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Fiduciary Duties of Directors
Although the Delaware code – and the corporate codes of all the other states for that matter – do a good job of describing the corporate form and the mechanics of operating this form, with the exception of perhaps §144, the code says precious little about the standards to which boards of directors who are managing the corporation will be held. This is so because corporate fiduciary duties are a product of the common law and not statute. In the following sections we examine the various core duties of corporate directors. Although these duties are fewer in number than the fiduciary obligations of agents, they are entirely consistent.
  • 1 Standards of Conduct and Standards of Review

    The question is often asked: to whom do corporate directors owe their duties? And, how are the actions of directors evaluated ex post by courts? In Trados, an excerpt of which follows, Vice Chancellor Laster describes the standards of conduct against which director action is measured as well as Delaware's various standards of reviews.

    When determining whether directors have breached their fiduciary duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review. See William T. Allen, Jack B. Jacobs, & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a Standard of Review Problem, 96 Nw. U.L.Rev. 449, 451-52 (2002) [hereinafter Realigning the Standard]. The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct. It describes what a plaintiff must first plead and later prove to prevail.

    Under Delaware law, the standard of review depends initially on whether the board members (i) were disinterested and independent (the business judgment rule), (ii) faced potential conflicts of interest because of the decisional dynamics present in particular recurring and recognizable situations (enhanced scrutiny), or (iii) confronted actual conflicts of interest such that the directors making the decision did not comprise a disinterested and independent board majority (entire fairness). The standard of review may change further depending on whether the directors took steps to address the potential or actual conflict, such as by creating an independent committee, conditioning the transaction on approval by disinterested stockholders, or both. Regardless, in every situation, the standard of review is more forgiving of directors and more onerous for stockholder plaintiffs than the standard of conduct. This divergence is warranted for diverse policy reasons typically cited as justifications for the business judgment rule. See, e.g., Brehm v. Eisner, 746 A.2d 244, 263 (Del.2000) (explaining justifications for business judgment rule).

     

    The Standard Of Conduct

    Delaware corporate law starts from the bedrock principle that "[t]he business and affairs of every corporation ... shall be managed by or under the direction of a board of directors." 8 Del. C. § 141(a). When exercising their statutory responsibility, the standard of conduct requires that directors seek "to promote the value of the corporation for the benefit of its stockholders."

    "It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize profits currently. They may do so, however, because such activities are rationalized as producing greater profits over the long-term." Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L.Rev. 135, 147 n. 34 (2012) [hereinafter For-Profit Corporations]. Decisions of this nature benefit the corporation as a whole, and by increasing the value of the corporation, the directors increase the share of value available for the residual claimants. Judicial opinions therefore often refer to directors owing fiduciary duties "to the corporation and its shareholders."Gheewalla, 930 A.2d at 99accord Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del.1989) ("[D]irectors owe fiduciary duties of care and loyalty to the corporation and its shareholders ...."); Polk v. Good, 507 A.2d 531, 536 (Del.1986) ("In performing their duties the directors owe fundamental fiduciary duties of loyalty and care to the corporation and its shareholders."). This formulation captures the foundational relationship in which directors owe duties to the corporation for the ultimate benefit of the entity's residual claimants. Nevertheless, "stockholders' best interest must always, within legal limits, be the end. Other constituencies may be considered only instrumentally to advance that end." For-Profit Corporations, supra, at 147 n. 34.

    A Delaware corporation, by default, has a perpetual existence. 8 Del. C. §§ 102(b)(5), 122(1). Equity capital, by default, is permanent capital. In terms of the standard of conduct, the duty of loyalty therefore mandates that directors maximize the value of the corporation over the long-term for the benefit of the providers of equity capital, as warranted for an entity with perpetual life in which the residual claimants have locked in their investment. When deciding whether to pursue a strategic alternative that would end or fundamentally alter the stockholders' ongoing investment in the corporation, the loyalty-based standard of conduct requires that the alternative yield value exceeding what the corporation otherwise would generate for stockholders over the long-term. Value, of course, does not just mean cash. It could mean an ownership interest in an entity, a package of other securities, or some combination, with or without cash, that will deliver greater value over the anticipated investment horizon. See QVC, 637 A.2d at 44 (describing how directors should approach consideration of non-cash or mixed consideration).

    The duty to act for the ultimate benefit of stockholders does not require that directors fulfill the wishes of a particular subset of the stockholder base. See In re Lear Corp. S'holder Litig., 967 A.2d 640, 655 (Del.Ch.2008) ("Directors are not thermometers, existing to register the ever-changing sentiments of stockholders.... During their term of office, directors may take good faith actions that they believe will benefit stockholders, even if they realize that the stockholders do not agree with them.");Paramount Commc'ns Inc. v. Time Inc., 1989 WL 79880, at *30 (Del.Ch. July 14, 1989)("The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm."),aff'd in pertinent part, Time, 571 A.2d at 1150TW Servs., 1989 WL 20290, at *8 n. 14("While corporate democracy is a pertinent concept, a corporation is not a New England town meeting; directors, not shareholders, have responsibilities to manage the business and affairs of the corporation, subject however to a fiduciary obligation."). Stockholders may have idiosyncratic reasons for preferring decisions that misallocate capital. Directors must exercise their independent fiduciary judgment; they need not cater to stockholder whim. See Time, 571 A.2d at 1154 ("Delaware law confers the management of the corporate enterprise to the stockholders' duly elected board representatives. The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders." (citations omitted)).

    More pertinent to the current case, a particular class or series of stock may hold contractual rights against the corporation and desire outcomes that maximize the value of those rights. See MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *6 (Del.Ch. May 5, 2010) (noting that preferential contract rights may appear in "the articles of incorporation, the preferred share designations, or some other appropriate document" such as a registration rights agreement, investor rights agreement, or stockholder agreement). By default, "all stock is created equal." Id. Unless a corporation's certificate of incorporation provides otherwise, each share of stock is common stock. If the certificate of incorporation grants a particular class or series of stock special "voting powers, ... designations, preferences and relative, participating, optional or other special rights" superior to the common stock, then the class or series holding the rights is known as preferred stock. 8 Del. C. § 151(a); see Starring v. Am. Hair & Felt Co.,191 A. 887, 890 (Del.Ch.1937) (Wolcott, C.) ("The term `preferred stock' is of fairly definite import. There is no difficulty in understanding its general concept. [It] is of course a stock which in relation to other classes enjoys certain defined rights and privileges."), aff'd, 2 A.2d 249 (Del.1937). If the certificate of incorporation is silent on a particular issue, then as to that issue the preferred stock and the common stock have the same rights. Consequently, as a general matter, "the rights and preferences of preferred stock are contractual in nature." Trados I, 2009 WL 2225958, at *7accord Judah v. Del. Trust Co., 378 A.2d 624, 628 (Del.1977) ("Generally, the provisions of the certificate of incorporation govern the rights of preferred shareholders, the certificate of incorporation being interpreted in accordance with the law of contracts, with only those rights which are embodied in the certificate granted to preferred shareholders.").

    A board does not owe fiduciary duties to preferred stockholders when considering whether or not to take corporate action that might trigger or circumvent the preferred stockholders' contractual rights. Preferred stockholders are owed fiduciary duties only when they do not invoke their special contractual rights and rely on a right shared equally with the common stock. Under those circumstances, "the existence of such right and the correlative duty may be measured by equitable as well as legal standards."] Thus, for example, just as common stockholders can challenge a disproportionate allocation of merger consideration, so too can preferred stockholders who do not possess and are not limited by a contractual entitlement. Under those circumstances, the decision to allocate different consideration is a discretionary, fiduciary determination that must pass muster under the appropriate standard of review, and the degree to which directors own different classes or series of stock may affect the standard of review.

    To reiterate, the standard of conduct for directors requires that they strive in good faith and on an informed basis to maximize the value of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm's value, not for the benefit of its contractual claimants. In light of this obligation, "it is the duty of directors to pursue the best interests of the corporation and its common stockholders, if that can be done faithfully with the contractual promises owed to the preferred." LC Capital, 990 A.2d at 452. Put differently, "generally it will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of the common stock — as the good faith judgment of the board sees them to be — to the interests created by the special rights, preferences, etc .... of preferred stock." Equity-Linked, 705 A.2d at 1042. This principle is not unique to preferred stock; it applies equally to other holders of contract rights against the corporation. Consequently, as this court observed at the motion to dismiss stage, "in circumstances where the interests of the common stockholders diverge from those of the preferred stockholders, it is possible that a director could breach her duty by improperly favoring the interests of the preferred stockholders over those of the common stockholders." Trados I, 2009 WL 2225958, at *7accord LC Capital, 990 A.2d at 447 (quoting Trados I and remarking that it "summarized the weight of authority very well"). …

     

    The Standards Of Review

    To determine whether directors have met their fiduciary obligations, Delaware courts evaluate the challenged decision through the lens of a standard of review. In this case, the Board lacked a majority of disinterested and independent directors, making entire fairness the applicable standard.

    "Delaware has three tiers of review for evaluating director decision-making: the business judgment rule, enhanced scrutiny, and entire fairness." Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del.Ch.2011). Delaware's default standard of review is the business judgment rule. The rule presumes 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." This standard of review "reflects and promotes the role of the board of directors as the proper body to manage the business and affairs of the corporation." Trados I, 2009 WL 2225958, at *6. Unless one of its elements is rebutted, "the court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation's objectives." In re Dollar Thrifty S'holder Litig.,14 A.3d 573, 598 (Del.Ch. 2010). Only when a decision lacks any rationally conceivable basis will a court infer bad faith and a breach of duty.

    Enhanced scrutiny is Delaware's intermediate standard of review. Framed generally, it requires that the defendant fiduciaries "bear the burden of persuasion to show that their motivations were proper and not selfish" and that "their actions were reasonable in relation to their legitimate objective." Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del.Ch. 2007). Enhanced scrutiny applies to specific, recurring, and readily identifiable situations involving potential conflicts of interest where the realities of the decisionmaking context can subtly undermine the decisions of even independent and disinterested directors. In Unocal, the Delaware Supreme Court created enhanced scrutiny to address the potential conflicts of interest faced by a board of directors when resisting a hostile takeover, namely the "omnipresent specter" that target directors may be influenced by and act to further their own interests or those of incumbent management, "rather than those of the corporation and its shareholders."493 A.2d at 954. Tailored for this context, enhanced scrutiny requires that directors who take defensive action against a hostile takeover show (i) that "they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed," and (ii) that the response selected was "reasonable in relation to the threat posed." Id. at 955.

    In Revlon, the Delaware Supreme Court extended the new intermediate standard to the sale of a corporation. See 506 A.2d at 180-82 (expressly applying Unocal test). Here too, enhanced scrutiny applies because of the potential conflicts of interest that fiduciaries must confront. "[T]he potential sale of a corporation has enormous implications for corporate managers and advisors, and a range of human motivations, including but by no means limited to greed, can inspire fiduciaries and their advisors to be less than faithful." In re El Paso Corp. S'holders Litig., 41 A.3d 432, 439 (Del.Ch.2012). These potential conflicts warrant a more searching standard of review than the business judgment rule:

    The heightened scrutiny that applies in the Revlon (and Unocal) contexts are, in large measure, rooted in a concern that the board might harbor personal motivations in the sale context that differ from what is best for the corporation and its stockholders. Most traditionally, there is the danger that top corporate managers will resist a sale that might cost them their managerial posts, or prefer a sale to one industry rival rather than another for reasons having more to do with personal ego than with what is best for stockholders.

    Dollar Thrifty, 14 A.3d at 597 (footnote omitted). Consequently, "the predicate question of what the board's true motivation was comes into play," and "[t]he court must take a nuanced and realistic look at the possibility that personal interests short of pure self-dealing have influenced the board ...." Id. at 598. Tailored to the sale context, enhanced scrutiny requires that the defendant fiduciaries show that they acted reasonably to obtain for their beneficiaries the best value reasonably available under the circumstances, which may be no transaction at all. See QVC, 637 A.2d at 48-49.

    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." Cinerama, Inc. v. Technicolor, Inc. (Technicolor III), 663 A.2d 1156, 1163 (Del. 1995) (internal quotation marks omitted). "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." Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del.Ch.2006).

    To obtain review under the entire fairness test, the stockholder plaintiff must prove that there were not enough independent and disinterested individuals among the directors making the challenged decision to comprise a board majority. See Aronson, 473 A.2d at 812 (noting that if "the transaction is not approved by a majority consisting of the disinterested directors, then the business judgment rule has no application"). To determine whether the directors approving the transaction comprised a disinterested and independent board majority, the court conducts a director-by-director analysis.

     

    Excerpted from: In re Trados Inc. Shareholder Litigation, 73 A. 3d 17, 35 - Del: Court of Chancery 2013

     

     

  • 2 Duty of Care

    • 2.1 Aronson v. Lewis

      In an earlier case (Shlensky v Wrigley) you were introduced the business judgment presumption. Remember that in Shlensky, the court ruled that absent some act of fraud or gross negligence that it would not second guess business decisions of a board of directors. This general deference to the board’s statutory role is known as the business judgment presumption and it plays out most commonly in cases where stockholders bring claims that boards have somehow violated their duty of care to the corporation. The case that follows, Aronson, is the leading restatement of the business judgment presumption. 

      1
      473 A.2d 805 (1984)
      2
      Senior ARONSON, et al., Defendants Below, Appellants,
      v.
      Harry LEWIS, Plaintiff Below, Appellee.
      3

      Supreme Court of Delaware.
      Submitted: November 14, 1983.
      Decided: March 1, 1984.

      4

      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.

      5

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

      6

      Before McNEILLY, MOORE and CHRISTIE, JJ.

      7
      [807] MOORE, Justice:
      8

      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).

      9

      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.

      10
      I.
      11

      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.

      12

      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.

      13

      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]

      14

      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.

      15

      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.

      16

      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.

      17

      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.

      18

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

      19
      13. ... such attempt would be futile for the following reasons:
      20
      (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.
      21
      (b) Defendant Fink, having selected each director, controls and dominates every member of the Board and every officer of Meyers.
      22
      (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.
      23

      Complaint, at ¶ 13.

      24

      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.

      25
      II.
      26

      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.

      27

      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.

      28

      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.

      29

      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.

      30

      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:

      31
      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.
      32

      Id.

      33

      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.

      34

      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.

      35

      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.

      36
      III.
      37

      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.

      38
      IV.
      39
      A.
      40

      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:

      41
      "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."
      42

      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.

      43

      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.

      44

      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).

      45

      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.

      46

      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).

      47

      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).

      48

      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.

      49

      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).

      50

      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.

      51

      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?

      52

      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").

      53

      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.

      54

      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.

      55

      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.

      56

      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).

      57

      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.

      58
      B.
      59

      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.

      60

      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.

      61

      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).

      62

      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.

      63

      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.

      64

      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]

      65

      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.

      66
      C.
      67

      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.

      68

      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]

      69

      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]

      70

      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).

      71
      D.
      72

      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.

      73
      V.
      74

      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.

      75
      * * *
      76

      REVERSED AND REMANDED.

      77

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

      78

      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).

      79

      [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.

      80

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

      81

      [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).

      82

      [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).

      83

      [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").

      84

      [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).

      85

      [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.

      86

      [9] Chancery Rule 11 provides:

      87

      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.

      88

      Del.Ch.Ct.R. 11.

      89

      [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.

      90

      [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).

      91

      [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).

      92

      [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.

    • 2.2 Kamin v. Am. Express

      The business judgment presumption creates a great deal of space for boards to make decisions related to the operation and strategic direction of the business. Provided boards are disinterested and act in good faith in an informed manner, courts will give those board decisions great lattitude when they are challenged by stockholders.  The following case is an example of a stockholder challenge to a board decision and the court's implementation of the business judgment presumption.

      1
      86 Misc.2d 809 (1976)
      2
      Howard P. Kamin et al., Plaintiffs,
      v.
      American Express Company et al., Defendants.
      3

      Supreme Court, Special Term, New York County.

      4
      March 17, 1976
      5

      Carter, Ledyard & Milburn for American Express Company, defendant. Winthrop, Stimson, Putnam & Roberts for Hoyt Ammidon and others, defendants. Cowan, Liebowitz & Latman, P.C., for plaintiffs.

      6
      [810] EDWARD J. GREENFIELD, J.
      7

      In this stockholders' derivative action, the individual defendants, who are the directors of the American Express Company, move for an order dismissing the complaint for failure to state a cause of action pursuant to CPLR 3211 (subd [a], par 7), and alternatively, for summary judgment pursuant to CPLR 3211 (subd [c]).

      8

      The complaint is brought derivatively by two minority stockholders of the American Express Company, asking for a declaration that a certain dividend in kind is a waste of [811] corporate assets, directing the defendants not to proceed with the distribution, or, in the alternative, for monetary damages. The motion to dismiss the complaint requires the court to presuppose the truth of the allegations. It is the defendants' contention that, conceding everything in the complaint, no viable cause of action is made out.

      9

      After establishing the identity of the parties, the complaint alleges that in 1972 American Express acquired for investment 1,954,418 shares of common stock of Donaldson, Lufken and Jenrette, Inc. (hereafter DLJ), a publicly traded corporation, at a cost of $29,900,000. It is further alleged that the current market value of those shares is approximately $4,000,000. On July 28, 1975, it is alleged, the board of directors of American Express declared a special dividend to all stockholders of record pursuant to which the shares of DLJ would be distributed in kind. Plaintiffs contend further that if American Express were to sell the DLJ shares on the market, it would sustain a capital loss of $25,000,000 which could be offset against taxable capital gains on other investments. Such a sale, they allege, would result in tax savings to the company of approximately $8,000,000, which would not be available in the case of the distribution of DLJ shares to stockholders. It is alleged that on October 8, 1975 and October 16, 1975, plaintiffs demanded that the directors rescind the previously declared dividend in DLJ shares and take steps to preserve the capital loss which would result from selling the shares. This demand was rejected by the board of directors on October 17, 1975.

      10

      It is apparent that all the previously-mentioned allegations of the complaint go to the question of the exercise by the board of directors of business judgment in deciding how to deal with the DLJ shares. The crucial allegation which must be scrutinized to determine the legal sufficiency of the complaint is paragraph 19, which alleges: "19. All of the defendant Directors engaged in or acquiesced in or negligently permitted the declaration and payment of the Dividend in violation of the fiduciary duty owed by them to Amex to care for and preserve Amex's assets in the same manner as a man of average prudence would care for his own property."

      11

      Plaintiffs never moved for temporary injunctive relief, and did nothing to bar the actual distribution of the DLJ shares. The dividend was in fact paid on October 31, 1975. Accordingly, that portion of the complaint seeking a direction not to [812] distribute the shares is deemed to be moot, and the court will deal only with the request for declaratory judgment or for damages.

      12

      Examination of the complaint reveals that there is no claim of fraud or self-dealing, and no contention that there was any bad faith or oppressive conduct. The law is quite clear as to what is necessary to ground a claim for actionable wrongdoing. "In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed, or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference; for the powers of those entrusted with corporate management are largely discretionary." (Leslie v Lorillard, 110 N.Y. 519, 532; see, also, Winter v Anderson, 242 App Div 430, 432; Rous v Carlisle, 261 App Div 432, 434, affd 290 N.Y. 869; 11 NY Jur, Corporations, § 378.)

      13

      More specifically, the question of whether or not a dividend is to be declared or a distribution of some kind should be made is exclusively a matter of business judgment for the board of directors. "Courts will not interfere with such discretion unless it be first made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose. It is for the directors to say, acting in good faith of course, when and to what extent dividends shall be declared * * * The statute confers upon the directors this power, and the minority stockholders are not in a position to question this right, so long as the directors are acting in good faith" (Liebman v Auto Strop Co., 241 N.Y. 427, 433-434; accord: City Bank Farmers Trust Co. v Hewitt Realty Co., 257 N.Y. 62; Venner v Southern Pacific Co., 279 F 832, cert den 258 US 628).

      14

      Thus, a complaint must be dismissed if all that is presented is a decision to pay dividends rather than pursuing some other course of conduct. (Weinberger v Quinn, 264 App Div 405, affd 290 N.Y. 635.) A complaint which alleges merely that some course of action other than that pursued by the board of directors would have been more advantageous gives rise to no cognizable cause of action. Courts have more than enough to do in adjudicating legal rights and devising remedies for wrongs. The directors' room rather than the courtroom is the appropriate forum for thrashing out purely business questions [813] which will have an impact on profits, market prices, competitive situations, or tax advantages. As stated by CARDOZO, J., when sitting at Special Term, the substitution of someone else's business judgment for that of the directors "`is no business for any court to follow.'" (Holmes v Saint Joseph Lead Co., 84 Misc 278, 283, quoting from Gamble v Queens County Water Co., 123 N.Y. 91, 99.)

      15

      It is not enough to allege, as plaintiffs do here, that the directors made an imprudent decision, which did not capitalize on the possibility of using a potential capital loss to offset capital gains. More than imprudence or mistaken judgment must be shown. "Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient." (Pollitz v Wabash R.R. Co., 207 N.Y. 113, 124.)

      16

      Section 720 (subd [a], par [1], cl [A]) of the Business Corporation Law permits an action against directors for "[t]he neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge." This does not mean that a director is chargeable with ordinary negligence for having made an improper decision, or having acted imprudently. The "neglect" referred to in the statute is neglect of duties (i.e., malfeasance or nonfeasance) and not misjudgment. To allege that a director "negligently permitted the declaration and payment" of a dividend without alleging fraud, dishonesty or nonfeasance, is to state merely that a decision was taken with which one disagrees.

      17

      Nor does this appear to be a case in which a potentially valid cause of action is inartfully stated. The defendants have moved alternatively for summary judgment and have submitted affidavits under CPLR 3211 (subd [c]), and plaintiffs likewise have submitted papers enlarging upon the allegations of the complaint. The affidavits of the defendants and the exhibits annexed thereto demonstrate that the objections raised by the plaintiffs to the proposed dividend action were carefully considered and unanimously rejected by the board at a special meeting called precisely for that purpose at the plaintiffs' request. The minutes of the special meeting indicate that the [814] defendants were fully aware that a sale rather than a distribution of the DLJ shares might result in the realization of a substantial income tax saving. Nevertheless, they concluded that there were countervailing considerations primarily with respect to the adverse effect such a sale, realizing a loss of $25,000,000, would have on the net income figures in the American Express financial statement. Such a reduction of net income would have a serious effect on the market value of the publicly traded American Express stock. This was not a situation in which the defendant directors totally overlooked facts called to their attention. They gave them consideration, and attempted to view the total picture in arriving at their decision. While plaintiffs contend that according to their accounting consultants the loss on the DLJ stock would still have to be charged against current earnings even if the stock were distributed, the defendants' accounting experts assert that the loss would be a charge against earnings only in the event of a sale, whereas in the event of distribution of the stock as a dividend, the proper accounting treatment would be to charge the loss only against surplus. While the chief accountant for the SEC raised some question as to the appropriate accounting treatment of this transaction, there was no basis for any action to be taken by the SEC with respect to the American Express financial statement.

      18

      The only hint of self-interest which is raised, not in the complaint but in the papers on the motion, is that 4 of the 20 directors were officers and employees of American Express and members of its executive incentive compensation plan. Hence, it is suggested, by virtue of the action taken earnings may have been overstated and their compensation affected thereby. Such a claim is highly speculative and standing alone can hardly be regarded as sufficient to support an inference of self-dealing. There is no claim or showing that the four company directors dominated and controlled the 16 outside members of the board. Certainly, every action taken by the board has some impact on earnings and may therefore affect the compensation of those whose earnings are keyed to profits. That does not disqualify the inside directors, nor does it put every policy adopted by the board in question. All directors have an obligation, using sound business judgment, to maximize income for the benefit of all persons having a stake in the welfare of the corporate entity. (See Amdur v Meyer, 15 AD2d 425, app dsmd 14 N.Y.2d 541.) What we have here as revealed [815] both by the complaint and by the affidavits and exhibits, is that a disagreement exists between two minority stockholders and a unanimous board of directors as to the best way to handle a loss already incurred on an investment. The directors are entitled to exercise their honest business judgment on the information before them, and to act within their corporate powers. That they may be mistaken, that other courses of action might have differing consequences, or that their action might benefit some shareholders more than others present no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith. The question of to what extent a dividend shall be declared and the manner in which it shall be paid is ordinarily subject only to the qualification that the dividend be paid out of surplus (Business Corporation Law, § 510, subd [b]). The court will not interfere unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust.

      19

      Courts should not shrink from the responsibility of dismissing complaints or granting summary judgment when no legal wrongdoing is set forth. As stated in Greenbaum v American Metal Climax (27 AD2d 225, 231-232): "It is well known that derivative actions by stockholders generally involve extensive pretrial procedures, including lengthy examinations before trial, and then, finally, prolonged trials; and that they also entail large litigation costs, including the probability of a considerable liability upon the corporation for the defense costs of defendant offices. Such actions are a heavy burden upon the courts and litigants. Consequently, the summary judgment remedy should be fully utilized and given due effect to challenge such an action which appears to be in the nature of a strike suit or otherwise lacks apparent merit * * * [plaintiffs] are bound to bear in mind that matters depending on business judgment are not actionable. (Cf. Steinberg v Carey, 285 App Div 1131.) They are required to set forth something more than vague general charges of wrongdoing; their charges must be supported by factual assertions of specific wrongdoing; conclusory allegations of breaches of fiduciary duty are not enough."

      20

      In this case it clearly appears that the plaintiffs have failed as a matter of law to make out an actionable claim. Accordingly, the motion by the defendants for summary judgment and dismissal of the complaint is granted.

    • 2.3 Williams v. Geier

      Absent the taint of self-interest, boards have great latitude with respect to decisions how to manage the business and affairs of the corporation.  Board decisions to amend the certificate of incorporation, like other business decisions, receive the benefit of the business judgment presumption.  In the following case, the effect of a fully-informed, uncoerced stockholder vote on the challenged transaction is that the challenged transaction receives the benefit of the business judgment presumption.

      1
      671 A.2d 1368 (1996)
      2
      Josephine L. WILLIAMS, Plaintiff Below, Appellant,
      v.
      James A.D. GEIER, Gilbert Geier McCurdy, Daniel J. Meyer, C. Lawson Reed, Joseph A. Steger, Neil A. Armstrong, Edward A. Asplin, Clark Daugherty, Lyle Everingham, and Cincinnati Milacron, Inc., Defendants Below, Appellees.
      3
      No. 380, 1994.
      4

      Supreme Court of Delaware.

      5
      Submitted: November 28, 1995.
      6
      Decided: January 23, 1996.
      7

      Norman Monhait of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington; William T. Jacobs (argued), of Strauss & Troy, Cincinnati, for appellant.

      8

      Martin P. Tully, Richard L. Sutton and Thomas C. Grimm of Morris, Nichols, Arsht & Tunnell, Wilmington; Rory O. Millson (argued), of Cravath, Swaine & Moore, New York City, for appellees.

      9

      Before VEASEY, C.J., WALSH and HARTNETT, JJ., HORSEY, J. (Retired), and RIDGELY, President Judge, constituting the Court en Banc.[1]

      10
      [1370] VEASEY, Chief Justice, for the majority:
      11

      In this appeal, we consider whether defendant below-appellee, Cincinnati Milacron ("Milacron"), may validly implement a recapitalization plan (the "Recapitalization") resulting from an amendment to Milacron's certificate of incorporation (the "Amendment"). The Amendment was recommended by resolution of the Milacron Board of Directors (the "Board") and approved by the requisite stockholder vote. Plaintiff below-appellant, Josephine L. Williams ("Williams"), an individual minority stockholder, brought suit in the Court of Chancery against Milacron and certain members of the Board, challenging the validity of the Amendment and Recapitalization.

      12

      The essence of the Recapitalization is to provide for a form of "tenure voting" whereby holders of common stock on the record date would receive ten votes per share. Upon sale or other transfer, however, each share would revert to one-vote-per-share status until that share is held by its owner for three years. The Recapitalization applied to every stockholder, whether a stockholder was a minority stockholder or part of the majority bloc. Williams argues that the Recapitalization disproportionately and invalidly favors stockholders who are part of the majority bloc and disfavors the minority stockholders. Williams further contends that the sole purpose of the Recapitalization was to entrench Milacron management in office and allow the majority bloc to sell a portion of its [1371] holdings while retaining control of the company.

      13

      The Court of Chancery granted summary judgment in favor of defendants, holding that Milacron's adoption of the Amendment and Recapitalization was valid. Specifically, the court held that Unocal[2] applied, and found that the Board had reasonable grounds to believe that a corporate threat existed and that the Recapitalization was a reasonable response to that threat, there being no improper action or motive. In this appeal, Williams claims that the Court of Chancery erred in analyzing the Recapitalization under Unocal rather than Blasius.[3] Williams also contends that the trial court incorrectly found that the Board satisfied its burden under Unocal. Finally, Williams contends that the stockholder vote approving the Amendment does not validate the Amendment or the Recapitalization.

      14

      We AFFIRM the judgment of the Court of Chancery, but on the following grounds: (1) the instant factual situation implicates neither Unocal nor Blasius; (2) the business judgment rule applies to the action of the independent majority of the Board in recommending the advisability of the Amendment to the Milacron stockholders; and (3) since a fully informed majority of the stockholders voted in favor of the Amendment pursuant to the statutory authority of 8 Del.C. § 242 ("Section 242"), the stockholder vote is dispositive.

      15
      I. FACTS
      16

      Milacron is a Delaware corporation that manufactures machine tools, plastics machinery, computer controls and various other industrial machinery and tools. During the time period relevant to this suit, the Board consisted of ten members — seven independent, disinterested directors[4] who collectively owned less than 1 percent of the common shares outstanding, and three inside directors (deemed not to be independent or disinterested for this purpose) who collectively owned approximately 12.6 percent of the common shares outstanding.[5] With regard to overall share ownership, the Geier family (including the two Geier directors, in-laws and family trusts), together with employee benefit plans owned or controlled in excess of 50 percent of the total voting power of Milacron. We assume, without deciding, therefore, that this group represents a controlling bloc for purposes of this decision.[6] Hence, we will refer to the Geier family and the employees and benefit plans collectively as the "Family Group."[7]

      17

      [1372] Toward the end of 1985, Meyer determined that it would be in Milacron's best interests to develop a recapitalization plan. With that goal in mind, he pursued talks with the First Boston Corporation ("First Boston"). On December 10, 1985, Meyer, along with Geier and several Milacron officers, met with First Boston and Milacron's outside legal counsel, Cravath, Swaine & Moore ("Cravath"), to communicate Milacron's goals and analyze its options. Another meeting followed on January 8, 1986, at which First Boston identified Milacron's objectives as follows:

      18
      • Maintain ability to maximize long-term value for shareholders.
      19
      • Provide for ability to meet financing needs of corporation without impairing ability of management to maintain focus on long-term values rather than short-term business cycles.
      20
      • Protect long-term commitment to continued growth and investment in machine tool business.
      21
      • Reduce level of exposure to raiders seeking to capitalize on corporate vulnerability due to short-term business cycles.
      22
      • Continue process of diversification away from primary reliance on machine tool business to mix of 1/3 of revenue and income from machine tools and 2/3 from other sources.
      23
      • Provide Board of Directors with a corporate structure which gives the Board the best opportunity to fairly evaluate and negotiate, in the best interests of all shareholders, any proposal to acquire control of the Company.
      24

      In light of these goals, First Boston recommended pursuing a "tenure voting plan," loosely based on the "Smuckers"[8] recapitalization, whereby all shares would be granted multiple votes which would be lost at transfer and then regained by the transferee after holding the shares for a certain period of time.

      25

      Pursuant to First Boston's recommendation, Article Fourth of Milacron's Restated Certificate of Incorporation would be amended so that all stockholders owning common stock on the effective date would be entitled to ten votes per share. Upon sale or other transfer of ownership, the voting rights of each share would revert to a single vote per share until such time as the new stockholder held the share for thirty-six consecutive months. If Milacron issued new shares after the effective date, these shares would be treated the same as pre-Recapitalization shares that had been sold or transferred — they would be entitled to only one vote until held for thirty-six consecutive months by the same stockholder. Milacron's officers ultimately decided to pursue the Recapitalization and instructed First Boston to prepare a presentation to be made to the Board.

      26

      On January 24, 1986, Milacron management and First Boston presented the Recapitalization to the Board at a special board meeting.[9] First Boston provided the directors with detailed materials focusing on the benefits long-term investors would realize under the Recapitalization, as well as analyses of several other possible recapitalization plans. The Board decided to postpone action concerning the Recapitalization, and agreed to discuss the subject further at its next meeting on February 11, 1986. On March 21, 1986, the Board ultimately [1373] adopted a resolution proposing the Amendment and Recapitalization, determining that the Amendment and Recapitalization are "in the best interests of the Company and its shareholders" and recommending a favorable vote by stockholders at the April 22, 1986 Annual Meeting.

      27

      Pursuant to 8 Del.C. § 242(b)(1), effectuation of the Amendment required both the Board resolution recommending advisability and approval by the affirmative vote of a majority of the outstanding stock entitled to vote thereon.[10] Accordingly, Milacron sent to stockholders a Notice of Annual Meeting of Shareholders and accompanying Proxy Statement for the April 22, 1986 meeting. The Proxy Statement (the "Proxy") explained that the Board believed the Recapitalization was in the best interests of the stockholders and had the threefold effect of: (1) providing existing and long-term stockholders with a greater voice in the company; (2) permitting issuance of additional shares of common stock with minimal dilution of voting rights; and (3) discouraging hostile takeovers.

      28

      In addition to informing the stockholders of the benefits of the Recapitalization, the Proxy also informed them of possible disadvantages:

      29
      (1) if passed, the Recapitalization would "concentrate voting power in the hands of long-term shareholders" including the "descendants of the Company's founder, their in-laws and trusts established by them," Proxy at 16-17;[11]
      30
      (2) "the Recapitalization may make [Milacron] a less attractive target for a takeover bid or share accumulation ..." and, as a result, "approval of the Recapitalization may deprive shareholders of an opportunity to sell their shares at a price higher than that prevailing in the market ...," Proxy at 15-16;
      31
      [1374] (3) "[i]f the Recapitalization is approved by the shareholders, the same shareholders who voted to approve the Recapitalization may have insufficient voting power to amend or repeal the Recapitalization at a future date," Proxy at 17; and
      32
      (4) if the Recapitalization is approved by less than a 66.7 percent majority, Milacron is likely to be delisted from the New York Stock Exchange ("NYSE"), Proxy at 17-18.
      33

      As noted, the Proxy also informed the stockholders that the Family Group owned or controlled in excess of 50 percent of the total voting power, and that, accordingly, "approval of the Recapitalization at the meeting is virtually assured," Proxy at 21.[12]

      34

      Over 72 percent of the outstanding common stock voted in favor of the Amendment. Assuming all the common stock held by the Family Group voted in favor, of the remaining (presumed unaffiliated) shares present or represented by proxy, approximately 5,858,777 voted in favor and 3,103,608 voted against or abstained. An additional 3,302,759 shares of common stock were not represented at the meeting. This means that there were approximately 6,406,367 presumed unaffiliated common shares that did not vote in person or by proxy or did not vote in favor, compared with approximately 5,858,777 which did vote in favor. Therefore, construing the record most favorably for Williams, the Amendment received less than 50 percent of the votes of all the unaffiliated shares outstanding.[13]

      35
      II. PROCEDURAL HISTORY IN COURT OF CHANCERY
      36

      In April 1986, Williams challenged the Recapitalization by bringing suit against Milacron and nine of its directors (collectively, the "Defendants").[14] Williams' complaint purported to state five separate claims as follows: (1) the sole purpose of the Recapitalization was to entrench Milacron management in office and allow the Family Group to liquidate a portion of its holdings while retaining control of the company; (2) the Recapitalization impermissibly created disparate voting rights within a single class of stock in contravention of established principles of Delaware law; (3) the Recapitalization impermissibly restricts the transferability of Milacron common stock since the transferee may not exercise the full voting power of her shares for a period of three years; (4) the Proxy failed to disclose facts material to a Milacron stockholder's determination of the merits of the Recapitalization; and (5) the Board impermissibly coerced Milacron stockholders into voting for the Recapitalization and thereby breached their fiduciary duties.

      37

      Defendants then filed a motion to dismiss the complaint which was granted in part and denied in part. In a Memorandum Opinion [1375] dated May 20, 1987,[15] the Court of Chancery permitted Williams to pursue her claim that, in recommending the Recapitalization, Milacron management was motivated solely by a desire to entrench itself in office. The related claim, that the Recapitalization was designed to allow the Family Group to liquidate a portion of its holdings and still retain control of Milacron, was also allowed to proceed. Three of the four remaining claims, including allegations of impermissible creation of disparate voting rights within a single class of stock, improper restrictions on stock transferability and disclosure violations, were dismissed by the court. Williams' remaining claim of substantive coercion was voluntarily dismissed.[16]

      38

      After discovery was nearly complete, Williams moved for partial summary judgment as to liability. Defendants cross-moved for summary judgment. The Court of Chancery, in an order dated September 9, 1994, denied Williams' motion, but granted Defendants' cross-motion. Analyzing the facts under Unocal Corp. v. Mesa Petroleum, Del. Supr., 493 A.2d 946 (1985), the trial court found that the Recapitalization was a reasonable defensive measure in light of the undisputed evidence that the Board carefully considered the Company's long-term needs and its potential vulnerability, concluding:

      39
      Although plaintiff argues that the real purpose of the recapitalization plan was to allow the Family Group to liquidate some of its holdings without losing voting control, the evidence, viewed in the light most favorable to plaintiff, does not support this claim. It is true that long-term investors, including the Family Group, will be able to maintain their voting power even if they sell some of their stock. However, the fact that a plan has an entrenchment effect does not mean that it was so motivated. The undisputed evidence establishes that the directors were motivated by the good faith belief that long term corporate planning would be enhanced by the recapitalization plan. Plaintiff's reliance on post-recapitalization stock sales as evidence of improper motivation, also is misplaced. The evidence establishes that those stock sales were unrelated to the adoption of the plan. In particular, Geier stated that tax reasons forced the liquidation of a large portion of his deceased parents' estate including most of its Milacron holdings.
      40

      Williams v. Geier, Del.Ch., C.A. No. 8456, at 7, 1994 WL 514871, *3 (Sept. 9, 1994) (ORDER).

      41
      III. SCOPE OF APPELLATE REVIEW
      42

      To discharge its appellate function on review of the trial court's entry of summary judgment, this Court must determine "whether the record shows that there is no genuine, material issue of fact and the moving party is entitled to judgment as a matter of law." Arnold v. Society for Sav. Bancorp, Del.Supr., 650 A.2d 1270, 1276 (1994). Our review of the trial court's determinations in this context is de novo, not deferential, both as to the facts and the law. On a summary judgment record (which is essentially a paper record not involving credibility assessments), we are free to draw our own inferences in making factual determinations and in evaluating the legal significance of the evidence because this Court "is as institutionally competent to discern the existence of factual disputes as is the trial court." Hoechst Celanese Corp. v. Certain Underwriters at Lloyd's, London, Del.Supr., 656 A.2d 1094, 1099 (1995) (quoting Merrill v. Crothall-American, Inc., Del.Supr., 606 A.2d 96, 100 (1992)). The facts of record, including any reasonable hypotheses or inferences to be drawn therefrom, must be viewed in the light most favorable to the non-moving party (which is deemed to be Williams for purposes [1376] of this appeal). Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840, 844 (1987).

      43
      IV. INAPPLICABILITY OF UNOCAL AND BLASIUS
      44

      Williams begins her attack on the grant of summary judgment by questioning the trial court's choice of the "more lenient standard of Unocal" to review the Board's actions, rather than the "heightened standard of scrutiny" used in Blasius Industries v. Atlas Corp., Del.Ch., 564 A.2d 651 (1988). We hold that neither standard is implicated here because there was no unilateral board action. Here, there was stockholder approval of the Amendment. Accordingly, the Board action was not unilateral. The Board recommended that stockholders vote in favor of the Amendment. We must examine, therefore, both the Board action and the validity of the stockholder approval.

      45

      In Blasius, Blasius Industries ("Blasius"), the owner of a substantial block of Atlas Corporation ("Atlas") common stock, initiated a consent solicitation seeking to amend the Atlas bylaws to expand the size of the Atlas board from seven to fifteen members. Blasius, 564 A.2d at 652. The Atlas board of directors, in an attempt to preempt the consent solicitation, immediately and unilaterally expanded the size of the board to nine members and filled the new directorships with its own nominees. Blasius brought an action challenging the validity of Atlas' action. The Court of Chancery held that "when [a board] acts ... for the primary purpose of preventing or impeding an unaffiliated majority of shareholders from expanding the board and electing a new majority," its action "constitute[s] an offense to the relationship between corporate directors and shareholders that has traditionally been protected...." Blasius, 564 A.2d at 652. Such disenfranchising actions are not, however, invalid per se. "Rather, ... in such a case, the board bears the heavy burden of demonstrating a compelling justification for such action." Blasius, 564 A.2d at 661.[17]

      46

      Blasius' burden of demonstrating a "compelling justification" is quite onerous, and is therefore applied rarely. As this Court noted in Stroud v. Grace, Del.Supr., 606 A.2d 75, 92 (1992) ("Stroud II"), the application of the "compelling justification" standard set forth in Blasius is appropriate only where the "`primary purpose' of the board's action [is] to interfere with or impede exercise of the shareholder franchise," and the stockholders are not given a "full and fair opportunity to vote."

      47

      We can find no evidence to support Williams' claim that the Defendants' primary purpose in adopting the Recapitalization was a desire to impede the Milacron stockholders' vote. The record does not rebut the business judgment rule presumption that the Board acted independently, with due care, in good faith and in the honest belief that its actions were in the stockholders' best interests. See Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984). According to the Proxy, the directors were motivated by a desire to:

      48
      promote long-term planning and values by enhancement of voting rights of long-term shareholders ...[;] permit the issuance of additional shares of common stock for financing or other purposes with minimal dilution of voting rights of long-term shareholders ...[; and] discourage hostile takeovers and put the Board of Directors in the best position to represent the interests of all shareholders.
      49

      Proxy at 14. Plaintiff has submitted no evidence to the contrary.[18]

      50

      [1377] A Unocal analysis should be used only when a board unilaterally (i.e., without stockholder approval) adopts defensive measures in reaction to a perceived threat. Unocal, 493 A.2d at 954-55. Unocal is a landmark innovation of the dynamic takeover era of the 1980s.[19] It has stood the test of time, and was recently explicated by this Court in Unitrin, Inc. v. American General Corp., Del.Supr., 651 A.2d 1361 (1995). Yet, it is inapplicable here because there was no unilateral board action.

      51

      The Court of Chancery did, however, apply a Unocal analysis here, finding that a threat to corporate policy and effectiveness existed and that the Recapitalization was a reasonable response to that threat. Specifically, the Court of Chancery found that:

      52
      Milacron's directors were interested in long-term planning and, given the cyclical nature of Milacron's business, they were concerned that the company would be vulnerable during short-term market fluctuations. The reasonableness of the Recapitalization Plan as a defensive measure is established by the fact that the plan achieves Milacron's goals without preventing any stockholder from becoming a long-term stockholder and, thus, obtaining the super voting power.
      53

      Williams v. Geier, Del.Ch., C.A. No. 8456, at 6-7, 1994 WL 514871, *3 (Sept. 9, 1994) (ORDER).

      54

      The instant case does not involve either unilateral director action in the face of a claimed threat or an act of disenfranchisement. Rather, the instant case implicates the traditional review of disinterested and independent[20] director action in recommending, and the vote of the stockholders in approving, the Amendment and the resulting Recapitalization. Thus, neither Blasius nor Unocal applies. The Court of Chancery's finding does, however, support the conclusion that the director and stockholder action which effectuated the Recapitalization here "can be attributed to [a] ... rational business purpose." See Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971).

      55
      V. STANDARD OF JUDICIAL REVIEW OF BOARD ACTION RECOMMENDING THE AMENDMENT TO THE STOCKHOLDERS
      56

      The Board's action in recommending the Recapitalization to the stockholders pursuant to Section 242(b)(1) is protected by the presumption of the business judgment rule [1378] unless that presumption is rebutted.[21] See Paramount Communications, Inc. v. Time Inc., Del.Supr., 571 A.2d 1140, 1151-52 (1990) (finding that the strategic decision of Time's board, after an exhaustive appraisal of Time's future, was entitled to the protection of the business judgment rule); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624-25, 627 (1984) (finding business judgment presumption not rebutted in context of board's rejection of unsolicited tender offer); TW Servs., Inc. v. SWT Acquisition Corp., Del.Ch., C.A. Nos. 10427, 10298, 1989 WL 20290, *11, mem. op. at 34, Allen, C. (Mar. 2, 1989) (holding that board's decision not to agree to an invitation to merge was a statutory prerogative of the board under 8 Del.C. § 251, and therefore protected by the business judgment rule).

      57

      Williams contends that the action of the Board in recommending the Amendment and Recapitalization to the stockholders constituted either a breach of fiduciary duty or an impermissible effort at entrenchment, both of which are claimed to rebut the business judgment presumption and implicate entire fairness review. We disagree. These contentions are conclusory and have no factual support in this record.

      58

      There was on this record: (1) no non-prorata or disproportionate benefit which accrued to the Family Group on the face of the Recapitalization, although the dynamics of how the Plan would work in practice had the effect of strengthening the Family Group's control;[22] (2) no evidence adduced to show that a majority of the Board was interested or acted for purposes of entrenching themselves in office; (3) no evidence offered to show that the Board was dominated or controlled by the Family Group;[23] and (4) no violation of fiduciary duty by the Board.

      59

      Only by demonstrating that the Board breached its fiduciary duties may the presumption of the business judgment rule be rebutted, thereby shifting the burden to the Board to demonstrate that the transaction complained of was entirely fair to the stockholders. See Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 663 A.2d 1156, 1164 (1995) ("Technicolor"); Kahn v. Lynch Communication Systems, Inc., Del.Supr., 638 A.2d 1110, 1115-17 (1994); Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1375-76 (1993); see also Aronson, 473 A.2d at 812 (noting that business judgment rule is inapposite to demand futility analysis if directors breach their fiduciary duties).

      60

      Based on the undisputed evidence in this record, we conclude that the Board's action in recommending the Amendment and Recapitalization to the stockholders for approval, pursuant to 8 Del.C. § 242(b)(1), is protected by the business judgment rule. We [1379] now turn to the issue of the validity of the stockholder vote.

      61
      VI. THE EFFECT OF THE STOCKHOLDER VOTE
      62
      A. General
      63

      The recommendation by a board of directors of the advisability of a charter amendment is merely the first step under the organic, statutory scheme of 8 Del.C. § 242, which authorizes amendments to certificates of incorporation. The second step — the stockholder vote pursuant to which an amendment is approved — must be examined for compliance with the statute, the adequacy of the disclosures advanced to secure the stockholder approval, and compliance with fiduciary duty. In such a situation, "our standard of review is linked to the validity of the shareholder vote." Stroud II, 606 A.2d at 83.

      64

      Stockholder approval of an organic, statutory change must comply with the statutory procedure and must be based on full and fair disclosure. The burden rests on the party relying on stockholder approval to establish that the approval resulted from a fully informed electorate and that all material facts relevant to the transaction were fully disclosed. See Yiannatsis v. Stephanis, Del. Supr., 653 A.2d 275, 280 (1995); Bershad, 535 A.2d at 846; Smith v. Van Gorkom, Del. Supr., 488 A.2d 858, 893 (1985); Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 703 (1983); see also Michelson v. Duncan, Del. Supr., 407 A.2d 211, 224 (1979); Gottlieb v. Heyden Chem. Corp., Del.Supr., 91 A.2d 57, 58-59 (1952); Saxe v. Brady, Del.Ch., 184 A.2d 602, 610 (1962); Gerlach v. Gillam, Del.Ch., 139 A.2d 591, 593 (1958).

      65

      We put to one side those cases, not relevant here, where stockholders are called upon to ratify action which may involve a transaction with an interested director or where the transaction approved by the board may otherwise be voidable.[24] See, e.g., Marciano v. Nakash, Del.Supr., 535 A.2d 400, 403-04 (1987); Van Gorkom, 488 A.2d at 889-90; Michelson, 407 A.2d at 218-220.

      66

      Our analysis here involves an entirely different application of the Delaware General Corporation Law — namely, the effect of corporate action which, in order to become operative, requires and receives both approval by the board of directors and the stockholders. Three examples are common: amendments to the certificate of incorporation (8 Del.C. § 242); mergers or consolidations of domestic corporations (8 Del.C. § 251); and sales of all or substantially all of a corporation's assets (8 Del.C. § 271, which permits a sequence that may vary from the sequences applicable to amendments or mergers).[25] There are, of course, other examples.

      67

      [1380] Stroud II, 606 A.2d 75, provides a useful example of the type of analysis required of this Court when presented with this type of organic, statutory change. In Stroud II, the board of Milliken Enterprises ("Milliken"), a privately held Delaware corporation, recommended to its stockholders that the certificate of incorporation be amended in certain respects and that certain bylaw amendments be approved.[26] The minority-stockholder plaintiffs alleged that the amendments were defensive, served no legitimate purpose, were designed to entrench the majority, and were, therefore, invalid under Unocal. Plaintiffs in Stroud II further contested the accuracy and adequacy of the disclosures made to the stockholders in connection with the vote at the stockholders' meeting.

      68

      In Stroud II, this Court first determined that the directors' actions in recommending to the stockholders the charter and bylaw amendments were protected by the business judgment rule and that Unocal was inapplicable. Id., 606 A.2d at 82-83. Since the majority of the stockholders entitled to vote approved the changes, the issue confronting this Court was whether the stockholder vote was effective. While 78 percent of the shares entitled to vote approved the changes, the vast majority of these shares were controlled by four members of Milliken's board of directors. Turning to the validity of the stockholder vote, the Court concluded:

      69
      In the absence of proof by plaintiffs that the disclosures were misleading or inadequate, or that the actions of the board involved fraud, waste or other misconduct which were not ratified by unanimous vote of the stockholders, this ends the matter. See, e.g., Keenan v. Eshleman, Del.Supr., 2 A.2d 904, 909 (1938).
      70

      Stroud II, 606 A.2d at 84 (emphasis supplied) (footnote omitted).

      71
      In sum, after finding that the shareholder vote was fully informed, and in the absence of any fraud, waste, manipulative or other inequitable conduct, that should have ended the matter on basic principles of ratification.
      72

      Id., 606 A.2d at 92 (emphasis supplied) (citation omitted).

      73
      B. Applicability of Existing Law to this Case
      74

      We find that Stroud II is applicable here. In Stroud II, this Court held that the stockholder vote, being both fully informed and devoid of any fraud, waste, manipulative or other inequitable conduct, effectively implemented the board recommendations adopting amendments to the certificate of incorporation and approving a bylaw change, both of which allegedly benefited the incumbent controlling majority. Stroud II, 606 A.2d at 83. The presence of a controlling majority stockholder did not undermine the validity of the stockholder vote.

      75

      In the instant case, like Stroud II, the Board recommended the advisability of the Amendment to the stockholders who voted in favor of the Amendment. On its face, therefore, the corporate action was authorized and regular.[27] Stockholders (even a [1381] controlling stockholder bloc) may properly vote in their own economic interest, and majority stockholders are not to be disenfranchised because they may reap a benefit from corporate action which is regular on its face. As we stated in Stroud II:

      76
      The fact that controlling shareholders voted in favor of the transaction is irrelevant as long as they did not breach their fiduciary duties to the minority holders. Unocal, 493 A.2d at 958; Bershad, 535 A.2d at 845; see Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, Del. Supr., 53 A.2d 441, 447 (1947).
      77

      Stroud II, 606 A.2d at 83-84.

      78

      The result here, as in Stroud II, is entirely in harmony with the broad policies underlying the Delaware General Corporation Law. At its core, the Delaware General Corporation Law is a broad enabling act which leaves latitude for substantial private ordering, provided the statutory parameters and judicially imposed principles of fiduciary duty are honored. Although directors are given much discretion in managing the business and affairs of the corporation,[28] some fundamental measures require stockholder action. For example, when the statutory framework was altered in 1986 to permit some exemptions from personal liability for directors in 8 Del.C. § 102(b)(7), it was (and is) the legislative policy of this State that such exemptions could be enjoyed by directors only if stockholders approved such a provision in the certificate of incorporation. Further, all amendments to certificates of incorporation and mergers require stockholder action. Thus, Delaware's legislative policy is to look to the will of the stockholders in these areas.

      79

      Like the statutory scheme relating to mergers under 8 Del.C. § 251, it is significant that two discrete corporate events must occur, in precise sequence, to amend the certificate of incorporation under 8 Del.C. § 242: First, the board of directors must adopt a resolution declaring the advisability of the amendment and calling for a stockholder vote. Second, a majority of the outstanding stock entitled to vote must vote in favor. The stockholders may not act without prior board action. Likewise, the board may not act unilaterally without stockholder approval. Therefore, the stockholders control their own destiny through informed voting. This is the highest and best form of corporate democracy.[29]

      80
      C. No "Majority of Minority" Vote Required
      81

      In support of her claim that the stockholder vote is ineffective, Williams points to Fliegler v. Lawrence, Del.Supr., 361 A.2d 218 (1976), a case in which this Court held that a stockholder vote to validate an interested director transaction under 8 Del.C. § 144 requires that the approval must come from a majority of the disinterested stockholders. Clearly, Fliegler does not apply here where there was an independent board and no interested director transaction.[30]

      82

      [1382] There is no requirement under the Delaware General Corporation Law that a majority of the outstanding minority shares must vote in favor of a transaction which benefits the majority. The issue of the role of a "majority of the minority" vote must be clearly understood. Where, as here, there is a controlling stockholder or a controlling bloc, there is no requirement under the Delaware General Corporation Law that the transaction be structured or conditioned so as to require an affirmative vote of a majority of the minority group of outstanding shares. See Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 937 (1985). In those parent-subsidiary situations where the circumstances call for an entire fairness analysis, the burden is normally on the defendants to show entire fairness, but if a majority of the minority votes in favor under certain circumstances, the burden shifts to the plaintiff to show unfairness. Id.; see also Kahn, 638 A.2d at 1116-17. The converse does not apply, however — namely, the failure to obtain a majority of the minority does not give rise to any adverse inference of invalidity. Moreover, in a case such as the case at bar where entire fairness is not an issue, the question of whether a majority of the minority was obtained is simply irrelevant.

      83
      D. Alleged Improper "Coercion"
      84

      Williams claims that the stockholder vote was rendered null and void because the vote was improperly coerced and the majority of stockholders voting to approve the Amendment were members of the Family Group. Williams' claim that the Recapitalization vote was wrongfully coerced is based on disclosures in the Proxy: First, the Proxy informed the stockholders that, due to the Family Group's voting control and the likelihood that the Family Group would favor the Recapitalization,[31] "approval of the Recapitalization... [was] virtually assured."[32] The Proxy further disclosed that the then current NYSE rules "prohibit[ed] voting structures similar to that proposed by the Recapitalization." The Proxy went on to explain that, "[i]f the NYSE's current policy is modified in accordance with the NYSE subcommittee proposal,[33] and if the Recapitalization is approved by the holders of shares entitled to cast two-thirds of the votes at the meeting, then it appears that the Common Stock could continue to trade on the NYSE." Proxy at 17. The effect of these two statements, Williams contends, was impermissibly to coerce the stockholders into voting for the Recapitalization. "[E]ven in light of a valid threat, management actions that are coercive in nature[,] ... force upon shareholders a management sponsored" proposal, or fail adequately to inform the stockholders of all material information, "may be struck down as unreasonable." Time, 571 A.2d at 1154.

      85

      Thus, a board of directors seeking stockholder approval of a transaction must walk a fine line between disclosures designed to inform and disclosures which may be seen as coercive. An otherwise valid stockholder vote may be nullified by a showing that the structure or circumstances of the vote were impermissibly coercive. See, e.g., Lacos Land Co. v. Arden Group, Inc., Del.Ch., 517 A.2d 271, 278-79 (1986). Wrongful coercion may exist where the board or some other party takes actions which have the effect of [1383] causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction. See, e.g., Eisenberg v. Chicago Milwaukee Corp., Del.Ch., 537 A.2d 1051, 1061 (1987) (holding corporation's self tender to be impermissibly coercive); AC Acquisitions Corp. v. Anderson, Clayton & Co., Del.Ch., 519 A.2d 103, 112-15 (1986) (same). In the final analysis, however, the determination of whether a particular stockholder vote has been robbed of its effectiveness by impermissible coercion depends on the facts of the case.

      86

      The simple answer to Williams' argument in this case is that the Proxy was merely stating facts which were required to be disclosed. These disclosures were neutrally stated and were not threatening in any respect. "Under Delaware law, it is undisputed that when a board of directors `is required or elects to seek shareholder action,' it is under a duty `to disclose fully and fairly pertinent information within the board's control.'" Stroud v. Milliken Enters., Inc., Del. Supr., 552 A.2d 476, 480 (1989) ("Stroud I") (quoting Lacos, 517 A.2d at 279). The Milacron Board was required to disclose the reality of the situation (i.e., that the voting control of the Family Group makes passage of the Recapitalization "virtually assured" and that voting against the Recapitalization may harm the stockholders in that the failure to obtain two-thirds of the voting shares could risk NYSE delisting). The board could not couch these disclosures in vague or euphemistic language or in terms that would deprive the stockholders of their right to choose. The disclosures must be forthright and clear, and they were in this case.

      87

      Williams contends that Lacos controls this situation and mandates a finding of improper coercion. In Lacos, the Court of Chancery struck down a recapitalization with some features similar to those involved here. But that is where the similarity ends. Lacos involved blatant threats. In Lacos, plaintiffs sought to enjoin a pending recapitalization of the Arden Group pursuant to which a new class of common stock would be created with ten votes per share. All stockholders would be entitled to exchange their existing common shares for new common shares. The new shares were designed, however, to hold limited attractiveness to ordinary stockholders — they had limited dividend rights and limited transferability. Lacos, 517 A.2d at 272-74. The Court of Chancery ultimately enjoined the Lacos recapitalization for reasons which are not present here — namely, threats that, unless the new shares were approved, the proponent of the plan would oppose transactions that the board had determined were in Arden's best interests. Id., 517 A.2d at 276; cf. Kahn, 638 A.2d at 1114, 1118 (where threats of a controlling stockholder deprived an otherwise "independent committee" of its independence).

      88

      Lacos is plainly distinguishable from the case at bar. The disclosures in the Milacron Proxy were true, accurate and unvarnished. There is no valid claim that the Proxy was misleading. Unlike the situation in Lacos, the Proxy here allowed the stockholders to decide on the basis of the merits of the transaction. The threats made to the stockholders in Lacos caused the vote to turn on factors extrinsic to the merits of the transaction. Rather than determining whether the Lacos recapitalization was in their best interests, the Lacos stockholders were forced to decide between the lesser of two evils: ceding control to a dominant stockholder or losing out on potentially favorable transactions in the future. Conversely, the Milacron Proxy merely presented to the stockholders material[34] information required — as a matter of full disclosure — so that they could determine the relative merits of the Recapitalization.

      89

      The possibility of NYSE delisting, which could decrease share value, is certainly a fact that a reasonable stockholder would want to know before casting his or her vote. See, e.g., Sonesta Int'l Hotels Corp. v. Wellington Assocs., 2d Cir., 483 F.2d 247, 254 (1973) ("the risk of delisting was sufficiently appreciable to require disclosure.... [and] could [1384] certainly have been of importance to a Sonesta shareholder in deciding whether to retain some shares or to tender all"); see also Eisenberg, 537 A.2d at 1061-62 ("the possibility that shares not tendered will be delisted and/or deregistered ... and its disclosure in the offering materials, without more, has been held to be not wrongfully coercive"). Likewise, the fact that the vote was candidly described as "virtually assured" was something that a reasonable stockholder would want to know. Neither statement could have been omitted or incompletely described. Moreover, inclusion of one fact without the other could have been misleading.

      90

      The tension between full disclosure and perceived coercion is clearly present in this case. The alternative of nondisclosure is obviously unacceptable and could have invalidated the vote. The other alternative, which would preclude an amendment which is otherwise valid because of the requirement of full disclosure, would be truly ironic and is likewise clearly unacceptable. Hence, we do not find improper coercion in the disclosures here.

      91
      E. Whether the Result of the Stockholder Vote was "Fair" to the Minority
      92

      Williams contends that the Family Group — due solely to their majority status — benefited from the Amendment and the Recapitalization[35] to a disproportionately greater extent than the minority stockholders. Accordingly, she contends that the Family Group breached its duty of loyalty to the minority, thus requiring that the majority show entire fairness. See Technicolor, 663 A.2d at 1162-63. But this argument is misplaced. In Technicolor, the business judgment rule was rebutted by the Chancellor's findings that the board of directors acted without the requisite care. When the presumption of the business judgment rule is rebutted either because the board lacked independence (as in Kahn v. Lynch and Nixon v. Blackwell, for example) or because of lack of due care (as in Technicolor), the burden shifts to the defendants to show entire fairness (fair dealing and fair price). That is not the case here. The Milacron board was independent and acted with the requisite care. There were no disclosure violations. Therefore, the entire fairness inquiry articulated in Technicolor simply has no application here, and plaintiff's reliance thereon is misplaced.

      93

      As in Stroud II, the stockholder vote in favor of the Amendment "was fully informed, and in the absence of any fraud, waste, manipulative or other inequitable conduct, that should have ended the matter on basic principles of ratification." Stroud II, 606 A.2d at 92. Strict compliance with the statutory scheme laid out in 8 Del.C. § 242(b)(1) will not protect a corporate act if that act involved the excepted misconduct articulated in Stroud II.[36] As we stated in Schnell v. Chris-Craft Industries, Inc., Del. Supr., 285 A.2d 437, 439 (1971), for example, "inequitable action does not become permissible simply because it is legally possible." There is no basis for a finding here that the Amendment and Recapitalization involved waste, fraud, or manipulative or other inequitable conduct. Likewise, there is no showing either that the Recapitalization lacked a rational business purpose or that its sole or primary purpose was entrenchment. The burden is on the plaintiff to prove these outer limits on corporate behavior, and plaintiff has not sustained her burden.

      94
      [1385] VII. CONCLUSION
      95

      This is an old case. In the nearly nine years this case has languished in the Court of Chancery, Williams has had ample opportunity to produce some proof of wrongdoing and has failed to do so. Conclusory allegations that the result of the Recapitalization was "unfair" to the minority are not a substitute for analysis or proper pleading and proof of violation of fiduciary duty. It is no answer to say that the statute should not permit the result obtained here even though the Amendment is within the broad powers of Section 242. The quarrel (if any) with the result is not with the application of the statutory authority in this case; it is with the breadth of the statutory authority itself. The remedy is not to ask this Court to fashion some ad hoc "relief" for Williams. If we were to engraft here an exception to the statutory structure and authority in order to accommodate Williams' objection to this result, we would be engaging in impermissible judicial legislation. See Nixon, 626 A.2d at 1379-81; Providence & Worcester Co. v. Baker, Del.Supr., 378 A.2d 121, 124 (1977).[37]

      96

      Williams has failed to sustain her burden to show invalidity. The statutory procedure was followed and authorized the adoption of the Amendment. The Board's action in recommending the Recapitalization to the stockholders was the result of an independent business decision of the Board, protected by the presumption of the business judgment rule which was not rebutted. The fully informed stockholder vote approving the Amendment validly effected the Recapitalization. The fact that the Family Group voted in favor of the Amendment does not invalidate the vote, even if they benefited more than the minority. Plaintiff has not alleged or shown a violation of Section 242 or any proof of fraud, waste, manipulative or other inequitable conduct.

      97

      Accordingly, the judgment of the Court of Chancery granting summary judgment to defendants is AFFIRMED.

      98
      HARTNETT, Justice, and HORSEY, Justice (Retired), dissenting:
      99

      We respectfully dissent. The question is what is the appropriate standard of review to be employed by the Court of Chancery in reviewing the Milacron Recapitalization Plan that was approved by a vote of the shareholders pursuant to 8 Del.C. § 242, the effect of which will inevitably entrench the majority stockholders, to the ultimate detriment of the minority stockholders who did not approve the Plan. The members of the Geier Family Group, the intended and acknowledged beneficiaries of the Plan, "own or control in excess of 50% of the total voting power of the Company's stock and in excess of two-thirds of the Preferred Stock Outstanding." (Proxy [1386] Statement set forth in footnote 6 of the Majority's Opinion.) Under these circumstances, neither the business judgment rule nor the shareholder vote shift the burden of persuasion in the required judicial inquiry into the reasonableness of the Recapitalization Plan or its fairness to the minority shareholders.

      100

      Furthermore, the existence of controverted facts precluded the Court of Chancery from finding that the Plan was reasonable under the standard articulated in Unocal or that the standard articulated in Blasius was not applicable.

      101
      I.
      102

      We believe the action of the Milacron Board in instituting and recommending adoption of the Recapitalization Plan implicates the duty of loyalty and, therefore, must be subject to full judicial scrutiny, not to judicial deference because of the business judgment rule. The Board's stated reason for the Plan is not dispositive, given the Plan's conceded effect: to confer substantial benefits on the majority shareholders, the Geier Family Group, without conferring similar benefits upon the minority shareholders having equally legitimate, but differing, investment objectives.

      103

      The shareholders were informed by the Proxy that shareholder approval of the Plan was "virtually assured." (Footnote 6, majority opinion.) We, therefore, do not believe that the Board's submission of the Recapitalization Plan to the shareholders, pursuant to 8 Del.C. § 242, and the approval of it by the same majority shareholders who are the beneficiaries of the Plan lessens judicial scrutiny into the reasonableness of the Plan and its fairness to the minority shareholders.

      104

      Even if the shareholder vote was voluntary (which it was not), it would have merely accorded the Plan a presumption of fairness. The Court of Chancery still had a duty to determine whether the power exercised by the Board was oppressive to the minority. See Davis v. Louisville Gas & Electric Co., Del.Ch., 142 A. 654 (1928); Bailey v. Tubize Rayon Corp., D.Del., 56 F.Supp. 418 (1944).

      105
      II.
      106

      The majority's reliance on Stroud v. Grace, Del.Supr., 606 A.2d 75 (1992), to preclude or lessen judicial review of the Plan is misplaced. In the present case, the Geier Family Group are the controlling shareholders of a public corporation. The proposed Plan significantly alters shareholder voting rights to the detriment of those minority shareholders who have no interest in preserving the family ownership, or whose investment objectives may have a different time frame from the Family Group. Stroud involved a private, closely held corporation that sought to have adopted a "right of first refusal" charter amendment commonly used by such corporations to preclude the transfer of shares to outsiders. Milacron's status as a public corporation does not permit the Court of Chancery to merely defer to the text of the Recapitalization Plan which has the ultimate effect of turning a public corporation into a de facto close corporation.

      107

      In Stroud this Court relied upon a shareholder vote to cure otherwise suspect board actions involving charter amendments commonly adopted by close corporations. The court found that "[i]n the absence of fraud, a fully informed stockholder vote in favor of even a `voidable' transaction ratifies board action and places the burden of proof on the challenger." Stroud, 606 A.2d at 83.

      108

      In the present case, however, the charter amendments worked fundamental changes in the governance of Milacron, as the Proxy concedes. The Recapitalization Plan's ultimate effect will be to confer upon the Geier Family shareholders control not only over the future composition of the Board, but over the strategic long-term planning of the company. A coerced shareholder vote which received the approval of less than 50 percent of the votes of all the unaffiliated [non-Geier Family] shares outstanding cannot be deemed to be a shareholder approval that lessens judicial scrutiny as to the fundamental fairness of the Plan. In our opinion, for there to be a vote that cures a defect, two factors are implicated. First, there must be a full disclosure of the pertinent facts. Stroud, 606 A.2d at 84; Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 703 (1993). [1387] Second, the vote must be free from coercion, that is, the shareholder action must be meaningful and voluntary. Rakestraw v. Rodrigues, Supr., 8 Cal.3d 67, 104 Cal.Rptr. 57, 60, 500 P.2d 1401, 1404 (1972). See Eisenberg v. Chicago Milwaukee Corp., Del.Ch., 537 A.2d 1051, 1061 (1987); Ivanhoe Partners v. Newmont Mining Corp., Del.Ch., 533 A.2d 585, 605, aff'd, Del.Supr., 535 A.2d 1334 (1987); AC Acquisitions Corp. v. Anderson Clayton & Co., Del.Ch., 519 A.2d 103, 113-14 (1986); Lacos Land Co. v. Arden Group, Inc., Del. Ch., 517 A.2d 271, 278-79 (1986). The legal imprimatur of a shareholder ratification cannot arise out of a staged and essentially meaningless vote.[38]

      109

      Here the minority stockholders were faced with two significant disclosures in the Proxy: (1) the adoption of the Recapitalization Plan was "virtually assured" of approval because of the votes of the Geier Family (the proposers of, and the prime beneficiaries of the Plan), and (2) the adoption of the proposed Charter Amendment could result in a delisting of Milacron stock from the New York Stock Exchange unless it was ratified by an affirmative vote of 2/3 of all the shares. The minority stockholders, therefore, had no real choice. Nor did a majority of the minority apparently vote for the Plan.[39] (Footnote 12, majority opinion.) Notwithstanding that the shareholder vote was legally sufficient to meet the requirements of 8 Del.C. § 242, the burden of persuasion to show the unfairness of the Plan was not shifted to the minority shareholders. See Schnell v. Chris-Craft Indus., Inc., Del.Supr., 285 A.2d 437, 439 (1971).

      110
      III.
      111

      In our opinion, the Board's decision proposing and recommending the adoption of the Recapitalization Plan should be subject to a heightened level of judicial scrutiny, under the rationale of Unocal, 493 A.2d 946, or Blasius, 564 A.2d 651, or both. When the voting rights of minority stockholders are changed without their consent, there is the omnipresent specter of inherent conflict between a board's duty to all the stockholders and the desires of the block of stockholders holding a majority of the shares. This conflict is similar to the conflict that existed in Unocal.[40]

      112

      Although an action diminishing a shareholder's vote is not invalid, per se, the right of an individual stockholder to exercise the voting rights of its shares is a fundamental corporate right. Tanzer v. Int'l Gen. Indus., Inc., Del.Supr., 379 A.2d 1121, 1123 (1977); Wylain, Inc. v. TRE Corp., Del.Ch., 412 A.2d 338, 344 (1980); Aprahamian v. HBO & Co., Del.Ch., 531 A.2d 1204 (1987); Blasius, 564 A.2d at 659 n. 2 (1988). The right of franchise must not be diluted except where reasonably necessary to accomplish an appropriate corporate business policy. Id.

      113

      If the Milacron Board's purpose was to reduce the voting power of the minority shareholders or to increase the voting strength of the Geier Family Group shares, then the Board's action must pass the "compelling justification" standard of scrutiny articulated in Blasius. Stroud, 606 A.2d at 92 n. 3 (1992). As the majority concedes, the Board's duties were not fulfilled merely by blind compliance with the technical mandates of 8 Del.C. § 242. See Schnell, 285 A.2d at 439.

      114

      The Court of Chancery's determination that the "compelling justification" standard of Blasius was not implicated was apparently based on its conclusory finding that "the recapitalization plan does not interfere with voting rights so as to preclude effective stockholder action." This, however, is contradicted by the Court of Chancery's finding that the Plan has an entrenchment effect. [1388] The Court of Chancery's finding of the inevitability of the entrenchment of the Geier Family shareholders in the control of Milacron's future is an indisputable fact fully supported by the record through the Proxy Statement, and acknowledged in the Majority's Opinion at op. 1373-1374 and footnote 10. Hence, the Majority's conclusion to the contrary, at op. 1377-1378, is not supported by the record. Because the primary issue is shareholder entrenchment, the directors' motivation and good faith are not dispositive. Cf. Kahn v. Lynch Communication Systems, Inc., Del.Supr., 638 A.2d 1110, 1112-20 (1994) (recognizing that the appointment of a special committee by a controlling stockholder does not necessarily shift the burden of proving entire fairness from the controlling shareholder).

      115

      From a review of the entire record, we are convinced that, notwithstanding the self-serving denials of the proponents of the Plan, its effect on shareholders' voting rights was clearly substantial rather than incidental. The Court of Chancery, in our view, should have held an evidentiary hearing to determine if the Recapitalization Plan has a negative effect on the minority shares and to determine whether the primary purpose of the Plan was to assure the continual control of the corporation by the Geier Family members while permitting them to sell some of their shares.

      116

      If the Court of Chancery found these factors existed, it should have reviewed the Plan under the Blasius compelling justification standard.

      117
      IV.
      118

      In Stroud, this Court described the relationship between the tests articulated in Blasius and Unocal and stated that these tests are not mutually exclusive. Stroud, 606 A.2d at 92, n. 3. Although the Court of Chancery improperly, in our view, rejected the "compelling justification" standard of Blasius, unlike the majority, we believe that it correctly found that the action of the Board in adopting the Recapitalization Plan was subject to the heightened judicial scrutiny mandated by Unocal. A court must apply the enhanced scrutiny test set forth in Unocal whenever the board "adopts any defensive measure taken in response to some threat to corporate policy and effectiveness which touches upon issues of control." Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131, 1144 (1990).

      119

      If the purpose of the Recapitalization Plan was defensive, so as to eliminate challenges to control from hostile acquisition offers or proxy contests, as the Proxy suggests, the Unocal standard is triggered, as the Court of Chancery properly found. In conducting its Unocal analysis, however, the Court of Chancery failed to recognize that genuine issues of material fact existed that precluded its finding that the Recapitalization was a reasonable response to a perceived corporate threat.

      120

      From a review of the entire record, we are convinced that there are several disputed issues of fact that must be resolved before the Unocal heightened judicial scrutiny as to the proportionality and reasonableness of the Recapitalization Plan can be completed.[41] Among them are: 1) whether the primary purpose of the Recapitalization Plan was to disenfranchise the non-Geier Family shares; 2) whether the Plan's purpose was to substantially reduce the value and marketability of those shares; and 3) whether the primary purpose of the Plan was to enable the Geier Family members to dispose of a substantial portion of their shares and still retain control of the corporation.

      121

      Lastly, we find nothing in the text of 8 Del.C. § 242(b)(1) that precludes the Court of Chancery from exercising judicial oversight over a Recapitalization Plan with such a disproportionate effect on the minority shares.

      122
      V.
      123

      The standard for granting summary judgment is high. Summary judgment should [1389] not be granted if the record indicates that a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of law to the circumstances. Ebersole v. Lowengrub, Del.Supr., 180 A.2d 467 (1962). "In discharging this function, the [trial] court must view all the evidence in the light most favorable to the non-moving party." Merrill v. Crothall-American, Inc., Del.Supr., 606 A.2d 96, 99 (1992) (citation omitted).

      124

      It is clear from the record that the Recapitalization Plan will increase the relative voting power of the long-term holders of the common stock — who are likely to be Geier Family members. This fact mandates a factual inquiry into the purpose of the Board in adopting and recommending the Recapitalization Plan. If the change in shareholder voting power was an unintended byproduct of a defensive strategy, the heightened scrutiny standard in Unocal should be applied. If, however, the facts show that the Board's primary purpose was to dilute the franchise of the non-Geier Family shares, then, under Blasius, Defendants "[bear] the heavy burden of demonstrating a compelling justification for such action." Blasius, 564 A.2d at 661.

      125

      If the facts show that the purpose of the Recapitalization Plan was simply to favor the Geier Family at the expense of the other stockholders, then a breach of the duty of loyalty likely occurred. See Unitrin, 651 A.2d at 1375 (a director may be found to be acting independently only when his "decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences" (quoting Aronson v. Lewis, Del.Supr., 473 A.2d 805, 816 (1984)); Frantz Mfg. v. EAC Indus., Del. Supr., 501 A.2d 401, 408 (1985); Giuricich v. Emtrol Corp., Del.Supr., 449 A.2d 232, 239 (1982); Schnell, 285 A.2d at 439.

      126

      Although we recognize the frustration of the Court of Chancery in attempting to dispose of this suit, which was filed in 1986, the granting of summary judgment must be cautiously invoked so that the parties may always be afforded an evidentiary hearing where there is a bona fide dispute as to the facts. H & S Mfg. Co. v. Benjamin F. Rich Co., Del.Ch., 164 A.2d 447 (1961). A trial court must not weigh the evidence in passing on the motion. Continental Oil Co. v. Pauley Petroleum, Inc., Del.Supr., 251 A.2d 824 (1969).

      127

      We believe, therefore, that the case should be remanded to the Court of Chancery for a limited evidentiary hearing to resolve the remaining issues of material fact and for a meaningful review of the Recapitalization Plan in which the proponents of the Plan bear the burden of showing its fairness and reasonableness to the minority shareholders. After resolving the disputed factual issues, the Court of Chancery would be in a position to decide whether the review should be conducted under the enhanced standard of review of Unocal or Blasius.

      128

      [1] This matter was originally heard by a panel of this Court and then was reargued on June 13, 1995 before the Court en Banc, consisting of Veasey, Chief Justice, Walsh, Holland and Hartnett, Justices, and Horsey, Justice (Retired), sitting by designation pursuant to Supr.Ct.R. 2 and Del. Const., art. IV, § 38. Williams v. Geier, Del.Supr., No. 380, 1994, Walsh, J. (April 13, 1995) (ORDER). Following the June 13, 1995 oral argument, the Court ordered supplemental briefing, Williams v. Geier, Del.Supr., No. 380, 1994, Veasey, C.J. (July 7, 1995) (ORDER). On September 6, 1995, the supplemental briefing was completed and the matter was resubmitted to the Court for decision on the briefs. Thereafter, Justice Holland recused himself and President Judge Ridgely of the Superior Court was designated to sit pursuant to Supr.Ct.R. 2 and Del. Const. art. IV, § 12. With the consent of the parties, the matter was submitted for decision on the briefs, without oral argument, on November 28, 1995. Williams v. Geier, Del.Supr., No. 380, 1994, Veasey, C.J. (Nov. 14, 1995) (ORDER),

      129

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

      130

      [3] Blasius Indus., Inc. v. Atlas Corp., Del.Ch., 564 A.2d 651 (1988).

      131

      [4] The seven independent, disinterested directors were: Neil A. Armstrong, Chairman of Computer Technologies for Aviation, Inc. and Director of Thiokol Corp., UAL Corp., USX Corp., as well as other companies; Edward W. Asplin, Chairman and CAO of Bemis Co.; Clark Daugherty, retired past Executive Vice President of Dart Indus.; Lyle Everingham, then Chairman and CEO of the Kroger Co.; Donald N. Frey, Chairman and CEO of Bell & Howell Co.; C. Lawson Reed, retired past Chairman of Xomox Corp.; and Joseph A. Steger, President of the University of Cincinnati.

      132

      [5] The three inside directors were: James A.D. Geier ("Geier") (then Chairman of the Board and CEO of Milacron, as well as a descendant of Milacron's founder), who owned the largest percentage of shares, holding 9.36% of the common stock outstanding; Gilbert Geier McCurdy ("McCurdy") (another descendant of Milacron's founder), who owned 3.06% of the common shares; and Daniel J. Meyer ("Meyer") (then Milacron's Executive Vice President of Finance and Administration), who owned 0.17% of the common shares.

      133

      [6] But see Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 278, 290-91 (1989) ("Polaroid II") (noting that pension plans do not necessarily vote monolithically).

      134

      [7]According to the Proxy Statement for the April 22, 1986 Annual Meeting:

      135

      Current and former employees and Directors, employee benefit plans, descendants of the Company's founder, their in-laws and trusts established by them, own or control in excess of 50% of the total voting power of the Company's stock and in excess of two-thirds of the Preferred Stock outstanding. The trustee for the Company's employee benefit plans, which hold approximately 15% of the total voting power of the Company's stock, has informed the Company that, subject to its fiduciary duties, it currently expects to vote shares with respect to which it has not received instructions from employees in favor of the Recapitalization. All officers and directors as a group (21 persons) beneficially own approximately 14% of the total voting power of the Company's stock and are expected to vote in favor of the Recapitalization. Although the Company has not solicited the views of shareholders, it is also expected that most descendants of the Company's founder and their in laws will vote shares of the Common Stock and Preferred Stock owned or controlled by them in favor of the Recapitalization. Accordingly, approval of the Recapitalization at the meeting is virtually assured.

      136

      Cincinnati Milacron, Inc. Proxy Statement 21 (Mar. 24, 1986) (the "Proxy").

      137

      [8] The J.M. Smucker Company stockholders adopted a provision whereby existing stockholders would receive ten votes for each share held. These shares would revert to one-vote-per-share status upon transfer and would regain super-voting status only after being held for forty-eight consecutive months. J.M. Smucker Co. Proxy Statement 10-12 (July 25, 1985); see A.A. Sommer, Jr., Two Classes of Common Stock and Other Corporate Governance Issues 1985 (PLI Corp. Law & Practice Course Handbook Series No. 498, 1985) (analyzing the policy behind stock exchange voting rules and the interaction of various forms of recapitalization with those rules).

      138

      [9] All directors attended the meeting except Neil A. Armstrong.

      139

      [10] 8 Del.C.§ 242(b)(1) provides, in pertinent part:

      140

      (b) Every amendment authorized by subsection (a) of this section shall be made and effected in the following manner:

      141

      (1) If the corporation has capital stock, its board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment or directing that the amendment proposed be considered at the next annual meeting of the stockholders....

      142

      ... If a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class has been voted in favor of the amendment, a certificate setting forth the amendment and certifying that such amendment has been duly adopted in accordance with this section shall be executed, acknowledged, filed and recorded, and shall become effective in accordance with § 103 of this title.

      143

      [11]Prior to the Recapitalization, the Family Group held over 50% of the outstanding Milacron shares, making it Milacron's controlling stockholder bloc. First Boston prepared an analysis of the relative control the Family Group could expect to exert under the Recapitalization. Assuming 30% of the minority shares were sold, the Family Group would control anywhere from 51.9% if they sold 30% of their own shares, to 59.1% if they held on to all of their shares for a period of three years. Their control would become even greater in the event of a mass minority share sell-off, such as in a hostile tender offer. For example, in a scenario where 70% of the minority shares are sold, the Family Group will control anywhere from 67.3% if they sell 30% of their own holdings, to 73.9% if they do not sell their own shares for a period of three years. Thus, the Recapitalization strengthened the Family Group's "veto" power over any proposed sale of Milacron, and perpetuated the Family Group's control over the election of future directors, even after substantial reduction of Family Group share holdings.

      144

      At oral argument, Williams' counsel suggested that the Recapitalization had an immediate dilutive effect upon outside stockholders' voting power. This assertion was based on the fact that all shares held in street name were presumed to be short-term, possessing one vote. Under the terms of the Recapitalization, however, this presumption was rebuttable. By demonstrating that a particular beneficial owner was, in fact, a long-term holder, the shares held in street name would be given full, super-voting power. Thus, any dilution of outside stockholders' voting power came as a result of the inaction of those stockholders. The Family Group did not exercise control over whether the beneficial owners of the shares held in street name would seek to rebut the presumption and attain super-voting status. This was merely an incidental effect, brought about by the logistics of the transaction. Thus, this incidental impact cannot be seen as a non-pro rata or disproportionate benefit accruing to the Family Group. The failure of beneficial owners of shares held in street name to assert their super-voting status increased the relative voting power of all long-term holders, not just the Family Group.

      145

      [12] See supra n. 6.

      146

      [13] According to the Proxy, the Geier family (including trusts) owned or controlled approximately 35% of the shares of common stock and approximately 44% of the shares of preferred stock, or approximately 36% of the total voting power of the Company's stock. In addition, approximately 15% of the common stock and 37% of the preferred stock (or 16% of the total voting power of the Company) was owned or controlled by plans for the benefit of employees and by current or former employees other than descendants of the Company's founder. The record as to the vote is unclear and requires some interpolation. The Secretary certified that there were 23,538,326 common shares outstanding, of which 20,235,567 shares were represented at the meeting and voted, leaving 3,302,759 outstanding shares which were not represented at the meeting; 17,131.959 voted in favor; 3,103,608 voted against or abstained; members of the family and family trusts voted 7,507,050 in favor; there were 9,624,909 additional votes in favor. This is all the information provided in the Secretary's certificate. We must interpolate the following: Perhaps as much as, but not more than 3,766,132 (16%) of the outstanding common shares are presumed to be held by benefit plans and former employees and are presumed to have voted in favor. This leaves at least 5,858,777 unaffiliated common shares voting in favor as compared to 3,103,608 voting against or abstaining and 3,302,759 which were not represented at the meeting, totalling 6,406,367 presumed unaffiliated common shares which did not vote in favor. The record does not show that the preferred vote is relevant for this purpose.

      147

      [14] Williams did not include Donald N. Frey in her suit.

      148

      [15] Williams v. Geier, Del.Ch., C.A. No. 8456, 1987 WL 11285, mem. op. (May 20, 1987).

      149

      [16] In this appeal, Williams raises allegations of improper coercion to support her contention that the stockholder vote should be deemed null and void. Defendants point to the fact that Williams voluntarily dismissed this claim at an earlier stage of the litigation, and argue that this contention should not be reached by the Court on appeal. In essence, Defendants contend that Williams has waived the right to argue that improper coercion infected the electoral process. We conclude otherwise — namely that the question of improper coercion is an issue properly before us in analyzing the validity of the stockholder approval of the Amendment.

      150

      [17] The Court of Chancery's holding in that case — that a corporate board violates Delaware law when it deliberately acts to frustrate or disenfranchise a stockholder electorate, Blasius, 564 A.2d at 661 — has been cited with approval by this Court in other contexts. See, e.g., Unitrin Inc. v. American Gen. Corp., Del.Supr., 651 A.2d 1361, 1378-79 (1995); Preston v. Allison, Del. Supr., 650 A.2d 646, 649 (1994); Paramount Communications Inc. v. QVC Network Inc., Del. Supr., 637 A.2d 34, 42 n. 11 (1994) ("QVC Network"); Stroud v. Grace, Del.Supr., 606 A.2d 75, 78-79, 91 (1992) ("Stroud II"); Centaur Partners IV v. National Intergroup, Inc., Del.Supr., 582 A.2d 923, 927 (1990).

      151

      [18] The only evidence that Williams points to regarding a desire to impede the stockholder vote are First Boston's presentation materials that identify the Family Group's voting power under different scenarios, and a statement by Geier that he did not want the family to sell its shares. An investment banking firm examining recapitalization options normally would include in its analysis a description of how shares, particularly controlling shares, are affected under various plans. Thus, Williams' reliance on the First Boston data is unpersuasive.

      152

      [19] Central to the Unocal jurisprudence is the following: When a board unilaterally adopts defensive measures, there is the "omnipresent specter" of the inherent conflict between the board's duty to stockholders and the board's possible self-interest. That danger requires that the business judgment rule be applied only after the board's actions pass an intermediate level of enhanced judicial scrutiny which implicates the board's burden of going forward with the evidence before the burden may shift back to the plaintiffs for the ultimate burden of persuasion. Unocal, 493 A.2d at 954-55. Unocal requires that the court evaluate whether, in undertaking its unilateral defensive action: (1) the board "had reasonable grounds for believing that a danger to corporate policy and effectiveness existed"; and (2) the board's response was reasonable in relation to the threat posed. Unocal, 493 A.2d at 955. The fact that no company or person has commenced a specific takeover threat or action at the time of the defensive measure's adoption does not preclude application of the Unocal analysis if it is otherwise applicable. Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346, 1350 (1985).

      153

      [20] This Court has defined "disinterested directors" as those directors that "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." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citing 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 Int'l, Inc., Del.Ch., 249 A.2d 427, 430 (1968)); see also 8 Del.C. § 144. Likewise, "independent" means that a "director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Aronson, 473 A.2d at 816. Williams has not presented any evidence rebutting the presumption that the majority of the Board was disinterested and independent. See text accompanying n. 3, supra.

      154

      [21] If and when the presumption is rebutted, the matter proceeds to an analysis of entire fairness, which in turn implicates fair price and fair dealing. Otherwise, an entire fairness analysis is not implicated. In such an entire fairness proceeding, the defendant directors have the burden of proof. See Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 663 A.2d 1156, 1162 (1995) ("Technicolor"); Unitrin, 651 A.2d at 1371-75; Kahn v. Lynch Communication Sys., Inc., Del.Supr., 638 A.2d 1110, 1115-17 (1994); QVC Network, 637 A.2d at 42 n. 9; Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1375-76 (1993).

      155

      [22] See n. 10 supra and the accompanying text for an analysis of the effects of the Recapitalization. In support of its assertion that the Recapitalization disproportionately favors the Family Group, the dissent erroneously suggests that the Recapitalization allows Family Group members to transfer shares among themselves without losing super-voting status. See infra at n. 40. As the Proxy reveals, however, no special dispensation is given to Family Group members. Rather, the Recapitalization excludes certain types of transfers from its purview. For example, transfers pursuant to divorce, bequest or gift are deemed not to interrupt the previous owner's tenure, and do not, therefore, cause a diminution in the voting power of the shares transferred. Proxy at 13. The Recapitalization does allow the transfer of shares among Milacron's employee benefit plans without penalty. This is not, however, tantamount to an exclusion of Family Group shares from the effects of the Recapitalization.

      156

      [23] The mere fact that the Family Group owned a dominant stock interest does not rebut the presumption of the business judgment rule or call the directors' independence into question. See Puma v. Marriott, Del.Ch., 283 A.2d 693 (1971) (where five of nine directors were independent, board approval of transaction with 46% stockholder bloc held governed by the business judgment rule). If domination and control by a majority stockholder is not alleged by particularized facts and supported by evidence, the presumption of independence is intact. See Aronson, 473 A.2d at 816-17. That is this case.

      157

      [24] Transactions which are voidable, as distinct from those which are void,may in some circumstances, be ratified.

      158

      The key to upholding an interested transaction is the approval of some neutral decision-making body. Under 8 Del.C. § 144, a transaction will be sheltered from shareholder challenge if approved by either a committee of independent directors, the shareholders, or the courts.

      159

      Oberly v. Kirby, Del.Supr., 592 A.2d 445, 467 (1991); Technicolor, 663 A.2d at 1170; see also In re Wheelabrator Technologies, Inc. Shareholders Litig., Del.Ch., 663 A.2d 1194, 1202 (1995) (noting some such circumstances and concluding that stockholder ratification may not extinguish a "duty of loyalty claim"); cf. In re Santa Fe Pac. Corp. Shareholder Litig., Del.Supr., 669 A.2d 59, 67 (1995) (holding that stockholder approval of merger did not ratify board's use of defensive measures to thwart hostile bidder). We express no opinion on the question whether a "duty of loyalty claim" may or may not be ratified. Delaware law relating to the approval of interested director transactions and ratification principles may differ in certain respects from that advanced in 1 American Law Inst., Principles of Corporate Governance pt. 5, § 5.01 et seq., at 199-382 (1994). See John F. Johnston and Frederick H. Alexander, The Effect of Disinterested Director Approval of Conflict Transactions under the ALI Corporate Governance Project — A Practitioner's Perspective, 48 Bus.Law. 1393 (1993); see also Charles Hansen, A Guide to the American Law Institute Corporate Governance Project, 43-55 (1995).

      160

      [25] The term "ratification" is, in the dictionary sense, a generic term connoting official approval, confirmation or sanction. See Random House Unabridged Dictionary 1602 (2d Ed.1993). Thus, it is not incorrect to consider broadly that stockholder approval in either sense may be called "ratification." But where the organic act (such as those occurring under Section 242) necessarily requires stockholder approval for its effectuation, it may be preferable to employ the statutory usage — viz., "vote in favor" or, simply, stockholder approval.

      161

      [26] As we explained in Stroud II,606 A.2d at 80:

      162

      The most controversial aspects of the Amendments are charter Article Eleventh (c) and Bylaw 3. Article Eleventh (c) established a new method of qualifying directors for membership on Milliken's board. By-law 3 established the procedure for nominating board candidates. By-law 3 required the shareholders to submit a notice of their candidates to the board, specifying their qualifications under Article Eleventh (c), well in advance of the annual meeting. By-law 3 also empowered the board to disqualify a shareholder's nominee at any time even at the annual meeting.

      163

      [27] 8 Del.C.§ 242 is very broad in its authority:

      164

      [A] corporation may amend its certificate of incorporation, from time to time, so as:

      (1) To change its corporate name; or

      (2) To change, substitute, enlarge or diminish the nature of its business or its corporate powers and purposes; or

      (3) To increase or decrease its authorized capital stock or to reclassify the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares, or the qualifications, limitations or restrictions of such rights, or by changing shares with par value into shares without par value, or shares without par value into shares with par value either with or without increasing or decreasing the number of shares; or

      (4) To cancel or otherwise affect the right of the holders of the shares of any class to receive dividends which have accrued but have not been declared; or

      (5) To create new classes of stock having rights and preferences either prior and superior or subordinate and inferior to the stock of any class then authorized, whether issued or unissued; or

      (6) To change the period of its duration.

      The Amendment here clearly fits within that authority.

      165

      [28] See 8 Del.C. § 141(a); Moran, 500 A.2d at 1353; Unocal, 493 A.2d at 953.

      166

      [29] Absent fraud, waste, manipulative or inequitable conduct or other breach of fiduciary duty, a majority stockholder block, like the Family Group here, has broad legitimate powers. Of course, the corporate action must have a rational corporate purpose, Sinclair, 280 A.2d at 720, and may not be taken for the sole or primary purpose of entrenchment. Johnson v. Trueblood, 3rd Cir., 629 F.2d 287, 293 (1980). As we noted in QVC Network, 637 A.2d at 42-43, a controlling stockholder has the power, absent violation of fiduciary duty, to cause a cash-out merger, cause a break-up of the company, merge with another company, sell substantially all the corporate assets, etc. See also Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840, 845 (1987); Unocal, 493 A.2d at 958.

      167

      [30] The statutory scheme in Fliegler was based upon 8 Del.C. § 144 — the interested director transaction statute. In the case at bar, an entirely different statutory scheme is involved — namely, an amendment to the certificate of incorporation under 8 Del.C. § 242. Those are two statutory frameworks of independent legal significance. See Orzeck v. Englehart, Del.Supr., 195 A.2d 375, 377 (1963); Heilbrunn v. Sun Chemical Corp., Del.Supr., 150 A.2d 755, 757-59 (1959).

      168

      [31] See n. 6 supra.

      169

      [32] See, e.g., Jeffrey N. Gordon, Ties that Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 79 Cal.L.Rev. 1 (1988) (contending that when management or other group already holds substantial percentage of company stock stockholders may not value their voting rights highly and thus are coerced into approving dual class stock even when it may reduce their chance of receiving a lucrative tender offer).

      170

      [33] For the text of the subcommittee proposal, see A.A. Sommer, et al., Initial Report of the Subcommittee on Shareholder Participation and Qualitative Listing Standards: Dual Class Capitalization (Jan. 3, 1985) reprinted in Sommer, supra n. 7, at app. The subcommittee's recommended changes in the NYSE rules to which the Proxy referred did not materialize. Nevertheless, the Proxy discussed at length the then current situation under the NYSE rules. It went on to discuss the proposed amendments to those rules. The language quoted above was further modified by a number of conditional statements correctly indicating that passage of the amendments to the NYSE rules was not certain, and that, even if the amendments were adopted, the Recapitalization might still cause Milacron's stock to be delisted. The Proxy then discussed at length the effects of delisting and the possibility of trading on NASDAQ or other exchanges.

      171

      [34] "A[] ... fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Arnold, 650 A.2d at 1277 (quoting TSC Indus. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)).

      172

      [35] A summary of certain of these benefits appears at n. 10 supra. See also n. 21 supra.

      173

      [36] In the instant case, the Board complied with the statutory procedure delineated in 8 Del.C. § 242. Actions taken in strict compliance with a statutory scheme will generally not be disturbed by the Court, absent a showing of some inequitable conduct. Upon such a showing, however, the Court may use its equitable powers to invalidate a corporate act despite compliance with applicable legislative guidelines. See, e.g., Schnell v. Chris-Craft Indus., Inc., Del.Supr., 285 A.2d 437, 439 (1971). Absent inequitable or other improper conduct, compliance with a statutory prescription will shield director action from the intervention of the Court. See Maddock v. Vorclone Corp., Del.Ch., 147 A. 255, 256-57 (1929) (holding that amendment to certificate of incorporation removing cumulative voting provision and thereby eliminating ability of minority stockholders to elect a director to the board was permissible because of compliance with relevant statute and absence of inequitable conduct by board).

      174

      [37] In addition to the specter of impermissible judicial legislation, the relief requested by Williams, if granted, would introduce an undesirable degree of uncertainty into the corporation law. See Nixon, 626 A.2d at 1381. Directors and investors must be able to rely on the stability and absence of judicial interference with the State's statutory prescriptions. Nearly fifty years ago, this Court addressed a similar problem in the case of American Hardware Corp. v. Savage Arms Corp., Del.Supr., 136 A.2d 690 (1957). In American Hardware, the Court was called upon to evaluate the validity of a corporate act taken pursuant to the corporation's bylaws. The board of Savage Arms accelerated the date of its annual meeting, arguably to thwart an unsolicited tender offer by American Hardware and assist the board in consummating a transaction with its preferred merger partner, Aircraft Armaments Corp. American Hardware contended that the change of the meeting date was impermissible despite compliance with the corporation's bylaws because it adversely impacted on American's tender offer. Chief Justice Southerland, focusing on the Savage board's compliance with the corporation's bylaws, held that "[i]t needs little consideration to realize that the adoption of [American Hardware's] ... view would import serious confusion and uncertainty into corporate procedure." Id. at 693. As we held in American Hardware, absent a showing of inequitable conduct on the part of the board, compliance with the applicable corporate governance regime (be it statute or bylaw) will generally shield corporate action from judicial interference. Schnell cited this principle with approval, but found inequitable conduct. Schnell, 285 A.2d at 439; cf. Kidsco, Inc. v. Dinsmore, Del.Ch., C.A. Nos. 14649, 14657, 14684, 1995 WL 707859, *9, mem. op. at 18-20, Jacobs, V.C. (Nov. 22, 1995), aff'd, Del.Supr., Nos. 481, 482, 1995, 1995 WL 715886, Veasey, C.J. (Nov. 27, 1995) (ORDER) (finding board's unilateral decision to lengthen minimum time for calling stockholder-initiated special meeting to be permissible exercise of power granted to board by company's certificate of incorporation).

      175

      [38] As the majority opinion notes at footnote 12, apparently 6,406,367 shares were not voted for the Plan.

      176

      [39] If the Charter Amendment had been put to a separate vote of the minority shareholders they would have had an operative choice and, presumably, an affirmative vote would have relieved the Board of its burden of defending the Plan. See Citron v. E.I. DuPont de Nemours & Co., Del.Ch., 584 A.2d 490, 500 (1990).

      177

      [40] For a discussion of the desirability of broadened, enhanced judicial scrutiny, see Martin Lipton and Theodore N. Mirvis, Enhanced Scrutiny and Corporate Performance: The New Frontier for Corporate Directors, 20 Del.J.Corp.L. 123 (1995).

      178

      [41] An example of how the Recapitalization Plan was structured to favor the Geier Family shareholders is the Plan's provision that a transfer of shares will cause a reversion of the voting rights from 10 votes per share to a single vote per share for 36 consecutive months after a transfer. This provision will not apply, however, to shares of stock given by members of the Geier family to other family members.

    • 2.4 Smith v. Van Gorkom

      Van Gorkom is a controversial case of the Duty of Care in the context of a corporate acquisition. Van Gorkom occurred before and was the impetus for the adoption of the §102(b)(7)'s exculpation provision. Consequently, the result in Van Gorkom is unlikely to occur again. However, the Van Gorkom case is worth reading because it demonstrates the kinds of director failures that may well rise to the level of a violation of the duty of care.

      1
      488 A.2d 858 (1985)
      2
      Alden SMITH and John W. Gosselin, Plaintiffs Below, Appellants,
      v.
      Jerome W. VAN GORKOM, Bruce S. Chelberg, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan, Thomas P. O'Boyle, W. Allen Wallis, Sidney H. Bonser, William D. Browder, Trans Union Corporation, a Delaware corporation, Marmon Group, Inc., a Delaware corporation, GL Corporation, a Delaware corporation, and New T. Co., a Delaware corporation, Defendants Below, Appellees.
      3

      Supreme Court of Delaware.
      Submitted: June 11, 1984.
      Decided: January 29, 1985.
      Opinion on Denial of Reargument: March 14, 1985.

      4

      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.

      5

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

      6

      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.

      7

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

      8
      [863] HORSEY, Justice (for the majority):
      9

      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]

      10

      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.

      11

      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]

      12

      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.

      13
      I.
      14

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

      15
      -A-
      16

      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.

      17

      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.

      18

      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."

      19
      -B-
      20

      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.

      21

      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."

      22

      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.

      23

      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.

      24

      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.

      25

      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.

      26

      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.

      27

      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."

      28

      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.

      29

      [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."

      30

      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."

      31

      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.

      32

      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.

      33

      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.

      34

      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.

      35

      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.

      36

      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.

      37

      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.

      38

      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]

      39

      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.

      40

      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:

      41
      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.
      42

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

      43

      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."

      44

      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.

      45

      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.

      46
      * * *
      47

      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.

      48

      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.

      49

      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.

      50

      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.

      51
      * * *
      52

      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.

      53

      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.

      54

      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.

      55
      * * *
      56

      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.

      57
      II.
      58

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

      59

      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:

      60
      ... 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.
      61

      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.

      62

      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):

      63
      [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.
      64

      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.

      65

      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.

      66

      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.

      67

      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]

      68

      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).

      69

      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.

      70

      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:

      71
      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)
      72

      473 A.2d at 812.

      73

      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]

      74

      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.

      75

      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.

      76
      III.
      77

      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.

      78

      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.

      79
      -A-
      80

      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:

      81

      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.

      82

      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.

      83

      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.

      84

      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.

      85

      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:

      86
      (1)
      87

      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.

      88

      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.

      89

      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.

      90

      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.)

      91

      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.

      92

      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.

      93

      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.

      94

      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.

      95

      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.

      96

      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.

      97

      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.

      98

      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.

      99

      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]

      100
      (2)
      101

      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.

      102

      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:

      103

      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.

      104

      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.)

      105

      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.

      106

      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:

      107
      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.
      108

      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.

      109

      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.

      110

      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.

      111
      (3)
      112

      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.

      113
      (4)
      114

      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.

      115

      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]

      116
      * * *
      117

      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.

      118

      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.

      119

      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.

      120
      -B-
      121

      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]

      122
      (1)
      123

      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.

      124

      Trans Union's press release stated:

      125
      FOR IMMEDIATE RELEASE:
      126
      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.
      127
      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.
      128
      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.
      129
      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.
      130
      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.
      131

      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.

      132

      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.

      133

      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.

      134

      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.

      135

      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]

      136

      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.

      137

      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.

      138

      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]

      139

      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.)

      140

      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.

      141

      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.

      142

      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.

      143
      (2)
      144

      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."

      145

      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.

      146

      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.

      147

      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.

      148

      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.

      149

      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.

      150

      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."

      151
      * * *
      152

      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.

      153
      (3)
      154

      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.

      155

      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.

      156

      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:

      157

      (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.

      158

      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.

      159

      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.

      160

      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.

      161

      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."

      162

      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.

      163

      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).

      164

      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.

      165
      * * *
      166

      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.

      167
      IV.
      168

      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.

      169

      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.

      170

      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":

      171
      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....
      172
      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.
      173

      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).

      174
      V.
      175

      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.

      176

      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.

      177

      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.

      178

      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.

      179

      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).

      180

      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):

      181
      [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....
      182

      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.

      183

      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:

      184

      (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).

      185

      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:

      186
      [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.
      187

      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.

      188

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

      189
      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.
      190

      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."

      191

      (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.

      192

      (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:

      193
      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, ...
      194

      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.

      195

      (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:

      196

      (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;

      197

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

      198

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

      199

      (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

      200

      (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.

      201
      * * *
      202

      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."

      203

      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.

      204

      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.

      205

      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).

      206

      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.

      207
      * * *
      208

      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.

      209
      VI.
      210

      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.

      211

      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.

      212

      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.

      213
      * * *
      214
      REVERSED and REMANDED for proceedings consistent herewith.
      215
      McNEILLY, Justice, dissenting:
      216

      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.

      217

      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.

      218

      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.

      219

      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.

      220

      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.

      221

      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.

      222

      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.

      223

      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.

      224

      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.

      225

      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.

      226

      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.

      227

      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:

      228
      "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)
      229

      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.

      230

      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.

      231

      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.

      232

      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.

      233

      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.

      234

      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.

      235

      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.

      236

      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.

      237

      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.

      238

      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.

      239

      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.

      240

      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.

      241
      CHRISTIE, Justice, dissenting:
      242

      I respectfully dissent.

      243

      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.

      244
      ON MOTIONS FOR REARGUMENT
      245

      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.

      246

      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.

      247

      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.

      248

      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:

      249
      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 —
      250
      JUSTICE MOORE: Is there a distinction between Chelberg and Van Gorkom vis-a-vis the other defendants?
      251
      COUNSEL: No, sir.
      252
      JUSTICE MOORE: None whatsoever?
      253
      COUNSEL: I think not.
      254

      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:

      255
      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...
      256

      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.

      257

      The Motions for Reargument of all defendants are denied.

      258
      McNEILLY and CHRISTIE, Justices, dissenting:
      259

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

      260

      ---------

      261

      [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.

      262

      [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.

      263

      [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.

      264

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

      265

      [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.

      266

      [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."

      267

      [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.

      268

      [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."

      269

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

      270

      * * * 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.

      271

      [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...."

      272

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

      273

      (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.

      274

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

      275

      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.

      276

      [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.

      277

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

      278

      (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)

      279

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

      280

      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.

      281

      [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.

      282

      [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.

      283

      [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.

      284

      [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.

      285

      [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.

      286

      [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.

      287

      [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.

      288

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

      289

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

      290

      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.

      291

      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.

      292

      [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.

      293

      [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.

      294

      [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.

      295

      [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.

      296

      [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:

      297

      "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."

      298

      [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:

      299

      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.

      300

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

      301

      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.

      302

      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.

      303

      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.

      304

      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.

      305

      [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.

      306

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

      307

      (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....

      308

      [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.

      309

      [*] 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.

    • 2.5 Section 102(b)(7)

      The Delaware Supreme Court's decision in Van Gorkom was highly controversial at the time - even now.  The imposition of monetary liability for directors' lack of care while not unheard of was not a common occurence.  The court was divided 3-2 in the decision.  The Delaware Supreme Court has a norm of unanimity and it is highly unusual for the court - partcularly with respect to the corporate law - to issue divided opinions.  

      The decision has been variously derided by observerds as a "comedy of errors", a "serious mistake", "dumbfounding", and "surely one of the worst decisions in the history of corporate law." Nevertheless, Van Gorkom has endured over the years.   In part, that may be because a combination of statutory responses and subsequent developments in the common law have robbed Van Gorkom of much of its bite.  Almost in direct response to the Van Gorkom decision the legislature in Delaware (as well soon thereafter the legislatures in all 50 states, DC, and Puerto Rico) adopted exculpation provisions, which exculpate from liability for monetary damages violations by directors of their duty of care. 

      The text of 102(b)(7), which you've seen earlier in this course, is below.

       

      § 102. Contents of certificate of incorporation.

      (b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

       

      (7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

       

      Question:  Given the elimination of monetary liability, what incentives are there for directors to do a good job?  Is potential monetary liability required in order to assure directors live up to the standard of care?

       

    • 2.6 Malpiede v. Townson

      The effect of 102(b)(7) provisions on litigation is significant. Exculpation provisions eliminate of monetary liability directors for violations of their duty of care. Consequently, if a plaintiffs alleges only that directors violated their duty of care and that caused them some damage, there is no remedy available at law for these plaintiffs. Where the court is unable to provide a remedy, judicial economy requires that a case be dismissed.

      In Malpiede, the Delaware courts ecounter just such a situation. The result is not surprising: a duty of care claim is dismissed for failure to state a claim for which there is a remedy available.

      1
      780 A.2d 1075 (2001)
      2
      Lu V. MALPIEDE, Neil Malpiede, Julie S. Karchin, JJL Partners, Mary Jane Howard, and Roger H. Papazian, Plaintiffs Below, Appellants,
      v.
      George W. TOWNSON, Richard O. Starbird, Hugh W. Hunter, William J. Barrett, Merle A. Johnston, Royalty Acquisition Corp., Royalty Corporation, and Knightsbridge Capital Corporation, Defendants Below, Appellees.
      3
      No. 80, 2000.
      Supreme Court of Delaware.
      4
      Submitted:[*] April 3, 2001.
      5
      Decided: August 27, 2001.
      6

      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.

      7

      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.

      8

      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.

      9

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

      10

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

      11
      [1078] VEASEY, Chief Justice.
      12

      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.

      13

      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.

      14
      Facts
      15

      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]

      16

      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.

      17

      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.

      18

      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]

      19

      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]

      20

      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.

      21

      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.

      22

      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.

      23

      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.

      24

      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.

      25

      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]

      26

      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).

      27

      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]

      28
      Standard of Review
      29

      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]

      30

      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]

      31
      The Duty of Loyalty Claim
      32

      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.

      33

      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]

      34

      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.

      35

      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.

      36

      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]

      37
      The Disclosure Claims
      38

      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]

      39

      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]

      40

      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]

      41

      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]

      42

      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.

      43

      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.

      44

      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]

      45

      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.

      46

      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.

      47

      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.

      48
      The Due Care Claim
      49

      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.

      50

      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.

      51

      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.

      52

      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]

      53
      A. The Exculpatory Charter Provision Was Properly Before the Court of Chancery
      54

      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]

      55

      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]

      56

      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

      57
      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]
      58

      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]

      59

      [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]

      60

      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.

      61

      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.

      62

      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.

      63

      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.

      64
      B. Application of Emerald Partners
      65

      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.

      66

      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:

      67
      [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]
      68

      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.

      69
      1. The Court of Chancery Properly Dismissed Claims Based Solely on the Duty of Care
      70

      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.

      71

      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]

      72

      [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.

      73
      2. The Court of Chancery Correctly Applied the Parties' Respective Burdens of Proof
      74

      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]

      75

      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]

      76

      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.

      77

      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]

      78

      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]

      79
      The Aiding and Abetting Claim Against Knightsbridge
      80

      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]

      81

      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]

      82

      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]

      83

      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]

      84

      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.

      85

      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.

      86
      [1099] The Tortious Interference Claim Against Knightsbridge
      87

      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.

      88

      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.

      89

      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]

      90

      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]

      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.

      92

      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]

      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.

      94

      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.

      95
      [1101] Conclusion
      96

      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.

      97

      [*] 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).

      98

      [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.

      99

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

      100

      [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.

      101

      [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."

      102

      [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.

      103

      [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.

      104

      [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.

      105

      [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.

      106

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

      107

      [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.

      108

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

      109

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

      110

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

      111

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

      112

      [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.").

      113

      [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)).

      114

      [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.").

      115

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

      116

      [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.").

      117

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

      118

      [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.").

      119

      [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.

      120

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

      121

      [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.

      122

      [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.

      123

      [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.

      124

      [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.").

      125

      [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.

      126

      [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.

      127

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

      128

      [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.").

      129

      [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).

      130

      [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).

      131

      [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.").

      132

      [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).

      133

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

      134

      [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.

      135

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

      136

      [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."

      137

      [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).

      138

      [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.

      139

      [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).

      140

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

      141

      [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).

      142

      [45]Article TWELFTH provides:

      143

      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.

      144

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

      145

      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.

      146

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

      147

      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.

      148

      [48] Chancery Rule 12(b).

      149

      [49] See Chancery Rule 56(c).

      150

      [50] Chancery Rule 12(b).

      151

      [51] Chancery Rule 12(b).

      152

      [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)).

      153

      [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.").

      154

      [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).

      155

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

      156

      [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.").

      157

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

      158

      [58] Id. at 1223.

      159

      [59] Id. at 1224.

      160

      [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).

      161

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

      162

      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.

      163

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

      164

      [63] Chancery Rule 8(a).

      165

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

      166

      [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).

      167

      [66] 65 Del. Laws ch. 289.

      168

      [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).

      169

      [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):

      170

      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.

      171

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

      172

      [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).

      173

      [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.

      174

      [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).

      175

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

      176

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

      177

      [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)).

      178

      [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).

      179

      [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).

      180

      [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).

      181

      [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.

      182

      [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).

      183

      [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.").

      184

      [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)).

      185

      [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.").

      186

      [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").

      187

      [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.

      188

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

      189

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

      190

      [88] Id.

      191

      [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.

      192

      [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.

      193

      [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.

      194

      [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)).

      195

      [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. 

  • 3 Duty of Loyalty

    The business judgment presumption presumes, among other things, that directors act “in the best interests of the corporation.” When a plaintiff can plead facts to suggest that director does not act in the best interests of the corporation, then the defendant director will lose the deferential business judgment presumption and will be required to prove at trial that notwithstanding the facts pleaded by the plaintiff that the challenged decision was nevertheless entirely fair to the corporation (the entire fairness standard).

    Factual situations that commonly call into question whether a director acted in the best interests of the corporation include some of the following factual scenarios:

    1. A director engages in a commercial transaction with the corporation (a director is “on both sides” of a transaction with the corporation).
    2. A director uses his or her position to obtain a benefit for the director rather that the corporation.
    3. A director acts secretly acts as an adverse party or in competition with the corporation.
    4. A director gets a material personal benefit from a third party in connection with a transaction between the corporation and third party.

    In each of these factual situations, a plaintiff can reasonably plead that a director's decision was not in the best interests of the corporation and the director can lose the presumption of business judgment.

    Unlike violations of the duty of care, violations of the duty of loyalty are not exculpable. That is to say, if a director violates her duty of loyalty to the corporation, the director may be personally liable to the corporation and its stockholders for damages. Violations of the duty of care, as you will remember, are exculpable on the other hand. The availability of a monetary remedy consequently draws the attention of plaintiffs' counsel who can be expected to engage in a high degree of scrutiny of interested director transactions. 

    • 3.1 Dweck v. Nasser

      Consider the facts in the following case. Do the agents of the corporation and the corporate directors appear to comport themselves as loyal agents of the corporation? If not, how do their actions fall short of the standard of conduct expected of corporate fiduciaries?

      1
      GILA DWECK, SUCCESS APPAREL LLC, and PREMIUM APPAREL BRANDS LLC, Plaintiffs and Counterclaim-Defendants,
      v.
      ALBERT NASSER and KIDS INTERNATIONAL CORPORATION, Defendants and Counterclaim-Plaintiffs.
      ALBERT NASSER and KIDS INTERNATIONAL CORPORATION, Third-Party Plaintiffs,
      v.
      KEVIN TAXIN and BRUCE FINE, Third-Party Defendants.
      2
      Consol. C.A. No. 1353-VCL.
      Court of Chancery of Delaware.
      3
      Submitted: November 3, 2011.
      4
      Decided: January 18, 2012.
      5

      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.

      6

      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.

      7
      MEMORANDUM OPINION
      8
      LASTER, Vice Chancellor.
      9

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

      10

      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.

      11

      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.

      12

      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.

      13
      I. FACTUAL BACKGROUND
      14

      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.

      15

      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.

      16
      A. The Dabah Family Business
      17

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

      18

      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.

      19

      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.

      20

      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.

      21

      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.

      22

      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.

      23
      B. The Formation Of Kids
      24

      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.

      25

      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.

      26

      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.

      27

      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.

      28

      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."

      29

      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.

      30

      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.

      31

      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.

      32
      C. Dweck Builds Kids' Business.
      33

      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.

      34

      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.

      35

      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.

      36

      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.

      37

      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.

      38

      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.

      39

      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.

      40

      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.

      41

      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.

      42

      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.

      43
      D. Dweck Forms Success To Gain A Bigger Share Of The Profits.
      44

      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.

      45

      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.

      46

      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.

      47

      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.

      48

      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.

      49

      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.

      50

      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.

      51

      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.

      52
      E. Dweck Forms Premium.
      53

      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.

      54

      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.

      55
      F. Dweck Charges Personal Expenses To Kids.
      56

      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.

      57

      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.

      58
      G. Nasser Becomes Concerned.
      59

      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.

      60

      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.

      61

      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.

      62

      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.

      63

      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.

      64

      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.

      65

      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.

      66
      H. The March 11, 2005 Meetings
      67

      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.

      68

      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.

      69

      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.

      70

      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.

      71
      I. Dweck, Taxin, And Fine Destroy Kids' Business.
      72

      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.

      73

      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.

      74

      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.

      75

      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.

      76

      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.

      77

      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.

      78

      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.

      79
      J. Nasser And Djemal Fail To Revive Kids.
      80

      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.

      81

      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.

      82

      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.

      83
      K. Nasser Pays Off The Maubi Loan.
      84

      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%.

      85

      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.

      86
      II. LEGAL ANALYSIS
      87

      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.

      88

      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.

      89
      A. Success And Premium
      90

      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.

      91
      1. The Nature Of The Breach
      92

      "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.

      93

      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.

      94

      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.

      95
      2. The Line Of Business Defense
      96

      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.

      97

      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).

      98

      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.

      99

      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.

      100
      3. The Consent Defense
      101

      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.

      102

      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.

      103

      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.

      104

      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.

      105

      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.

      106

      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.

      107
      4. The Stockholder Agreement Defense
      108

      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.

      109

      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.

      110
      5. The Essential Childrenswear Defense
      111

      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:

      112
      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.
      113

      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."

      114

      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.

      115

      "[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.

      116

      "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.

      117

      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.

      118
      6. The Remedy
      119

      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.

      120

      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.

      121

      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.

      122

      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.

      123
      B. The Mass Departure And The Taking Of Kids' Property And Business Expectancies
      124

      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.

      125

      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.

      126

      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.

      127

      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.

      128

      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.

      129
      C. Dweck's Personal Expenses
      130

      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.

      131
      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.
      132

      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.

      133

      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.

      134

      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.

      135

      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.

      136

      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.

      137

      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.

      138

      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.

      139
      D. Other Claims Against Dweck, Taxin, And Fine
      140

      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.

      141
      E. The Overseas Payments
      142

      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.

      143

      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.

      144

      "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.

      145

      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.

      146
      F. The Consulting Fees To RAJN
      147

      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.

      148

      "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.

      149

      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.

      150

      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.

      151

      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.

      152

      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

      153
      G. Nasser's Appointment Of Djemal As Kids' CEO
      154

      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.

      155

      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.

      156
      H. The Seabreeze Joint Venture
      157

      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.

      158

      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.

      159
      I. The $3,076,400 In Cash
      160

      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.

      161

      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.

      162
      J. Kids' Payments For Attorneys' Fees
      163

      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.

      164

      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.

      165
      K. Fee Shifting
      166

      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.

      167
      III. CONCLUSION
      168

      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.

      169

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

    • 3.2 Entire Fairness

      When fiduciaries of the corporation lose the business judgment presumption, they will have to justify to the court that their actions were entirely fair to the corporation. A defendant director who bears the burden of proving its actions were entirely fair to the corporation has to bear a heavy burden. Unlike the business judgment presumption, which can a defendant can rely on to have a claim dismissed on the pleadings, when a defendant must bear the burden of proving the entire fairness of transaction, the defendant can only do that after a full trial. Consequently, losing the presumption of business judgment and being forced to prove at trial that the actions of the defendants were entirely fair to the corporation is often outcome determinative. Defendant directors will often seek to settle litigation rather than go to trial under the entire fairness standard.

      In older cases, the “entire fairness” standard is also known as the “intrinsic fairness” standard or the “inherent fairness” standard.

      • 3.2.1 Weinberger v. UOP, Inc.

        In Weinberger, the court deals with a common loyalty problem. What are the fiduciary duties of a controlling stockholder in dealing with minority stockholders. In such situations, the controlling stockholder, because of her ability to control and direct management decisions of the corporation, has fiduciary obligations to deal with minority stockholders fairly. Transactions between the controller and the corporation will not receive the protection of the business judgment presumption.

        Rather, the controlling stockholder bears the burden of proving the fairness of its dealings with the corporation.  The entire fairness standard requires the court to examine two aspects of the board's dealings with the corporation: whether the board dealt fairly with the corporation and whether the challenged transaction was at a fair price to the corporation.

        As you read Weinberger, consider the facts and ask yourself if you were advising the controller how, if they were able to do things all over again, they might change things to make sure the actions of the controller and the board comported with the entire fairness standard as described by the court. 

        1
        457 A.2d 701 (1983)
        2
        William B. WEINBERGER, Plaintiff Below, Appellant,
        v.
        UOP, INC., et al., Defendants Below, Appellees.
        3

        Supreme Court of Delaware.
        Submitted: July 16, 1982.
        Decided: February 1, 1983.

        4

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

        5

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

        6

        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.

        7

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

        8
        [702] MOORE, Justice:
        9

        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.

        10

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

        11
        1) The plaintiff's duty to plead sufficient facts demonstrating the unfairness of the challenged merger;
        12
        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;
        13
        3) The fairness of the merger in terms of adequacy of the defendants' disclosures to the minority shareholders;
        14
        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
        15
        5) The continued force and effect of Singer v. Magnavox Co., Del.Supr., 380 A.2d 969, 980 (1977), and its progeny.
        16

        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.

        17

        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.

        18

        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.

        19

        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.

        20

        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.

        21
        I.
        22

        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]

        23

        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.

        24

        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.

        25

        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.

        26

        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.

        27

        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.

        28

        [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.

        29

        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.

        30

        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.

        31

        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.

        32

        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.

        33

        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.

        34

        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:

        35
        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.
        36
        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.
        37

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

        38

        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.

        39

        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.

        40

        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.

        41

        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.

        42

        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.

        43

        [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.

        44

        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.

        45

        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.

        46

        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.

        47

        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.

        48

        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.

        49

        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".

        50

        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".

        51

        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:

        52
        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.)
        53

        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.

        54

        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.

        55

        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.

        56
        II.
        57
        A.
        58

        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]

        59
        Purpose Of The Merger
        60
        1) Provides an outstanding investment opportunity for Signal — (Better than any recent acquisition we have seen.)
        61
        2) Increases Signal's earnings.
        62
        3) Facilitates the flow of resources between Signal and its subsidiaries — (Big factor — works both ways.)
        63
        4) Provides cost savings potential for Signal and UOP.
        64
        5) Improves the percentage of Signal's `operating earnings' as opposed to `holding company earnings'.
        65
        6) Simplifies the understanding of Signal.
        66
        7) Facilitates technological exchange among Signal's subsidiaries.
        67
        8) Eliminates potential conflicts of interest.
        68

        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.

        69

        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.

        70

        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.

        71

        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.

        72

        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).

        73

        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]

        74
        [710] B.
        75

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

        76
        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.
        77
        * * * * * *
        78
        ... Completeness, not adequacy, is both the norm and the mandate under present circumstances.
        79

        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:

        80
        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.
        81

        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).

        82

        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.

        83
        C.
        84

        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.

        85
        D.
        86

        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.

        87

        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.

        88

        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.

        89

        [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.

        90

        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.

        91

        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).

        92

        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.

        93
        E.
        94

        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.

        95

        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.

        96

        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.

        97

        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:

        98
        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.)
        99

        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:

        100
        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)
        101

        See also Bell v. Kirby Lumber Corp., Del. Supr., 413 A.2d 137, 150-51 (1980) (Quillen, J., concurring).

        102

        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.

        103

        Prior to an amendment in 1976, the earlier relevant provision of section 262 stated:

        104
        (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 ...
        105

        The first references to "fair" value occurred in a 1976 amendment to section 262(f), which provided:

        106
        [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....
        107

        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.

        108

        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.

        109

        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.

        110

        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.

        111

        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.

        112
        III.
        113

        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]

        114

        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.

        115

        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.

        116

        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.

        117
        * * * * * *
        118

        REVERSED AND REMANDED.

        119

        [1] Accordingly, this Court's February 9, 1982 opinion is withdrawn.

        120

        [2] For the opinion of the trial court see Weinberger v. UOP, Inc., Del.Ch., 426 A.2d 1333 (1981).

        121

        [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.

        122

        [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).

        123

        [5] Weinberger v. UOP, Inc., Del.Ch., 426 A.2d 1333, 1335-40 (1981).

        124

        [6] The parentheses indicate certain handwritten comments of Mr. Arledge.

        125

        [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).

        126

        [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.

        127

        [9] Weiss, The Law of Take Out Mergers: A Historical Perspective, 56 N.Y.U.L.Rev. 624, 671, n. 300 (1981).

        128

        [10] Tanzer v. International General Industries, Inc., Del.Supr., 379 A.2d 1121, 1124-25 (1977).

        129

        [11] Roland International Corp. v. Najjar, Del. Supr., 407 A.2d 1032, 1036 (1979).

      • 3.2.2 Sinclair Oil Corporation v. Levien

        Stockholders do not normally have fiduciary duties with respect to other stockholders. This principle makes sense for a number of reasons. Stockholders with small stakes have no ability to influence the board of directors and therefore should be free from restrictions in their dealings with other stockholders.

        However, this principle is subject to an exception. When stockholders can, through their ownership position influence and control the direction of the corporation, then those stockholders have fiduciary obligations with respect to minority stockholders. As a result, in such circumstances, controlling stockholders will bear the burden of proving entire fairness when they engage in self dealing with the corporation.

        1
        280 A.2d 717 (1971)
        2
        SINCLAIR OIL CORPORATION, Defendant Below, Appellant,
        v.
        Francis S. LEVIEN, Plaintiff Below, Appellee.
        3

        Supreme Court of Delaware.

        4
        June 18, 1971.
        5

        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.

        6

        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.

        7

        WOLCOTT, C. J., CAREY, J., and CHRISTIE, Judge, sitting.

        8
        [719] WOLCOTT, Chief Justice.
        9

        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.

        10

        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.

        11

        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.

        12

        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.

        13

        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.

        14

        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.

        15

        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.

        16

        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.

        17

        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.

        18

        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.

        19

        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.

        20

        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).

        21

        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.

        22

        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.

        23

        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.

        24

        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.

        25

        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.

        26

        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.

        27

        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.

        28

        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.

        29

        Next, Sinclair argues that the Chancellor committed error when he held it liable to Sinven for breach of contract.

        30

        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.

        31

        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.

        32

        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.

        33

        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.

        34

        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.

        35

        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.

        36

        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.

      • 3.2.3 In Re Cornerstone Therapeutics

        In many cases, the entire board is not guilty of a violation of the duty of loyalty. Rather, only one or two directors may have been alleged to have engaged in bad acts. Nevertheless, plaintiffs will often sue the entire board of directors. The question then arises whether when a 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? Or must those directors remain in the suit. The Cornerstone opinion provides some guidance on this question.

        1

        115 A.3d 1173 (2015)

        2
        IN RE CORNERSTONE THERAPEUTICS INC, STOCKHOLDER LITIGATION.
        Raymond Leal, Yaoguo Pan, and Xiaosong Hu, Defendants Below-Appellants,
        v.
        Phillip Meeks, Ernesto Rodriguez, and Alan Hall, Plaintiffs Below-Appellees.

        Nos. 564, 2014, 706, 2014.

        3

        Supreme Court of Delaware.

        Submitted: May 6, 2015.
        Decided: May 14, 2015.

        4

        [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.

        5

        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.

        6

        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.

        7

        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.

        8

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

        9
        STRINE, Chief Justice:
        10
        I. INTRODUCTION
        11

        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.

        12

        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.

        13

        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.

        14
        II. BACKGROUND
        15

        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.

        16

        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.

        17

        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]

        18

        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]

        19

        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]

        20

        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.

        21
        III. ANALYSIS
        22

        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.

        23

        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]

        24

        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]

        25

        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]

        26

        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]

        27

        [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.

        28

        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]

        29

        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.

        30

        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]

        31

        [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).

        32

        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:

        33

        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]

        34

        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]

        35

        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.

        36

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

        37

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

        38

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

        39

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

        40

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

        41

        [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).

        42

        [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.

        43

        [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.

        44

        [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.").

        45

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

        46

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

        47

        [12] See id.

        48

        [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.").

        49

        [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).

        50

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

        51

        [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).

        52

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

        53

        [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).

        54

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

        55

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

        56

        [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.").

        57

        [22] See id. at *12.

        58

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

        59

        [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.").

        60

        [25] Id.

        61

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

        62

        [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).

        63

        [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).

        64

        [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.").

        65

        [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).

        66

        [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.").

        67

        [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.").

        68

        [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.").

        69

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

        70

        [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.").

        71

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

        72

        [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.").

        73

        [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.").

        74

        [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.").

        75

        [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).

        76

        [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).

        77

        [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.").

        78

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

        79

        [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.").

        80

        [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).

        81

        [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).

        82

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

        83

        [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.").

        84

        [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.

        85

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

        86

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

        87

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

        88

        [53] Id. at *11.

        89

        [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).

        90

        [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.

    • 3.3 Sec. 144 Safe Harbor and Interested Director Transactions

      During the 19th century, transactions between the corporation and its directors were commonplace. Such transactions often worked to the advantage of the interested director at the expense of the stockholder. The pernicious effect of such transactions caused legislatures to strictly regulate relationships between corporations and their directors. Through the early 20th century, transactions between a corporation and a director were considered void. Over the years, policy with respect to interested director transactions has loosened, but such transactions are still, rightly, looked at with suspicion.

      Such transactions are no longer void per se. Section 144 provides for a statutory safe harbor for interested director transactions. Interested director transactions that comply with the requirements of Section 144 will not be considered void or voidable.  

      Compliance with the requirements of Section 144 provides a board with a safe harbor only against attacks for voidability. Interested director transactions are still subject to attack for potential violations of the duty of loyalty. So, while the challenged transaction might not be void, it could still be unfair and boards may be required to defend the transaction for violations of the duty of loyalty. 

      The procedures for insulating interested director transactions from attack for purposes of Section 144 provide a partial roadmap for the related doctrine of stockholder ratification. Interested director transactions that comply with the requirements of stockholder ratification doctrine will not be subject to attack for potential violations of the duty of loyalty and will receive the benefit of the business judgment presumption.

      • 3.3.1 DGCL Sec. 144 - Interested director transactions

        The following provision of the statute provides a safe harbor for interested director transactions. If the requirements of the safe harbor are complied with then an interested director transaction will not be void or voidable because of the participation of the director. It may still, however, be subject to attack as a violation of the duty of loyalty and the interested director may be required to prove the entire fairness of the transaction. 

        1
        TITLE 8
        2
        Corporations
        3
        CHAPTER 1. GENERAL CORPORATION LAW
        4 5 6

        (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 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 any such director's or officer's votes are counted for such purpose, if:

        7

        (1) The material facts as to the director's or officer's 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 or 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

        8

        (2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

        9

        (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 stockholders.

        10

        (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.

        11

        8 Del. C. 1953, § 144; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 557 Del. Laws, c. 148, § 771 Del. Laws, c. 339, §§ 15-1777 Del. Laws, c. 253, §§ 13, 14.;

      • 3.3.2 Benihana of Tokyo Inc. v. Benihana Inc.

        Section 144(a)(1) provides that when a board member's interest is disclosed to or is known by disinterested directors and a majority of the disinterested directors approve the challenged transaction, the board's decision to enter into the transaction will receive the benefit of the §144 safe harbor protection from challenges for voidness and voidability.

        Benihana raises a couple of important issues. First, does the disclosure of the director's interest need to be accomplished formally? Or, is it sufficient that the director's interest be common knowledge to the disinterested directors? Second, to the extent a majority of disinterested directors approve the transaction does such an approval provide the interested director and the transaction any additional protection beyond merely protection against the transaction being deemed void or voidable? If a transaction is approved by a majority of disinterested directors who are fully informed about the transaction should that transaction get the protection of the business judgment presumption? 

        1
        906 A.2d 114 (2006)
        2
        BENIHANA OF TOKYO, INC., individually and on behalf of Benihana, Inc., Plaintiff Below-Appellant,
        v.
        BENIHANA, INC., John E. Abdo, Norman Becker, Darwin Dornbush, Max Pine, Yoshihiro Sano, Joel Schwartz, Robert B. Sturges, Takanori Yoshimoto, and BFC Financial Corporation, Defendants Below-Appellees.
        3
        No. 36, 2006.
        4

        Supreme Court of Delaware.

        5
        Submitted: June 14, 2006.
        6
        Decided: August 24, 2006.
        7

        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.

        8

        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.

        9

        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.

        10

        Before STEELE, Chief Justice, HOLLAND and BERGER, Justices.

        11
        [115] BERGER, Justice:
        12

        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.

        13
        Factual and Procedural Background
        14

        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).

        15

        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]

        16

        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]

        17

        [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.

        18

        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.

        19

        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.

        20

        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.

        21

        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."

        22

        [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.

        23

        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.

        24

        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.

        25

        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.

        26

        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.

        27
        Discussion
        28

        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:

        29
        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. . . .
        30

        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.

        31

        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:

        32
        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."
        33
        Thereafter, companies began including boilerplate language in their charters to clarify that no shareholder possessed preemptive rights under common law.
        34
        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]
        35

        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.

        36

        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.

        37
        A. Section 144(a)(1) Approval
        38

        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]

        39

        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.

        40

        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]

        41
        B. Abdo's alleged fiduciary violation
        42

        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]

        43
        C. Dilution of BOT's voting power
        44

        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.

        45

        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.

        46
        Conclusion
        47

        Based on the foregoing, the judgment of the Court of Chancery is affirmed.

        48

        [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.

        49

        [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.

        50

        [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.

        51

        [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."

        52

        [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.

        53

        [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.

        54

        [7] Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 172 (Del.Ch.2005) (Citation omitted).

        55

        [8] Staar Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del.1991); Lawson v. Household Finance Corporation, 152 A. 723, 726 (Del. 1930).

        56

        [9] Northwestern National Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del.1996).

        57

        [10] Anchor Motor Freight v. Ciabattoni, 716 A.2d 154 (Del.1998).

        58

        [11] 8 Del. C. § 144(a)(1).

        59

        [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).

        60

        [13] Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

        61

        [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.

        62

        [15] Appellant's Appendix, A 135.

        63

        [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.

        64

        [17] Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d at 181 (Internal quotations omitted.).

        65

        [18] Cf. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del.1995).

        66

        [19] Williams v. Geier, 671 A.2d 1368, 1381 n. 28 (Del.1996).

        67

        [20] 891 A.2d at 190.

      • 3.3.3 Fliegler v. Lawrence

        Section 144 provides alternate methods to insulate interested director transactions from attack for voidness. In addition to seeking the approval of a majority of the disinterested directors, a board can seek the approval of the stockholders. Notice that the statute requires only that the challenged transaction is approved by a majority of the stockholders in order to gain the protection of the statutory safe harbor and not necessarily a majority of disinterested stockholders.

        Remember the protections of §144 extend only to the question of void or voidability of an interested director transaction and not further.  One can see how there would be many situations where one might not want stockholder approval of an interested director transaction to do much more than simply rescue a transaction from voidness. Where a controlling stockholder approves a transaction with itself (as a director) we may be okay with that transaction not being void, but we might still want the interested director/stockholder to be required to prove the transaction is nevertheless entirely fair to the corporation.    

        The court in the following case, Fliegler, recognizes this problem and makes it clear that for directors who are seeking the additional protection of the business judgment presumption, they would have to do more than just comply with §144(a)(2).  For those directors, they will have to take the additonal step of complying with the requirements of common law stockholder ratification doctrine and seek informed approval of a majority of disinterested stockholders.  

        1
        361 A.2d 218 (1976)
        2
        Irving FLIEGLER, Plaintiff below, Appellant,
        v.
        John C. LAWRENCE et al., Defendants below, Appellees.
        3

        Supreme Court of Delaware.

        4
        Submitted October 15, 1975.
        5
        Decided June 28, 1976.
        6

        Steven D. Goldberg of Theisen, Lank & Mulford, Wilmington, and Barry H. Singer of Pollack & Singer, New York City, of counsel, for plaintiff below, appellant.

        7

        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.

        8

        Edward B. Maxwell of Young, Conaway, Stargatt & Taylor, Wilmington, for defendant below, Agau Mines, Inc.

        9

        Before DUFFY and McNEILLY, JJ., and CHRISTIE, Judge.

        10
        [219] McNEILLY, Justice:
        11

        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.

        12
        I
        13

        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.

        14

        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.

        15

        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.

        16
        II
        17

        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.

        18

        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.

        19
        III
        20

        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.

        21

        [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]

        22
        A.
        23

        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).

        24

        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:

        25
        "[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.
        26

        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.

        27

        Nor do we believe the Legislature intended a contrary policy and rule to prevail by enacting 8 Del.C. § 144, which provides, in part:

        28
        (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:
        29
        (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
        30
        (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
        31
        (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.
        32

        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.

        33
        B.
        34

        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.

        35

        [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.

        36

        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:

        37
        "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."
        38

        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.

        39

        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.

        40

        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.

        41

        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.

        42

        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.

        43

        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.

        44

        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.

        45

        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.

        46

        Affirmed.

        47

        [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.

        48

        [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.

        49

        [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.

        50

        [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.

        51

        [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%.

        52

        [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.

    • 3.4 Stockholder Ratification Doctrine

      For anyone with more than a passing familiarity with the law of agency, stockholder ratification doctrine will sound very familiar. As you remember in the Restatement (3rd) of Agency, §8.06 conduct by an agent that would otherwise constitute a breach of a fiduciary duty does not constitute a breach of duty if the principal consents to the conduct, provided that the agent acts in good faith, discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment, and the agent otherwise deals fairly with the principal. Full and adequate disclosure of an agent's actions followed by knowing and uncoerced assent by the principal in effect cleanses the otherwise disloyal acts of an agent.

      In the context of the corporate law, common law courts have adopted a very similar approach to the unauthorized acts of boards, or agents of the corporation. For example, self-dealing by a board will, upon a stockholder challenge, be subject to the stringent entire fairness standard with the board bearing the burden of proving that it dealt fairly with the corporation. However, where the material facts about those acts are fully disclosed to the stockholders and stockholders have an uncoerced opportunity to vote ‘yay or nay' on those actions, board actions so approved by the stockholders will be granted the deference of business judgment rather than be subject to entire fairness review. 

      Although in a successful ratification case, the board is not required prove entire fairness, in order to establish that the ratification is effective, the board is required to bear the burden of proving that it disclosed to stockholders all the material facts related to the challenged transaction available to it at the time.  

      Once a board has successfully established that stockholder ratification the effect of such ratification is to shift the substantive test on judicial review of the act from one of fairness to one of “corporate waste”.

      • 3.4.1 Corwin v. KKR Financial Holdings LLC

        In Corwin, the court takes up the question of what is the appropriate standard of review for a challenged merger transaction during a post-closing damages trial, where the directors are disinterested and the transaction has been approved by an informed vote of the stockholders. In such situations, where the stockholders are fully-informed and their vote has not been coerced, courts will be loathe to substitute their own business judgment for that of the stockholders. This result – essentially raitifcation by the stockholders – is consistent with the court’s previous rulings with which you are already familiar (e.g. Williams v. Geier).

        1

        125 A.3d 304 (2015)

        2
        Robert A. CORWIN, Margaret Demauro, Eric Greene, Pipefitters Local Union No. 120 Pension Fund, and Pompano Beach Police & Firefighters' Retirement System, Plaintiffs Below-Appellants,
        v.
        KKR FINANCIAL HOLDINGS LLC, Tracy Collins, Robert L. Edwards, Craig J. Farr, Vincent Paul Finigan, Jr., Paul M. Hazen, R. Glenn Hubbard, Ross J. Kari, Ely L. Licht, Deborah H. McAneny, Scott C. Nuttall, Scott Ryles, Willy Strothotte, KKR & Co. L.P., KKR Fund Holdings L.P., and Copal Merger Sub LLC, Defendants Below-Appellees.
        3

        No. 629, 2014.

        4

        Supreme Court of Delaware.

        Submitted: September 16, 2015.
        Decided: October 2, 2015.

        5

        [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.

        6

        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.

        7

        Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, Justices; and RENNIE, Judge,[*] constituting the Court en Banc.

        8
        STRINE, Chief Justice:
        9

        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.

        10

         

        11
        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
        12

        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]

        13

        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]

        14

        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:

        15

        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]

        16

        After carefully analyzing the pled facts and the relevant precedent, the Chancellor held:

        17

        [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]

        18

        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.

        19

         

        20
        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
        21

        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.

        22

        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.

        23

        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]

        24

        [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]

        25

        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]

        26

        [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.

        27

        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.

        28

        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.

        29

        For these reasons, therefore, we affirm the Court of Chancery's judgment on the basis of its well-reasoned decision.

        30

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

        31

        [1] In re KKR Fin. Holdings LLC S'holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).

        32

        [2] Id.

        33

        [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.

        34

        [4] In re KKR Fin. Holdings, 101 A.3d at 995.

        35

        [5] Id. at 994.

        36

        [6] Id. at 994-95.

        37

        [7] For example, the Chancellor noted the importance of ex