). If such a dividend is in essence self-dealing by the parent, then the intrinsic fairness standard is the proper standard. For example, suppose a parent dominates a subsidiary and its board of directors. The subsidiary has outstanding two classes of stock, X and Y. Class X is owned by the parent and Class Y is owned by minority stockholders of the subsidiary. If the subsidiary, at the direction of the parent, declares a dividend on its Class X stock only, this might well be self-dealing by the parent. It would be receiving something from the subsidiary to the exclusion of and detrimental to its minority stockholders. This self-dealing, coupled with the parent's fiduciary duty, would make intrinsic fairness the proper standard by which to evaluate the dividend payments.

Consequently it must be determined whether the dividend payments by Sinven were, in essence, self-dealing by Sinclair. The dividends resulted in great sums of money being transferred from Sinven to Sinclair. However, a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its [722] minority stockholders. As such, these dividends were not self-dealing. We hold therefore that the Chancellor erred in applying the intrinsic fairness test as to these dividend payments. The business judgment standard should have been applied.

We conclude that the facts demonstrate that the dividend payments complied with the business judgment standard and with 8 Del.C. § 170. The motives for causing the declaration of dividends are immaterial unless the plaintiff can show that the dividend payments resulted from improper motives and amounted to waste. The plaintiff contends only that the dividend payments drained Sinven of cash to such an extent that it was prevented from expanding.

The plaintiff proved no business opportunities which came to Sinven independently and which Sinclair either took to itself or denied to Sinven. As a matter of fact, with two minor exceptions which resulted in losses, all of Sinven's operations have been conducted in Venezuela, and Sinclair had a policy of exploiting its oil properties located in different countries by subsidiaries located in the particular countries.

From 1960 to 1966 Sinclair purchased or developed oil fields in Alaska, Canada, Paraguay, and other places around the world. The plaintiff contends that these were all opportunities which could have been taken by Sinven. The Chancellor concluded that Sinclair had not proved that its denial of expansion opportunities to Sinven was intrinsically fair. He based this conclusion on the following findings of fact. Sinclair made no real effort to expand Sinven. The excessive dividends paid by Sinven resulted in so great a cash drain as to effectively deny to Sinven any ability to expand. During this same period Sinclair actively pursued a company-wide policy of developing through its subsidiaries new sources of revenue, but Sinven was not permitted to participate and was confined in its activities to Venezuela.

However, the plaintiff could point to no opportunities which came to Sinven. Therefore, Sinclair usurped no business opportunity belonging to Sinven. Since Sinclair received nothing from Sinven to the exclusion of and detriment to Sinven's minority stockholders, there was no self-dealing. Therefore, business judgment is the proper standard by which to evaluate Sinclair's expansion policies.

Since there is no proof of self-dealing on the part of Sinclair, it follows that the expansion policy of Sinclair and the methods used to achieve the desired result must, as far as Sinclair's treatment of Sinven is concerned, be tested by the standards of the business judgment rule. Accordingly, Sinclair's decision, absent fraud or gross overreaching, to achieve expansion through the medium of its subsidiaries, other than Sinven, must be upheld.

Even if Sinclair was wrong in developing these opportunities as it did, the question arises, with which subsidiaries should these opportunities have been shared? No evidence indicates a unique need or ability of Sinven to develop these opportunities. The decision of which subsidiaries would be used to implement Sinclair's expansion policy was one of business judgment with which a court will not interfere absent a showing of gross and palpable overreaching. Meyerson v. El Paso Natural Gas Co., 246 A.2d 789 (Del.Ch.1967). No such showing has been made here.

Next, Sinclair argues that the Chancellor committed error when he held it liable to Sinven for breach of contract.

In 1961 Sinclair created Sinclair International Oil Company (hereafter International), a wholly owned subsidiary used for the purpose of coordinating all of Sinclair's foreign operations. All crude purchases by Sinclair were made thereafter through International.

On September 28, 1961, Sinclair caused Sinven to contract with International whereby Sinven agreed to sell all of its [723] crude oil and refined products to International at specified prices. The contract provided for minimum and maximum quantities and prices. The plaintiff contends that Sinclair caused this contract to be breached in two respects. Although the contract called for payment on receipt, International's payments lagged as much as 30 days after receipt. Also, the contract required International to purchase at least a fixed minimum amount of crude and refined products from Sinven. International did not comply with this requirement.

Clearly, Sinclair's act of contracting with its dominated subsidiary was self-dealing. Under the contract Sinclair received the products produced by Sinven, and of course the minority shareholders of Sinven were not able to share in the receipt of these products. If the contract was breached, then Sinclair received these products to the detriment of Sinven's minority shareholders. We agree with the Chancellor's finding that the contract was breached by Sinclair, both as to the time of payments and the amounts purchased.

Although a parent need not bind itself by a contract with its dominated subsidiary, Sinclair chose to operate in this manner. As Sinclair has received the benefits of this contract, so must it comply with the contractual duties.

Under the intrinsic fairness standard, Sinclair must prove that its causing Sinven not to enforce the contract was intrinsically fair to the minority shareholders of Sinven. Sinclair has failed to meet this burden. Late payments were clearly breaches for which Sinven should have sought and received adequate damages. As to the quantities purchased, Sinclair argues that it purchased all the products produced by Sinven. This, however, does not satisfy the standard of intrinsic fairness. Sinclair has failed to prove that Sinven could not possibly have produced or someway have obtained the contract minimums. As such, Sinclair must account on this claim.

Finally, Sinclair argues that the Chancellor committed error in refusing to allow it a credit or setoff of all benefits provided by it to Sinven with respect to all the alleged damages. The Chancellor held that setoff should be allowed on specific transactions, e. g., benefits to Sinven under the contract with International, but denied an over all setoff against all damages claimed. We agree with the Chancellor, although the point may well be moot in view of our holding that Sinclair is not required to account for the alleged excessiveness of the dividend payments.

We will therefore reverse that part of the Chancellor's order that requires Sinclair to account to Sinven for damages sustained as a result of dividends paid between 1960 and 1966, and by reason of the denial to Sinven of expansion during that period. We will affirm the remaining portion of that order and remand the cause for further proceedings.

C. Barr Flinn, Elena C. Norman and D. Fon Muttamara-Walker of Young Conaway Stargatt & Taylor, L.L.P., Wilmington, DE; Jonathan Rosenberg (argued) and Alexandra A. Lewis of O'Melveny & Myers, L.L.P., New York City, of counsel, for appellant.

Gregory V. Varallo (argued), Lisa Zwally Brown and Geoffrey G. Grivner of Richards, Layton & Finger, P.A., Wilmington, [116] DE; Jeffrey A. Tew, and Dennis Nowak of Tew Cardenas, L.L.P., Miami, FL, of counsel, for appellees Benihana, Inc., Norman Becker, Darwin Dornbush, Max Pine, Yoshihiro Sano, Joel Schwartz, Robert B. Sturges and Takamori Yoshimoto.

John G. Harris of Reed Smith, L.L.P., Wilmington, DE; Alan H. Fein (argued) of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., Miami, FL, of counsel, for appellees BFC Financial Corporation and John E. Abdo.

Before STEELE, Chief Justice, HOLLAND and BERGER, Justices.

[115] BERGER, Justice:

In this appeal, we consider whether Benihana, Inc. was authorized to issue $20 million in preferred stock and whether Benihana's board of directors acted properly in approving the transaction. We conclude that the Court of Chancery's factual findings are supported by the record and that it correctly applied settled law in holding that the stock issuance was lawful and that the directors did not breach their fiduciary duties. Accordingly, we affirm.

Factual and Procedural Background

Rocky Aoki founded Benihana of Tokyo, Inc. (BOT), and its subsidiary, Benihana, which own and operate Benihana restaurants in the United States and other countries. Aoki owned 100% of BOT until 1998, when he pled guilty to insider trading charges. In order to avoid licensing problems created by his status as a convicted felon, Aoki transferred his stock to the Benihana Protective Trust. The trustees of the Trust were Aoki's three children (Kana Aoki Nootenboom, Kyle Aoki and Kevin Aoki) and Darwin Dornbush (who was then the family's attorney, a Benihana director, and, effectively, the company's general counsel).

Benihana, a Delaware corporation, has two classes of common stock. There are approximately 6 million shares of Class A common stock outstanding. Each share has 1/10 vote and the holders of Class A common are entitled to elect 25% of the directors. There are approximately 3 million shares of Common stock outstanding. Each share of Common has one vote and the holders of Common stock are entitled to elect the remaining 75% of Benihana's directors. Before the transaction at issue, BOT owned 50.9% of the Common stock and 2% of the Class A stock. The nine member board of directors is classified and the directors serve three-year terms.^[1]

In 2003, shortly after Aoki married Keiko Aoki, conflicts arose between Aoki and his children. In August, the children were upset to learn that Aoki had changed his will to give Keiko control over BOT. Joel Schwartz, Benihana's president and chief executive officer, also was concerned about this change in control. He discussed the situation with Dornbush, and they briefly considered various options, including the issuance of sufficient Class A stock to trigger a provision in the certificate of incorporation that would allow the Common and Class A to vote together for 75% of the directors.^[2]

[117] The Aoki family's turmoil came at a time when Benihana also was facing challenges. Many of its restaurants were old and outmoded. Benihana hired WD Partners to evaluate its facilities and to plan and design appropriate renovations. The resulting Construction and Renovation Plan anticipated that the project would take at least five years and cost $56 million or more. Wachovia offered to provide Benihana a $60 million line of credit for the Construction and Renovation Plan, but the restrictions Wachovia imposed made it unlikely that Benihana would be able to borrow the full amount.^[3] Because the Wachovia line of credit did not assure that Benihana would have the capital it needed, the company retained Morgan Joseph & Co. to develop other financing options.

On January 9, 2004, after evaluating Benihana's financial situation and needs, Fred Joseph, of Morgan Joseph, met with Schwartz, Dornbush and John E. Abdo, the board's executive committee. Joseph expressed concern that Benihana would not have sufficient available capital to complete the Construction and Renovation Plan and pursue appropriate acquisitions. Benihana was conservatively leveraged, and Joseph discussed various financing alternatives, including bank debt, high yield debt, convertible debt or preferred stock, equity and sale/leaseback options.

The full board met with Joseph on January 29, 2004. He reviewed all the financing alternatives that he had discussed with the executive committee, and recommended that Benihana issue convertible preferred stock.^[4] Joseph explained that the preferred stock would provide the funds needed for the Construction and Renovation Plan and also put the company in a better negotiating position if it sought additional financing from Wachovia.

Joseph gave the directors a board book, marked "Confidential," containing an analysis of the proposed stock issuance (the Transaction). The book included, among others, the following anticipated terms: (i) issuance of $20,000,000 of preferred stock, convertible into Common stock; (ii) dividend of 6% +/- 0.5%; (iii) conversion premium of 20% +/- 2.5%; (iv) buyer's approval required for material corporate transactions; and (v) one to two board seats to the buyer. At trial, Joseph testified that the terms had been chosen by looking at comparable stock issuances and analyzing the Morgan Joseph proposal under a theoretical model.

The board met again on February 17, 2004, to review the terms of the Transaction. The directors discussed Benihana's preferences and Joseph predicted what a buyer likely would expect or require. For example, Schwartz asked Joseph to try to negotiate a minimum on the dollar value for transactions that would be deemed "material corporation transactions" and subject to the buyer's approval. Schwartz wanted to give the buyer only one board seat, but Joseph said that Benihana might have to give up two. Joseph told the board that he was not sure that a buyer would agree to an issuance in two tranches, and that it would be difficult to make the second tranche non-mandatory. As the Court of Chancery found, the board understood that the preferred terms were akin to a "wish list."

[118] Shortly after the February meeting, Abdo contacted Joseph and told him that BFC Financial Corporation was interested in buying the new convertible stock.^[5] In April 2005, Joseph sent BFC a private placement memorandum. Abdo negotiated with Joseph for several weeks.^[6] They agreed to the Transaction on the following basic terms: (i) $20 million issuance in two tranches of $10 million each, with the second tranche to be issued one to three years after the first; (ii) BFC obtained one seat on the board, and one additional seat if Benihana failed to pay dividends for two consecutive quarters; (iii) BFC obtained preemptive rights on any new voting securities; (iv) 5% dividend; (v) 15% conversion premium; (vi) BFC had the right to force Benihana to redeem the preferred stock in full after ten years; and (vii) the stock would have immediate "as if converted" voting rights. Joseph testified that he was satisfied with the negotiations, as he had obtained what he wanted with respect to the most important points.

On April 22, 2004, Abdo sent a memorandum to Dornbush, Schwartz and Joseph, listing the agreed terms of the Transaction. He did not send the memorandum to any other members of the Benihana board. Schwartz did tell Becker, Sturges, Sano, and possibly Pine that BFC was the potential buyer. At its next meeting, held on May 6, 2004, the entire board was officially informed of BFC's involvement in the Transaction. Abdo made a presentation on behalf of BFC and then left the meeting. Joseph distributed an updated board book, which explained that Abdo had approached Morgan Joseph on behalf of BFC, and included the negotiated terms. The trial court found that the board was not informed that Abdo had negotiated the deal on behalf of BFC. But the board did know that Abdo was a principal of BFC. After discussion, the board reviewed and approved the Transaction, subject to the receipt of a fairness opinion.

On May 18, 2004, after he learned that Morgan Joseph was providing a fairness opinion, Schwartz publicly announced the stock issuance. Two days later, Aoki's counsel sent a letter asking the board to abandon the Transaction and pursue other, more favorable, financing alternatives. The letter expressed concern about the directors' conflicts, the dilutive effect of the stock issuance, and its "questionable legality." Schwartz gave copies of the letter to the directors at the May 20 board meeting, and Dornbush advised that he did not believe that Aoki's concerns had merit. Joseph and another Morgan Joseph representative then joined the meeting by telephone and opined that the Transaction was fair from a financial point of view. The board then approved the Transaction.

During the following two weeks, Benihana received three alternative financing proposals. Schwartz asked Becker, Pine and Sturges to act as an independent committee and review the first offer. The committee decided that the offer was inferior and not worth pursuing. Morgan Joseph agreed with that assessment. Schwartz referred the next two proposals to Morgan Joseph, with the same result.

On June 8, 2004, Benihana and BFC executed the Stock Purchase Agreement. On June 11, 2004, the board met and approved resolutions ratifying the execution of the Stock Purchase Agreement and authorizing the stock issuance. Schwartz [119] then reported on the three alternative proposals that had been rejected by the ad hoc committee and Morgan Joseph. On July 2, 2004, BOT filed this action against all of Benihana's directors, except Kevin Aoki, alleging breaches of fiduciary duties; and against BFC, alleging that it aided and abetted the fiduciary violations. Three months later, as the parties were filing their pre-trial briefs, the board again reviewed the Transaction. After considering the allegations in the amended complaint, the board voted once more to approve it. The Court of Chancery held a four day trial in November 2004. In December 2005, after post-trial briefing and argument, the trial court issued an opinion holding that Benihana was authorized to issue the preferred stock with preemptive rights, and that the board's approval of the Transaction was a valid exercise of business judgement. This appeal followed.

Discussion

Before addressing the directors' conduct and motivation, we must decide whether Benihana's certificate of incorporation authorized the board to issue preferred stock with preemptive rights. Article 4, ¶ 2 of the certificate provides that, "[n]o stockholder shall have any preemptive right to subscribe to or purchase any issue of stock. . . of the corporation. . . ." Article 4(b) authorizes the board to issue:

Preferred Stock of any series and to state in the resolution or resolutions providing for the issuance of shares of any series the voting powers, if any, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of such series to the full extent now or hereafter permitted by the law of the State of Delaware. . . .

BOT contends that Article 4, ¶ 2 clearly and unambiguously prohibits preemptive rights. BOT acknowledges that Article 4(b) gives the board so-called "blank check" authority to designate the rights and preferences of Benihana's preferred stock. Reading the two provisions together, BOT argues that they give the board blank check authority to designate rights and preferences as to all enumerated matters except preemptive rights.

The trial court reviewed the history of 8 Del. C. § 102, and decided that the boilerplate language in Article 4, ¶ 2 merely confirms that no stockholder has preemptive rights under common law. As a result, the seemingly absolute language in ¶ 2 has no bearing on the availability of contractually created preemptive rights. The trial court explained:

Before the 1967 amendments, § 102(b)(3) provided that a certificate of incorporation may contain provisions "limiting or denying to the stockholders the preemptive rights to subscribe to any or all additional issues of stock of the corporation." As a result, a common law rule developed that shareholders possess preemptive rights unless the certificate of incorporation provided otherwise. In 1967 the Delaware Legislature reversed this presumption. Section 102(b)(3) was amended to provide in relevant part: "No stockholder shall have any preemptive right ... unless, and except to the extent that, such right is expressly granted to him in the certificate of incorporation."

Thereafter, companies began including boilerplate language in their charters to clarify that no shareholder possessed preemptive rights under common law.

The blank check provision in Benihana's Certificate of Incorporation suggests that the certificate was never intended to limit Benihana's ability to issue preemptive rights by contract to purchasers of preferred stock. Therefore, [120] I do not read Article 4 of the charter as doing anything more than confirming that the common law presumption does not apply and that the Certificate of Incorporation itself does not grant any preemptive rights.^[7]

It is settled law that certificates of incorporation are contracts, subject to the general rules of contract and statutory construction.^[8] Thus, if the charter language is clear and unambiguous, it must be given its plain meaning.^[9] If there is ambiguity, however, the language must be construed in a manner that will harmonize the apparent conflicts and give effect to the intent of the drafters.^[10] The Court of Chancery properly applied these principles, and we agree with its conclusion that the Benihana certificate does not prohibit the issuance of preferred stock with preemptive rights.

Even if the Benihana board had the power to issue the disputed stock, BOT maintains that the trial court erred in finding that it acted properly in approving the Transaction. Specifically, BOT argues that the Court of Chancery erred: (1) by applying 8 Del. C. § 144(a)(1), because the board did not know all material facts before it approved the Transaction; (2) by applying the business judgment rule, because Abdo breached his fiduciary duties; and (3) by finding that the board's primary purpose in approving the Transaction was not to dilute BOT's voting power.

A. Section 144(a)(1) Approval

Section 144 of the Delaware General Corporation Law provides a safe harbor for interested transactions, like this one, if "[t]he material facts as to the director's. . . relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors ... and the board . . . in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors. . . ."^[11] After approval by disinterested directors, courts review the interested transaction under the business judgment rule,^[12] which "is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company."^[13]

BOT argues that § 144(a)(1) is inapplicable because, when they approved the Transaction, the disinterested directors did not know that Abdo had negotiated the terms for BFC.^[14] Abdo's role as negotiator is material, according to BOT, because Abdo had been given the confidential term sheet prepared by Joseph and knew which of those terms Benihana was prepared to give up during negotiations. We agree that the board needed to know about Abdo's involvement in order to make an informed decision. The record clearly [121] establishes, however, that the board possessed that material information when it approved the Transaction on May 6, 2004 and May 20, 2004.

Shortly before the May 6 meeting, Schwartz told Becker, Sturges and Sano that BFC was the proposed buyer. Then, at the meeting, Abdo made the presentation on behalf of BFC. Joseph's board book also explained that Abdo had made the initial contact that precipitated the negotiations. The board members knew that Abdo is a director, vice-chairman, and one of two people who control BFC. Thus, although no one ever said, "Abdo negotiated this deal for BFC," the directors understood that he was BFC's representative in the Transaction. As Pine testified, "whoever actually did the negotiating, [Abdo] as a principal would have to agree to it. So whether he sat in the room and negotiated it or he sat somewhere else and was brought the results of someone else's negotiation, he was the ultimate decision-maker."^[15] Accordingly, we conclude that the disinterested directors possessed all the material information on Abdo's interest in the Transaction, and their approval at the May 6 and May 20 board meetings satisfies § 144(a)(1).^[16]

B. Abdo's alleged fiduciary violation

BOT next argues that the Court of Chancery should have reviewed the Transaction under an entire fairness standard because Abdo breached his duty of loyalty when he used Benihana's confidential information to negotiate on behalf of BFC. This argument starts with a flawed premise. The record does not support BOT's contention that Abdo used any confidential information against Benihana. Even without Joseph's comments at the February 17 board meeting, Abdo knew the terms a buyer could expect to obtain in a deal like this. Moreover, as the trial court found, "the negotiations involved give and take on a number of points" and Benihana "ended up where [it] wanted to be" for the most important terms.^[17] Abdo did not set the terms of the deal; he did not deceive the board; and he did not dominate or control the other directors' approval of the Transaction. In short, the record does not support the claim that Abdo breached his duty of loyalty.^[18]

C. Dilution of BOT's voting power

Finally, BOT argues that the board's primary purpose in approving the Transaction was to dilute BOT's voting control. BOT points out that Schwartz was concerned about BOT's control in 2003 and even discussed with Dornbush the possibility of issuing a huge number of Class A shares. Then, despite the availability of other financing options, the board decided on a stock issuance, and agreed to give BFC "as if converted" voting rights. According to BOT, the trial court overlooked this powerful evidence of the board's improper purpose.

It is settled law that, "corporate action . . . may not be taken for the sole or [122] primary purpose of entrenchment."^[19] Here, however, the trial court found that "the primary purpose of the . . . Transaction was to provide what the directors subjectively believed to be the best financing vehicle available for securing the necessary funds to pursue the agreed upon Construction and Renovation Plan for the Benihana restaurants."^[20] That factual determination has ample record support, especially in light of the trial court's credibility determinations. Accordingly, we defer to the Court of Chancery's conclusion that the board's approval of the Transaction was a valid exercise of its business judgment, for a proper corporate purpose.

Conclusion

Based on the foregoing, the judgment of the Court of Chancery is affirmed.

[1] The directors at the time of the challenged transaction were: Dornbush, John E. Abdo, Norman Becker, Max Pine, Yoshihiro Sano, Joel Schwartz, Robert B. Sturges, Takanori Yoshimoto, and Kevin Aoki.

[2] Before this time, Schwartz and Dornbush had discussed transactions that could lead to BOT's loss of its voting control. Schwartz testified that, under pressure from Wall Street, he was looking at ways to improve Benihana's stock liquidity, and the elimination of the two-tiered voting structure would have helped. As part of his effort to improve liquidity, Schwartz regularly asked Dornbush whether the Trust was interested in selling the shares held by BOT.

[3] Benihana would only be able to borrow 1.5 times its earnings before interest, taxes, depreciation and amortization (EBITDA). In 2003, Benihana's EBITDA was far below the $40 million required to access the full credit limit.

[4] Joseph testified that: "the oldest rule in our business is you raise equity when you can, not when you need it. And Benihana's stock had been doing okay. The markets were okay. We thought we could do an equity placement."

[5] BFC, a publicly traded Florida corporation, is a holding company for several investments. Abdo is a director and vice chairman. He owns 30% of BFC's stock.

[6] At the outset of the negotiations, Joseph agreed not to shop the Transaction to any other potential investor for a limited period of time.

[7] Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 172 (Del.Ch.2005) (Citation omitted).

[8] Staar Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del.1991); Lawson v. Household Finance Corporation, 152 A. 723, 726 (Del. 1930).

[9] Northwestern National Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del.1996).

[10] Anchor Motor Freight v. Ciabattoni, 716 A.2d 154 (Del.1998).

[11] 8 Del. C. § 144(a)(1).

[12] See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 366 n. 34 (Del.1993); Marciano v. Nakash, 535 A.2d 400, 405 n. 3 (Del.1987).

[13] Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

[14] BOT argued to the trial court that the directors who voted on the Transaction were not disinterested or independent. BOT is not pressing that claim on appeal.

[15] Appellant's Appendix, A 135.

[16] The Court of Chancery also decided that the Benihana directors' ratifying votes on June 11 and October 27, 2004 provide independent grounds to uphold their decision under § 144. 891 A.2d at 181 n. 190. Assuming that the board's initial decision was not an informed one, we question how a vote taken after the June 8 closing could ratify the earlier approval. See: Smith v. Van Gorkom, 488 A.2d 858, 885-888 (Del.1985). We need not reach this question, however, as we find that the board was adequately informed of all material facts before voting at the May 6 and May 20 meetings.

[17] Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d at 181 (Internal quotations omitted.).

[18] Cf. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del.1995).

[19] Williams v. Geier, 671 A.2d 1368, 1381 n. 28 (Del.1996).

[20] 891 A.2d at 190.

Steven D. Goldberg of Theisen, Lank & Mulford, Wilmington, and Barry H. Singer of Pollack & Singer, New York City, of counsel, for plaintiff below, appellant.

R. Franklin Balotti and Stephen E. Herrmann of Richards, Layton & Finger, Wilmington, and Warren M. Weggeland, Salt Lake City, Utah, of counsel for defendants below, appellees, John C. Lawrence and Fred H. Tresher.

Edward B. Maxwell of Young, Conaway, Stargatt & Taylor, Wilmington, for defendant below, Agau Mines, Inc.

Before DUFFY and McNEILLY, JJ., and CHRISTIE, Judge.

[219] McNEILLY, Justice:

In this shareholder derivative action brought on behalf of Agau Mines, Inc., a Delaware corporation, (Agau) against its officers and directors and United States Antimony Corporation, a Montana corporation (USAC), we are asked to decide whether the individual defendants, in their capacity as directors and officers of both corporations, wrongfully usurped a corporate opportunity belonging to Agau, and whether all defendants wrongfully profited by causing Agau to exercise an option to purchase that opportunity. The Court of Chancery found in favor of the defendants on both issues. (1974). Reference is made to that opinion for a full statement of the facts; what follows here is but a brief resume of the events giving rise to this litigation.

I

In November, 1969, defendant, John C. Lawrence (then president of Agau, a publicly held corporation engaged in a dual-phased gold and silver exploratory venture) in his individual capacity, acquired certain antimony properties under a lease-option for $60,000.^[1] Lawrence offered to [220] transfer the properties, which were then "a raw prospect", to Agau, but after consulting with other members of Agau's board of directors, he and they agreed that the corporation's legal and financial position would not permit acquisition and development of the properties at that time. Thus, it was decided to transfer the properties to USAC, (a closely held corporation formed just for this purpose and a majority of whose stock was owned by the individual defendants) where capital necessary for development of the properties could be raised without risk to Agau through the sale of USAC stock; it was also decided to grant Agau a long-term option to acquire USAC if the properties proved to be of commercial value.

In January, 1970, the option agreement was executed by Agau and USAC. Upon its exercise and approval by Agau shareholders, Agau was to deliver 800,000 shares of its restricted investment stock for all authorized and issued shares of USAC. The exchange was calculated on the basis of reimbursement to USAC and its shareholders for their costs in developing the properties to a point where it could be ascertained if they had commercial value. Such costs were anticipated to range from $250,000. to $500,000. At the time the plan was conceived, Agau shares traded over-the-counter, bid at $5/8 to $¾ and asked at $1 to $1¼. Applying to these quotations a 50% discount for the investment restrictions, the parties agreed that 800,000 Agau shares would reflect the range of anticipated costs in developing USAC and, accordingly, that figure was adopted.

In July, 1970, the Agau board resolved to exercise the option, an action which was approved by majority vote of the shareholders in October, 1970. Subsequently, plaintiff instituted this suit on behalf of Agau to recover the 800,000 shares and for an accounting.

II

The Vice-Chancellor determined that the chance to acquire the antimony claims was a corporate opportunity which should have been (and was) offered to Agau, but because the corporation was not in a position, either financially or legally, to accept the opportunity at that time, the individual defendants were entitled to acquire it for themselves after Agau rejected it.

We agree with these conclusions for the reasons stated by the Vice-Chancellor, which are based on settled Delaware law. Equity Corp. v. Milton, Del.Supr., 221 A.2d 494 (1966); Guth v. Loft, Inc., Del.Supr., 23 Del.Ch. 255, 5 A.2d 503 (1939); also see Wolfensohn v. Madison Fund, Inc., Del.Supr., 253 A.2d 72 (1969). Accordingly, Agau was not entitled to the properties without consideration.

III

Plaintiff contends that because the individual defendants personally profited through the use of Agau's resources, viz., personnel (primarily Lawrence) to develop the USAC properties and stock purchase warrants to secure a $300,000. indebtedness (incurred by USAC because it could not raise sufficient capital through sale of stock), they must be compelled to account to Agau for that profit. This argument pre-supposes that defendants did in fact so misuse corporate assets; however, the record reveals substantial evidence to support the Vice-Chancellor's conclusion that there was no misuse of either Agau personnel or warrants. Issuance of the warrants in fact enhanced the value of Agau's option at a time when there was reason to believe that USAC's antimony properties had a "considerable potential", and plaintiff did not prove that alleged use of Agau's personnel and equipment was detrimental to the corporation.

[221] Nevertheless, our inquiry cannot stop here, for it is clear that the individual defendants stood on both sides of the transaction in implementing and fixing the terms of the option agreement. Accordingly, the burden is upon them to demonstrate its intrinsic fairness Johnston v. Greene, Del.Supr., 35 Del.Ch. 479, 121 A.2d 919 (1956); Sterling v. Mayflower Hotel Corp., Del.Supr., 33 Del.Ch. 293, 93 A.2d 107 (1952); Gottlieb v. Heyden Chemical Corp., Del.Supr., 33 Del.Ch. 82, 90 A.2d 660 (1952); David J. Greene & Co., v. Dunhill International, Inc., Del.Ch., 249 A. 2d 427 (1968). We agree with the Vice-Chancellor that the record reveals no bad faith on the part of the individual defendants. But that is not determinative. The issue is where the 800,000 restricted investment shares of Agau stock, objectively, was a fair price for Agau to pay for USAC as a wholly-owned subsidiary.^[2]

A.

Preliminarily, defendants argue that they have been relieved of the burden of proving fairness by reason of shareholder ratification of the Board's decision to exercise the option. They rely on 8 Del.C. § 144(a)(2) and Gottlieb v. Heyden Chemical Corp., Del.Supr., 33 Del.Ch. 177, 91 A. 2d 57 (1952).

In Gottlieb, this Court stated that shareholder ratification of an "interested transaction", although less than unanimous, shifts the burden of proof to an objecting shareholder to demonstrate that the terms are so unequal as to amount to a gift or waste of corporate assets. Also see Saxe v. Brady, 40 Del.Ch. 474, 184 A.2d 602 (1962). The Court explained:

"[T]he entire atmosphere is freshened and a new set of rules invoked where formal approval has been given by a majority of independent, fully informed [share]holders." 91 A.2d at 59.

The purported ratification by the Agau shareholders would not affect the burden of proof in this case because the majority of shares voted in favor of exercising the option were cast by defendants in their capacity as Agau shareholders. Only about one-third of the "disinterested" shareholders voted, and we cannot assume that such non-voting shareholders either approved or disapproved. Under these circumstances, we cannot say that "the entire atmosphere has been freshened" and that departure from the objective fairness test is permissible. Compare Schiff v. R. K. O. Pictures Corp., 37 Del.Ch. 21, 104 A.2d 267 (1954), with David J. Greene & Co. v. Dunhill International, Inc., supra, and Abelow v. Symonds, 40 Del.Ch. 462, 184 A.2d 173 (1962). In short, defendants have not established factually a basis for applying Gottlieb.

Nor do we believe the Legislature intended a contrary policy and rule to prevail by enacting 8 Del.C. § 144, which provides, in part:

(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors [222] 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 which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:

(1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(2) The material facts as his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee, or the shareholders.

Defendants argue that the transaction here in question is protected by § 144(a)(2)^[3] which, they contend, does not require that ratifying shareholders be "disinterested" or "independent"; nor, they argue, is there warrant for reading such a requirement into the statute. See Folk, The Delaware General Corporation Law — A Commentary and Analysis (1972), pp. 85-86. We do not read the statute as providing the broad immunity for which defendants contend. It merely removes an "interested director" cloud when its terms are met and provides against invalidation of an agreement "solely" because such a director or officer is involved. Nothing in the statute sanctions unfairness to Agau or removes the transaction from judicial scrutiny.

B.

Turning to the transaction itself, we note at the outset that from the time the option arrangement was conceived until the time it was implemented, there occurred marked changes in several of the factors which formed the basis for the terms of the exchange. As of the critical date, the market value of Agau shares had risen and shares were being traded at about $3.00 per share; thus, while initially the maximum discounted market value of the 800,000 was considered to be $500,000, by the time in question it was $1.2 million. Development expenses, originally anticipated to range from $250,000.-$500,000., but as actually incurred, were towards the lower end of that scale. Further, while only equity investment was anticipated as the means of raising the capital to finance exploration and development, an original subscriber for 1,500 shares for $250,000. cancelled his subscription and USAC found itself unable to obtain sufficient capital through sale of stock; thus it was forced to borrow $300,000., the debt being secured by USAC property as well as by Agau stock purchase warrants.^[4] It also appears that only $83,000. in cash was actually received through sales of stock.

[223] On the basis of these changed conditions and in light of the fact that the exchange price was originally calculated simply to reimburse the USAC shareholders for their costs, plaintiff argues that the issuance of 800,000 shares of Agau stock, having a market value of at least 1.2 million dollars, to acquire a corporation in which only $83,000 in cash had been invested, and whose property was subject to loans of $300,000, is patently unfair.

The difficulty with this argument for purposes of the fairness test is that it impermissibly attempts to equate and compare two different standards of value (if indeed USAC's debt/equity ratio is a standard of value) in order to demonstrate the inadequacy of the consideration Agau received. See Sterling v. Mayflower Hotel Corp., supra. In fact, a reference to market sales of the stock involved, might support a finding of fairness. It appears that, although USAC was closely held, there was one arms-length sale of 75 USAC shares to non-affiliated investors for $160. per share. At this rate, the value of the 10,000 USAC shares would be 1.6 million, $400,000. more than the value of the shares given up by USAC. Furthermore, the market value of Agau's stock, even discounted, is an unrealistic indicator of the true value of what Agau gave up as it was clearly inflated due to Agau's possession of the option to acquire USAC whose properties were increasing in value largely as a result of the time and efforts expended by the individual defendants. As stated by the Vice-Chancellor:

"Thus, I think it is without question that if Lawrence and the other defendant shareholders of USAC had not granted the option to Agau, the value of the consideration originally established would not have risen. In other words, the very fact that Agau had the option increased the value of the consideration it was committed to give in the event it chose to exercise it, and this, in turn, was due to the fact that as USAC continued its efforts it became increasingly obvious that it had something that Agau would want to acquire."

The book value of 800,000 Agau shares reinforces this conclusion. Saleable assets (at cost less depreciation) less liabilities (excluding accrued salary due Lawrence) yielded an equity totaling about $113,000. On this basis, the 800,000 shares, which when issued represented a 28.6% interest in the corporation,^[5] thus had a value of about $32,000. In this sense, Agau paid little; but, USAC's book position was no better, with assets and liabilities about equal. This comparison, however, is likewise unrealistic for it ignores the true value of USAC's most valuable asset, the antimony properties themselves. While the properties were carried on the books at cost ($60,000.), the record indicates their value was considerably higher. In late 1969 or early 1970, when the properties were still considered to be a "raw prospect", USAC received two offers (subsequently confirmed in writing) of $200,000. for a 50% interest in the properties and their future development and yield. Further, Lawrence, a qualified expert, testified that in his opinion, the properties had a net value of between 3.5-70 million dollars as of August 31, 1970.

Viewing the two corporations as going concerns from the standpoint of their current and potential operational status presents a clearer and more realistic picture not only of what Agau gave up, but of what it received.

Agau was organized solely for the purpose of developing and exploring certain properties for potentially mineable gold and silver ore. The bulk of its cash, raised through a public offering, had been expended [224] in "Phase I" exploration of the properties which failed to establish a commercial ore body, although it did reveal "interesting" zones of mineralization which indicated to Lawrence that "Phase II" development and exploration might eventually be desirable. However, plans for further development had been temporarily abandoned as being economically unfeasible due to Agau's lack of sufficient funds to adequately explore the properties, as well as to the falling market price of silver. It further appears that other than a few outstanding unexercised stock purchase warrants, Agau did not have any ready sources of capital. Thus, as the Vice-Chancellor found, had the option not been exercised, Agau might well have gone out of business.

By comparison, the record shows that USAC, while still considered to be in the exploratory and development stage, could reasonably be expected to produce substantial profits. At the time in question, the corporation had established a sizeable commercial ore body, had proven markets for its product, and was in the midst of constructing a major ore separation facility expected to produce a high grade ore concentrate for market.

An admittedly "conservative" report submitted in June, 1970, by Pennebaker, an independent geologist retained by USAC, confirmed the presence of a sizeable ore body and projected for the corporation a three-year net pre-tax profit of $660,000. after deducting all costs from ground to market including property payments, a complete return of the capitalized construction costs of the ore separation facility and $120,000 per year for further exploration and development.^[6] Without allowing for capital return and exploration and development costs, he projected a three-year profit of $1,357,500. He noted further that his projections were based on only 50% recovery by the proposed separation facility; the remaining 50% not thereby recovered would be recoverable at a later date by another facility planned to be constructed for this purpose. Likewise a metallurgy report by defendant Snyder, projected a sizeable positive cash flow once production got underway.

The record does suggest that if the properties were to be immediately profitable, the market value for antimony would have to remain relatively high; however, Pennebaker, after noting this potential problem, stated that he was encouraged by the long-term purchaser offers USAC had already received and accordingly concluded that USAC should proceed with the plant construction as planned. Further, Lawrence stated that any mining venture is by its very nature speculative in that its success or failure largely depends upon the whims and vagaries of the metals market. It appears that at the time in question, consumption and demand for domestic antimony were rising.

The only evidence offered by plaintiffs on the fairness question consisted of Agau's annual reports for the years 1971 and 1972, and a 1973 proxy statement. These documents are immaterial to the issue before us since we are concerned only with the situation as it existed at the time of the transaction. Johnston v. Greene, supra.

Considering all of the above factors, we conclude that defendants have proven the intrinsic fairness of the transaction. Agau received properties which by themselves were clearly of substantial value. But more importantly, it received a promising, potentially self-financing and [225] profit generating enterprise with proven markets and commercial capability which could well be expected to provide Agau at the very least with the cash it sorely needed to undertake further exploration and development of its own properties if not to stay in existence. For those reasons, we believe that the interest given to the USAC shareholders was a fair price to pay. Accordingly, we have no doubt but that this transaction was one which at that time would have commended itself to an independent corporation in Agau's position.

Affirmed.

[1] Antimony is a metallic element used in a wide variety of alloys, especially with lead in battery plates, and in the manufacture of flame-proofing compounds, paints, semiconductors and ceramic products.

[2] The date at which this transaction must be scrutinized for intrinsic fairness is critical to the resolution of this question. We agree with the Vice-Chancellor that as of January 28, 1970, when the option was formally executed, that the transaction was one which would have commended itself to an independent corporation in Agau's position. Johnston v. Greene, supra. However, we are not concerned so much with Agau's acquisition of the option, but rather with the exercise thereof and implementation of its terms. In other words, the focus must be on the actual exchange of Agau's stock for USAC's stock and the test is whether that which Agau received was a fair quid pro quo for that which it had to pay. Since that exchange did not and could not, in fact occur until shareholder approval had been given in October, 1970, we must examine the transaction as of that point in time.

[3] They also argue that since defendant-director Dawson was not "interested" and since he approved acquiring the option, the transaction falls under the protection of § 144(a)(1). However, Dawson, who was the only disinterested director, did not participate at the Board meeting in which it was resolved to exercise the option; and it is with that decision which we are now concerned.

[4] These warrants apparently were demanded by the lenders because of Agau's option rights in USAC and were issued after the Agau Board of Directors had resolved that the option be exercised.

[5] Prior to the exchange, there were approximately two million shares outstanding. Adding to that the 800,000 shares paid to defendants, their consequential share was 800,000/2,800,000, or 28.57%.

[6] We note here that while Agau did take USAC subject to a $3000,000 long-term debt, the loan proceeds were used in part to pay off the balance due on USAC's lease-option on the properties and to finance construction of the ore separation facility; and as indicated above, these expenditures were anticipated to be recovered through before-profit product sale receipts. In other words, it was apparently anticipated that the loans would be paid off from gross product income.

[305] Stuart M. Grant, Esquire (Argued), Mary S. Thomas, Esquire, Bernard C. Devieux, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware; Mark Lebovitch, Esquire, Jeroen van Kwawegen, Esquire, Adam Hollander, Esquire, Bernstein Litowitz Berger & Grossmann LLP, New York, New York, for Appellants.

Garrett B. Moritz, Esquire, Eric D. Selden, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware; Gregory P. Williams, Esquire, Richards Layton & Finger, P.A., Wilmington, Delaware; William Savitt (Argued), Esquire, Ryan A. McLeod, Esquire, Nicholas Walter, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York, for Appellees.

Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, Justices; and RENNIE, Judge,^[*] constituting the Court en Banc.

STRINE, Chief Justice:

In a well-reasoned opinion, the Court of Chancery held that the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action [306] when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.^[1] For that and other reasons, the Court of Chancery dismissed the plaintiffs' complaint.^[2] In this decision, we find that the Chancellor was correct in finding that the voluntary judgment of the disinterested stockholders to approve the merger invoked the business judgment rule standard of review and that the plaintiffs' complaint should be dismissed. For sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.

I. The Court Of Chancery Properly Held That The Complaint Did Not Plead Facts Supporting An Inference That KKR Was A Controlling Stockholder of Financial Holdings

The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock merger between KKR & Co. L.P. ("KKR") and KKR Financial Holdings LLC ("Financial Holdings") in which KKR acquired each share of Financial Holdings's stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. Below, the plaintiffs' primary argument was that the transaction was presumptively subject to the entire fairness standard of review because Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee. As a result, the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings, which was an LLC, not a corporation.^[3]

The defendants filed a motion to dismiss, taking issue with that argument. In a thoughtful and thorough decision, the Chancellor found that the defendants were correct that the plaintiffs' complaint did not plead facts supporting an inference that KKR was Financial Holdings's controlling stockholder.^[4] Among other things, the Chancellor noted that KKR owned less than 1% of Financial Holdings's stock, had no right to appoint any directors, and had no contractual right to veto any board action.^[5] Although the Chancellor acknowledged the unusual existential circumstances the plaintiffs cited, he noted that those were known at all relevant times by investors, and that Financial Holdings had real assets its independent board controlled and had the option of pursuing any [307] path its directors chose.^[6]

In addressing whether KKR was a controlling stockholder, the Chancellor was focused on the reality that in cases where a party that did not have majority control of the entity's voting stock was found to be a controlling stockholder, the Court of Chancery, consistent with the instructions of this Court, looked for a combination of potent voting power^[7] and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.^[8] Not finding that combination here, the Chancellor noted:

Plaintiffs' real grievance, as I see it, is that [Financial Holdings] was structured from its inception in a way that limited its value-maximizing options. According to plaintiffs, [Financial Holdings] serves as little more than a public vehicle for financing KKR-sponsored transactions and the terms of the Management Agreement make [Financial Holdings] unattractive as an acquisition target to anyone other than KKR because of [Financial Holdings]'s operational dependence on KKR and because of the significant cost that would be incurred to terminate the Management Agreement. I assume all that is true. But, every contractual obligation of a corporation constrains the corporation's freedom to operate to some degree and, in this particular case, the stockholders cannot claim to be surprised. Every stockholder of [Financial Holdings] knew about the limitations the Management Agreement imposed on [Financial Holdings]'s business when he, she or it acquired shares in [Financial Holdings]. They also knew that the business and affairs of [Financial Holdings] would be managed by a board of directors that would be subject to annual stockholder elections.

At bottom, plaintiffs ask the Court to impose fiduciary obligations on a relatively nominal stockholder, not because of any coercive power that stockholder could wield over the board's ability to independently decide whether or not to approve the merger, but because of pre-existing contractual obligations with that stockholder that constrain the business or strategic options available to the corporation. Plaintiffs have cited no legal authority for that novel proposition, and I decline to create such a rule.^[9]

After carefully analyzing the pled facts and the relevant precedent, the Chancellor held:

[308] [T]here are no well-pled facts from which it is reasonable to infer that KKR could prevent the [Financial Holdings] board from freely exercising its independent judgment in considering the proposed merger or, put differently, that KKR had the power to exact retribution by removing the [Financial Holdings] directors from their offices if they did not bend to KKR's will in their consideration of the proposed merger.^[10]

Although the plaintiffs reiterate their position on appeal, the Chancellor correctly applied the law and we see no reason to repeat his lucid analysis of this question.

II. The Court of Chancery Correctly Held That The Fully Informed, Uncoerced Vote Of The Disinterested Stockholders Invoked The Business Judgment Rule Standard Of Review

On appeal, the plaintiffs further contend that, even if the Chancellor was correct in determining that KKR was not a controlling stockholder, he was wrong to dismiss the complaint because they contend that if the entire fairness standard did not apply, Revlon^[11] did, and the plaintiffs argue that they pled a Revlon claim against the defendant directors. But, as the defendants point out, the plaintiffs did not fairly argue below that Revlon applied and even if they did, they ignore the reality that Financial Holdings had in place an exculpatory charter provision, and that the transaction was approved by an independent board majority and by a fully informed, uncoerced stockholder vote.^[12] Therefore, the defendants argue, the plaintiffs failed to state a non-exculpated claim for breach of fiduciary duty.

But we need not delve into whether the Court of Chancery's determination that Revlon did not apply to the merger is correct for a single reason: it does not matter. Because the Chancellor was correct in determining that the entire fairness standard did not apply to the merger, the Chancellor's analysis of the effect of the uncoerced, informed stockholder vote is outcome-determinative, even if Revlon applied to the merger.

As to this point, the Court of Chancery noted, and the defendants point out on appeal, that the plaintiffs did not contest the defendants' argument below that if the merger was not subject to the entire fairness standard, the business judgment standard of review was invoked because the merger was approved by a disinterested stockholder majority.^[13] The Chancellor [309] agreed with that argument below, and adhered to precedent supporting the proposition that when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.^[14] Although the Chancellor took note of the possible conflict between his ruling and this Court's decision in Gantler v. Stephens,^[15] he reached the conclusion that Gantler did not alter the effect of legally required stockholder votes on the appropriate standard of review.^[16] Instead, the Chancellor read Gantler as a decision solely intended to clarify the meaning of the precise term "ratification."^[17] He had two primary reasons for so finding. First, he noted that any statement about the effect a statutorily required vote had on the appropriate standard of review would have been dictum because in Gantler the Court held that the disclosures regarding the vote in question — a vote on an amendment to the company's charter — were materially misleading.^[18] Second, the Chancellor doubted that the Supreme Court would have "overrule[d] extensive Delaware precedent, including Justice Jacobs's own earlier decision in Wheelabrator, which involved a statutorily required stockholder vote to consummate a merger" without "expressly stat[ing] such an intention."^[19]

[311] On appeal, the plaintiffs make Gantler a central part of their argument, even though they did not fairly present this point below. They now argue that Gantler bound the Court of Chancery to give the informed stockholder vote no effect in determining the standard of review. They contend that the Chancellor's reading of Gantler as a decision focused on the precise term "ratification" and not a decision intended to overturn a deep strain of precedent it never bothered to cite, was incorrect.^[20] The plaintiffs also argue that they should be relieved of their failure to argue this point fairly below in the interests of justice.^[21]

Although we disagree with the plaintiffs that this sort of case provides a sound basis for relieving a sophisticated party of its failure to present its position properly to the trial court, even if we agreed it would not aid the plaintiffs. No doubt Gantler can be read in more than one way, but we agree with the Chancellor's interpretation of that decision and do not accept the plaintiffs' contrary one. Had Gantler been intended to unsettle a long-standing body of case law, the decision would likely have said so.^[22] Moreover, as the Chancellor noted, the issue presented in this case was not even squarely before the Court in Gantler because it found the relevant proxy statement to be materially misleading.^[23] To erase any doubt on the part of practitioners, we embrace the Chancellor's well-reasoned decision and the precedent it cites to support an interpretation of Gantler as a narrow decision focused on defining a specific legal term, "ratification," and not on the question of what standard of review applies if a transaction not subject to the entire fairness standard is approved by an informed, voluntary vote of disinterested stockholders. This view is consistent with well-reasoned Delaware precedent.^[24]

[312] Furthermore, although the plaintiffs argue that adhering to the proposition that a fully informed, uncoerced stockholder vote invokes the business judgment rule would impair the operation of Unocal^[25] and Revlon, or expose stockholders to unfair action by directors without protection, the plaintiffs ignore several factors. First, Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M & A decisions in real time, before closing. They were not tools designed with post-closing money damages claims in mind, the standards they articulate do not match the gross negligence standard for director due care liability under Van Gorkom,^[26] and with the prevalence of exculpatory charter provisions, due care liability is rarely even available.

Second and most important, the doctrine applies only to fully informed, uncoerced stockholder votes, and if troubling facts regarding director behavior were not disclosed that would have been material to a voting stockholder, then the business judgment rule is not invoked.^[27] Here, however, all of the objective facts regarding the board's interests, KKR's interests, and the negotiation process, were fully disclosed.

Finally, when a transaction is not subject to the entire fairness standard, the [313] long-standing policy of our law has been to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves. There are sound reasons for this policy. When the real parties in interest — the disinterested equity owners — can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.^[28] The reason for that is tied to the core rationale of the business judgment rule, which is that judges are poorly positioned to evaluate the wisdom of business decisions and there is little utility to having them second-guess the determination [314] of impartial decision-makers with more information (in the case of directors) or an actual economic stake in the outcome (in the case of informed, disinterested stockholders). In circumstances, therefore, where the stockholders have had the voluntary choice to accept or reject a transaction, the business judgment rule standard of review is the presumptively correct one and best facilitates wealth creation through the corporate form.

For these reasons, therefore, we affirm the Court of Chancery's judgment on the basis of its well-reasoned decision.

[*] Sitting by designation under Del. Const. art. IV, § 12.

[1] In re KKR Fin. Holdings LLC S'holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).

[2] Id.

[3] We wish to make a point. We are keenly aware that this case involves a merger between a limited partnership and a limited liability company, albeit both ones whose ownership interests trade on public exchanges. But, it appears that both before the Chancellor, and now before us on appeal, the parties have acted as if this case was no different from one between two corporations whose internal affairs are governed by the Delaware General Corporation Law and related case law. We have respected the parties' approach to arguing this complex case, but felt obliged to note that we recognize that this case involved alternative entities, and that in cases involving those entities, distinctive arguments often arise due to the greater contractual flexibility given to those entities under our statutory law.

[4] In re KKR Fin. Holdings, 101 A.3d at 995.

[5] Id. at 994.

[6] Id. at 994-95.

[7] For example, the Chancellor noted the importance of examining whether an insurgent could win a proxy contest or whether the company could take action without the stockholder's consent. Id. at 991-95.

[8] Id. (citing Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994) (quoting Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)); In re Morton's Rest. Grp., Inc. S'holders Litig., 74 A.3d 656, 664-65 (Del. Ch. 2013); Williamson v. Cox Commc'ns, Inc., 2006 WL 1586375, at *4, *5 (Del. Ch. June 5, 2006); In re Cysive, Inc. S'holders Litig., 836 A.2d 531, 551-52, 552 n.30 (Del. Ch. 2003); In re PNB Holding Co. S'holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (noting that the test for actual control "is not an easy one to satisfy" and can only be met where "stockholders who, although lacking a clear majority, have such formidable voting and managerial power that they, as a practical matter, are no differently situated than if they had majority voting control"); Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006) (examining Kahn v. Lynch, 638 A.2d at 1114; Cox Commc'ns, Inc., 2006 WL 1586375 at *5; In re W. Nat'l Corp. S'holders Litig., 2000 WL 710192, at *20 (Del. Ch. May 22, 2000))).

[9] In re KKR Fin. Holdings, 101 A.3d at 994.

[10] Id. at 995.

[11] Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

[12] The Court of Chancery indicated that the merger was not subject to review under Revlon because KKR was a widely held, public company and that Financial Holdings's stockholders would therefore own stock after the merger in a company without a controlling stockholder. In re KKR Fin. Holdings, 101 A.3d at 989. On appeal, the plaintiffs argue that that observation was incorrect and that ownership in KKR was not dispersed after the merger because "KKR is a limited partnership that is controlled by its managing partner, which is in turn controlled by KKR's founders." Opening Br. at 20 (emphasis in original). The defendants, for their part, stress that the plaintiffs' focus on Revlon is a novel one in the course of this case, and that claims such as this should be made in the trial court initially, and not on appeal. Although we do not reach this issue, we note that the defendants are correct in their argument that the plaintiffs should have fairly raised their Revlon argument below and did not. Consistent with their failure to argue the point fairly below, the plaintiffs press this argument on appeal without citation to supporting facts pled in the complaint.

[13] In re KKR Fin. Holdings, 101 A.3d at 1001 ("[P]laintiffs do not disagree with defendants' position that the legal effect of a fully informed stockholder vote of a transaction with a non-controlling stockholder is that the business judgment rule applies and insulates the transaction from all attacks other than on the grounds of waste, even if a majority of the board approving the transaction was not disinterested or independent."); Answering Br. at 28-29.

[14] In re KKR Fin. Holdings, 101 A.3d at 1001 ("This position is supported by numerous decisions, including [the Court of Chancery's] 1995 decision in In re Wheelabrator Technologies, Inc. Shareholder Litigation, and [its] later decision in Harbor Finance, which, in turn, recited numerous supporting authorities." (citing In re Wheelabrator Techs., Inc. S'holders Litig., 663 A.2d 1194, 1200 (Del. Ch. 1995); Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 890 (Del. Ch. 1999) (citing Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987); In re Gen. Motors Class H S'holders Litig., 734 A.2d 611, 616 (Del. Ch. 1999); Solomon v. Armstrong, 747 A.2d 1098, 1113-17 (Del. Ch. 1999), aff'd, 746 A.2d 277 (Del. 2000))).

[15] 965 A.2d 695 (Del. 2009).

[16] In re KKR Fin. Holdings, 101 A.3d at 1001-02.

[17] Id. at 1002.

[18] Id. ("The Supreme Court in Gantler did not expressly address the legal effect of a fully informed stockholder vote when the vote is statutorily required. Having determined that the proxy disclosures were materially misleading, the Supreme Court did not need to reach that question."); Gantler, 965 A.2d at 710.

[19] In re KKR Fin. Holdings, 101 A.3d at 1002.

Aside from the substantial authority cited by the Chancellor, there is additional precedent under Delaware law for the proposition that the approval of the disinterested stockholders in a fully informed, uncoerced vote that was required to consummate a transaction has the effect of invoking the business judgment rule. In citing to these authorities, we note that many of them used the term "ratification" in a looser sense than the clarified and narrow description that was given to that term in the scholarly Gantler opinion. Although the nomenclature was less precise, the critical reasoning of these opinions was centered on giving standard of review-invoking effect to a fully informed vote of the disinterested stockholders.

In many of the cases, that effect was given to a statutorily required vote or one required by the certificate of incorporation. See Stroud v. Grace, 606 A.2d 75, 83 (Del. 1992) ("Inherent in [enhanced scrutiny] is a presumption that a board acted in the absence of an informed shareholder vote ratifying the challenged action."); Solomon, 747 A.2d at 1127, 1133, aff'd, 746 A.2d 277 (dismissing a challenge to a spin-off of a subsidiary because a fully informed, uncoerced vote of the stockholders that was required under the corporation's charter invoked the business judgment rule); In re Lukens Inc. S'holders Litig., 757 A.2d 720, 736-38 (Del. Ch. 1999), aff'd sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000) (holding that the fully informed stockholder approval of a merger invoked the business judgment rule); In re Gen. Motors Class H S'holders Litig., 734 A.2d 611, 616 (Del. Ch. 1999) ("Because the shareholders were afforded the opportunity to decide for themselves [whether to approve charter amendments in connection with a series of transactions] on accurate disclosures and in a non-coercive atmosphere, the business judgment rule applies...."); Weiss v. Rockwell Int'l. Corp., 1989 WL 80345, at *3, *7 (Del. Ch. July 19, 1989), aff'd, 574 A.2d 264 (Del. 1990) (dismissing a challenge to a charter amendment because it was approved by a fully informed vote of the disinterested stockholders); Schiff v. RKO Pictures Corp., 104 A.2d 267, 271-72 (Del. Ch. 1954) (finding that the principles established in Gottlieb v. Heyden Chemical Corp., 91 A.2d 57, 58 (Del. 1952), which held that voluntary stockholder approval of a stock option plan invoked the business judgment standard of review, were "equally applicable" to statutorily required stockholder approval of an asset sale to the company's chairman and 30% stockholder, requiring the plaintiffs to show "that the disparity between the money received and the value of the assets sold is so great that the court will infer that those passing judgment are guilty of improper motives or are recklessly indifferent to or intentionally disregarding the interest of the whole body of stockholders"); Cole v. Nat'l Cash Credit Ass'n, 156 A. 183, 188 (Del. Ch. 1931) ("The same presumption of fairness that supports the discretionary judgment of the managing directors must also be accorded to the majority of stockholders whenever they are called upon to speak for the corporation in matters assigned to them for decision, as is the case at one stage of the proceedings leading up to a sale of assets or a merger. No rational ground of distinction can be drawn in this respect between the directors on the one hand and the majority of stockholders on the other."); MacFarlane v. N. Am. Cement Corp., 157 A. 396, 398 (Del. Ch. 1928) ("When, therefore, the law provided that a merger might be effected if approved by the votes of stockholders of each corporation representing two-thirds of its total capital stock, it was no doubt believed that the interests of all the stockholders in the merging companies would be sufficiently safeguarded. Such being the case, it is manifest that the court should not, by its injunctive process, prevent a merger so approved unless it is clear that it would be so injurious and unfair to some minority complaining stockholders as to be shocking, and the court is convinced that it is so grossly unfair to such stockholders as to be fraudulent."); see also In re Morton's, 74 A.3d at 663 n.34 ("[W]hen disinterested approval of a sale to an arm's-length buyer is given by a majority of stockholders who have had the chance to consider whether or not to approve the transaction for themselves, there is a long line and sensible tradition of giving deference to the stockholders' voluntary decision, invoking the business judgment rule standard of review...."); In re S. Peru Copper Corp. S'holder Derivative Litig., 52 A.3d 761, 793 n.113 (Del. Ch. 2011) ("[I]t has long been my understanding of Delaware law, that the approval of an uncoerced, disinterested electorate of a merger (including a sale) would have the effect of invoking the business judgment rule standard of review."); Sample v. Morgan, 914 A.2d 647, 663 (Del. Ch. 2007) (footnote omitted) ("When uncoerced, fully informed, and disinterested stockholders approve a specific corporate action, the doctrine of ratification, in most situations, precludes claims for breach of duty attacking that action."); In re PNB Holding Co., 2006 WL 2403999, at *14 ("[O]utside the [controlling stockholder] context, proof that an informed, non-coerced majority of the disinterested stockholders approved an interested transaction has the effect of invoking business judgment rule protection for the transaction and, as a practical matter, insulating the transaction from revocation and its proponents from liability."); Apple Comput., Inc. v. Exponential Tech., Inc., 1999 WL 39547, at *7 (Del. Ch. Jan. 21, 1999) (noting that if an informed vote of the stockholders approved an asset sale potentially subject to § 271, that would moot any statutory claim and invoke the business judgment rule); William T. Allen et al., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1317-18 (2001) [hereinafter Function Over Form] ("Under present Delaware law, a fully informed majority vote of the disinterested stockholders that approves a transaction (other than a merger with a controlling stockholder) has the effect of insulating the directors from all claims except waste.").

In other cases, the vote may not have been statutorily required, but there was no suggestion that that factor was necessary for the vote to be given effect in determining the judicial standard of review. See Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987) ("[A]pproval by fully-informed disinterested stockholders ... permits invocation of the business judgment rule...."); Michelson v. Duncan, 407 A.2d 211, 224 (Del. 1979) ("`Where there has been independent stockholder ratification of interested director action, the objecting stockholder has the burden of showing that no person of ordinary sound business judgment would say that the consideration received for the options was a fair exchange for the options granted.'" (internal citation omitted)).

[20] Related to their arguments over the proper interpretation of Gantler, the parties have engaged in an interesting debate about whether this Court's decision in In re Santa Fe Pacific Corporation Shareholder Litigation supports their respective positions. 669 A.2d 59 (Del. Ch. 1995). There are colorable arguments on both sides, and a learned article has a thoughtful consideration of that point. J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 WM. MITCHELL L. REV. 1443, 1471-77 (2014) [hereinafter Effect of Stockholder Approval]. For present purposes, however, we think it unnecessary to engage in that debate, when the overwhelming weight of our state's case law supports the Chancellor's decision below.

[21] Supr. Ct. R. 8 ("Only questions fairly presented to the trial court may be presented for review; provided, however, that when the interests of justice so require, the Court may consider and determine any question not so presented.").

[22] See In re KKR Fin. Holdings, 101 A.3d at 1002; see also Effect of Stockholder Approval, supra note 20, at 1482.

[23] In re KKR Fin. Holdings, 101 A.3d at 1002; Gantler, 965 A.2d at 710.

[24] See supra notes 14 & 19. In addition to the cases previously cited for the proposition that an uncoerced, fully informed vote of the disinterested stockholders invokes the business judgment rule standard of review, the tradition of giving burden-shifting effect to a majority-of-the-minority vote in a controlling stockholder going-private merger also supports our view that a statutorily required vote has historically been taken into account in determining the standard of review. In fact, in the case of Greene v. Dunhill International, Inc., the Court of Chancery refused to invoke the business judgment rule because the merger in question involved a controlling stockholder as the buyer, the court cited to a case invoking the business judgment based on a stockholder vote, and indicating that it stood for the proposition that "[i]n the absence of divided interests, the judgment of the majority stockholders ... is presumed made in good faith and inspired by a bona fides of purpose." 249 A.2d 427, 430 (Del. Ch. 1968) (citing Cole, 156 A. at 188). The entire strand of our entire controlling stockholder law, running from Dunhill, to Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), to Kahn v. Lynch, to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), has focused on what effect of fully informed, uncoerced approval of the disinterested stockholders should have, and has never focused on whether the vote was statutorily required. Furthermore, although there has been the requirement that the disinterested vote be determinative in giving standard of review influencing effect to a stockholder vote in a controlling stockholder merger, e.g., by having the merger subject to a majority of the minority condition, this Court has never held that the stockholders had to be asked separately to "ratify" the board's actions for that effect to be given. Rather, it has been the ability of an uncoerced group of informed stockholders to freely accept for themselves whether a transaction was good for them that gave rise to the effect on the standard of review applied in any post-closing challenge.

[25] Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

[26] Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).

[27] See Williams v. Geier, 671 A.2d 1368, 1380-83 (Del. 1996) (noting that "[a]n otherwise valid stockholder vote may be nullified by a showing that the structure or circumstances of the vote were impermissibly coercive"); In re Rural Metro Corp., 88 A.3d 54, 84 n.10 (Del. Ch. 2014) ("Because the Proxy Statement contained materially misleading disclosures and omissions, this case does not provide any opportunity to consider whether a fully informed stockholder vote would lower the standard of review from enhanced scrutiny to the business judgment rule."); Huizenga, 751 A.2d at 898-99 ("If the corporate board failed to provide the voters with material information undermining the integrity or financial fairness of the transaction subject to the vote, no ratification effect will be accorded to the vote and the plaintiffs may press all of their claims.... In this regard, it is noteworthy that Delaware law does not make it easy for a board of directors to obtain `ratification effect' from a stockholder vote. The burden to prove that the vote was fair, uncoerced, and fully informed falls squarely on the board.").

[28] See Williams, 671 A.2d at 1381 (where a stockholder vote is statutorily required such as for a merger or a charter amendment, "the stockholders control their own destiny through informed voting," and calling this "the highest and best form of corporate democracy"); In re Morton's, 74 A.3d at 663 n.34 ("Traditionally, our equitable law of corporations has applied the business judgment standard of review to sales to arms'-length buyers when an informed, uncoerced vote of the disinterested electorate has approved the transaction. This effect on the standard of review is, of course, only available to disinterested stockholder approval for good reason — only disinterested stockholder approval is a strong assurance of fairness." (internal citations omitted)); In re Netsmart Techs. Inc. S'holders Litig., 924 A.2d 171, 207 (Del. Ch. 2007) ("Delaware corporate law strives to give effect to business decisions approved by properly motivated directors and by informed, disinterested stockholders. By this means, our law seeks to balance the interest in promoting fair treatment of stockholders and the utility of avoiding judicial inquiries into the wisdom of business decisions. Thus, doctrines ... operate to keep the judiciary from second-guessing transactions when disinterested stockholders have had a fair opportunity to protect themselves by voting no."); In re Lear Corp. S'holder Litig., 926 A.2d 94, 114-15 (Del. Ch. 2007) ("Delaware corporation law gives great weight to informed decisions made by an uncoerced electorate. When disinterested stockholders make a mature decision about their economic self-interest, judicial second-guessing is almost completely circumscribed by the doctrine of ratification."); In re PNB Holding Co., 2006 WL 2403999, at *15 ("[W]hen most of the affected minority affirmatively approves the transaction, their self-interested decision to approve is sufficient proof of fairness to obviate a judicial examination of that question."); Huizenga, 751 A.2d at 901 ("If fully informed, uncoerced, independent stockholders have approved the transaction, they have ... made the decision that the transaction is a fair exchange. As such, it is difficult to see the utility of allowing litigation to proceed in which the plaintiffs are permitted discovery and a possible trial.... In this day and age in which investors also have access to an abundance of information about corporate transactions from sources other than boards of directors, it seems presumptuous and paternalistic to assume that the court knows better in a particular instance than a fully informed corporate electorate with real money riding on the corporation's performance." (internal citations omitted)); Effect of Stockholder Approval, supra note 20, at 1457 n.50 ("There is a gut-level sense of fairness to [the result that the business judgment rule is invoked where there is an uncoerced and fully informed vote of the disinterested stockholders to approve the action of a compromised board]. If the fully informed stockholders conclude collectively that they want an outcome, why should self-appointed stockholder plaintiffs be able to seek to hold directors liable for a decision that a majority of the stockholders endorsed? Absent disclosure violations or coercion, there is something contradictory about stockholders collectively saying, `Yes, I want this merger' and then for the stockholder plaintiffs to seek damages from the directors for having approved the deal and recommended it to the stockholders in the first place."); cf. Function Over Form, supra note 19, at 1307 ("If ... the vote is uncoerced and is fully informed, there is no reason why the shareholder vote should not be given that effect, particularly given the [Delaware Supreme Court's] rightful emphasis on the importance of the shareholder franchise and its exercise.").

Court Below:—Court of Chancery of the State of Delaware C.A. No. 12327-VCS.

Upon appeal from the Court of Chancery: REVERSED and REMANDED.

Steve J. Purcell, Esquire (Argued), Purcell Julie & Lefkowitz LLP, New York, New York; David A. Jenkins, Esquire, Neal C. Belgam, Esquire, and Clarissa R. Chenoweth, Esquire, Smith Katzenstein & Jenkins LLP, Wilmington, Delaware, for Plaintiffs-Below, Appellants Robert Elburn and Dieter Soehnel.

Kenneth J. Nachbar, Esquire (Argued) and Zi-Xiang Shen, Esquire Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, for Defendants-Below, Appellees Robert C. Albanese, Dennis M. Bone, Doreen R. Byrnes, Domenick A. Cama, Robert M. Cashill, William V. Cosgrove, Kevin Cummings, Brian D. Dittenhafer, Brendan J. Dugan, James J. Garibaldi, Michele N. Siekerka, and James H. Ward III, and Nominal Defendant-Below, Appellee Investors Bancorp, Inc.

Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR, Justices.

1211*1211 

SEITZ, Justice.

In this appeal we consider the limits of the stockholder ratification defense when directors make equity awards to themselves under the general parameters of an equity incentive plan. In the absence of stockholder approval, if a stockholder properly challenges equity incentive plan awards the directors grant to themselves, the directors must prove that the awards are entirely fair to the corporation. But, when the stockholders have approved an equity incentive plan, the affirmative defense of stockholder ratification comes into play. Stated generally, stockholder ratification means a majority of fully informed, uncoerced, and disinterested stockholders approved board action, which, if challenged, typically leads to a deferential business judgment standard of review.

For equity incentive plans in which the award terms are fixed and the directors have no discretion how they allocate the awards, the stockholders know exactly what they are being asked to approve. But, other plans—like the equity incentive plan in this appeal—create a pool of equity awards that the directors can later award to themselves in amounts and on terms they decide. The Court of Chancery has recognized a ratification defense for such discretionary plans as long as the plan has "meaningful limits" on the awards directors can make to themselves.^[1] If the discretionary plan does not contain meaningful limits, the awards, if challenged, are subject to an entire fairness standard of review.

Stockholder ratification serves an important purpose—directors can take self-interested action secure in the knowledge that the stockholders have expressed their approval. But, when directors make discretionary awards to themselves, that discretion must be exercised consistent with their fiduciary duties. Human nature being what it is,^[2] self-interested discretionary acts by directors should in an appropriate case be subject to review by the Court of Chancery.

We balance the competing concerns—utility of the ratification defense and the need for judicial scrutiny of certain self-interested discretionary acts by directors—by focusing on the specificity of the acts submitted to the stockholders for approval. When the directors submit their specific compensation decisions for approval by fully informed, uncoerced, and disinterested stockholders, ratification is properly asserted as a defense in support of a motion to dismiss. The same applies for self-executing plans, meaning plans that make awards over time based on fixed criteria, with the specific amounts and terms approved by the stockholders. But, when stockholders have approved an equity incentive plan that gives the directors discretion to grant themselves awards within general parameters, and a stockholder properly alleges that the directors inequitably exercised that discretion, then the ratification defense is unavailable to dismiss the suit, and the directors will be required to prove the fairness of the awards to the corporation.

1212*1212 Here, the Equity Incentive Plan ("EIP") approved by the stockholders left it to the discretion of the directors to allocate up to 30% of all option or restricted stock shares available as awards to themselves. The plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties by awarding excessive equity awards to themselves under the EIP. Thus, a stockholder ratification defense is not available to dismiss the case, and the directors must demonstrate the fairness of the awards to the Company. We therefore reverse the Court of Chancery's decision dismissing the complaint and remand for further proceedings consistent with this opinion.

I.

According to the allegations of the complaint, which we must accept as true at this stage of the proceedings,^[3] the plaintiffs are stockholders of Investors Bancorp, Inc. ("Investors Bancorp" or the "Company") and were stockholders at the time of the awards challenged in this case. The defendants fall into two groups—ten non-employee director defendants^[4] and two executive director defendants.^[5]Investors Bancorp, the nominal defendant, is a Delaware corporation with its principal place of business in Short Hills, New Jersey. Investors Bancorp is a holding company for Investors Bank, a New Jersey chartered savings bank with corporate headquarters in Short Hills, New Jersey. The Company operates 143 banking branches in New Jersey and New York. In 2014, after a mutual-to-stock conversion,^[6] Investors Bancorp conducted a second-step offering to the public, which is when the plaintiffs acquired their shares. In this second-step offering, the Company sold 219,580,695 shares and raised about $2.15 billion.

The board sets director compensation based on recommendations of the Compensation and Benefits Committee ("Committee"), composed of seven of the ten non-employee directors. In 2014, the non-employee directors were compensated by (i) a monthly cash retainer; (ii) cash awards for attending board and board committee meetings; and (iii) perquisites and personal benefits. The chairman of each committee received an additional annual retainer. As the Court of Chancery noted, the annual compensation for all non-employee directors ranged from $97,200 to $207,005, with $133,340 as the average amount of compensation per director:

1213*1213
                 Investors
   Name          Bancorp         Bank Cash        All Other         Total
                 Cash Fees          Fees         Compensation

   Albanese      $56,500          $73,200          $343           $130,043
   Bone          $37,500          $73,200          $264           $110,964
   Byrnes        $59,500          $73,200         $9,898          $142,598
   Cashill       $48,000         $146,400        $12,605          $207,005
   Cosgrove      $24,000          $73,200        $32,970          $130,170
   Dittenhafer   $59,500          $73,200        $13,392          $146,092
   Dugan         $45,000          $73,200           -             $118,200
   Garibaldi     $24,000          $73,200           -              $97,200
   Siekerka      $45,000          $73,200          $230           $118,430
   Ward          $59,500          $73,200           -             $132,700
   Total                                                        $1,333,402

In 2014, Cummings, the Company's President and CEO, received (i) a $1,000,000 base salary; (ii) an Annual Cash Incentive Award of up to 150% of his base salary contingent on certain performance goals; and (iii) perquisites and benefits valued at $278,400, which totaled $2,778,700. Cama, the Company's COO and Senior Executive Vice President, received annual compensation consisting of (i) a $675,000 base salary; (ii) an Annual Cash Incentive Award of up to 120% of his base salary; and (iii) perquisites and benefits valued at $180,794, which totaled $1,665,794.^[7]

At the end of 2014, following completion of the conversion plan, the Committee met to review 2014 director compensation and set compensation for 2015. Gregory Keshishian, a compensation consultant from GK Partners, Inc., presented to the board a study of director compensation for eighteen publicly held peer companies. According to the study, these companies paid their non-employee directors an average of $157,350 in total compensation. The Company's $133,340 average non-employee director compensation in 2014 fell close to the study average. Following the presentation, the Committee recommended to the board that the non-employee director compensation package remain the same for 2015. The only change was to increase the fees paid for attending committee meetings from $1,500 to $2,500.

The Committee also reviewed the compensation package for executive officers. After GK Partners reviewed peer-average figures with the committee, the committee unanimously recommended no changes to Cummings' or Cama's annual salary, but recommended an increase in the 2015 Annual Cash Incentive Award from 150% to 200%, and 120% to 160% of their base salaries, respectively.^[8] The Committee did not discuss any additional equity awards at the December or February meetings.

1214*1214 Just a few months after setting the 2015 board compensation, in March, 2015, the board proposed the 2015 EIP. The EIP was intended to "provide additional incentives for [the Company's] officers, employees and directors to promote [the Company's] growth and performance and to further align their interests with those of [the Company's] stockholders . . . and give [the Company] the flexibility [needed] to continue to attract, motivate and retain highly qualified officers, employees and directors."^[9]

The Company reserved 30,881,296 common shares for restricted stock awards, restricted stock units, incentive stock options, and non-qualified stock options for the Company's 1,800 officers, employees, non-employee directors, and service providers. The EIP has limits within each category. Of the total shares, a maximum of 17,646,455 can be issued for stock options or restricted stock awards and 13,234,841 for restricted stock units or performance shares. Those limits are further broken down for employee and non-employee directors:

• A maximum of 4,411,613 shares, in the aggregate (25% of the shares available for stock option awards), may be issued or delivered to any one employee pursuant to the exercise of stock options;

• A maximum of 3,308,710 shares, in the aggregate (25% of the shares available for restricted stock awards and restricted stock units), may be issued or delivered to any one employee as a restricted stock or restricted stock unit grant; and

• The maximum number of shares that may be issued or delivered to all non-employee directors, in the aggregate, pursuant to the exercise of stock options or grants of restricted stock or restricted stock units shall be 30% of all option or restricted stock shares available for awards, "all of which may be granted in any calendar year."^[10]

According to the proxy sent to stockholders, "[t]he number, types and terms of awards to be made pursuant to the [EIP] are subject to the discretion of the Committee and have not been determined at this time, and will not be determined until subsequent to stockholder approval."^[11] At the Company's June 9, 2015 annual meeting, 96.25% of the voting shares approved the EIP (79.1% of the total shares out-standing).^[12]

Three days after stockholders approved the EIP, the Committee held the first of four meetings and eventually approved awards of restricted stock and stock options to all board members. According to the complaint, these awards were not part of the final 2015 compensation package nor discussed in any prior meetings.^[13] The first meeting took place on June 12, 2015. The Committee met with Cummings, Cama, Keshishian (the compensation consultant), and representatives from Luse Gorman 1215*1215 (outside counsel) "to begin the process of determining the allocation of shares."^[14]

At the second meeting on June 16, 2015, the Committee met with Keshishian, the Luse Gorman representatives, and the full board except Siekerka and Ward, to "gather input" from outside experts and Committee members.^[15] They considered a list of the stock options and awards granted by the 164 companies that underwent mutual-to-stock conversions in the last twenty years.^[16] Luse Gorman presented an analysis of these companies, selected "based on the size of the company and the size of the equity sold in the second step offering, and the size of the equity plan."^[17] The complaint alleges that the first two are arbitrary and the third is "a textbook example of results driven by self-selection bias."^[18] The plaintiffs also claim that Luse Gorman did not compare five other companies on the list that met the criteria and had more recently undergone conversions—each of which granted significantly lower awards.^[19]

At the third meeting on June 19, 2015, the Committee met with Cummings, Cama, Keshishian, and the representatives from Luse Gorman "to have a thorough discussion of all the major decisions" regarding the allocation of shares.^[20] They analyzed the circumstances surrounding the peer companies' awards and discussed the EIP, noting the stockholders' authorization of director awards of up to 30% of the EIP's restricted stock options.^[21] Cama proposed and the attendees approved the specific awards—including those to Cama and Cummings.^[22]According to the plaintiffs, however, the 2016 Proxy disclosed that Cummings and Cama did not attend meetings when their "compensation is being determined."^[23]The Committee held a fourth and final meeting on June 23, 2015 when the entire board, after hearing from Keshishian and the Luse Gorman representatives, "approve[d] all the components of the incentive stock and option grants for Directors and Management."^[24]

The board awarded themselves 7.8 million shares.^[25] Non-employee directors each received 250,000 stock options—valued at $780,000—and 100,000 restricted shares—valued at $1,254,000; Cashill and Dittenhafer received 150,000 restricted shares—valued at $1,881,000—due to their years of service. The non-employee director awards totaled $21,594,000 and averaged $2,159,400. Peer companies' non-employee awards averaged $175,817. Cummings received 1,333,333 stock options and 1,000,000 restricted shares, valued at $16,699,999 and alleged to be 1,759% higher than the peer companies' average compensation for executive directors. Cama received 1,066,666 stock options and 600,000 restricted shares, valued at $13,359,998 and alleged 1216*1216 to be 2,571% higher than the peer companies' average.

According to the complaint, the total fair value of the awards was $51,653,997, broken down by board member as follows:^[26]

                  Restricted       Stock
      Name         Stock          Options         Total

   Cummings     $12,540,000     $4,159,999    $16,699,999
   Cama         $10,032,000     $3,327,998    $13,359,998
   Albanese      $1,254,000       $780,000     $2,034,000
   Bone          $1,254,000       $780,000     $2,034,000
   Byrnes        $1,254,000       $780,000     $2,034,000
   Cashill       $1,881,000       $780,000     $2,661,000
   Cosgrove      $1,254,000       $780,000     $2,034,000
   Dittenhafer   $1,881,000       $780,000     $2,661,000
   Dugan         $1,254,000       $780,000     $2,034,000
   Garibaldi     $1,254,000       $780,000     $2,034,000
   Siekerka      $1,254,000       $780,000     $2,034,000
   Ward          $1,254,000       $780,000     $2,034,000
   Total                                      $51,653,997

After the Company disclosed the awards, stockholders filed three separate complaints in the Court of Chancery alleging breaches of fiduciary duty by the directors for awarding themselves excessive compensation. Following the filing of a consolidated complaint, the defendants moved to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim and under Court of Chancery Rule 23.1 for failure to make a demand before filing suit.

The Court of Chancery granted both motions and dismissed the plaintiffs' complaint.^[27] Relying on the court's earlier decisions in In re 3COM Corp.^[28] and Calma on Behalf of Citrix Systems, Inc. v. Templeton,^[29] the court dismissed the complaint against the non-employee directors because the EIP contained "meaningful, specific limits on awards to all director beneficiaries" like the 3COMplan, as opposed to the broad-based plan in Citrix that contained a generic limit covering director and non-director beneficiaries.^[30] The court also dismissed the claims directed to the executive directors because the plaintiffs failed to make a pre-suit demand on the board.

We review the Court of Chancery decision dismissing the complaint de novo.^[31] 1217*1217 

II.

Unless restricted by the certificate of incorporation or bylaws, Section 141(h) of Delaware General Corporation Law ("DGCL") authorizes the board "to fix the compensation of directors."^[32] Although authorized to do so by statute, when the board fixes its compensation, it is self-interested in the decision because the directors are deciding how much they should reward themselves for board service.^[33] If no other factors are involved, the board's decision will "lie outside the business judgment rule's presumptive protection, so that, where properly challenged, the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation."^[34] In other words, the entire fairness standard of review will apply.^[35]

Other factors do sometimes come into play. When a fully informed, uncoerced, and disinterested majority of stockholders approve the board's authorized corporate action, the stockholders are said to have ratified the corporate act. Stockholder ratification of corporate acts applies in different corporate law settings.^[36] Here, we address the affirmative defense of stockholder ratification of director self-compensation decisions.

A.

Early Supreme Court cases recognized a ratification defense by directors when reviewing their self-compensation decisions. In the 1952 decision Kerbs v. California Eastern Airways, Inc., a stockholder filed suit against the directors attacking a stock option and profit sharing plan on a number of grounds.^[37] As to the stock option plan, 250,000 shares of the corporation's unissued stock were granted in specific amounts to named executives of the corporation at a $1 per share exercise price.^[38] The profit sharing plan was based on a mathematical formula tied to the financial performance of the corporation.^[39] Both plans were approved at a board meeting where five of the eight directors were beneficiaries of both plans.^[40] The stockholders approved the plans.

Addressing the effect of stockholder approval of the stock option plan, our Court held that "ratification cures any voidable defect in the action of the [b]oard. Stockholder ratification of voidable acts of directors 1218*1218 is effective for all purposes unless the action of the directors constituted a gift of corporate assets to themselves or was ultra vires, illegal, or fraudulent."^[41] As to the profit sharing plan, the Court viewed things differently because "the effectiveness of such ratification depends upon the type of notice sent to the stockholder and the explanation to them of the plan itself,"^[42] and the record on appeal was insufficient to determine the adequacy of the disclosures.^[43]

The stock option plan approved by the stockholders in Kerbs was self-executing, meaning once approved by the stockholders, implementing the awards required no discretion by the directors.^[44] The Court addressed a similar dispute in a case decided the following day. In Gottlieb v. Heyden Chemical Corp.,^[45] the restricted stock option plan granted specific company officers—six of whom were board members—present and future options to purchase fixed amounts of common stock at prices to be set by the board, subject to a price collar. The plan was contingent upon ratification by a majority of the stockholders.^[46] In advance of the stockholder meeting, the board disclosed the names of the officers receiving the awards, the number of shares allocated to each, the price per share, and the schedule for future issuances.^[47] The stockholders approved the plan.^[48]

After initially denying the stockholder's challenge to the plan, on reargument, the Court noted the effect of stockholder ratification. For the current awards specifically approved by the stockholders:

Where there is stockholder ratification,. . . the burden of proof is shifted to the objector. In such a case the objecting stockholder must convince the court that no person of ordinary sound business judgment would be expected to entertain the view that the consideration furnished by the individual directors is a fair exchange for the options conferred.^[49]

But, for the options subject to future awards, the court explained that they were not ratified because the 25,500 shares had not been placed into any contracts prior to approval.^[50] The stockholders only approved the allocation of shares "of a certain general pattern," but "nobody [knew] what all of the terms of these future contracts [would] be."^[51] The Court concluded that ratification "cannot be taken to have approved specific bargains not yet proposed."^[52] 1219*1219 Thus, after Kerbs and Gottlieb, directors could successfully assert the ratification defense when the stockholders were fully informed and approved stock option plans containing specific director awards. But the award of "specific bargains not yet proposed" could not be ratified by general stockholder approval of the compensation plan.^[53]

Our Court has not considered ratification of director self-compensation decisions since Kerbs and Gottlieb. The Court of Chancery has, however, continued to develop this area of the law.

B.

Following the Supreme Court's lead recognizing the ratification defense only when specific acts are presented to the stockholders for approval, the Court of Chancery in Steiner v. Meyerson^[54] and Lewis v. Vogelstein^[55] recognized the directors' ratification defense when awards made to directors under equity compensation plans were specific as to amounts and value. In Steiner, the stock option plan granted each non-employee director "an option to purchase 25,000 shares upon election to the Telxon board, and an additional 10,000 shares on the anniversary of his election while he remains on the board."^[56] In Lewis, the plan provided for two categories of director compensation: (i) one-time grants of 15,000 options per director; and (ii) annual grants of up to 10,000 options per director depending on length of board service.^[57] The plans were self-executing, meaning that no further director action was required to implement the awards as they were earned. In both cases, the Court of Chancery held that the stockholders validly ratified the awards, and the standard of review following ratification was waste.^[58]

Two Court of Chancery decisions following Steiner and Lewis addressed a twist in previous cases that bears directly on this appeal—the plans approved by the stockholders set upper limits on the amounts to be awarded, but allowed the directors to decide the specific awards or change the conditions of the awards after stockholder approval.^[59] In In re 3COM Corp. Shareholders Litigation, the option grants were 1220*1220 based on "specific ceilings on the awarding of options each year" which "differ based on specific categories of service, such as service on a committee, position as a lead director, and chairing the [b]oard."^[60] The plaintiff alleged in conclusory fashion that grants made by the board were "lavish and excessive compensation tantamount to a waste of corporate assets."^[61]Because the board exercised its discretion within the specific limits approved by the stockholders, the Court of Chancery determined that the stockholder approval of the plan parameters extended to the specific awards made after plan approval.^[62] Thus, the directors' post-approval compensation decisions were subject to the business judgment rule standard of review, requiring the directors to show waste.^[63]

In Criden v. Steinberg, the Court of Chancery addressed a broad-based stock option plan that allowed the directors to re-price the options after stockholder approval of the plan.^[64] The re-pricing decisions, although not submitted to the stockholders for approval, were subject to a business judgment standard of review.^[65] According to the court, the stockholders approved a plan setting the re-pricing parameters, and the directors re-priced the options within those parameters.^[66]Thus, the directors' decisions were reviewed under a business judgment rule standard of review.

After 3COM and Criden, the Court of Chancery decided Sample v. Morgan.^[67] In Sample, the Court addressed two non-employee directors on the compensation committee who awarded 200,000 shares to the company's three employee directors under a management stock incentive plan.^[68] A disinterested majority of Randall Bearings' stockholders had previously approved the plan, which authorized up to 200,000 shares, with no parameters on how the shares should be awarded. The court rejected a ratification defense and stated:

[T]he Delaware doctrine of ratification does not embrace a "blank check" theory. When uncoerced, fully informed, and disinterested stockholders approve a specific corporate action, the doctrine of ratification, in most situations, precludes claims for breach of fiduciary duty attacking that action. But the mere approval by stockholders of a request by directors for the authority to take action within broad parameters does not insulate all future action by the directors within those parameters from attack. Although the fact of stockholder approval might have some bearing on consideration of a fiduciary duty claim in that context, it does not, by itself, preclude such a claim. An essential aspect of our form of corporate law is the balance between law (in the form of statute and contract, including the contracts governing the internal affairs of corporations, such as charters and bylaws) and equity (in the form of concepts of fiduciary duty). Stockholders can entrust directors with broad legal authority precisely because they know that authority 1221*1221 must be exercised consistently with equitable principles of fiduciary duty. Therefore, the entrustment to the [compensation committee] of the authority to issue up to 200,000 shares to key employees under discretionary terms and conditions cannot reasonably be interpreted as a license for the [c]ommittee and other directors making proposals to it to do whatever they wished, unconstrained by equity. Rather, it is best understood as a decision by the stockholders to give the directors broad legal authority and to rely upon the policing of equity to ensure that authority would be utilized properly. For this reason alone, the directors' ratification argument fails.^[69]

The court in Sample did not address either 3COM or Criden. But, in Seinfeld v. Slager,^[70] the court addressed 3COM and a concern that recognizing ratification for plans approved by stockholders with only general parameters for making compensation awards provided insufficient protection from possible self-dealing. The plan in Seinfeld was a broad-based plan applying to directors, officers, and employees.^[71] Unlike the plan in 3COM, where each category of beneficiaries had an upper limit on what they could receive, the Seinfeld plan contained a single generic limit on awards, with no restrictions on how the awards could be distributed to the different classes of beneficiaries.^[72] Rather than essentially approve a blank check, or in the Vice Chancellor's words—give the directors carte blanche—to make awards as the directors saw fit, the court required "some meaningful limit imposed by the stockholders on the [b]oard for the plan to be consecrated by 3COM and receive the blessing of the business judgment rule."^[73]Thus, after Seinfeld, directors could retain the discretion to make awards after stockholder plan approval, but the plan had to contain meaningful limits on the awards the directors could make to themselves before ratification could be successfully asserted.

Finally, in Cambridge Retirement System v. Bosnjak, although the plan did not set forth the specific compensation awarded to the directors, the specific awards were submitted to the stockholders for approval.^[74] Thus, the court found that the directors could assert a ratification defense.^[75] And, in Calma on Behalf of Citrix Systems, Inc. v. Templeton, Chancellor Bouchard, after a thorough review of the case law, determined that directors could not assert a ratification defense when the incentive plan had generic limits on compensation for all the plan beneficiaries.^[76]The court denied a ratification defense, holding "when the [b]oard sought stockholder approval of the broad parameters of the plan and the generic limits specified therein, Citrix stockholders were not asked to approve any action specific to 1222*1222 director compensation."^[77]

III.

A.

As ratification has evolved for stockholder-approved equity incentive plans, the courts have recognized the defense in three situations—when stockholders approved the specific director awards; when the plan was self-executing, meaning the directors had no discretion when making the awards; or when directors exercised discretion and determined the amounts and terms of the awards after stockholder approval. The first two scenarios present no real problems. When stockholders know precisely what they are approving, ratification will generally apply. The rub comes, however, in the third scenario, when directors retain discretion to make awards under the general parameters of equity incentive plans. The defendants rely on 3COM and Criden, where the Court of Chancery recognized a stockholder ratification defense even though the directors' self-compensation awards were not submitted for stockholder approval.^[78] As noted earlier, in 3COM, the Court of Chancery recognized ratification for director-specific compensation plans, where the plans contained specific limits for awards depending on factors set forth in the plan.^[79] In Criden, the court upheld a ratification defense when the plan authorized the directors to re-price the options after stockholder approval.^[80]

The court's decisions in 3COM and Criden opened the door to the difficulties raised in this appeal. After those decisions, the Court of Chancery had to square 3COM and Criden—and their expanded use of ratification for discretionary plans— with existing precedent, which only recognized ratification when stockholders approved the specific awards. The Court of Chancery tried to harmonize the decisions by requiring "meaningful limits" on the amounts directors could award to themselves.

We think, however, when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged. As the Court of Chancery emphasized in Sample, using an expression coined many years ago, director action is "twice-tested," first for legal authorization, and second by equity.^[81] When stockholders approve the general parameters of an equity compensation plan and 1223*1223 allow directors to exercise their "broad legal authority" under the plan, they do so "precisely because they know that authority must be exercised consistently with equitable principles of fiduciary duty."^[82] The stockholders have granted the directors the legal authority to make awards. But, the directors' exercise of that authority must be done consistent with their fiduciary duties. Given that the actual awards are self-interested decisions not approved by the stockholders, if the directors acted inequitably when making the awards, their "inequitable action does not become permissible simply because it is legally possible"^[83] under the general authority granted by the stockholders.

The Sample case underlines the need for continued equitable review of self-interested discretionary director self-compensation decisions. As noted before, the plaintiffs in Sample alleged that the board adopted "a self-dealing plan to entrench the Company under the then-current management and massively dilute the equity interests of the public holders to benefit management personally."^[84] If ratification could be invoked at the outset, those breach of fiduciary duty allegations would be insulated from judicial review. Other cases reinforce the same point—when a stockholder properly alleges that the directors breached their fiduciary duties when exercising their discretion after stockholders approve the general parameters of an equity incentive plan, the directors should have to demonstrate that their self-interested actions were entirely fair to the company.^[85]

B.

The Investors Bancorp EIP is a discretionary plan as described above. It covers about 1,800 officers, employees, non-employee directors, and service providers. Specific to the directors, the plan reserves 30,881,296 shares of common stock for restricted stock awards, restricted stock units, incentive stock options, and non-qualified stock options for the Company's officers, employees, non-employee directors, and service providers.^[86] Of those reserved shares and other equity, the non-employee directors were entitled to up to 30% of all option and restricted stock shares, all of which could be granted in 1224*1224 any calendar year.^[87] But, "[t]he number, types, and terms of the awards to be made pursuant to the [EIP] are subject to the discretion of the Committee and have not been determined at this time, and will not be determined until subsequent to stockholder approval."^[88]

When submitted to the stockholders for approval, the stockholders were told that "[b]y approving the Plan, stockholders will give [the Company] the flexibility [it] need[s] to continue to attract, motivate and retain highly qualified officers, employees and directors by offering a competitive compensation program that is linked to the performance of [the Company's] common stock."^[89] The complaint alleges that this representation was reasonably interpreted as forward-looking. In other words, by approving the EIP, stockholders understood that the directors would reward Company employees for future performance, not past services.

After stockholders approved the EIP, the board eventually approved just under half of the stock options available to the directors and nearly thirty percent of the shares available to the directors as restricted stock awards, based predominately on a five-year going forward vesting period. The plaintiffs argue that the directors breached their fiduciary duties by granting themselves these awards because they were unfair and excessive.^[90] According to the plaintiffs, the stockholders were told the EIP would reward future performance, but the Board instead used the EIP awards to reward past efforts for the mutual-to-stock conversion—which the directors had already accounted for in determining their 2015 compensation packages.^[91] Also, according to the plaintiffs, the rewards were inordinately higher than peer companies'. As alleged in the complaint, the Board paid each non-employee director more than $2,100,000 in 2015,^[92] which "eclips[ed] director pay at every Wall Street firm."^[93] This significantly exceeded the Company's non-employee director compensation in 2014, which ranged from $97,200 to $207,005.^[94] It also far surpassed the $198,000 median pay at similarly sized companies and the $260,000 median pay at much larger companies.^[95] And the awards were over twenty-three times more than the $87,556 median award granted to other companies' non-employee directors after mutual-to-stock conversions.^[96]

In addition, according to the complaint, Cama and Cummings' compensation far exceeded their prior compensation and that of peer companies. Cummings' $20,006,957 total compensation in 2015 was 1225*1225 seven times more than his 2014 compensation package of $2,778,000.^[97] And Cama's $15,318,257 compensation was nine times more than his 2014 compensation package of $1,665,794.^[98] Cummings' $16,699,999 award was 3,683% higher than the median award other companies granted their CEOs after mutual-to-stock conversions. And Cama's $13,359,998 award was 5,384% higher than the median other companies granted their second-highest paid executives after the conversions.^[99]

The plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties in making unfair and excessive discretionary awards to themselves after stockholder approval of the EIP. Because the stockholders did not ratify the specific awards the directors made under the EIP, the directors must demonstrate the fairness of the awards to the Company.

IV.

The parties raise a last issue—whether the plaintiffs are excused from making a demand on the board under Court of Chancery Rule 23.1 for the awards made to executive directors Cama and Cummings. The directors do not contest that they are interested for the awards they made to themselves. But, according to the directors, the awards made to the two executive directors were not part of a "single transaction" because these awards were made as part of a series of compensation meetings following the EIP's adoption. Further, they argue, the plaintiffs failed to demonstrate a "quid pro quo" between the non-employee directors and Cama and Cummings. Thus, the non-employee directors claim they would be capable of exercising independent judgment to consider a demand challenging the board's awards to the executive directors.

Demand is futile when, under the particular facts alleged, a reasonable doubt is created that (1) a majority of the board is disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.^[100] Although showing a quid pro quo might be one way of proving interestedness or lack of independence, it is not a requirement. Rather, the focus is on the acts being challenged and the relationship between those acts and the directors who approved them. Here, immediately after the Investors Bancorp stockholders approved the EIP, the directors 1226*1226 held a series of nearly contemporaneous meetings that resulted in awards to both the non-employee directors and the executive directors. It is implausible to us that the non-employee directors could independently consider a demand when to do so would require those directors to call into question the grants they made to themselves. In other words, "[i]t strains reason to argue that a defendant-director could act independently to evaluate the merits of bringing a legal action against any of the other defendants if the director participated in the identical challenged misconduct."^[101] Thus, demand is excused for the claims made against non-employee and executive directors.

V.

The Investors Bancorp stockholders approved the general parameters of the EIP. The plaintiffs have properly alleged, however, that the directors, when exercising their discretion under the EIP, acted inequitably in granting themselves unfair and excessive awards. Because the stockholders did not ratify the specific awards under the EIP, the affirmative defense of ratification cannot not be used to dismiss the complaint. The plaintiffs have also demonstrated that demand would be futile as to all directors. Thus, the Court of Chancery's decision is reversed, and the case is remanded for further proceedings consistent with this opinion.

[1] Seinfeld v. Slager, C.A. No. 6462-VCG, 2012 WL 2501105, at *11-12 (Del. Ch. June 29, 2012).

[2] Gottlieb v. Heyden Chem. Corp., 90 A.2d 660, 663 (1952) ("Human nature being what it is, the law, in its wisdom, does not presume that directors will be competent judges of the fair treatment of their company where fairness must be at their own personal expense. In such a situation the burden is upon the directors to prove not only that the transaction was in good faith, but also that its intrinsic fairness will withstand the most searching and objective analysis.").

[3] In re Gen. Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006) ("In deciding a motion to dismiss under Rule 12(b)(6), a trial court must accept as true all of the well-pleaded allegations of fact and draw reasonable inferences in the plaintiff's favor.").

[4] Robert C. Albanese, Dennis M. Bone, Doreen R. Byrnes, Robert M. Cashill, William V. Cosgrove, Brian D. Dittenhafer, Brendan J. Dugan, James J. Garibaldi, Michele N. Siekerka, and James H. Ward III.

[5] Kevin Cummings, the Company's President and CEO, and Domenick A. Cama, the Company's COO and Senior Executive Vice President.

[6] In May 2014, a mutual-to-stock conversion transformed Investors Bank from a two-tier mutual holding company into a fully public stock holding company. App. to Opening Br. at 29 (Compl., In re Investors Bancorp, Inc. Stockholder Litig., No. 12327-VCS, ¶ 29 (Del. Ch. June 7, 2016)). Through the conversion, MHC, Old Investors Bancorp's parent company, merged into Old Investors Bancorp, which merged into Investors Bancorp—the Company that is the subject of this suit. Id. Old Investors Bancorp shares not held by MHC were converted into Investors Bancorp shares, and the common shares of MHC were sold. Id.

[7] App. to Opening Br. at 30-34 (Compl. ¶¶ 32-40).

[8] App. to Opening Br. at 38 (Compl. ¶ 54). The Committee did not define the precise performance metrics that would be used to set the Annual Cash Incentive Award percentage Cummings or Cama would receive, noting only that receiving the full amount would "entail a significant degree of challenge." Id. at 39 (Compl. ¶ 57). The metrics were later determined at the February 23, 2015 Committee meeting and included net income, successful conversion of the core operating system, and certain personal goals. Id. at 40 (Compl. ¶ 59).

[9] Id. at 328 (Investors Bancorp, Inc., Proxy Statement for the 2014 Annual Meeting of Stockholders, at 40 (June 9, 2015) [hereinafter 2014 Proxy] )).

[10] In re Investors Bancorp, Inc. Stockholder Litig., C.A. No. 12327-VCS, 2017 WL 1277672, at *4 (Del. Ch. Apr. 5, 2017) (quoting App. to Answering Br. at 351 (2014 Proxy, at 72 § 3.3).

[11] App. to Answering Br. at 336 (2014 Proxy, at 46).

[12] In re Investors Bancorp, Inc. Stockholder Litig., 2017 WL 1277672, at *4.

[13] App. to Opening Br. at 41, 45-46 (Compl. ¶ 61, 27-29 ¶ 72).

[14] Id. at 46 (Compl. ¶ 73). It is unclear when these meetings were planned; but as of the first meeting, the three future meetings had already been scheduled. Id.

[15] Id. at 47 (Compl. ¶ 75).

[16] Id.

[17] Id. at 73 (Compl. ¶ 120).

[18] Id. at 47 (Compl. ¶ 75).

[19] Id. at 71-74 (Compl. ¶¶ 117-22).

[20] Id. at 47 (Compl. ¶ 76).

[21] Id. at 47-48 (Compl. ¶¶ 76-77).

[22] App. to Opening Br. at 129 (Pls.' Opposition to Defs.' Mot. to Dismiss 15, In re Investors Bancorp, Inc. Stockholder Litig., C.A. No. 12327-VCS, 2017 WL 1277672 (Del. Ch. Oct. 13, 2016).

[23] App. to Opening Br. at 48 (Compl. ¶ 77).

[24] Id. (Compl. ¶ 78).

[25] Id. at 50 (Compl. ¶ 82).

[26] Id. at 51 (Compl. ¶ 32); In re Investors Bancorp, Inc. Stockholder Litig., 2017 WL 1277672, at *5.

[27] In re Investors Bancorp, Inc. Stockholder Litig., 2017 WL 1277672, at *12.

[28] C.A. No. 16721, 1999 WL 1009210 (Del. Ch. Oct. 25, 1999).

[29] 114 A.3d 563 (Del. Ch. 2015).

[30] In re Investors Bancorp, Inc. Stockholder Litig., 2017 WL 1277672, at *8.

[31] Gantler v. Stephens, 965 A.2d 695, 703 (Del. 2009).

[32] 8 Del. C. § 141(h).

[33] Telxon Corp. v. Meyerson, 802 A.2d 257, 262 (Del. 2002).

[34] Id. at 257; see also Gottlieb, 90 A.2d at 663 ("[W]here a majority of the directors representing the corporation are conferring benefits upon themselves out of the assets of the corporation, we do not understand [the business judgment rule] to have any application what[so]ever.").

[35] Citrix, 114 A.3d at 577 (quoting Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)) ("[T]he Court reviews the directors' decision under the entire fairness standard, in which case the directors must establish `to the court's satisfaction that the transaction was the product of both fair dealing and fair price.'").

[36] See, e.g., Gantler, 965 A.2d at 712 (proposal to reclassify shares); In re Gen. Motors (Hughes) S'holder Litig., 897 A.2d at 166 (series of financial transactions splitting off a subsidiary); Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) (amendments to a company's charter and bylaws); Fliegler v. Lawrence, 361 A.2d 218, 220 (Del. 1976) (director decision to exercise an option for shares); Kleinman v. Saminsky, 200 A.2d 572, 575 (Del. 1964) (underwriting contracts and management fees).

[37] 90 A.2d 652.

[38] Id. at 655.

[39] Id.

[40] Id.

[41] Id. (citations omitted).

[42] Id. at 659-60.

[43] Id. at 655.

[44] Id.

[45] 90 A.2d 660 (Del. 1960).

[46] Id. at 661.

[47] Id. at 662.

[48] Id.

[49] Gottlieb [v. Heyden Chemical Corp.], 91 A.2d [57]at 58 [(1952)]; see id. ("Where there was stockholder ratification, however, the court will look into the transaction only far enough to see whether the terms are so unequal as to amount to waste, or whether, on the other hand, the question is such a close one as to call for the exercise of what is commonly called `business judgment.'").

[50] Id. at 59-60.

[51] Id. at 60.

[52] Id. In another early case, Kaufman v. Shoenberg, 91 A.2d 786 (Del. Ch. 1952), the Court of Chancery addressed a stockholder challenge to the consideration the corporation received for a restricted stock option plan. The plan in Kaufman did not specify the awards to be issued, but the awards were administered by a board committee that did not receive options under the plan. Id. at 788-89, 793. The Chancellor held that "independent stockholder ratification of an interested director transaction" led to the conclusion that "the objecting stockholder has the burden of showing that no person of ordinary sound business judgment would say that the consideration received for the options was a fair exchange for the options granted." Id. at 791.

[53] Gottlieb, 91 A.2d at 58.

[54] C.A. No. 13139, 1995 WL 441999 (Del. Ch. July 19, 1995).

[55] 699 A.2d [327] at 338 [(1997)].

[56] 1995 WL 441999, at *5.

[57] 699 A.2d at 329-30.

[58] In Lewis, Chancellor Allen explored the ratification defense through the lens of agency, finding that ratification "contemplates the ex post conferring upon or confirming of the legal authority of an agent in circumstances in which the agent had no authority or arguably had no authority. . . . [T]he effect of informed ratification is to validate or affirm the act of the agent as the act of the principal." 699 A.2d at 334 (citing Restatement (Second) of Agency § 82 (1958)). The Chancellor also observed that the standard of review following stockholder ratification of director self-compensation decisions evolved from the Kerbs proportionality or reasonableness standard when considering the adequacy of the consideration to a waste standard. Id. at 338 (citing Michelson v. Lewis, 407 A.2d 211 (Del. 1979)).

[59] In re 3Com Corp. S'holders Litig., 1999 WL 1009210, at *2-3; Criden v. Steinberg, 2000 WL 354390, at *2 (Del. Ch. Mar. 23, 2000).

[60] 1999 WL 1009210, at *3 n.9.

[61] Id. at *1.

[62] Id. at *2.

[63] Id.

[64] 2000 WL 354390.

[65] Id. at *3-4.

[66] Id. at *4.

[67] Sample v. Morgan, 914 A.2d 647 (Del. Ch. 2007).

[68] The company granted 100,000 shares to the CEO, 75,000 shares to the Vice President of Manufacturing, and 25,000 shares to the CFO. Id. at 654.

[69] Id. at 663-64.

[70] 2012 WL 2501105, at *11-12.

[71] Id. at *10.

[72] Id.

[73] Id. at *12. The court went on to hold that "[i]f a board is free to use its absolute discretion under even a stockholder-approved plan, with little guidance as to the total pay that can be awarded, a board will ultimately have to show that the transaction is entirely fair." Id.

[74] C.A. No. 9178-CB, 2014 WL 2930869, at *2 (Del. Ch. June 26, 2014).

[75] Id. at *8-9; see also Desimone, 924 A.2d at 917 (dismissing a claim challenging option grants because stockholders approved the specific amount to be granted).

[76] 114 A.3d 563.

[77] Id. at 588 (emphasis omitted).

[78] Answering Br. at 17-18, 23; In re 3COM Corp., 1999 WL 1009210; Criden, 2000 WL 354390. The defendants also rely on Steiner, 1995 WL 441999, and Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, but those cases are not helpful to their argument. The plan in Steiner was self-executing. 1995 WL 441999, at *4 ("The plan grants each director an option to purchase 25,000 shares upon election to the Telxon board, and an additional 10,000 shares on the anniversary of his election while he remains on the board."). In Cambridge Retirement System, the stockholders approved the specific awards made by the directors. 2014 WL 2930869, at *8 ("Unilife stockholders approved the grant of up to 100,000 options to two of the [c]ompany's outside directors and, in 2011, approved the grant of up to 45,000 stock-based awards to six of the Company's outside directors.").

[79] 1999 WL 1009210, at *3.

[80] 2000 WL 354390, at *4.

[81] Sample, 914 A.2d at 672 (Strine, V.C.) (citing Adolf A. Berle, Corporate Powers as Powers in Trust,44 HARV. L. REV. 1049, 1049 (1931)) ("Corporate acts thus must be `twice-tested'—once by the law and again by equity.").

[82] Id. at 584.

[83] Schnell v. Chris-Craft Ind., Inc., 285 A.2d 437, 439 (Del. 1971). As noted in Desimone v. Barrows,924 A.2d 908, 917 (Del. Ch. 2007), "[s]pecifying the precise amount and form of director compensation . . . `ensure[s] integrity' in the underlying principal-agent relationship between stockholders and directors."

[84] 914 A.2d at 659 (Pet'rs' Second Am. Class Action & Derivative Compl. ¶ 55, Sample, 2005 WL 5769871 (Del. Ch. May 24, 2015)).

[85] For example, in Seinfeld, the Court of Chancery refused to extend stockholder approval of the plan to the awards themselves. 2012 WL 2501105, at *12. The directors had the "theoretical ability to award themselves as much as tens of millions of dollars per year, with few limitations." Id. The board was also "free to use its absolute discretion . . . with little guidance as to the total pay that can be awarded." Id. In Citrix, where the stockholders challenged the awards as out of line with peer group compensation, the plan broadly authorized payments as high as $55 million a year to any one person. 114 A.3d at 587-88. Because the plan lacked any restrictions on the amounts the directors could allocate to themselves, ratification could not be used to prevent equitable review. Id. at 588. In both cases, if the directors acted inequitably in exercising their broad discretionary powers under the plans, those decisions should be subject to review by the Court of Chancery.

[86] Opening Br. at 11; App. to Answering Br. at 349 (Investors Bancorp, Inc., 2014 Proxy, Appendix A: Equity Incentive Plan, at A-5 § 3.2(a) (June 9, 2015) [hereinafter EIP]).

[87] App. to Answering Br. at 349-50 (EIP, at A-5 § 3.3).

[88] Id. at 336 (2014 Proxy, at 57).

[89] Id. at 329 (2014 Proxy, at 50).

[90] App. to Opening Br. at 50 (Compl. ¶ 83).

[91] Id. at 42-43 (Compl. ¶ 65).

[92] App. to Opening Br. at 136 (Pls.' Opposition to Defs.' Mot. to Dismiss 22 (citing Compl. ¶¶ 88-89)).

[93] Id. at 58 (Compl. ¶ 96 (quoting Caleb Melby, New Jersey Bank Pays Directors More than at Any Finance Firm, BLOOMBERG (May 5, 2016, 5:00AM), https://www.bloomberg.com/ news/articles/XXXX-XX-XX/new-jersey-bankpays-directors-morethan-any-wall-street-board)).

[94] Id. at 32 (Compl. ¶ 35).

[95] Id. at 57-58 (Compl. ¶ 95). Plaintiffs allege the 75th percentile of pay at these companies was $227,000. Id.

[96] Id. at 51-54 (Compl. ¶¶ 85-86). As alleged in the complaint, the average award at these companies was $175,817. Id.

[97] Id. at 32-33, 64 (Compl. ¶¶ 37, 105). According to plaintiffs, CEO compensation at peer companies averaged $4,170,000—approximately one-fifth of Cummings' compensation and one-fourth of Cama's. App. to Opening Br. at 139 (Pls.' Opposition to Defs.' Mot. to Dismiss 25).

[98] Id. at 33 (Compl. 15 ¶ 38).

[99] Id. at 64 (Compl. ¶ 104). The average awards at peer companies were $898,490 for CEOs and $510,435 for the second-highest paid executives. Id. at 61-64 (Compl. ¶ 103). The plaintiffs also point out that this discrepancy with peer companies greatly exceeds the discrepancies in Citrix, in which the Court of Chancery found the plaintiffs sufficiently alleged an unfair compensation claim. In Citrix, non-employee director compensation ranged from $303,360 to $425,570, which was "on average over $100,000 more" than peer companies that had "stock significantly outperforming Citrix." Pls.' S'holder Derivative Compl. ¶¶ 2, 9-10, Citrix, No. 9579-CB, 2014 WL 1873725 (Del. Ch. May 6, 2014). Since the board's change in director compensation, the peer companies' stock increased 5% on average, while Citrix's stock performed 43% worse. Id. ¶ 28. The court found these numbers stated a cognizable claim of unfair compensation and allowed the case to proceed. Citrix, 114 A.3d at 589-90.

[100] Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

[101] Needham v. Cruver, C.A. No. 12428, 1993 WL 179336, *3 (Del. Ch. May 12, 1993).

Stephen C. Norman and Michael A. Pittenger of Potter, Anderson & Corroon, Wilmington; Michael J. Silverberg (argued), and Theodore C. Max of Phillips, Nizer, Benjamin, Krim & Ballon LLP, New York City, for Appellants Robert F. Broz and RFB Cellular, Inc.

Kenneth J. Nachbar and Karen L. Pascale of Morris, Nichols, Arsht & Tunnell, Wilmington; Paul Vizcarrondo, Jr. (argued), Meir Feder and Marc Ashley of Wachtell, Lipton, Rosen & Katz, New York City, for Plaintiff Below, Appellee, Cellular Information Systems, Inc.

Before VEASEY, C.J., WALSH and HOLLAND, JJ.

[150] VEASEY, Chief Justice:

In this appeal, we consider the application of the doctrine of corporate opportunity. The Court of Chancery decided that the defendant, a corporate director, breached his fiduciary duty by not formally presenting to the corporation an opportunity which had come to the director individually and independent of the director's relationship with the corporation. Here the opportunity was not one in which the corporation in its current mode had an interest or which it had the financial ability to acquire, but, under the unique circumstances here, that mode was subject to change by virtue of the impending acquisition of the corporation by another entity.

We conclude that, although a corporate director may be shielded from liability by offering to the corporation an opportunity which has come to the director independently and individually, the failure of the director to present the opportunity does not necessarily result in the improper usurpation of a corporate opportunity. We further conclude that, if the corporation is a target or potential target of an acquisition by another company which has an interest and ability to entertain the opportunity, the director of the target company does not have a fiduciary duty to present the opportunity to the target company. Accordingly, the judgment of the Court of Chancery is REVERSED.

I. THE CONTENTIONS OF THE PARTIES AND THE DECISION BELOW

Robert F. Broz ("Broz") is the President and sole stockholder of RFB Cellular, Inc. ("RFBC"), a Delaware corporation engaged in the business of providing cellular telephone service in the Midwestern United States. At the time of the conduct at issue in this appeal, Broz was also a member of the board of directors of plaintiff below-appellee, Cellular Information Systems, Inc. ("CIS"). CIS is a publicly held Delaware corporation and a competitor of RFBC.

The conduct before the Court involves the purchase by Broz of a cellular telephone service license for the benefit of RFBC.^[1] The license in question, known as the Michigan-2 Rural Service Area Cellular License ("Michigan-2"), is issued by the Federal Communications Commission ("FCC") and entitles its holder to provide cellular telephone service to a portion of northern Michigan. CIS brought an action against Broz and RFBC for equitable relief, contending that the purchase of this license by Broz constituted a usurpation of a corporate opportunity properly belonging to CIS, irrespective of whether or not CIS was interested in the Michigan-2 opportunity at the time it was offered to Broz.

[151] The principal basis for the contention of CIS is that PriCellular, Inc. ("PriCellular"), another cellular communications company which was contemporaneously engaged in an acquisition of CIS, was interested in the Michigan-2 opportunity. CIS contends that, in determining whether the Michigan-2 opportunity rightfully belonged to CIS, Broz was required to consider the interests of PriCellular insofar as those interests would come into alignment with those of CIS as a result of PriCellular's acquisition plans.

After trial, the Court of Chancery agreed with the contentions of CIS and entered judgment against Broz and RFBC. See Cellular Information Systems, Inc. v. Broz, Del. Ch., 663 A.2d 1180 (1995). The court held that: (1) irrespective of the fact that the Michigan-2 opportunity came to Broz in a manner wholly independent of his status as a director of CIS, the Michigan-2 license was an opportunity that properly belonged to CIS; (2) due to an alignment of the interests of CIS and PriCellular arising out of PriCellular's efforts to acquire CIS, Broz breached his fiduciary duty by failing to consider whether the opportunity was one in which PriCellular would be interested; (3) despite the fact that CIS was aware of the opportunity and expressed no interest in pursuing it, Broz was required formally to present the transaction to the CIS board prior to seizing the opportunity for his own; and (4) absent formal presentation to the board, Broz' acquisition of Michigan-2 constituted an impermissible usurpation of a corporate opportunity. The trial court imposed a constructive trust on the agreement to purchase Michigan-2 and directed that the right to purchase the license be transferred to CIS. From this judgment, Broz and RFBC appeal.

Broz contends that the Court of Chancery erred in holding that he breached his fiduciary duties to CIS and its stockholders. Specifically, Broz asserts that he was under no obligation formally to present the corporate opportunity to the CIS Board of Directors. Broz further contends that PriCellular had not consummated its acquisition of CIS at the time of his decision to purchase Michigan-2, and that, accordingly, he was not obligated to consider the interests of PriCellular. We agree with Broz and hold that: (1) the determination of whether a corporate fiduciary has usurped a corporate opportunity is fact-intensive and turns on, inter alia, the ability of the corporation to make use of the opportunity and the company's intent to do so; (2) while presentation of a purported corporate opportunity to the board of directors and the board's refusal thereof may serve as a shield to liability, there is no per se rule requiring presentation to the board prior to acceptance of the opportunity; and (3) on these facts, Broz was not required to consider the interests of PriCellular in reaching his determination whether or not to purchase Michigan-2.

II. FACTS

Broz has been the President and sole stockholder of RFBC since 1992. RFBC owns and operates an FCC license area, known as the Michigan-4 Rural Service Area Cellular License ("Michigan-4"). The license entitles RFBC to provide cellular telephone service to a portion of rural Michigan. Although Broz' efforts have been devoted primarily to the business operations of RFBC, he also served as an outside director of CIS at the time of the events at issue in this case. CIS was at all times fully aware of Broz' relationship with RFBC and the obligations incumbent upon him by virtue of that relationship.

In April of 1994, Mackinac Cellular Corp. ("Mackinac") sought to divest itself of Michigan-2, the license area immediately adjacent to Michigan-4. To this end, Mackinac contacted Daniels & Associates ("Daniels") and arranged for the brokerage firm to seek potential purchasers for Michigan-2. In compiling a list of prospects, Daniels included RFBC as a likely candidate. In May of 1994, David Rhodes, a representative of Daniels, contacted Broz and broached the subject of RFBC's possible acquisition of Michigan-2. Broz later signed a confidentiality agreement at the request of Mackinac, and received the offering materials pertaining to Michigan-2.

Michigan-2 was not, however, offered to CIS. Apparently, Daniels did not consider CIS to be a viable purchaser for Michigan-2 in light of CIS' recent financial difficulties. [152] The record shows that, at the time Michigan-2 was offered to Broz, CIS had recently emerged from lengthy and contentious Chapter 11 proceedings. Pursuant to the Chapter 11 Plan of Reorganization, CIS entered into a loan agreement that substantially impaired the company's ability to undertake new acquisitions or to incur new debt. In fact, CIS would have been unable to purchase Michigan-2 without the approval of its creditors.

The CIS reorganization resulted from the failure of CIS' rather ambitious plans for expansion. From 1989 onward, CIS had embarked on a series of cellular license acquisitions. In 1992, however, CIS' financing failed, necessitating the liquidation of the company's holdings and reduction of the company's total indebtedness. During the period from early 1992 until the time of CIS' emergence from bankruptcy in 1994, CIS divested itself of some fifteen separate cellular license systems.^[2] CIS contracted to sell four additional license areas on May 27, 1994,^[3] leaving CIS with only five remaining license areas, all of which were outside of the Midwest.

On June 13, 1994, following a meeting of the CIS board, Broz spoke with CIS' Chief Executive Officer, Richard Treibick ("Treibick"), concerning his interest in acquiring Michigan-2. Treibick communicated to Broz that CIS was not interested in Michigan-2.^[4] Treibick further stated that he had been made aware of the Michigan-2 opportunity prior to the conversation with Broz, and that any offer to acquire Michigan-2 was rejected. After the commencement of the PriCellular tender offer, in August of 1994, Broz contacted another CIS director, Peter Schiff ("Schiff"), to discuss the possible acquisition of Michigan-2 by RFBC. Schiff, like Treibick, indicated that CIS had neither the wherewithal nor the inclination to purchase Michigan-2. In late September of 1994, Broz also contacted Stanley Bloch ("Bloch"), a director and counsel for CIS, to request that Bloch represent RFBC in its dealings with Mackinac. Bloch agreed to represent RFBC, and, like Schiff and Treibick, expressed his belief that CIS was not at all interested in the transaction. Ultimately, all the CIS directors testified at trial that, had Broz inquired at that time, they each would have expressed the opinion that CIS was not interested in Michigan-2.^[5]

On June 28, 1994, following various overtures from PriCellular concerning an acquisition of CIS, six CIS directors^[6] entered into agreements with PriCellular to sell their shares in CIS at a price of $2.00 per share. These agreements were contingent upon, inter alia, the consummation of a PriCellular tender offer for all CIS shares at the same price. Pursuant to their agreements with PriCellular, the CIS directors also entered into a "standstill" agreement which prevented the directors from engaging in any transaction outside the regular course of CIS' business or incurring any new liabilities until the close of the PriCellular tender offer. On August 2, 1994, PriCellular commenced a tender offer for all outstanding shares of CIS at $2.00 per share. The PriCellular tender offer mirrored the standstill agreements entered into by the CIS directors.

PriCellular's tender offer was originally scheduled to close on September 16, 1994. [153] At the time the tender offer was launched, however, the source of the $106,000,000 in financing required to consummate the transaction was still in doubt. PriCellular originally planned to structure the transaction around bank loans. When this financing fell through, PriCellular resorted to a junk bond offering. PriCellular's financing difficulties generated a great deal of concern among the CIS insiders whether the tender offer was, in fact, viable. Financing difficulties ultimately caused PriCellular to delay the closing date of the tender offer from September 16, 1994 until October 14, 1994 and then again until November 9, 1994.

On August 6, September 6 and September 21, 1994, Broz submitted written offers to Mackinac for the purchase of Michigan-2. During this time period, PriCellular also began negotiations with Mackinac to arrange an option for the purchase of Michigan-2. PriCellular's interest in Michigan-2 was fully disclosed to CIS' chief executive, Treibick, who did not express any interest in Michigan-2, and was actually incredulous that PriCellular would want to acquire the license. Nevertheless, CIS was fully aware that PriCellular and Broz were bidding for Michigan-2 and did not interpose CIS in this bidding war.

In late September of 1994, PriCellular reached agreement with Mackinac on an option to purchase Michigan-2. The exercise price of the option agreement was set at $6.7 million, with the option remaining in force until December 15, 1994. Pursuant to the agreement, the right to exercise the option was not transferrable to any party other than a subsidiary of PriCellular. Therefore, it could not have been transferred to CIS. The agreement further provided that Mackinac was free to sell Michigan-2 to any party who was willing to exceed the exercise price of the Mackinac-PriCellular option contract by at least $500,000. On November 14, 1994, Broz agreed to pay Mackinac $7.2 million for the Michigan-2 license, thereby meeting the terms of the option agreement. An asset purchase agreement was thereafter executed by Mackinac and RFBC.

Nine days later, on November 23, 1994, PriCellular completed its financing and closed its tender offer for CIS. Prior to that point, PriCellular owned no equity interest in CIS. Subsequent to the consummation of the PriCellular tender offer for CIS, members of the CIS board of directors, including Broz, were discharged and replaced with a slate of PriCellular nominees. On March 2, 1995, this action was commenced by CIS in the Court of Chancery.

At trial in the Court of Chancery, CIS contended that the purchase of Michigan-2 by Broz constituted the impermissible usurpation of a corporate opportunity properly belonging to CIS. Thus, CIS asserted that Broz breached his fiduciary duty to CIS and its stockholders. CIS admits that, at the time the opportunity was offered to Broz, the board of CIS would not have been interested in Michigan-2, but CIS asserts that Broz usurped the opportunity nevertheless. CIS claims that Broz was required to look not just to CIS, but to the articulated business plans of PriCellular, to determine whether PriCellular would be interested in acquiring Michigan-2. Since Broz failed to do this and acquired Michigan-2 without first considering the interests of PriCellular in its capacity as a potential acquiror of CIS, CIS contends that Broz must be held to account for breach of fiduciary duty.

In assessing the contentions of the parties in light of the facts of record, the Court of Chancery concluded:

(1) that [CIS] ... could have legitimately required its director [Broz] to abstain from the Mackinac transaction out of deference to its own interests in extending an offer, despite the fact that it came to such director in a wholly independent way, (that is the transaction is one that falls quite close to the core transactions that the corporation was formed to engage in); (2) that by no later than the time by which Price had extended the public tender offer, the circumstances of the company had changed so that it was quite plausibly in the corporation's interest and financially feasible for it to pursue the Mackinac transaction; (3) that in such circumstances as existed at the latest after October 14, 1994 (date of PriCellular's option contract on Michigan 2 RSA) it was the obligation [154] of Mr. Broz as a director of CIS to take the transaction to the CIS board for its formal action; and (4) the after the fact testimony of directors to the effect that they would not have been interested in pursuing this transaction had it been brought to the board, is not helpful to defendant, in my opinion, because most of them did not know at that time of PriCellular's interest in the property and how it related to PriCellular's plan for CIS.

663 A.2d at 1186. Based on these conclusions, the court held that:

even though knowledge of the availability of the Michigan 2 RSA license and its associated assets came to Mr. Broz wholly independently of his role on the CIS board, that opportunity was within the core business interests of CIS at the relevant times; that at such time CIS would have had access to the financing necessary to compete for the assets that were for sale; and that the CIS board of directors were not asked to and thus did not consider whether such action would have been in the best interests of the corporation. In these circumstances I conclude that Mr. Broz as a director of CIS violated his duty of loyalty to CIS by seizing this opportunity without formally informing the CIS board fully about the opportunity and facts surrounding it and by proceeding to acquire rights for his benefit without the consent of the corporation. See Yiannatsis v. Stephanis, Del.Supr., 653 A.2d 275 (1995).

663 A.2d at 1181-82.

III. STANDARD AND SCOPE OF APPELLATE REVIEW

The determination after trial of the Court of Chancery that Broz breached his fiduciary duty of loyalty involves both a question of law and a question of fact. Science Accessories Corp. v. Summagraphics Corp., Del.Supr., 425 A.2d 957, 963 (1980) (whether corporate opportunity has been usurped "depends... on the facts and the reasonable inferences to be drawn therefrom"); Johnston v. Greene, Del.Supr., 121 A.2d 919, 923 (1956); Guth v. Loft, Inc., Del.Supr., 5 A.2d 503, 513 (1939) (whether a corporate opportunity has been usurped is "a factual question to be decided by reasonable inferences from objective facts"). As we have stated previously, a trial court's finding pertaining to a purported breach of the duty of loyalty, "being fact dominated," is, "on appeal, entitled to substantial deference unless clearly erroneous or not the product of a logical and deductive process." Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 360 (1993) (quoting 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).

In all events, if it can be shown that the court erred in formulating or applying legal precepts, this Court's review is plenary. Delaware Alcoholic Beverage Wholesalers, Inc. v. Ayers, Del.Supr., 504 A.2d 1077, 1081 (1986); see also Rohner v. Niemann, Del. Supr., 380 A.2d 549, 552 (1977).

IV. APPLICATION OF THE CORPORATE OPPORTUNITY DOCTRINE

The doctrine of corporate opportunity represents but one species of the broad fiduciary duties assumed by a corporate director or officer. A corporate fiduciary agrees to place the interests of the corporation before his or her own in appropriate circumstances. In light of the diverse and often competing obligations faced by directors and officers, however, the corporate opportunity doctrine arose as a means of defining the parameters of fiduciary duty in instances of potential conflict. The classic statement of the doctrine is derived from the venerable case of Guth v. Loft, Inc. In Guth, this Court held that:

if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of the corporation, the law will not permit him to seize the opportunity for himself.

Guth, 5 A.2d at 510-11.

The corporate opportunity doctrine, as delineated by Guth and its progeny, holds [155] that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation. The Court in Guth also derived a corollary which states that a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. Guth, 5 A.2d at 509.

Thus, the contours of this doctrine are well established. It is important to note, however, that the tests enunciated in Guth and subsequent cases provide guidelines to be considered by a reviewing court in balancing the equities of an individual case. No one factor is dispositive and all factors must be taken into account insofar as they are applicable. Cases involving a claim of usurpation of a corporate opportunity range over a multitude of factual settings. Hard and fast rules are not easily crafted to deal with such an array of complex situations. As this Court noted in Johnston v. Greene, Del. Supr., 121 A.2d 919 (1956), the determination of "[w]hether or not a director has appropriated for himself something that in fairness should belong to the corporation is `a factual question to be decided by reasonable inference from objective facts.'" Id. at 923 (quoting Guth, 5 A.2d at 513). In the instant case, we find that the facts do not support the conclusion that Broz misappropriated a corporate opportunity.

We note at the outset that Broz became aware of the Michigan-2 opportunity in his individual and not his corporate capacity. As the Court of Chancery found, "Broz did not misuse proprietary information that came to him in a corporate capacity nor did he otherwise use any power he might have over the governance of the corporation to advance his own interests." 663 A.2d at 1185. This fact is not the subject of serious dispute. In fact, it is clear from the record that Mackinac did not consider CIS a viable candidate for the acquisition of Michigan-2. Accordingly, Mackinac did not offer the property to CIS. In this factual posture, many of the fundamental concerns undergirding the law of corporate opportunity are not present (e.g., misappropriation of the corporation's proprietary information). The burden imposed upon Broz to show adherence to his fiduciary duties to CIS is thus lessened to some extent. See Science Accessories Corp., 425 A.2d at 964 (holding that because opportunity to purchase new technology was "an `outside' opportunity not available to SAC, defendants' failure to disclose the concept to SAC and their taking it for themselves for purposes of competing with SAC cannot be found to be in breach of any agency fiduciary duty"). Nevertheless, this fact is not dispositive. The determination of whether a particular fiduciary has usurped a corporate opportunity necessitates a careful examination of the circumstances, giving due credence to the factors enunciated in Guth and subsequent cases.

We turn now to an analysis of the factors relied on by the trial court. First, we find that CIS was not financially capable of exploiting the Michigan-2 opportunity. Although the Court of Chancery concluded otherwise, we hold that this finding was not supported by the evidence. Levitt, 287 A.2d at 673. The record shows that CIS was in a precarious financial position at the time Mackinac presented the Michigan-2 opportunity to Broz. Having recently emerged from lengthy and contentious bankruptcy proceedings, CIS was not in a position to commit capital to the acquisition of new assets. Further, the loan agreement entered into by CIS and its creditors severely limited the discretion of CIS as to the acquisition of new assets and substantially restricted the ability of CIS to incur new debt.

The Court of Chancery based its contrary finding on the fact that PriCellular had purchased an option to acquire CIS' bank debt. [156] Thus, the court reasoned, PriCellular was in a position to exercise that option and then waive any unfavorable restrictions that would stand in the way of a CIS acquisition of Michigan-2. The trial court, however, disregarded the fact that PriCellular's own financial situation was not particularly stable. PriCellular was unable to finance the acquisition of CIS through conventional bank loans and was forced to use the more risky mechanism of a junk bond offering to raise the required capital. Thus, the court's statement that "PriCellular had other sources of financing to permit the funding of that purchase" is clearly not free from dispute. Moreover, as discussed infra, the fact that PriCellular had available sources of financing is immaterial to the analysis. At the time that Broz was required to decide whether to accept the Michigan-2 opportunity, PriCellular had not yet acquired CIS, and any plans to do so were wholly speculative. Thus, contrary to the Court of Chancery's finding, Broz was not obligated to consider the contingency of a PriCellular acquisition of CIS and the related contingency of PriCellular thereafter waiving restrictions on the CIS bank debt. Broz was required to consider the facts only as they existed at the time he determined to accept the Mackinac offer and embark on his efforts to bring the transaction to fruition. Guth, 5 A.2d at 513.

Second, while it may be said with some certainty that the Michigan-2 opportunity was within CIS' line of business, it is not equally clear that CIS had a cognizable interest or expectancy in the license.^[7] Under the third factor laid down by this Court in Guth, for an opportunity to be deemed to belong to the fiduciary's corporation, the corporation must have an interest or expectancy in that opportunity. As this Court stated in Johnston, 121 A.2d at 924, "[f]or the corporation to have an actual or expectant interest in any specific property, there must be some tie between that property and the nature of the corporate business." Despite the fact that the nature of the Michigan-2 opportunity was historically close to the core operations of CIS, changes were in process. At the time the opportunity was presented, CIS was actively engaged in the process of divesting its cellular license holdings. CIS' articulated business plan did not involve any new acquisitions. Further, as indicated by the testimony of the entire CIS board, the Michigan-2 license would not have been of interest to CIS even absent CIS' financial difficulties and CIS' then current desire to liquidate its cellular license holdings.^[8] Thus, CIS had no [157] interest or expectancy in the Michigan-2 opportunity. Cf. Guth, 5 A.2d at 514 (holding that Loft had an interest or expectancy in the Pepsi opportunity by virtue of its need for cola syrup for use in its retail stores).

Finally, the corporate opportunity doctrine is implicated only in cases where the fiduciary's seizure of an opportunity results in a conflict between the fiduciary's duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity. In the instant case, Broz' interest in acquiring and profiting from Michigan-2 created no duties that were inimicable to his obligations to CIS. Broz, at all times relevant to the instant appeal, was the sole party in interest in RFBC, a competitor of CIS. CIS was fully aware of Broz' potentially conflicting duties. Broz, however, comported himself in a manner that was wholly in accord with his obligations to CIS. Broz took care not to usurp any opportunity which CIS was willing and able to pursue. Broz sought only to compete with an outside entity, PriCellular, for acquisition of an opportunity which both sought to possess. Broz was not obligated to refrain from competition with PriCellular. Therefore, the totality of the circumstances indicates that Broz did not usurp an opportunity that properly belonged to CIS.

A. Presentation to the Board:

In concluding that Broz had usurped a corporate opportunity, the Court of Chancery placed great emphasis on the fact that Broz had not formally presented the matter to the CIS board. The court held that "in such circumstances as existed at the latest after October 14, 1994 (date of PriCellular's option contract on Michigan 2 RSA) it was the obligation of Mr. Broz as a director of CIS to take the transaction to the CIS board for its formal action...." 663 A.2d at 1185. In so holding, the trial court erroneously grafted a new requirement onto the law of corporate opportunity, viz., the requirement of formal presentation under circumstances where the corporation does not have an interest, expectancy or financial ability.

The teaching of Guth and its progeny is that the director or officer must analyze the situation ex ante to determine whether the opportunity is one rightfully belonging to the corporation. If the director or officer believes, based on one of the factors articulated above, that the corporation is not entitled to the opportunity, then he may take it for himself. Of course, presenting the opportunity to the board creates a kind of "safe harbor" for the director, which removes the specter of a post hoc judicial determination that the director or officer has improperly usurped a corporate opportunity. Thus, presentation avoids the possibility that an error in the fiduciary's assessment of the situation will create future liability for breach of fiduciary duty. It is not the law of Delaware that presentation to the board is a necessary prerequisite to a finding that a corporate opportunity has not been usurped.

The numerous cases decided since Guth are in full accord with this view of the doctrine. For instance, in Field v. Allyn, Del. Ch., 457 A.2d 1089 (1983), the Court of Chancery held that a director or officer is free to take a business opportunity for himself once the corporation has rejected it or if it can be shown that the corporation is not in a position to take the opportunity. The Field court held this to be true even if the fiduciary became aware of the opportunity by virtue of the fiduciary's position in the corporation. Id. at 1099. Notably, this Court affirmed the Field holding on the basis of the well reasoned opinion of the court below. Field v. Allyn, Del.Supr., 467 A.2d 1274 (1983). Field is not unique, however. The view that presentation to the board is not required where the opportunity is one that the corporation is incapable of exercising is also expressed in other cases. See, e.g., Wolfensohn [158] v. Madison Fund, Inc., Del.Supr., 253 A.2d 72, 76 (1969).

Other cases, such as Kaplan v. Fenton, Del.Supr., 278 A.2d 834 (1971), have found no violation of the corporate opportunity doctrine where the director determined that the corporation was not interested in the opportunity, but never made formal presentation to the board. The director in Kaplan asked the CEO and another board member if the corporation would be interested in the opportunity and whether he should present the opportunity to the board. These questions were answered in the negative and the director then acquired the opportunity for himself. The Kaplan Court found no breach of the doctrine, despite the absence of formal presentation.^[9]

The Court of Chancery cited Yiannatsis v. Stephanis, Del.Supr., 653 A.2d 275 (1995), in support of the proposition that formal presentation to the board of directors is a necessary prerequisite to a corporate fiduciary taking an opportunity for his own. See 663 A.2d at 1182. In Yiannatsis, the opportunity in question was a block of stock in a closely held corporation, the holder of which was subject to a right of first refusal held by the corporation. Two of the three directors of the corporation caused the company to refuse the opportunity and, as a result, the corporation never invoked its right of first refusal. This Court held that the corporate fiduciaries had acted surreptitiously to keep the opportunity from being exercised by the corporation, when they had no reasonable ground to believe that the corporation would not be interested therein. This background of bad faith is not present in the case at bar. Here, Broz had substantial reason to believe that CIS was not interested in or able to take advantage of the Michigan-2 opportunity. Accordingly, Yiannatsis is not relevant to the analysis here.

Thus, we hold that Broz was not required to make formal presentation of the Michigan-2 opportunity to the CIS board prior to taking the opportunity for his own. In so holding, we necessarily conclude that the Court of Chancery erred in grafting the additional requirement of formal presentation onto Delaware's corporate opportunity jurisprudence.^[10]

B. Alignment of Interests Between CIS and PriCellular:

In concluding that Broz usurped an opportunity properly belonging to CIS, the Court of Chancery held that "[f]or practical business reasons CIS' interests with respect to the Mackinac transaction came to merge with those of PriCellular, even before the closing of its tender offer for CIS stock." Based on this fact, the trial court concluded that Broz was required to consider PriCellular's prospective, post-acquisition plans for CIS in determining whether to forego the opportunity or seize it for himself. Had Broz done this, the Court of Chancery determined that he would have concluded that CIS was entitled to the opportunity by virtue of the alignment of its interests with those of PriCellular.

We disagree. Broz was under no duty to consider the interests of PriCellular when he chose to purchase Michigan-2. As stated in Guth, a director's right to "appropriate [an]... opportunity depends on the circumstances existing at the time it presented itself to him without regard to subsequent events." Guth, 5 A.2d at 513. At the time Broz purchased Michigan-2, PriCellular had not yet acquired CIS. Any plans to do so would still have been wholly speculative. Accordingly, Broz was not required to consider the contingent and uncertain plans of PriCellular in reaching his determination of how to proceed.

[159] Whether or not the CIS board would, at some time, have chosen to acquire Michigan-2 in order to make CIS a more attractive acquisition target for PriCellular or to enhance the synergy of any combined enterprise, is speculative. The trial court found this to be a plausible scenario and therefore found that, pursuant to the factors laid down in Guth, CIS had a valid interest or expectancy in the license. This speculative finding cuts against the statements made by CIS' Chief Executive and the entire CIS board of directors and ignores the fact that CIS still lacked the wherewithal to acquire Michigan-2, even if one takes into account the possible availability of PriCellular's financing. Thus, the fact of PriCellular's plans to acquire CIS is immaterial and does not change the analysis.

In reaching our conclusion on this point, we note that certainty and predictability are values to be promoted in our corporation law. See Williams v. Geier, Del.Supr., 671 A.2d 1368, 1385 n. 36 (1996). Broz, as an active participant in the cellular telephone industry, was entitled to proceed in his own economic interest in the absence of any countervailing duty. The right of a director or officer to engage in business affairs outside of his or her fiduciary capacity would be illusory if these individuals were required to consider every potential, future occurrence in determining whether a particular business strategy would implicate fiduciary duty concerns. In order for a director to engage meaningfully in business unrelated to his or her corporate role, the director must be allowed to make decisions based on the situation as it exists at the time a given opportunity is presented. Absent such a rule, the corporate fiduciary would be constrained to refrain from exploiting any opportunity for fear of liability based on the occurrence of subsequent events. This state of affairs would unduly restrict officers and directors and would be antithetical to certainty in corporation law.

V. CONCLUSION

The corporate opportunity doctrine represents a judicially crafted effort to harmonize the competing demands placed on corporate fiduciaries in a modern business environment. The doctrine seeks to reduce the possibility of conflict between a director's duties to the corporation and interests unrelated to that role. In the instant case, Broz adhered to his obligations to CIS. We hold that the Court of Chancery erred as a matter of law in concluding that Broz had a duty formally to present the Michigan-2 opportunity to the CIS board. We also hold that the trial court erred in its application of the corporate opportunity doctrine under the unusual facts of this case, where CIS had no interest or financial ability to acquire the opportunity, but the impending acquisition of CIS by PriCellular would or could have caused a change in those circumstances.

Therefore, we hold that Broz did not breach his fiduciary duties to CIS. Accordingly, we REVERSE the judgment of the Court of Chancery holding that Broz diverted a corporate opportunity properly belonging to CIS and imposing a constructive trust.

[1] The Court recognizes that the actual purchase of the Michigan-2 license was consummated by RFBC as a corporate entity, rather than by Broz acting as an individual for his own benefit. Broz is, however, the sole party in interest in RFBC and all actions taken by RFBC, including the acquisition of Michigan-2, are accomplished at the behest of Broz. Therefore, insofar as the purchase of Michigan-2 is concerned, the Court will not distinguish between the actions of Broz and those of RFBC in analyzing Broz' alleged breach of fiduciary duty.

[2] Of these fifteen licenses, three were sold to subsidiaries of PriCellular. Specifically, the licenses held by CIS for areas in Wisconsin and Minnesota were acquired by the PriCellular subsidiaries. These transactions closed immediately upon CIS' emergence from bankruptcy.

[3] These license areas, all located in Wisconsin, were to be sold to PriCellular. After completing its acquisition of CIS, however, PriCellular determined that ownership of the licenses should remain with CIS.

[4] In fact, during a deposition given in March of 1995, Treibick testified that he didn't "know who frankly was hawking [the Michigan-2 license]... at the time ... [W]e said forget it. It was not something we would have bought if they offered it to us for nothing."

[5] We assume arguendo that informal contacts and individual opinions of board members are not a substitute for a formal process of presenting an opportunity to a board of directors. Nevertheless, in our view such a formal process was not necessary under the circumstances of this case in order for Broz to avoid liability. These contacts with individual board members do, however, tend to show that Broz was not acting surreptitiously or in bad faith.

[6] All the members of the CIS board of directors except Broz and Bloch agreed to tender their shares to PriCellular.

[7] The language in the Guthopinion relating to "line of business" is less than clear:

Where a corporation is engaged in a certain business, and an opportunity is presented to it embracing an activity as to which it has fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable to its business having regard for its financial position, and is consonant with its reasonable needs and aspirations for expansion, it may properly be said that the opportunity is within the corporation's line of business.

Guth, 5 A.2d at 514 (emphasis supplied). This formulation of the definition of the term "line of business" suggests that the business strategy and financial well-being of the corporation are also relevant to a determination of whether the opportunity is within the corporation's line of business. Since we find that these considerations are decisive under the other factors enunciated by the Court in Guth, we do not reach the question of whether they are here relevant to a determination of the corporation's line of business.

[8] At trial, each of the members of the CIS board testified to his belief that CIS would not have been interested in the Michigan-2 opportunity at the time it was presented to Broz. The Court of Chancery chose to disregard this testimony, holding that "the after the fact testimony of directors to the effect that they would not have been interested in pursuing this transaction had it been brought to the board, is not helpful to defendant, in my opinion, because most of them did not know at that time of PriCellular's interest in the property and how it related to PriCellular's plan for CIS." 663 A.2d at 1186. We disagree with the court's assessment. First, as discussed, infra, Broz was required to consider the situation only as it existed when the opportunity was presented. Thus, the fact the CIS directors were unaware of the future plans of PriCellular does not impact adversely on the weight to be ascribed to this particular evidence. Second, testimony of the CIS board is extremely helpful to establish the propriety of Broz' actions. As discussed, infra, Broz was not required to present this opportunity to the board. He was free to evaluate the situation and determine whether the opportunity was one properly belonging to CIS. Absent such formal presentation, however, this Court must make an after-the-fact assessment of an essentially stale factual scenario. In such a setting, the testimony of the directors who controlled the business and affairs of the corporation at the time the opportunity was allegedly usurped is relevant. Such testimony gives a direct indication of the business posture and expectations of the corporation during the relevant period of time. The Court of Chancery also held that "this sort of after the fact testimony is a very thin substitute for an informed board decision made at a meeting in `real time' (i.e., while the opportunity to act with effect continues)." Id. While it is true that contemporaneous decisionmaking or unanimous written consent is required for board action (8 Del.C. § 141(f)), in our view, this testimony of the CIS board was probative and should not have been wholly discounted. See n. 5, supra.

[9] As the parties note, Kaplan is distinguishable in that the Kaplan board previously rejected a similar offer to the one exploited by the defendant director. The board of CIS, however, had demonstrated a comparable lack of interest by divesting itself of holdings similar to the license at issue.

[10] Recognizing the interests the Court of Chancery sought to promote, however, we note that formal presentation to the board is often the preferred — or "safe" — approach, and we note that this litigation might have been unnecessary had this precaution been observed.

2004 WL 253521

UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.

In re: EBAY, INC. SHAREHOLDERS LITIGATION

No. C.A. 19988-NC.

Court of Chancery of Delaware.

Submitted Sept. 16, 2003.
Decided Jan. 23, 2004.
Revised Feb. 11, 2004.

Attorneys and Law Firms

Carmella P. Keener, of Rosenthal Monhait Gross & Goddess, P.A., Wilmington, Delaware; H. Adam Prussin and Ronen Sarraf, of Pomerantz Haudek Block Grossman & Gross LLP, New York, New York, and Peter S. Linden and Mark Strauss, of Kirby, McInerney & Squire, LLP, New York, New York, for Plaintiffs, of counsel.

Lawrence C. Ashby and Philip Trainer, Jr., of Ashby & Geddes, Wilmington, Delaware; Stephen C. Neal, Michael G. Rhodes, Grant P. Fondo, Jeffrey S. Karr, and Aaron P. Arnzen, of Cooley Godward LLP, Palo Alto, CA, for Defendants eBay Inc., Philippe Bourguignon, Scott D. Cook, Dawn G. Lepore, Pierre M. Omidyar, Howard D. Schultz, Jeffrey S. Skoll, and Margaret C. Whitman, of counsel.

Jesse A. Finkelstein and John D. Hendershot, of Richards, Layton & Finger, P.A., Wilmington, Delaware; Gandolfo V. DiBlasi and John L. Hardiman, of Sullivan & Cromwell, LLP, New York, New York, for Defendant The Goldman Sachs Group, Inc, of counsel.

MEMORANDUM OPINION

CHANDLER, J.

*1 Shareholders of eBay, Inc. filed these consolidated derivative actions against certain eBay directors and officers for usurping corporate opportunities. [1] Plaintiffs allege that eBay's investment banking advisor, Goldman Sachs Group, engaged in “spinning,” a practice that involves allocating shares of lucrative initial public offerings of stock to favored clients. In effect, the plaintiff shareholders allege that Goldman Sachs bribed certain eBay insiders, using the currency of highly profitable investment opportunities-opportunities that should have been offered to, or provided for the benefit of, eBay rather than the favored insiders. Plaintiffs accuse Goldman Sachs of aiding and abetting the corporate insiders breach of their fiduciary duty of loyalty to eBay.

The individual eBay defendants, as well as Goldman Sachs, have moved to dismiss these consolidated actions for failure to state a claim and for failure to make a pre-suit demand on eBay's board of directors as required under Chancery Court Rule 23.1. For reasons I briefly discuss below, I deny all of the defendants' motions to dismiss.

I. BACKGROUND FACTS

The facts, as alleged in the complaint, are straightforward. In 1995, defendants Pierre M. Omidyar and Jeffrey Skoll founded nominal defendant eBay, a Delaware corporation, as a sole proprietorship. eBay is a pioneer in online trading platforms, providing a virtual auction community for buyers and sellers to list items for sale and to bid on items of interest. In 1998, eBay retained Goldman Sachs and other investment banks to underwrite an initial public offering of common stock. Goldman Sachs was the lead underwriter. The stock was priced at $18 per share. Goldman Sachs purchased about 1.2 million shares. Shares of eBay stock became immensely valuable during 1998 and 1999, rising to $175 per share in early April 1999. Around that time, eBay made a secondary offering, issuing 6.5 million shares of common stock at $170 per share for a total of $1.1 billion. Goldman Sachs again served as lead underwriter. Goldman Sachs was asked in 2001 to serve as eBay's financial advisor in connection with an acquisition by eBay of PayPal, Inc. For these services, eBay has paid Goldman Sachs over $8 million.

During this same time period, Goldman Sachs “rewarded” the individual defendants by allocating to them thousands of IPO shares, managed by Goldman Sachs, at the initial offering price. Because the IPO market during this particular period of time was extremely active, prices of initial stock offerings often doubled or tripled in a single day. Investors who were well connected, either to Goldman Sachs or to similarly situated investment banks serving as IPO underwriters, were able to flip these investments into instant profit by selling the equities in a few days or even in a few hours after they were initially purchased.

The essential allegation of the complaint is that Goldman Sachs provided these IPO share allocations to the individual defendants to show appreciation for eBay's business and to enhance Goldman Sachs' chances of obtaining future eBay business. In addition to co-founding eBay, defendant Omidyar has been eBay's CEO, CFO and President. He is eBay's largest stockholder, owning more than 23% of the company's equity. Goldman Sachs allocated Omidyar shares in at least forty IPOs at the initial offering price. Omidyar resold these securities in the public market for millions of dollars in profit. Defendant Whitman owns 3.3% of eBay stock and has been President, CEO and a director since early 1998. Whitman also has been a director of Goldman Sachs since 2001. Goldman Sachs allocated Whitman shares in over a 100 IPOs at the initial offering price. Whitman sold these equities in the open market and reaped millions of dollars in profit. Defendant Skoll, in addition to co-founding eBay, has served in various positions at the company, including Vice-President of Strategic Planning and Analysis and President. He served as an eBay director from December 1996 to March 1998. Skoll is eBay's second largest stockholder, owning about 13% of the company. Goldman Sachs has allocated Skoll shares in at least 75 IPOs at the initial offering price, which Skoll promptly resold on the open market, allowing him to realize millions of dollars in profit. Finally, defendant Robert C. Kagle has served as an eBay director since June 1997. Goldman Sachs allocated Kagle shares in at least 25 IPOs at the initial offering price. Kagle promptly resold these equities, and recorded millions of dollars in profit.

II. ANALYSIS

A. Demand Futility

*2 Plaintiffs bring these actions on behalf of nominal defendant eBay, seeking an accounting from the individual director defendants of their profits from the IPO transactions as well as compensatory damages from Goldman Sachs for its participation (aiding and abetting) in the eBay insiders' breach of fiduciary duty. Court of Chancery Rule 23.1 requires that a shareholder make a demand that the corporation's board pursue potential litigation before initiating such litigation on the corporation's behalf. When a plaintiff fails to make a demand on the board of directors, the plaintiff must plead with factual particularity why the demand is excused.

eBay's board of directors consists of seven members. Three are the individual defendants-Whitman, Omidyar and Kagle; defendant Skoll is not presently a director. All four of these individual defendants received IPO allocations from Goldman Sachs. As a result, the three current directors of eBay who received IPO allocations (Omidyar, Whitman and Kagle) are clearly interested in the transactions at the core of this controversy.

Although the other four directors of eBay (Cook, Lepore, Schultz and Bourguignon) did not participate in the “spinning,” plaintiffs allege that they are not independent of the interested directors and, thus, demand is excused as futile. Since three of the seven present eBay directors are interested in the transactions that give rise to this litigation, plaintiffs need only demonstrate a reason to doubt the independence of one of the remaining four directors. Plaintiffs allege that directors Cook, Lepore, Schultz and Bourguignon all have “close business and personal ties with the individual defendants” and are incapable of exercising independent judgment to determine whether eBay should bring a breach of fiduciary duty action against the individual defendants. Plaintiffs allege, for example, that Schultz is a member of Maveron LLC, an investment advisory company in which Whitman has made significant personal investments. More significantly, plaintiffs allege that Cook, Lepore, Schultz and Bourguignon have received huge financial benefits as a result of their positions as eBay directors and, furthermore, that they owe their positions on the board to Omidyar, Whitman, Kagle and Skoll.

eBay pays no cash compensation to its directors, but it does award substantial stock options. For example, in 1998, when Cook joined eBay's board, it awarded him 900,000 options at an exercise price of $1.555. One fourth of these options (225,000) vested immediately, and an additional 2% vests each subsequent month so long as Cook remains a director. In 1998, after Cook had joined the board, eBay adopted a director's stock option plan pursuant to which each non-employee director was to be awarded 30,000 options each year (except for 1999, when no additional options were awarded). As of early 2002, Cook beneficially owned 903,750 currently exercisable options, and an additional 200,000 shares of eBay stock. The complaint notes that the exercise price on 900,000 of the options originally awarded to Cook is $1.555 per share. At the time the complaint was filed in this case, eBay stock was valued at $62.13 per share. At an exercise price of $1.555, Cook's original option grant is thus worth millions of dollars. In addition, the stock options awarded in 2000, 2001 and 2002, which are not yet fully vested, and will never vest unless Cook retains his position as a director, are worth potentially millions of dollars.

*3 The complaint further alleges that director Schultz, Lepore and Bourguignon are similarly situated. That is, the stock options granted to these directors, which are both vested and unvested, are so valuable that they create a financial incentive for these directors to retain their positions as directors and make them beholden to the defendant directors. As a result, plaintiffs contend that it is more than reasonable to assume that an individual who has already received, and who expects to receive still more, options of such significant value could not objectively decide whether to commence legal proceedings against fellow directors who are directly responsible for the outside directors” continuing positions on the board.

I need not address each of the four outside directors, as I agree with plaintiffs that the particularized allegations of the complaint are sufficient to raise a reasonable doubt as to Cook's independence from the eBay insider directors who accepted Goldman Sachs' IPO allocations. Defendants resist this conclusion by pointing out that Whitman, Kagle, Omidyar and Skoll, collectively with management, control 40% of eBay's common stock, which they argue is insufficient to allege control or domination. Defendants also contend that the options represent past compensation and would not effectively disable a director from acting fairly and impartially with respect to a demand. These arguments are unpersuasive in these circumstances.

First, defendants must concede that certain stockholders, executive officers and directors control eBay. For example, eBay's form 10-K for the fiscal year ending December 31, 2000 notes that eBay's executive officers and directors Whitman, Omidyar, Kagle and Skoll (and their affiliates) own about one-half of eBay's outstanding common stock. [2] As a result, these eBay officers and directors effectively have the ability to control eBay and to direct its affairs and business, including the election of directors and the approval of significant corporate transactions. Although the percentage of ownership may have decreased slightly from the time eBay filed the 2000 10-K, the decrease is insufficient to detract from the company's acknowledgement that these four individual defendants control the company and the election of directors.

Second, although many of the options awarded to Cook and the other purported outside directors have in fact vested, a significant number of options have not yet vested and will never vest unless the outside directors remain directors of eBay. Given that the value of the options for Cook (and allegedly for the other outside directors) potentially run into the millions of dollars, one cannot conclude realistically that Cook would be able to objectively and impartially consider a demand to bring litigation against those to whom he is beholden for his current position and future position on eBay's board. With the specific allegations of the complaint in mind, I conclude that plaintiffs have adequately demonstrated that demand on eBay's board should be excused as futile.

B. Corporate Opportunity

*4 Plaintiffs have stated a claim that defendants usurped a corporate opportunity of eBay. Defendants insist that Goldman Sachs' IPO allocations to eBay's insider directors were “collateral investments opportunities” that arose by virtue of the inside directors status as wealthy individuals. They argue that this is not a corporate opportunity within the corporation's line of business or an opportunity in which the corporation had an interest or expectancy. [3] These arguments are unavailing.

First, no one disputes that eBay financially was able to exploit the opportunities in question. Second, eBay was in the business of investing in securities. The complaint alleges that eBay “consistently invested a portion of its cash on hand in marketable securities.” According to eBay's 1999 10-K, for example, eBay had more than $550 million invested in equity and debt securities. eBay invested more than $181 million in “short-term investments” and $373 million in “long-term investments.” Thus, investing was “a line of business” of eBay. Third, the facts alleged in the complaint suggest that investing was integral to eBay's cash management strategies and a significant part of its business. Finally, it is no answer to say, as do defendants, that IPOs are risky investments. It is undisputed that eBay was never given an opportunity to turn down the IPO allocations as too risky. [4]

Defendants also argue that to view the IPO allocations in question as corporate opportunities will mean that every advantageous investment opportunity that comes to an officer or director will be considered a corporate opportunity. On the contrary, the allegations in the complaint in this case indicate that unique, below-market price investment opportunities were offered by Goldman Sachs to the insider defendants as financial inducements to maintain and secure corporate business. This was not an instance where a broker offered advice to a director about an investment in a marketable security. The conduct challenged here involved a large investment bank that regularly did business with a company steering highly lucrative IPO allocations to select insider directors and officers at that company, allegedly both to reward them for past business and to induce them to direct future business to that investment bank. This is a far cry from the defendants' characterization of the conduct in question as merely “a broker's investment recommendations” to a wealthy client.

Nor can one seriously argue that this conduct did not place the insider defendants in a position of conflict with their duties to the corporation. One can realistically characterize these IPO allocations as a form of commercial discount or rebate for past or future investment banking services. Viewed pragmatically, it is easy to understand how steering such commercial rebates to certain insider directors places those directors in an obvious conflict between their self-interest and the corporation's interest. It is noteworthy, too, that the Securities and Exchange Commission has taken the position that “spinning” practices violate the obligations of broker-dealers under the “Free-riding and Withholding Interpretation” rules. [5] As the SEC has explained, “the purpose of the interpretation is to protect the integrity of the public offering system by ensuring that members make a bona fide public distribution of ‘hot issue’ securities and do not withhold such securities for their own benefit or use the securities to reward other persons who are in a position to direct future business to the member.” [6]

*5 Finally, even if one assumes that IPO allocations like those in question here do not constitute a corporate opportunity, a cognizable claim is nevertheless stated on the common law ground that an agent is under a duty to account for profits obtained personally in connection with transactions related to his or her company. The complaint gives rise to a reasonable inference that the insider directors accepted a commission or gratuity that rightfully belonged to eBay but that was improperly diverted to them. Even if this conduct does not run afoul of the corporate opportunity doctrine, it may still constitute a breach of the fiduciary duty of loyalty. [7] Thus, even if one does not consider Goldman Sachs' IPO allocations to these corporate insiders-allocations that generated millions of dollars in profit-to be a corporate opportunity, the defendant directors were nevertheless not free to accept this consideration from a company, Goldman Sachs, that was doing significant business with eBay and that arguably intended the consideration as an inducement to maintaining the business relationship in the future. [8]

C. Aiding and Abetting Claim

Plaintiffs' complaint adequately alleges the existence of a fiduciary relationship, that the individual defendants breached their fiduciary duty and that plaintiffs have been damaged because of the concerted actions of the individual defendants and Goldman Sachs. Goldman Sachs, however, disputes whether it “knowingly participated” in the eBay insiders' alleged breach of fiduciary duty. [9] The allegation, however, is that Goldman Sachs had provided underwriting and investment advisory services to eBay for years and that it knew that each of the individual defendants owed a fiduciary duty to eBay not to profit personally at eBay's expense and to devote their undivided loyalty to the interests of eBay. Goldman Sachs also knew or had reason to know of eBay's investment of excess cash in marketable securities and debt. Goldman Sachs was aware (or charged with a duty to know) of earlier SEC interpretations that prohibited steering “hot issue” securities to persons in a position to direct future business to the broker-dealer. Taken together, these allegations allege a claim for aiding and abetting sufficient to withstand a motion to dismiss.

III. CONCLUSION

For all of the above reasons, I deny the defendants' motions to dismiss the complaint in this consolidated action.

IT IS SO ORDERED.

All Citations

Not Reported in A.2d, 2004 WL 253521, 29 Del. J. Corp. L. 924

Footnotes

[1] Two separate derivative actions were filed (C.A. No. 19988 and C.A. No. 19996) and the Court consolidated them on December 3, 2002, with the complaint in C.A. No. 19988 treated as the operative complaint.

[2] A 10-K is appropriately considered in ruling on a motion to dismiss, especially when referenced in the complaint.

[3] See Broz v. Cellular Info. Sys. Inc., 673 A.2d 148, 155 (Del.1996) (listing factors to find corporate opportunity).

[4] Defendants' counsel implied at oral argument that these investments were so risky that defendants may have lost money on some or all of them. That is a factual assertion that certainly contradicts allegations in the complaint, but of course I may not consider it on a motion to dismiss.

[5] See Approval of Amendments to Free-riding and Withholding Interpretation, NASD Notice 98-48, 1998 WL 1707944, at *1 (July 1998).

[6] SEC Release No. 35059, Release No. 34-35059, 58 SEC Docket 451, 1994 WL 697640, at *1 (Dec. 7, 1994).

[7] Gibralt Capital Corp. v. Smith, 2001 WL 647837, at *9 (Del. Ch. May 8, 2001); Thorpe v. CERBCO, Inc., 676 A.2d 436, 444 (Del.1996).

[8] RESTATEMENT (SECOND) OF AGENCY § 388 (1957).

[9] Knowing participation obviously is the fourth element of the claim for aiding and abetting. See generally Jackson Nat'l Life Ins. Co. v. Kennedy, 741 A.2d 377, 381 (Del. Ch.1999).

Brian D. Long (argued) and Seth D. Rigrodsky, of Rigrodsky & Long, P.A., Wilmington, DE, for appellants.

Jesse A. Finkelstein, Raymond J. DiCamillo, and Lisa Zwally Brown, of Richards, Layton & Finger, Wilmington, DE, David B. Tulchin (argued), L. Wiesel, and Jacob F.M. Oslick, of Sullivan & Cromwell, L.L.P., New York City, for appellees.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS, and RIDGELY, Justices (constituting the Court en Banc).

HOLLAND, Justice:

This is an appeal from a final judgment of the Court of Chancery dismissing a derivative complaint against fifteen present and former directors of AmSouth Bancorporation ("AmSouth"), a Delaware corporation. The plaintiffs-appellants, William and Sandra Stone, are AmSouth shareholders and filed their derivative complaint without making a pre-suit demand on AmSouth's board of directors (the "Board"). The Court of Chancery held that the plaintiffs had failed to adequately plead that such a demand would have been futile. The Court, therefore, dismissed the derivative complaint under Court of Chancery Rule 23.1.

The Court of Chancery characterized the allegations in the derivative complaint as a "classic Caremark claim," a claim that derives its name from In re Caremark Int'l Deriv. Litig.^[1] In Caremark, the Court of Chancery recognized that: "[g]enerally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation . . . only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability."^[2]

In this appeal, the plaintiffs acknowledge that the directors neither "knew [n]or should have known that violations of law were occurring," i.e., that there were no "red flags" before the directors. Nevertheless, the plaintiffs argue that the Court of Chancery erred by dismissing the derivative complaint which alleged that "the defendants had utterly failed to implement any sort of statutorily required monitoring, reporting or information controls that would have enabled them to learn of problems requiring their attention." The defendants argue that the plaintiffs' assertions are contradicted by the derivative complaint itself and by the documents incorporated therein by reference.

[365] Consistent with our opinion in In re Walt Disney Co. Deriv Litig, we hold that Caremark articulates the necessary conditions for assessing director oversight liability.^[3] We also conclude that the Caremark standard was properly applied to evaluate the derivative complaint in this case. Accordingly, the judgment of the Court of Chancery must be affirmed.

Facts

This derivative action is brought on AmSouth's behalf by William and Sandra Stone, who allege that they owned AmSouth common stock "at all relevant times." The nominal defendant, AmSouth, is a Delaware corporation with its principal executive offices in Birmingham, Alabama. During the relevant period, AmSouth's wholly-owned subsidiary, AmSouth Bank, operated about 600 commercial banking branches in six states throughout the southeastern United States and employed more than 11,600 people.

In 2004, AmSouth and AmSouth Bank paid $40 million in fines and $10 million in civil penalties to resolve government and regulatory investigations pertaining principally to the failure by bank employees to file "Suspicious Activity Reports" ("SARs"), as required by the federal Bank Secrecy Act ("BSA")^[4] and various anti-money-laundering ("AML") regulations.^[5] Those investigations were conducted by the United States Attorney's Office for the Southern District of Mississippi ("USAO"), the Federal Reserve, FinCEN and the Alabama Banking Department. No fines or penalties were imposed on AmSouth's directors, and no other regulatory action was taken against them.

The government investigations arose originally from an unlawful "Ponzi" scheme operated by Louis D. Hamric, II and Victor G. Nance. In August 2000, Hamric, then a licensed attorney, and Nance, then a registered investment advisor with Mutual of New York, contacted an AmSouth branch bank in Tennessee to arrange for custodial trust accounts to be created for "investors" in a "business venture." That venture (Hamric and Nance represented) involved the construction of medical clinics overseas. In reality, Nance had convinced more than forty of his clients to invest in promissory notes bearing high rates of return, by misrepresenting the nature and the risk of that investment. Relying on similar misrepresentations by Hamric and Nance, the AmSouth branch employees in Tennessee agreed to provide custodial accounts for the investors and to distribute monthly interest payments to each account upon receipt of a check from Hamric and instructions from Nance.

The Hamric-Nance scheme was discovered in March 2002, when the investors did not receive their monthly interest payments. Thereafter, Hamric and Nance became the subject of several civil actions brought by the defrauded investors in Tennessee and Mississippi (and in which AmSouth [366] also was named as a defendant), and also the subject of a federal grand jury investigation in the Southern District of Mississippi. Hamric and Nance were indicted on federal money-laundering charges, and both pled guilty.

The authorities examined AmSouth's compliance with its reporting and other obligations under the BSA. On November 17, 2003, the USAO advised AmSouth that it was the subject of a criminal investigation. On October 12, 2004, AmSouth and the USAO entered into a Deferred Prosecution Agreement ("DPA") in which AmSouth agreed: first, to the filing by USAO of a one-count Information in the United States District Court for the Southern District of Mississippi, charging AmSouth with failing to file SARs; and second, to pay a $40 million fine. In conjunction with the DPA, the USAO issued a "Statement of Facts," which noted that although in 2000 "at least one" AmSouth employee suspected that Hamric was involved in a possibly illegal scheme, AmSouth failed to file SARs in a timely manner. In neither the Statement of Facts nor anywhere else did the USAO ascribe any blame to the Board or to any individual director.

On October 12, 2004, the Federal Reserve and the Alabama Banking Department concurrently issued a Cease and Desist Order against AmSouth, requiring it, for the first time, to improve its BSA/AML program. That Cease and Desist Order required AmSouth to (among other things) engage an independent consultant "to conduct a comprehensive review of the Bank's AML Compliance program and make recommendations, as appropriate, for new policies and procedures to be implemented by the Bank." KPMG Forensic Services ("KPMG") performed the role of independent consultant and issued its report on December 10, 2004 (the "KPMG Report").

Also on October 12, 2004, FinCEN and the Federal Reserve jointly assessed a $10 million civil penalty against AmSouth for operating an inadequate anti-money-laundering program and for failing to file SARs. In connection with that assessment, FinCEN issued a written Assessment of Civil Money Penalty (the "Assessment"), which included detailed "determinations" regarding AmSouth's BSA compliance procedures. FinCEN found that "AmSouth violated the suspicious activity reporting requirements of the Bank Secrecy Act," and that "[s]ince April 24, 2002, AmSouth has been in violation of the anti-money-laundering program requirements of the Bank Secrecy Act." Among FinCEN's specific determinations were its conclusions that "AmSouth's [AML compliance] program lacked adequate board and management oversight," and that "reporting to management for the purposes of monitoring and oversight of compliance activities was materially deficient." AmSouth neither admitted nor denied FinCEN's determinations in this or any other forum.

Demand Futility and Director Independence

It is a fundamental principle of the Delaware General Corporation Law that "[t]he business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors. . . ."^[6] Thus, "by its very nature [a] derivative action impinges on the managerial freedom of directors."^[7] Therefore, the right of a stockholder to prosecute a derivative suit is limited to situations where either the stockholder has [367] demanded the directors pursue a corporate claim and the directors have wrongfully refused to do so, or where demand is excused because the directors are incapable of making an impartial decision regarding whether to institute such litigation.^[8] Court of Chancery Rule 23.1, accordingly, requires that the complaint in a derivative action "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors [or] the reasons for the plaintiff's failure to obtain the action or for not making the effort."^[9]

In this appeal, the plaintiffs concede that "[t]he standards for determining demand futility in the absence of a business decision" are set forth in Rales v. Blasband.^[10] To excuse demand under Rales, "a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."^[11] The plaintiffs attempt to satisfy the Rales test in this proceeding by asserting that the incumbent defendant directors "face a substantial likelihood of liability" that renders them "personally interested in the outcome of the decision on whether to pursue the claims asserted in the complaint," and are therefore not disinterested or independent.^[12]

Critical to this demand excused argument is the fact that the directors' potential personal liability depends upon whether or not their conduct can be exculpated by the section 102(b)(7) provision contained in the AmSouth certificate of incorporation.^[13] Such a provision can exculpate directors from monetary liability for a breach of the duty of care, but not for conduct that is not in good faith or a breach of the duty of loyalty.^[14] The standard for assessing a director's potential personal liability for failing to act in good faith in discharging his or her oversight responsibilities has evolved beginning with our decision in Graham v. Allis-Chalmers Manufacturing Company,^[15] through the Court of Chancery's Caremark decision to our most recent decision in Disney.^[16] A brief discussion of that evolution will help illuminate the standard that we adopt in this case.

Graham and Caremark

Graham was a derivative action brought against the directors of Allis-Chalmers for [368] failure to prevent violations of federal anti-trust laws by Allis-Chalmers employees. There was no claim that the Allis-Chalmers directors knew of the employees' conduct that resulted in the corporation's liability. Rather, the plaintiffs claimed that the Allis-Chalmers directors should have known of the illegal conduct by the corporation's employees. In Graham, this Court held that "absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists."^[17]

In Caremark, the Court of Chancery reassessed the applicability of our holding in Graham when called upon to approve a settlement of a derivative lawsuit brought against the directors of Caremark International, Inc. The plaintiffs claimed that the Caremark directors should have known that certain officers and employees of Caremark were involved in violations of the federal Anti-Referral Payments Law. That law prohibits health care providers from paying any form of remuneration to induce the referral of Medicare or Medicaid patients. The plaintiffs claimed that the Caremark directors breached their fiduciary duty for having "allowed a situation to develop and continue which exposed the corporation to enormous legal liability and that in so doing they violated a duty to be active monitors of corporate performance."^[18]

In evaluating whether to approve the proposed settlement agreement in Caremark, the Court of Chancery narrowly construed our holding in Graham "as standing for the proposition that, absent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the company's behalf."^[19] The Caremark Court opined it would be a "mistake" to interpret this Court's decision in Graham to mean that:

corporate boards may satisfy their obligation to be reasonably informed concerning the corporation, without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation's compliance with law and its business performance.^[20]

To the contrary, the Caremark Court stated, "it is important that the board exercise a good faith judgment that the corporation's information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility."^[21] The Caremark Court recognized, however, that "the duty to act in good faith to be informed cannot be thought to require directors to possess detailed information about all aspects of the operation of the enterprise."^[22] The Court of Chancery then formulated the following standard for assessing the liability of directors where the directors are unaware of employee [369] misconduct that results in the corporation being held liable:

Generally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation, as in Graham or in this case, . . . only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability.^[23]

Caremark Standard Approved

As evidenced by the language quoted above, the Caremark standard for so-called "oversight" liability draws heavily upon the concept of director failure to act in good faith. That is consistent with the definition(s) of bad faith recently approved by this Court in its recent Disney^[24] decision, where we held that a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence).^[25] In Disney, we identified the following examples of conduct that would establish a failure to act in good faith:

A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.^[26]

The third of these examples describes, and is fully consistent with, the lack of good faith conduct that the Caremark court held was a "necessary condition" for director oversight liability, i.e., "a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists. . . ."^[27] Indeed, our opinion in Disney cited Caremark with approval for that proposition.^[28] Accordingly, the Court of Chancery applied the correct standard in assessing whether demand was excused in this case where failure to exercise oversight was the basis or theory of the plaintiffs' claim for relief.

It is important, in this context, to clarify a doctrinal issue that is critical to understanding fiduciary liability under Caremark as we construe that case. The phraseology used in Caremark and that we employ here—describing the lack of good faith as a "necessary condition to liability"—is deliberate. The purpose of that formulation is to communicate that a failure to act in good faith is not conduct that results, ipso facto, in the direct imposition of fiduciary liability.^[29] The failure to act in [370] good faith may result in liability because the requirement to act in good faith "is a subsidiary element[,]" i.e., a condition, "of the fundamental duty of loyalty."^[30] It follows that because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.

This view of a failure to act in good faith results in two additional doctrinal consequences. First, although good faith may be described colloquially as part of a "triad" of fiduciary duties that includes the duties of care and loyalty,^[31] the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. The second doctrinal consequence is that the fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith. As the Court of Chancery aptly put it in Guttman, "[a] director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation's best interest."^[32]

We hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.^[33] Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities,^[34] they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.^[35]

Chancery Court Decision

The plaintiffs contend that demand is excused under Rule 23.1 because AmSouth's directors breached their oversight duty and, as a result, face a "substantial likelihood of liability" as a result of their "utter failure" to act in good faith to put into place policies and procedures to ensure compliance with BSA and AML obligations. The Court of Chancery found that the plaintiffs did not plead the existence of "red flags"—"facts showing that the board ever was aware that AmSouth's internal controls were inadequate, that these inadequacies would result in illegal activity, and that the board chose to do nothing about problems it allegedly knew existed." In dismissing the derivative complaint in this action, the Court of Chancery concluded:

This case is not about a board's failure to carefully consider a material corporate decision that was presented to the [371] board. This is a case where information was not reaching the board because of ineffective internal controls. . . . With the benefit of hindsight, it is beyond question that AmSouth's internal controls with respect to the Bank Secrecy Act and anti-money laundering regulations compliance were inadequate. Neither party disputes that the lack of internal controls resulted in a huge fine—$50 million, alleged to be the largest ever of its kind. The fact of those losses, however, is not alone enough for a court to conclude that a majority of the corporation's board of directors is disqualified from considering demand that AmSouth bring suit against those responsible.^[36]

This Court reviews de novo a Court of Chancery's decision to dismiss a derivative suit under Rule 23.1.^[37]

Reasonable Reporting System Existed

The KPMG Report evaluated the various components of AmSouth's longstanding BSA/AML compliance program. The KPMG Report reflects that AmSouth's Board dedicated considerable resources to the BSA/AML compliance program and put into place numerous procedures and systems to attempt to ensure compliance. According to KPMG, the program's various components exhibited between a low and high degree of compliance with applicable laws and regulations.

The KPMG Report describes the numerous AmSouth employees, departments and committees established by the Board to oversee AmSouth's compliance with the BSA and to report violations to management and the Board:

BSA Officer. Since 1998, AmSouth has had a "BSA Officer" "responsible for all BSA/AML-related matters including employee training, general communications, CTR reporting and SAR reporting," and "presenting AML policy and program changes to the Board of Directors, the managers at the various lines of business, and participants in the annual training of security and audit personnel[;]"

BSA/AML Compliance Department. AmSouth has had for years a BSA/AML Compliance Department, headed by the BSA Officer and comprised of nineteen professionals, including a BSA/AML Compliance Manager and a Compliance Reporting Manager;

Corporate Security Department. AmSouth's Corporate Security Department has been at all relevant times responsible for the detection and reporting of suspicious activity as it relates to fraudulent activity, and William Burch, the head of Corporate Security, has been with AmSouth since 1998 and served in the U.S. Secret Service from 1969 to 1998; and

Suspicious Activity Oversight Committee. Since 2001, the "Suspicious Activity Oversight Committee" and its predecessor, the "AML Committee," have actively overseen AmSouth's BSA/AML compliance program. The Suspicious Activity Oversight Committee's mission has for years been to "oversee the policy, procedure, and process issues affecting the Corporate Security and BSA/ AML Compliance Programs, to ensure that an effective program exists at AmSouth to deter, detect, and report money laundering, suspicious activity and other fraudulent activity."

The KPMG Report reflects that the directors not only discharged their oversight [372] responsibility to establish an information and reporting system, but also proved that the system was designed to permit the directors to periodically monitor AmSouth's compliance with BSA and AML regulations. For example, as KPMG noted in 2004, AmSouth's designated BSA Officer "has made annual high-level presentations to the Board of Directors in each of the last five years." Further, the Board's Audit and Community Responsibility Committee (the "Audit Committee") oversaw AmSouth's BSA/AML compliance program on a quarterly basis. The KPMG Report states that "the BSA Officer presents BSA/AML training to the Board of Directors annually," and the "Corporate Security training is also presented to the Board of Directors."

The KPMG Report shows that AmSouth's Board at various times enacted written policies and procedures designed to ensure compliance with the BSA and AML regulations. For example, the Board adopted an amended bank-wide "BSA/AML Policy" on July 17, 2003—four months before AmSouth became aware that it was the target of a government investigation. That policy was produced to plaintiffs in response to their demand to inspect AmSouth's books and records pursuant to section 220^[38] and is included in plaintiffs' appendix. Among other things, the July 17, 2003, BSA/AML Policy directs all AmSouth employees to immediately report suspicious transactions or activity to the BSA/AML Compliance Department or Corporate Security.

Complaint Properly Dismissed

In this case, the adequacy of the plaintiffs' assertion that demand is excused depends on whether the complaint alleges facts sufficient to show that the defendant directors are potentially personally liable for the failure of non-director bank employees to file SARs. Delaware courts have recognized that "[m]ost of the decisions that a corporation, acting through its human agents, makes are, of course, not the subject of director attention."^[39] Consequently, a claim that directors are subject to personal liability for employee failures is "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment."^[40]

For the plaintiffs' derivative complaint to withstand a motion to dismiss, "only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability."^[41] As the Caremark decision noted:

Such a test of liability—lack of good faith as evidenced by sustained or systematic failure of a director to exercise reasonable oversight—is quite high. But, a demanding test of liability in the oversight context is probably beneficial to corporate shareholders as a class, as it is in the board decision context, since it makes board service by qualified persons more likely, while continuing to act as a stimulus to good faith performance of duty by such directors.^[42]

The KPMG Report—which the plaintiffs explicitly incorporated by reference into their derivative complaint—refutes the assertion that the directors "never took the necessary steps . . . to ensure that a reasonable BSA compliance and reporting system existed." KPMG's findings reflect [373] that the Board received and approved relevant policies and procedures, delegated to certain employees and departments the responsibility for filing SARs and monitoring compliance, and exercised oversight by relying on periodic reports from them. Although there ultimately may have been failures by employees to report deficiencies to the Board, there is no basis for an oversight claim seeking to hold the directors personally liable for such failures by the employees.

With the benefit of hindsight, the plaintiffs' complaint seeks to equate a bad outcome with bad faith. The lacuna in the plaintiffs' argument is a failure to recognize that the directors' good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both, as occurred in Graham, Caremark and this very case. In the absence of red flags, good faith in the context of oversight must be measured by the directors' actions "to assure a reasonable information and reporting system exists" and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.^[43] Accordingly, we hold that the Court of Chancery properly applied Caremark and dismissed the plaintiffs' derivative complaint for failure to excuse demand by alleging particularized facts that created reason to doubt whether the directors had acted in good faith in exercising their oversight responsibilities.

Conclusion

The judgment of the Court of Chancery is affirmed.

[1] In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del.Ch.1996).

[2] In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d at 971; see also David B. Shaev Profit Sharing Acct. v. Armstrong, 2006 WL 391931, at *5 (Del.Ch.); Guttman v. Huang, 823 A.2d 492, 506 (Del.Ch.2003).

[3] In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del.2006).

[4] 31 U.S.C. § 5318 (2006) et seq. The Bank Secrecy Act and the regulations promulgated thereunder require banks to file with the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury known as "FinCEN," a written "Suspicious Activity Report" (known as a "SAR") whenever, inter alia, a banking transaction involves at least $5,000 "and the bank knows, suspects, or has reason to suspect" that, among other possibilities, the "transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities. . . ." 31 U.S.C. § 5318(g) (2006); 31 C.F.R. § 103.18(a)(2) (2006).

[5] See, e.g., 31 C.F.R. § 103.18(a)(2) (2006).

[6] Del.Code Ann. tit. 8, § 141(a) (2006). See Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).

[7] Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984).

[8] Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000).

[9] Ch. Ct. R. 23.1. Allegations of demand futility under Rule 23.1 "must comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings governed solely by Chancery Rule 8(a)." Brehm v. Eisner, 746 A.2d at 254.

[10] Rales v. Blasband, 634 A.2d 927 (Del. 1993).

[11] Id. at 934.

[12] The fifteen defendants include eight current and seven former directors. The complaint concedes that seven of the eight current directors are outside directors who have never been employed by AmSouth. One board member, C. Dowd Ritter, the Chairman, is an officer or employee of AmSouth.

[13] Del.Code Ann. tit. 8, § 102(b)(7) (2006).

[14] Id.; see In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del.2006).

[15] Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del.1963).

[16] In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del.2006).

[17] Graham v. Allis-Chalmers Mfg. Co., 188 A.2d at 130 (emphasis added).

[18] In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del.Ch.1996).

[19] Id. at 969.

[20] Id. at 970.

[21] Id.

[22] Id. at 971.

[23] In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d at 971.

[24] In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del.2006).

[25] Id. at 66.

[26] Id. at 67.

[27] In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959, 971 (Del.Ch.1996).

[28] In re Walt Disney Co. Deriv. Litig., 906 A.2d at 67 n. 111.

[29] That issue, whether a violation of the duty to act in good faith is a basis for the direct imposition of liability, was expressly left open in Disney. 906 A.2d at 67 n. 112. We address that issue here.

[30] Guttman v. Huang, 823 A.2d 492, 506 n. 34 (Del.Ch.2003).

[31] See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993).

[32] Guttman v. Huang, 823 A.2d 492, 506 n. 34 (Del.Ch.2003).

[33] Id. at 506.

[34] In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del.2006).

[35] See Guttman v. Huang, 823 A.2d at 506.

[36] Stone v. Ritter, C.A. No. 1570-N, 2006 WL 302558, at *2 (Del.Ch.2006) (Letter Opinion).

[37] Beam ex rel. Martha Stewart Living Omnimedia Inc. v. Stewart, 845 A.2d 1040, 1048 (Del.2004).

[38] Del.Code Ann. tit. 8, § 220 (2006).

[39] In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d at 968.

[40] Id. at 967.

[41] Id. at 971.

[42] Id. (emphasis in original).

[43] Id. at 967-68, 971.

[111] Pamela S. Tikellis, Meghan A. Adams, and Tiffany J. Cramer, of Chimicles & Tikellis LLP, Wilmington, Delaware; Of Counsel: Marvin A. Miller, of Miller Law LLC, Chicago, Illinois; Daniel W. Krasner, Peter C. Harrar, and Matthew M. Guiney, of Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York, Attorneys for Plaintiffs.

Gregory P. Williams and John D. Hendershot, of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants and Nominal Defendant Citigroup Inc.

Brad S. Karp, Richard A. Rosen, and Susanna M. Buergel, of Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, Attorneys for Defendants Charles Prince, Winfried Bischoff, Robert E. Rubin, David C. Bushnell, John C. Gerspach, Lewis B. Kaden, Sallie L. Krawcheck, and Gary Crittenden.

Robert D. Joffe and Richard W. Clary, of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for Defendants C. Michael Armstrong, Alain J.P. Belda, George David, Kenneth T. Derr, John M. Deutch, Roberto Hernández Ramirez, Andrew N. Liveris, Anne M. Mulcahy, Richard D. Parsons, Judith Rodin, Robert L. Ryan, Franklin A. Thomas, Ann Dibble Jordan, Klaus Kleinfeld, and Dudley C. Mecum.

Lawrence B. Pedowitz, George T. Conway III, Jonathan M. Moses, and John F. Lynch, of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys for Nominal Defendant Citigroup Inc.

OPINION

CHANDLER, Chancellor.

This is a shareholder derivative action brought on behalf of Citigroup Inc. ("Citigroup" or the "Company"), seeking to recover for the Company its losses arising from exposure to the subprime lending market. Plaintiffs, shareholders of Citigroup, brought this action against current and former directors and officers of Citigroup, alleging, in essence, that the defendants breached their fiduciary duties by failing to properly monitor and manage the risks the Company faced from problems in the subprime lending market and for failing to properly disclose Citigroup's exposure to subprime assets. Plaintiffs allege that there were extensive "red flags" that should have given defendants notice of the problems that were brewing in the real estate and credit markets and that defendants ignored these warnings in the pursuit of short term profits and at the expense of the Company's long term viability.

Plaintiffs further allege that certain defendants are liable to the Company for corporate waste for (1) allowing the Company to purchase $2.7 billion in subprime loans from Accredited Home Lenders in March 2007 and from Ameriquest Home Mortgage in September 2007; (2) authorizing and not suspending the Company's share repurchase program in the first quarter of 2007, which allegedly resulted in the Company buying its own shares at "artificially inflated prices;" (3) approving [112] a multi-million dollar payment and benefit package for defendant Charles Prince, whom plaintiffs describe as largely responsible for Citigroup's problems, upon his retirement as Citigroup's CEO in November 2007; and (4) allowing the Company to invest in structured investment vehicles ("SIVs") that were unable to pay off maturing debt.

Pending before the Court is defendants' motion (1) to dismiss or stay the action in favor of an action pending in the Southern District of New York (the "New York Action") or (2) to dismiss the complaint for failure to state a claim under Court of Chancery Rule 12(b)(6) and for failure to properly plead demand futility under Court of Chancery Rule 23.1. For the reasons set forth below, the motion to stay or dismiss in favor of the New York Action is denied. The motion to dismiss is denied as to the claim in Count III for waste for approval of the November 4, 2007 Prince letter agreement. All other claims are dismissed for failure to adequately plead demand futility pursuant to Rule 23.1.

I. BACKGROUND

A. The Parties

Citigroup is a global financial services company whose businesses provide a broad range of financial services to consumers and businesses. Citigroup was incorporated in Delaware in 1988 and maintains its principal executive offices in New York, New York.

Defendants in this action are current and former directors and officers of Citigroup. The complaint names thirteen members of the Citigroup board of directors on November 9, 2007, when the first of plaintiffs' now-consolidated derivative actions was filed.^[1] Plaintiffs allege that a majority of the director defendants were members of the Audit and Risk Management Committee ("ARM Committee") in 2007 and were considered audit committee financial experts as defined by the Securities and Exchange Commission.

Plaintiffs Montgomery County Employees' Retirement Fund, City of New Orleans Employees' Retirement System, Sheldon M. Pekin Irrevocable Descendants Trust Dated 10/01/01, and Carole Kops are all owners of shares of Citigroup stock.

B. Citigroup's Exposure to the Subprime Crisis

Plaintiffs allege that since as early as 2006, defendants have caused and allowed Citigroup to engage in subprime lending^[2] that ultimately left the Company exposed to massive losses by late 2007.^[3] Beginning in late 2005, house prices, which many believe were artificially inflated by speculation and easily available credit, began to [113] plateau, and then deflate. Adjustable rate mortgages issued earlier in the decade began to reset, leaving many homeowners with significantly increased monthly payments. Defaults and foreclosures increased, and assets backed by income from residential mortgages began to decrease in value. By February 2007, subprime mortgage lenders began filing for bankruptcy and subprime mortgages packaged into securities began experiencing increasing levels of delinquency. In mid-2007, rating agencies downgraded bonds backed by subprime mortgages.

Much of Citigroup's exposure to the subprime lending market arose from its involvement with collateralized debt obligations ("CDOs")—repackaged pools of lower rated securities that Citigroup created by acquiring asset-backed securities, including residential mortgage backed securities ("RMBSs"),^[4] and then selling rights to the cash flows from the securities in classes, or tranches, with different levels of risk and return. Included with at least some of the CDOs created by Citigroup was a "liquidity put"—an option that allowed the purchasers of the CDOs to sell them back to Citigroup at original value.

According to plaintiffs, Citigroup's alleged $55 billion subprime exposure was in two areas of the Company's Securities & Banking Unit. The first portion totaled $11.7 billion and included securities tied to subprime loans that were being held until they could be added to debt pools for investors. The second portion included $43 billion of super-senior securities, which are portions of CDOs backed in part by RMBS collateral.^[5]

By late 2007, it was apparent that Citigroup faced significant losses on its subprime-related assets, including the following as alleged by plaintiffs:

• October 1, 2007: Citigroup announced it would write-down approximately $1.4 billion on funded and unfunded highly leveraged finance commitments.

• October 15, 2007: Citigroup issued a press release reporting a net income of $2.38 billion, a 57% decline from the Company's prior year results.

• November 4, 2007: Citigroup announced significant declines on the fair value of the approximately $55 billion in the Company's U.S. subprime-related direct exposures, and estimated that further write downs would be between $8 and $11 billion.

• November 6, 2007: Citigroup disclosed that it provided $7.6 billion of emergency financing to the seven SIVs the Company operated after they were unable to repay maturing debt. The SIVs drew on the $10 billion of so-called committed liquidity provided by Citigroup. On December 13, 2007 Citigroup bailed out seven of its affiliated SIVs by bringing $49 billion in assets onto its balance sheet and taking full responsibility for the SIVs' $49 billion worth of assets.

• January 15, 2008: Citigroup announced it would take an additional $18.1 billion write-down for the fourth quarter 2007 and a quarterly loss of $9.83 billion. Citigroup also announced that the Company lowered its dividend to $0.32 per share, a 40% decline from the Company's previous dividend disbursement.

[114] • By March 2008, Citigroup shares traded below book value and the Company announced that it would lay off an additional 2,000 employees, bringing Citigroup's total layoff since the beginning of the subprime market crisis to more than 6,000.

• July 18, 2008: Citigroup announced it lost $2.5 billion in the second quarter, largely caused by $7.2 billion of write-downs of Citigroup's investments in mortgages and other loans and by weakness in the consumer market.

Plaintiffs also allege that Citigroup was exposed to the subprime mortgage market through its use of SIVs. Banks can create SIVs by borrowing cash (by selling commercial paper) and using the proceeds to purchase loans; in other words, the SIVs sell short term debt and buy longer-term, higher yielding assets. According to plaintiffs, Citigroup's SIVs invested in riskier assets, such as home equity loans, rather than the low-risk assets traditionally used by SIVs.

The problems in the subprime market left Citigroup's SIVs unable to pay their investors. The SIVs held subprime mortgages that had decreased in value, and the normally liquid commercial paper market became illiquid. Because the SIVs could no longer meet their cash needs by attracting new investors, they had to sell assets at allegedly "fire sale" prices. In November 2007, Citigroup disclosed that it provided $7.6 billion of emergency financing to the seven SIVs the Company operated after they were unable to repay maturing debt. Ultimately, Citigroup was forced to bail out seven of its affiliated SIVs by bringing $49 billion in assets onto its balance sheet, notwithstanding that Citigroup previously represented that it would manage the SIVs on an arms-length basis.

C. Plaintiffs' Claims

Plaintiffs allege that defendants are liable to the Company for breach of fiduciary duty for (1) failing to adequately oversee and manage Citigroup's exposure to the problems in the subprime mortgage market, even in the face of alleged "red flags" and (2) failing to ensure that the Company's financial reporting and other disclosures were thorough and accurate.^[6] As will be more fully explained below, the "red flags" alleged in the eighty-six page Complaint are generally statements from public documents that reflect worsening [115] conditions in the financial markets, including the subprime and credit markets, and the effects those worsening conditions had on market participants, including Citigroup's peers. By way of example only, plaintiffs' "red flags" include the following:

• May 27, 2005: Economist Paul Krugman of the New York Times said he saw "signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble."

• May 2006: Ameriquest Mortgage, one of the United States' leading wholesale subprime lenders, announced the closing of each of its 229 retail offices and reduction of 3,800 employees.

• February 12, 2007: ResMae Mortgage, a subprime lender, filed for bankruptcy. According to Bloomberg, in its Chapter 11 filing, ResMae stated that "[t]he subprime mortgage market has recently been crippled and a number of companies stopped originating loans and United States housing sales have slowed and defaults by borrowers have risen."

• April 18, 2007: Freddie Mac announced plans to refinance up to $20 billion of loans held by subprime borrowers who would be unable to afford their adjustable-rate mortgages at the reset rate.

• July 10, 2007: Standard and Poor's and Moody's downgraded bonds backed by subprime mortgages.

• August 1, 2007: Two hedge funds managed by Bear Stearns that invested heavily in subprime mortgages declared bankruptcy.

• August 9, 2007: American International Group, one of the largest United States mortgage lenders, warned that mortgage defaults were spreading beyond the subprime sector, with delinquencies becoming more common among borrowers in the category just above subprime.

• October 18, 2007: Standard & Poor's cut the credit ratings on $23.35 billion of securities backed by pools of home loans that were offered to borrowers during the first half of the year. The downgrades even hit securities rated AAA, which was the highest of the ten investment-grade ratings and the rating of government debt.^[7]

Plaintiffs also allege that the director defendants and certain other defendants are liable to the Company for waste for: (1) allowing the Company to purchase $2.7 billion in subprime loans from Accredited Home Lenders in March 2007 and from Ameriquest Home Mortgage in September 2007; (2) authorizing and not suspending the Company's share repurchase program in the first quarter of 2007, which allegedly resulted in the Company buying its own shares at "artificially inflated prices;" (3) approving a multi-million dollar payment and benefit package for defendant Prince upon his retirement as Citigroup's CEO in November 2007; and (4) allowing the Company to invest in SIVs that were unable to pay off maturing debt.

D. The Procedural History

1. The New York Action

The first New York Action was filed on November 6, 2007 in the United States District Court for the Southern District of New York. On August 22, 2008, the five [116] pending derivative actions were consolidated as In re Citigroup, Inc. Shareholder Derivative Litigation, No 07 Civ. 9841, and on September 23, 2008, the Court appointed lead counsel and lead plaintiffs. Plaintiffs filed a consolidated complaint on November 10, 2008, alleging: (1) violation of the Securities Exchange Act of 1934 ("Exchange Act") § 10(b) and Rule 10b-5 (derivatively on behalf of Citigroup); (2) breach of fiduciary duties of care, loyalty, and good faith; (3) breach of fiduciary duty for insider trading and misappropriation of information; (4) breach of fiduciary duty of disclosure; (5) waste of corporate assets; and (6) unjust enrichment. Defendants filed a motion to dismiss on December 23, 2008, and pursuant to the schedule set by the Federal District Court, the motion to dismiss the New York Action will be fully briefed by late February 2009.

2. The Delaware Action

This action was commenced on November 9, 2007, and the four pending actions were consolidated on February 5, 2008. Defendants filed a motion to dismiss the Consolidated Amended Derivative Complaint on April 21, 2008. Plaintiffs responded by filing a Consolidated Second Amended Derivative Complaint (the "Complaint"), which was accepted by the Court on September 15, 2008. Pending before the Court is defendants' motion to dismiss or stay.

II. MOTION TO DISMISS OR STAY IN FAVOR OF THE NEW YORK ACTION

A. Legal Standard

Defendants seek a stay of this action in favor of the New York Action. Under McWane, this Court may, in the exercise of its discretion, stay an action "when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues."^[8] Such discretion allows the Court, for reasons of comity and the fair and orderly administration of justice, to ensure that a plaintiff's choice of forum is not defeated and to properly confine litigation to the forum in which it is first commenced.^[9] Where, however, the actions are contemporaneously filed such that the action pending elsewhere is not considered "first-filed," the Court will consider the motion "under the traditional forum non conveniens framework without regard to a McWane-type preference of one action over the other."^[10] Where, as here, the actions were filed within the same general time frame, the Court considers the actions simultaneously filed so as to avoid a "race to the courthouse."^[11] Because the actions were filed only a few days apart, I consider them contemporaneous.^[12]

[117] Additionally, even where there is a first filed derivative or class action, this Court has recognized the difficulty presented by the McWane doctrine. A shareholder plaintiff in a derivative suit alleges claims in the right of the corporation rather than directly; thus, representative actions raise the concern that the best interest of the class might diverge from the best interest of the representative plaintiff's attorneys. To avoid exacerbating this potential conflict, the Court gives less weight to the first filed status of a lawsuit, and instead "will examine more closely the relevant factors bearing on where the case should best proceed, using something akin to a forum non conveniens analysis."^[13] I turn now to the forum non conveniens standard.

When assessing whether to stay or dismiss an action under the doctrine of forum non conveniens this Court considers six factors:

1) the applicability of Delaware law in the action; 2) the relative ease of access to proof; 3) the availability of compulsory process for witnesses; 4) the pendency or non-pendency of any similar actions in other jurisdictions; 5) the possibility of a need to view the premises; and 6) all other practical considerations which would serve to make the trial easy, expeditious and inexpensive.^[14] A party is not entitled to a stay as a matter of right; rather, the granting of a motion to stay rests with the sound discretion of the Court. This Court is rightfully hesitant to grant motions to stay based on forum non conveniens, and the doctrine is not a vehicle by which the Court should determine which forum would be most convenient for the parties.^[15] Rather, a defendant bears the burden of showing entitlement to a stay or dismissal on grounds of forum non conveniens: in a case where a stay will likely have substantially the same effect as a dismissal, the defendant must show that one or more of the factors, either separately or together, would subject the defendant to sufficient hardship to warrant staying the proceedings.^[16]

[118] B. Forum Non Conveniens Analysis

Although there may be some overlap with the New York Action, defendants have failed to meet their burden of showing hardship that would entitle them to a stay or dismissal in favor of the New York Action.^[17] First, Delaware law applies to this action. Citigroup is incorporated in Delaware, and the fiduciary duties owed by its officers and directors are governed by Delaware law. Defendants argue that this case does not pose novel issues of Delaware law and only calls for application of the established doctrines governing Caremark and waste claims to the facts in this case. Of course, the contextual application of Delaware fiduciary duty law is not novel. This case, however, raises important issues regarding the standards governing directors and officers of Delaware corporations, and Delaware has an ongoing interest in applying our law to director conduct in the context of current market conditions—conditions which change rapidly and pose new challenges for directors and officers of Delaware corporations.^[18]

Second, the relative ease of access to proof should not be accorded much weight in this case. Although access to proof may be marginally easier in New York, collecting evidence from other jurisdictions is regularly handled with ease in this Court.^[19]

Third, the availability of compulsory process for witnesses should not be given much weight in this case. Although witnesses may be located in New York, "the process of issuing commissions to take discovery in another state is efficient, effective, [119] and routinely accomplished."^[20] Defendants have failed to identify documents or witnesses that will be unavailable if litigation continues in Delaware.

Fourth, although there is an action pending in New York that arises out of the same nucleus of operative fact, the pendency of such action does not give rise to the hardship required to establish entitlement to a stay. Although some overlap may result, the pendency of a similar action in another jurisdiction regarding corporate governance issues under Delaware law does not necessarily override the interest of Delaware in resolving such claims. Defendants argue that a stay should be granted because the New York Court is the only court capable of granting complete relief because the New York Action includes claims that can only be adjudicated in federal court, specifically claims under Exchange Act § 10(b) and Rule 10b-5. In response, plaintiffs argue that this Court should refuse to grant a stay because the complaint in the New York Action contains meager Caremark allegations compared to the Complaint in this action. According to plaintiffs, the claims in the New York Action are primarily for securities fraud and insider trading and set forth demand futility allegations based on defendants' misrepresentations, omissions, and insider sales.

While the authority of one Court to grant complete relief may be a relevant consideration under the pendency of similar actions prong of the forum non conveniens analysis, it is not outcome determinative. In this case, it does not even approach the required showing of hardship defendants would have to make in order to warrant a stay of the proceedings, and I need not further scrutinize the arguments on this prong of the test.

Finally, the "important and atypical practical considerations," described by the Bear Stearns Court as sui generis, are not present in this case.^[21] In Bear Stearns, the Court was faced with a case involving the Federal Reserve Bank and the Department of the Treasury in which inconsistent rulings could "negatively impact not only the parties involved, but also the U.S. financial markets and the national economy."^[22] In light of, among other things, "the persuasive practical reasons against embarking unnecessarily on a collision course with our sister court in New York in these extraordinary circumstances," the Court granted the motion for a stay after finding that the defendants had shown that failure to stay the action would result in overwhelming hardship.^[23] Defendants in this action have not shown analogous practical circumstances or that proceeding in Delaware would result in significant hardship. The essence of defendants' argument in favor of the stay is that the Court in the New York Action is capable of hearing all the claims and that it would be more expedient and convenient to litigate in New York rather than Delaware.^[24] Such considerations, however, without more, are not sufficient to entitle defendants to a stay on forum non conveniens grounds.

[120] III. THE MOTION TO DISMISS UNDER RULE 23.1

A. The Legal Standard for Demand Excused

The decision whether to initiate or pursue a lawsuit on behalf of the corporation is generally within the power and responsibility of the board of directors.^[25] This follows from the "cardinal precept of the General Corporation Law of the State of Delaware ... that directors, rather than shareholders, manage the business and affairs of the corporation."^[26] Accordingly, in order to cause the corporation to pursue litigation, a shareholder must either (1) make a pre-suit demand by presenting the allegations to the corporation's directors, requesting that they bring suit, and showing that they wrongfully refused to do so, or (2) plead facts showing that demand upon the board would have been futile.^[27] Where, as here, a plaintiff does not make a pre-suit demand on the board of directors, the complaint must plead with particularity facts showing that a demand on the board would have been futile.^[28] The purpose of the demand requirement is not to insulate defendants from liability; rather, the demand requirement and the strict requirements of factual particularity under Rule 23.1 "exist[] to preserve the primacy of board decisionmaking regarding legal claims belonging to the corporation."^[29]

Under the familiar Aronson test, to show demand futility, plaintiffs must provide particularized factual allegations that raise a reasonable doubt that "(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment."^[30] Where, however, plaintiffs complain of board inaction and do not challenge a specific decision of the board, there is no "challenged transaction," and the ordinary Aronson analysis does not apply.^[31] Instead, to show demand futility where the subject of the derivative suit is not a business decision of the board, a plaintiff must allege particularized facts that "create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."^[32]

In evaluating whether demand is excused, the Court must accept as true the well pleaded factual allegations in the Complaint. The pleadings, however, are held to a higher standard under Rule 23.1 than under the permissive notice pleading standard under Court of Chancery Rule 8(a). To establish that demand is excused under Rule 23.1, the pleadings must comply with "stringent requirements of factual particularity" and set forth "particularized factual statements that are essential to the [121] claim."^[33] "A prolix complaint larded with conclusory language ... does not comply with these fundamental pleading mandates."^[34]

Plaintiffs have not alleged that a majority of the board was not independent for purposes of evaluating demand. Rather, as to the claims for waste asserted in Count III, plaintiffs allege that the approval of certain transactions did not constitute a valid exercise of business judgment under the second prong of the Aronson test. Plaintiffs allege that demand is futile as to Counts I, II, and IV because the director defendants are not able to exercise disinterested business judgment in responding to a demand because their failure of oversight subjects them to a substantial likelihood of personal liability. According to plaintiffs, the director defendants face a substantial threat of personal liability because their conscious disregard of their duties and lack of proper supervision and oversight caused the Company to be overexposed to risk in the subprime mortgage market.

Demand is not excused solely because the directors would be deciding to sue themselves.^[35] Rather, demand will be excused based on a possibility of personal director liability only in the rare case when a plaintiff is able to show director conduct that is "so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists."^[36]

B. Demand Futility Regarding Plaintiffs' Fiduciary Duty Claims

Plaintiffs' argument is based on a theory of director liability famously articulated by former-Chancellor Allen in In re Caremark.^[37] Before Caremark, in Graham v. Allis-Chalmers Manufacturing Company,^[38] the Delaware Supreme Court, in response to a theory that the Allis-Chalmers directors were liable because they should have known about employee violations of federal anti-trust laws, held that "absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to [122] suspect exists."^[39] Over thirty years later, in the context of approval of a settlement of a class action, former-Chancellor Allen took the opportunity to revisit the duty to monitor under Delaware law. In Caremark, the plaintiffs alleged that the directors were liable because they should have known that certain officers and employees were violating the federal Anti-Referral Payments Law. In analyzing these claims, the Court began, appropriately, by reviewing the duty of care and the protections of the business judgment rule.

With regard to director liability standards, the Court distinguished between (1) "a board decision that results in a loss because that decision was ill advised or `negligent'" and (2) "an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss."^[40] In the former class of cases, director action is analyzed under the business judgment rule, which prevents judicial second guessing of the decision if the directors employed a rational process and considered all material information reasonably available—a standard measured by concepts of gross negligence.^[41] As former-Chancellor Allen explained:

What should be understood, but may not widely be understood by courts or commentators who are not often required to face such questions, is that compliance with a director's duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through "stupid" to "egregious" or "irrational", provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule—one that permitted an "objective" evaluation of the decision—would expose directors to substantive second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests. Thus, the business judgment rule is process oriented and informed by a deep respect for all good faith board decisions.^[42]

In the latter class of cases, where directors are alleged to be liable for a failure to monitor liability creating activities, the Caremark Court, in a reassessment of the holding in Graham, stated that while directors could be liable for a failure to monitor, "only a sustained or systematic failure of the board to exercise oversight— such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability."^[43]

In Stone v. Ritter, the Delaware Supreme Court approved the Caremark standard for director oversight liability and made clear that liability was based on the concept of good faith, which the Stone Court held was embedded in the fiduciary duty of loyalty and did not constitute a freestanding fiduciary duty that [123] could independently give rise to liability.^[44] As the Stone Court explained:

Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.^[45]

Thus, to establish oversight liability a plaintiff must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act.^[46] The test is rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to director oversight liability.^[47]

1. Plaintiffs' Caremark Allegations

Plaintiffs' theory of how the director defendants will face personal liability is a bit of a twist on the traditional Caremark claim. In a typical Caremark case, plaintiffs argue that the defendants are liable for damages that arise from a failure to properly monitor or oversee employee misconduct or violations of law. For example, in Caremark the board allegedly failed to monitor employee actions in violation of the federal Anti-Referral Payments Law; in Stone, the directors were charged with a failure of oversight that resulted in liability for the company because of employee violations of the federal Bank Secrecy Act.^[48]

In contrast, plaintiffs' Caremark claims are based on defendants' alleged failure to properly monitor Citigroup's business risk, specifically its exposure to the subprime mortgage market. In their answering brief, plaintiffs allege that the director defendants are personally liable under Caremark for failing to "make a good faith [124] attempt to follow the procedures put in place or fail[ing] to assure that adequate and proper corporate information and reporting systems existed that would enable them to be fully informed regarding Citigroup's risk to the subprime mortgage market."^[49] Plaintiffs point to so-called "red flags" that should have put defendants on notice of the problems in the subprime mortgage market and further allege that the board should have been especially conscious of these red flags because a majority of the directors (1) served on the Citigroup board during its previous Enron related conduct and (2) were members of the ARM Committee and considered financial experts.

Although these claims are framed by plaintiffs as Caremark claims, plaintiffs' theory essentially amounts to a claim that the director defendants should be personally liable to the Company because they failed to fully recognize the risk posed by subprime securities. When one looks past the lofty allegations of duties of oversight and red flags used to dress up these claims, what is left appears to be plaintiff shareholders attempting to hold the director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company. Delaware Courts have faced these types of claims many times and have developed doctrines to deal with them—the fiduciary duty of care and the business judgment rule. These doctrines properly focus on the decision-making process rather than on a substantive evaluation of the merits of the decision. This follows from the inadequacy of the Court, due in part to a concept known as hindsight bias,^[50] to properly evaluate whether corporate decision-makers made a "right" or "wrong" decision.

The business judgment rule "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."^[51] The burden is on plaintiffs, the party challenging the directors' decision, to rebut this presumption.^[52] Thus, absent an allegation of interestedness or disloyalty to the corporation, the business judgment rule prevents a judge or jury from second guessing director decisions if they were the product of a rational process and the directors availed themselves of all material and reasonably available information. The standard of director liability under the business judgment rule "is predicated upon concepts of gross negligence."^[53]

Additionally, Citigroup has adopted a provision in its certificate of incorporation pursuant to 8 Del. C. § 102(b)(7) that exculpates directors from personal liability for violations of fiduciary duty, except for, among other things, breaches of the duty of loyalty or actions or omissions not in good faith or that involve intentional misconduct or a knowing violation of law. Because the director defendants are "exculpated from liability for certain conduct, `then a serious threat of liability may only be found to exist if the plaintiff pleads a [125] non-exculpated claim against the directors based on particularized facts.'"^[54] Here, plaintiffs have not alleged that the directors were interested in the transaction and instead root their theory of director personal liability in bad faith.

The Delaware Supreme Court has stated that bad faith conduct may be found where a director "intentionally acts with a purpose other than that of advancing the best interests of the corporation, ... acts with the intent to violate applicable positive law, or ... intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties."^[55] More recently, the Delaware Supreme Court held that when a plaintiff seeks to show that demand is excused because directors face a substantial likelihood of liability where "directors are exculpated from liability except for claims based on `fraudulent,' `illegal' or `bad faith' conduct, a plaintiff must also plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had `actual or constructive knowledge' that their conduct was legally improper."^[56] A plaintiff can thus plead bad faith by alleging with particularity that a director knowingly violated a fiduciary duty or failed to act in violation of a known duty to act, demonstrating a conscious disregard for her duties.

Turning now specifically to plaintiffs' Caremark claims, one can see a similarity between the standard for assessing oversight liability and the standard for assessing a disinterested director's decision under the duty of care when the company has adopted an exculpatory provision pursuant to § 102(b)(7). In either case, a plaintiff can show that the director defendants will be liable if their acts or omissions constitute bad faith. A plaintiff can show bad faith conduct by, for example, properly alleging particularized facts that show that a director consciously disregarded an obligation to be reasonably informed about the business and its risks or consciously disregarded the duty to monitor and oversee the business.

The Delaware Supreme Court made clear in Stone that directors of Delaware corporations have certain responsibilities to implement and monitor a system of oversight; however, this obligation does not eviscerate the core protections of the business judgment rule—protections designed to allow corporate managers and directors to pursue risky transactions without the specter of being held personally liable if those decisions turn out poorly. Accordingly, the burden required for a plaintiff to rebut the presumption of the business judgment rule by showing gross negligence is a difficult one, and the burden to show bad faith is even higher. Additionally, as former-Chancellor Allen noted in Caremark, director liability based on the duty of oversight "is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment."^[57] The presumption of the business judgment rule, the protection of an exculpatory § 102(b)(7) provision, and the difficulty of proving a Caremark claim together function to place an extremely high burden on a plaintiff to state a claim for personal director liability for a failure to see the extent of a company's business risk.

[126] To the extent the Court allows shareholder plaintiffs to succeed on a theory that a director is liable for a failure to monitor business risk, the Court risks undermining the well settled policy of Delaware law by inviting Courts to perform a hindsight evaluation of the reasonableness or prudence of directors' business decisions. Risk has been defined as the chance that a return on an investment will be different that expected. The essence of the business judgment of managers and directors is deciding how the company will evaluate the trade-off between risk and return. Businesses—and particularly financial institutions—make returns by taking on risk; a company or investor that is willing to take on more risk can earn a higher return. Thus, in almost any business transaction, the parties go into the deal with the knowledge that, even if they have evaluated the situation correctly, the return could be different than they expected.

It is almost impossible for a court, in hindsight, to determine whether the directors of a company properly evaluated risk and thus made the "right" business decision.^[58] In any investment there is a chance that returns will turn out lower than expected, and generally a smaller chance that they will be far lower than expected. When investments turn out poorly, it is possible that the decision-maker evaluated the deal correctly but got "unlucky" in that a huge loss—the probability of which was very small—actually happened. It is also possible that the decision-maker improperly evaluated the risk posed by an investment and that the company suffered large losses as a result.

Business decision-makers must operate in the real world, with imperfect information, limited resources, and an uncertain future. To impose liability on directors for making a "wrong" business decision would cripple their ability to earn returns for investors by taking business risks. Indeed, this kind of judicial second guessing is what the business judgment rule was designed to prevent, and even if a complaint is framed under a Caremark theory, this Court will not abandon such bedrock principles of Delaware fiduciary duty law. With these considerations and the difficult standard required to show director oversight liability in mind, I turn to an evaluation of the allegations in the Complaint.

a. The Complaint Does Not Properly Allege Demand Futility for Plaintiffs' Fiduciary Duty Claims

In this case, plaintiffs allege that the defendants are liable for failing to properly monitor the risk that Citigroup faced from subprime securities. While it may be possible for a plaintiff to meet the burden under some set of facts, plaintiffs in this case have failed to state a Caremark claim sufficient to excuse demand based on a theory that the directors did not fulfill their oversight obligations by failing to monitor the business risk of the company.

The allegations in the Complaint amount essentially to a claim that Citigroup suffered large losses and that there were certain warning signs that could or should have put defendants on notice of the business [127] risks related to Citigroup's investments in subprime assets. Plaintiffs then conclude that because defendants failed to prevent the Company's losses associated with certain business risks, they must have consciously ignored these warning signs or knowingly failed to monitor the Company's risk in accordance with their fiduciary duties.^[59] Such conclusory allegations, however, are not sufficient to state a claim for failure of oversight that would give rise to a substantial likelihood of personal liability, which would require particularized factual allegations demonstrating bad faith by the director defendants.

Plaintiffs do not contest that Citigroup had procedures and controls in place that were designed to monitor risk. Plaintiffs admit that Citigroup established the ARM Committee and in 2004 amended the ARM Committee charter to include the fact that one of the purposes of the ARM Committee was to assist the board in fulfilling its oversight responsibility relating to policy standards and guidelines for risk assessment and risk management.^[60] The ARM Committee was also charged with, among other things, (1) discussing with management and independent auditors the annual audited financial statements, (2) reviewing with management an evaluation of Citigroup's internal control structure, and (3) discussing with management Citigroup's major credit, market, liquidity, and operational risk exposures and the steps taken by management to monitor and control such exposures, including Citigroup's risk assessment and risk management policies.^[61] According to plaintiffs' own allegations, the ARM Committee met eleven times in 2006 and twelve times in 2007.^[62]

Plaintiffs nevertheless argue that the director defendants breached their duty of oversight either because the oversight mechanisms were not adequate or because the director defendants did not make a good faith effort to comply with the established oversight procedures. To support this claim, the Complaint alleges numerous facts that plaintiffs argue should have put the director defendants on notice of the impending problems in the subprime mortgage market and Citigroup's exposure thereto. Plaintiffs summarized some of these "red flags" in their answering brief as follows:

• the steady decline of the housing market and the impact the collapsing bubble would have on mortgages and subprime backed securities since as early as 2005;

• December 2005 guidance from the FASB staff—"The FASB staff is aware of loan products whose contractual features may increase the exposure of the originator, holder, investor, guarantor, or servicer to risk of nonpayment or realization.";

• the drastic rise in foreclosure rates starting in 2006;

• several large subprime lenders reporting substantial losses and filing for bankruptcy starting in 2006;

• billions of dollars in losses reported by Citigroup's peers, such as Bear Stearns and Merrill Lynch.

Plaintiffs argue that demand is excused because a majority of the director defendants face a substantial likelihood of personal liability because they were charged with management of Citigroup's risk as members of the ARM Committee and as audit committee financial experts and [128] failed to properly oversee and monitor such risk.^[63] As explained above, however, to establish director oversight liability plaintiffs would ultimately have to prove bad faith conduct by the director defendants. Plaintiffs fail to plead any particularized factual allegations that raise a reasonable doubt that the director defendants acted in good faith.

The warning signs alleged by plaintiffs are not evidence that the directors consciously disregarded their duties or otherwise acted in bad faith; at most they evidence that the directors made bad business decisions. The "red flags" in the Complaint amount to little more than portions of public documents that reflected the worsening conditions in the subprime mortgage market and in the economy generally. Plaintiffs fail to plead "particularized facts suggesting that the Board was presented with `red flags' alerting it to potential misconduct" at the Company.^[64] That the director defendants knew of signs of a deterioration in the subprime mortgage market, or even signs suggesting that conditions could decline further, is not sufficient to show that the directors were or should have been aware of any wrongdoing at the Company or were consciously disregarding a duty somehow to prevent Citigroup from suffering losses.^[65] Nothing about plaintiffs' "red flags" supports plaintiffs' conclusory allegation that "defendants have not made a good faith attempt to assure that adequate and proper corporate information and reporting systems existed that would enable them to be fully informed regarding Citigroup's risk to the subprime mortgage market."^[66] Indeed, plaintiffs' allegations do not even specify how the board's oversight mechanisms were inadequate or how the director defendants knew of these inadequacies and consciously ignored them. Rather, plaintiffs seem to hope the Court will accept the conclusion that since the Company suffered large losses, and since a properly functioning risk management system would have avoided such losses, the directors must have breached their fiduciary duties in allowing such losses.

[129] Moving from such general ipse dixit syllogisms to the more specific, plaintiffs argue that the director defendants, and especially those nine directors who were on the board at the time, "should have been especially sensitive to the red flags in the marketplace in light of the Company's prior involvement in the Enron Corporation debacle and other financial scandals earlier in the decade."^[67] Plaintiffs also allege that the director defendants should have been especially alert to the dangers of transactions involving SIVs because SIVs were involved in Citigroup's transactions with Enron that resulted in liability for the Company. Plaintiffs allege that Citigroup helped finance transactions that allowed Enron to hide its true financial condition and resulted in Citigroup paying approximately $120 million in penalties and disgorgement as well as agreeing to new risk management procedures designed to prevent similar conduct.

Plaintiffs fail in their attempt to impose some sort of higher standard of liability on the director defendants that were on Citigroup's board at the time of its involvement with Enron. They have utterly failed to show how Citigroup's involvement with the financial scandals at Enron has any relevance to Citigroup's investments in subprime securities. Plaintiffs cite McCall v. Scott^[68] to support the proposition that directors who were on the board during previous misconduct should be sensitive to similar circumstances which had previously prompted investigations. That case, however, actually shows how plaintiffs' attempt to impose a higher standard on the directors because of the Enron scandal is inadequate. Unlike here, the plaintiffs in McCall alleged numerous specific instances of widespread, prevalent wrongdoing throughout the company and the mechanisms by which the wrongdoing came to the board's attention.^[69] The Sixth Circuit in McCall did not, as plaintiffs assert, hold that alleged prior, unrelated wrongdoing would make directors "sensitive to similar circumstances."^[70] Unlike plaintiffs' allegations about Enron, the prior "experience" referenced in McCall was an investigation and settlement for the same type of questionable billing practices before the Sixth Circuit.^[71] Plaintiffs have not shown how involvement with the Enron related scandals should have in any way put the director defendants on a heightened alert to problems in the subprime mortgage market. Additionally, the use of SIVs in the Enron related conduct would not serve to put the director defendants on any type of heightened notice to the unrelated use of SIVs in structuring transactions involving subprime securities.

The Complaint and plaintiffs' answering brief repeatedly make the conclusory allegation that the defendants have breached their duty of oversight, but nowhere do plaintiffs adequately explain what the director defendants actually did or failed to do that would constitute such a violation. Even while admitting that Citigroup had a risk monitoring system in place, plaintiffs seem to conclude that, because the director defendants (and the ARM Committee members in particular) were charged with monitoring Citigroup's risk, then they must be found liable because Citigroup experienced losses as a result of exposure [130] to the subprime mortgage market. The only factual support plaintiffs provide for this conclusion are "red flags" that actually amount to nothing more than signs of continuing deterioration in the subprime mortgage market. These types of conclusory allegations are exactly the kinds of allegations that do not state a claim for relief under Caremark.

To recognize such claims under a theory of director oversight liability would undermine the long established protections of the business judgment rule. It is well established that the mere fact that a company takes on business risk and suffers losses—even catastrophic losses—does not evidence misconduct, and without more, is not a basis for personal director liability.^[72] That there were signs in the market that reflected worsening conditions and suggested that conditions may deteriorate even further is not an invitation for this Court to disregard the presumptions of the business judgment rule and conclude that the directors are liable because they did not properly evaluate business risk. What plaintiffs are asking the Court to conclude from the presence of these "red flags" is that the directors failed to see the extent of Citigroup's business risk and therefore made a "wrong" business decision by allowing Citigroup to be exposed to the subprime mortgage market.

This Court's recent decision in American International Group, Inc. Consolidated Derivative Litigation^[73] demonstrates the stark contrast between the allegations here and allegations that are sufficient to survive a motion to dismiss. In AIG, the Court faced a motion to dismiss a complaint that included "well-pled allegations of pervasive, diverse, and substantial financial fraud involving managers at the highest levels of AIG."^[74] In concluding that the complaint stated a claim for relief under Rule 12(b)(6),^[75] the Court held that the factual allegations in the complaint were sufficient to support an inference that AIG executives running those divisions knew of and approved much of the wrongdoing. The Court reasoned that huge fraudulent schemes were unlikely to be perpetrated without the knowledge of the executive in charge of that division of the company.^[76] Unlike the allegations in this case, the defendants in AIG allegedly failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct. Indeed, the Court in AIG even stated that the complaint there supported the assertion that top AIG officials were leading a "criminal organization" and that "[t]he diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG is extraordinary."^[77]

Contrast the AIG claims with the claims in this case. Here, plaintiffs argue that the Complaint supports the reasonable conclusion that the director defendants acted in bad faith by failing to see the warning signs of a deterioration in the subprime mortgage market and failing to [131] cause Citigroup to change its investment policy to limit its exposure to the subprime market. Director oversight duties are designed to ensure reasonable reporting and information systems exist that would allow directors to know about and prevent wrongdoing that could cause losses for the Company. There are significant differences between failing to oversee employee fraudulent or criminal conduct and failing to recognize the extent of a Company's business risk. Directors should, indeed must under Delaware law, ensure that reasonable information and reporting systems exist that would put them on notice of fraudulent or criminal conduct within the company. Such oversight programs allow directors to intervene and prevent frauds or other wrongdoing that could expose the company to risk of loss as a result of such conduct. While it may be tempting to say that directors have the same duties to monitor and oversee business risk, imposing Caremark-type duties on directors to monitor business risk is fundamentally different. Citigroup was in the business of taking on and managing investment and other business risks. To impose oversight liability on directors for failure to monitor "excessive" risk would involve courts in conducting hindsight evaluations of decisions at the heart of the business judgment of directors. Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk.^[78]

Instead of alleging facts that could demonstrate bad faith on the part of the directors, by presenting the Court with the so called "red flags," plaintiffs are inviting the Court to engage in the exact kind of judicial second guessing that is proscribed by the business judgment rule. In any business decision that turns out poorly there will likely be signs that one could point to and argue are evidence that the decision was wrong. Indeed, it is tempting in a case with such staggering losses for one to think that they could have made the "right" decision if they had been in the directors' position. This temptation, however, is one of the reasons for the presumption against an objective review of business decisions by judges, a presumption that is no less applicable when the losses to the Company are large.

2. Plaintiffs' Disclosure Allegations

Plaintiffs argue that demand is excused as futile because the director defendants face a substantial likelihood of personal liability for violating their duty of disclosure and would therefore be unable to exercise independent and disinterested business judgment in responding to a demand.^[79] Plaintiffs allege that the director [132] defendants violated their duty of disclosure by, among other things, failing to properly disclose the value of certain financial instruments,^[80] placing underperforming assets in SIVs without fully disclosing the risk that Citigroup might have to bring the assets back onto its balance sheet,^[81] and failing to properly account for guarantees, specifically the liquidity puts that allowed buyers of CDOs to sell the products back to Citigroup at face value.^[82] Plaintiffs argue that the "red flags" alleged in the Complaint lead to a reasonable inference that the director defendants, and particularly the ARM Committee members, knew that certain disclosures regarding the Company's exposure to subprime assets were misleading.

"[E]ven in the absence of a request for shareholder action, shareholders are entitled to honest communication from directors, given with complete candor and in good faith."^[83] When there is no request for shareholder action, a shareholder plaintiff can demonstrate a breach of fiduciary duty by showing that the directors "deliberately misinform[ed] shareholders about the business of the corporation, either directly or by a public statement."^[84] Citigroup's certificate of incorporation exculpates the director defendants from personal liability for violations of fiduciary duty except for, among other things, breaches of the duty of loyalty and acts or omissions not in good faith or that involve intentional misconduct or knowing violation of law. Thus, to show a substantial likelihood of liability that would excuse demand, plaintiffs must plead particularized factual allegations that "support the inference that the disclosure violation was made in bad faith, knowingly or intentionally."^[85] Additionally, directors of Delaware corporations are fully protected in relying in good faith on the reports of officers and experts.^[86]

The factual allegations in the Complaint are not sufficient to allow me to reasonably conclude that the director defendants face a substantial likelihood of liability that would prevent them from impartially considering a demand. This is so for at least three reasons. First, plaintiffs fail to allege with sufficient specificity the actual misstatements or omissions that constituted a violation of the board's duty of [133] disclosure.^[87] The Complaint merely alleges, in general and conclusory terms, that the director defendants did not adequately disclose certain risks faced by the Company—for example, the risks posed by Citigroup's SIVs and the liquidity puts that allowed purchasers of CDOs to sell the instruments back to Citigroup at face value.^[88] The Complaint does not identify any actual disclosure that was misleading or any statement that was made misleading as a result of an omission of a material fact. Instead, plaintiffs allege, for instance, that the Citigroup board "abdicated its fiduciary duties by not disclosing information on the fair value of VIEs, CDOs and SIVs"^[89] and that "the ARM Committee abdicated its fiduciary duties... to ensure the integrity of Citigroup's financial statements and financial reporting process, including earnings press releases and financial information provided to analysts and rating agencies."^[90]

In other words, the disclosure allegations in the complaint do not meet the stringent standard of factual particularity required under Rule 23.1. They fail to allege with particularity which disclosures were misleading, when the Company was obligated to make disclosures, what specifically the Company was obligated to disclose, and how the Company failed to do so.^[91] This information is critical because to establish a threat of director liability [134] based on a disclosure violation, plaintiffs must plead facts that show that the violation was made knowingly or in bad faith, a showing that requires allegations regarding what the directors knew and when. Without knowing when and how the alleged disclosure violations occurred, it is impossible to determine if the directors made the misstatements or omissions knowingly or in bad faith. As a result, the disclosure allegations in the complaint do not meet the stringent requirements of factual particularity under Rule 23.1.

Second, the Complaint does not contain specific factual allegations that reasonably suggest sufficient board involvement in the preparation of the disclosures that would allow me to reasonably conclude that the director defendants face a substantial likelihood of personal liability.^[92] Plaintiffs do not allege facts suggesting that the director defendants prepared the financial statements or that they were directly responsible for the misstatements or omissions. The Complaint merely alleges that Citigroup's financial statements contained false statements and material omissions and that the director defendants reviewed the financial statements pursuant to their responsibilities under the ARM Committee charter. Thus, I am unable to reasonably conclude that the director defendants face a substantial likelihood of liability.

Third, and perhaps most importantly, the Complaint does not sufficiently allege that the director defendants had knowledge that any disclosures or omissions were false or misleading or that the director defendants acted in bad faith in not adequately informing themselves.^[93] Plaintiffs have not alleged particular facts showing that the director defendants were even aware of any misstatements or omissions. Instead, plaintiffs conclusorily assert that the members of the ARM Committee, as financial experts, knew the relevant accounting standards, knew or should have known the extent of the Company's exposure to the subprime mortgage market, and are therefore responsible for alleged false statements or omissions in Citigroup's financial statements.^[94] Instead of providing factual allegations regarding the knowledge or bad faith of the individual director defendants, the Complaint makes broad group allegations about the director defendants or the members of the ARM Committee.^[95] A determination of whether the alleged misleading statements or omissions were made with knowledge or in bad faith requires an analysis of the state of mind of the individual director defendants, and plaintiffs have not made specific factual allegations that would allow for such an inquiry. Plaintiffs' alleged "red flags," which amount to nothing more than indications of worsening economic conditions, do not support a reasonable inference that the [135] director defendants approved or disseminated the financial disclosures knowingly or in bad faith. Merely alleging that there were signs of problems in the subprime mortgage market is not sufficient to show that the director defendants knew that Citigroup's disclosures were false or misleading. The allegations are not sufficiently specific to Citigroup or to the director defendants to meet the strict pleading requirements of Rule 23.1.

Although the members of the ARM Committee were charged with reviewing and ensuring the accuracy of Citigroup's financial statements under the ARM Committee charter, director liability is not measured by the aspirational standard established by the internal documents detailing a company's oversight system. Under our law, to establish liability for misstatements when the board is not seeking shareholder action, shareholder plaintiffs must show that the misstatement was made knowingly or in bad faith. Additionally, even board members who are experts are fully protected under § 141(e) in relying in good faith on the opinions and statements of the corporation's officers and employees who were responsible for preparing the company's financial statements. Plaintiffs' allegations that the members of the ARM Committee were financial experts and were aware of the "red flags" alleged in the Complaint do not support a reasonable inference that the director defendants' reliance on the officers and experts who prepared the financial statements was not in good faith.

Even accepting plaintiffs' allegations as true, the Complaint fails to plead with particularity facts that would lead to the reasonable inference that the director defendants made or allowed to be made any false statements or material omissions with knowledge or in bad faith. Accordingly, plaintiffs have failed to plead with particularity facts creating a reasonable doubt that the director defendants face a threat of personal liability that would render them incapable of exercising independent and disinterested business judgment in responding to a demand. Plaintiffs' disclosure claims are therefore dismissed pursuant to Rule 23.1

C. Demand Futility Allegations Regarding Plaintiffs' Waste Claims

Count III of the Complaint alleges that certain of the defendants are liable for waste for (1) approving the Letter Agreement dated November 4, 2007 between Citigroup and defendant Prince; (2) allowing the Company to purchase over $2.7 billion in subprime loans from Accredited Home Lenders at one of its "fire sales" in March 2007 and from Ameriquest Home Mortgage in September 2007; (3) approving the buyback of over $645 million worth of the Company's shares at artificially inflated prices pursuant to a repurchase program in early 2007; and (4) allowing the Company to invest in SIVs that were unable to pay off maturing debt.^[96]

[136] Demand futility is analyzed under Aronson when plaintiffs have challenged board action or approval of a transaction. With regard to the claims based on the approval of the Letter Agreement and the repurchase of Citigroup stock, plaintiffs do not argue that a majority of the director defendants were not disinterested and independent. Rather, plaintiffs argue that demand is excused under the second prong of the Aronson analysis, which requires that the plaintiffs plead particularized factual allegations that raise a reasonable doubt at to whether "the challenged transaction was otherwise the product of a valid exercise of business judgment."^[97]

Delaware law provides stringent requirements for a plaintiff to state a claim for corporate waste, and to excuse demand on grounds of waste the Complaint must allege particularized facts that lead to a reasonable inference that the director defendants authorized "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration."^[98] The test to show corporate waste is difficult for any plaintiff to meet; indeed, "[t]o prevail on a waste claim ... the plaintiff must overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests."^[99]

1. Approval of the Stock Repurchase Program

Plaintiffs' claim for waste for the board's approval of the stock repurchase program falls far short of satisfying the standard for demand futility. Plaintiffs allege that "in spite of its prior buybacks below $50 per share and in spite of the [137] Company's expanding losses and declining stock price, Citigroup repurchased 12.1 million shares during the first quarter of 2007 at an average price of $53.37."^[100] Plaintiffs then claim that at the time the buyback of Citigroup stock was halted, the stock was trading at $46 per share. Plaintiffs conclude that the director defendants "authorized and did not suspend the Company's share repurchase program, which resulted in the Company's buying back over $645 million worth of the Company's shares at artificially inflated prices."^[101]

Specifically, plaintiffs argue the following:

As set forth in the Complaint, the Director Defendants recklessly failed to consider and account for the subprime lending crisis, the Company's exposure to falling CDO values by virtue of its liquidity puts, and the collective impact on the Company's billions in warehoused subprime loans. Consequently, the Director Defendants are not entitled to the presumption of business judgment and are liable for waste for approving the buyback of over $645 million worth of the Company's shares at artificially inflated prices pursuant to the repurchase program. Under the circumstances, the repurchase program should have been suspended, and would have saved the Company hundreds of millions of dollars. The magnitude of the Director Defendants' utter failure to properly inform themselves of the Company's dire straits has only been highlighted by the Company's recent historically low share prices.^[102]

To say the least, this argument demonstrates that the Complaint utterly fails to state a claim for waste for the board's approval of the stock repurchase. Plaintiffs seem to completely ignore the standard governing corporate waste under Delaware law—a standard that requires that plaintiffs plead facts overcoming the presumption of good faith by showing "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration."^[103] Plaintiffs attempted to meet this standard by alleging that the director defendants approved a repurchase of Citigroup stock at the market price. Other than a conclusory allegation, plaintiffs have alleged nothing that would explain how buying stock at the market price—the price at which presumably ordinary and rational businesspeople were trading the stock— could possibly be so one sided that no reasonable and ordinary business person would consider it adequate consideration. Again, plaintiffs merely allege "red flags" and then conclude that the board is liable for waste because Citigroup repurchased its stock before the stock dropped in price as a result of Citigroup's losses from exposure to the subprime market. In short, the Complaint states no particularized facts that would lead to any inference that the board's approval of the stock repurchase constituted corporate waste. Accordingly, plaintiffs have not adequately alleged demand futility as to this claim pursuant to Rule 23.1.

2. Approval of the Letter Agreement

Plaintiffs allege that the board's approval of the November 4, 2007 letter agreement constituted corporate waste. Because approval of the letter was board action, demand is evaluated under the Aronson [138] standard. Plaintiffs claim that demand is excused under the second prong of Aronson because the particularized factual allegations in the Complaint raise a reasonable doubt as to whether the approval was "the product of a valid exercise of business judgment."^[104]

The directors of a Delaware corporation have the authority and broad discretion to make executive compensation decisions. The standard under which the Court evaluates a waste claim is whether there was "an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade."^[105] It is also well settled in our law, however, that the discretion of directors in setting executive compensation is not unlimited. Indeed, the Delaware Supreme Court was clear when it stated that "there is an outer limit" to the board's discretion to set executive compensation, "at which point a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste."^[106]

According to plaintiffs' allegations, the November 4, 2007 letter agreement provides that Prince will receive $68 million upon his departure from Citigroup, including bonus, salary, and accumulated stockholdings.^[107] Additionally, the letter agreement provides that Prince will receive from Citigroup an office, an administrative assistant, and a car and driver for the lesser of five years or until he commences full time employment with another employer.^[108] Plaintiffs allege that this compensation package constituted waste and met the "so one sided" standard because, in part, the Company paid the multi-million dollar compensation package to a departing CEO whose failures as CEO were allegedly responsible, in part, for billions of dollars of losses at Citigroup. In exchange for the multi-million dollar benefits and perquisites package provided for in the letter agreement, the letter agreement contemplated that Prince would sign a non-compete agreement, a non-disparagement agreement, a non-solicitation agreement, and a release of claims against the Company.^[109] Even considering the text of the letter agreement, I am left with very little information regarding (1) how much additional compensation Prince actually received as a result of the letter agreement and (2) the real value, if any, of the various promises given by Prince. Without more information and taking, as I am required, plaintiffs' well pleaded allegations as true, there is a reasonable doubt as to whether the letter agreement meets the admittedly stringent "so one sided" standard or whether the letter agreement awarded compensation that is beyond the "outer limit" described by the Delaware Supreme Court. Accordingly, the Complaint has adequately alleged, pursuant to Rule 23.1, that demand is excused with regard to the waste claim based on the board's approval of Prince's compensation under the letter agreement.

[139] D. The Motion to Dismiss under Rule 12(b)(6)

The only claim as to which plaintiffs adequately pleaded demand futility is the claim for corporate waste for the board's approval of the letter agreement granting a multi-million dollar compensation package to Prince upon his departure as Citigroup's CEO. When considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), the Court is required to accept as true all well-pleaded factual allegations in the complaint and make all reasonable inferences that logically flow from the face of the complaint in the plaintiff's favor.^[110] The Court can only dismiss the complaint if it "determines with `reasonable certainty' that the plaintiff could prevail on no set of facts that may be inferred from the well-pleaded allegations in the complaint."^[111]

The standard for pleading demand futility under Rule 23.1 is more stringent than the standard under Rule 12(b)(6), and "a complaint that survives a motion to dismiss pursuant to Rule 23.1 will also survive a 12(b)(6) motion to dismiss, assuming that it otherwise contains sufficient facts to state a cognizable claim."^[112] Accordingly, for the same reasons stated in the demand futility analysis, the Complaint contains well-pleaded factual allegations regarding the claim for waste for the approval of the Prince letter agreement that make it impossible for me to conclude with reasonable certainty that the plaintiff could prevail on no set of facts that could be reasonably inferred from the allegations in the Complaint.^[113]

IV. CONCLUSION

Citigroup has suffered staggering losses, in part, as a result of the recent problems in the United States economy, particularly those in the subprime mortgage market. It is understandable that investors, and others, want to find someone to hold responsible for these losses, and it is often difficult to distinguish between a desire to blame someone and a desire to force those responsible to account for their wrongdoing. Our law, fortunately, provides guidance for precisely these situations in the form of doctrines governing the duties owed by officers and directors of Delaware corporations. This law has been refined over hundreds of years, which no doubt included many crises, and we must not let our desire to blame someone for our losses make us lose sight of the purpose of our law. Ultimately, the discretion granted directors and managers allows them to maximize shareholder value in the long term by taking risks without the debilitating fear that they will be held personally liable if the company experiences losses. This doctrine also means, however, that when the company suffers losses, shareholders may not be able to hold the directors personally liable.

For the foregoing reasons, the motion to dismiss or stay in favor of the New York Action is denied. Defendants' motion to dismiss is denied as to the claim in Count III of the Complaint for waste for approval [140] of the November 4, 2007 Prince letter agreement. All other claims in the complaint are dismissed for failure to adequately plead demand futility pursuant to Court of Chancery Rule 23.1.

An Order has been entered consistent with this Opinion.

ORDER

For the reasons set forth in this Court's Opinion entered in this case on this date, it is

ORDERED:

1. The motion to dismiss or stay in favor of the New York Action is denied;

2. Counts I, III, and IV of the Consolidated Second Amended Derivative Complaint are hereby dismissed pursuant to Court of Chancery Rule 23.1; and

3. Defendants' motion to dismiss is denied as to the claim in Count III of the Complaint for waste for the board's approval of the November 4, 2007 letter agreement between Citigroup, Inc. and defendant Charles Prince. All other claims in Count III of the Complaint are hereby dismissed pursuant to Court of Chancery Rule 23.1.

[1] The director defendants are C. Michael Armstrong, Alain J.P. Belda, George David, Kenneth T. Derr, John M. Deutch, Andrew N. Liveris, Anne M. Mulcahy, Richard D. Parsons, Roberto Hernández Ramirez, Judith Rodin, Robert E. Rubin, Robert L. Ryan, and Franklin A. Thomas (collectively, the "director defendants"). Plaintiffs and defendants agree that the director defendants constitute the board for demand futility purposes. The complaint also names (1) former Citigroup directors Ann Dibble Jordan, Klaus Kleinfeld, and Dudley C. Mecum and (2) former and current officers and senior management of Citigroup Charles Prince, Winfried Bischoff, David C. Bushnell, Gary Crittenden, John C. Gerspach, Lewis B. Kaden, and Sallie L. Krawcheck.

[2] "Subprime" generally refers to borrowers who do not qualify for prime interest rates, typically due to weak credit histories, low credit scores, high debt-burden ratios, or high loan-to-value ratios.

[3] The facts are drawn from the complaint and taken as true for purposes of the motion to dismiss.

[4] RMBSs are securities whose cash flows come from residential debt such as mortgages.

[5] Rights to cash flows from CDOs are divided into tranches rated by credit risk, whereby the senior tranches are paid before the junior tranches.

[6] Plaintiffs also assert a claim for "reckless and gross mismanagement." Consol. Second Am. Derivative Compl. (hereinafter, "Compl.") ¶¶ 219-25. Delaware law does not recognize an independent cause of action against corporate directors and officers for reckless and gross mismanagement; such claims are treated as claims for breach of fiduciary duty. Delaware fiduciary duties are based in common law and have been carefully crafted to define the responsibilities of directors and managers, as fiduciaries, to the corporation. In defining these duties, the courts balance specific policy considerations such as the need to keep directors and officers accountable to shareholders and the degree to which the threat of personal liability may discourage beneficial risk taking. These common law standards thus govern the duties that directors and officers owe the corporation as well as claims such as those for "reckless and gross mismanagement," even if those claims are asserted separate and apart from claims of breach of fiduciary duty. See Metro Commc'n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 155-57 (Del.Ch. 2004); Albert v. Alex. Brown Mgmt. Servs., Inc., 2004 WL 2050527, at *6 (Del.Super. Sept.15, 2004) ("[A] claim that a corporate manager acted with gross negligence is the same as a claim that she breached her fiduciary duty of care."). Plaintiffs seem to agree that Count IV's claims for "reckless and gross mismanagement" do not assert a separate cause of action against defendants. In the two sentences of their answering brief on the motion to dismiss that address Count IV, plaintiffs equate Count IV to their Caremark claim in Count I. Because I find that Count I fails, it follows that Court IV also fails.

[7] Compl. ¶¶ 73-74. I have provided only a small sample of the numerous "red flags" alleged in the Complaint.

[8] McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng'g Co., 263 A.2d 281, 283 (Del. 1970).

[9] See id.

[10] In re The Bear Stearns Cos. S'holder Litig., C.A. No. 3643-VCP, 2008 WL 959992, at *5 (Del.Ch. Apr. 9, 2008) (quoting Rapoport v. The Litig. Trust of MDIP Inc., C.A. No. 1035-N, 2005 WL 3277911, at *2 (Del.Ch. Nov. 23, 2005)); see County of York Employees Ret. Plan v. Merrill Lynch & Co., C.A. No. 4066-VCN, 2008 WL 4824053, at *3 (Del.Ch. Oct. 28, 2008).

[11] Merrill Lynch, 2008 WL 4824053, at *3 (citing Texas Instruments Inc. v. Cyrix Corp., C.A. No. 13288, 1994 WL 96983, at *3-4 (Del.Ch. Mar. 22, 1994)).

[12] Bear Stearns, 2008 WL 959992, at *5 (treating actions filed three days apart as contemporaneous). The parties agree that the New York Action was first commenced on November 6, 2007. Plaintiffs assert that this action was first commenced on November 7, 2007—meaning it was filed the day after the New York Action. The Court's records, however, indicate that this action was first commenced on November 9, 2007. Even assuming the November 9, 2007 filing, however, I still consider the actions contemporaneously filed.

[13] Biondi v. Scrushy, 820 A.2d 1148, 1159 & n. 22 (Del.Ch.2003) ("Where one person seeking to act in a representative capacity chooses to litigate in Delaware and another in a different forum, there is little reason to accord decisive weight to the priority of filing, at least where no prejudicial delay has occurred. Other factors bearing on the convenience of the parties and the interests of Delaware in resolving the dispute will be more important."). See Ryan v. Gifford, 918 A.2d 341, 349 (Del.Ch.2007).

[14] In re Chambers Dev. Co. S'holders Litig., C.A. No. 12508, 1993 WL 179335, at *2 (Del. Ch. May 20, 1993).

[15] See Taylor v. LSI Logic Corp., 689 A.2d 1196, 1199 (Del. 1997) ("An action may not be dismissed upon bare allegations of inconvenience without a particularized showing of the hardships relied upon.").

[16] Bear Stearns, 2008 WL 959992, at *5 ("Motions to stay litigation on grounds of forum non conveniens are granted only in the rare case."); Aveta, Inc. v. Colon, 942 A.2d 603, 608 (Del.Ch.2008) ("[T]o achieve a stay or dismissal for forum non conveniens, a defendant must demonstrate that litigating in the plaintiff's chosen forum would present an overwhelming hardship."); Ryan, 918 A.2d at 351 (citing Berger v. Intelident Solutions, Inc., 906 A.2d 134 (Del.2006)). I am aware of the so-called debate as to whether there exists a different standard for staying, rather than dismissing, litigation on forum non conveniens grounds. See Kolber v. Holyoke Shares, Inc., 213 A.2d 444, 446-47 (Del. 1965); Sprint Nextel Corp. v. iPCS, Inc., C.A. No. 3746-VCP, 2008 WL 4516645, at *2 n. 8 (Del.Ch. Oct. 8, 2008); Bear Stearns, 2008 WL 959992, at *5 n. 22; Brandin v. Deason, 941 A.2d 1020, 1024 n. 13 (Del.Ch.2007); HFTP Invs. v. ARIAD Pharm., Inc., 752 A.2d 115, 121 (Del.Ch. 1999). I see no reason, however, to make such a distinction in a case in which a stay would likely have the same ultimate effect as a dismissal. This Court has clearly articulated the policy justifications for requiring a showing of overwhelming hardship in order to dismiss on grounds of forum non conveniens, for example, (1) the plaintiff's interest in litigating in the chosen forum, (2) Delaware's interest in deciding issues of Delaware law, and (3) Delaware's interest in adjudicating disputes involving Delaware entities. See, e.g., In re Topps Co. S'holders Litig., 924 A.2d 951, 956-64 (Del.Ch.2007). Those same policy justifications apply when the Court is considering a motion to stay on grounds of forum non conveniens that would have the same practical effect as dismissal.

While there are certainly significant procedural differences, in many cases the practical effect of staying litigation in favor of a lawsuit pending in another jurisdiction is the same as ordering dismissal. A stay in favor of another action results in the action in Delaware being put on hold until the resolution of the action in another jurisdiction, at which point principles of res judicata would likely apply. In light of this practical consideration, this Court must defer to the doctrine of the Supreme Court of this State, and the policy considerations underlying such doctrine, and should be extremely chary about disposing of cases on grounds of forum non conveniens, either by granting dismissal or a stay. See, e.g., Candlewood Timber Group, LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 998 (Del.2004); Mar-Land Indus. Contractors, Inc. v. Caribbean Petroleum Ref., L.P., 777 A.2d 774, 777-778 (Del.2001). To do otherwise would allow and encourage defendants to move this Court for a stay, rather than a dismissal, and thereby achieve the same result without the showing of hardship articulated by the Supreme Court.

[17] Alternatively, even if the Court were to apply a preponderance of the evidence standard rather than requiring a showing of hardship, this case would still not warrant a stay. As in Merrill Lynch, "nothing in the forum non conveniens analysis offers any persuasive reason for rejecting the Plaintiff's choice of forum for the bringing of its claims." Merrill Lynch, 2008 WL 4824053, at *4.

[18] See id. at *3; Topps, 924 A.2d at 954 ("When new issues arise, the state of incorporation has a particularly strong interest in addressing them, and providing guidance.").

[19] See Merrill Lynch, 2008 WL 4824053, at *3. It is also highly unlikely that this case will require a view of the premises.

[20] Id.

[21] Bear Stearns, 2008 WL 959992, at *6-8.

[22] Id. at *8; see Merrill Lynch, 2008 WL 4824053, at *4.

[23] Bear Stearns, 2008 WL 959992, at *8.

[24] The New York Action is pending in the Southern District of New York before Judge Sidney H. Stein. The decision not to stay this action should not be seen as reflecting on the expertise of Judge Stein, who, to my knowledge, is an excellent jurist, fully capable of adjudicating issues of Delaware law.

[25] 8 Del. C. § 141(a).

[26] Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).

[27] See Stone v. Ritter, 911 A.2d 362, 366-67 (Del.2006).

[28] Ct. Ch. R. 23.1(a); see Stone, 911 A.2d at 367 n. 9; Brehm v. Eisner, 746 A.2d 244, 254 (Del.2000).

[29] Am. Int'l Group, Inc., Consol. Derivative Litig., C.A. No. 769-VCS, ___ A.2d ___, ___, 2009 WL 366613, at *29 (Del.Ch. Feb. 10, 2009).

[30] Brehm, 746 A.2d at 253 (quoting Aronson, 473 A.2d at 814).

[31] Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993).

[32] Id. at 934.

[33] Brehm, 746 A.2d at 254.

[34] Id.

[35] Jacobs v. Yang, C.A. No. 206-N, 2004 WL 1728521, at *6 n. 31 (Del.Ch. Aug. 2, 2004).

[36] Aronson, 473 A.2d at 815. The Complaint appears to allege that demand on defendants Rubin and Ramirez would be futile because 1) Rubin faces a substantial threat of personal liability because he benefited personally by wrongfully selling stock while in possession of material nonpublic information; 2) Rubin is beholden to defendants Belda, Derr, and Parsons due to the extraordinary monetary compensation and other benefits they approved for him while he was a director and despite his lack of operational responsibility; and 3) Ramirez is not independent because he ran a subsidiary of Citigroup and received security and other services valued at more than $2 million from Citigroup while doing so. See Compl. ¶¶ 181-82. The Court does not need to determine the adequacy of these demand futility allegations because plaintiffs have not made similar individualized allegations regarding the other director defendants. Thus, even if the allegations in the Complaint are sufficient to excuse demand as to Rubin and Ramirez, plaintiffs have still failed to properly plead demand futility for a majority of the director defendants. As further explained below, instead of providing similar individualized assertions for the other director defendants, plaintiffs rely on the "group" accusation mode of pleading demand futility. Had plaintiffs provided individual allegations as to each of the director defendants, the outcome of this case may have been different.

[37] In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del.Ch. 1996).

[38] 188 A.2d 125 (Del. 1963).

[39] Id. at 130.

[40] Caremark, 698 A.2d at 967.

[41] Id.; see Brehm, 746 A.2d at 259.

[42] Caremark, 698 A.2d at 967-68 (footnotes omitted).

[43] Id. at 971.

[44] Stone, 911 A.2d at 370.

[45] Id. (footnotes omitted).

[46] See Guttman v. Huang, 823 A.2d 492, 506 (Del.Ch.2003) ("[T]he [Caremark] opinion articulates a standard for liability for failures of oversight that requires a showing that the directors breached their duty of loyalty by failing to attend to their duties in good faith. Put otherwise, the decision premises liability on a showing that the directors were conscious of the fact that they were not doing their jobs.") (footnote omitted).

[47] Stone, 911 A.2d at 369; Desimone v. Barrows, 924 A.2d 908, 935 (Del.Ch.2007) ("Caremark itself encouraged directors to act with reasonable diligence, but plainly held that director liability for failure to monitor required a finding that the directors acted with the state of mind traditionally used to define the mindset of a disloyal director—bad faith— because their indolence was so persistent that it could not be ascribed to anything other than a knowing decision not to even try to make sure the corporation's officers had developed and were implementing a prudent approach to ensuring law compliance. By reinforcing that a scienter-based standard applies to claims in the delicate monitoring context, Stone ensured that the protections that exculpatory charter provisions afford to independent directors against damage claims would not be eroded.") (footnotes omitted).

[48] See, e.g., David B. Shaev Profit Sharing Account v. Armstrong, C.A. No. 1449-N, 2006 WL 391931, at *2 (Del.Ch. Feb. 13, 2006) (Caremark claims for failure to discover involvement in allegedly fraudulent business practices).

[49] Pls.' Answering Br. at 2.

[50] "Hindsight bias is the tendency for people with knowledge of an outcome to exaggerate the extent to which they believe that outcome could have been predicted." Hal R. Arkes & Cindy A. Schipani, Medical Malpractice v. The Business Judgment Rule: Differences in Hindsight Bias, 73 OR. L.REV. 587, 587 (1994).

[51] Aronson, 473 A.2d at 812.

[52] Id.

[53] Id.

[54] Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (quoting Guttman, 823 A.2d at 501).

[55] In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del.2006).

[56] Wood, 953 A.2d at 141.

[57] Caremark, 698 A.2d at 967.

[58] See Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L.REV. 83, 114-15 (2004) ("[T]here is a substantial risk that suing shareholders and reviewing judges will be unable to distinguish between competent and negligent management because bad outcomes often will be regarded, ex post, as having been foreseeable and, therefore, preventable ex ante. If liability results from bad outcomes, without regard to the ex ante quality of the decision or the decision-making process, however, managers will be discouraged from taking risks.") (footnotes omitted).

[59] Pls.' Answering Br. at 39-40.

[60] Compl. ¶ 185.

[61] Id. ¶ 187.

[62] Id. ¶ 189.

[63] Compl. ¶ 189; Pls.' Answering Br. at 41-45. Directors with special expertise are not held to a higher standard of care in the oversight context simply because of their status as an expert. See Canadian Commercial Workers Indus. Pension Plan v. Alden, C.A. No. 1184-N, 2006 WL 456786, at *7 n. 54 (Del.Ch. Feb. 22, 2006); see also E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992-2004? A Retrospective on Some Key Developments, 153 U. PA. L.REV. 1399, 1445-47 (2005). Directors of a committee charged with oversight of a company's risk have additional responsibilities to monitor such risk; however, such responsibility does not change the standard of director liability under Caremark and its progeny, which requires a showing of bad faith. Evaluating director action under the bad faith standard is a contextual and fact specific inquiry and what a director knows and understands is, of course, relevant to such an inquiry. See In re Emerging Commc'ns, Inc. S'holders Litig., C.A. No. 16415, 2004 WL 1305745, at *39-40 (Del.Ch. May 3, 2004). Even accepting, however, that a majority of the directors were members of the ARM Committee and considered audit committee financial experts, plaintiffs have not alleged facts showing that they demonstrated a conscious disregard for duty, or any other conduct or omission that would constitute bad faith. Even directors who are experts are shielded from judicial second guessing of their business decisions by the business judgment rule.

[64] Shaev, 2006 WL 391931, at *3.

[65] That plaintiffs are unable to point to specific wrongdoing within the Company that caused Citigroup's losses from exposure to the subprime mortgage market further supports my hypothesis that this case is not truly a Caremark case, but rather a straightforward claim of breach of the fiduciary duty of care.

[66] Pls.' Answering Br. at 62.

[67] Id. at 47.

[68] 239 F.3d 808 (6th Cir.2001).

[69] Id. at 819-24 (noting allegations of numerous financial irregularities in reports brought to the board's attention).

[70] Pls.' Answering Br. at 48.

[71] See McCall, 239 F.3d at 821.

[72] See Gagliardi v. TriFoods Int'l, Inc., 683 A.2d 1049, 1051 (Del.Ch. 1996) ("The business outcome of an investment project that is unaffected by director self-interest or bad faith, cannot itself be an occasion for director liability.") (footnote omitted).

[73] C.A. No. 769-VCS, ___ A.2d ___, 2009 WL 366613 (Del.Ch. Feb. 10, 2009).

[74] Id. at ___, 2009 WL 366613 at *3.

[75] It is also significant that the AIG Court was analyzing the Complaint under the plaintiff-friendly standard of Rule 12(b)(6), rather than the particularized pleading standard of Rule 23.1.

[76] AIG, ___ A.2d at ___, 2009 WL 366613 at *22.

[77] Id. at ___, 2009 WL 366613 at *23.

[78] If defendants had been able to predict the extent of the problems in the subprime mortgage market, then they would not only have been able to avoid losses, but presumably would have been able to make significant gains for Citigroup by taking positions that would have produced a return when the value of subprime securities dropped. Compl. ¶ 78. Query: if the Court were to adopt plaintiffs' theory of the case—that the defendants are personally liable for their failure to see the problems in the subprime mortgage market and Citigroup's exposure to them—then could not a plaintiff succeed on a theory that a director was personally liable for failure to predict the extent of the subprime mortgage crisis and profit from it, even if the company was not exposed to losses from the subprime mortgage market? If directors are going to be held liable for losses for failing to accurately predict market events, then why not hold them liable for failing to profit by predicting market events that, in hindsight, the director should have seen because of certain red (or green?) flags? If one expects director prescience in one direction, why not the other?

[79] Plaintiffs argue that the disclosure claims relate to actions taken by the board and are therefore subject to the Aronson standard. Plaintiffs request, however, that the Court review demand futility under the substantial likelihood of liability standard and present their demand futility arguments under that standard.

[80] Compl. ¶ 172.

[81] Id. at ¶ 70.

[82] Id. at ¶¶ 163-65.

[83] In re infoUSA, Inc. S'holders Litig., 953 A.2d 963, 990 (Del.Ch.2007).

[84] Malone v. Brincat, 722 A.2d 5, 14 (Del. 1998) (emphasis added); see infoUSA, 953 A.2d at 990 (finding that directors violate their fiduciary duties "where it can be shown that the directors involved issued their communication with the knowledge that it was deceptive or incomplete").

[85] O'Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 915 (Del.Ch. Aug. 20, 1999).

[86] 8 Del. C. § 141(e) ("A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member's duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation."); see Brehm, 746 A.2d at 261.

[87] See Pfeffer v. Redstone, No. 115, 2008, ___ A.2d ___, ___ 2009 WL 188887, at *6 (Del. Jan. 23, 2009) ("Although there is `no reason to depart from the general pleading rules when alleging duty of disclosure violations,' `it is inherent in disclosure cases that the misstated or omitted facts be identified and that the pleading not be merely conclusory.'") (quoting Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 140 (Del.1997)).

[88] Compl. ¶¶ 160-73. To be fair, plaintiffs point to some specific statements in the Complaint. For example, paragraph 82 of the Complaint alleges that the director defendants "caused or allowed" Citigroup to issue a press release that highlighted, among other things, "positive trends from Citigroup's strategic actions." Paragraphs 88 and 99 of the Complaint allege that the director defendants "caused" Citigroup to issue press releases that stated that the Company had "generated strong momentum this quarter" and that cited decreasing credit costs "reflecting a stable global credit environment." Even these allegations, however, fail to meet the strict pleading requirements under Rule 23.1. Pleading that the director defendants "caused" or "caused or allowed" the Company to issue certain statements is not sufficient particularized pleading to excuse demand under Rule 23.1. It is unclear from such allegations how the board was actually involved in creating or approving the statements, factual details that are crucial to determining whether demand on the board of directors would have been excused as futile. These allegations also fail for the other reasons described below, most notably because the Complaint fails to adequately plead facts reasonably suggesting that the director defendants made disclosures with knowledge that they were false or misleading or in bad faith.

[89] Compl. ¶ 172.

[90] Id. at ¶ 161.

[91] The closest plaintiffs come to alleging a specific disclosure violation are the allegations that the Company failed to disclosure the existence of the liquidity puts until November 2007 and failed to disclose that the Company may have to take certain assets held by SIVs back onto its balance sheet. Compl. ¶¶ 70, 165-69. Even these claims, however, are vague and relatively light on the details of what the Company was required to disclose, when it was required to disclose it, and how its failure to do so would constitute a violation of the duty of disclosure. In any event, as discussed below, these claims fail to plead demand futility because plaintiffs have (1) failed to sufficiently allege facts showing that the director defendants were involved in preparing (or were otherwise responsible for) the alleged misleading disclosures and (2) failed to allege facts that would lead to a reasonable inference that the director defendants made any false or misleading statements or omissions knowingly or in bad faith.

[92] See Wood, 953 A.2d at 142 ("The Board's execution of [the company's] financial reports, without more, is insufficient to create an inference that the directors had actual or constructive notice of any illegality.").

[93] See Pfeffer, ___ A.2d ___, at ___, 2009 WL 188887, at *6 ("When pleading a breach of fiduciary duty based on the ... Directors' knowledge, [the plaintiff] must, at a minimum, offer `well-pleaded facts from which it can be reasonably inferred that this `something' was knowable and that the defendant was in a position to know it.'") (quoting IOTEX Commc'ns, Inc. v. Defries, C.A. No. 15817, 1998 WL 914265, at *4 (Del.Ch. Dec. 21, 1998)).

[94] Compl. ¶ 191.

[95] See AIG, ___ A.2d at ___, 2009 WL 366613 at *21 ("Although these allegations are varied and far reaching, ... these allegations are supported by the pled facts. For starters, the Complaint is not laden with such accusations against the D & O Defendants as a group; these group accusations are used sparingly.").

[96] Plaintiffs do not adequately plead that the asset purchases or the investments in SIVs were the result of board action rather than inaction. To establish demand futility in the absence of director action the Complaint would have to plead facts sufficient to create a reasonable doubt that the director defendants could exercise disinterested and independent business judgment in responding to a demand. It is not clear to the Court on exactly what theory plaintiffs believe that demand is excused for these allegations. Pls.' Answering Br. at 56 nn. 45-46. In any event, the Complaint does not properly allege demand futility as to these claims because it does not create a reasonable doubt that the director defendants would be unable to exercise disinterested and independent business judgment in responding to a demand. First, because plaintiffs have failed to adequately plead that the challenged asset purchases or investments in SIVs were the result of board action, the director defendants cannot possibly face a substantial likelihood of personal liability for these transactions. See Highland Legacy Ltd. v. Singer, C.A. No. 1566-N, 2006 WL 741939, at *7 (Del.Ch. Mar. 17, 2006) ("To excuse demand on the grounds of waste, the complaint must allege particularized facts sufficient to create a reasonable doubt that the board authorized action on the corporation's behalf on terms that no person of ordinary, sound business judgment could conclude represents a fair exchange.") (emphasis added).

Second, and in the alternative, the director defendants do not face a substantial likelihood of personal liability for these claims because the Complaint is devoid of any allegation that would lead to the conclusion that allowing the Company to purchase these assets or invest in the SIVs constituted bad faith conduct by the director defendants. For similar reasons as I explained with regard to the Caremark claims, the alleged "red flags" are not sufficient to support an inference that the director defendants did not act in good faith by not preventing those charged with making business decisions for the Company from purchasing subprime assets or investing in the SIVs. That these investments turned out poorly for the Company is not evidence of bad faith conduct. The decision to purchase certain investment assets, or to allow others in the Company to purchase certain investment assets, is the essence of the business judgment of directors and officers. Additionally, the Complaint makes no factual allegation that the decision to invest in the subprime assets or the SIVs was of no value to the Company. As I have said numerous times now, judges are in no position to second guess well-informed business decisions made in good faith, and the allegations in the Complaint are not sufficient to suggest that the directors knowingly or in bad faith disregarded their duty to monitor. Accordingly, the claims for waste for the asset purchases and the investments in SIVs fail to properly plead demand futility pursuant to Rule 23.1.

[97] Aronson, 473 A.2d at 814.

[98] Brehm, 746 A.2d at 263 (quoting In re The Walt Disney Co. Derivative Litig., 731 A.2d 342, 362 (Del.Ch.1998)); see Highland, 2006 WL 741939, at *7.

[99] White v. Panic, 783 A.2d 543, 554 n. 36 (Del.2001).

[100] Pls.' Answering Br. at 61.

[101] Id.

[102] Id. (citation omitted).

[103] Brehm, 746 A.2d at 263 (quoting Disney, 731 A.2d at 362).

[104] Aronson, 473 A.2d at 814.

[105] Brehm, 746 A.2d at 263.

[106] Id. at 262 n. 56 (citing Saxe v. Brady, 184 A.2d 602, 610 (Del.Ch.1962)); see Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996).

[107] Compl. ¶ 122; Pls.' Answering Br. at 57-58.

[108] Compl. ¶ 124.

[109] The Court takes judicial notice of the letter agreement, a publicly available document that was integral to plaintiffs' waste claim and incorporated into the Complaint. See Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996).

[110] See Malpiede v. Townson, 780 A.2d 1075, 1082-83 (Del.2001).

[111] Id.

[112] McPadden v. Sidhu, C.A. No. 3310-CC, 2008 WL 4017052, at *7 (Del.Ch. Aug. 29, 2008).

[113] I am also not convinced that defendants would be exculpated under Citigroup's certificate for committing waste. See In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 (Del.Ch.2005) ("The Delaware Supreme Court has implicitly held that committing waste is an act of bad faith.") (citing White v. Panic, 783 A.2d 543, 553-55 (Del.2001)).

Bruce E. Jameson, Marcus E. Montejo, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Attorneys for Plaintiffs.

Gregory V. Varallo, John D. Hendershot, Rudolf Koch, Scott W. Perkins, RICHARDS, LAYTON & FINGER, P.A.; Attorneys for Defendants Wayport, Inc. and Gordon P. Williams, Jr.

M. Duncan Grant, James H.S. Levine, PEPPER HAMILTON LLP, Wilmington, Delaware; Roger A. Lane, Courtney Worcester, FOLEY & LARDNER LLP, Boston, Massachusetts; Attorneys for Defendants New Enterprise Associates VIII L.P. and New Enterprise Associates 8A L.P.

Michael F. Bonkowski, COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A., Wilmington, Delaware; John J. McKetta III, GRAVES DOUGHERTY HEARON & MOODY, P.C., Austin, Texas; Attorneys for Defendant Trellis Partners Opportunity Fund, L.P.

OPINION

LASTER, Vice Chancellor.

The plaintiffs sued for damages arising out of their sales of stock in Wayport, Inc. ("Wayport" or the "Company"). Vice Chancellor Lamb granted the defendants' motion to dismiss in part, and his rulings represent law of the case. See Latesco, L.P. v. Wayport, Inc., 2009 WL 2246793 (Del. Ch. July 24, 2009) (the "Dismissal Opinion"). The litigation proceeded to trial against the remaining defendants on claims for breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, common law fraud, and equitable fraud. Judgment is entered in favor of plaintiff Brett Stewart and against defendant Trellis Partners Opportunity Fund, L.P. ("Trellis Opportunity Fund") in the amount of $470,000, subject to an adjustment to be calculated by the parties in accordance with this opinion, plus pre- and post-judgment interest at the legal rate, compounded quarterly. Judgment otherwise is entered against the plaintiffs and in favor of the defendants.

I. FACTUAL BACKGROUND

The case was tried on September 17-20, 2012. The parties introduced over 400 exhibits, submitted deposition testimony from nineteen witnesses, and adduced live testimony from ten fact witnesses and one expert witness. The burden of proof rested on the plaintiffs. Having evaluated live witness testimony, weighed credibility, and considered the evidence as a whole, I make the following factual findings.

A. Wayport's Early Days

Wayport was a privately held Delaware corporation with its principal place of business in Austin, Texas. Founded in 1996, the Company was a pioneer in designing, developing, and enabling Wi-Fi hotspots, which use a wireless router to offer internet access within the immediate vicinity. Stewart was Wayport's original CEO, a member of its board of directors (the "Board"), and a named inventor on most of its patents. Plaintiffs Dirk Heinen and Brad Gray were the Company's vice president of operations and vice president of sales, respectively.

Early on, Heinen introduced Stewart to John Long, who was a partner in a venture capital firm known as Trellis Partners.^[1] In 1998, Trellis purchased Series A Preferred Stock in Wayport and obtained (i) the right to designate a director, (ii) the right to receive financial information, and (iii) a right of first refusal ("ROFR") on plaintiffs' shares. Long joined the Board as the Trellis designee. He had primary responsibility for Trellis's investment in Wayport, but often discussed the Company's progress with Broeker, one of his partners at Trellis.

In 1999, Wayport sought additional funding. Trellis introduced Wayport to Richard Kramlich, a partner in the venture capital firm New Enterprise Associates ("NEA").^[2] NEA purchased Series B Preferred Stock in Wayport and obtained (i) the right to designate a Board observer, (ii) the right to receive financial information, and (iii) a ROFR on plaintiffs' shares. Kramlich became NEA's Board observer and had primary responsibility for NEA's investment.

B. The Bursting Of The Technology Bubble

In 2000, the technology bubble burst, and Wayport's business prospects soured. Wayport's struggles led the Board to consider a management transition. According to the defendants, Stewart was forced to step aside. Stewart testified that he did not oppose the change. He considered himself a "technology and analysis" buff, and once fundraising and cash flow issues became all-consuming, Stewart felt he was out of his "comfort zone." Tr. 90.

In fall 2000, Dave Vucina took over as CEO, and Stewart received the title of President. Stewart soon became disenchanted with his new role, which he felt was "ambiguous," "uncomfortable," and "poorly defined." Tr. 91. In late 2001, Stewart resigned from all positions with the Company. He nominated Heinen to serve as a director in his stead, and Heinen continued as a director until May 2005.

C. Wayport's Prospects Revive.

Under Vucina's leadership, Wayport reduced its cash burn and began to turn around its business. Over four years, thanks in part to a rebounding economy and the advent of smart phones, the Company went from operating at a loss on little revenue to generating $90-100 million in sales with positive cash flow and a healthy balance sheet.

In 2005, Wayport began exploring an initial public offering. In preparation, Vucina hired defendant Gordon P. Williams, Jr. as Wayport's new general counsel. In the trial record, Gordon Williams is referred to frequently as Chuck Williams. Another Wayport employee, Greg Williams, plays a smaller part in the case. To distinguish between the two, and because Gordon Williams has the more prominent role, I refer to him as "Williams." When his colleague enters the frame, I refer to him as "Greg Williams."

Williams took steps to "prepare [Wayport] for an IPO" by implementing what he believed were "best practices" with respect to sharing financial and other information about the Company. Tr. 874-75. Wayport previously shared information freely with directors and stockholders alike. Williams worried that sharing unaudited financial information posed a risk of misleading investors and could lead to violations of securities laws. He therefore instituted a policy that required any common stockholder who wanted information to make a formal books and records demand pursuant to Section 220 of the Delaware General Corporation Law (the "DGCL"), 8 Del. C. § 220, and sign a nondisclosure agreement (collectively, the "Section 220 Policy"). The Section 220 Policy did not affect Trellis or NEA, because they had contractual information rights and representatives in the boardroom.

Also in 2005, Wayport management began to explore whether the Company could better utilize its intellectual property. As an initial step, Wayport hired Craig Yudell, a patent attorney with the firm Dillon & Yudell, to clean up the portfolio. Yudell's firm also served as a patent broker, and Wayport anticipated that Yudell might serve in that role. Over the next twelve to eighteen months, Yudell organized a patent inventory, assessed the portfolio's potential value, and determined which patents required the filing of amendments with the U.S. Patent and Trademark Office ("USPTO").

D. Stewart Offers His Two Cents On Patents.

In spring 2005, as part of the patent cleanup process, Yudell reached out to Stewart to obtain his signature on certain patent amendments. Stewart "hadn't really thought about Wayport for several years," but Yudell's inquiry sparked his interest. Tr. 98. On May 17, Stewart sent an email to the Board and management containing a lengthy and unsolicited strategic manifesto about how Wayport could monetize its patent portfolio.

I have seen no evidence of any attempt by Wayport to enforce [its] ever increasingly valuable patent assets. Indeed, I would be surprised if the ability to enforce the patents [was] not to some extent already limited by either direct licenses, covenants not to sue, or implicit licenses under the patent exhaustion doctrine as a part of other deals Wayport has done with [carriers].

. . . .

However, there is more to IP strategy than waiting defensively to be sued, or offensively suing someone. I would like here to propose a set of strategic actions in this regard. Four years ago, [Vucina] asked me to make such a proposal, and I could not think of a good one. But today, many things have changed. So I herewith have two trivial and one significant patent asset management strategies to propose. My credentials for these proposals are threefold: I am a significant shareholder with a desire to see Wayport maximize value of all assets, I am a named inventor on all of Wayport's system and method patents, and I pretty much only did technology IP strategy and deals globally for AMD during the five years prior to starting Wayport. . . .

I can quickly dispose of the trivial:

1. Abandon any investment, including fees, in [patent A] if you have not already done so. . . .

2. Offer to sell [patent] 6732176 to Cisco. . . . The cash benefit to Wayport could be relatively immediate and significant. However, I don't see how Wayport would need to continue to invest in this patent over time — it is about gear, and not about service. . . . Regarding value of this patent, I would propose you start at 5% of actual or forecast[ed] sales, and settle for 2% or some NPV equivalent of 2%. This could be many hundreds of thousands of dollars. . . .

3. Far more interesting is the profound component of strategy I would like to propose regarding the remaining system and method patients.

The big change in the environment from 2000/2001 is the presence of municipalities operating wifi networks. Some or all of these will infringe [patent B] and its progeny. But you can enforce patents against a government with a degree of impunity not available when contemplating enforcement against customers, suppliers, or competitors.

. . . .

As I see it there are three approaches:

— [D]o nothing, wait for more infringement

— [D]o the `little fish/big fish' dance, well known to technology IP strategists. Under this approach Wayport would find a small municipality somewhere (the little fish) operating a municipal wifi network, approach them, say `hey you know what? You infringe my patents. But [don't] worry, I am not trying to shut you down. Why [don't] you just give me $500 and I'll give you this license. Then you never have to worry about this again.'

Next, find a slightly bigger fish, and repeat at a slightly higher price, saying `municipality A needed a license, and so do you.' Repeat. Repeat. Repeat. . . .

— The third approach is my personal favorite. If you know who you'd do this with, and [carrier A] or [carrier B] come directly to mind, . . . just go to their IP section and lay out the strategy, and use the NPV of the strategy to add to valuation discussions either with private or public markets. The neat thing about this approach is that you can directly get valuation from a carrier who would like to control the patent assets . . . .

The courtesy of a response to these suggestions would be greatly appreciated.

JX 8 (the "Patent Strategy Memo"). As these excerpts indicate, the tone of the Patent Strategy Memo was not entirely complimentary towards Wayport management. But for Stewart's emails, which tend toward the prickly and condescending, it was relatively subdued. The 6,732,176 patent referenced in the Patent Strategy Memo was one of the chief patents in a family (the "MSSID Patents") that Wayport would sell to Cisco Systems, Inc. ("Cisco") in a transaction that serves as the foundation for much of the plaintiffs' case.

On the same day he received the Patent Strategy Memo, Wayport's then-general counsel, Bob Kroll, sent a brief email thanking Stewart "for [his] time and for sharing [his] thoughts." JX 9. He then referred to a patent monetization strategy and team:

We are aggressively pursuing a patent monetization strategy and will give due consideration to the suggestions you have set forth below. No doubt many ideas for deep consideration are contained in it, but time constraints limit my ability to fully consider them right now. They will be shared with the patent monetization team once it is in place, which should be within the near future.

Again, thank you for your continuing interest in Wayport's success.

Id. Kroll copied Stewart, Vucina, Heinen, other members of the Board, and Yudell.

Wayport's Chief Technology Officer at the time, Dr. James Keeler, also replied to Stewart, but cautioned that any patent strategy would take time.

Thank you for your thoughts. We view the patent portfolio as being a valuable asset and I have been nurturing this asset in the US and in selected international locations. . . .

The actual strategy of what to do with [the patents] is a complex one that tends to move slowly — when I was involved in licensing the patent portfolio at Pavilion . . . it took about 4 to 5 years from start to finish, $5 million of investment, and resulted in about $30Million [sic] licensing fees after 2 lawsuits . . . .

Under [Kroll's] leadership we are engaging several firms regarding our strategy for how to monetize this asset and we expect to have a plan put in place within the next six months or so. However, it will be a multi-year process to actually monetize. . . .

I will say that the value of your patents has not gone unnoticed by me, the board or our lawyers. It is being worked on and strategies are being developed. . . . There is a lot of work to do to tap into that mine, however, and it takes a lot of time for these things to become monetized.

. . . [W]e are approaching this in a very structured and professional manner that we expect will optimize the value of the good work that you have done in the past.

JX 10.

Long also responded to Stewart:

Thanks for prodding us on this, and for laying out the issue more clearly. It's clear to all of us that Wayport's patents have value, but as you know the issue has been how and when to best realize that value. Your idea is interesting and worth

examining closely. JX 15.

To me, these communications appear professional and courteous. To Stewart, they were disingenuous, and he concluded that the Board had no concept of the patent portfolio's value. In an email to Heinen, Stewart summarized his reaction. "As a person literate in the English language, it is safe to assume there is no patent monetization activity underway, just glib lip service." JX 15. At trial, Stewart testified to the same effect. He believed that Wayport had brushed aside the Patent Strategy Memo and had no alternative patent strategy. See Tr. 176-77 (Stewart agreeing that "regardless of what the company was telling [him] through several different voices, [he] made a decision personally simply not to give credit to that information").

Despite what Stewart perceived to be a dismissal of his recommendations, Long and Stewart continued discussing the Company's patents. In summer 2005, they met for lunch, but the meeting ended badly when Long became "annoyed at what [he] took as [Stewart's] zings against Wayport and its board . . . ." JX 27. After this difficult encounter, Long reached out to Stewart again in fall 2005. Yudell was nearing the end of his housekeeping efforts and starting to develop a formal marketing plan, and Long hoped to tap Stewart's expertise. On October 21, Long emailed Stewart:

I would like to follow up with you about your ideas on how Wayport can best exploit its IP portfolio. This has become a higher priority for [Vucina] and the board, and [Vucina] acknowledges that you are uniquely qualified by background and talent to help with these efforts. The company has not been completely idle here, although I know we have not moved as quickly as you would have liked or followed your suggestions around IP strategy. The board is scheduled to hear presentations in a couple of weeks from two outside IP firms to get their assessments of the Wayport portfolio and their thoughts around exploitation strategies.

Id. Long asked whether Stewart would "be willing to look into this matter and help us" and suggested that there appeared to be "a real opportunity to drive meaningful value to Wayport . . . ." Id. He suggested that Stewart and the Company "look past [their] disagreements and frictions . . . ." Id.

Stewart replied the same day and reiterated his criticisms of Vucina and the Company, including what he described as its failures to honor his requests for information even when he complied with the Section 220 Policy. While acknowledging Wayport's efforts, Stewart denigrated the strategy of using brokers to market and sell the patents.

Indeed, I view the process you describe, of outside law firms presenting ("pay me fees and I will go ask for licenses in the following way") as one where I could hardly add value, likely to have the prospect of consuming inordinate amounts of my (uncompensated) time, and unlikely to do anything significant for shareholder value in the time frame of interest. I have seen this movie and I know how it ends.

JX 27. In subsequent emails, Stewart offered more heated assessments of how Wayport had treated him and whether its patent strategy was likely to succeed.

On November 11, 2005, Long again informed Stewart that Wayport was taking his suggestions seriously and would soon act.

While [Vucina] may not have moved as quickly as you would have liked, and may not have the technology background to understand the issues, opportunities and strategies as completely as you would like, I can assure you that he now has a sense of urgency on this topic and is marshalling resources to move quickly.

JX 33. In the same email, Long asked Stewart to be more constructive and suggested that he stop any independent efforts to reach out to industry contacts about Wayport's patents. Long expressed concern that a dual track sales process, one managed by Wayport and one conducted independently by Stewart, would undermine the Company's efforts.

I believe that your proposed independent activities with potential partners risk greater potential harm than potential gain. I am confident that the value of Wayport's IP will get communicated to the appropriate people . . . . In pursuing this course you would also be taking a position that the company could only view as adversarial, an outcome I think would be very unfortunate.

Id. Stewart reserved his right to do whatever he wanted, and the discussions between Stewart and Long stopped.

E. The First Stock Sale

In November 2005, Max Chee, a principal at Millennium Technology Value Partners, L.P. ("Millennium") contacted Stewart and Gray about their shares of Wayport common stock. Millennium is a venture capital fund that invests in founders' shares. Chee asked whether Stewart and Gray might be interested in liquidating a portion of their Wayport common stock.

Stewart was initially suspicious. Coming on the heels of his exchanges with Long about the patents, he thought there was "zero chance [Chee] [did] not have Wayport's hand up his back." JX 37. But less than a month later, Stewart, Heinen, and Gray signed letters of intent to sell a portion of their Wayport common stock to Millennium at $3.00 per share. Stewart, Heinen, and Gray initially agreed to sell 184,000 shares. In January 2006, plaintiff Paul Koffend, formerly Wayport's CFO during Stewart's tenure as CEO, caught wind of the opportunity and asked to sell some of his shares to Millennium on the same terms.

The contemplated sales could not close immediately because of the ROFRs held by Wayport, Trellis, and NEA. When the sellers gave notice of their intent to sell, Wayport and NEA declined to exercise their rights, but Trellis sought to buy.

A dispute then ensued between Stewart and Trellis. Stewart's shares ostensibly were covered by multiple iterations of a stockholder agreement that contained various other ROFRs, but the parties to the iterations were different and Stewart was not a signatory to the later versions, including the version that Trellis believed was operative. To Trellis's dismay, Stewart began sending ROFR notices to parties under the last version of the stockholder agreement that he signed, including parties that Trellis believed were not entitled to notice. Stewart also objected to the shares being purchased by a Trellis fund that was not a signatory to the agreement he deemed controlling and therefore, in his view, did not have a ROFR.

After much wrangling and considerable delay, Williams came up with a solution. Each version of the ROFR permitted the affected seller, the Company, and a supermajority of the preferred stockholders to waive any provision of the agreement. As long as the necessary votes could be obtained, the ROFRs could be waived, avoiding the need to determine which version of the stockholder agreement was actually controlling. The parties followed this course.

Everything was proceeding towards a closing until March 9, 2006, when Trellis backed out. According to Broeker, Trellis decided to invest in other portfolio companies. Trellis's decision did not affect the plaintiffs because Millennium stepped in to buy their shares. In late March, Millennium acquired 527,500 shares from the plaintiffs.

F. Wayport Markets The MSSID Patents.

At some point in 2006, Wayport Executive Vice President Greg Williams assumed responsibility for executing Wayport's patent strategy. In the fall, Greg Williams told Vucina that he wanted Wayport to be in good faith negotiations for a license to the MSSID Patents by April 1, 2007.

Consistent with this goal, Wayport began marketing the MSSID Patents in February 2007. Yudell distributed offering materials to approximately sixty potential buyers and asked for initial indications of interest by the end of March. Only two parties submitted indications of interest: Cisco and Intellectual Ventures Management, LLC ("Intellectual Ventures"), an investment firm focused on intellectual property.

G. The Second Stock Sale Begins.

In December 2006, shortly before the auction for the MSSID Patents commenced, Stewart contacted Wayport about selling more stock to Millennium. The transaction was anticipated to close on substantially similar terms, including a $3.00 sale price. Stewart asked if Williams wanted to handle the ROFR issues through the waiver process. On December 13, Stewart followed up with an email in which he informed Williams that the selling stockholders preferred the waiver approach. The same day, Stewart and Williams spoke by phone, and Williams suggested that Trellis and NEA would likely agree to waive their ROFRs if plaintiffs made enough shares available such that Trellis and NEA could participate. Stewart alluded to this conversation in an email to Williams on December 14:

I was thinking over our conversation yesterday, and after a few discussions among the [plaintiffs], I would like to indicate to you the potential flexibility to increase the number of shares available, should one of the [preferred stockholders] have an interest in taking an additional position. I don't have a number, I just want to communicate receptivity to discussing this, should it turn out that one of the issues in getting a waiver . . . is, as you anticipated, the desire for one of the [preferred stockholders] to co-buy.

JX 145 (emphasis added). Williams responded: "Thanks [Stewart]. It does help." Id. Later that week, Williams confirmed that Wayport was willing to proceed by waiver, but he still needed to coordinate with Trellis and NEA.

On December 20, 2006, Long emailed the Board and noted that there were two directors, Katzen and McCormick, who wanted to purchase shares. Long described how Williams planned to satisfy everyone's desires.

[Williams] has concluded it doesn't make sense to intervene in the current proposed sale, but rather to see if the [plaintiffs] would sell an additional 200-250k shares directly to [Katzen and McCormick]. [Williams] also learned from Greg Williams that he would be interested in selling 100k of his shares, which would reduce the request to the [plaintiffs].

JX 149. Caught off-guard, Vucina emailed Williams and asked why he made this "formal recommendation." JX 150. Williams downplayed the idea of a "formal recommendation" but did not dispute that requesting additional shares from the plaintiffs was his idea.

I had originally been thinking of this as a two step (company buys and then sells to directors) approach as well. Different approach of facilitating the sales directly came into the discussion yesterday and has the appeal of keeping the Company out of the transaction . . . . I was still forming my thinking around that yesterday but it is settling in as a better simpler [sic] approach.

Id. Under Williams's structure, the plaintiffs and Greg Williams would sell directly to Katzen and McCormick.

Williams conveyed his proposal to Stewart, who agreed. On January 25, 2007, Williams supplied the parties with a draft stock purchase agreement. Around this time, Trellis and NEA decided not to participate in the second stock sale, at least while the going-rate was $3.00 per share.

H. Millennium Lowers Its Bid.

On January 31, 2007, Millennium asked Wayport for financial information to help evaluate the proposed transactions. The record does not contain direct evidence of what Millennium received or learned, but on February 13, Millennium told Stewart that it was dropping its price to $2.50. Stewart vented to Williams: "I learned yesterday evening that . . . [Millennium] received new information from Wayport that was unavailable to the [plaintiffs], and that as a consequence of that information and subsequent questioning of management, [Millennium] would decline to perform the stock transfer [at $3.00 per share]." JX 171. Stewart asked Williams to give him the same information to "restore [the] balance of information available." Id.

Williams forwarded Stewart's email directly to Millennium, remarking that Stewart's communication was his "morning surprise." JX 171. Williams and Millennium spoke by phone twenty minutes later. Williams also gave a heads up to Vucina, who was upset that Millennium had acted without warning the Company. Vucina commented:

One of the things I don't understand is the need for [Millennium] to share this level of information with [Stewart]. I don't feel like we should have any more of these conversations with [Millennium] if they are going to turn around and communicate back to [Stewart] in this manner. .. . [T]hey have put us in a tough position.

JX 173.

Williams did not respond to Stewart until after his communications with both Millennium and Vucina. On February 15, 2007, Williams decided that Stewart would get "exactly what [Millennium] got." JX 174. Wayport sent Stewart the additional information and set up a call between Stewart and Wayport's CFO, Ken Kieley, which took place on February 27.

Meanwhile, Williams continued acting as an intermediary for the stock sales. On February 16, 2007, Williams facilitated the exchange of draft stock purchase agreements between Stewart and McCormick. On February 21, Stewart asked Williams whether Trellis and NEA were interested in buying stock at the new price, and Williams responded "definitely." JX 186. On February 28, Stewart confirmed to Williams and Millennium that plaintiffs would still sell at $2.50 per share. To generate the same proceeds, Gray increased the number of shares he would make available by 20,000 shares. On March 1, Williams reported on these developments to the Board.

On March 2, 2007, Greg Williams learned that Millennium had lowered the price from $3.00 to $2.50. He declined to sell at the new price. On March 7, Stewart and Williams worked out a ledger reflecting Greg Williams's withdrawal.

Because the price had changed, the revised stock sales at $2.50 per share required a new ROFR waiver. On March 8, Wayport waived the Company's ROFR, but Trellis and NEA now indicated that they wanted to buy.

To keep everyone happy, Williams stepped in. He first determined the preferred stockholders' investment appetites. Once this figure was known, Williams asked Stewart whether the plaintiffs would make additional shares available to accommodate both the preferred stockholders and Millennium, indicating that it would enable him to procure the ROFR waivers. When Stewart agreed, Williams contacted Trellis and NEA to confirm that if the plaintiffs made additional shares available, the extra shares could go to Millennium. When they agreed, Williams believed he had a transaction in which the ROFRs could be waived, and Trellis, NEA, and Millennium would be able to participate

I. The Auction Generates Two Bidders.

While Williams and Stewart were putting together the stock sales, the auction results came in for the MSSID Patents. On March 30, 2007, Cisco submitted a "non-binding indication of interest" suggesting a transaction price in a "range" of $1-10 million, subject to "Cisco's evaluation of relevant market factors," "due diligence," and negotiation of a "definitive agreement." JX 211. Attached to the indication of interest was an extensive list of due diligence requests. Greg Williams understood Cisco to be closer to the $1 million figure.

On April 3, 2007, Intellectual Ventures submitted a "preliminary, non-binding indication of interest" suggesting a transaction price "between $1.5 and $2.25 million." JX 212. Intellectual Ventures also asked about purchasing an additional patent for $500,000. Id. The Intellectual Ventures indication of interest was subject to "due diligence" including "the review of complete file histories, relevant prior art, [and] pre-existing licenses . . . ." Id.

Yudell tried to negotiate the bidders up. Cisco balked at his initial counteroffer of $12-17 million, so he proposed a "non-exclusive license" requiring an "up-front payment" of $8 million. JX 234. On May 17, 2007, Yudell sent Cisco's counsel a non-binding term sheet reflecting Wayport's counteroffer. Cisco went silent, and Greg Williams thought Yudell had overplayed his hand.

Negotiations with Intellectual Ventures progressed more smoothly. By June 8, 2007, Intellectual Ventures had proposed a transaction that included a $5 million upfront payment and future royalties. Wayport countered with a new term: the deal would be conditioned on a license for "a large networking equipment manufacturer," namely Cisco. JX 252. Greg Williams's contemporaneous emails suggest he thought the condition might cause Intellectual Ventures to believe it faced competition and increase its bid. But Intellectual Ventures never agreed to the condition and never raised its price.

Meanwhile, Greg Williams reached out to Cisco to restart negotiations. On June 14, 2007, he reported to the Board on his efforts, and the directors formally authorized him to reopen discussions. After the meeting, Greg Williams offered to sell the MSSID Patents to Cisco for $10 million, subject "to Cisco's sole satisfaction with its due diligence . . . ." JX 257.

On June 18, 2007, Greg Williams sent Cisco a proposed sale agreement. Cisco rejected Wayport's form of the agreement and supplied its own, without specifying a price. On June 20, Wayport began providing Cisco with due diligence. Eight days later, on June 28, Cisco finally named a price: $9 million. Greg Williams countered, and Cisco and Wayport reached agreement at a price of $9.5 million. The agreement was executed on June 29.

The sale of the MSSID Patents was a major achievement for Wayport. After paying Yudell's success fee, Wayport received $7.6 million in cash. The proceeds increased the Company's year-end cash position by 22%, and the gain on sale represented 77% of the Company's year-end operating income. On July 2, 2007, Vucina notified the Board. The directors received detailed materials about the Cisco sale on July 20 and gathered for a Board meeting on July 25 where Greg Williams provided a formal update. No one at Wayport said anything about the sale of the MSSID Patents to the plaintiffs.

J. The Second Stock Sale Closes.

In late March 2007, as bids for the MSSID Patents arrived, Stewart was growing increasingly frustrated with the delays in closing the second stock sale caused by Trellis and NEA deciding how many shares to purchase. On April 9, NEA indicated that it would purchase 200,000 shares. Trellis originally indicated that it would purchase 400,000 shares, but reduced its ask to approximately 300,000 shares as a courtesy to NEA. Katzen and McCormick would purchase 270,000 shares in the aggregate. Millennium would purchase the balance. On April 24, with the transaction structure finalized, Wayport waived its ROFR.

On April 25, 2007, Stewart and Koffend sold shares to Millennium. On May 9, a sufficient number of preferred stockholders executed ROFR waivers to facilitate the remainder of the transactions. The same day, Williams's paralegal circulated Wayport's draft stock purchase agreement.

For the sales to the directors, Williams negotiated the terms of the stock purchase agreement with Williams's paralegal. Stewart asked that certain buyer-friendly language be removed, and Williams agreed. Stewart had more difficulty with Trellis. Trellis's outside counsel tried to add language to the stock purchase agreement reciting that the parties were operating with equal information, but Stewart objected. On June 8, 2007, after Stewart and Trellis's counsel reached an impasse, Broeker weighed in:

We cannot have a one sided representation . . . . I think [Trellis's counsel] has outlined a number of solutions which are attempting to address comfort so we can have symmetry in the [representations]. He indicated we'd be happy to [represent] a number of items. We are not aware of any bluebirds of happiness in the Wayport world right now and have graciously offered to [represent] that. But what happens if Google walks in in 30 days and says "we'd like to buy [Wayport]". [sic] The way the [representation] is worded, you would come to us and say foul — you should have told me. I think we can address this but we need to focus on solutions that will meet [Wayport's] guidance for existing investors and [B]oard members and our counsel.

JX 248 (emphasis added). In response, Stewart emailed Broeker, saying that "[i]f you know of a Google deal in play, perhaps you ought to refrain from this transaction, or arrange for us to be on a level information playing field." JX 246.

At trial, this "bluebirds" email was hotly disputed. Stewart testified that he understood "bluebirds" to mean any unspecified good news. Broeker testified that it meant an acquisition. Having heard the witnesses and considered the email in context, I agree with Stewart. Broeker's reference to an acquisition was just one example of a potential bluebird. During his deposition, Greg Williams volunteered an example of another "great big bluebird"—a patent sale in the range of the Cisco sale. Greg Williams Dep. Tr. 64-65.

Later that day on June 8, 2007, Broeker attempted to break the logjam with Stewart by providing him with a copy of a stock purchase agreement that Trellis entered into with Dave Hampton, a former Wayport employee. Broker pointed out that Hampton was "no longer at the company and doesn't receive financial information," but he agreed to the "mutual representations" that Trellis wanted. JX 247. Broeker offered: "If you feel you do not have the correct information to make an informed selling decision, we stand by ready to provide whatever we can to help you make an informed decision." Id. Neither the agreement nor the offer mollified Stewart, who remained concerned about being at an information disadvantage. Ultimately Trellis and Stewart executed a stock purchase agreement that did not contain any representations about information.

On June 13, 2007, Stewart closed his sale of stock with NEA. On June 14, Katzen and McCormick backed out of their purchases, leaving Stewart with 270,000 shares that he had planned on liquidating. On June 20, Stewart, Heinen, and Gray closed their sales with Trellis.

K. The Third Stock Sale

On June 26, 2007, Stewart emailed Williams and stated that he was "contemplating asking for [William's] assistance in mitigating the effect of [Katzen and McCormick] bolting." JX 272. First, though, he asked for "a copy of the 11-months to date" current fiscal year unaudited financial statements. Id. Williams sent the materials the following day. Recall that at the time, Greg Williams had reengaged with Cisco. On June 28, Cisco offered $9 million for the MSSID Patents, and on June 29, the parties executed a patent sale agreement at a price of $9.5 million. Williams never informed Stewart of these developments.

On July 2, 2007, Stewart confirmed that he wanted to sell additional shares and asked Williams for his "assistance in recovering from the 11th-hour departure of [Katzen and McCormick]." JX 281. Williams initially suggested that Stewart reach out to Trellis and NEA directly. Stewart wrote back:

If you would like to change the flow of communication over the last six months, where the company interposed itself between the preferred [stockholders] and the [plaintiffs] until the actual transfer was about to occur, that is OK by me. I am happy to contact Trellis and NEA, but I suspect we will quickly be back to where we are now.

JX 290. Williams then contacted Trellis and NEA and advised them that Stewart wanted to sell additional shares at a price of $2.50 per share. After several weeks of internal discussions, Trellis and NEA decided to purchase 100,000 and 150,000 shares, respectively. The parties agreed to use the same versions of the stock purchase agreement previously used. On September 27 and 28, the transactions closed.

L. Stewart Learns Of The Patent Sale.

On October 1, 2007, just days after the final stock sale, Stewart asked Williams for a copy of Wayport's audited financials. On October 30, Williams provided them. Buried in the notes was the following three sentence disclosure:

In June 2007, Wayport completed the sale of certain of its patents related to a distributed network communication system which enables multiple network providers to use a common distributed network infrastructure. Cash proceeds of $7.6 million, net of expenses related to the transaction, were received in June 2007. The Company has no ongoing obligations under the patent sale agreement and was granted a royalty-free, nontransferable license to the related patents sold.

JX 316. This was the first time Stewart learned of the patent sale.

At his deposition, Williams testified that he was upset that even this limited disclosure was included in the financial statements. Williams opposed making any disclosure about the sale, citing the need to respect Cisco's confidentiality. Williams also testified that he ultimately agreed to the disclosure only because Wayport's auditors told him that they "really didn't have an alternative . . . ." Williams Dep. Tr. 207-08. If the auditors had not insisted on following GAAP, Stewart might never have learned about the sale.

On November 6, 2007, Stewart asked Williams about the purchase, including "who bought them?" JX 318. Williams refused to divulge anything, citing a confidentiality agreement between Cisco and Wayport. Stewart then pared back his request, agreed to forego the name of the buyer, and asked for only (i) whether one or more patents were sold, (ii) whether any pending patents were sold, (iii) the date of the sale, and (iv) the gross sale proceeds. Williams would not budge, and Wayport provided nothing.

On December 21, 2007, Stewart made formal demand under Section 220. When Wayport failed to respond, he filed a books and records action on January 3, 2008. On March 10, Wayport provided Stewart with a list of its currently held patents, which enabled Stewart to deduce which patents were sold. Wayport did not disclose the gross proceeds, the timing, or the purchaser. Wayport continued to withhold this information even after Cisco filed a patent amendment with the USPTO that publicly identified Cisco as the purchaser of the MSSID Patents.

M. AT&T; Purchases Wayport.

On November 6, 2008, Wayport announced that it would be acquired by AT&T; Inc. and its common stock would be converted into the right to receive $7.20 per share. The plaintiffs were informed of the transaction upon announcement. The discussions with AT&T; began just months after Stewart completed his final stock sale. The AT&T; transaction closed on December 11, 2008.

N. The Plaintiffs Sue.

On November 17, 2008, Stewart filed this litigation. As amended, his complaint contained seven counts:

• Count I—Breach of the fiduciary duty of disclosure;

• Count II—Breach of the fiduciary duty of loyalty;

• Count III—Common law fraud;

• Count IV—Civil conspiracy;

• Count V—Aiding and abetting a breach of fiduciary duty;

• Count VI—Unjust enrichment;

• Count VII—Breach of the implied covenant of good faith and fair dealing.

In the Dismissal Opinion, Vice Chancellor Lamb dismissed all claims with respect to any stock sales that took place before 2007. He also dismissed Counts I, IV, VI, and VII with respect to the 2007 stock sales. The motion to dismiss Counts II and III was denied as to defendants Wayport, Williams, Trellis, and NEA. The motion to dismiss Count V was denied as to Wayport. Dismissal Op. at *8-10.

After discovery, the plaintiffs moved to amend their complaint to add a claim for equitable fraud. Leave was granted on the grounds that all of the elements of equitable fraud are subsumed within the elements of common law fraud and therefore were already at issue in the case. See Ct. Ch. R. 15(a) ("leave [to amend] shall be freely given when justice so requires"); Ikeda v. Molock, 603 A.2d 785, 788 (Del. 1991) (finding reversible error and ordering new trial where trial court failed to permit amendment of the pleadings on the morning of trial); see also Bellanca Corp. v. Bellanca, 169 A.2d 620, 622 (Del. 1961) (affirming grant of leave to amend mid-trial under Ct. Ch. R. 15(b) where additional theory of liability did not require "additional evidence" and thereby posed "no possible prejudice").

II. LEGAL ANALYSIS

The Dismissal Opinion located this case at "an interesting intersection of contract, fiduciary duty, and fraud." Dismissal Op. at *8. In making this comment, Vice Chancellor Lamb assumed based on the allegations of the complaint that the ROFRs would play a significant role and that only the Company had waived its ROFR. Id. at *1. Trial simplified matters, because the plaintiffs proved that all of the parties waived all of their ROFRs. By executing the Waivers of Rights of First Refusal and Co-Sale that Williams prepared, Wayport, Trellis, NEA, and the plaintiffs relinquished "all rights of first refusal and co-sale" with respect to the sale transactions. JX 154; see also Pre-trial Order ¶¶ 65-66, 80-81. Default common law principles therefore apply. The plaintiffs have advanced two principal theories of liability: breach of fiduciary duty and fraud.

A. The Claim For Breach Of Fiduciary Duty

The plaintiffs contended at trial that Trellis, NEA, Williams, and Wayport breached their fiduciary duties of loyalty. The plaintiffs did not carry their burden of proof, and judgment is entered in favor of the defendants on the fiduciary duty claim.

1. The Nature Of The Fiduciary Duty Claim

The plaintiffs contended that the defendants owed them fiduciary duties that included a duty to disclose material information when they purchased the plaintiffs' shares. Directors of a Delaware corporation owe two fiduciary duties: care and loyalty. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006). The "duty of disclosure is not an independent duty, but derives from the duties of care and loyalty." Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (internal quotation marks omitted). The duty of disclosure arises because of "the application in a specific context of the board's fiduciary duties . . . ." Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001). Its scope and requirements depend on context; the duty "does not exist in a vacuum." Stroud v. Grace, 606 A.2d 75, 85 (Del. 1992). When confronting a disclosure claim, a court therefore must engage in a contextual specific analysis to determine the source of the duty, its requirements, and any remedies for breach. See Lawrence A. Hamermesh, Calling Off the Lynch Mob: The Corporate Director's Fiduciary Disclosure Duty, 49 Vand. L. Rev. 1087, 1099 (1996). Governing principles have been developed for recurring scenarios, four of which are prominent.

The first recurring scenario is classic common law ratification, in which directors seek approval for a transaction that does not otherwise require a stockholder vote under the DGCL. See Gantler v. Stephens, 965 A.2d 695, 713 (Del. 2009) (describing ratification in its classic form); id. at 713 n.54 (distinguishing "the common law doctrine of shareholder ratification" from "the effect of an approving vote of disinterested shareholders" under 8 Del. C. § 144). If a director or officer has a personal interest in a transaction that conflicts with the interests of the corporation or its stockholders generally, and if the board of directors asks stockholders to ratify the transaction, then the directors have a duty "to disclose all facts that are material to the stockholders' consideration of the transaction and that are or can reasonably be obtained through their position as directors." Hamermesh, supra, at 1103. The failure to disclose material information in this context will eliminate any effect that a favorable stockholder vote otherwise might have for the validity of the transaction or for the applicable standard of review. Id.; see Gantler, 965 A.2d at 713 ("With one exception, the `cleansing' effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to `extinguishing' the claim altogether (i.e., obviating all judicial review of the challenged action)."); id. at 713 n.54 ("The only species of claim that shareholder ratification can validly extinguish is a claim that the directors lacked the authority to take action that was later ratified. Nothing herein should be read as altering the well-established principle that void acts such as fraud, gift, waste and ultra vires acts cannot be ratified by a less than unanimous shareholder vote.").

A second and quite different scenario involves a request for stockholder action. When directors submit to the stockholders a transaction that requires stockholder approval (such as a merger, sale of assets, or charter amendment) or which requires a stockholder investment decision (such as tendering shares or making an appraisal election), but which is not otherwise an interested transaction, the directors have a duty to "exercise reasonable care to disclose all facts that are material to the stockholders' consideration of the transaction or matter and that are or can reasonably be obtained through their position as directors." Hamermesh, supra, at 1103; see Stroud, 606 A.2d at 84 ("[D]irectors of Delaware corporations [have] a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action."). A failure to disclose material information in this context may warrant an injunction against, or rescission of, the transaction, but will not provide a basis for damages from defendant directors absent proof of (i) a culpable state of mind or non-exculpated gross negligence, (ii) reliance by the stockholders on the information that was not disclosed, and (iii) damages proximately caused by that failure. See Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 146-47 (Del. 1997).

A third scenario involves a corporate fiduciary who speaks outside of the context of soliciting or recommending stockholder action, such as through "public statements made to the market," "statements informing shareholders about the affairs of the corporation," or public filings required by the federal securities laws. Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998). In that context, directors owe a duty to stockholders not to speak falsely:

Whenever directors communicate publicly or directly with shareholders about the corporation's affairs, with or without a request for shareholder action, directors have a fiduciary duty to shareholders to exercise due care, good faith and loyalty. It follows a fortiori that when directors communicate publicly or directly with shareholders about corporate matters the sine qua non of directors' fiduciary duty to shareholders is honesty.

Id. at 10. "[D]irectors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances." Id. at 9; see id. at 14 ("When the directors are not seeking shareholder action, but are deliberately misinforming shareholders about the business of the corporation, either directly or by a public statement, there is a violation of fiduciary duty."). Breach "may result in a derivative claim on behalf of the corporation," "a cause of action for damages," or "equitable relief . . . ." Id.

The fourth scenario arises when a corporate fiduciary buys shares directly from or sells shares directly to an existing outside stockholder. Hamermesh, supra, at 1103. Under the "special facts doctrine" adopted by the Delaware Supreme Court in Lank v. Steiner, 224 A.2d 242 (Del. 1966), a director has a fiduciary duty to disclose information in the context of a private stock sale "only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them." Id. at 244. If this standard is met, a duty to speak exists, and the director's failure to disclose material information is evaluated within the framework of common law fraud. If the standard is not met, then the director does not have a duty to speak and is liable only to the same degree as a non-fiduciary would be. It bears emphasizing that the duties that exist in this context do not apply to purchases or sales in impersonal secondary markets. See Hamermesh, supra, at 1153 & n.296. Transactions in the public markets are distinctly different. See, e.g., In re Am. Int'l Gp., Inc., 965 A.2d 763, 800 (Del. Ch. 2009), aff'd, 11 A.3d 228 (Del. 2011) (TABLE); In re Oracle Corp., 867 A.2d 904, 932-33, 953 (Del. Ch. 2004), aff'd, 872 A.2d 960 (Del. 2005); Guttman v. Huang, 823 A.2d 492, 505 (Del. Ch. 2003).

The current case originally raised the second, third, and fourth scenarios, but only the fourth remains. Count I of the complaint was titled "Breach of Fiduciary Duty of Disclosure." Dkt. 25 at 20. At the motion to dismiss stage, it was understood to invoke the second scenario, viz., the duty of disclosure in the context of a request for stockholder action. Vice Chancellor Lamb dismissed Count I on the grounds that "a call for an individual stockholder to sell his shares does not, without more, qualify as a call for stockholder action." Dismissal Op. at *6 n.18.

Count II of the complaint was titled "Breach of Fiduciary Duty of Loyalty." Dkt. 25 at 21. At the motion to dismiss stage, it was understood to invoke both the third scenario (the duty under Malone not to engage in deliberate falsehoods) and the fourth scenario (the duty to speak that a fiduciary may have in the context of a direct purchase of shares from a stockholder). As to the former, Vice Chancellor Lamb recognized that the "corporation and its officers and directors are, of course, subject to the underlying duty of loyalty not to make false statements or otherwise materially misrepresent the facts in such a way as to defraud the stockholder in any such negotiation [over the purchase of shares]." Dismissal Op. at *6 n.19 (citing Malone, 722 A.2d at 10). He held, however, that the complaint pled "no facts whatsoever to suggest that the company, or its directors or officers, made any knowingly false statements . . . ." Id. He therefore dismissed Count II as to the Company and the director defendants, effectively disposing of the Malone claim. As to the latter, Vice Chancellor Lamb denied the motion to dismiss, holding that Count II implicated the "normal standard of fraud, as applied to transactions between corporate insiders . . . ." Dismissal Op. at *5 (emphasis added). In a footnote, Vice Chancellor Lamb contrasted this variety of fraud with "the affirmative-misrepresentation or intentional concealment species of fraud (that is, the forms of fraud that do not require a duty to speak)" that applies to non-fiduciaries. Id. at *5 n.17. This remaining aspect of Count II was litigated and tried.

2. The Duty Of Disclosure In A Direct Purchase By A Fiduciary

The legal principles that govern a direct purchase of shares by a corporate fiduciary from an existing stockholder have a venerable pedigree.

As almost anyone who has opened a corporation law casebook or treatise knows, there has been for over a century a conflict of authority as to whether in connection with a purchase of stock a director owes a fiduciary duty to disclose to the selling stockholder material facts which are not known or available to the selling stockholder but are known or available to the director by virtue of his position as a director.

Hamermesh, supra, at 1116. Three rules were developed: a majority rule, a minority rule, and a compromise position known as the "special facts doctrine." Id. at 1116-17; see also Robert Charles Clark, Corporation Law § 8.8, at 306-09 (1986); Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189, 1219 (1995).

The "supposedly `majority' rule disavows the existence of any general fiduciary duty in this context, and holds that directors have no special disclosure duties in the purchase and sale of the corporation's stock, and need only refrain from misrepresentation and intentional concealment of material facts." Hamermesh, supra, at 1116-17. Under this rule, corporate fiduciaries may

trade like strangers at arm's length, provided they do not commit a deliberate active fraud for the purpose of procuring the shareholders' stock. They need not disclose to the shareholders important official information which they possess, at least in the absence of inquiry. Not only the element of active misrepresentation is required, but also the reliance of the shareholders thereon as an inducement to part with their shares.

Henry Winthrop Ballantine, Ballantine on Corporations § 80, at 212 (1946); accord Clark, supra, § 8.9, at 311 ("[T]he majority rule appears to have been that corporate directors and officers owe their fiduciary duties to the corporation, . . . so that shareholders selling to an officer who purchased on the basis of inside information would ordinarily have no remedy."); 2 Seymour D. Thompson & Joseph W. Thompson, Commentaries on the Law of Corporations § 1363, at 885 (1927) (describing majority rule under which "a director may purchase the stock of the stockholder without disclosing to him the condition of the corporation, or without giving the stockholder the benefit of any knowledge that such director may possess in relation to the corporate affairs and affecting the value of the stock"); see also 3A William Meade Fletcher, Fletcher Cyc. Corp. § 1168.1, at 321-26 (perm ed., rev. vol. 2011 & supp. 2013) (collecting cases exemplifying majority rule). The majority rule was "criticized as a rule of unconscionable laxity" and "condemned by almost all text writers and commentators . . .." Ballantine, supra, § 80, at 213; see, e.g., Adolf A. Berle, Jr. & Gardiner C. Means, The Modern Corporation & Private Property, at 327-29 (1932) (criticizing majority rule). By 1937, the majority rule arguably no longer represented the rule in a majority of jurisdictions. See Bainbridge, supra, at 1120.

"The ostensibly opposing `minority' view broadly requires directors to disclose all material information bearing on the value of the stock when they buy it from or sell it to another stockholder." Hamermesh, supra, at 1117. Jurisdictions taking this approach hold that a director's fiduciary duties obligate the director to make the necessary disclosures of material information or abstain from the transaction. See Clark, supra, § 8.9, at 311; Ballantine, supra, § 80, at 213; Berle & Means, supra, at 328; Thompson & Thompson, supra, § 1364, at 888; see also Fletcher, supra, § 1168.2, at 326-29 (collecting cases exemplifying minority rule).

The special facts doctrine attempts to strike a compromise position between "the extreme view that directors and officials are always under a full fiduciary duty to the shareholders to volunteer all their information and a rule that they are always free to take advantage of their official information." Ballantine, supra, § 80, at 213. Under this variant, a director has a duty of disclosure only

in special circumstances . . . where otherwise there would be a great and unfair inequality of bargaining position by the use of inside information. Such special circumstances or developments have been held to include peculiar knowledge of directors as to important transactions, prospective mergers, probable sales of the entire assets or business, agreements with third parties to buy large blocks of stock at a high price and impending declarations of unusual dividends.

Id.; see id. at 213-14 (collecting cases exemplifying special facts rule). Like the minority rule, the compromise position recognizes a duty of disclosure, but cuts back on its scope by limiting disclosure only to that subcategory of material information that qualifies as special facts or circumstances. Berle and Means criticized the "reasoning underlying [the intermediate rule as] not particularly clear . . . ." Berle & Means, supra, at 329.

In Kors v. Carey, 158 A.2d 136 (Del. Ch. 1960), the Delaware Court of Chancery applied the special facts doctrine. The stockholder plaintiff alleged that the defendant directors had acted inequitably by causing the corporation to purchase the plaintiff's block of stock secretly, without revealing the corporation's identity, under circumstances where the court agreed the plaintiff would not have sold if the purchaser's true identity was known. Id. at 143. Then-Vice Chancellor Marvel dismissed the breach of fiduciary duty claim, explaining that

it disregards the principle that directors generally do not occupy a fiduciary position vis à vis individual stockholders in direct personal dealings as opposed to dealings with stockholders as a class, failing to recognize that it is only in special cases where advantage is taken of inside information and the like that the selling stockholder is afforded relief and then on the basis of fraud . . . .

Id. (emphasis added) (citations omitted). In support of this proposition, Vice Chancellor Marvel relied on two leading "special facts" cases: Strong v. Repide, 213 U.S. 419 (1909), and Northern Trust Co. v. Essaness Theatres Corp., 108 N.E.2d 493 (Ill. App. 1957). On the facts alleged, he found that

the purchaser[ ] had no fiduciary or other duty in the transaction (there being no showing that the buyer had any special knowledge about the possibilities of appreciation in the market value of the purchased stock which was not basically available to the seller) other than to live up to its contract which it did. In other words, this is a case in which there is neither proof of fraud, nor of actionable willful concealment, but also no proof of a false statement innocently made.

Kors, 158 A.2d at 143 (citations omitted).

Six years later, in Lank, the Delaware Supreme Court identified Kors as "a decision which we expressly approve . . . ." Lank, 224 A.2d at 244. The high court then described Kors as holding that "the special circumstance rule applies only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them." Id. (emphasis added). By making the test conjunctive, the Delaware Supreme Court combined the scienter requirement of the majority rule with a disclosure duty limited to "special facts."

Lank involved a privately held Delaware corporation in which two stockholder-directors were responsible for its "active management" while another stockholder, the plaintiff, was largely passive. Id. at 243. One of the directors learned that a third party had offered to acquire the company for $600 per share. Id. After learning of the offer, the director purchased an option to buy the minority stockholder's shares at $270 per share. Id. at 244. After the minority stockholder passed away, his heirs alleged the director breached his fiduciary duty by failing to disclose the offer to the minority stockholder when securing the option. Chancellor Seitz dismissed the complaint, finding that there was no breach of duty. See Lank v. Steiner, 213 A.2d 848, 851 (Del. Ch. 1965).

On appeal, the Delaware Supreme Court affirmed, relying on the trial court's finding that the minority stockholder "knew of the [third party] offer since he, along with all the stockholders, signed a resolution . . . authorizing the sale of corporate assets" for a price equal to the offer, prior to agreeing to the option contract. Lank, 224 A.2d at 244. The high court agreed that there was no evidence to "justify the conclusion that [the minority stockholder] was not aware of the difference" between the strike price of the option contract and the offer price, and therefore the director "had breached no duty to [the minority stockholder] as a corporate fiduciary." Id. (emphasis added). The reasoning of Lank suggests that without the finding of knowledge, the defendant's failure to disclose an offer for the whole company could have supported a claim for breach of fiduciary duty in connection with the option contract, although it appears that the plaintiff still would have had to show that the defendant took action or remained silent to deliberately mislead. See id. (stating Kors applies where a director fails to disclose special knowledge and "deliberately misleads" a stockholder).

Based on Lank and Kors, it appears to me that Delaware follows the special facts doctrine. Professor Hamermesh has argued that in Lynch v. Vickers Energy Corp., 383 A.2d 278 (Del. 1977), the Delaware Supreme Court reversed course and adopted the minority rule. See Hamermesh, supra, at 1121 ("Lynch . . . aligned Delaware with jurisdictions rejecting the `majority rule' in favor of a rule recognizing a fiduciary duty on the part of directors, officers and controlling stockholders to disclose material facts, learned through their position with the corporation, to outside stockholders when buying stock from them."). In Lynch, then-Chancellor Marvel, the author of Kors, held that a majority stockholder owed a fiduciary duty of "complete candor" when purchasing shares from the minority, and he equated that obligation with the duty owed by corporate directors:

[I]n situations in which the holder of a majority of the voting shares of a corporation, as here, seeks to impose its will upon minority stockholders, the conduct of such majority must be tested by those same standards of fiduciary duty which directors must observe in their relations with all their stockholders. I take this to mean that in a situation such as the one found in the case at bar that the majority stockholder here, namely Vickers, had a duty to exercise complete candor in its approach to the minority stockholders of TransOcean for a tender of their shares, namely a duty to make a full disclosure of all of the facts and circumstances surrounding the offer for tenders, including the consequence of acceptance and that of refusal . . . .

Lynch v. Vickers Energy Corp., 351 A.2d 570, 573 (Del. Ch. 1976) (citations omitted), aff'd in pertinent part, 383 A.2d 278 (Del. 1977). Applying this standard, Chancellor Marvel held that disclosure violations alleged by the plaintiffs were not material. Id. at 574-75. On appeal, the Delaware Supreme Court reversed on the factual application, but agreed with the legal standard and the existence of a "fiduciary duty . . . which required `complete candor.'" Lynch, 383 A.2d at 279. The high court explained that "[t]he objective, of course, is to prevent insiders from using special knowledge which they may have to their own advantage and to the detriment of the stockholders." Id. at 281. "Completeness, not adequacy, is both the norm and the mandate . . . ." Id.

Lynch did not expressly overrule either Lank or Kors, nor did it discuss the minority rule. The passage in the Court of Chancery decision that described the duty of disclosure owed by a controlling stockholder equated it with the "same standards of fiduciary duty which directors must observe in their relations with all their stockholders." 351 A.2d at 573 (emphasis added). It is not immediately apparent that this language refers to the duty that a director would owe when purchasing shares directly from a stockholder in a private transaction. It seems more likely to anticipate the duty of disclosure that directors owe to all stockholders when seeking stockholder action. In Stroud, the Delaware Supreme Court seemingly sought to clarify this very point by stating that the "duty of candor" described in Lynch did not import "a unique or special rule of disclosure" but rather represented "nothing more than the well-recognized proposition that directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action." Stroud, 606 A.2d at 84. Subsequent Delaware Supreme Court decisions have treated the disclosure obligations of a controlling stockholder when making a tender offer or effecting a short-form merger as examples of the duty of disclosure in the context of stockholder action. See, e.g., Berger v. Pubco Corp., 976 A.2d 132, 145 (Del. 2009); Glassman v. Unocal Exploration Corp., 777 A.2d 242, 248 (Del. 2001); Shell Petroleum, Inc. v. Smith, 606 A.2d 112, 116 (Del. 1992).

Although I agree with the policy rationales that Professor Hamermesh advances for imposing an affirmative duty to disclose material information on a director who purchases shares from or sells shares to a stockholder in a private transaction, see Hamermesh, supra, at 1151-59, it does not appear to me that the Delaware Supreme Court has endorsed this rule. Absent further guidance from the high court, the "special facts" doctrine remains the standard in this context.

3. No "Special Facts"

Under the "special facts" doctrine, Trellis and NEA were free to purchase shares from other Wayport stockholders, without any fiduciary duty to disclose information about the Company or its prospects, unless the information related to an event of sufficient magnitude to constitute a "special fact." If they knew of a "special fact," then they had a duty to speak and could be liable if they deliberately misled the plaintiffs by remaining silent.

To satisfy the "special facts" requirement, a plaintiff generally must point to knowledge of a substantial transaction, such as an offer for the whole company. See Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 435 (7th Cir. 1987) ("The `special facts' doctrine developed by several courts at the turn of the century is based on the principle that insiders in closely held firms may not buy stock from outsiders in person-to-person transactions without informing them of new events that substantially affect the value of the stock."); accord Lazenby v. Godwin, 253 S.E.2d 489, 495 (N.C. App. 1979) (third party purchase of corporation's assets at multiple of book value); Weatherby v. Weatherby Lumber Co., 492 P.2d 43, 45 (Idaho 1972) (ongoing negotiation over sale of assets "enhancing the value of the stock"); Lank v. Steiner, 213 A.2d 848, 851 (Del. Ch. 1965) (third party offer to purchase corporation's stock at multiple of book value), aff'd, 224 A.2d 242 (Del. 1966); Jacobson v. Yaschik, 155 S.E.2d 601, 605 (S.C. 1967) ("forthcoming assured sale of corporate assets," "an offer of purchase of the [corporation's] stocks," or a "fact or condition enhancing the value of the [corporation's] stocks); Fox v. Cosgriff, 159 P.2d 224, 229 (Idaho 1945) (liquidation "enhancing the value of the stock"); Nichol v. Sensenbrenner, 263 N.W. 650, 657 (Wis. 1935) (plan of reorganization generating "fair" value above price paid by insider); Buckley v. Buckley, 202 N.W. 955, 956 (Mich. 1925) ("assured sale, merger, or other fact or condition enhancing the value of the stock"); see generally Harold R. Smith, Purchase of Shares of a Corporation by a Director From a Shareholder, 19 Mich. L. Rev. 698, 712-17 (1921) (analyzing special facts cases).

Contrary to Lank, the plaintiffs argue that they need only show that the defendants failed to disclose material information. Under Delaware law, "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important" such that "under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder." Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985). The standard "does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote" or (in more generalized terms) act differently. Id. The standard of materiality is thus lower than the standard for a "special fact."

The plaintiffs have identified three allegedly material omissions. Only one—the Cisco sale—is material. Even this omission does not rise to the level of a "special fact."

The plaintiffs first argue that the Company's efforts to monetize Wayport's patent portfolio constituted material information that the defendants failed to disclose. According to the plaintiffs, the Company's decision to take concrete steps towards monetizing its portfolio represented a substantial change in corporate direction, and its stockholders should have been told. I need not decide whether this information was material or special, because in either event it was not omitted. Through his communications with Long and other members of Wayport management, Stewart learned as early as 2005 that Wayport was evaluating its patent portfolio and taking steps to monetize it. The Company even asked for his help. Stewart discussed the Company's plans and expressed his views about them to his fellow plaintiffs. Stewart did not like Wayport's strategy and did not believe the Company would really execute it, but what matters for present purposes is that he fully understood its plan of action. The plaintiffs cannot maintain a claim for breach of the duty of loyalty in a direct stock sale based on information they actually knew. Lank, 224 A.2d at 244.

The plaintiffs next contend that the existence of the Intellectual Ventures proposal constituted material information that should have been disclosed. For purposes of Delaware law, the existence of preliminary negotiations regarding a transaction generally becomes material once the parties "have agreed on the price and structure of the transaction." Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 847 (Del. 1987); see also Alessi v. Beracha, 849 A.2d 939, 945-49 (Del. Ch. 2004). Under these standards, the plaintiffs did not prove that the Intellectual Ventures deal ever became material. After the Board meeting on June 14, 2007, the Intellectual Ventures transaction remained a Wayport counteroffer that was subject to a carve-out for "a large networking equipment manufacturer." JX 263. Intellectual Ventures never accepted. No agreement on price and structure was reached, and the Intellectual Ventures transaction was not otherwise sufficiently firm to be material. It therefore could not rise to the level of a "special fact."

By contrast, plaintiffs proved at trial that the Cisco sale was material. Wayport and Cisco agreed on a total price of $9.5 million on June 29, 2007, and the patent sale agreement was signed that day. Wayport's net sale proceeds of $7.6 million increased the Company's year-end cash position by 22%, and the gain on sale represented 77% of the Company's year-end operating income. Wayport's auditors concluded that the transaction was material to Wayport's financial statements and insisted that it be included over Williams's opposition because they "really didn't have an alternative . . . ." Williams Dep. Tr. 207-08.

The Cisco sale was a milestone in the Company's process of monetizing its patent portfolio, and it was sufficiently large to enter into the decisionmaking of a reasonable stockholder. But the plaintiffs did not prove at trial that the Cisco sale substantially affected the value of their stock to the extent necessary to trigger the special facts doctrine. Stewart admitted that the sale of the MSSID Patents did not necessarily imply anything about the market value of the remaining patents, and he himself believed— before and after learning of the Cisco sale—that the rest of the Company's patent portfolio was still worth hundreds of millions of dollars. Tr. 182-83, 261-65; Stewart Dep. Tr. 564-68, 576-78.

Because they did not know of any "special facts," Trellis and NEA did not have a fiduciary duty to speak when purchasing shares from the plaintiffs. Judgment is entered in their favor on the breach of fiduciary duty claim.

4. Williams Had No Greater Duty

Williams was an officer of Wayport, and the "fiduciary duties of officers are the same as those of directors." Gantler, 965 A.2d at 708-09. Although Williams did not purchase shares from the plaintiffs, I will assume for the sake of argument that Williams could have undertaken a duty to disclose based on his fiduciary status and substantial role in the transaction process. See Arnold v. Soc'y for Sav. Bancorp, Inc., 678 A.2d 533, 541 (Del. 1996); Shell Oil, 606 A.2d at 116. But even then, it does not seem to me that the scope of Williams's duty to speak as a transactional facilitator would exceed the duty imposed on the fiduciaries who were actual participants in the transaction. Trellis and NEA only had a duty to speak if they knew of a "special fact." For the reasons already discussed, although the Cisco sale was material information, it did not rise to the level of a special fact. Consequently, Williams did not have a duty to speak, and judgment is entered in his favor on the breach of fiduciary duty claim.^[3]

5. The Claim Against Wayport

Wayport is not liable for breach of fiduciary duty. As a corporate entity, Wayport did not owe fiduciary duties to its stockholders. See A.W. Fin. Servs., S.A. v. Empire Res., Inc., 981 A.2d 1114, 1127 n.36 (Del. 2009); Arnold, 678 A.2d at 539. The plaintiffs asserted a separate claim against Wayport for aiding and abetting Williams's breach of fiduciary duty, but without an underlying breach, the aiding and abetting claim fails. See Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001). Judgment is entered in favor of Wayport.

B. The Common Law Fraud Claim

As an alternative to their breach of fiduciary duty claim, the plaintiffs alleged in Count III of their complaint and contended at trial that Trellis, NEA, and Williams were liable for common law fraud. To establish a claim for fraud, a plaintiff must prove (i) a false representation, (ii) a defendant's knowledge or belief of its falsity or his reckless indifference to its truth, (iii) a defendant's intention to induce action, (iv) reasonable reliance, and (v) causally related damages. See Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983). The plaintiffs proved that Trellis committed fraud in connection with the September 27, 2007 stock sale. Otherwise judgment is entered in favor of defendants.

1. A False Representation

The plaintiffs do not ground their fraud claim on affirmative representations but rather on material omissions. "[F]raud does not consist merely of overt misrepresentations. It may also occur through deliberate concealment of material facts, or by silence in the face of a duty to speak." Stephenson, 462 A.2d at 1074. The plaintiffs rely on the same three omissions that were previously analyzed in the context of the breach of fiduciary duty claim. For the reasons already discussed, only one was a material omission: the Cisco sale.

2. A Duty To Speak

The plaintiffs next contend, as the Dismissal Opinion held, that "the duty of loyalty may give rise to a duty to speak . . . ." Dismissal Op. at *6. But under Lank, a corporate fiduciary has a duty to speak when buying or selling stock from a stockholder in a direct transaction "only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them." 224 A.2d at 244. For the reasons discussed in Part II.A.3, none of the defendants knew about a "special fact" that gave rise to a duty to speak.

A duty to speak also can arise because of statements a party previously made. A "party to a business transaction is under a duty to . . . disclose to the other [party] before the transaction is consummated . . . subsequently acquired information that [the speaker] knows will make untrue or misleading a previous representation that when made was true . . . ." Restatement (Second) of Torts § 551 (1977) (emphasis added) [hereinafter Restatement of Torts]. The fact that a statement was true when made does not enable the speaker to stand silent if the speaker subsequently learns of new information that renders the earlier statement materially misleading.

[H]aving made a representation which when made was true or believed to be so, [one who] remains silent after he has learned that [the representation] is untrue and that the person to whom [the representation was] made is relying upon it in a transaction with him, is . . . in the same position as if he knew that his [representation] was false when made.

Id. cmt. h. Numerous cases apply this rule to claims of securities fraud.^[4]

NEA never spoke, and hence had no duty to update an earlier statement. Williams never made any representation that subsequently became untrue. He and others at the Company consistently told Stewart to assume that the Company was actively exploring options for its patent portfolio and considering a number of different alternatives, any of which might come to fruition. Williams also informed Stewart that the Company believed the stock was worth more than the price reflected in the sale transactions.

Trellis, by contrast, chose to speak, and its representation later became untrue. On June 8, 2007, Trellis's managing partner, Broeker, represented in an email to Stewart that Trellis was "not aware of any bluebirds of happiness in the Wayport world right now . . .." JX 248. Long was included on the email chain and knew that his partner had made the representation. Heinen emailed Long contemporaneously to call his attention to the contentious negotiations between Broeker and Stewart. When the email was sent, the representation was true. But by speaking, Trellis assumed a duty to update its statement to the extent that subsequent events rendered its representation materially misleading. See Restatement of Torts § 551.

Trellis's statement became materially misleading on July 2, 2007, when Vucina informed the Board via email of the Cisco sale. On July 20, Board materials were distributed which described the Cisco sale in detail. On July 25, Greg Williams gave the Board a presentation about the Cisco sale. Long thus knew about Wayport's unexpected good news and the falsity of the "bluebirds" email. Broeker did as well, because he often spoke with Long about Wayport developments and had access to Board materials through Trellis's information rights. Their knowledge is imputed to Trellis. See Teachers' Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 671 n.23 (Del. Ch. 2006) ("[I]t is the general rule that knowledge of an officer or director of a corporation will be imputed to the corporation."); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch. Aug. 26, 2005) (imputing knowledge of member-employees to limited liability companies); Metro Commc'n Corp. BVI, v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 153-55 (Del. Ch. 2004) (imputing fraud claims to corporation where it designated a manager of a limited liability company and where the manager made fraudulent statements); Nolan v. E. Co., 241 A.2d 885, 891 (Del. Ch. 1968) ("Knowledge of an agent acquired while acting within the scope of his authority is imputable to the principal."), aff'd, 249 A.2d 45 (Del. 1969); see also 3 William Meade Fletcher, Fletcher Cyc. Corp. § 790, at 16-20 (perm ed., rev. vol. 2011 & supp. 2013) ("[T]he general rule is well established that a corporation is charged with constructive knowledge . . . of all material facts of which its officer or agent receives notice or acquires knowledge [of] while acting in the course of employment within the scope of his or her authority, even though the officer or agent does not in fact communicate the knowledge to the corporation." (footnote omitted)).

Once the Cisco sale occurred and Trellis learned of it, the "no bluebird" representation became materially misleading, and Trellis therefore had a duty to speak. Instead, Trellis remained silent. For purposes of fraud, the decision to remain silent placed Trellis in the same position as if Trellis knowingly made a false representation in the first instance.

3. Inducement, Reliance, And Causation

At this point, only Trellis is potentially liable for fraud and only in connection with the September 27, 2007 purchase. But for liability to exist, Trellis must have made its misrepresentation "with the intent to induce action or inaction by the plaintiff." Stephenson, 462 A.2d at 1074. "A result is intended if the actor either acts with the desire to cause it or acts believing that there is a substantial certainty that the result will follow from his conduct." Restatement of Torts § 531, cmt. c. The party that was the recipient of the information "must in fact have acted or not acted in justifiable reliance on the representation." NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 29 (Del. Ch. 2009) (internal quotation marks omitted). And the fraudulent misrepresentation must actually cause harm. Id. at 32; Restatement of Torts § 548A. Each of these requirements is met.

Broeker represented that he did not know of "any bluebirds of happiness in the Wayport world," JX 248, to induce Stewart to complete the sale transactions. At the time, Stewart was complaining about information asymmetry, and Broeker sought to mollify his concerns. Broeker intended for Stewart to rely on the statement, to no longer be suspicious about what Trellis knew, and to sell his shares. For his part, Stewart relied on Trellis's representation. Stewart was concerned about Trellis's insider knowledge, and Broeker's statement spoke directly to that issue. In response, Stewart emailed Broeker, saying that "[i]f you know of a Google deal in play, perhaps you ought to refrain from this transaction, or arrange for us to be on a level information playing field." JX 246. This email demonstrates that Stewart took Trellis's representation seriously and expected that if Trellis were aware of any unexpected good news, Trellis would either abstain from the transaction or disclose. After learning of the Cisco sale, Trellis did neither. Under the circumstances, Stewart's reliance on Trellis was justifiable. He knew that Broeker's partner, Long, was a member of the Board, and Stewart had spoken and emailed with Long about developments at the Company. Long received a copy of the Patent Strategy Memo and communicated extensively with Stewart about the Company's patent strategy. Stewart had reason to believe that Trellis would know if any unexpected good news was forthcoming.

Stewart also demonstrated causation. Trellis's representation and course of dealing caused Stewart to feel comfortable closing the transactions with Trellis. The defendants make much of the fact that, in their view, Stewart wanted liquidity and would have sold his shares to someone else, such as Millennium. I find that if Broeker had not made his representation, Stewart would not have sold to Trellis and would have suspected that something was afoot at the Company. Having already sold a significant number of shares, Stewart would not have sold additional shares until after he had requested and received Wayport's year-end financial statements. At that point, he would have seen the note about the patent sale and demanded additional information. Once he obtained it, he would have considered it thoroughly and used it to recalibrate his sense of the Company's value.

All this would have taken considerable time. Williams rarely responded quickly to Stewart's informational requests, except on the one occasion when Stewart asked for information when Williams knew Greg Williams was reengaging with Cisco. Williams was particularly resistant to providing Stewart with any information about the Cisco sale, going so far as to force Stewart to file a books and records action. Assuming one of the defendants provided some form of disclosure to Stewart about the Cisco sale, it would have taken months and potentially a Section 220 lawsuit before Stewart could be satisfied that he had obtained the information he needed. To the extent Stewart decided at some point to explore another sale, the process would take additional months, as demonstrated by the lengthy timeline required for each of the transactions at issue in this case. I find that Stewart still would have been holding his shares approximately one year later when Wayport announced that it would be acquired by AT&T; for $7.20 per share. Instead, because of the "no bluebirds" representation and Trellis's failure to correct it, Stewart sold 100,000 shares to Trellis on September 27, 2007 for $2.50 per share.

4. Scienter

The final hurdle for Stewart's common law fraud claim is scienter. Under Delaware law, scienter can be proven by establishing that the defendant acted with knowledge of the falsity of a statement or with reckless indifference to its truth. See Metro, 854 A.2d at 143. Stewart proved that Trellis acted with scienter by establishing that Long knew of the Cisco transaction by July 2, 2007 (via Vucina's email) and received detailed information on July 20 (via the distribution of Board materials) and on July 25 (via Board meeting). On June 8, less than a month earlier, Long read Broeker's "no bluebirds" representation. Yet despite repeated communications from Wayport management about the importance of the Cisco sale, which demonstrated that the "no bluebirds" representation was false, Long remained silent.

It would have been evident to Long that if Trellis disclosed the Cisco sale to Stewart, the stock purchase would not have gone forward as planned. Long knew from personal experience that Stewart was a volatile and combative fellow. He also knew that Stewart was deeply interested in the Company's patents and its monetization efforts, having been copied on the Patent Strategy Memo which suggested selling the MSSID Patents to Cisco. If Long told Stewart about the Cisco sale, Stewart would have demanded information and wanted to analyze its implications, just as he ultimately did when he saw a reference to a patent sale in Wayport's financial statements. The process would be unpleasant, and Stewart could be expected to indulge his penchant for eloquent accusations. But if Long and Trellis failed to mention the sale, there was a good chance that Stewart might never find out—or find out too late for it to matter. Wayport and Cisco had agreed to keep the sale confidential, and during approximately the same period, Williams was attempting to keep any mention of the sale out of the Company's financial statements. The evidence is circumstantial but sufficient to find that Long knew disclosure would place the stock sales at risk and therefore decided not to correct Trellis's earlier representation. Scienter is therefore met.

5. Damages for Fraud

"The recipient of a fraudulent misrepresentation is entitled to recover as damages. . . pecuniary loss suffered otherwise as a consequence of the recipient's reliance upon the misrepresentation." Restatement of Torts § 549. The best measure of the quantum of Stewart's damages is approximately $470,000, or $4.70 per share, calculated as the difference between the $7.20 per share Stewart would have received in the AT&T; merger and the $2.50 per share that Stewart received from Trellis in the final stock sale. I say "approximately $470,000" because to account for Stewart's use of the cash he received from Trellis, the parties will add interest to that amount at the legal rate, compounded quarterly, for the period from September 27, 2007 until December 11, 2008. See Lynch v. Vickers Energy Corp., 429 A.2d 497, 506 (Del. 1981). Trellis is liable to Stewart for the net amount, plus pre- and post-judgment interest at the legal rate, compounded quarterly, from December 11, 2008, until the date of payment.

C. The Equitable Fraud Claim

In addition to their common law fraud claim, the plaintiffs asserted that the defendants are liable for "equitable" or "constructive" fraud. "Constructive fraud is simply a term applied to a great variety of transactions, having little resemblance either in form or nature, which equity regards as wrongful, to which it attributes the same or similar effects as those which follow from actual fraud . . . ." 3 John Norton Pomeroy, A Treatise on Equity Jurisprudence § 922, at 626 (5th ed. 1941).

The principal factor distinguishing constructive fraud from actual fraud is the existence of a special relationship between the plaintiff and the defendant, such as where the defendant is a fiduciary for the plaintiff. See NACCO, 997 A.2d at 33. On the facts of this case, the breach of fiduciary duty count confronts directly the implications of the fiduciary relationship, rendering the constructive fraud count redundant and superfluous. See Parfi Hldg. AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1236-37 (Del. Ch. 2001), rev'd on other grounds, 817 A.2d 149 (Del. 2002).

Equitable fraud also has been described as a form of fraud having all of the elements of common law fraud except the requirement of scienter. See Zirn v. VLI Corp., 681 A.2d 1050, 1061 (Del. 1996) (explaining that equitable fraud "provides a remedy for negligent or innocent misrepresentations"); Stephenson, 462 A.2d at 1074 (noting that with equitable fraud, a "defendant [does] not have to know or believe that his statement was false or to have proceeded in reckless disregard of the truth"). To the extent this formulation is used, the outcome is no different. The plaintiffs failed on their common law fraud claims against NEA and Williams for reasons other than scienter, and hence their equitable fraud claims would fail as well. The plaintiffs succeeded on their common law fraud claim against Trellis.

III. CONCLUSION

Trellis is liable to Stewart for damages in accordance with this opinion. Otherwise judgment is entered in favor of the defendants and against the plaintiffs. All parties will bear their own costs. The plaintiffs will submit a form of Final Order and Judgment after consulting with the defendants as to form.

[1] Trellis Opportunity Fund is the only Trellis-affiliated defendant in the case. Non-party Trellis Partners Opportunity Management, LLC ("Trellis GP") is the general partner of Trellis Opportunity Fund, and non-party Alex Broeker is the managing member of Trellis GP. Non-parties Trellis Partners, L.P. and Trellis Partners II, L.P. were Trellis-affiliated funds also managed by Broeker through Trellis GP. Trellis Partners, L.P. acquired the Series A Preferred Stock. Trellis Partners II, L.P. and Trellis Opportunity Fund held later series of preferred stock. For simplicity, I refer only to "Trellis."

[2] New Enterprise Associates VIII L.P. and New Enterprise Associates 8A L.P. (jointly, the "NEA Funds") are the only NEA-affiliated defendants in the case. Non-parties NEA Partners VIII, L.P. and NEA Partners 10, L.P. were the general partners, respectively, of the two NEA Funds. Non-party Charles W. Newhall, III was the general partner of the two NEA Funds' general partners. For simplicity, I refer only to "NEA."

[3] By contrast, a non-fiduciary aider and abetter could face different liability exposure than the defendant fiduciaries if, for example, the non-fiduciary misled unwitting directors to achieve a desired result. See In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813, 838 (Del. Ch. 2011). ("[U]nless post-closing discovery reveals additional facts, the plaintiffs face a long and steep uphill climb before they could recover money damages from the independent, outside directors on the Board. Admittedly other prospects for recovery are not so remote. By their terms, Sections 102(b)(7) and 141(e) do not protect aiders and abetters, and disgorgement of transaction-related profits may be available as an alternative remedy."). It is thus possible for a non-fiduciary to be liable for aiding and abetting "even if the Board breached only its duty of care" and is exculpated for that breach. In re Celera Corp. S'holder Litig., 2012 WL 1020471, at *28 (Del. Ch. Mar. 23, 2012), aff'd in part, rev'd in part, 59 A.3d 418 (Del. 2012); see Arnold v. Soc'y for Sav. Bancorp, Inc., 1995 WL 376919, at *8 (Del. Ch. June 15, 1995) (holding that plaintiffs could maintain a claim against acquirer for aiding and abetting a breach of the duty of disclosure, notwithstanding that defendant directors were protected by an exculpatory provision), aff'd, 678 A.2d 533, 541-542 (Del. 1996) (affirming analysis and remanding for further proceedings on aiding and abetting claim); see also In re Shoe-Town Inc. S'holders Litig., 1990 WL 13475, at *8 (Del. Ch. Feb. 12, 1990) (denying motion to dismiss aiding and abetting claim against financing advisor in going-private transaction where financial advisor "was closely involved with the management group, the special committee and the Shoe-Town board").

[4] See In re Int'l Bus. Machs. Corporate Sec. Litig., 163 F.3d 102, 110 (2d Cir. 1998) ("A duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event."); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) ("[T]here may be room to read in an implicit representation by the company that it will update the public with news of any radical change in the company's plans" when it makes public disclosure.); Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1331 (7th Cir. 1995) ("The [duty to update] applies when a company makes a historical statement that, at the time made, the company believed to be true, but as revealed by subsequently discovered information actually was not. The company then must correct the prior statement within a reasonable time."); Backman v. Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 1990) ("Obviously, if a disclosure is in fact misleading when made, and the speaker thereafter learns of this, there is a duty to correct it.").