When the business judgment rule applies to adoption of a defensive mechanism, the initial burden will lie with the directors. The directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed. They satisfy that burden by showing good faith and reasonable investigation. Moreover, that proof is materially enhanced where a majority of the board favoring the proposal consisted of outside independent directors. Then the burden shifts back to the plaintiffs who have the ultimate burden of persuasion to show a breach of the directors' fiduciary duties.
On 1984, the Board of Directors of Household International, Inc. adopted the Rights Plan by a fourteen to two vote. The Plan provides that Household common stockholders are entitled to the issuance of one Right per common share under certain triggering conditions. There are two triggering events that can activate the Rights. The first is the announcement of a tender offer for 30 percent of Household's shares ("30% trigger") and the second is the acquisition of 20 percent of Household's shares by any single entity or group ("20% trigger"). Representatives of Wachtell, Lipton and Goldman, Sachs attended the August 14 Board meeting. The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of "bust-up" takeovers, the increasing takeover activity in the financial service industry, such as Leucadia's attempt to take over Arco, and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt. Against this factual background, the Plan was approved. Thereafter, Moran and the company of which he is Chairman, D-K-M, filed this suit. On the eve of trial, Gretl Golter, the holder of 500 shares of Household, was permitted to intervene as an additional plaintiff. The trial was held, and the Court of Chancery ruled in favor of Household. Appellants now appeal from that ruling to this Court
Can the “Rights Plan” be considered a legitimate exercise of business judgment by the Directors of Household?
To determine whether a business judgment reached by a board of directors was an informed one, we determine whether the directors were grossly negligent. Upon a review of this record, we conclude the Directors were not grossly negligent. The information supplied to the Board on August 14 provided the essentials of the Plan. The Directors were given beforehand a notebook which included a three-page summary of the Plan along with articles on the current takeover environment. The extended discussion between the Board and representatives of Wachtell, Lipton and Goldman, Sachs before approval of the Plan reflected a full and candid evaluation of the Plan. Moran's expression of his views at the meeting served to place before the Board a knowledgeable critique of the Plan. The factual happenings here are clearly distinguishable from the actions of the directors of Trans Union Corporation who displayed gross negligence in approving a cash-out merger.