Delaware law provides that the business judgment rule will not protect uninformed decisions by the board of directors. Specifically, the rule will not apply if plaintiff can show that a majority of the board was grossly negligent in failing to avail themselves of all material information reasonably available to them. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), is usually cited as the origin of that requirement.
I recently got into a discussion on Twitter about whether there were pre-Van Gorkom signals that Delaware would make an informed decision a precondition to application of the business judgment rule.
It was suggested that Aronson v. Lewis was the root of Van Gorkom and its progeny in cases like Unocal and Revlon.
Aronson is relevant today mainly as one of the two "seminal demand futility cases in Delaware" (the other being Rales v. Blasband). Orexigen Therapeutics, Inc. v. Narachi, CV 12412-VCMR, 2018 WL 1100372, at *9 (Del. Ch. Feb. 28, 2018).
But there also is no doubt that Aronson was an incredibly important case in the evolution of the business judgment rule. As the late Delaware Supreme Court Justice Randy Holland observed, "the Delaware Supreme Court refined the business judgment rule in what is now a seminal case--Aronson v. Lewis." Randy J. Holland, Delaware Directors' Fiduciary Duties: The Focus on Loyalty, 11 U. Pa. J. Bus. L. 675, 681 (2009). In particular, the Aronson opinion stated that "to invoke the rule's protection directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties." Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Arguably, however, that statement was dicta, leaving it for Van Gorkom to raise the principle to that of a holding.
Having said that, however, I do not think Aronson is the ur-source of the principle. A decade before Aronson, the Delaware Chancery Court decided Gimbel v. Signal Companies, Inc., 316 A.2d 599 (Del. Ch. 1974), aff'd, 316 A.2d 619 (Del. 1974). In it, the Court stated that invoking the business judgment rule requires "a showing that informed directors did, in fact, make a business judgment authorizing the transaction under review." Id. at 609.
The procedural posture of the case matters. The issue before the court was whether plaintiff shareholder was entitled to a preliminary injunction enjoining Signal from selling off one of its subsidiaries. The court concluded that "The circumstances are such as to raise the question as to whether the Signal Board, when the sale of Signal Oil stock was presented, were able to perform their fiduciary obligation as directors to make an informed judgment of approving the transaction." Id. at 614. The court went on to identify a number of allegations suggesting that the decision to sell was not an informed one.
It is at this point that the procedural posture becomes critical. Comparing the potential harm to Signal shareholders if the injunction was denied to the potential harms to Signal and the buyer if the deal was blocked--even on a temporary basis--the court stated it would grant the preliminary injunction but only if the plaintiff posted a bond "in the amount of twenty five million dollars, an amount which is, as far as I have been able to determine, without precedent." Id. at 618.
Plaintiff appealed, arguing that the required security was unreasonable. The Supreme Court rejected that argument. Gimbel v. Signal Companies, Inc., 316 A.2d 619, 619 (Del. 1974).
Plaintiff was unable to post the required security and, as a result, the preliminary injunction did not issue and the case did not proceed to the merits.
But the requirement that the board's decision be informed was on the books ten years before Aronson.
Yet, even Gimbel is not the true ur-source. (One begins to feel like an explorer looking for the source of the Mississippi or the Nile.)
Gimbel itself cited two earlier cases. See Kaplan v. Centex Corp., 284 A.2d 119, 124 (Del. Ch. 1971) ("Application of the [business judgment] rule of necessity depends upon a showing that informed directors did, in fact, make a business judgment authorizing the transaction under review."); Mitchell v. Highland-W. Glass Co. 167 A. 831, 833 (Del. Ch. 1933). ("I can find no justification in the evidence for concluding that the defendant's directors acted so far without information that they can be said to have passed an unitelligent and unadvised judgment.").
I have been unable to find a Delaware decision on point that is older than Mitchell. I did, however, find an earlier decision by an Ohio Court of Common Pleas, which was interpreting an Ohio statute allowing the corporation to sell sell, lease or exchange or otherwise dispose of all ... of its property and assets ... upon such terms and conditions and for such considerations, ... as its board of directors deems expedient ..." Wick v. Youngstown Sheet & Tube Co., 1930 WL 2386, at *2 (Ohio Com. Pl. 1930) (emphasis supplied), rev'd, 188 N.E. 514 (Ohio App. 7th Dist. 1932). The court observed that:
“Deems” means “to judge or to form an opinion; to determine.” To deem expedient thus requires and pre-supposes fully informed judgment on the part of each and every member of the board present to take action, after reasonable opportunity afforded for investigation, weighing and determination at the meeting of all the terms, conditions and considerations entering into the proposal.
Id. at *3. The case is not directly on point, because it was not dealing with the business judgment rule, but it does suggest that the requirement of an informed decision is even older than I suspected.
