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Fairness Standard and Business Judgment Rule

The business judgment rule is a rebuttable, procedural presumption that a corporate director has acted on an informed basis in good faith and in the honest belief that the action taken was in the best interest of the company. When a plaintiff’s evidence is sufficient to rebut the presumption that the director did not act in good faith to further legitimate corporate objectives and purposes, the burden of proof shifts to the director to prove that the business decision or transaction was proper, fair, and reasonable to the corporation. Burden shifting does not create per se liability on the part of the director. Burden shifting is a procedure by which courts “determine under what standard of review the director’s liability is to be judged.”

An honest belief in the fairness of the decision or transaction is insufficient to invoke the protections of the business judgment rule. The court must consider the conduct that allowed the presumption to be rebutted. In addition, the court must consider all relevant facts and circumstances in determining whether the director breached any one of the fiduciary duties of good faith, due care, and loyalty in regards to the challenged business decision or transaction. The determination that a director has not demonstrated entire fairness can support a finding of substantive liability. It should be noted that the plaintiff has the ultimate burden of persuasion in showing a breach of fiduciary duties.

The fairness standard frequently arises in situations where a director is involved in both sides of a transaction or obtains a benefit that is not available or is detrimental to the shareholders. The concept of fairness has two components: fair dealing and fair price. As a Delaware court stated, fair dealing goes to “when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Where fair price is at issue, financial and economic considerations of the challenged transactions are considered along with other relevant factors that affect the value of the corporate stock. A director must be committed to obtaining the highest value that is reasonably available to the stockholders under the circumstances.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.