A friend sent along this question:
In a DGCL § 141 (e) situation (board relying on an expert), does the choice of an expert qualify for the business judgment rule’s safe harbor? Leaving the question of the expert being disinterested aside, can courts second-guess the suitability of the expert (for instance as to his qualifications to answer the question at hand)?
DGCL § 141(e) provides that:
A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member’s duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation’s officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.
You'll note that the statute divides the individuals upon whom the board may rely into two categories:
- "any of the corporation’s officers or employees, or committees of the board of directors" and
- "any other person"
Only the latter category is subject to the proviso requiring that the board member reasonably believe that the matters on which the expert is being consulted "are within such other person’s professional or expert competence" and that the expert was "selected with reasonable care by or on behalf of the corporation."
On its face the statute seems to preclude application of the business judgment rule to the board's choice of an outside expert. This reading arguably is supported by Brehm v. Eisner:
To survive a Rule 23.1 motion to dismiss in a due care case where an expert has advised the board in its decisionmaking process, the complaint must allege particularized facts (not conclusions) that, if proved, would show, for example, that: (a) the directors did not in fact rely on the expert; (b) their reliance was not in good faith; (c) they did not reasonably believe that the expert's advice was within the expert's professional competence; (d) the expert was not selected with reasonable care by or on behalf of the corporation, and the faulty selection process was attributable to the directors ...
Brehm v. Eisner, 746 A.2d 244, 262 (Del. 2000). The court thus apparently will explore the reasonableness of the director's selection of the expert, which is something that the business judgment rule would preclude. See Michael P. Dooley, Two Models of Corporate Governance, 47 Bus. Law. 461, 478-79 n.58 (1992) (arguing that the term “rational is to be equated with conceivable or imaginable and means only that the court will not even look at the board's judgment if there is any possibility that it was actuated by a legitimate business reason. It clearly does not mean, and cannot legitimately be cited for the proposition, that individual directors must have, and be prepared to put forth, proof of rational reasons for their decisions.”
Update: Keith Paul Bishop notes key differences between the Delaware statute and the comparable California statute.
