Conglomerate Blog: Business, Law, Economics & Society

In a memorandum discussing the Disney opinion, my former law firm, Wachtell, Lipton, proclaims that “the Business Judgment Rule is Alive and Well” (and, presumably, living in Delaware). I’m guessing other top firms will soon make similar announcements to their clients, creating a chorus of defense firm triumphalism. And they’ll be right.

The bottom line issue concerning good faith is this: will it give plaintiffs’ lawyers a new means of surviving the motion to dismiss? The answer, as Wachtell and other firms have figured out, is: not really.

Chancellor Chandler makes clear that good faith is presumed as a part of the business judgment rule—“Delaware law presumes that directors act in good faith when making business judgments” (120). So, in order to sustain a good faith claim, plaintiffs will have to overcome the business judgment rule (124). As all of us know, that is not easily done, and the Chancellor did nothing to lighten the plaintiffs’ load when proceeding under a claim of bad faith as opposed to, say, negligence.

Still, to be fair, the Chancellor’s opinion does create another argument that plaintiffs can make in seeking to rebut the business judgment rule. Plaintiffs’ lawyers can now claim that the board’s decision-making process stems from a motive other than the best interests of the corporation. How can they do this, short of the evidence of smoldering lust I suggested in my first post? They might try to show a total absence of deliberation, but I imagine most corporations will be able to construct an adequate paper trail (primarily in board minutes) to rebut this suggestion. So when will good faith really provide any kind of life raft to a plaintiffs’ firm looking to survive the motion to dismiss?

Only, Chandler suggests, where there is “an imperial CEO or controlling shareholder with a supine or passive board” (footnote 487). The best chance for a bad faith claim, in other words, involves (1) a board stacked with the CEO’s cronies, and (2) an act that the CEO wants the board to accept for personal rather than professional reasons.

Disney fulfilled condition (1) but not condition (2).

The single most important thing the defense did at trial was to show that Eisner and Ovitz didn’t really have a friendship, but rather a business relationship. Remember Ovitz on the stand (the richest man I have ever pitied) saying that Eisner was his best friend? Remember Eisner shrewdly responding a few days later that Ovitz was “a guy who had a hundred best friends”? That was not only a Hollywood moment in little Delaware. It was also, I believe, a turning point in the trial. Once it was plainly established that friendship was not a motive for the mistakes the board made, the good faith claim went away. As I note in my article, the 2003 opinion repeats some variant of the word “friend” fifteen times. The first thing I did when I got this opinion last night was search for “friend.” It appears only eight times. Once I saw that I knew the board had won. As long as the motive is business, not friendship, there’s little else the plaintiffs can say.

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In a memorandum discussing the Disney opinion, my former law firm, Wachtell, Lipton, proclaims that “the Business Judgment Rule is Alive and Well” (and, presumably, living in Delaware). I’m guessing other top firms will soon make similar announcements to their clients, creating a chorus of defense firm triumphalism. And they’ll be right.

The bottom line issue concerning good faith is this: will it give plaintiffs’ lawyers a new means of surviving the motion to dismiss? The answer, as Wachtell and other firms have figured out, is: not really.

Chancellor Chandler makes clear that good faith is presumed as a part of the business judgment rule—“Delaware law presumes that directors act in good faith when making business judgments” (120). So, in order to sustain a good faith claim, plaintiffs will have to overcome the business judgment rule (124). As all of us know, that is not easily done, and the Chancellor did nothing to lighten the plaintiffs’ load when proceeding under a claim of bad faith as opposed to, say, negligence.

Still, to be fair, the Chancellor’s opinion does create another argument that plaintiffs can make in seeking to rebut the business judgment rule. Plaintiffs’ lawyers can now claim that the board’s decision-making process stems from a motive other than the best interests of the corporation. How can they do this, short of the evidence of smoldering lust I suggested in my first post? They might try to show a total absence of deliberation, but I imagine most corporations will be able to construct an adequate paper trail (primarily in board minutes) to rebut this suggestion. So when will good faith really provide any kind of life raft to a plaintiffs’ firm looking to survive the motion to dismiss?

Only, Chandler suggests, where there is “an imperial CEO or controlling shareholder with a supine or passive board” (footnote 487). The best chance for a bad faith claim, in other words, involves (1) a board stacked with the CEO’s cronies, and (2) an act that the CEO wants the board to accept for personal rather than professional reasons.

Disney fulfilled condition (1) but not condition (2).

The single most important thing the defense did at trial was to show that Eisner and Ovitz didn’t really have a friendship, but rather a business relationship. Remember Ovitz on the stand (the richest man I have ever pitied) saying that Eisner was his best friend? Remember Eisner shrewdly responding a few days later that Ovitz was “a guy who had a hundred best friends”? That was not only a Hollywood moment in little Delaware. It was also, I believe, a turning point in the trial. Once it was plainly established that friendship was not a motive for the mistakes the board made, the good faith claim went away. As I note in my article, the 2003 opinion repeats some variant of the word “friend” fifteen times. The first thing I did when I got this opinion last night was search for “friend.” It appears only eight times. Once I saw that I knew the board had won. As long as the motive is business, not friendship, there’s little else the plaintiffs can say.

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