The presumption of the Business Judgment Rule (BJR) was not rebutted and breach of fiduciary duty claims were thus defeated in Blackmore Partners, L.P. v. Link Energy, LLC,download pdf file. In this case Vice Chancellor Lamb granted summary judgment in favor of defendants based on the failure to overcome the presumptions of the Business Judgment Rule for claims of breaches of fiduciary duties arising out of the sale of assets at a price likely to yield zero value to the equity owners of the selling company. The case includes a discussion of the duties of directors where the company is in the “zone of insolvency” as well as three tests that are used to determine insolvency for those purposes. The court distinguished the case of Orban v. Field , which held that when a transaction favors one corporate constituency over another the board loses, at least initially, the cloak of the business judgment protection. In the Orban case, the board did not simply make a business decision that hurt shareholders while repaying creditors but it engaged in an elaborate maneuver in which the defendant company intentionally diluted a major shareholder to a position where he was powerless to stop a merger favored by the directors (citing 1997 Del. Ch. LEXIS at * 28-29). In the instant case, the court found that the corporate action may have left the equity holders with little residual value but the action did not take place primarily for the purpose of “depriving a shareholder of effective enjoyment of a right conferred by law.” Thus, the court found that the enhanced scrutiny announced in Orban did not apply because there was no specter of management entrenchment here. Rather, although there was a duty recognized to creditors based on the insolvency of the company, the transaction involving the sale of assets, which primarily involved the assumption of substantial debt, was the best deal that the board could make under the circumstances. The court also discussed the case of Cooke v. Oolie which involved a potential conflict where the defendants were both shareholders and creditors and there was a tension between the duty to obtain the highest value for the shareholders and at the same time addressing their duties to creditors. The court found that the plaintiffs bore the burden of showing an actual conflict. The court found Cooke inapplicable because in the current case despite a clear duty owed to creditors, no conflict was established. In the present case the court found that the business judgment rule still insulated the board decision because a majority of the directors approving the transaction remained disinterested. In addition, the independent board also insulated itself by appointing a special committee made up entirely of independent directors that also approved the transaction. Nor did the court find any secret or subversive communications between interested directors that troubled the court in the case of In Re: Freeport – McMoRan- Sulfur, Inc. The court also dismissed the plaintiff’s claims of a violation of the breach of the duty of care because the claim was precluded by operation of a provision in the charter that exculpated directors from any awards for damages for violation of due care. The court did not find any bad faith that would vitiate that provision. Nor did it find any gross negligence that would be required to establish a violation of due care.
Although the court recognized that “subjective bad faith of directors can be inferred from corporate actions which are so egregious as to be afforded no presumption of business judgment protection”, the court found no basis to draw an inference of bad faith or waste in this case–thus finding an insufficient rebuttal to the presumption that the directors were acting in a good faith exercise of their fiduciary duties.