Cede & Co. v. Technicolor, Inc.

Supreme Court of Delaware · 1993 · Corporations

CorporationsFiduciary DutiesMergers and AcquisitionsBusiness Judgment Rulebusiness judgment ruleduty of careduty of loyaltyentire fairness

Facts

Technicolor agreed to be acquired by MAF in a two-step transaction for $23 per share after negotiations conducted principally by Technicolor's chairman, Kamerman, with limited board involvement before the October 29, 1982 board meeting. Several directors had little or no advance notice or knowledge of the sale, while director Sullivan had helped initiate contact with MAF and was to receive a $150,000 finder's fee, and Kamerman negotiated a post-merger employment arrangement for himself. The board approved the merger, related agreements, and repeal of a supermajority charter provision at the October 29 meeting, relying in part on a Goldman Sachs presentation and oral fairness opinion. Cinerama, a dissenting shareholder, pursued both appraisal and fiduciary-duty claims, alleging unfair dealing, disloyalty, inadequate care, and disclosure violations.

Issue

Whether the Technicolor board's October 29 decision approving the merger was protected by the business judgment rule or instead subject to entire fairness review. More specifically, whether a shareholder must prove injury to rebut the business judgment rule on a duty-of-care theory, and how director self-interest should be assessed for loyalty purposes in this third-party sale.

Rule

The business judgment rule presumes that directors acted on an informed basis, in good faith, and in the honest belief that their action was in the corporation's best interests. A shareholder rebuts that presumption by producing evidence that directors breached any one of the fiduciary triad of good faith, loyalty, or due care; proof of resulting injury is not required at that rebuttal stage. Once rebutted, the burden shifts to the directors to prove the transaction's entire fairness, including fair dealing and fair price.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

The board of Lakefront Imaging, Inc., a Delaware corporation based in Chicago, approved a cash merger with North Harbor Holdings after a 90-minute meeting. Most directors received the merger documents that morning, no one had explored other strategic alternatives, and the board relied on a brief oral banker presentation; dissenting stockholder Maya Patel sues but cannot yet show the price was below fair value.

Under the governing Delaware rule, has Maya done enough to rebut the business judgment rule on a duty-of-care theory?

Explanation. A shareholder rebuts the business judgment presumption by producing evidence of breach of any one fiduciary element—good faith, loyalty, or due care. Proof of injury or quantified damages is not required at the rebuttal stage. Evidence that directors approved a sale without adequately informing themselves is sufficient to rebut the rule and shift review to entire fairness.