Grobow v. Perot
539 A.2d 180
Del.,1988.

HORSEY, Justice:

FN1. The complaints fail to state whether the other two directors on the SRC were inside or outside directors. Since plaintiffs do not allege that they were members of management, we will presume that they were outside directors. For purposes of this case, we define “outside” directors to mean nonemployee, nonmanagement directors.

FN2. “Of the aggregate cost of $742.8 million, $396 million ($33 per share) was attributed to the Class E stock, $282 million ($23.50 per share) was attributed to the contingent notes, and $64.8 million ($5.40 per share) was attributed to ‘Special Interest’ federal tax compensation under the terms of the contingent notes.” Grobow, 526 A.2d at 919 n. 6.

FN3. This commitment by Perot would later be characterized as the “hush mail” feature of the agreement. The colloquial term is not defined in the pleadings but is assumed by this Court to combine the terms “green mail” and “hush money” to connote a variation on an unlawful and secret payment to assure silence. Here, the commitment is cast in the form of an explicit liquidated damage clause for future breach of contract. See infra section III B.

FN4. Plaintiffs allege that the total repurchase price per share ($31.375) was double the market price of the GM class E stock on the last day of trading before consummation of the repurchase ($61.90). However, the extent of premium over market cannot be mathematically calculated with any precision without disregarding the value of the contingent notes. The total repurchase price per share includes not only the price paid for the class E stock, but also the price paid for the contingent notes and the value of the special interest federal tax compensation. See infra note 7.

FN5. Rule 23.1 provides, in pertinent part:

In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint ... shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort. The action shall not be dismissed or compromised without the approval of the Court....

[1] We first note this Court's standard of review of the Court of Chancery's ruling that plaintiffs have failed to plead a demand-futility case consistent with Aronson. Assuming no rule of law is implicated, a decision on a Rule 23.1 motion based on failure to make presuit demand involves essentially a discretionary ruling on a predominantly factual issue. Aronson, 473 A.2d at 814–15. Therefore, this Court will disturb the Court of Chancery's Rule 23.1 ruling only on a showing of abuse of discretion, assuming no legal error led to an erroneous holding. Id. (the Court's determination of a Rule 23.1 motion is discretionary); see also Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984) (the Court of Chancery, exercising its sound discretion, must determine whether demand is excused under either prong of Aronson ).

[2] However, before applying our standard of review, we briefly revisit the underlying requirements of a well-pleaded derivative complaint to withstand a Rule 23.1 motion to dismiss for failure to make presuit demand upon a board in accordance with Aronson and Pogostin. Our standard or test for determining whether a derivative complaint states a demand futility claim under Rule 23.1 is: whether taking the well-pleaded facts as true, the allegations raise a reasonable doubt as to (i) director disinterest or independence or (ii) whether the directors exercised proper business judgment in approving the challenged transaction. Aronson, 473 A.2d at 814, and Pogostin, 480 A.2d at 624.

[3] Addressing plaintiffs' claim of legal error, we find the Vice Chancellor's use of a “judicial finding” criterion for judging a derivative claim for demand excusal to be erroneous, but not reversible error. First, the Court's “judicial finding” criterion would impose a more stringent standard for demand futility than is warranted under Aronson. The test for demand futility should be whether the well-pleaded facts of the particular complaint support a reasonable doubt of business judgment protection, not whether the facts support a judicial finding that the directors' actions are not protected by the business judgment rule. See Aronson, 473 A.2d at 815.

[4] Therefore, we decline to approve the use of a “judicial finding” standard as the minimum criterion below which presuit demand will not be excused. We think it sufficient simply to say that the Court of Chancery must weigh the presumption of the business judgment rule that attaches to a board of directors' decision against the well-pleaded facts alleged in a plaintiff's demand-futility complaint. In that respect, the suggestion in the Trial Court's Opinion that a transaction is first analyzed from the standpoint of fairness is erroneous. See 526 A.2d at 927. Fairness becomes an issue only if the presumption of the business judgment rule is defeated. Aronson, 473 A.2d at 812–817.

[5] [6] [7] As previously noted, the business judgment rule is but a presumption that directors making a business decision, not involving self-interest, act on an informed basis, in good faith and in the honest belief that their actions are in the corporation's best interest. See Aronson, 473 A.2d at 812. Thus, good faith and the absence of self-dealing are threshold requirements for invoking the rule. Id.; cf. Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985). Assuming the presumptions of director good faith and lack of self-dealing are not rebutted by well-pleaded facts, a shareholder derivative complainant must then allege further facts with particularity which, “taken as true, support a reasonable doubt that the challenged transaction was [in fact] the product of a valid exercise of business judgment.” Aronson, 473 A.2d at 815; see also Pogostin, 480 A.2d at 624–25. The complaints as amended do not even purport to plead a claim of fraud, bad faith, or self-dealing in the usual sense of personal profit or betterment. See, e.g., Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971). Therefore, we must presume that the GM directors reached their repurchase decision in good faith. See Allaun v. Consolidated Oil Co., Del.Ch., 147 A. 257, 261 (1929).

[8] [9] The burden then clearly falls upon plaintiffs claiming demand futility to plead particularized facts sufficient to rebut the presumption that the GM Board exercised sound business judgment “in the honest belief that the action taken was in the best interest of the company.” Aronson, 473 A.2d at 812 (citations omitted); cf. Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971). Moreover, upon a motion to dismiss, only well-pleaded allegations of fact must be accepted as true; conclusionary allegations of fact or law not supported by allegations of specific fact may not be taken as true.^FN6 A trial court need not blindly accept as true all allegations, nor must it draw all inferences from them in plaintiffs' favor unless they are reasonable inferences. Thus, for plaintiffs to meet the Aronson reasonable doubt standard, we must examine the complaints, as amended, to determine whether their well-pleaded facts raise a reasonable doubt sufficient to rebut the presumption that the business judgment rule attaches to the repurchase *188 transaction. This brings us to the application of the two-pronged demand futility test of Aronson.

FN6. Even under the less stringent standard of a Chancery Court Rule 12(b)(6) motion to dismiss, all facts of the pleadings and reasonable inferences to be drawn therefrom are accepted as true, but neither inferences nor conclusions of fact unsupported by allegations of specific facts upon which the inferences or conclusions rest are accepted as true. See, e.g., Weinberger v. UOP, Inc., Del.Ch., 409 A.2d 1262, 1264 (1979); Cohen v. Mayor of Wilmington, Del.Ch., 99 A.2d 393, 395 (1953).

[10] [11] In order to satisfy Aronson 's first prong involving director disinterest, see Aronson, 473 A.2d at 812, plaintiffs must plead particularized facts demonstrating either a financial interest or entrenchment on the part of the GM directors. Plaintiffs plead no facts demonstrating a financial interest on the part of GM's directors. The only averment permitting such an inference is the allegation that all GM's directors are paid for their services as directors. However, such allegations, without more, do not establish any financial interest. See, e.g., In re E.F. Hutton Banking Practices Litigation, S.D.N.Y., 634 F.Supp. 265, 271 (1986) (construing Delaware law); Moran v. Household Internat'l, Inc., Del.Ch., 490 A.2d 1059, 1074–75, aff'd, Del.Supr., 500 A.2d 1346 (1985).

[12] Plaintiffs also do not plead any facts tending to show that the GM directors' positions were actually threatened by Perot, who owned only 0.8 percent of GM's voting stock, nor do plaintiffs allege that the repurchase was motivated and reasonably related to the directors' retention of their positions on the Board. See Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964). Plaintiffs merely argue that Perot's public criticism of GM management could cause the directors embarrassment sufficient to lead to their removal from office. Such allegations are tenuous at best and are too speculative to raise a reasonable doubt of director disinterest. Speculation on motives for undertaking corporate action are wholly insufficient to establish a case of demand excusal. Cf. Sinclair Oil Corp., 280 A.2d at 722. Therefore, we agree with the Vice Chancellor that plaintiffs' entrenchment theory is based largely on supposition rather than fact.

FN7. The formula plaintiffs use to establish the existence of a “giant premium” is ambiguous, making the allegation conclusory. The total repurchase price includes not only the price paid for the class E stock, but also the price paid for the contingent notes and the value of the tax compensation. Ambiguity is caused when these items are factored in, especially the contingent note discounts. For example, in their complaints, plaintiffs appear to discount the contingent notes by $16.20, reflecting present value ($62.50–$46.30). The GM directors, however, discount the notes by $6.00. This disparity appears to be due to plaintiffs' use of a base figure of $46.30, which is $16.20 less than that used by the defendants. The plaintiffs fail to explain this disparity with particularity, thus failing to satisfy their burden under Aronson.

[13] Having concluded that plaintiffs have failed to plead a claim of financial interest or entrenchment sufficient to excuse presuit demand, we examine the complaints as amended to determine whether they raise a reasonable doubt that the directors exercised proper business judgment in the transaction. By proper business judgment we mean both substantive due care (purchase terms), see Saxe v. Brady, Del.Ch., 184 A.2d 602, 610 (1962), and procedural due care (an informed decision), see Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872–73 (1985).

Grobow, 526 A.2d at 927. We agree with this analysis.

[14] The law of Delaware is well established that, in the absence of evidence of fraud or unfairness, a corporation's repurchase of its capital stock at a premium over market from a dissident shareholder is entitled to the protection of the business judgment rule. (See Polk, 507 A.2d at 536–37, for this Court's most recent statement of this principle.) We have already determined that plaintiffs have not stated a claim of financial interest or entrenchment as the compelling motive for the repurchase, and it is equally clear that the complaints as amended do not allege a claim of fraud. They allege, at most, a claim of waste based on the assertion that GM's Board paid such a premium for the Perot holdings as to shock the conscience of the ordinary person.

[15] Thus, the issue becomes whether the complaints state a claim of waste of assets, i.e., whether “what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid.” Saxe, 184 A.2d at 610. By way of reinforcing their claim of waste, plaintiffs seize upon the hush-mail feature of the repurchase as being the motivating reason for the “giant premium” approved by the GM Board. Plaintiffs then argue that buying the silence of a dissident within management constitutes an invalid business purpose. Ergo, plaintiffs argue that a claim of waste of corporate assets evidencing lack of director due care has been well pleaded.

[16] Approval of a transaction by a majority of independent, disinterested directors almost always bolsters a presumption that the business judgment rule attaches to transactions approved by a board of directors that are later attacked on grounds of lack of due care. In such cases, a heavy burden falls on a plaintiff to avoid presuit demand. Cf. Polk, 507 A.2d at 537 (1986); Unocal, 493 A.2d at 955. This principle of law clearly applies in this case.

[17] To support their allegation of lack of procedural due care, plaintiffs point principally to the lack of negotiations between Perot and GM and the speed with which the Perot repurchase was submitted to and approved by GM's Board of Directors.*191 However, we find plaintiffs' complaints as amended (a) to contradict these assertions and (b) otherwise to be lacking in averments essential to raise a reasonable doubt that the GM Board failed to exercise due care.

[18] Notwithstanding the Vice Chancellor's misstatement of the test for determining when demand on a board of directors will be considered excused as futile, we *192 reach the same result. We hold that the complaints as amended fail to allege facts sufficient to create a reasonable doubt that the GM Board-approved repurchase transaction is not within the protection of the business judgment rule; thus, the plaintiffs have failed to establish the futility of demand required under Aronson and Pogostin for casting reasonable doubt thereon. The Trial Court, therefore, correctly dismissed the suits under Del.Ch.Ct.R. 23.1 for failure of plaintiffs to make presuit demand upon the GM Board.^FN8

FN8. Plaintiffs request of this Court leave to amend once again their complaints if we affirm the judgment of the Court of Chancery. Under Court of Chancery Rule 15, a leave to amend is freely granted when justice so requires. However, such a ruling is always a discretionary matter with the trial judge, reviewable on appeal solely for abuse of discretion. Bokat v. Getty Oil Co., Del.Supr., 262 A.2d 246, 251 (1970). Since plaintiffs did not file motions to amend in the Chancery Court, no motions are now before this Court. See Supr.Ct.R. 8. Plaintiffs' request for leave to amend is, therefore, denied.


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