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minority shareholders from the risk, of which the director had unique
knowledge, that the transaction was unfair.

B. The Business Judgment Rule

x Presumption – The board is presumed to have acted in good faith, on an informed
basis, and in a manner honestly believed to be in the best interests of the corporation.
A plaintiff has the burden of proving that the board failed to meet either the duty of
care or loyalty.

x Protection – If the board acted in good faith, on an informed basis, and in a manner
honestly believed to be in the best interests of the corporation, the court will not
substitute its judgment for the board’s judgment and will uphold the business
decision.

C. The Duty of Care Cases

x Decision-Making

x In Smith v. Van Gorkum, 488 A.2d 858 (Del. 1985), the Delaware Supreme Court
found the directors were grossly negligent and failed to adequately inform
themselves when they approved the sale of the company after a two-hour meeting
without reviewing the merger agreement or receiving a fairness opinion about the
adequacy of the proposed purchase price. The board relied solely on a
presentation by the president, who negotiated the merger agreement without
consultation with other directors, senior management, or a financial advisor.

x In Ash v. McCall, C.A. No. 17132 (Del. Ch. Sept. 15, 2000), the court dismissed
the plaintiff’s claim that that board breached its duty of care in failing to detect
accounting problems at the target before a merger, when the board relied on a due
diligence reviews conducted by a Big Five accounting firm and a national
investment banking firm.

x Oversight

x A director’s obligation includes a duty to attempt in good faith to assure that a
corporate information and reporting system exists that the board concludes is
adequate in concept and design to assure that appropriate information is brought
to the board’s attention in a timely manner so the board may satisfy its
responsibility. A sustained or systematic failure to attempt to do so may render a
director liable for losses caused by non-compliance with applicable legal
standards. Although the corporation was investigated over a number of years for
potential violations of Medicare and Medicaid reimbursement laws, and
ultimately paid $98.5 million in settlement payments, the court found the directors
were not guilty of a sustained failure to exercise their oversight functions and the
corporation’s information and reporting systems represented a good faith attempt

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