As most lawyers familiar with corporate litigation in the Court of Chancery can tell you, determining the standard of review of a director’s actions can be one of the most important aspects of a case. Although determining the proper standard of review is important throughout the life of an action, it can be most important at the outset, as it will dictate whether a complaint is subject to a pleadings-stage motion or whether discovery is inevitable. Not surprisingly, most defendant directors argue that their conduct is shielded by the business judgment rule rather than the harsher entire fairness standard of review that, in almost all instances, means the complaint will survive a motion to dismiss.

Determining the appropriate standard of review to apply to the conduct of facially independent directors in an action challenging a transaction that requires application of the entire fairness standard, such as a transaction between a corporation and its controlling stockholder, presents an interesting challenge. Certain decisions have held that even if the challenged transaction requires entire fairness review, to state a claim against independent directors, a stockholder must plead a non-exculpated breach of fiduciary duty. Courts adopting this view hold that it is the controlling or dominating stockholder that bears the burden of proving the fairness of such a transaction, not the disinterested and independent directors who may have voted in favor of it. Other courts, however, have held that when the entire fairness standard of review applies to the transaction ab initio, even independent directors cannot escape a review of their conduct based on a factual record because, according to the Delaware Supreme Court’s decision in Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), when the entire fairness standard of review applies, the exculpatory provision of a certificate of incorporation cannot apply until liability has been decided.

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