BA Targeted

Based on the provided materials and Professor Ayotte’s emphasis, here is an explanation of the topics in your outline and how they apply to your upcoming exam.

Fiduciary Duty Baselines: Disney and Van Gorkom

  • In re the Walt Disney Co.: This case is critical for defining bad faith. It clarifies that while a board’s process may be flawed or fall short of "best practices," it does not automatically constitute gross negligence or bad faith. Bad faith is defined as "intentional dereliction of duty" or a "conscious disregard for one’s responsibilities".

  • Smith v. Van Gorkom: A classic duty of care case where the board was found grossly negligent for approving a merger after only two hours of deliberation without adequate documentation. This decision directly led to the adoption of DGCL § 102(b)(7), allowing corporations to exculpate directors from monetary liability for such care breaches.

Conflict Transactions: DGCL § 144, SB 21, MFW, and § 144(c)

  • SB 21 and the New DGCL § 144: The passage of SB 21 was a "major change in the law" that moved conflict-transaction "cleansing" from common law into the statute. Satisfying the statute now provides a true safe harbor—a complete litigation shield rather than just a shift to Business Judgment Review (BJR).

  • MFW (Kahn v. M&F Worldwide): This was the common-law "gold standard" for cleansing controller transactions. It required a deal to be conditioned ab initio (from the start) on two prongs: approval by an independent Special Committee and an informed majority-of-the-minority (MOM) vote.

  • DGCL § 144(c): This is the new statutory safe harbor for controller freeze-outs. Professor Ayotte describes it as a "kinder, gentler MFW" because it removes the strict ab initio requirement and allows committee approval to stand even if one director is compromised, provided a disinterested majority approves.

Oversight and Litigation Control: Caremark and Zuckerberg

  • Caremark: Analyzed through the Stone v. Ritter two-prong test, this standard governs board inaction. It is a bad-faith loyalty claim (non-exculpable) requiring a showing that directors either utterly failed to implement a reporting system (Prong 1) or consciously ignored "red flags" (Prong 2).

  • United Food v. Zuckerberg: This is now the controlling formulation for demand futility in derivative suits. It uses a universal director-by-director analysis to ask if at least half the board: (1) received a material personal benefit; (2) faces a substantial likelihood of non-exculpated liability; or (3) lacks independence from those in the first two categories.

Takeover Defenses: Revlon and Airgas

  • Revlon: Duties are triggered when a sale or breakup of the company becomes "inevitable" or there is a change of control (e.g., target holders are cashed out or the company moves to a controlled-stockholder state). The board's role shifts to "auctioneers" seeking the best value reasonably available.

  • Airgas: This case confirmed the board's "just say no" power. A board acting in good faith may maintain a poison pill against an all-cash offer it believes is inadequate (substantive coercion), provided no Revlon trigger has occurred.

Procedural Tools and Modern Cases: Zapata and Tornetta v. Musk

  • Zapata v. Maldonado: This governs when a Special Litigation Committee (SLC) seeks to dismiss a derivative suit after demand has been excused. It involves a two-step inquiry into the committee's independence/good faith and the court's own business judgment regarding the corporation's best interests.

  • Tornetta v. Musk: This recent case applied entire fairness review to Elon Musk's compensation package. The court found Musk was a controller for that specific transaction and that the deal was not properly cleansed due to a compromised board process and misleading disclosures.