The business judgment standard 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. On a motion to dismiss, the facts must support a reasonable inference that in making a challenged decision, the board of directors breached either its duty of loyalty or its duty of care. A court will not substitute its judgment for that of the board if the decision can be attributed to any rational business purpose.
Appellant shareholders filed a complaint alleging that the appellees, officers and directors, violated their fiduciary duties by rejecting a valuable opportunity to sell the company, deciding instead to reclassify the company's shares in order to benefit themselves, and by disseminating a materially misleading proxy statement to induce shareholder approval. The Court of Chancery dismissed their complaint and the shareholders appealed the case.
Did the Court of Chancery err in dismissing the claim of disloyalty?
The Court held that the claim of disloyalty was erroneously dismissed. Shareholders alleged facts sufficient to establish that a majority of the board acted disloyally, and that claim rebutted the business judgment presumption. In a case of first impression, the court held that officers, like directors, owed the same fiduciary duties of care and loyalty. It was reasonable to infer from the facts alleged that the duty of loyalty was breached. Proxy disclosures as to the board's careful deliberations were materially misleading; disclosure that there was little or no deliberation may have altered the total mix of data given to shareholders. The court clarified the doctrine of shareholder ratification, holding that the scope of the doctrine was limited to circumstances where a fully informed shareholder vote approved director action that did not legally require shareholder approval in order to become legally effective. The only action or conduct that was ratifiable was that which shareholders were specifically asked to approve. The cleansing effect of a ratification was to subject a challenged action to business judgment review. To the extent that Smith v. Van Gorkom held otherwise, it was overruled.