Courts applying the business judgment rule afford substantial deference to corporate directors' business decisions, and resist replacing corporate directors' judgments with their own. In order to receive this protection, a director must: (1) make a business decision; (2) be disinterested and independent; (3) act with due care; (4) in good faith; and (5) the decision must have a rational business purpose. The plaintiffs bear the burden of rebutting the presumption that the business judgment rule applies.
This case involves a dispute between two directors of The Nostalgia Network, Inc. ("TNN" or the "Company"), Sam Oolie and Morton Salkind, and TNN's shareholders. The shareholder plaintiffs, contending that Oolie and Salkind breached their duty of care and loyalty, essentially challenge four transactions: (1) TNN's issue of warrants to its directors as compensation; (2) Oolie's and Salkind's personal loans to TNN; (3) Oolie's and Salkind's vote to pursue one particular acquisition proposal for TNN over other proposals the board was considering at its December 6, 1989 meeting; and (4) Oolie's and Salkind's sale of their personal stock to Gold 'N M Communications, Inc. ("Gold") in a privately negotiated sale. The sole class claim remaining from plaintiff shareholders' earlier lawsuit was whether the two defendant directors breached their fiduciary duty of loyalty by electing to pursue a particular acquisition proposal that allegedly best protected their personal interests as creditors of defendant corporation, rather than proposals that allegedly offered superior value to plaintiffs. The two defendant directors moved for summary judgment on the claim.
Will the business judgment rule apply, when shareholders challenge the fairness of an action taken by interested directors with approval from the disinterested directors after full disclosure?
The court granted the two defendant directors' summary judgment motion for the following reasons: (1) plaintiffs failed to demonstrate an actual conflict of interest on the part of the two defendant directors sufficient to rebut the business judgment rule; and (2) the disinterested directors' vote to pursue the same proposal that the two defendant directors voted to pursue provided strong evidence that the two defendant directors acted in good faith and with the interests of defendant corporation and plaintiffs in mind.