The CEO proposes a transformative merger transaction, or a massive new technology investment, or the spin-off of the company's slower-growth, but historically core, business. Or, as was the case in a recent Delaware Chancery Court decision, management proposes to implement a poison pill with a 4.99% trigger to protect against ownership changes that threaten the company's net operating loss carry-forwards. How are directors to evaluate highly complicated strategic initiatives--particularly where understanding them requires in-depth knowledge of technological, legal, tax or accounting arcana?
In each of the cases, management starts out with a knowledge base superior to that of the board. And directors have a natural and generally appropriate inclination to be supportive of management. At the same time, however, directors must be alert to their obligation to act on an informed basis, which requires them to ask questions and to understand proposals that may have complex and far-reaching implications for their companies. Directors have always sought expert guidance when considering matters as fundamental as a sale of the company; increasingly, they are looking for outside advice to help them fulfill their duties when considering other strategically important questions.
Seeking expert advice is not only a useful way of bringing fresh points of view into the boardroom decision making process, it is also an effective way of shielding directors from potential liability. By statute in Delaware ([section]141 (e)), as well as in most other states, directors are fully protected in relying on expert advice--as long as they satisfy the dictates of the statute, which in Delaware require that the board member be:
(i) relying (ii) in good faith ... (iii) upon ... information, opinions, reports or statements presented to the corporation ... (iv) by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and (v) who has been selected with reasonable care by or on behalf of the corporation.
It's worthwhile to unpack the elements of the statute, since, according to the Delaware Supreme Court, a plaintiff arguing that its safe harbor is inapplicable must show either that one of the elements has not been satisfied, or that omitted information the board should have considered was so obvious and reasonably available that it was gross negligent not to...