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stemming from Stewart’s untimely sale of stock in another entity and the way the
board handled the post-sale media attention. The Delaware Supreme Court held that
allegations of mere friendship or a mere outside business relationship, standing alone,
are insufficient to raise reasonable doubt about a director’s independence. Drawing a
distinction with the Oracle case, the court explained that to create a reasonable doubt
about an outside director’s independence, a plaintiff must plead facts that would
support the inference that because of the nature of a relationship or additional
circumstances other than the interested director’s stock ownership or voting power,
the non-interested director would be more willing to risk his or her reputation than
risk the relationship with the interested director.

G. Director Liability

x In General – a director who acts in good faith, on an informed basis, and in a manner
which the director honestly believes to be in the best interests of the corporation will
not be personally liable for the consequences of a business judgment.

x However, court cases arising from business decisions frequently involve complex
fact scenarios. Directors have a justifiable concern about personal liability
because their business decisions may be reviewed with the benefit of “20-20
hindsight.”

x In the acquisitions context in particular, the damages that may arise from a class
action lawsuit can greatly outweigh the benefits gained from service as a director.

x Threshold for Liability –

x Gross Negligence – The Delaware courts have generally required that a director’s
action must be grossly negligent in order for the director to be personally liable
for damages. Smith v. Van Gorkum, 488 A.2d 858 (Del. 1985).

x Higher Statutory Standards – Several states statutes require a greater degree of
culpability in order to hold a director personally liable.

x Willful misconduct – Florida (in suits by the corporation or shareholders),
Indiana, Kentucky, Utah, Virginia, and Wisconsin

x Knowing violation of criminal law – Florida, Virginia, Wisconsin

x Recklessness – Florida (in suits by third parties), Indiana, and Ohio.

x Conscious or reckless disregard for the best interests of the corporation –
Florida (in suits by the corporation or shareholders) and Kentucky

x Knowing violation of federal or state securities law – Virginia.

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