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Does the business judgment rule apply to a board's choice of expert?

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:

1. "any of the corporation’s officers or employees, or committees of the board of directors" and
2. "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.

Joseph Coletti reviews my book The Profit Motive

From behind a paywall at Journal of Markets and Morality:

In his review of precedent, corporate performance, and management incentives Bainbridge provides the legal, economic, and empirical justification for putting shareholders first. It is the law and should be the law. “Pursuit of shareholder value maximization,” Bainbridge concludes, “leads to more efficient resource allocation, creates new social wealth, and promotes economic and political liberty.”

Complying with M&A ordinary course of business covenants in times of global disasters

As I explain in my guide, Mergers & Acquisitions, merger agreements usually include an ordinary course of business covenant:

Covenants are a series of promises about how the parties will behave during the interim (usually two to four months) between the time the agreement is signed and the closing. A key covenant is that governing the target’s conduct of the business during the pendency of the merger agreement. Usually, the target is prohibited from doing anything other than engaging in ordinary course transactions that are consistent with past practice. Typically, certain major acts will be expressly forbidden, such as changes to the articles or by-laws, dividends, stock repurchases, and the like. Conversely, a target friendly version will allow various deviations from past practice, such as those that are immaterial or would not constitute a MAC.

As I also explain:

The COVID-19 pandemic strained ordinary course covenants to their limits. In AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, for example, the Chancery Court reportedly observed that:

The real question is whether an ordinary course covenant means ordinary course on a clear day or ordinary course based on the hand you’re dealt. In other words, if you have flooding, is it the ordinary course of what you do consistent with past practice when you are in a flood, or is it ordinary course on a clear day when there hasn’t been any rain? Here, we obviously have a colossal and viral-based rainstorm.

The court opted the clear day rule, holding that “when faced with an extraordinary event,” the target’s management may not “take extraordinary actions and claim that they are ordinary under the circumstances.” Not surprisingly, in the immediate aftermath, ordinary course covenants increasingly included a pandemic exception allowing the target to take such actions as are reasonably necessary in response to such an event.

All of which leads me to Kevin Bishop's post Nevada Supreme Court Holds That Temporary Closing During Pandemic Did Not Violate This "Ordinary Course" Covenant:

When Lucky Lucy D, LLC agreed to sell its hotel and casino to LGS Casino LLC in 2019, the parties included a covenant pursuant to which Lucky Lucy agreed to maintain the property and conduct related business "in a manner generally consistent with the manner in which [Lucky Lucy] has operated and maintained the [p]roperty and [a]ssets prior to the date hereof."    COVID-19 arrived before the sale was consummated and Lucky Lucy temporarily closed the casino and laid off employees in response to gubernatorial directive ordering the closure of non-essential businesses.   The buyer then sent a notice of breach, which Lucky Lucy was unable to cure in light of the Governor's emergency directive.  Needless to say, litigation ensued.

... The Nevada Supreme Court ... held that "[i]n closing the casino and hotel pursuant to the emergency directive, the seller was merely following the law so as to maintain its gaming licenses and thus did not materially breach the agreement".  Lucky Lucy D LLC v. LGS Casino LLC, 139 Nev. Adv. 26 (2023).

Oddly, as Bishop explains, the court thought the result might have been different if the provision had not included the word "generally." It's another valuable lesson in the point that words do work and the transaction planner must carefully consider the meaning of every word, even those that seem generally mundane.

On losing interest in politics

As I get older, I find myself giving less of a [mild scatalogical expletive omitted] about politics. Which is sort of odd for somebody who once was very engaged. I’ve more or less dropped out of The Federalist Society. I vote American Solidarity. But without enthusiasm. I can’t remember the last time I read a book about politics. I can’t remember the last really political blog post I wrote; I.e., one that was unrelated to corporate and securities law.

Of course, it may not just be part of the aging process, but rather the times. Certainly, the major parties aren’t helping. Each in its own way is just awful. They offer up uninspiring candidates with serious flaws. They each have adopted many policies I regard as deal breakers. They accomplish nothing.

The good news, I suppose, is that it frees up time for the things I really enjoy: Devotional life. Scholarship. Maintaining my aquaria. Meal planning.

But it’s still sort of odd to see posts from my politically engaged friends over on X and think “oh, who cares?”

Marc Benioff embraces The Profit Motive

In my book, The Profit Motive, I predicted that a lot of social justice warrior CEOs were really just greenwashing and that, when push comes to shove, they will put profits and shareholder value first. Salesforce CEO Marc Benioff now stands as a prime example that I was right.

2/ In The Profit Motive, I pointed out that Benioff's actions have not always matched his rhetoric. But it now seems as though even his rhetoric is changing.

— Steve Bainbridge (@PrawfBainbridge) September 2, 2023

4/ Benioff is also taking an increasingly hard line on the deteriorating conditions in San Francisco. https://t.co/usHPAPk130

— Steve Bainbridge (@PrawfBainbridge) September 2, 2023

6/ But it is the rhetorical shift that is most striking. The WSJ Benioff told an earnings call: "I am quite addicted to the bottom line as well.” This from a guy who used to say "I need to embrace all of my stakeholders, not just all of my shareholders." https://t.co/wFFIHOD4HD

— Steve Bainbridge (@PrawfBainbridge) September 2, 2023