This is a quick review for those individuals looking for Delaware jury instructions dealing with interested directors, minority shareholder oppression, and breach of fiduciary duty. We just completed a week long jury trial in DC covering these topics (under Delaware law), and after no small amount of haggling, these instructions came in very handy. The problem is that business matters are handled by the Chancery court in Delaware -- and that isn't a jury forum. The Supreme Court of Delaware is silent about the matter -- and that means you have to hunt through case law to create non-standard instructions. Hope these help!
PLAINTIFFS’
SUPPLEMENTAL JURY INSTRUCTIONS
Comes now your Plaintiffs, A.V. and G.L., through Counsel, and request this Honorable Court include the following special instructions to inform the jury on the specifics of Delaware corporate law:
Business Judgment Rule
A director is presumed to have 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. This presumption is called the business judgment rule. The business judgment rule's protections only apply to transactions in which a director is not an interested director, and is independent.
To overcome the business judgment rule, a plaintiff must show one of the following exceptions: That the director (1) had a personal interest in the subject matter of the action, (2) was not fully informed in approving the action, or (3) did not act in good faith in approving the action.
If you believe any one of the three exceptions apply, that is sufficient to overcome the business judgment rule defense.
Case Law:
From: Cede & Co. v. Technicolor, 634 A.2d 345, 360-362 (Del. 1993)
The [business judgment] rule operates as both a procedural guide for litigants and a substantive rule of law. As a rule of evidence, it creates a "presumption that in making a business decision, the directors of a corporation acted on an informed basis [i.e., with due care], in good faith and in the honest belief that the action taken was in the best interest of the company." Aronson v. Lewis,Del. Supr., 473 A.2d 805, 812 (1984).
To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty--good faith, loyalty or due care. Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1988).
From: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36, 41-42 (Del. Ch. 2010)
There are a number of ways the plaintiff can rebut the business judgment presumption, including by showing that the majority of directors who approved the action (1) had a personal interest in the subject matter of the action,(2) were not fully informed in approving the action, or (3) did not act in good faith in approving the action.
Interested Director Defined
A director is interested if he stands on both sides of a transaction or expects to derive a material personal financial benefit from the transaction that no other stockholder receives.
If you believe that for a given transaction, the defendant received a substantial benefit that no other member received, that is sufficient to find the defendant was an interested director for that transaction.
Case Law
From:eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36, 41-42 (Del. Ch. 2010)
The business judgment rule's protections only apply to transactions in which a majority of directors are disinterested and independent. A director is "interested" if he or she stands on both sides of a transaction or expects to derive a material personal financial benefit from the transaction that does not devolve on all stockholders generally.
The Court has generally defined a director as being independent only when the director's decision is based entirely on the corporate merits of the transaction and is not influenced by personal or extraneous considerations. By contrast, a director who receives a substantial benefit from supporting a transaction cannot be objectively viewed as disinterested or independent.
From: Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993)
When there is no independent corporate decisionmaker, the court may become the objective arbiter.
Entire Fairness Doctrine
If the plaintiff overcomes the business judgment rule, the defendant must establish that the transaction was the product of both (1) fair dealing and (2) fair price.
Case Law
From: Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993)
If the [business judgment] rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the "entire fairness" of the transaction to the shareholder plaintiff. Nixon v. Blackwell,Del. Supr., 626 A.2d 1366, 1376 (1993).
Under the entire fairness standard of judicial review, the defendant directors must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price.
From: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36, 41-42 (Del. Ch. 2010)
To prove a transaction was entirely fair, directors must demonstrate that the transaction was (1) effectuated at a fair price and (2) the product of fair dealing. . . . The entire fairness test is not bifurcated; the Court must consider allegations of unfair dealing and unfair price. Price, however, is the paramount consideration because procedural aspects of the deal are circumstantial evidence of whether the price is fair.
Fair Price Defined
To demonstrate a fair price, the defendant must prove that the transaction was economically fair to the minority shareholder plaintiffs.
Case Law
From: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36, 41-42 (Del. Ch. 2010)
The fair price element relates to the economics of the transaction; it focuses on whether the transaction was economically fair to the plaintiff. The analysis of price can draw on any valuation methods or techniques generally accepted in the financial community.
Fair Dealing Defined
To demonstrate fair dealing, the defendant must show he discharged his duty as a fiduciary (director) properly. You should focus on the conduct of the director involved in the transaction, analyzing how the transaction was timed, initiated, negotiated, and structured, as well as how the director sought approval from other members of the LLC.
Case Law
From: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36, 41-42 (Del. Ch. 2010)
Fair dealing focuses on the conduct of the fiduciaries involved in the transaction. In analyzing fair dealing the Court may inquire into how the transaction was timed, initiated, negotiated, and structured, as well as how approvals of the directors and stockholders were obtained.
Duty of Loyalty Defined
Corporate officers and directors are not allowed to use their position of trust and confidence to further their private interests.
Corporate officers and directors have a fiduciary duty to the corporation and its shareholders. That means they have a duty to protect the interests of the corporation, and also a duty 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 be no conflict between duty and self-interest. Where a director places his own interest and self-gain above that of the LLC, there is a violation of the duty of loyalty.
Case Law
From: Guth v. Loft, 5 A.2d 503, 510 (Del. 1939)
Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders.
From: Pogostin v. Rice, 480 A.2d 619, 624 (Del. Supr. 1984) (overruled in part; Brehm v. Eisner, 746 A.2d 244, 253-54 (Del. 2000) (“[O]verruled to the extent that the Court reviewed a Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or otherwise suggested deferential appellate review”)).
Essentially, the duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.
From: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36, 41-42 (Del. Ch. 2010)
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 be no conflict between duty and self-interest. Ivanhoe Partners v. Newmont Mining Corp., Del. Supr., 535 A.2d 1334, 1345 (1987).
Minority Shareholder Oppression
Shareholders, even those that do not own a majority of shares in a company, have a right to be heard. When the majority shareholders take actions that prevent the minority from enjoying the benefit of their ownership, a possible claim to shareholder oppression may exist.
Minority shareholder oppression can be either one of the following: (1) A violation of the reasonable expectations of the minority. The reasonable expectations are the spoken and unspoken understandings on which the founders of a venture rely when commencing a venture; or
(2) burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.
If you find that the majority shareholder has oppressed the minority, that finding may be used to indicate bad faith and/or breach of loyalty by the majority shareholder.
Case Law
From: Litle v. Waters, CA No. 12155, 1992 WL 25758, *327-329 (1992)
The most prominent [definition of oppression] stems from the writings of F. Hodge O'Neal, [which] define 'oppression' as a violation of the 'reasonable expectations' of the minority.
Gimpel v. Bolstein,477 N.Y.S.2d 1014, 1018 (1984).The reasonable expectations are the spoken and unspoken understandings on which the founders of a venture rely when commencing a venture. Gimpel, 477 N.Y.S.2d at 1019.
The Court in Gimpel applied a secondary definition of oppressive conduct in determining whether the majority shareholders were oppressing the minority shareholder. This definition of oppressive conduct describes it as "burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely." Gimpel, 477 N.Y.S.2d at 1018(citations omitted).
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