[229] Raymond J. DiCamillo, Blake Rohrbacher, and Scott W. Perkins, Esquires, of Richards, Layton & Finger, P.A., Wilmington, Delaware; of Counsel: Robert J. Giuffra, Jr. (argued), David B. Harms, William B. Monahan, and William H. Wagener, Esquires, of Sullivan & Cromwell LLP, New York, New York; for Appellant.

Jay W. Eisenhofer, Stuart M. Grant, Michael J. Barry (argued), and Ananda Chaudhuri, Esquires, of Grant & Eisenhofer P.A., Wilmington, Delaware; for Appellee.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS, and RIDGELY, Justices, constituting the Court en Banc.

JACOBS, Justice.

This proceeding arises from a certification by the United States Securities and Exchange Commission (the "SEC"), to this Court, of two questions of law pursuant to Article IV, Section 11(8) of the Delaware Constitution^[1] and Supreme Court Rule 41. On June 27, 2008, the SEC asked this Court to address two questions of Delaware law regarding a proposed stockholder bylaw submitted by the AFSCME Employees Pension Plan ("AFSCME") for inclusion in the proxy materials of CA, Inc. ("CA" or the "Company") for CA's 2008 annual stockholders' meeting. This Court accepted certification on July 1, 2008, and after expedited briefing, the matter was argued on July 9, 2008. This is the decision of the Court on the certified questions.

I. FACTS

CA is a Delaware corporation whose board of directors consists of twelve persons, all of whom sit for reelection each year. CA's annual meeting of stockholders is scheduled to be held on September 9, 2008. CA intends to file its definitive proxy materials with the SEC on or about July 24, 2008 in connection with that meeting.

AFSCME, a CA stockholder, is associated with the American Federation of State, County and Municipal Employees. On March 13, 2008, AFSCME submitted a proposed stockholder bylaw (the "Bylaw" or "proposed Bylaw") for inclusion in the Company's proxy materials for its 2008 annual meeting of stockholders. The Bylaw, if adopted by CA stockholders, would amend the Company's bylaws to provide as follows:

RESOLVED, that pursuant to section 109 of the Delaware General Corporation Law and Article IX of the bylaws of CA, Inc., stockholders of CA hereby amend the bylaws to add the following Section 14 to Article II:

[230] The board of directors shall cause the corporation to reimburse a stockholder or group of stockholders (together, the "Nominator") for reasonable expenses ("Expenses") incurred in connection with nominating one or more candidates in a contested election of directors to the corporation's board of directors, including, without limitation, printing, mailing, legal, solicitation, travel, advertising and public relations expenses, so long as (a) the election of fewer than 50% of the directors to be elected is contested in the election, (b) one or more candidates nominated by the Nominator are elected to the corporation's board of directors, (c) stockholders are not permitted to cumulate their votes for directors, and (d) the election occurred, and the Expenses were incurred, after this bylaw's adoption. The amount paid to a Nominator under this bylaw in respect of a contested election shall not exceed the amount expended by the corporation in connection with such election.

CA's current bylaws and Certificate of Incorporation have no provision that specifically addresses the reimbursement of proxy expenses. Of more general relevance, however, is Article SEVENTH, Section (1) of CA's Certificate of Incorporation, which tracks the language of 8 Del. C. § 141(a) and provides that:

The management of the business and the conduct of the affairs of the corporation shall be vested in [CA's] Board of Directors.

It is undisputed that the decision whether to reimburse election expenses is presently vested in the discretion of CA's board of directors, subject to their fiduciary duties and applicable Delaware law.

On April 18, 2008, CA notified the SEC's Division of Corporation Finance (the "Division") of its intention to exclude the proposed Bylaw from its 2008 proxy materials. The Company requested from the Division a "no-action letter" stating that the Division would not recommend any enforcement action to the SEC if CA excluded the AFSCME proposal.^[2] CA's request for a no-action letter was accompanied by an opinion from its Delaware counsel, Richards Layton & Finger, P.A. ("RL & F"). The RL & F opinion concluded that the proposed Bylaw is not a proper subject for stockholder action, and that if implemented, the Bylaw would violate the Delaware General Corporation Law ("DGCL").

On May 21, 2008, AFSCME responded to CA's no-action request with a letter taking the opposite legal position. The AFSCME letter was accompanied by an opinion from AFSCME's Delaware counsel, Grant & Eisenhofer, P.A. ("G & E"). The G & E opinion concluded that the proposed Bylaw is a proper subject for shareholder action and that if adopted, would be permitted under Delaware law.

The Division was thus confronted with two conflicting legal opinions on Delaware law. Whether or not the Division would determine that CA may exclude the proposed Bylaw from its 2008 proxy materials would depend upon which of these conflicting views is legally correct. To obtain guidance, the SEC, at the Division's request, certified two questions of Delaware law to this Court. Given the short timeframe for the filing of CA's proxy materials, [231] we concluded that "there are important and urgent reasons for an immediate determination of the questions certified," and accepted those questions for review on July 1, 2008.

II. THE CERTIFIED QUESTIONS

The two questions certified to us by the SEC are as follows:

1. Is the AFSCME Proposal a proper subject for action by shareholders as a matter of Delaware law?

2. Would the AFSCME Proposal, if adopted, cause CA to violate any Delaware law to which it is subject?

The questions presented are issues of law which this Court decides de novo.^[3]

III. THE FIRST QUESTION

A. Preliminary Comments

The first question presented is whether the Bylaw is a proper subject for shareholder action, more precisely, whether the Bylaw may be proposed and enacted by shareholders without the concurrence of the Company's board of directors. Before proceeding further, we make some preliminary comments in an effort to delineate a framework within which to begin our analysis.

First, the DGCL empowers both the board of directors and the shareholders of a Delaware corporation to adopt, amend or repeal the corporation's bylaws. 8 Del. C. § 109(a) relevantly provides that:

After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote...; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors.... The fact that such power has been so conferred upon the directors ... shall not divest the stockholders ... of the power, nor limit their power to adopt, amend or repeal bylaws.

Pursuant to Section 109(a), CA's Certificate of Incorporation confers the power to adopt, amend or repeal the bylaws upon the Company's board of directors.^[4] Because the statute commands that that conferral "shall not divest the stockholders... of ... nor limit" their power, both the board and the shareholders of CA, independently and concurrently, possess the power to adopt, amend and repeal the bylaws.

Second, the vesting of that concurrent power in both the board and the shareholders raises the issue of whether the stockholders' power is coextensive with that of the board, and vice versa. As a purely theoretical matter that is possible, and were that the case, then the first certified question would be easily answered. That is, under such a regime any proposal to adopt, amend or repeal a bylaw would be a proper subject for either shareholder or board action, without distinction. But the DGCL has not allocated to the board and the shareholders the identical, coextensive power to adopt, amend and repeal the bylaws. Therefore, how that power is allocated between those two decision-making bodies requires an analysis that is more complex.

[232] Moving from the theoretical to this case, by its terms Section 109(a) vests in the shareholders a power to adopt, amend or repeal bylaws that is legally sacrosanct, i.e., the power cannot be non-consensually eliminated or limited by anyone other than the legislature itself. If viewed in isolation, Section 109(a) could be read to make the board's and the shareholders' power to adopt, amend or repeal bylaws identical and coextensive, but Section 109(a) does not exist in a vacuum. It must be read together with 8 Del. C. § 141(a), which pertinently provides that:

The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.^[5]

No such broad management power is statutorily allocated to the shareholders. Indeed, it is well-established that stockholders of a corporation subject to the DGCL may not directly manage the business and affairs of the corporation, at least without specific authorization in either the statute or the certificate of incorporation.^[6] Therefore, the shareholders' statutory power to adopt, amend or repeal bylaws is not coextensive with the board's concurrent power and is limited by the board's management prerogatives under Section 141(a).^[7]

Third, it follows that, to decide whether the Bylaw proposed by AFSCME is a proper subject for shareholder action under Delaware law, we must first determine: (1) the scope or reach of the shareholders' power to adopt, alter or repeal the bylaws of a Delaware corporation, and then (2) whether the Bylaw at issue here falls within that permissible scope. Where, as here, the proposed bylaw is one that limits director authority, that is an elusively difficult task. As one noted scholar has put it, "the efforts to distinguish by-laws that permissibly limit director authority from by-laws that impermissibly do so have failed to provide a coherent analytical structure, and the pertinent statutes provide no guidelines for distinction at all."^[8] The tools that are [233] available to this Court to answer those questions are other provisions of the DGCL^[9] and Delaware judicial decisions that can be brought to bear on this question.

B. Analysis

1.

Two other provisions of the DGCL, 8 Del. C. §§ 109(b) and 102(b)(1), bear importantly on the first question and form the basis of contentions advanced by each side. Section 109(b), which deals generally with bylaws and what they must or may contain, provides that:

The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

And Section 102(b)(1), which is part of a broader provision that addresses what the certificate of incorporation must or may contain, relevantly states that:

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

(1) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders....; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation.

AFSCME relies heavily upon the language of Section 109(b), which permits the bylaws of a corporation to contain "any provision ... relating to the ... rights or powers of its stockholders [and] directors...." The Bylaw, AFSCME argues, "relates to" the right of the stockholders meaningfully to participate in the process of electing directors, a right that necessarily "includes the right to nominate an opposing slate."^[10]

CA argues, in response, that Section 109(b) is not dispositive, because it cannot be read in isolation from, and without regard to, Section 102(b)(1). CA's argument [234] runs as follows: the Bylaw would limit the substantive decision-making authority of CA's board to decide whether or not to expend corporate funds for a particular purpose, here, reimbursing director election expenses. Section 102(b)(1) contemplates that any provision that limits the broad statutory power of the directors must be contained in the certificate of incorporation.^[11] Therefore, the proposed Bylaw can only be in CA's Certificate of Incorporation, as distinguished from its bylaws. Accordingly, the proposed bylaw falls outside the universe of permissible bylaws authorized by Section 109(b).^[12]

Implicit in CA's argument is the premise that any bylaw that in any respect might be viewed as limiting or restricting the power of the board of directors automatically falls outside the scope of permissible bylaws. That simply cannot be. That reasoning, taken to its logical extreme, would result in eliminating altogether the shareholders' statutory right to adopt, amend or repeal bylaws. Bylaws, by their very nature, set down rules and procedures that bind a corporation's board and its shareholders. In that sense, most, if not all, bylaws could be said to limit the otherwise unlimited discretionary power of the board. Yet Section 109(a) carves out an area of shareholder power to adopt, amend or repeal bylaws that is expressly inviolate.^[13] Therefore, to argue that the Bylaw at issue here limits the board's power to manage the business and affairs of the Company only begins, but cannot end, the analysis needed to decide whether the Bylaw is a proper subject for shareholder action. The question left unanswered is what is the scope of shareholder action that Section 109(b) permits yet does not improperly intrude upon the directors' power to manage corporation's business and affairs under Section 141(a).

It is at this juncture that the statutory language becomes only marginally helpful in determining what the Delaware legislature intended to be the lawful scope of the shareholders' power to adopt, amend and repeal bylaws. To resolve that issue, the Court must resort to different tools, namely, decisions of this Court and of the Court of Chancery that bear on this question. Those tools do not enable us to articulate with doctrinal exactitude a bright line that divides those bylaws that shareholders may unilaterally adopt under Section 109(b) from those which they may not under Section 141(a). They do, however, enable us to decide the issue presented in this specific case.^[14]

2.

It is well-established Delaware law that a proper function of bylaws is not to mandate [235] how the board should decide specific substantive business decisions, but rather, to define the process and procedures by which those decisions are made. As the Court of Chancery has noted:

Traditionally, the bylaws have been the corporate instrument used to set forth the rules by which the corporate board conducts its business. To this end, the DGCL is replete with specific provisions authorizing the bylaws to establish the procedures through which board and committee action is taken.... [T]here is a general consensus that bylaws that regulate the process by which the board acts are statutorily authorized.^[15]

* * *

... I reject International's argument that that provision in the Bylaw Amendments impermissibly interferes with the board's authority under § 141(a) to manage the business and affairs of the corporation. Sections 109 and 141, taken in totality,.... make clear that bylaws may pervasively and strictly regulate the process by which boards act, subject to the constraints of equity.^[16]

Examples of the procedural, process-oriented nature of bylaws are found in both the DGCL and the case law. For example, 8 Del. C. § 141(b) authorizes bylaws that fix the number of directors on the board, the number of directors required for a quorum (with certain limitations), and the vote requirements for board action. 8 Del. C. § 141(f) authorizes bylaws that preclude board action without a meeting.^[17] And, almost three decades ago this Court upheld a shareholder-enacted bylaw requiring unanimous board attendance and board approval for any board action, and unanimous ratification of any committee action.^[18] Such purely procedural bylaws do not improperly encroach upon the board's managerial authority under Section 141(a).

The process-creating function of bylaws provides a starting point to address the Bylaw at issue. It enables us to frame the issue in terms of whether the Bylaw is one that establishes or regulates a process for substantive director decision-making, or one that mandates the decision itself. Not surprisingly, the parties sharply divide on that question. We conclude that the Bylaw, even though infelicitously couched as [236] a substantive-sounding mandate to expend corporate funds, has both the intent and the effect of regulating the process for electing directors of CA. Therefore, we determine that the Bylaw is a proper subject for shareholder action, and set forth our reasoning below.

Although CA concedes that "restrictive procedural bylaws (such as those requiring the presence of all directors and unanimous board consent to take action) are acceptable," it points out that even facially procedural bylaws can unduly intrude upon board authority. The Bylaw being proposed here is unduly intrusive, CA claims, because, by mandating reimbursement of a stockholder's proxy expenses, it limits the board's broad discretionary authority to decide whether to grant reimbursement at all. CA further claims that because (in defined circumstances) the Bylaw mandates the expenditure of corporate funds, its subject matter is necessarily substantive, not process-oriented, and, therefore falls outside the scope of what Section 109(b) permits.^[19]

Because the Bylaw is couched as a command to reimburse ("The board of directors shall cause the corporation to reimburse a stockholder"), it lends itself to CA's criticism. But the Bylaw's wording, although relevant, is not dispositive of whether or not it is process-related. The Bylaw could easily have been worded differently, to emphasize its process, as distinguished from its mandatory payment, component.^[20] By saying this we do not mean to suggest that this Bylaw's reimbursement component can be ignored. What we do suggest is that a bylaw that requires the expenditure of corporate funds does not, for that reason alone, become automatically deprived of its process-related character. A hypothetical example illustrates the point. Suppose that the directors of a corporation live in different states and at a considerable distance from the corporation's headquarters. Suppose also that the shareholders enact a bylaw that requires all meetings of directors to take place in person at the corporation's headquarters. Such a bylaw would be clearly process-related, yet it cannot be supposed that the shareholders would lack the power to adopt the bylaw because it would require the corporation to expend its funds to reimburse the directors' travel expenses. Whether or not a bylaw is process-related [237] must necessarily be determined in light of its context and purpose.

The context of the Bylaw at issue here is the process for electing directors—a subject in which shareholders of Delaware corporations have a legitimate and protected interest.^[21] The purpose of the Bylaw is to promote the integrity of that electoral process by facilitating the nomination of director candidates by stockholders or groups of stockholders. Generally, and under the current framework for electing directors in contested elections, only board-sponsored nominees for election are reimbursed for their election expenses. Dissident candidates are not, unless they succeed in replacing at least a majority of the entire board. The Bylaw would encourage the nomination of non-management board candidates by promising reimbursement of the nominating stockholders' proxy expenses if one or more of its candidates are elected. In that the shareholders also have a legitimate interest, because the Bylaw would facilitate the exercise of their right to participate in selecting the contestants. The Court of Chancery has so recognized:

[T]he unadorned right to cast a ballot in a contest for [corporate] office ... is meaningless without the right to participate in selecting the contestants. As the nominating process circumscribes the range of choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders. To allow for voting while maintaining a closed selection process thus renders the former an empty exercise.^[22]

* * *

The shareholders of a Delaware corporation have the right "to participate in selecting the contestants" for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action. Accordingly, we answer the first question certified to us in the affirmative.

That, however, concludes only part of the analysis. The DGCL also requires that the Bylaw be "not inconsistent with law."^[23] Accordingly, we turn to the second certified question, which is whether the proposed Bylaw, if adopted, would cause CA to violate any Delaware law to which it is subject.

[238] IV. THE SECOND QUESTION

In answering the first question, we have already determined that the Bylaw does not facially violate any provision of the DGCL or of CA's Certificate of Incorporation. The question thus becomes whether the Bylaw would violate any common law rule or precept. Were this issue being presented in the course of litigation involving the application of the Bylaw to a specific set of facts, we would start with the presumption that the Bylaw is valid and, if possible, construe it in a manner consistent with the law.^[24] The factual context in which the Bylaw was challenged would inform our analysis, and we would "exercise caution [before] invalidating corporate acts based upon hypothetical injuries...."^[25] The certified questions, however, request a determination of the validity of the Bylaw in the abstract. Therefore, in response to the second question, we must necessarily consider any possible circumstance under which a board of directors might be required to act. Under at least one such hypothetical, the board of directors would breach their fiduciary duties if they complied with the Bylaw. Accordingly, we conclude that the Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders.^[26]

This Court has previously invalidated contracts that would require a board to act or not act in such a fashion that would limit the exercise of their fiduciary duties. In Paramount Communications, Inc. v. QVC Network, Inc.,^[27] we invalidated a "no shop" provision of a merger agreement with a favored bidder (Viacom) that prevented the directors of the target company (Paramount) from communicating with a competing bidder (QVC) the terms of its competing bid in an effort to obtain the highest available value for shareholders. We held that:

The No-Shop Provision could not validly define or limit the fiduciary duties of the Paramount directors. To the extent that a contract, or a provision thereof, purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable. [ ... ] [T]he Paramount directors could not contract away their fiduciary obligations. Since the No-Shop Provision was invalid, Viacom never had any vested contract rights in the provision.^[28]

Similarly, in Quickturn Design Systems, Inc. v. Shapiro,^[29] the directors of the target company (Quickturn) adopted a "poison pill" rights plan that contained a so-called "delayed redemption provision" as a defense against a hostile takeover bid, as part of which the bidder (Mentor Graphics) intended to wage a proxy contest to replace the target company board. The delayed redemption provision was intended to deter that effort, by preventing any [239] newly elected board from redeeming the poison pill for six months. This Court invalidated that provision, because it would "impermissibly deprive any newly elected board of both its statutory authority to manage the corporation under 8 Del. C. § 141(a) and its concomitant fiduciary duty pursuant to that statutory mandate."^[30] We held that:

One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. [ ... ] The Quickturn certificate of incorporation contains no provision purporting to limit the authority of the board in any way. The Delayed Redemption Provision, however, would prevent a newly elected board of directors from completely discharging its fundamental management duties to the corporation and its stockholders for six months. While the Delayed Redemption Provision limits the board of directors' authority in only one respect, the suspension of the Rights Plan, it nonetheless restricts the board's power in an area of fundamental importance to the shareholders—negotiating a possible sale of the corporation. Therefore, we hold that the Delayed Redemption Provision is invalid under Section 141(a), which confers upon any newly elected board of directors full power to manage and direct the business and affairs of a Delaware corporation.^[31]

Both QVC and Quickturn involved binding contractual arrangements that the board of directors had voluntarily imposed upon themselves. This case involves a binding bylaw that the shareholders seek to impose involuntarily on the directors in the specific area of election expense reimbursement. Although this case is distinguishable in that respect, the distinction is one without a difference. The reason is that the internal governance contract— which here takes the form of a bylaw—is one that would also prevent the directors from exercising their full managerial power in circumstances where their fiduciary duties would otherwise require them to deny reimbursement to a dissident slate. That this limitation would be imposed by a majority vote of the shareholders rather than by the directors themselves, does not, in our view, legally matter.^[32]

AFSCME contends that it is improper to use the doctrine articulated in QVC and Quickturn as the measure of the validity of the Bylaw. Because the Bylaw would remove the subject of election expense reimbursement (in circumstances as defined by the Bylaw) entirely from the CA's board's discretion (AFSCME argues), it cannot fairly be claimed that the directors would be precluded from discharging their fiduciary duty. Stated differently, AFSCME argues that it is unfair to claim that the Bylaw prevents the CA board from discharging its fiduciary duty where the effect of the Bylaw is to relieve the board entirely of those duties in this specific area.

That response, in our view, is more semantical than substantive. No matter how artfully it may be phrased, the argument concedes the very proposition that renders the Bylaw, as written, invalid: [240] the Bylaw mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude. That such circumstances could arise is not far fetched. Under Delaware law, a board may expend corporate funds to reimburse proxy expenses "[w]here the controversy is concerned with a question of policy as distinguished from personnel o[r] management."^[33] But in a situation where the proxy contest is motivated by personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation, the board's fiduciary duty could compel that reimbursement be denied altogether.^[34]

It is in this respect that the proposed Bylaw, as written, would violate Delaware law if enacted by CA's shareholders. As presently drafted, the Bylaw would afford CA's directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the "reasonable" expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA's directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.^[35]

* * *

In arriving at this conclusion, we express no view on whether the Bylaw as currently drafted, would create a better governance scheme from a policy standpoint. We decide only what is, and is not, legally permitted under the DGCL. That statute, as currently drafted, is the expression of policy as decreed by the Delaware legislature. Those who believe that CA's shareholders should be permitted to make the proposed Bylaw as drafted part of CA's governance scheme, have two alternatives. They may seek to amend the Certificate of Incorporation to include the substance of the Bylaw; or they may seek recourse from the Delaware General Assembly.

Accordingly, we answer the second question certified to us in the affirmative.

QUESTIONS ANSWERED.

[1] Article IV, Section 11(8) was amended in 2007 to authorize this Court to hear and determine questions of law certified to it by (in addition to the tribunals already specified therein) the United States Securities and Exchange Commission. 76 Del. Laws 2007, ch. 37 § 1, effective May 3, 2007. This certification request is the first submitted by the SEC to this Court.

[2] Under Sections (i)(1) and (i)(2) of SEC Rule 14a-8, a company may exclude a stockholder proposal from its proxy statement if the proposal "is not a proper subject for action by the shareholders under the laws of the jurisdiction of the company's organization," or where the proposal, if implemented, "would cause the company to violate any state law to which it is subject." See 17 C.F.R. § 240.14a-8.

[3] B.F. Rich & Co., Inc. v. Gray, 933 A.2d 1231, 1241 (Del.2007).

[4] Article SEVENTH Section (2) of CA's Certificate of Incorporation provides that "[t]he original By Laws of the corporation shall be adopted by the incorporator. Thereafter, the power to make, alter, or repeal the By Laws, and to adopt any new By Law, except a By Law classifying directors for election for staggered terms, shall be vested in the Board of Directors."

[5] As earlier noted, CA's Certificate of Incorporation fully empowers the board of directors, in language that tracks Section 141(a), to manage the business and affairs of the Company.

[6] See, e.g., McMullin v. Beran, 765 A.2d 910, 916 (Del.2000) ("[o]ne of the fundamental principles of the Delaware General Corporation Law statute is that the business affairs of a corporation are managed by or under the direction of its board of directors."); Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281, 1291-92 (Del.1998) ("One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. [ ... ] Section 141(a) ... confers upon any newly elected board of directors full power to manage and direct the business and affairs of a Delaware corporation.") (emphasis in original) (internal citations omitted); Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984) ("[a] cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation.").

[7] Because the board's managerial authority under Section 141(a) is a cardinal precept of the DGCL, we do not construe Section 109 as an "except[ion] ... otherwise specified in th[e] [DGCL]" to Section 141(a). Rather, the shareholders' statutory power to adopt, amend or repeal bylaws under Section 109 cannot be "inconsistent with law," including Section 141(a).

[8] Lawrence A. Hamermesh, Corporate Democracy and Stockholder-Adopted By-Laws: Taking Back the Street?, 73 TUL. L.REV. 409, 444 (1998); Id. at 416 (noting that "neither the courts, the legislators, the SEC, nor legal scholars have clearly articulated the means of... determining whether a stockholder-adopted by-law provision that constrains director managerial authority is legally effective."). See also Randall S. Thomas & Catherine T. Dixon, ARANOW & EINHORN ON PROXY CONTESTS FOR CORPORATE CONTROL, § 160.5 (3d ed. 1998) ("At some point the broad shareholder power to adopt or amend corporate by-laws must yield to the board's plenary authority to manage the business and affairs of the corporation.... The difficulty of pinpointing where a proposal falls on this spectrum of sometimes overlapping authority is exacerbated by the absence of state-law precedent demarcating this boundary."); John C. Coffee, Jr., The SEC and the Institutional Investor: A Half-Time Report, 15 CARDOZO L.REV. 837, 889 (1994) ("Symptomatically, persuasive Delaware authority is simply lacking that draws boundaries between the shareholder's right to amend the bylaws and the board's right to manage."); William W. Bratton & Joseph A. McCahery, Regulatory Competition, Regulatory Capture, and Corporate Self-Regulation, 73 N.C. L.REV. 1861, 1932 n. 274 (1995) ("[S]tate lawmakers have never had occasion to draw a clear line between board management authority and shareholder by-law promulgation authority. As a result, the extent to which a by-law may constrain ... management authority is not clear.").

[9] Keeler v. Harford Mut. Ins. Co., 672 A.2d 1012, 1016 (Del.1996) ("In determining legislative intent ... we find it important to give effect to the whole statute, and leave no part superfluous.").

[10] Harrah's Entm't v. JCC Holding Co., 802 A.2d 294, 310 (Del.Ch.2002).

[11] 8 Del. C. § 102(b)(1) pertinently provides that the "the certificate of incorporation may also contain ... any provision ... limiting... the powers of ... the directors."

[12] Although CA advances this argument in its Brief in connection with the second question, i.e., as a reason why the Bylaw, if adopted, would violate Delaware law, we view the argument as also properly bearing upon the first question, namely, whether the proposed Bylaw is a proper subject for shareholder action.

[13] Section 109(a), to reiterate, provides that the fact that the certificate of incorporation confers upon the directors the power to adopt, amend or repeal bylaws "shall not divest the stockholders ... of the power ..., nor limit their power to adopt, amend or repeal bylaws."

[14] We do not attempt to delineate the location of that bright line in this Opinion. What we do hold is case specific; that is, wherever may be the location of the bright line that separates the shareholders' bylaw-making power under Section 109 from the directors' exclusive managerial authority under Section 141(a), the proposed Bylaw at issue here does not invade the territory demarcated by Section 141(a).

[15] Hollinger Intern., Inc. v. Black, 844 A.2d 1022, 1078-79 (Del.Ch.2004) (internal footnotes omitted), aff'd, 872 A.2d 559 (Del.2005). See also, Gow v. Consol. Coppermines Corp., 165 A. 136, 140 (Del.Ch.1933) ("[A]s the charter is an instrument in which the broad and general aspects of the corporate entity's existence and nature are defined, so the by-laws are generally regarded as the proper place for the self-imposed rules and regulations deemed expedient for its convenient functioning to be laid down.").

[16] Id. at 1080 n. 136.

[17] See also, e.g., 8 Del. C. § 211(a) & (b) (bylaws may establish the date and the place of the annual meeting of the stockholders); § 211(d) (bylaws may specify the conditions for the calling of special meetings of stockholders); § 216 (bylaws may establish quorum and vote requirements for meetings of stockholders and "[a] bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors."); § 222 (bylaws may regulate certain notice requirements regarding adjourned meetings of stockholders).

[18] Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985). See also Hollinger, 844 A.2d at 1079-80 (shareholder-enacted bylaw abolishing a board committee created by board resolution does not impermissibly interfere with the board's authority under Section 141(a)).

[19] CA actually conflates two separate arguments that, although facially similar, are analytically distinct. The first argument is that the Bylaw impermissibly intrudes upon board authority because it mandates the expenditure of corporate funds. The second is that the Bylaw impermissibly leaves no role for board discretion and would require reimbursement of the costs of a subset of CA's stockholders, even in circumstances where the board's fiduciary duties would counsel otherwise. Analytically, the first argument is relevant to the issue of whether the Bylaw is a proper subject for unilateral stockholder action, whereas the second argument more properly goes to the separate question of whether the Bylaw, if enacted, would violate Delaware law.

[20] For example, the Bylaw could have been phrased more benignly, to provide that "[a] stockholder or group of stockholders (together, the `Nominator') shall be entitled to reimbursement from the corporation for reasonable expenses (`Expenses') incurred in connection with nominating one or more candidates in a contested election of directors to the corporation's board of directors in the following circumstances...." Although the substance of the Bylaw would be no different, the emphasis would be upon the shareholders' entitlement to reimbursement, rather than upon the directors' obligation to reimburse. As discussed in Part IV, infra, of this Opinion, in order for the Bylaw not to be "not inconsistent with law" as Section 109(b) mandates, it would also need to contain a provision that reserves the directors' full power to discharge their fiduciary duties.

[21] Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 n. 2 (Del.Ch.1988) ("Delaware courts have long exercised a most sensitive and protective regard for the free and effective exercise of voting rights."); Id. at 659 ("[W]hen viewed from a broad, institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve consideration[s] not present in any other context in which directors exercise delegated power."); See also Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1378 (Del. 1995); MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118 (Del.2003); and 8 Del. C. § 211 (authorizing a shareholder to petition the Court of Chancery to order a meeting of stockholders to elect directors where such a meeting has not been held for at least 13 months).

[22] Harrah's Entm't v. JCC Holding Co., 802 A.2d 294, 311 (Del.Ch.2002) (quoting Durkin v. Nat'l Bank of Olyphant, 772 F.2d 55, 59 (3d Cir.1985)).

[23] 8 Del. C. § 109(b).

[24] Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985).

[25] Stroud v. Grace, 606 A.2d 75, 79 (Del. 1992).

[26] Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994); Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998).

[27] 637 A.2d 34 (Del. 1994).

[28] Paramount v. QVC, 637 A.2d at 51.

[29] 721 A.2d 1281 (Del.1998).

[30] Quickturn, 721 A.2d at 1291.

[31] Id. at 1291-92 (italics in original, internal footnotes omitted).

[32] Only if the Bylaw provision were enacted as an amendment to CA's Certificate of Incorporation would that distinction be dispositive. See 8 Del. C. § 102(b)(1) and § 242.

[33] Hall v. Trans-Lux Daylight Picture Screen Corp., 171 A. 226, 227 (Del.Ch.1934); See also Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 345 (Del.1983) (reimbursement of "reasonable expenses" permitted where the proxy contest "was actually one involving substantive differences about corporation policy.").

[34] Such a circumstance could arise, for example, if a shareholder group affiliated with a competitor of the company were to cause the election of a minority slate of candidates committed to using their director positions to obtain, and then communicate, valuable proprietary strategic or product information to the competitor.

[35] See Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) ("Although the fiduciary duty of a Delaware director is unremitting, the exact course of conduct that must be charted to properly discharge that responsibility will change in the specific context of the action the director is taking with regard to either the corporation or its shareholders."). A decision by directors to deny reimbursement on fiduciary grounds would be judicially reviewable.

William Prickett (argued) and James P. Dalle Pazze, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, and Ivan Irwin, Jr. and Brett A. Ringle, of Shank, Irwin, Conant & Williamson, Dallas, Tex., of counsel, for plaintiffs below, appellants.

Robert K. Payson (argued) and Peter M. Sieglaff of Potter, Anderson & Corroon, Wilmington, for individual defendants below, appellees.

Lewis S. Black, Jr., A. Gilchrist Sparks, III (argued) and Richard D. Allen, of Morris, Nichols, Arsht & Tunnell, Wilmington, for Trans Union Corp., Marmon Group, Inc., GL Corp. and New T. Co., defendants below, appellees.

Before HERRMANN, C.J., and McNEILLY, HORSEY, MOORE and CHRISTIE, JJ., constituting the Court en banc.

[863] HORSEY, Justice (for the majority):

This appeal from the Court of Chancery involves a class action brought by shareholders of the defendant Trans Union Corporation ("Trans Union" or "the Company"), originally seeking rescission of a cash-out merger of Trans Union into the defendant New T Company ("New T"), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. ("Marmon"). Alternate relief in the form of damages is sought against the defendant members of the Board of Directors of Trans Union, [864] New T, and Jay A. Pritzker and Robert A. Pritzker, owners of Marmon.^[1]

Following trial, the former Chancellor granted judgment for the defendant directors by unreported letter opinion dated July 6, 1982.^[2] Judgment was based on two findings: (1) that the Board of Directors had acted in an informed manner so as to be entitled to protection of the business judgment rule in approving the cash-out merger; and (2) that the shareholder vote approving the merger should not be set aside because the stockholders had been "fairly informed" by the Board of Directors before voting thereon. The plaintiffs appeal.

Speaking for the majority of the Court, we conclude that both rulings of the Court of Chancery are clearly erroneous. Therefore, we reverse and direct that judgment be entered in favor of the plaintiffs and against the defendant directors for the fair value of the plaintiffs' stockholdings in Trans Union, in accordance with Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983).^[3]

We hold: (1) that the Board's decision, reached September 20, 1980, to approve the proposed cash-out merger was not the product of an informed business judgment; (2) that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were ineffectual, both legally and factually; and (3) that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger.

I.

The nature of this case requires a detailed factual statement. The following facts are essentially uncontradicted:^[4]

-A-

Trans Union was a publicly-traded, diversified holding company, the principal earnings of which were generated by its railcar leasing business. During the period here involved, the Company had a cash flow of hundreds of millions of dollars annually. However, the Company had difficulty in generating sufficient taxable income to offset increasingly large investment tax credits (ITCs). Accelerated depreciation deductions had decreased available taxable income against which to offset accumulating ITCs. The Company took these deductions, despite their effect on usable ITCs, because the rental price in the railcar leasing market had already impounded the purported tax savings.

In the late 1970's, together with other capital-intensive firms, Trans Union lobbied in Congress to have ITCs refundable in cash to firms which could not fully utilize the credit. During the summer of 1980, defendant Jerome W. Van Gorkom, Trans Union's Chairman and Chief Executive Officer, [865] testified and lobbied in Congress for refundability of ITCs and against further accelerated depreciation. By the end of August, Van Gorkom was convinced that Congress would neither accept the refundability concept nor curtail further accelerated depreciation.

Beginning in the late 1960's, and continuing through the 1970's, Trans Union pursued a program of acquiring small companies in order to increase available taxable income. In July 1980, Trans Union Management prepared the annual revision of the Company's Five Year Forecast. This report was presented to the Board of Directors at its July, 1980 meeting. The report projected an annual income growth of about 20%. The report also concluded that Trans Union would have about $195 million in spare cash between 1980 and 1985, "with the surplus growing rapidly from 1982 onward." The report referred to the ITC situation as a "nagging problem" and, given that problem, the leasing company "would still appear to be constrained to a tax breakeven." The report then listed four alternative uses of the projected 1982-1985 equity surplus: (1) stock repurchase; (2) dividend increases; (3) a major acquisition program; and (4) combinations of the above. The sale of Trans Union was not among the alternatives. The report emphasized that, despite the overall surplus, the operation of the Company would consume all available equity for the next several years, and concluded: "As a result, we have sufficient time to fully develop our course of action."

-B-

On August 27, 1980, Van Gorkom met with Senior Management of Trans Union. Van Gorkom reported on his lobbying efforts in Washington and his desire to find a solution to the tax credit problem more permanent than a continued program of acquisitions. Various alternatives were suggested and discussed preliminarily, including the sale of Trans Union to a company with a large amount of taxable income.

Donald Romans, Chief Financial Officer of Trans Union, stated that his department had done a "very brief bit of work on the possibility of a leveraged buy-out." This work had been prompted by a media article which Romans had seen regarding a leveraged buy-out by management. The work consisted of a "preliminary study" of the cash which could be generated by the Company if it participated in a leveraged buyout. As Romans stated, this analysis "was very first and rough cut at seeing whether a cash flow would support what might be considered a high price for this type of transaction."

On September 5, at another Senior Management meeting which Van Gorkom attended, Romans again brought up the idea of a leveraged buy-out as a "possible strategic alternative" to the Company's acquisition program. Romans and Bruce S. Chelberg, President and Chief Operating Officer of Trans Union, had been working on the matter in preparation for the meeting. According to Romans: They did not "come up" with a price for the Company. They merely "ran the numbers" at $50 a share and at $60 a share with the "rough form" of their cash figures at the time. Their "figures indicated that $50 would be very easy to do but $60 would be very difficult to do under those figures." This work did not purport to establish a fair price for either the Company or 100% of the stock. It was intended to determine the cash flow needed to service the debt that would "probably" be incurred in a leveraged buyout, based on "rough calculations" without "any benefit of experts to identify what the limits were to that, and so forth." These computations were not considered extensive and no conclusion was reached.

At this meeting, Van Gorkom stated that he would be willing to take $55 per share for his own 75,000 shares. He vetoed the suggestion of a leveraged buy-out by Management, however, as involving a potential conflict of interest for Management. Van Gorkom, a certified public accountant and lawyer, had been an officer of Trans Union [866] for 24 years, its Chief Executive Officer for more than 17 years, and Chairman of its Board for 2 years. It is noteworthy in this connection that he was then approaching 65 years of age and mandatory retirement.

For several days following the September 5 meeting, Van Gorkom pondered the idea of a sale. He had participated in many acquisitions as a manager and director of Trans Union and as a director of other companies. He was familiar with acquisition procedures, valuation methods, and negotiations; and he privately considered the pros and cons of whether Trans Union should seek a privately or publicly-held purchaser.

Van Gorkom decided to meet with Jay A. Pritzker, a well-known corporate takeover specialist and a social acquaintance. However, rather than approaching Pritzker simply to determine his interest in acquiring Trans Union, Van Gorkom assembled a proposed per share price for sale of the Company and a financing structure by which to accomplish the sale. Van Gorkom did so without consulting either his Board or any members of Senior Management except one: Carl Peterson, Trans Union's Controller. Telling Peterson that he wanted no other person on his staff to know what he was doing, but without telling him why, Van Gorkom directed Peterson to calculate the feasibility of a leveraged buy-out at an assumed price per share of $55. Apart from the Company's historic stock market price,^[5] and Van Gorkom's long association with Trans Union, the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company.

Having thus chosen the $55 figure, based solely on the availability of a leveraged buy-out, Van Gorkom multiplied the price per share by the number of shares outstanding to reach a total value of the Company of $690 million. Van Gorkom told Peterson to use this $690 million figure and to assume a $200 million equity contribution by the buyer. Based on these assumptions, Van Gorkom directed Peterson to determine whether the debt portion of the purchase price could be paid off in five years or less if financed by Trans Union's cash flow as projected in the Five Year Forecast, and by the sale of certain weaker divisions identified in a study done for Trans Union by the Boston Consulting Group ("BCG study"). Peterson reported that, of the purchase price, approximately $50-80 million would remain outstanding after five years. Van Gorkom was disappointed, but decided to meet with Pritzker nevertheless.

Van Gorkom arranged a meeting with Pritzker at the latter's home on Saturday, September 13, 1980. Van Gorkom prefaced his presentation by stating to Pritzker: "Now as far as you are concerned, I can, I think, show how you can pay a substantial premium over the present stock price and pay off most of the loan in the first five years. * * * If you could pay $55 for this Company, here is a way in which I think it can be financed."

Van Gorkom then reviewed with Pritzker his calculations based upon his proposed price of $55 per share. Although Pritzker mentioned $50 as a more attractive figure, no other price was mentioned. However, Van Gorkom stated that to be sure that $55 was the best price obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating that his organization would serve as a "stalking horse" for an "auction contest" only if Trans Union would permit Pritzker to buy 1,750,000 shares of Trans Union stock at market price which Pritzker could then sell to any higher bidder. After further discussion on this point, Pritzker told Van Gorkom that he would give him a more definite reaction soon.

[867] On Monday, September 15, Pritzker advised Van Gorkom that he was interested in the $55 cash-out merger proposal and requested more information on Trans Union. Van Gorkom agreed to meet privately with Pritzker, accompanied by Peterson, Chelberg, and Michael Carpenter, Trans Union's consultant from the Boston Consulting Group. The meetings took place on September 16 and 17. Van Gorkom was "astounded that events were moving with such amazing rapidity."

On Thursday, September 18, Van Gorkom met again with Pritzker. At that time, Van Gorkom knew that Pritzker intended to make a cash-out merger offer at Van Gorkom's proposed $55 per share. Pritzker instructed his attorney, a merger and acquisition specialist, to begin drafting merger documents. There was no further discussion of the $55 price. However, the number of shares of Trans Union's treasury stock to be offered to Pritzker was negotiated down to one million shares; the price was set at $38-75 cents above the per share price at the close of the market on September 19. At this point, Pritzker insisted that the Trans Union Board act on his merger proposal within the next three days, stating to Van Gorkom: "We have to have a decision by no later than Sunday [evening, September 21] before the opening of the English stock exchange on Monday morning." Pritzker's lawyer was then instructed to draft the merger documents, to be reviewed by Van Gorkom's lawyer, "sometimes with discussion and sometimes not, in the haste to get it finished."

On Friday, September 19, Van Gorkom, Chelberg, and Pritzker consulted with Trans Union's lead bank regarding the financing of Pritzker's purchase of Trans Union. The bank indicated that it could form a syndicate of banks that would finance the transaction. On the same day, Van Gorkom retained James Brennan, Esquire, to advise Trans Union on the legal aspects of the merger. Van Gorkom did not consult with William Browder, a Vice-President and director of Trans Union and former head of its legal department, or with William Moore, then the head of Trans Union's legal staff.

On Friday, September 19, Van Gorkom called a special meeting of the Trans Union Board for noon the following day. He also called a meeting of the Company's Senior Management to convene at 11:00 a.m., prior to the meeting of the Board. No one, except Chelberg and Peterson, was told the purpose of the meetings. Van Gorkom did not invite Trans Union's investment banker, Salomon Brothers or its Chicago-based partner, to attend.

Of those present at the Senior Management meeting on September 20, only Chelberg and Peterson had prior knowledge of Pritzker's offer. Van Gorkom disclosed the offer and described its terms, but he furnished no copies of the proposed Merger Agreement. Romans announced that his department had done a second study which showed that, for a leveraged buy-out, the price range for Trans Union stock was between $55 and $65 per share. Van Gorkom neither saw the study nor asked Romans to make it available for the Board meeting.

Senior Management's reaction to the Pritzker proposal was completely negative. No member of Management, except Chelberg and Peterson, supported the proposal. Romans objected to the price as being too low;^[6] he was critical of the timing and suggested that consideration should be given to the adverse tax consequences of an all-cash deal for low-basis shareholders; and he took the position that the agreement to sell Pritzker one million newly-issued shares at market price would inhibit other offers, as would the prohibitions against soliciting bids and furnishing inside information [868] to other bidders. Romans argued that the Pritzker proposal was a "lock up" and amounted to "an agreed merger as opposed to an offer." Nevertheless, Van Gorkom proceeded to the Board meeting as scheduled without further delay.

Ten directors served on the Trans Union Board, five inside (defendants Bonser, O'Boyle, Browder, Chelberg, and Van Gorkom) and five outside (defendants Wallis, Johnson, Lanterman, Morgan and Reneker). All directors were present at the meeting, except O'Boyle who was ill. Of the outside directors, four were corporate chief executive officers and one was the former Dean of the University of Chicago Business School. None was an investment banker or trained financial analyst. All members of the Board were well informed about the Company and its operations as a going concern. They were familiar with the current financial condition of the Company, as well as operating and earnings projections reported in the recent Five Year Forecast. The Board generally received regular and detailed reports and was kept abreast of the accumulated investment tax credit and accelerated depreciation problem.

Van Gorkom began the Special Meeting of the Board with a twenty-minute oral presentation. Copies of the proposed Merger Agreement were delivered too late for study before or during the meeting.^[7] He reviewed the Company's ITC and depreciation problems and the efforts theretofore made to solve them. He discussed his initial meeting with Pritzker and his motivation in arranging that meeting. Van Gorkom did not disclose to the Board, however, the methodology by which he alone had arrived at the $55 figure, or the fact that he first proposed the $55 price in his negotiations with Pritzker.

Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would pay $55 in cash for all outstanding shares of Trans Union stock upon completion of which Trans Union would be merged into New T Company, a subsidiary wholly-owned by Pritzker and formed to implement the merger; for a period of 90 days, Trans Union could receive, but could not actively solicit, competing offers; the offer had to be acted on by the next evening, Sunday, September 21; Trans Union could only furnish to competing bidders published information, and not proprietary information; the offer was subject to Pritzker obtaining the necessary financing by October 10, 1980; if the financing contingency were met or waived by Pritzker, Trans Union was required to sell to Pritzker one million newly-issued shares of Trans Union at $38 per share.

Van Gorkom took the position that putting Trans Union "up for auction" through a 90-day market test would validate a decision by the Board that $55 was a fair price. He told the Board that the "free market will have an opportunity to judge whether $55 is a fair price." Van Gorkom framed the decision before the Board not as whether $55 per share was the highest price that could be obtained, but as whether the $55 price was a fair price that the stockholders should be given the opportunity to accept or reject.^[8]

Attorney Brennan advised the members of the Board that they might be sued if they failed to accept the offer and that a fairness opinion was not required as a matter of law.

Romans attended the meeting as chief financial officer of the Company. He told the Board that he had not been involved in the negotiations with Pritzker and knew nothing about the merger proposal until [869] the morning of the meeting; that his studies did not indicate either a fair price for the stock or a valuation of the Company; that he did not see his role as directly addressing the fairness issue; and that he and his people "were trying to search for ways to justify a price in connection with such a [leveraged buy-out] transaction, rather than to say what the shares are worth." Romans testified:

I told the Board that the study ran the numbers at 50 and 60, and then the subsequent study at 55 and 65, and that was not the same thing as saying that I have a valuation of the company at X dollars. But it was a way — a first step towards reaching that conclusion.

Romans told the Board that, in his opinion, $55 was "in the range of a fair price," but "at the beginning of the range."

Chelberg, Trans Union's President, supported Van Gorkom's presentation and representations. He testified that he "participated to make sure that the Board members collectively were clear on the details of the agreement or offer from Pritzker;" that he "participated in the discussion with Mr. Brennan, inquiring of him about the necessity for valuation opinions in spite of the way in which this particular offer was couched;" and that he was otherwise actively involved in supporting the positions being taken by Van Gorkom before the Board about "the necessity to act immediately on this offer," and about "the adequacy of the $55 and the question of how that would be tested."

The Board meeting of September 20 lasted about two hours. Based solely upon Van Gorkom's oral presentation, Chelberg's supporting representations, Romans' oral statement, Brennan's legal advice, and their knowledge of the market history of the Company's stock,^[9] the directors approved the proposed Merger Agreement. However, the Board later claimed to have attached two conditions to its acceptance: (1) that Trans Union reserved the right to accept any better offer that was made during the market test period; and (2) that Trans Union could share its proprietary information with any other potential bidders. While the Board now claims to have reserved the right to accept any better offer received after the announcement of the Pritzker agreement (even though the minutes of the meeting do not reflect this), it is undisputed that the Board did not reserve the right to actively solicit alternate offers.

The Merger Agreement was executed by Van Gorkom during the evening of September 20 at a formal social event that he hosted for the opening of the Chicago Lyric Opera. Neither he nor any other director read the agreement prior to its signing and delivery to Pritzker.

* * *

On Monday, September 22, the Company issued a press release announcing that Trans Union had entered into a "definitive" Merger Agreement with an affiliate of the Marmon Group, Inc., a Pritzker holding company. Within 10 days of the public announcement, dissent among Senior Management over the merger had become widespread. Faced with threatened resignations of key officers, Van Gorkom met with Pritzker who agreed to several modifications of the Agreement. Pritzker was willing to do so provided that Van Gorkom could persuade the dissidents to remain on the Company payroll for at least six months after consummation of the merger.

Van Gorkom reconvened the Board on October 8 and secured the directors' approval of the proposed amendments — sight unseen. The Board also authorized the employment of Salomon Brothers, its investment [870] banker, to solicit other offers for Trans Union during the proposed "market test" period.

The next day, October 9, Trans Union issued a press release announcing: (1) that Pritzker had obtained "the financing commitments necessary to consummate" the merger with Trans Union; (2) that Pritzker had acquired one million shares of Trans Union common stock at $38 per share; (3) that Trans Union was now permitted to actively seek other offers and had retained Salomon Brothers for that purpose; and (4) that if a more favorable offer were not received before February 1, 1981, Trans Union's shareholders would thereafter meet to vote on the Pritzker proposal.

It was not until the following day, October 10, that the actual amendments to the Merger Agreement were prepared by Pritzker and delivered to Van Gorkom for execution. As will be seen, the amendments were considerably at variance with Van Gorkom's representations of the amendments to the Board on October 8; and the amendments placed serious constraints on Trans Union's ability to negotiate a better deal and withdraw from the Pritzker agreement. Nevertheless, Van Gorkom proceeded to execute what became the October 10 amendments to the Merger Agreement without conferring further with the Board members and apparently without comprehending the actual implications of the amendments.

* * *

Salomon Brothers' efforts over a three-month period from October 21 to January 21 produced only one serious suitor for Trans Union — General Electric Credit Corporation ("GE Credit"), a subsidiary of the General Electric Company. However, GE Credit was unwilling to make an offer for Trans Union unless Trans Union first rescinded its Merger Agreement with Pritzker. When Pritzker refused, GE Credit terminated further discussions with Trans Union in early January.

In the meantime, in early December, the investment firm of Kohlberg, Kravis, Roberts & Co. ("KKR"), the only other concern to make a firm offer for Trans Union, withdrew its offer under circumstances hereinafter detailed.

On December 19, this litigation was commenced and, within four weeks, the plaintiffs had deposed eight of the ten directors of Trans Union, including Van Gorkom, Chelberg and Romans, its Chief Financial Officer. On January 21, Management's Proxy Statement for the February 10 shareholder meeting was mailed to Trans Union's stockholders. On January 26, Trans Union's Board met and, after a lengthy meeting, voted to proceed with the Pritzker merger. The Board also approved for mailing, "on or about January 27," a Supplement to its Proxy Statement. The Supplement purportedly set forth all information relevant to the Pritzker Merger Agreement, which had not been divulged in the first Proxy Statement.

* * *

On February 10, the stockholders of Trans Union approved the Pritzker merger proposal. Of the outstanding shares, 69.9% were voted in favor of the merger; 7.25% were voted against the merger; and 22.85% were not voted.

II.

We turn to the issue of the application of the business judgment rule to the September 20 meeting of the Board.

The Court of Chancery concluded from the evidence that the Board of Directors' approval of the Pritzker merger proposal fell within the protection of the business judgment rule. The Court found that the Board had given sufficient time and attention to the transaction, since the directors had considered the Pritzker proposal on three different occasions, on September 20, and on October 8, 1980 and finally on January 26, 1981. On that basis, the Court reasoned that the Board had acquired, over the four-month period, sufficient information to reach an informed business judgment [871] on the cash-out merger proposal. The Court ruled:

... that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently in determining on a course of action which they believed to be in the best interest of the stockholders of Trans Union.

The Court of Chancery made but one finding; i.e., that the Board's conduct over the entire period from September 20 through January 26, 1981 was not reckless or improvident, but informed. This ultimate conclusion was premised upon three subordinate findings, one explicit and two implied. The Court's explicit finding was that Trans Union's Board was "free to turn down the Pritzker proposal" not only on September 20 but also on October 8, 1980 and on January 26, 1981. The Court's implied, subordinate findings were: (1) that no legally binding agreement was reached by the parties until January 26; and (2) that if a higher offer were to be forthcoming, the market test would have produced it,^[10] and Trans Union would have been contractually free to accept such higher offer. However, the Court offered no factual basis or legal support for any of these findings; and the record compels contrary conclusions.

This Court's standard of review of the findings of fact reached by the Trial Court following full evidentiary hearing is as stated in Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972):

[In an appeal of this nature] this court has the authority to review the entire record and to make its own findings of fact in a proper case. In exercising our power of review, we have the duty to review the sufficiency of the evidence and to test the propriety of the findings below. We do not, however, ignore the findings made by the trial judge. If they are sufficiently supported by the record and are the product of an orderly and logical deductive process, in the exercise of judicial restraint we accept them, even though independently we might have reached opposite conclusions. It is only when the findings below are clearly wrong and the doing of justice requires their overturn that we are free to make contradictory findings of fact.

Applying that standard and governing principles of law to the record and the decision of the Trial Court, we conclude that the Court's ultimate finding that the Board's conduct was not "reckless or imprudent" is contrary to the record and not the product of a logical and deductive reasoning process.

The plaintiffs contend that the Court of Chancery erred as a matter of law by exonerating the defendant directors under the business judgment rule without first determining whether the rule's threshold condition of "due care and prudence" was satisfied. The plaintiffs assert that the Trial Court found the defendant directors to have reached an informed business judgment on the basis of "extraneous considerations and events that occurred after September 20, 1980." The defendants deny that the Trial Court committed legal error in relying upon post-September 20, 1980 events and the directors' later acquired knowledge. The defendants further submit that their decision to accept $55 per share was informed because: (1) they were "highly qualified;" (2) they were "well-informed;" and (3) they deliberated over the "proposal" not once but three times. On [872] essentially this evidence and under our standard of review, the defendants assert that affirmance is required. We must disagree.

Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in 8 Del.C. § 141(a), that the business and affairs of a Delaware corporation are managed by or under its board of directors.^[11]Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984); Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation and its shareholders. Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors. Zapata Corp. v. Maldonado, supra at 782. The rule itself "is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson, supra at 812. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one. Id.

The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves "prior to making a business decision, of all material information reasonably available to them." Id.^[12]

Under the business judgment rule there is no protection for directors who have made "an unintelligent or unadvised judgment." Mitchell v. Highland-Western Glass, Del.Ch., 167 A. 831, 833 (1933). A director's duty to inform himself in preparation for a decision derives from the fiduciary capacity in which he serves the corporation and its stockholders. Lutz v. Boas, Del.Ch., 171 A.2d 381 (1961). See Weinberger v. UOP, Inc., supra; Guth v. Loft, supra. Since a director is vested with the responsibility for the management of the affairs of the corporation, he must execute that duty with the recognition that he acts on behalf of others. Such obligation does not tolerate faithlessness or self-dealing. But fulfillment of the fiduciary function requires more than the mere absence of bad faith or fraud. Representation of the financial interests of others imposes on a director an affirmative duty to protect those interests and to proceed with a critical eye in assessing information of the type and under the circumstances present here. See Lutz v. Boas, supra; Guth v. Loft, supra at 510. Compare Donovan v. Cunningham, 5th Cir., 716 F.2d 1455, 1467 (1983); Doyle v. Union Insurance Company, Neb.Supr., 277 N.W.2d 36 (1979); Continental Securities Co. v. Belmont, N.Y. App., 99 N.E. 138, 141 (1912).

Thus, a director's duty to exercise an informed business judgment is in [873] the nature of a duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud, bad faith, or self-dealing, or proof thereof. Hence, it is presumed that the directors reached their business judgment in good faith, Allaun v. Consolidated Oil Co., Del. Ch., 147 A. 257 (1929), and considerations of motive are irrelevant to the issue before us.

The standard of care applicable to a director's duty of care has also been recently restated by this Court. In Aronson, supra, we stated:

While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence. (footnote omitted)

473 A.2d at 812.

We again confirm that view. We think the concept of gross negligence is also the proper standard for determining whether a business judgment reached by a board of directors was an informed one.^[13]

In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 Del.C. 251(b),^[14] along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. See Beard v. Elster, Del.Supr., 160 A.2d 731, 737 (1960). Only an agreement of merger satisfying the requirements of 8 Del.C. § 251(b) may be submitted to the shareholders under § 251(c). See generally Aronson v. Lewis, supra at 811-13; see also Pogostin v. Rice, supra.

It is against those standards that the conduct of the directors of Trans Union must be tested, as a matter of law and as a matter of fact, regarding their exercise of an informed business judgment in voting to approve the Pritzker merger proposal.

III.

The defendants argue that the determination of whether their decision to accept $55 per share for Trans Union represented an informed business judgment requires consideration, not only of that which they knew and learned on September 20, but also of that which they subsequently learned and did over the following four-month [874] period before the shareholders met to vote on the proposal in February, 1981. The defendants thereby seek to reduce the significance of their action on September 20 and to widen the time frame for determining whether their decision to accept the Pritzker proposal was an informed one. Thus, the defendants contend that what the directors did and learned subsequent to September 20 and through January 26, 1981, was properly taken into account by the Trial Court in determining whether the Board's judgment was an informed one. We disagree with this post hoc approach.

The issue of whether the directors reached an informed decision to "sell" the Company on September 20, 1980 must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the Pritzker merger proposal. This is not to say that the directors were precluded from altering their original plan of action, had they done so in an informed manner. What we do say is that the question of whether the directors reached an informed business judgment in agreeing to sell the Company, pursuant to the terms of the September 20 Agreement presents, in reality, two questions: (A) whether the directors reached an informed business judgment on September 20, 1980; and (B) if they did not, whether the directors' actions taken subsequent to September 20 were adequate to cure any infirmity in their action taken on September 20. We first consider the directors' September 20 action in terms of their reaching an informed business judgment.

-A-

On the record before us, we must conclude that the Board of Directors did not reach an informed business judgment on September 20, 1980 in voting to "sell" the Company for $55 per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as follows:

The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the "sale" of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the "sale" of the Company upon two hours' consideration, without prior notice, and without the exigency of a crisis or emergency.

As has been noted, the Board based its September 20 decision to approve the cash-out merger primarily on Van Gorkom's representations. None of the directors, other than Van Gorkom and Chelberg, had any prior knowledge that the purpose of the meeting was to propose a cash-out merger of Trans Union. No members of Senior Management were present, other than Chelberg, Romans and Peterson; and the latter two had only learned of the proposed sale an hour earlier. Both general counsel Moore and former general counsel Browder attended the meeting, but were equally uninformed as to the purpose of the meeting and the documents to be acted upon.

Without any documents before them concerning the proposed transaction, the members of the Board were required to rely entirely upon Van Gorkom's 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of $55 price per share for sale of the Company; and the Board had before it nothing more than Van Gorkom's statement of his understanding of the substance of an agreement which he admittedly had never read, nor which any member of the Board had ever seen.

Under 8 Del.C. § 141(e),^[15] "directors are fully protected in relying in [875] good faith on reports made by officers." Michelson v. Duncan, Del.Ch., 386 A.2d 1144, 1156 (1978); aff'd in part and rev'd in part on other grounds, Del.Supr., 407 A.2d 211 (1979). See also Graham v. Allis-Chalmers Mfg. Co., Del.Supr., 188 A.2d 125, 130 (1963); Prince v. Bensinger, Del. Ch., 244 A.2d 89, 94 (1968). The term "report" has been liberally construed to include reports of informal personal investigations by corporate officers, Cheff v. Mathes, Del.Supr., 199 A.2d 548, 556 (1964). However, there is no evidence that any "report," as defined under § 141(e), concerning the Pritzker proposal, was presented to the Board on September 20.^[16] Van Gorkom's oral presentation of his understanding of the terms of the proposed Merger Agreement, which he had not seen, and Romans' brief oral statement of his preliminary study regarding the feasibility of a leveraged buy-out of Trans Union do not qualify as § 141(e) "reports" for these reasons: The former lacked substance because Van Gorkom was basically uninformed as to the essential provisions of the very document about which he was talking. Romans' statement was irrelevant to the issues before the Board since it did not purport to be a valuation study. At a minimum for a report to enjoy the status conferred by § 141(e), it must be pertinent to the subject matter upon which a board is called to act, and otherwise be entitled to good faith, not blind, reliance. Considering all of the surrounding circumstances — hastily calling the meeting without prior notice of its subject matter, the proposed sale of the Company without any prior consideration of the issue or necessity therefor, the urgent time constraints imposed by Pritzker, and the total absence of any documentation whatsoever — the directors were duty bound to make reasonable inquiry of Van Gorkom and Romans, and if they had done so, the inadequacy of that upon which they now claim to have relied would have been apparent.

The defendants rely on the following factors to sustain the Trial Court's finding that the Board's decision was an informed one: (1) the magnitude of the premium or spread between the $55 Pritzker offering price and Trans Union's current market price of $38 per share; (2) the amendment of the Agreement as submitted on September 20 to permit the Board to accept any better offer during the "market test" period; (3) the collective experience and expertise of the Board's "inside" and "outside" directors;^[17] and (4) their reliance on Brennan's legal advice that the directors might be sued if they rejected the Pritzker proposal. We discuss each of these grounds seriatim:

(1)

A substantial premium may provide one reason to recommend a merger, but in the absence of other sound valuation information, the fact of a premium alone does not provide an adequate basis upon which to assess the fairness of an offering price. Here, the judgment reached as to the adequacy of the premium was based on a comparison between the historically depressed Trans Union market price and the amount of the Pritzker offer. Using market price as a basis for concluding that the premium adequately reflected the true value [876] of the Company was a clearly faulty, indeed fallacious, premise, as the defendants' own evidence demonstrates.

The record is clear that before September 20, Van Gorkom and other members of Trans Union's Board knew that the market had consistently undervalued the worth of Trans Union's stock, despite steady increases in the Company's operating income in the seven years preceding the merger. The Board related this occurrence in large part to Trans Union's inability to use its ITCs as previously noted. Van Gorkom testified that he did not believe the market price accurately reflected Trans Union's true worth; and several of the directors testified that, as a general rule, most chief executives think that the market undervalues their companies' stock. Yet, on September 20, Trans Union's Board apparently believed that the market stock price accurately reflected the value of the Company for the purpose of determining the adequacy of the premium for its sale.

In the Proxy Statement, however, the directors reversed their position. There, they stated that, although the earnings prospects for Trans Union were "excellent," they found no basis for believing that this would be reflected in future stock prices. With regard to past trading, the Board stated that the prices at which the Company's common stock had traded in recent years did not reflect the "inherent" value of the Company. But having referred to the "inherent" value of Trans Union, the directors ascribed no number to it. Moreover, nowhere did they disclose that they had no basis on which to fix "inherent" worth beyond an impressionistic reaction to the premium over market and an unsubstantiated belief that the value of the assets was "significantly greater" than book value. By their own admission they could not rely on the stock price as an accurate measure of value. Yet, also by their own admission, the Board members assumed that Trans Union's market price was adequate to serve as a basis upon which to assess the adequacy of the premium for purposes of the September 20 meeting.

The parties do not dispute that a publicly-traded stock price is solely a measure of the value of a minority position and, thus, market price represents only the value of a single share. Nevertheless, on September 20, the Board assessed the adequacy of the premium over market, offered by Pritzker, solely by comparing it with Trans Union's current and historical stock price. (See supra note 5 at 866.)

Indeed, as of September 20, the Board had no other information on which to base a determination of the intrinsic value of Trans Union as a going concern. As of September 20, the Board had made no evaluation of the Company designed to value the entire enterprise, nor had the Board ever previously considered selling the Company or consenting to a buy-out merger. Thus, the adequacy of a premium is indeterminate unless it is assessed in terms of other competent and sound valuation information that reflects the value of the particular business.

Despite the foregoing facts and circumstances, there was no call by the Board, either on September 20 or thereafter, for any valuation study or documentation of the $55 price per share as a measure of the fair value of the Company in a cash-out context. It is undisputed that the major asset of Trans Union was its cash flow. Yet, at no time did the Board call for a valuation study taking into account that highly significant element of the Company's assets.

We do not imply that an outside valuation study is essential to support an informed business judgment; nor do we state that fairness opinions by independent investment bankers are required as a matter of law. Often insiders familiar with the business of a going concern are in a better position than are outsiders to gather relevant information; and under appropriate circumstances, such directors may be fully protected in relying in good faith upon the valuation reports of their management. [877] See 8 Del.C. § 141(e). See also Cheff v. Mathes, supra.

Here, the record establishes that the Board did not request its Chief Financial Officer, Romans, to make any valuation study or review of the proposal to determine the adequacy of $55 per share for sale of the Company. On the record before us: The Board rested on Romans' elicited response that the $55 figure was within a "fair price range" within the context of a leveraged buy-out. No director sought any further information from Romans. No director asked him why he put $55 at the bottom of his range. No director asked Romans for any details as to his study, the reason why it had been undertaken or its depth. No director asked to see the study; and no director asked Romans whether Trans Union's finance department could do a fairness study within the remaining 36-hour^[18] period available under the Pritzker offer.

Had the Board, or any member, made an inquiry of Romans, he presumably would have responded as he testified: that his calculations were rough and preliminary; and, that the study was not designed to determine the fair value of the Company, but rather to assess the feasibility of a leveraged buy-out financed by the Company's projected cash flow, making certain assumptions as to the purchaser's borrowing needs. Romans would have presumably also informed the Board of his view, and the widespread view of Senior Management, that the timing of the offer was wrong and the offer inadequate.

The record also establishes that the Board accepted without scrutiny Van Gorkom's representation as to the fairness of the $55 price per share for sale of the Company — a subject that the Board had never previously considered. The Board thereby failed to discover that Van Gorkom had suggested the $55 price to Pritzker and, most crucially, that Van Gorkom had arrived at the $55 figure based on calculations designed solely to determine the feasibility of a leveraged buy-out.^[19] No questions were raised either as to the tax implications of a cash-out merger or how the price for the one million share option granted Pritzker was calculated.

We do not say that the Board of Directors was not entitled to give some credence to Van Gorkom's representation that $55 was an adequate or fair price. Under § 141(e), the directors were entitled to rely upon their chairman's opinion of value and adequacy, provided that such opinion was reached on a sound basis. Here, the issue is whether the directors informed themselves as to all information that was reasonably available to them. Had they done so, they would have learned of the source and derivation of the $55 price and could not reasonably have relied thereupon in good faith.

None of the directors, Management or outside, were investment bankers or financial analysts. Yet the Board did not consider recessing the meeting until a later hour that day (or requesting an extension of Pritzker's Sunday evening deadline) to give it time to elicit more information as to the sufficiency of the offer, either from [878] inside Management (in particular Romans) or from Trans Union's own investment banker, Salomon Brothers, whose Chicago specialist in merger and acquisitions was known to the Board and familiar with Trans Union's affairs.

Thus, the record compels the conclusion that on September 20 the Board lacked valuation information adequate to reach an informed business judgment as to the fairness of $55 per share for sale of the Company.^[20]

(2)

This brings us to the post-September 20 "market test" upon which the defendants ultimately rely to confirm the reasonableness of their September 20 decision to accept the Pritzker proposal. In this connection, the directors present a two-part argument: (a) that by making a "market test" of Pritzker's $55 per share offer a condition of their September 20 decision to accept his offer, they cannot be found to have acted impulsively or in an uninformed manner on September 20; and (b) that the adequacy of the $17 premium for sale of the Company was conclusively established over the following 90 to 120 days by the most reliable evidence available — the marketplace. Thus, the defendants impliedly contend that the "market test" eliminated the need for the Board to perform any other form of fairness test either on September 20, or thereafter.

Again, the facts of record do not support the defendants' argument. There is no evidence: (a) that the Merger Agreement was effectively amended to give the Board freedom to put Trans Union up for auction sale to the highest bidder; or (b) that a public auction was in fact permitted to occur. The minutes of the Board meeting make no reference to any of this. Indeed, the record compels the conclusion that the directors had no rational basis for expecting that a market test was attainable, given the terms of the Agreement as executed during the evening of September 20. We rely upon the following facts which are essentially uncontradicted:

The Merger Agreement, specifically identified as that originally presented to the Board on September 20, has never been produced by the defendants, notwithstanding the plaintiffs' several demands for production before as well as during trial. No acceptable explanation of this failure to produce documents has been given to either the Trial Court or this Court. Significantly, neither the defendants nor their counsel have made the affirmative representation that this critical document has been produced. Thus, the Court is deprived of the best evidence on which to judge the merits of the defendants' position as to the care and attention which they gave to the terms of the Agreement on September 20.

Van Gorkom states that the Agreement as submitted incorporated the ingredients for a market test by authorizing Trans Union to receive competing offers over the next 90-day period. However, he concedes that the Agreement barred Trans Union from actively soliciting such offers and from furnishing to interested parties any information about the Company other than that already in the public domain. Whether the original Agreement of September 20 went so far as to authorize Trans Union to receive competitive proposals is arguable. The defendants' unexplained failure to produce and identify the original Merger Agreement permits the logical inference that the instrument would not support their assertions in this regard. Wilmington Trust Co. v. General Motors Corp., Del.Supr., 51 A.2d 584, 593 (1947); II Wigmore on Evidence § 291 (3d ed. 1940). It is a well established principle that the production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse. Interstate Circuit v. United States, 306 U.S. [879] 208, 226, 59 S.Ct. 467, 474, 83 L.Ed. 610 (1939); Deberry v. State, Del.Supr., 457 A.2d 744, 754 (1983). Van Gorkom, conceding that he never read the Agreement, stated that he was relying upon his understanding that, under corporate law, directors always have an inherent right, as well as a fiduciary duty, to accept a better offer notwithstanding an existing contractual commitment by the Board. (See the discussion infra, part III B(3) at p. 55.)

The defendant directors assert that they "insisted" upon including two amendments to the Agreement, thereby permitting a market test: (1) to give Trans Union the right to accept a better offer; and (2) to reserve to Trans Union the right to distribute proprietary information on the Company to alternative bidders. Yet, the defendants concede that they did not seek to amend the Agreement to permit Trans Union to solicit competing offers.

Several of Trans Union's outside directors resolutely maintained that the Agreement as submitted was approved on the understanding that, "if we got a better deal, we had a right to take it." Director Johnson so testified; but he then added, "And if they didn't put that in the agreement, then the management did not carry out the conclusion of the Board. And I just don't know whether they did or not." The only clause in the Agreement as finally executed to which the defendants can point as "keeping the door open" is the following underlined statement found in subparagraph (a) of section 2.03 of the Merger Agreement as executed:

The Board of Directors shall recommend to the stockholders of Trans Union that they approve and adopt the Merger Agreement (`the stockholders' approval') and to use its best efforts to obtain the requisite votes therefor. GL acknowledges that Trans Union directors may have a competing fiduciary obligation to the shareholders under certain circumstances.

Clearly, this language on its face cannot be construed as incorporating either of the two "conditions" described above: either the right to accept a better offer or the right to distribute proprietary information to third parties. The logical witness for the defendants to call to confirm their construction of this clause of the Agreement would have been Trans Union's outside attorney, James Brennan. The defendants' failure, without explanation, to call this witness again permits the logical inference that his testimony would not have been helpful to them. The further fact that the directors adjourned, rather than recessed, the meeting without incorporating in the Agreement these important "conditions" further weakens the defendants' position. As has been noted, nothing in the Board's Minutes supports these claims. No reference to either of the so-called "conditions" or of Trans Union's reserved right to test the market appears in any notes of the Board meeting or in the Board Resolution accepting the Pritzker offer or in the Minutes of the meeting itself. That evening, in the midst of a formal party which he hosted for the opening of the Chicago Lyric Opera, Van Gorkom executed the Merger Agreement without he or any other member of the Board having read the instruments.

The defendants attempt to downplay the significance of the prohibition against Trans Union's actively soliciting competing offers by arguing that the directors "understood that the entire financial community would know that Trans Union was for sale upon the announcement of the Pritzker offer, and anyone desiring to make a better offer was free to do so." Yet, the press release issued on September 22, with the authorization of the Board, stated that Trans Union had entered into "definitive agreements" with the Pritzkers; and the press release did not even disclose Trans Union's limited right to receive and accept higher offers. Accompanying this press release was a further public announcement that Pritzker had been granted an option to purchase at any time one million shares of [880] Trans Union's capital stock at 75 cents above the then-current price per share.

Thus, notwithstanding what several of the outside directors later claimed to have "thought" occurred at the meeting, the record compels the conclusion that Trans Union's Board had no rational basis to conclude on September 20 or in the days immediately following, that the Board's acceptance of Pritzker's offer was conditioned on (1) a "market test" of the offer; and (2) the Board's right to withdraw from the Pritzker Agreement and accept any higher offer received before the shareholder meeting.

(3)

The directors' unfounded reliance on both the premium and the market test as the basis for accepting the Pritzker proposal undermines the defendants' remaining contention that the Board's collective experience and sophistication was a sufficient basis for finding that it reached its September 20 decision with informed, reasonable deliberation.^[21]Compare Gimbel v. Signal Companies, Inc., Del. Ch., 316 A.2d 599 (1974), aff'd per curiam, Del. Supr., 316 A.2d 619 (1974). There, the Court of Chancery preliminary enjoined a board's sale of stock of its wholly-owned subsidiary for an alleged grossly inadequate price. It did so based on a finding that the business judgment rule had been pierced for failure of management to give its board "the opportunity to make a reasonable and reasoned decision." 316 A.2d at 615. The Court there reached this result notwithstanding the board's sophistication and experience; the company's need of immediate cash; and the board's need to act promptly due to the impact of an energy crisis on the value of the underlying assets being sold — all of its subsidiary's oil and gas interests. The Court found those factors denoting competence to be outweighed by evidence of gross negligence; that management in effect sprang the deal on the board by negotiating the asset sale without informing the board; that the buyer intended to "force a quick decision" by the board; that the board meeting was called on only one-and-a-half days' notice; that its outside directors were not notified of the meeting's purpose; that during a meeting spanning "a couple of hours" a sale of assets worth $480 million was approved; and that the Board failed to obtain a current appraisal of its oil and gas interests. The analogy of Signal to the case at bar is significant.

(4)

Part of the defense is based on a claim that the directors relied on legal advice rendered at the September 20 meeting by James Brennan, Esquire, who was present at Van Gorkom's request. Unfortunately, Brennan did not appear and testify at trial even though his firm participated in the defense of this action. There is no contemporaneous evidence of the advice given by Brennan on September 20, only the later deposition and trial testimony of certain directors as to their recollections or understanding of what was said at the meeting. Since counsel did not testify, and the advice attributed to Brennan is hearsay received by the Trial Court over the plaintiffs' objections, we consider it only in the context of the directors' present claims. In fairness to counsel, we make no findings that the advice attributed to him was in fact given. We focus solely on the efficacy of the [881] defendants' claims, made months and years later, in an effort to extricate themselves from liability.

Several defendants testified that Brennan advised them that Delaware law did not require a fairness opinion or an outside valuation of the Company before the Board could act on the Pritzker proposal. If given, the advice was correct. However, that did not end the matter. Unless the directors had before them adequate information regarding the intrinsic value of the Company, upon which a proper exercise of business judgment could be made, mere advice of this type is meaningless; and, given this record of the defendants' failures, it constitutes no defense here.^[22]

* * *

We conclude that Trans Union's Board was grossly negligent in that it failed to act with informed reasonable deliberation in agreeing to the Pritzker merger proposal on September 20; and we further conclude that the Trial Court erred as a matter of law in failing to address that question before determining whether the directors' later conduct was sufficient to cure its initial error.

A second claim is that counsel advised the Board it would be subject to lawsuits if it rejected the $55 per share offer. It is, of course, a fact of corporate life that today when faced with difficult or sensitive issues, directors often are subject to suit, irrespective of the decisions they make. However, counsel's mere acknowledgement of this circumstance cannot be rationally translated into a justification for a board permitting itself to be stampeded into a patently unadvised act. While suit might result from the rejection of a merger or tender offer, Delaware law makes clear that a board acting within the ambit of the business judgment rule faces no ultimate liability. Pogostin v. Rice, supra. Thus, we cannot conclude that the mere threat of litigation, acknowledged by counsel, constitutes either legal advice or any valid basis upon which to pursue an uninformed course.

Since we conclude that Brennan's purported advice is of no consequence to the defense of this case, it is unnecessary for us to invoke the adverse inferences which may be attributable to one failing to appear at trial and testify.

-B-

We now examine the Board's post-September 20 conduct for the purpose of determining first, whether it was informed and not grossly negligent; and second, if informed, whether it was sufficient to legally rectify and cure the Board's derelictions of September 20.^[23]

(1)

First, as to the Board meeting of October 8: Its purpose arose in the aftermath of the September 20 meeting: (1) the September 22 press release announcing that Trans Union "had entered into definitive agreements to merge with an affiliate of Marmon Group, Inc.;" and (2) Senior Management's ensuing revolt.

Trans Union's press release stated:

FOR IMMEDIATE RELEASE:

CHICAGO, IL — Trans Union Corporation announced today that it had entered into definitive agreements to merge with an affiliate of The Marmon Group, Inc. in a transaction whereby Trans Union stockholders would receive $55 per share in cash for each Trans Union share held. The Marmon Group, Inc. is controlled by the Pritzker family of Chicago.

The merger is subject to approval by the stockholders of Trans Union at a special meeting expected to be held [882] sometime during December or early January.

Until October 10, 1980, the purchaser has the right to terminate the merger if financing that is satisfactory to the purchaser has not been obtained, but after that date there is no such right.

In a related transaction, Trans Union has agreed to sell to a designee of the purchaser one million newly-issued shares of Trans Union common stock at a cash price of $38 per share. Such shares will be issued only if the merger financing has been committed for no later than October 10, 1980, or if the purchaser elects to waive the merger financing condition. In addition, the New York Stock Exchange will be asked to approve the listing of the new shares pursuant to a listing application which Trans Union intends to file shortly.

Completing of the transaction is also subject to the preparation of a definitive proxy statement and making various filings and obtaining the approvals or consents of government agencies.

The press release made no reference to provisions allegedly reserving to the Board the rights to perform a "market test" and to withdraw from the Pritzker Agreement if Trans Union received a better offer before the shareholder meeting. The defendants also concede that Trans Union never made a subsequent public announcement stating that it had in fact reserved the right to accept alternate offers, the Agreement notwithstanding.

The public announcement of the Pritzker merger resulted in an "en masse" revolt of Trans Union's Senior Management. The head of Trans Union's tank car operations (its most profitable division) informed Van Gorkom that unless the merger were called off, fifteen key personnel would resign.

Instead of reconvening the Board, Van Gorkom again privately met with Pritzker, informed him of the developments, and sought his advice. Pritzker then made the following suggestions for overcoming Management's dissatisfaction: (1) that the Agreement be amended to permit Trans Union to solicit, as well as receive, higher offers; and (2) that the shareholder meeting be postponed from early January to February 10, 1981. In return, Pritzker asked Van Gorkom to obtain a commitment from Senior Management to remain at Trans Union for at least six months after the merger was consummated.

Van Gorkom then advised Senior Management that the Agreement would be amended to give Trans Union the right to solicit competing offers through January, 1981, if they would agree to remain with Trans Union. Senior Management was temporarily mollified; and Van Gorkom then called a special meeting of Trans Union's Board for October 8.

Thus, the primary purpose of the October 8 Board meeting was to amend the Merger Agreement, in a manner agreeable to Pritzker, to permit Trans Union to conduct a "market test."^[24] Van Gorkom understood that the proposed amendments were intended to give the Company an unfettered "right to openly solicit offers down through January 31." Van Gorkom presumably so represented the amendments to Trans Union's Board members on October 8. In a brief session, the directors approved Van Gorkom's oral presentation of the substance of the proposed amendments, [883] the terms of which were not reduced to writing until October 10. But rather than waiting to review the amendments, the Board again approved them sight unseen and adjourned, giving Van Gorkom authority to execute the papers when he received them.^[25]

Thus, the Court of Chancery's finding that the October 8 Board meeting was convened to reconsider the Pritzker "proposal" is clearly erroneous. Further, the consequence of the Board's faulty conduct on October 8, in approving amendments to the Agreement which had not even been drafted, will become apparent when the actual amendments to the Agreement are hereafter examined.

The next day, October 9, and before the Agreement was amended, Pritzker moved swiftly to off-set the proposed market test amendment. First, Pritzker informed Trans Union that he had completed arrangements for financing its acquisition and that the parties were thereby mutually bound to a firm purchase and sale arrangement. Second, Pritzker announced the exercise of his option to purchase one million shares of Trans Union's treasury stock at $38 per share — 75 cents above the current market price. Trans Union's Management responded the same day by issuing a press release announcing: (1) that all financing arrangements for Pritzker's acquisition of Trans Union had been completed; and (2) Pritzker's purchase of one million shares of Trans Union's treasury stock at $38 per share.

The next day, October 10, Pritzker delivered to Trans Union the proposed amendments to the September 20 Merger Agreement. Van Gorkom promptly proceeded to countersign all the instruments on behalf of Trans Union without reviewing the instruments to determine if they were consistent with the authority previously granted him by the Board. The amending documents were apparently not approved by Trans Union's Board until a much later date, December 2. The record does not affirmatively establish that Trans Union's directors ever read the October 10 amendments.^[26]

The October 10 amendments to the Merger Agreement did authorize Trans Union to solicit competing offers, but the amendments had more far-reaching effects. The most significant change was in the definition of the third-party "offer" available to Trans Union as a possible basis for withdrawal from its Merger Agreement with Pritzker. Under the October 10 amendments, a better offer was no longer sufficient to permit Trans Union's withdrawal. Trans Union was now permitted to terminate the Pritzker Agreement and abandon the merger only if, prior to February 10, 1981, Trans Union had either consummated a merger (or sale of assets) with a third party or had entered into a "definitive" merger agreement more favorable than Pritzker's and for a greater consideration — subject only to stockholder approval. Further, the "extension" of the market test period to February 10, 1981 was circumscribed by other amendments which required Trans Union to file its preliminary proxy statement on the Pritzker merger proposal by December 5, 1980 and use its best efforts to mail the statement to its shareholders by January 5, 1981. Thus, the market test period was effectively reduced, not extended. (See infra note 29 at 886.)

In our view, the record compels the conclusion that the directors' conduct on October [884] 8 exhibited the same deficiencies as did their conduct on September 20. The Board permitted its Merger Agreement with Pritzker to be amended in a manner it had neither authorized nor intended. The Court of Chancery, in its decision, over-looked the significance of the October 8-10 events and their relevance to the sufficiency of the directors' conduct. The Trial Court's letter opinion ignores: the October 10 amendments; the manner of their adoption; the effect of the October 9 press release and the October 10 amendments on the feasibility of a market test; and the ultimate question as to the reasonableness of the directors' reliance on a market test in recommending that the shareholders approve the Pritzker merger.

We conclude that the Board acted in a grossly negligent manner on October 8; and that Van Gorkom's representations on which the Board based its actions do not constitute "reports" under § 141(e) on which the directors could reasonably have relied. Further, the amended Merger Agreement imposed on Trans Union's acceptance of a third party offer conditions more onerous than those imposed on Trans Union's acceptance of Pritzker's offer on September 20. After October 10, Trans Union could accept from a third party a better offer only if it were incorporated in a definitive agreement between the parties, and not conditioned on financing or on any other contingency.

The October 9 press release, coupled with the October 10 amendments, had the clear effect of locking Trans Union's Board into the Pritzker Agreement. Pritzker had thereby foreclosed Trans Union's Board from negotiating any better "definitive" agreement over the remaining eight weeks before Trans Union was required to clear the Proxy Statement submitting the Pritzker proposal to its shareholders.

(2)

Next, as to the "curative" effects of the Board's post-September 20 conduct, we review in more detail the reaction of Van Gorkom to the KKR proposal and the results of the Board-sponsored "market test."

The KKR proposal was the first and only offer received subsequent to the Pritzker Merger Agreement. The offer resulted primarily from the efforts of Romans and other senior officers to propose an alternative to Pritzker's acquisition of Trans Union. In late September, Romans' group contacted KKR about the possibility of a leveraged buy-out by all members of Management, except Van Gorkom. By early October, Henry R. Kravis of KKR gave Romans written notice of KKR's "interest in making an offer to purchase 100%" of Trans Union's common stock.

Thereafter, and until early December, Romans' group worked with KKR to develop a proposal. It did so with Van Gorkom's knowledge and apparently grudging consent. On December 2, Kravis and Romans hand-delivered to Van Gorkom a formal letter-offer to purchase all of Trans Union's assets and to assume all of its liabilities for an aggregate cash consideration equivalent to $60 per share. The offer was contingent upon completing equity and bank financing of $650 million, which Kravis represented as 80% complete. The KKR letter made reference to discussions with major banks regarding the loan portion of the buy-out cost and stated that KKR was "confident that commitments for the bank financing * * * can be obtained within two or three weeks." The purchasing group was to include certain named key members of Trans Union's Senior Management, excluding Van Gorkom, and a major Canadian company. Kravis stated that they were willing to enter into a "definitive agreement" under terms and conditions "substantially the same" as those contained in Trans Union's agreement with Pritzker. The offer was addressed to Trans Union's Board of Directors and a meeting with the Board, scheduled for that afternoon, was requested.

Van Gorkom's reaction to the KKR proposal was completely negative; he did not view the offer as being firm because of its [885] financing condition. It was pointed out, to no avail, that Pritzker's offer had not only been similarly conditioned, but accepted on an expedited basis. Van Gorkom refused Kravis' request that Trans Union issue a press release announcing KKR's offer, on the ground that it might "chill" any other offer.^[27] Romans and Kravis left with the understanding that their proposal would be presented to Trans Union's Board that afternoon.

Within a matter of hours and shortly before the scheduled Board meeting, Kravis withdrew his letter-offer. He gave as his reason a sudden decision by the Chief Officer of Trans Union's rail car leasing operation to withdraw from the KKR purchasing group. Van Gorkom had spoken to that officer about his participation in the KKR proposal immediately after his meeting with Romans and Kravis. However, Van Gorkom denied any responsibility for the officer's change of mind.

At the Board meeting later that afternoon, Van Gorkom did not inform the directors of the KKR proposal because he considered it "dead." Van Gorkom did not contact KKR again until January 20, when faced with the realities of this lawsuit, he then attempted to reopen negotiations. KKR declined due to the imminence of the February 10 stockholder meeting.

GE Credit Corporation's interest in Trans Union did not develop until November; and it made no written proposal until mid-January. Even then, its proposal was not in the form of an offer. Had there been time to do so, GE Credit was prepared to offer between $2 and $5 per share above the $55 per share price which Pritzker offered. But GE Credit needed an additional 60 to 90 days; and it was unwilling to make a formal offer without a concession from Pritzker extending the February 10 "deadline" for Trans Union's stockholder meeting. As previously stated, Pritzker refused to grant such extension; and on January 21, GE Credit terminated further negotiations with Trans Union. Its stated reasons, among others, were its "unwillingness to become involved in a bidding contest with Pritzker in the absence of the willingness of [the Pritzker interests] to terminate the proposed $55 cash merger."

* * *

In the absence of any explicit finding by the Trial Court as to the reasonableness of Trans Union's directors' reliance on a market test and its feasibility, we may make our own findings based on the record. Our review of the record compels a finding that confirmation of the appropriateness of the Pritzker offer by an unfettered or free market test was virtually meaningless in the face of the terms and time limitations of Trans Union's Merger Agreement with Pritzker as amended October 10, 1980.

(3)

Finally, we turn to the Board's meeting of January 26, 1981. The defendant directors rely upon the action there taken to refute the contention that they did not reach an informed business judgment in approving the Pritzker merger. The defendants contend that the Trial Court correctly concluded that Trans Union's directors were, in effect, as "free to turn down the Pritzker proposal" on January 26, as they were on September 20.

Applying the appropriate standard of review set forth in Levitt v. Bouvier, supra, we conclude that the Trial Court's finding in this regard is neither supported by the record nor the product of an orderly and logical deductive process. Without disagreeing with the principle that a business decision by an originally uninformed board of directors may, under appropriate circumstances, be timely cured so as to become informed and deliberate, Muschel v. Western Union Corporation, Del. Ch., 310 [886] A.2d 904 (1973),^[28] we find that the record does not permit the defendants to invoke that principle in this case.

The Board's January 26 meeting was the first meeting following the filing of the plaintiffs' suit in mid-December and the last meeting before the previously-noticed shareholder meeting of February 10.^[29] All ten members of the Board and three outside attorneys attended the meeting. At that meeting the following facts, among other aspects of the Merger Agreement, were discussed:

(a) The fact that prior to September 20, 1980, no Board member or member of Senior Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible merger with Pritzker;

(b) The fact that the price of $55 per share had been suggested initially to Pritzker by Van Gorkom;

(c) The fact that the Board had not sought an independent fairness opinion;

(d) The fact that, at the September 20 Senior Management meeting, Romans and several members of Senior Management indicated both concern that the $55 per share price was inadequate and a belief that a higher price should and could be obtained;

(e) The fact that Romans had advised the Board at its meeting on September 20, that he and his department had prepared a study which indicated that the Company had a value in the range of $55 to $65 per share, and that he could not advise the Board that the $55 per share offer made by Pritzker was unfair.

The defendants characterize the Board's Minutes of the January 26 meeting as a "review" of the "entire sequence of events" from Van Gorkom's initiation of the negotiations on September 13 forward.^[30] The defendants also rely on the [887] testimony of several of the Board members at trial as confirming the Minutes.^[31] On the basis of this evidence, the defendants argue that whatever information the Board lacked to make a deliberate and informed judgment on September 20, or on October 8, was fully divulged to the entire Board on January 26. Hence, the argument goes, the Board's vote on January 26 to again "approve" the Pritzker merger must be found to have been an informed and deliberate judgment.

On the basis of this evidence, the defendants assert: (1) that the Trial Court was legally correct in widening the time frame for determining whether the defendants' approval of the Pritzker merger represented an informed business judgment to include the entire four-month period during which the Board considered the matter from September 20 through January 26; and (2) that, given this extensive evidence of the Board's further review and deliberations on January 26, this Court must affirm the Trial Court's conclusion that the Board's action was not reckless or improvident.

We cannot agree. We find the Trial Court to have erred, both as a matter of fact and as a matter of law, in relying on the action on January 26 to bring the defendants' conduct within the protection of the business judgment rule.

Johnson's testimony and the Board Minutes of January 26 are remarkably consistent. Both clearly indicate recognition that the question of the alternative courses of action, available to the Board on January 26 with respect to the Pritzker merger, was a legal question, presenting to the Board (after its review of the full record developed through pre-trial discovery) three options: (1) to "continue to recommend" the Pritzker merger; (2) to "recommend that [888] the stockholders vote against" the Pritzker merger; or (3) to take a noncommittal position on the merger and "simply leave the decision to [the] shareholders."

We must conclude from the foregoing that the Board was mistaken as a matter of law regarding its available courses of action on January 26, 1981. Options (2) and (3) were not viable or legally available to the Board under 8 Del.C. § 251(b). The Board could not remain committed to the Pritzker merger and yet recommend that its stockholders vote it down; nor could it take a neutral position and delegate to the stockholders the unadvised decision as to whether to accept or reject the merger. Under § 251(b), the Board had but two options: (1) to proceed with the merger and the stockholder meeting, with the Board's recommendation of approval; or (2) to rescind its agreement with Pritzker, withdraw its approval of the merger, and notify its stockholders that the proposed shareholder meeting was cancelled. There is no evidence that the Board gave any consideration to these, its only legally viable alternative courses of action.

But the second course of action would have clearly involved a substantial risk — that the Board would be faced with suit by Pritzker for breach of contract based on its September 20 agreement as amended October 10. As previously noted, under the terms of the October 10 amendment, the Board's only ground for release from its agreement with Pritzker was its entry into a more favorable definitive agreement to sell the Company to a third party. Thus, in reality, the Board was not "free to turn down the Pritzker proposal" as the Trial Court found. Indeed, short of negotiating a better agreement with a third party, the Board's only basis for release from the Pritzker Agreement without liability would have been to establish fundamental wrongdoing by Pritzker. Clearly, the Board was not "free" to withdraw from its agreement with Pritzker on January 26 by simply relying on its self-induced failure to have reached an informed business judgment at the time of its original agreement. See Wilmington Trust Company v. Coulter, Del.Supr., 200 A.2d 441, 453 (1964), aff'g Pennsylvania Company v. Wilmington Trust Company, Del.Ch., 186 A.2d 751 (1962).

Therefore, the Trial Court's conclusion that the Board reached an informed business judgment on January 26 in determining whether to turn down the Pritzker "proposal" on that day cannot be sustained.^[32] The Court's conclusion is not supported by the record; it is contrary to the provisions of § 251(b) and basic principles of contract law; and it is not the product of a logical and deductive reasoning process.

* * *

Upon the basis of the foregoing, we hold that the defendants' post-September conduct did not cure the deficiencies of their September 20 conduct; and that, accordingly, the Trial Court erred in according to the defendants the benefits of the business judgment rule.

IV.

Whether the directors of Trans Union should be treated as one or individually in terms of invoking the protection of the business judgment rule and the applicability of 8 Del.C. § 141(c) are questions which were not originally addressed by the parties in their briefing of this case. This resulted in a supplemental briefing and a second rehearing en banc on two basic questions: (a) whether one or more of the directors were deprived of the protection of the business judgment rule by evidence of an absence of good faith; and (b) whether one or more of the outside directors were [889] entitled to invoke the protection of 8 Del.C. § 141(e) by evidence of a reasonable, good faith reliance on "reports," including legal advice, rendered the Board by certain inside directors and the Board's special counsel, Brennan.

The parties' response, including reargument, has led the majority of the Court to conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified position, we are required to treat all of the directors as one as to whether they are entitled to the protection of the business judgment rule; and (2) that considerations of good faith, including the presumption that the directors acted in good faith, are irrelevant in determining the threshold issue of whether the directors as a Board exercised an informed business judgment. For the same reason, we must reject defense counsel's ad hominem argument for affirmance: that reversal may result in a multi-million dollar class award against the defendants for having made an allegedly uninformed business judgment in a transaction not involving any personal gain, self-dealing or claim of bad faith.

In their brief, the defendants similarly mistake the business judgment rule's application to this case by erroneously invoking presumptions of good faith and "wide discretion":

This is a case in which plaintiff challenged the exercise of business judgment by an independent Board of Directors. There were no allegations and no proof of fraud, bad faith, or self-dealing by the directors....

The business judgment rule, which was properly applied by the Chancellor, allows directors wide discretion in the matter of valuation and affords room for honest differences of opinion. In order to prevail, plaintiffs had the heavy burden of proving that the merger price was so grossly inadequate as to display itself as a badge of fraud. That is a burden which plaintiffs have not met.

However, plaintiffs have not claimed, nor did the Trial Court decide, that $55 was a grossly inadequate price per share for sale of the Company. That being so, the presumption that a board's judgment as to adequacy of price represents an honest exercise of business judgment (absent proof that the sale price was grossly inadequate) is irrelevant to the threshold question of whether an informed judgment was reached. Compare Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971); Kelly v. Bell, Del.Supr., 266 A.2d 878, 879 (1970); Cole v. National Cash Credit Association, Del.Ch., 156 A. 183 (1931); Allaun v. Consolidated Oil Co., supra; Allen Chemical & Dye Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486 (1923).

V.

The defendants ultimately rely on the stockholder vote of February 10 for exoneration. The defendants contend that the stockholders' "overwhelming" vote approving the Pritzker Merger Agreement had the legal effect of curing any failure of the Board to reach an informed business judgment in its approval of the merger.

The parties tacitly agree that a discovered failure of the Board to reach an informed business judgment in approving the merger constitutes a voidable, rather than a void, act. Hence, the merger can be sustained, notwithstanding the infirmity of the Board's action, if its approval by majority vote of the shareholders is found to have been based on an informed electorate. Cf. Michelson v. Duncan, Del.Supr., 407 A.2d 211 (1979), aff'g in part and rev'g in part, Del.Ch., 386 A.2d 1144 (1978). The disagreement between the parties arises over: (1) the Board's burden of disclosing to the shareholders all relevant and material information; and (2) the sufficiency of the evidence as to whether the Board satisfied that burden.

On this issue the Trial Court summarily concluded "that the stockholders of Trans Union were fairly informed as to the pending merger...." The Court provided no [890] supportive reasoning nor did the Court make any reference to the evidence of record.

The plaintiffs contend that the Court committed error by applying an erroneous disclosure standard of "adequacy" rather than "completeness" in determining the sufficiency of the Company's merger proxy materials. The plaintiffs also argue that the Board's proxy statements, both its original statement dated January 19 and its supplemental statement dated January 26, were incomplete in various material respects. Finally, the plaintiffs assert that Management's supplemental statement (mailed "on or about" January 27) was untimely either as a matter of law under 8 Del.C. § 251(c), or untimely as a matter of equity and the requirements of complete candor and fair disclosure.

The defendants deny that the Court committed legal or equitable error. On the question of the Board's burden of disclosure, the defendants state that there was no dispute at trial over the standard of disclosure required of the Board; but the defendants concede that the Board was required to disclose "all germane facts" which a reasonable shareholder would have considered important in deciding whether to approve the merger. Thus, the defendants argue that when the Trial Court speaks of finding the Company's shareholders to have been "fairly informed" by Management's proxy materials, the Court is speaking in terms of "complete candor" as required under Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978).

The settled rule in Delaware is that "where a majority of fully informed stockholders ratify action of even interested directors, an attack on the ratified transaction normally must fail." Gerlach v. Gillam, Del.Ch., 139 A.2d 591, 593 (1958). The question of whether shareholders have been fully informed such that their vote can be said to ratify director action, "turns on the fairness and completeness of the proxy materials submitted by the management to the ... shareholders." Michelson v. Duncan, supra at 220. As this Court stated in Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 59 (1952):

[T]he entire atmosphere is freshened and a new set of rules invoked where a formal approval has been given by a majority of independent, fully informed stockholders....

In Lynch v. Vickers Energy Corp., supra, this Court held that corporate directors owe to their stockholders a fiduciary duty to disclose all facts germane to the transaction at issue in an atmosphere of complete candor. We defined "germane" in the tender offer context as all "information such as a reasonable stockholder would consider important in deciding whether to sell or retain stock." Id. at 281. Accord Weinberger v. UOP, Inc., supra; Michelson v. Duncan, supra; Schreiber v. Pennzoil Corp., Del.Ch., 419 A.2d 952 (1980). In reality, "germane" means material facts.

Applying this standard to the record before us, we find that Trans Union's stockholders were not fully informed of all facts material to their vote on the Pritzker Merger and that the Trial Court's ruling to the contrary is clearly erroneous. We list the material deficiencies in the proxy materials:

(1) The fact that the Board had no reasonably adequate information indicative of the intrinsic value of the Company, other than a concededly depressed market price, was without question material to the shareholders voting on the merger. See Weinberger, supra at 709 (insiders' report that cash-out merger price up to $24 was good investment held material); Michelson, supra at 224 (alleged terms and intent of stock option plan held not germane); Schreiber, supra at 959 (management fee of $650,000 held germane).

Accordingly, the Board's lack of valuation information should have been disclosed. Instead, the directors cloaked the absence of such information in both the Proxy Statement and the Supplemental [891] Proxy Statement. Through artful drafting, noticeably absent at the September 20 meeting, both documents create the impression that the Board knew the intrinsic worth of the Company. In particular, the Original Proxy Statement contained the following:

[a]lthough the Board of Directors regards the intrinsic value of the Company's assets to be significantly greater than their book value ..., systematic liquidation of such a large and complex entity as Trans Union is simply not regarded as a feasible method of realizing its inherent value. Therefore, a business combination such as the merger would seem to be the only practicable way in which the stockholders could realize the value of the Company.

The Proxy stated further that "[i]n the view of the Board of Directors ..., the prices at which the Company's common stock has traded in recent years have not reflected the inherent value of the Company." What the Board failed to disclose to its stockholders was that the Board had not made any study of the intrinsic or inherent worth of the Company; nor had the Board even discussed the inherent value of the Company prior to approving the merger on September 20, or at either of the subsequent meetings on October 8 or January 26. Neither in its Original Proxy Statement nor in its Supplemental Proxy did the Board disclose that it had no information before it, beyond the premium-over-market and the price/earnings ratio, on which to determine the fair value of the Company as a whole.

(2) We find false and misleading the Board's characterization of the Romans report in the Supplemental Proxy Statement. The Supplemental Proxy stated:

At the September 20, 1980 meeting of the Board of Directors of Trans Union, Mr. Romans indicated that while he could not say that $55,00 per share was an unfair price, he had prepared a preliminary report which reflected that the value of the Company was in the range of $55.00 to $65.00 per share.

Nowhere does the Board disclose that Romans stated to the Board that his calculations were made in a "search for ways to justify a price in connection with" a leveraged buy-out transaction, "rather than to say what the shares are worth," and that he stated to the Board that his conclusion thus arrived at "was not the same thing as saying that I have a valuation of the Company at X dollars." Such information would have been material to a reasonable shareholder because it tended to invalidate the fairness of the merger price of $55. Furthermore, defendants again failed to disclose the absence of valuation information, but still made repeated reference to the "substantial premium."

(3) We find misleading the Board's references to the "substantial" premium offered. The Board gave as their primary reason in support of the merger the "substantial premium" shareholders would receive. But the Board did not disclose its failure to assess the premium offered in terms of other relevant valuation techniques, thereby rendering questionable its determination as to the substantiality of the premium over an admittedly depressed stock market price.

(4) We find the Board's recital in the Supplemental Proxy of certain events preceding the September 20 meeting to be incomplete and misleading. It is beyond dispute that a reasonable stockholder would have considered material the fact that Van Gorkom not only suggested the $55 price to Pritzker, but also that he chose the figure because it made feasible a leveraged buy-out. The directors disclosed that Van Gorkom suggested the $55 price to Pritzker. But the Board misled the shareholders when they described the basis of Van Gorkom's suggestion as follows:

Such suggestion was based, at least in part, on Mr. Van Gorkom's belief that loans could be obtained from institutional lenders (together with about a $200 million [892] equity contribution) which would justify the payment of such price, ...

Although by January 26, the directors knew the basis of the $55 figure, they did not disclose that Van Gorkom chose the $55 price because that figure would enable Pritzker to both finance the purchase of Trans Union through a leveraged buy-out and, within five years, substantially repay the loan out of the cash flow generated by the Company's operations.

(5) The Board's Supplemental Proxy Statement, mailed on or after January 27, added significant new matter, material to the proposal to be voted on February 10, which was not contained in the Original Proxy Statement. Some of this new matter was information which had only been disclosed to the Board on January 26; much was information known or reasonably available before January 21 but not revealed in the Original Proxy Statement. Yet, the stockholders were not informed of these facts. Included in the "new" matter first disclosed in the Supplemental Proxy Statement were the following:

(a) The fact that prior to September 20, 1980, no Board member or member of Senior Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible merger with Pritzker;

(b) The fact that the sale price of $55 per share had been suggested initially to Pritzker by Van Gorkom;

(c) The fact that the Board had not sought an independent fairness opinion;

(d) The fact that Romans and several members of Senior Management had indicated concern at the September 20 Senior Management meeting that the $55 per share price was inadequate and had stated that a higher price should and could be obtained; and

(e) The fact that Romans had advised the Board at its meeting on September 20 that he and his department had prepared a study which indicated that the Company had a value in the range of $55 to $65 per share, and that he could not advise the Board that the $55 per share offer which Pritzker made was unfair.

* * *

The parties differ over whether the notice requirements of 8 Del.C. § 251(c) apply to the mailing date of supplemental proxy material or that of the original proxy material.^[33] The Trial Court summarily disposed of the notice issue, stating it was "satisfied that the proxy material furnished to Trans Union stockholders ... fairly presented the question to be voted on at the February 10, 1981 meeting."

The defendants argue that the notice provisions of § 251(c) must be construed as requiring only that stockholders receive notice of the time, place, and purpose of a meeting to consider a merger at least 20 days prior to such meeting; and since the Original Proxy Statement was disseminated more than 20 days before the meeting, the defendants urge affirmance of the Trial Court's ruling as correct as a matter of statutory construction. Apparently, the question has not been addressed by either the Court of Chancery or this Court; and authority in other jurisdictions is limited. See Electronic Specialty Co. v. Int'l Controls Corp., 2d Cir., 409 F.2d 937, 944 (1969) (holding that a tender offeror's September 16, 1968 correction of a previous misstatement, combined with an offer of withdrawal running for eight days until September 24, 1968, was sufficient to cure past violations and eliminate any need for rescission); Nicholson File Co. v. H.K. Porter Co., D.R.I., 341 F.Supp. 508, 513-14 (1972), aff'd, 1st Cir., 482 F.2d 421 (1973) [893] (permitting correction of a material misstatement by a mailing to stockholders within seven days of a tender offer withdrawal date). Both Electronic and Nicholson are federal security cases not arising under 8 Del.C. § 251(c) and they are otherwise distinguishable from this case on their facts.

Since we have concluded that Management's Supplemental Proxy Statement does not meet the Delaware disclosure standard of "complete candor" under Lynch v. Vickers, supra, it is unnecessary for us to address the plaintiffs' legal argument as to the proper construction of § 251(c). However, we do find it advisable to express the view that, in an appropriate case, an otherwise candid proxy statement may be so untimely as to defeat its purpose of meeting the needs of a fully informed electorate.

In this case, the Board's ultimate disclosure as contained in the Supplemental Proxy Statement related either to information readily accessible to all of the directors if they had asked the right questions, or was information already at their disposal. In short, the information disclosed by the Supplemental Proxy Statement was information which the defendant directors knew or should have known at the time the first Proxy Statement was issued. The defendants simply failed in their original duty of knowing, sharing, and disclosing information that was material and reasonably available for their discovery. They compounded that failure by their continued lack of candor in the Supplemental Proxy Statement. While we need not decide the issue here, we are satisfied that, in an appropriate case, a completely candid but belated disclosure of information long known or readily available to a board could raise serious issues of inequitable conduct. Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971).

The burden must fall on defendants who claim ratification based on shareholder vote to establish that the shareholder approval resulted from a fully informed electorate. On the record before us, it is clear that the Board failed to meet that burden. Weinberger v. UOP, Inc., supra at 703; Michelson v. Duncan, supra.

* * *

For the foregoing reasons, we conclude that the director defendants breached their fiduciary duty of candor by their failure to make true and correct disclosures of all information they had, or should have had, material to the transaction submitted for stockholder approval.

VI.

To summarize: we hold that the directors of Trans Union breached their fiduciary duty to their stockholders (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger; and (2) by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer.

We hold, therefore, that the Trial Court committed reversible error in applying the business judgment rule in favor of the director defendants in this case.

On remand, the Court of Chancery shall conduct an evidentiary hearing to determine the fair value of the shares represented by the plaintiffs' class, based on the intrinsic value of Trans Union on September 20, 1980. Such valuation shall be made in accordance with Weinberger v. UOP, Inc., supra at 712-715. Thereafter, an award of damages may be entered to the extent that the fair value of Trans Union exceeds $55 per share.

* * *

REVERSED and REMANDED for proceedings consistent herewith.

McNEILLY, Justice, dissenting:

The majority opinion reads like an advocate's closing address to a hostile jury. And I say that not lightly. Throughout the [894] opinion great emphasis is directed only to the negative, with nothing more than lip service granted the positive aspects of this case. In my opinion Chancellor Marvel (retired) should have been affirmed. The Chancellor's opinion was the product of well reasoned conclusions, based upon a sound deductive process, clearly supported by the evidence and entitled to deference in this appeal. Because of my diametrical opposition to all evidentiary conclusions of the majority, I respectfully dissent.

It would serve no useful purpose, particularly at this late date, for me to dissent at great length. I restrain myself from doing so, but feel compelled to at least point out what I consider to be the most glaring deficiencies in the majority opinion. The majority has spoken and has effectively said that Trans Union's Directors have been the victims of a "fast shuffle" by Van Gorkom and Pritzker. That is the beginning of the majority's comedy of errors. The first and most important error made is the majority's assessment of the directors' knowledge of the affairs of Trans Union and their combined ability to act in this situation under the protection of the business judgment rule.

Trans Union's Board of Directors consisted of ten men, five of whom were "inside" directors and five of whom were "outside" directors. The "inside" directors were Van Gorkom, Chelberg, Bonser, William B. Browder, Senior Vice-President-Law, and Thomas P. O'Boyle, Senior Vice-President-Administration. At the time the merger was proposed the inside five directors had collectively been employed by the Company for 116 years and had 68 years of combined experience as directors. The "outside" directors were A.W. Wallis, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan and Robert W. Reneker. With the exception of Wallis, these were all chief executive officers of Chicago based corporations that were at least as large as Trans Union. The five "outside" directors had 78 years of combined experience as chief executive officers, and 53 years cumulative service as Trans Union directors.

The inside directors wear their badge of expertise in the corporate affairs of Trans Union on their sleeves. But what about the outsiders? Dr. Wallis is or was an economist and math statistician, a professor of economics at Yale University, dean of the graduate school of business at the University of Chicago, and Chancellor of the University of Rochester. Dr. Wallis had been on the Board of Trans Union since 1962. He also was on the Board of Bausch & Lomb, Kodak, Metropolitan Life Insurance Company, Standard Oil and others.

William B. Johnson is a University of Pennsylvania law graduate, President of Railway Express until 1966, Chairman and Chief Executive of I.C. Industries Holding Company, and member of Trans Union's Board since 1968.

Joseph Lanterman, a Certified Public Accountant, is or was President and Chief Executive of American Steel, on the Board of International Harvester, Peoples Energy, Illinois Bell Telephone, Harris Bank and Trust Company, Kemper Insurance Company and a director of Trans Union for four years.

Graham Morgan is achemist, was Chairman and Chief Executive Officer of U.S. Gypsum, and in the 17 and 18 years prior to the Trans Union transaction had been involved in 31 or 32 corporate takeovers.

Robert Reneker attended University of Chicago and Harvard Business Schools. He was President and Chief Executive of Swift and Company, director of Trans Union since 1971, and member of the Boards of seven other corporations including U.S. Gypsum and the Chicago Tribune.

Directors of this caliber are not ordinarily taken in by a "fast shuffle". I submit they were not taken into this multi-million dollar corporate transaction without being fully informed and aware of the state of the art as it pertained to the entire corporate panoroma of Trans Union. True, even [895] directors such as these, with their business acumen, interest and expertise, can go astray. I do not believe that to be the case here. These men knew Trans Union like the back of their hands and were more than well qualified to make on the spot informed business judgments concerning the affairs of Trans Union including a 100% sale of the corporation. Lest we forget, the corporate world of then and now operates on what is so aptly referred to as "the fast track". These men were at the time an integral part of that world, all professional business men, not intellectual figureheads.

The majority of this Court holds that the Board's decision, reached on September 20, 1980, to approve the merger was not the product of an informed business judgment, that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were legally and factually ineffectual, and that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger. I disagree.

At the time of the September 20, 1980 meeting the Board was acutely aware of Trans Union and its prospects. The problems created by accumulated investment tax credits and accelerated depreciation were discussed repeatedly at Board meetings, and all of the directors understood the problem thoroughly. Moreover, at the July, 1980 Board meeting the directors had reviewed Trans Union's newly prepared five-year forecast, and at the August, 1980 meeting Van Gorkom presented the results of a comprehensive study of Trans Union made by The Boston Consulting Group. This study was prepared over an 18 month period and consisted of a detailed analysis of all Trans Union subsidiaries, including competitiveness, profitability, cash throw-off, cash consumption, technical competence and future prospects for contribution to Trans Union's combined net income.

At the September 20 meeting Van Gorkom reviewed all aspects of the proposed transaction and repeated the explanation of the Pritzker offer he had earlier given to senior management. Having heard Van Gorkom's explanation of the Pritzker's offer, and Brennan's explanation of the merger documents the directors discussed the matter. Out of this discussion arose an insistence on the part of the directors that two modifications to the offer be made. First, they required that any potential competing bidder be given access to the same information concerning Trans Union that had been provided to the Pritzkers. Second, the merger documents were to be modified to reflect the fact that the directors could accept a better offer and would not be required to recommend the Pritzker offer if a better offer was made. The following language was inserted into the agreement:

"Within 30 days after the execution of this Agreement, TU shall call a meeting of its stockholders (the `Stockholder's Meeting') for the purpose of approving and adopting the Merger Agreement. The Board of Directors shall recommend to the stockholders of TU that they approve and adopt the Merger Agreement (the `Stockholders' Approval') and shall use its best efforts to obtain the requisite vote therefor; provided, however, that GL and NTC acknowledge that the Board of Directors of TU may have a competing fiduciary obligation to the Stockholders under certain circumstances." (Emphasis added)

While the language is not artfully drawn, the evidence is clear that the intention underlying that language was to make specific the right that the directors assumed they had, that is, to accept any offer that they thought was better, and not to recommend the Pritzker offer in the face of a better one. At the conclusion of the meeting, the proposed merger was approved.

At a subsequent meeting on October 8, 1981 the directors, with the consent of the Pritzkers, amended the Merger Agreement so as to establish the right of Trans Union to solicit as well as to receive higher bids, [896] although the Pritzkers insisted that their merger proposal be presented to the stockholders at the same time that the proposal of any third party was presented. A second amendment, which became effective on October 10, 1981, further provided that Trans Union might unilaterally terminate the proposed merger with the Pritzker company in the event that prior to February 10, 1981 there existed a definitive agreement with a third party for a merger, consolidation, sale of assets, or purchase or exchange of Trans Union stock which was more favorable for the stockholders of Trans Union than the Pritzker offer and which was conditioned upon receipt of stockholder approval and the absence of an injunction against its consummation.

Following the October 8 board meeting of Trans Union, the investment banking firm of Salomon Brothers was retained by the corporation to search for better offers than that of the Pritzkers, Salomon Brothers being charged with the responsibility of doing "whatever possible to see if there is a superior bid in the marketplace over a bid that is on the table for Trans Union". In undertaking such project, it was agreed that Salomon Brothers would be paid the amount of $500,000 to cover its expenses as well as a fee equal to 3/8ths of 1% of the aggregate fair market value of the consideration to be received by the company in the case of a merger or the like, which meant that in the event Salomon Brothers should find a buyer willing to pay a price of $56.00 a share instead of $55.00, such firm would receive a fee of roughly $2,650,000 plus disbursements.

As the first step in proceeding to carry out its commitment, Salomon Brothers had a brochure prepared, which set forth Trans Union's financial history, described the company's business in detail and set forth Trans Union's operating and financial projections. Salomon Brothers also prepared a list of over 150 companies which it believed might be suitable merger partners, and while four of such companies, namely, General Electric, Borg-Warner, Bendix, and Genstar, Ltd. showed some interest in such a merger, none made a firm proposal to Trans Union and only General Electric showed a sustained interest.^[1] As matters transpired, no firm offer which bettered the Pritzker offer of $55 per share was ever made.

On January 21, 1981 a proxy statement was sent to the shareholders of Trans Union advising them of a February 10, 1981 meeting in which the merger would be voted. On January 26, 1981 the directors held their regular meeting. At this meeting the Board discussed the instant merger as well as all events, including this litigation, surrounding it. At the conclusion of the meeting the Board unanimously voted to recommend to the stockholders that they approve the merger. Additionally, the directors reviewed and approved a Supplemental Proxy Statement which, among other things, advised the stockholders of what had occurred at the instant meeting and of the fact that General Electric had decided not to make an offer. On February 10, 1981 [897] the stockholders of Trans Union met pursuant to notice and voted overwhelmingly in favor of the Pritzker merger, 89% of the votes cast being in favor of it.

I have no quarrel with the majority's analysis of the business judgment rule. It is the application of that rule to these facts which is wrong. An overview of the entire record, rather than the limited view of bits and pieces which the majority has exploded like popcorn, convinces me that the directors made an informed business judgment which was buttressed by their test of the market.

At the time of the September 20 meeting the 10 members of Trans Union's Board of Directors were highly qualified and well informed about the affairs and prospects of Trans Union. These directors were acutely aware of the historical problems facing Trans Union which were caused by the tax laws. They had discussed these problems ad nauseam. In fact, within two months of the September 20 meeting the board had reviewed and discussed an outside study of the company done by The Boston Consulting Group and an internal five year forecast prepared by management. At the September 20 meeting Van Gorkom presented the Pritzker offer, and the board then heard from James Brennan, the company's counsel in this matter, who discussed the legal documents. Following this, the Board directed that certain changes be made in the merger documents. These changes made it clear that the Board was free to accept a better offer than Pritzker's if one was made. The above facts reveal that the Board did not act in a grossly negligent manner in informing themselves of the relevant and available facts before passing on the merger. To the contrary, this record reveals that the directors acted with the utmost care in informing themselves of the relevant and available facts before passing on the merger.

The majority finds that Trans Union stockholders were not fully informed and that the directors breached their fiduciary duty of complete candor to the stockholders required by Lynch v. Vickers Energy Corp., Del.Supr. 383 A.2d 278 (1978) [Lynch I], in that the proxy materials were deficient in five areas.

Here again is exploitation of the negative by the majority without giving credit to the positive. To respond to the conclusions of the majority would merely be unnecessary prolonged argument. But briefly what did the proxy materials disclose? The proxy material informed the shareholders that projections were furnished to potential purchasers and such projections indicated that Trans Union's net income might increase to approximately $153 million in 1985. That projection, what is almost three times the net income of $58,248,000 reported by Trans Union as its net income for December 31, 1979 confirmed the statement in the proxy materials that the "Board of Directors believes that, assuming reasonably favorable economic and financial conditions, the Company's prospects for future earnings growth are excellent." This material was certainly sufficient to place the Company's stockholders on notice that there was a reasonable basis to believe that the prospects for future earnings growth were excellent, and that the value of their stock was more than the stock market value of their shares reflected.

Overall, my review of the record leads me to conclude that the proxy materials adequately complied with Delaware law in informing the shareholders about the proposed transaction and the events surrounding it.

The majority suggests that the Supplemental Proxy Statement did not comply with the notice requirement of 8 Del.C. § 251(c) that notice of the time, place and purpose of a meeting to consider a merger must be sent to each shareholder of record at least 20 days prior to the date of the meeting. In the instant case an original proxy statement was mailed on January 18, 1981 giving notice of the time, place and purpose of the meeting. A Supplemental Proxy Statement was mailed January 26, 1981 in an effort to advise Trans Union's [898] shareholders as to what had occurred at the January 26, 1981 meeting, and that General Electric had decided not to make an offer. The shareholder meeting was held February 10, 1981 fifteen days after the Supplemental Proxy Statement had been sent.

All § 251(c) requires is that notice of the time, place and purpose of the meeting be given at least 20 days prior to the meeting. This was accomplished by the proxy statement mailed January 19, 1981. Nothing in § 251(c) prevents the supplementation of proxy materials within 20 days of the meeting. Indeed when additional information, which a reasonable shareholder would consider important in deciding how to vote, comes to light that information must be disclosed to stockholders in sufficient time for the stockholders to consider it. But nothing in § 251(c) requires this additional information to be disclosed at least 20 days prior to the meeting. To reach a contrary result would ignore the current practice and would discourage the supplementation of proxy materials in order to disclose the occurrence of intervening events. In my opinion, fifteen days in the instant case was a sufficient amount of time for the stockholders to receive and consider the information in the supplemental proxy statement.

CHRISTIE, Justice, dissenting:

I respectfully dissent.

Considering the standard and scope of our review under Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), I believe that the record taken as a whole supports a conclusion that the actions of the defendants are protected by the business judgment rule. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984). I also am satisfied that the record supports a conclusion that the defendants acted with the complete candor required by Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978). Under the circumstances I would affirm the judgment of the Court of Chancery.

ON MOTIONS FOR REARGUMENT

Following this Court's decision, Thomas P. O'Boyle, one of the director defendants, sought, and was granted, leave for change of counsel. Thereafter, the individual director defendants, other than O'Boyle, filed a motion for reargument and director O'Boyle, through newly-appearing counsel, then filed a separate motion for reargument. Plaintiffs have responded to the several motions and this matter has now been duly considered.

The Court, through its majority, finds no merit to either motion and concludes that both motions should be denied. We are not persuaded that any errors of law or fact have been made that merit reargument.

However, defendant O'Boyle's motion requires comment. Although O'Boyle continues to adopt his fellow directors' arguments, O'Boyle now asserts in the alternative that he has standing to take a position different from that of his fellow directors and that legal grounds exist for finding him not liable for the acts or omissions of his fellow directors. Specifically, O'Boyle makes a two-part argument: (1) that his undisputed absence due to illness from both the September 20 and the October 8 meetings of the directors of Trans Union entitles him to be relieved from personal liability for the failure of the other directors to exercise due care at those meetings, see Propp v. Sadacca, Del.Ch., 175 A.2d 33, 39 (1961), modified on other grounds, Bennett v. Propp, Del.Supr., 187 A.2d 405 (1962); and (2) that his attendance and participation in the January 26, 1981 Board meeting does not alter this result given this Court's precise findings of error committed at that meeting.

We reject defendant O'Boyle's new argument as to standing because not timely asserted. Our reasons are several. One, in connection with the supplemental briefing of this case in March, 1984, a special opportunity was afforded the individual defendants, [899] including O'Boyle, to present any factual or legal reasons why each or any of them should be individually treated. Thereafter, at argument before the Court on June 11, 1984, the following colloquy took place between this Court and counsel for the individual defendants at the outset of counsel's argument:

COUNSEL: I'll make the argument on behalf of the nine individual defendants against whom the plaintiffs seek more than $100,000,000 in damages. That is the ultimate issue in this case, whether or not nine honest, experienced businessmen should be subject to damages in a case where —

JUSTICE MOORE: Is there a distinction between Chelberg and Van Gorkom vis-a-vis the other defendants?

COUNSEL: No, sir.

JUSTICE MOORE: None whatsoever?

COUNSEL: I think not.

Two, in this Court's Opinion dated January 29, 1985, the Court relied on the individual defendants as having presented a unified defense. We stated:

The parties' response, including reargument, has led the majority of the Court to conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified position, we are required to treat all of the directors as one as to whether they are entitled to the protection of the business judgment rule...

Three, previously O'Boyle took the position that the Board's action taken January 26, 1981 — in which he fully participated — was determinative of virtually all issues. Now O'Boyle seeks to attribute no significance to his participation in the January 26 meeting. Nor does O'Boyle seek to explain his having given before the directors' meeting of October 8, 1980 his "consent to the transaction of such business as may come before the meeting."^[*] It is the view of the majority of the Court that O'Boyle's change of position following this Court's decision on the merits comes too late to be considered. He has clearly waived that right.

The Motions for Reargument of all defendants are denied.

McNEILLY and CHRISTIE, Justices, dissenting:

We do not disagree with the ruling as to the defendant O'Boyle, but we would have granted reargument on the other issues raised.

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[1] The plaintiff, Alden Smith, originally sought to enjoin the merger; but, following extensive discovery, the Trial Court denied the plaintiff's motion for preliminary injunction by unreported letter opinion dated February 3, 1981. On February 10, 1981, the proposed merger was approved by Trans Union's stockholders at a special meeting and the merger became effective on that date. Thereafter, John W. Gosselin was permitted to intervene as an additional plaintiff; and Smith and Gosselin were certified as representing a class consisting of all persons, other than defendants, who held shares of Trans Union common stock on all relevant dates. At the time of the merger, Smith owned 54,000 shares of Trans Union stock, Gosselin owned 23,600 shares, and members of Gosselin's family owned 20,000 shares.

[2] Following trial, and before decision by the Trial Court, the parties stipulated to the dismissal, with prejudice, of the Messrs. Pritzker as parties defendant. However, all references to defendants hereinafter are to the defendant directors of Trans Union, unless otherwise noted.

[3] It has been stipulated that plaintiffs sue on behalf of a class consisting of 10,537 shareholders (out of a total of 12,844) and that the class owned 12,734,404 out of 13,357,758 shares of Trans Union outstanding.

[4] More detailed statements of facts, consistent with this factual outline, appear in related portions of this Opinion.

[5] The common stock of Trans Union was traded on the New York Stock Exchange. Over the five year period from 1975 through 1979, Trans Union's stock had traded within a range of a high of $39½ and a low of $24¼. Its high and low range for 1980 through September 19 (the last trading day before announcement of the merger) was $38¼-$29½.

[6] Van Gorkom asked Romans to express his opinion as to the $55 price. Romans stated that he "thought the price was too low in relation to what he could derive for the company in a cash sale, particularly one which enabled us to realize the values of certain subsidiaries and independent entities."

[7] The record is not clear as to the terms of the Merger Agreement. The Agreement, as originally presented to the Board on September 20, was never produced by defendants despite demands by the plaintiffs. Nor is it clear that the directors were given an opportunity to study the Merger Agreement before voting on it. All that can be said is that Brennan had the Agreement before him during the meeting.

[8] In Van Gorkom's words: The "real decision" is whether to "let the stockholders decide it" which is "all you are being asked to decide today."

[9] The Trial Court stated the premium relationship of the $55 price to the market history of the Company's stock as follows:

* * * the merger price offered to the stockholders of Trans Union represented a premium of 62% over the average of the high and low prices at which Trans Union stock had traded in 1980, a premium of 48% over the last closing price, and a premium of 39% over the highest price at which the stock of Trans Union had traded any time during the prior six years.

[10] We refer to the underlined portion of the Court's ultimate conclusion (previously stated): "that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently...."

[11] 8 Del.C. § 141 provides, in pertinent part:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

[12] See Kaplan v. Centex Corporation, Del.Ch., 284 A.2d 119, 124 (1971), where the Court stated:

Application of the [business judgment] rule of necessity depends upon a showing that informed directors did in fact make a business judgment authorizing the transaction under review. And, as the plaintiff argues, the difficulty here is that the evidence does not show that this was done. There were director-committee-officer references to the realignment but none of these singly or cumulative showed that the director judgment was brought to bear with specificity on the transactions.

[13] Compare Mitchell v. Highland-Western Glass, supra, where the Court posed the question as whether the board acted "so far without information that they can be said to have passed an unintelligent and unadvised judgment." 167 A. at 833. Compare also Gimbel v. Signal Companies, Inc., 316 A.2d 599, aff'd per curiam Del. Supr., 316 A.2d 619 (1974), where the Chancellor, after expressly reiterating the Highland-Western Glass standard, framed the question, "Or to put the question in its legal context, did the Signal directors act without the bounds of reason and recklessly in approving the price offer of Burmah?" Id.

[14] 8 Del.C. § 251(b) provides in pertinent part:

(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. The agreement shall state: (1) the terms and conditions of the merger or consolidation; (2) the mode of carrying the same into effect; (3) such amendments or changes in the certificate of incorporation of the surviving corporation as are desired to be effected by the merger or consolidation, or, if no such amendments or changes are desired, a statement that the certificate of incorporation of one of the constituent corporations shall be the certificate of incorporation of the surviving or resulting corporation; (4) the manner of converting the shares of each of the constituent corporations... and (5) such other details or provisions as are deemed desirable.... The agreement so adopted shall be executed in accordance with section 103 of this title. Any of the terms of the agreement of merger or consolidation may be made dependent upon facts ascertainable outside of such agreement, provided that the manner in which such facts shall operate upon the terms of the agreement is clearly and expressly set forth in the agreement of merger or consolidation. (underlining added for emphasis)

[15] Section 141(e) provides in pertinent part:

A member of the board of directors ... shall, in the performance of his duties, be fully protected in relying in good faith upon the books of accounts or reports made to the corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the board of directors ..., or in relying in good faith upon other records of the corporation.

[16] In support of the defendants' argument that their judgment as to the adequacy of $55 per share was an informed one, the directors rely on the BCG study and the Five Year Forecast. However, no one even referred to either of these studies at the September 20 meeting; and it is conceded that these materials do not represent valuation studies. Hence, these documents do not constitute evidence as to whether the directors reached an informed judgment on September 20 that $55 per share was a fair value for sale of the Company.

[17] We reserve for discussion under Part III hereof, the defendants' contention that their judgment, reached on September 20, if not then informed became informed by virtue of their "review" of the Agreement on October 8 and January 26.

[18] Romans' department study was not made available to the Board until circulation of Trans Union's Supplementary Proxy Statement and the Board's meeting of January 26, 1981, on the eve of the shareholder meeting; and, as has been noted, the study has never been produced for inclusion in the record in this case.

[19] As of September 20 the directors did not know: that Van Gorkom had arrived at the $55 figure alone, and subjectively, as the figure to be used by Controller Peterson in creating a feasible structure for a leveraged buy-out by a prospective purchaser; that Van Gorkom had not sought advice, information or assistance from either inside or outside Trans Union directors as to the value of the Company as an entity or the fair price per share for 100% of its stock; that Van Gorkom had not consulted with the Company's investment bankers or other financial analysts; that Van Gorkom had not consulted with or confided in any officer or director of the Company except Chelberg; and that Van Gorkom had deliberately chosen to ignore the advice and opinion of the members of his Senior Management group regarding the adequacy of the $55 price.

[20] For a far more careful and reasoned approach taken by another board of directors faced with the pressures of a hostile tender offer, see Pogostin v. Rice, supra at 623-627.

[21] Trans Union's five "inside" directors had backgrounds in law and accounting, 116 years of collective employment by the Company and 68 years of combined experience on its Board. Trans Union's five "outside" directors included four chief executives of major corporations and an economist who was a former dean of a major school of business and chancellor of a university. The "outside" directors had 78 years of combined experience as chief executive officers of major corporations and 50 years of cumulative experience as directors of Trans Union. Thus, defendants argue that the Board was eminently qualified to reach an informed judgment on the proposed "sale" of Trans Union notwithstanding their lack of any advance notice of the proposal, the shortness of their deliberation, and their determination not to consult with their investment banker or to obtain a fairness opinion.

[22] Nonetheless, we are satisfied that in an appropriate factual context a proper exercise of business judgment may include, as one of its aspects, reasonable reliance upon the advice of counsel. This is wholly outside the statutory protections of 8 Del.C. § 141(e) involving reliance upon reports of officers, certain experts and books and records of the company.

[23] As will be seen, we do not reach the second question.

[24] As previously noted, the Board mistakenly thought that it had amended the September 20 draft agreement to include a market test.

A secondary purpose of the October 8 meeting was to obtain the Board's approval for Trans Union to employ its investment advisor, Salomon Brothers, for the limited purpose of assisting Management in the solicitation of other offers. Neither Management nor the Board then or thereafter requested Salomon Brothers to submit its opinion as to the fairness of Pritzker's $55 cash-out merger proposal or to value Trans Union as an entity.

There is no evidence of record that the October 8 meeting had any other purpose; and we also note that the Minutes of the October 8 Board meeting, including any notice of the meeting, are not part of the voluminous records of this case.

[25] We do not suggest that a board must read in haec verba every contract or legal document which it approves, but if it is to successfully absolve itself from charges of the type made here, there must be some credible contemporary evidence demonstrating that the directors knew what they were doing, and ensured that their purported action was given effect. That is the consistent failure which cast this Board upon its unredeemable course.

[26] There is no evidence of record that Trans Union's directors ever raised any objections, procedural or substantive, to the October 10 amendments or that any of them, including Van Gorkom, understood the opposite result of their intended effect — until it was too late.

[27] This was inconsistent with Van Gorkom's espousal of the September 22 press release following Trans Union's acceptance of Pritzker's proposal. Van Gorkom had then justified a press release as encouraging rather than chilling later offers.

[28] The defendants concede that Muschel is only illustrative of the proposition that a board may reconsider a prior decision and that it is otherwise factually distinguishable from this case.

[29] This was the meeting which, under the terms of the September 20 Agreement with Pritzker, was scheduled to be held January 10 and was later postponed to February 10 under the October 8-10 amendments. We refer to the document titled "Amendment to Supplemental Agreement" executed by the parties "as of" October 10, 1980. Under new Section 2.03(a) of Article A VI of the "Supplemental Agreement," the parties agreed, in part, as follows:

"The solicitation of such offers or proposals [i.e., `other offers that Trans Union might accept in lieu of the Merger Agreement'] by TU... shall not be deemed to constitute a breach of this Supplemental Agreement or the Merger Agreement provided that ... [Trans Union] shall not (1) delay promptly seeking all consents and approvals required hereunder ... [and] shall be deemed [in compliance] if it files its Preliminary Proxy Statement by December 5, 1980, uses its best efforts to mail its Proxy Statement by January 5, 1981 and holds a special meeting of its Stockholders on or prior to February 10, 1981 ...

* * * * * *

It is the present intention of the Board of Directors of TU to recommend the approval of the Merger Agreement to the Stockholders, unless another offer or proposal is made which in their opinion is more favorable to the Stockholders than the Merger Agreement."

[30] With regard to the Pritzker merger, the recently filed shareholders' suit to enjoin it, and relevant portions of the impending stockholder meeting of February 10, we set forth the Minutes in their entirety:

The Board then reviewed the necessity of issuing a Supplement to the Proxy Statement mailed to stockholders on January 21, 1981, for the special meeting of stockholders scheduled to be held on February 10, 1981, to vote on the proposed $55 cash merger with a subsidiary of GE Corporation. Among other things, the Board noted that subsequent to the printing of the Proxy Statement mailed to stockholders on January 21, 1981, General Electric Company had indicated that it would not be making an offer to acquire the Company. In addition, certain facts had been adduced in connection with pretrial discovery taken in connection with the lawsuit filed by Alden Smith in Delaware Chancery Court. After further discussion and review of a printer's proof copy of a proposed Supplement to the Proxy Statement which had been distributed to Directors the preceding day, upon motion duly made and seconded, the following resolution was unanimously adopted, each Director having been individually polled with respect thereto:

RESOLVED, that the Secretary of the Company be and he hereby is authorized and directed to mail to the stockholders a Supplement to Proxy Statement, substantially in the form of the proposed Supplement to Proxy Statement submitted to the Board at this meeting, with such changes therein and modifications thereof as he shall, with the advice and assistance of counsel, approve as being necessary, desirable, or appropriate.

The Board then reviewed and discussed at great length the entire sequence of events pertaining to the proposed $55 cash merger with a subsidiary of GE Corporation, beginning with the first discussion on September 13, 1980, between the Chairman and Mr. Jay Pritzker relative to a possible merger. Each of the Directors was involved in this discussion as well as counsel who had earlier joined the meeting. Following this review and discussion, such counsel advised the Directors that in light of their discussions, they could (a) continue to recommend to the stockholders that the latter vote in favor of the proposed merger, (b) recommend that the stockholders vote against the merger, or (c) take no position with respect to recommending the proposed merger and simply leave the decision to stockholders. After further discussion, it was moved, seconded, and unanimously voted that the Board of Directors continue to recommend that the stockholders vote in favor of the proposed merger, each Director being individually polled with respect to his vote.

[31] In particular, the defendants rely on the testimony of director Johnson on direct examination:

Q. Was there a regular meeting of the board of Trans Union on January 26, 1981?

A. Yes.

Q. And what was discussed at that meeting?

A. Everything relevant to this transaction.

You see, since the proxy statement of the 19th had been mailed, see, General Electric had advised that they weren't going to make a bid. It was concluded to suggest that the shareholders be advised of that, and that required a supplemental proxy statement, and that required authorization of the board, and that led to a total review from beginning to end of every aspect of the whole transaction and all relevant developments.

Since that was occurring and a supplemental statement was going to the shareholders, it also was obvious to me that there should be a review of the board's position again in the light of the whole record. And we went back from the beginning. Everything was examined and reviewed. Counsel were present. And the board was advised that we could recommend the Pritzker deal, we could submit it to the shareholders with no recommendation, or we could recommend against it.

The board voted to issue the supplemental statement to the shareholders. It voted unanimously — and this time we had a unanimous board, where one man was missing before — to recommend the Pritzker deal. Indeed, at that point there was no other deal. And, in truth, there never had been any other deal. And that's what transpired: a total review of the GE situation, KKR and everything else that was relevant.

[32] To the extent the Trial Court's ultimate conclusion to invoke the business judgment rule is based on other explicit criteria and supporting evidence (i.e., market value of Trans Union's stock, the business acumen of the Board members, the substantial premium over market and the availability of the market test to confirm the adequacy of the premium), we have previously discussed the insufficiency of such evidence.

[33] The pertinent provisions of 8 Del.C. § 251(c) provide:

(c) The agreement required by subsection (b) shall be submitted to the stockholders of each constituent corporation at an annual or special meeting thereof for the purpose of acting on the agreement. Due notice of the time, place and purpose of the meeting shall be mailed to each holder of stock, whether voting or non-voting, of the corporation at his address as it appears on the records of the corporation, at least 20 days prior to the date of the meeting....

----------

[1] Shortly after the announcement of the proposed merger in September senior members of Trans Union's management got in touch with KKR to discuss their possible participation in a leverage buyout scheme. On December 2, 1980 KKR through Henry Kravis actually made a bid of $60.00 per share for Trans Union stock on December 2, 1980 but the offer was withdrawn three hours after it was made because of complications arising out of negotiations with the Reichman family, extremely wealthy Canadians and a change of attitude toward the leveraged buyout scheme, by Jack Kruzenga, the member of senior management of Trans Union who most likely would have been President and Chief Operating Officer of the new company. Kruzenga was the President and Chief Operating Officer of the seven subsidiaries of Trans Union which constituted the backbone of Trans Union as shown through exhaustive studies and analysis of Trans Union's intrinsic value on the market place by the respected investment banking firm of Morgan Stanley. It is interesting to note that at no time during the market test period did any of the 150 corporations contacted by Salomon Brothers complain of the time frame or availability of corporate records in order to make an independent judgment of market value of 100% of Trans Union.

[*] We do not hereby determine that a director's execution of a waiver of notice of meeting and consent to the transaction of business constitutes an endorsement (or approval) by the absent director of any action taken at such a meeting.

Thomas SANDYS, Derivatively on Behalf of Zynga Inc., Plaintiff below, Appellant, v. Mark J. PINCUS, Reginald D. Davis, Cadir B. Lee, John Schappert, David M. Wehner, Mark Yranesh, William Gordon, Reid Hoffman, Jeffrey Katzenberg, Stanley J. Meresman, Sunil Paul And Owen Van Natta, Defendants below, Appellees, and Zynga Inc., a Delaware Corporation, Nominal Defendant below, Appellee.

No. 157, 2016

Supreme Court of Delaware.

Submitted: October 13, 2016

Decided: December 5, 2016

*125Norman M. Monhait, Esquire, P. Bradford deLeeuw, Esquire, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; Jeffrey S. Abraham, Esquire, (Argued), Philip T. Taylor, Esquire, Abraham, Fruchter & Twersky, LLP, New York, New York, Attorneys for Plaintiff-Below, Appellant, Thomas Sandys.

Elena C. Norman, Esquire, Nicholas J. Rohrer, Esquire, Paul J. Loughman, Esquire, Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware; Jordan Eth, Esquire, Anna Erickson White, Esquire, (Argued), Morrison & Foerster LLP, San Francisco, California, Attorneys for Defendants-Below, Appellees, Mark J. Pincus, Reginald D. Davis, Cadir B. Lee, John Schappert, David M. Wehner, Mark Vra-nesh, and Owen Van Natta, and Zynga Inc.

Bradley D. Sorrels, Esquire, Jessica A Montellese, Esquire, Wilson Sonsini Goodrich & Rosati, P.C., Wilmington, Delaware; Steven M. Schatz, Esquire, (Argued), Nina (Nicki) Locker, Esquire, Benjamin M. Crosson, Esquire, Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California, Attorneys for Defendants-Below, Appellees, William Gordon, Reid Hoffman, Jeffrey Katzenberg, Stanley J. Meresman, and Sunil Paul.

Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

*126STRINE, Chief Justice,

for the Majority:

I.

This appeal in a derivative suit brought by a stockholder of Zynga, Inc. turns on whether the Court of Chancery correctly found that a majority of the Zynga board could impartially consider a demand and thus corr.ectly dismissed the complaint for failure, to plead demand excusal under Court of Chancery Rule 23.1. This case again highlights the wisdom of the representative plaintiff bar heeding the repeated admonitions of this Court and the Court of Chancery to make a diligent pre-suit investigation into the board’s independence so that a complaint can be filed satisfying the burden to plead particularized facts supporting demand excusal. Here, the derivative plaintiffs lack of diligence compounded the already difficult task that the Court of Chancery faces when making close calls about pleading stage independence. Fortunately for the derivative plaintiff, however, he was able to plead particularized facts regarding three directors that create a reasonable doubt that these directors can impartially consider a demand. First, the plaintiff pled a powerful and unusual fact about one director’s relationship to Zynga’s former CEO and controlling stockholder which creates a reasonable doubt that she can impartially consider a' demand adverse to his interests. That fact is that the controlling stockholder and the director and her husband co-own an unusual asset, an airplane, which is suggestive of an extremely intimate personal friendship between their families. Second, the plaintiff pled that two other directors are partners at a prominent venture capital firm and that they and their firm not only control 9.2% of Zynga’s equity as a result of being early-stage investors, but have other interlocking relationships with the controller and another selling stockholder outside of Zyn-ga. Although it is true that entrepreneurs like the controller need access to venture capital, it is also true that venture capitalists compete to fund the best entrepreneurs and that these relationships can generate ongoing economic opportunities. There is nothing wrong with that, as that is how commerce often proceeds, but these relationships can give rise to human motivations compromising the participants’ ability to act impartially toward each other on a matter of material importance. Perhaps for that reason, the Zynga board itself determined that these two directors did not qualify as independent under the NASDAQ rules, which have a bottom line standard that a director is not independent if she has “a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment ....”1 Although the plaintiffs lack of diligence made the determination as to these directors perhaps closer than necessary, in our view, the combination of these facts creates a pleading stage reasonable doubt, as to .the ability of these directors to act independently on a demand adverse to the controller’s interests. When these three directors are considered incapable of impartially considering a demand, a majority of the nine member Zynga board is compromised for Rule 23.1 purposes and demand is excused. Thus, the dismissal of the complaint is reversed.

II.

The plaintiff alleges two derivative claims, each centering on allegations that certain top managers and directors at Zyn-ga—including its former CEO, Chairman, *127and controlling stockholder Mark Pincus— were given an exemption to the company’s standing rule preventing sales by insiders until three days after an earnings announcement. According to the plaintiff, top Zynga insiders sold 20.3 million shares of stock for $236.7 million as part of a secondary offering before Zynga’s April 26, 2012 earnings announcement, an announcement that the plaintiff contends involved information that placed downward pressure on Zynga’s' stock price.2 The plaintiff alleges that these insiders sold their shares at $12.00 per share and that, immediately after the earnings announcement, the market price dropped 9.6% to $8.52. Three months later, following the release of additional negative information, which the plaintiff alleges was known by Zynga management and the board when it granted the exemption, Zynga’s market price declined to $3.18, a decrease of 73.5% from the $12.00 per share offering price. In this suit, the plaintiff alleges that the insiders who participated in the sale breached' their fiduciary duties by misusing confidential information when they sold their shares while in possession of adverse, material non-public information and also asserts a duty of loyalty claim against the directors who approved the sale.

The defendants moved to dismiss this action under Court of Chaheery Rule 23.1 for plaintiffs failure to make a pre-suit demand on the board.3 The Court of Chancery’s decision turned on its evaluation of the pleading stage independence of the Zynga board at the time the complaint was filed,4 which was comprised of the following nine directors: Mark Pincus, Reid Hoffman, Jeffrey Katzenberg, Stanley J. Meresman, William Gordon, John Doerr, Ellen Siminoff, Sunil Paul, and Don Mat-trick. In addressing demand excusal, the Court of Chancery applied the standard set forth in this Court’s decision in Rales v. Blasband5 to determine if at least five of Zynga’s nine directors were independent for - pleading stage purposes. The Court of Chancery first determined that the two directors who participated in the transaction, Pincus and Hoffman, were interested in the transaction, and therefore could not impartially consider a demand.6 The Court of Chancery then examined the independence of directors Katzenberg, *128Meresman, Gordon, Doerr, and Siminoff. The Court of Chancery found that all five of these directors were independent and thus, that demand was not excused. The Court of Chancery did not analyze the independence of directors Paul and Mat-trick. But, the Court of Chancery did include a footnote stating that it “would reach the same conclusion regarding Paul, who did not participate in the Secondary Offering or even vote to approve it.”7 At the time of the complaint, Mattrick had replaced Pincus as CEO. The remaining seven directors were outsiders.

The Court of Chancery properly determined that directors Pincus and Hoffman were interested in the transaction. Furthermore, Mattrick is Zynga’s CEO. Zyn-ga’s controlling stockholder, Pincus, is interested in the transaction under attack, and therefore, Mattrick cannot be considered independent. Thus, the question for us is whether the plaintiff pled particularized facts that create a reasonable doubt about the independence of two of the remaining six Zynga directors.8 If the plaintiff convinces us that he did, then we must reverse the Court of Chancery’s dismissal under Rule 23.1. We review this question de novo.9

On appeal, neither party contests the applicability of the Rales standard employed by the Court of Chancery. Therefore, we use it in our analysis to determine whether the Court of Chancery erred in finding that a majority of the board was independent for pleading stage purposes. To plead demand excusal under Rales, the plaintiff must plead particularized factual allegations that “create a reasonable doubt that, as of the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”10 At the pleading stage, a lack of independence turns on “whether the plaintiffs have pled facts from which the director’s ability to act impartially on a matter important to the interested party can be doubted because that director may feel either subject to the interested party’s dominion or beholden to that interested party.”11 “Our law requires that all the pled facts regarding a director’s relationship to the interested party be considered in full context in making the, admittedly imprecise, pleading stage determination of independence.”12 “[Although the plaintiff is bound to plead particularized facts in pleading a derivative complaint, so too is the court bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought.”13

For many years, this Court and the Court of Chancery have advised derivative plaintiffs to take seriously their obligations to plead particularized facts justifying demand excusal.14 This case presents the unusual situation where a plaintiff who *129sought books and records to plead his complaint somehow only asked for records relating to the transaction he sought to redress and did not seek any books and records bearing on the independence of the board.15 Furthermore, although purporting to be a fitting representative for investors in a technology company, the plaintiff appears to have forgotten that one of the most obvious tools at hand is the rich body of information that now can be obtained by conducting an internet search.16 As a result of the plaintiffs failure, he made the task of the Court of Chancery more difficult than was necessary and hazarded an adverse result for those he seeks to represent. Despite that failure, the plaintiff did plead some particularized facts and we are bound to draw all reasonable inferences from those facts in the plaintiffs favor in determining whether dismissal was appropriately granted.17

A.

In conducting this analysis, we first focus on director Ellen Siminoff. The Court of Chancery found that Siminoff was independent even though she and her husband co-own a private airplane18 with Pincus.19 In his complaint, the plaintiff pled that “Siminoff and her husband have an existing business relationship with defendant Pincus as co-owners of a private airplane,” 20 and in his briefing in the Court of Chancery, the plaintiff characterized Siminoff as a “close family friend” of Pincus,21 which the Court of Chancery took into account as if it was a pled fact.22 Had the plaintiff been more thorough in his research by using all of the “tools at hand,”23 including the tool provided by the *130company whose name has become a verb— or another internet search engine—he likely would have discovered more information about Siminoff s relationship with Pincus. Not only was the plaintiffs research cursory, the plaintiff did not focus on the most likely inference from the co-ownership of the private airplane between Pincus and Siminoff—which is not that the private airplane was a business venture—but that it signaled an extremely close, personal bond between Pincus and Siminoff, and between their families. Thus, the Court of Chancery was stuck with the limited factual allegations made by the plaintiff and, citing our decision in Beam v. Stewart,24 the Court of Chancery determined that these allegations of friendship and shared ownership of an asset were not enough to create a reasonable pleading stage inference that Siminoff could not act impartially in considering a demand implicating Pincus.25

Although we acknowledge the difficult position that the Court of Chancery was placed in, we reach a different conclusion. The Siminoff and Pincus families own an airplane together. Although the plaintiff made some strained arguments below, it made one argument in relation to this unusual fact that does create a pleading stage inference that Siminoff cannot act independently of Pincus. That argument is that owning an airplane together is not a common thing, and suggests that the Pincus and Siminoff families are extremely close to each other and are among each other’s most important and intimate friends. Co-ownership of a private plane involves a partnership in a personal asset that is not only very expensive, but that also requires close cooperation in use, which is suggestive of detailed planning indicative of a continuing, close personal friendship. In fact, it is suggestive of the type of very close personal relationship that, like family ties, one would expect to heavily influence a human’s ability to exercise impartial judgment.26 As we noted recently, although a plaintiff has a pleading stage burden that is elevated in the demand excusal context, that standard does not require a plaintiff to plead a detailed calendar of social interaction to prove that directors have a very substantial personal relationship rendering them unable to act independently of each other.27 A plaintiff is only required to plead facts supporting an inference28—or in the words of Rales, “create a reasonable doubt”29—that a director cannot act impartially. Here, the facts support an inference that Siminoff would not be able to act impartially when deciding whether to move forward with a suit implicating a very close friend with *131whom she and her husband co-own a private plane.

B.

We next turn to the plaintiffs argument that he created a reasonable doubt that two other directors—William Gordon and John Doerr—are not independent for pleading stage purposes. In his complaint, the plaintiff included the following facts pertaining to Gordon and Doerr: both are partners at Kleiner Perkins Caufield & Byers,30 which controls approximately 9.2% of Zynga’s equity; 31 and, Kleiner Perkins is also invested in One Kings Lane, a company that Pincus’s wife co-founded.32 Not only that, defendant Reid Hoffman—an outside director of Zynga who was one of the directors and officers given an exemption to sell in the secondary offering—and Kleiner Perkins both have investments in Shopkick, Inc., and Hoffman serves on that company’s board along with yet another partner at Kleiner Perkins.33 These relationships, suggest the plaintiff, indicate that Gordon and Doerr have a mutually beneficial network of ongoing business relations with Pincus and Hoffman that they are not likely to risk by causing Zynga to sue them. Amplifying this argument, says the plaintiff, is the voice of Gordon’s and Doerr’s fellow Zynga directors who did not consider them to be independent directors. According to its own public disclosures, the Zynga board determined that Gordon and Doerr do not qualify as independent directors under the NASDAQ Listing Rules.34 Importantly, however, Zynga did not disclose why its board made this determination,35 and the plaintiff failed to request this information in its books and records demand.36

Despite these factual allegations, the Court of Chancery found that Gordon and Doerr were independent for pleading stage purposes because the plaintiff failed to specifically allege why Gordon and Doerr lack independence under the NASDAQ rules, and the other circumstances pled by the plaintiff were “insufficient to question their independence • under Delaware law.”37 In so ruling, the Court of Chancery seemed to place heavy weight on the presumptive independence of directors under our law.38 But, to have a derivative suit dismissed on demand excusal grounds because of the presumptive independence of directors whose own colleagues will not accord them the appellation of independence creates cognitive dissonance that our jurisprudence should not ignore.

We agree with the Court of Chancery that the Delaware independence standard is context specific and does not perfectly many with the standards of the stock exchange in all cases,39 but the criteria NASDAQ has articulated as bearing on independence are relevant under Delaware law and likely influenced by our law.40 The *132NASDAQ rules outline the following list of relationships that automatically preclude a finding of independence:

(A) a director who is, or at any time during the past three years was, employed by the Company;

(B) a director who accepted or who has a Family Member who accepted any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than the following:

(i) compensation for board or board committee service;

(ii) compensation paid to a Family Member who is an employee (other than an Executive Officer) of the Company; or

(iii) benefits under a tax-qualified retirement plan, or non-discretionary compensation.

Provided, however, that in addition to the requirements contained in this paragraph (B), audit committee members are also subject to additional, more stringent requirements under Rule 5605(c)(2).

(C) a director who is a Family Member of an individual who is, or at any time during the past three years was, employed by the Company as an Executive Officer;

(D) a director who is, or has a Family Member who is, a partner in, or a controlling Shareholder or an Executive Officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than the following:

(i) payments arising solely from investments in the Company’s securities; or

(ii) payments under non-discretionary charitable contribution matching programs.

(E) a director of the Company who is, or has a Family Member who is, employed as an Executive Officer of another entity where at any time during the past three years any of the Executive Officers of the Company serve on the compensation committee of such other entity; or

(F) a director who is, or has a Family Member who is, a current partner of the Company’s outside auditor, or was a partner or employee of the Company’s outside auditor who worked on the Company’s audit at any time during any of the past three years.

(G) in the case of an investment company, in lieu of paragraphs (A)-(F), a director who is an “interested person” of the Company as defined in Section 2(a)(19) of the Investment Company Act of 1940, other than in his or her capacity as a member of the board of directors or any board committee.41

Most importantly, under the NASDAQ rules there is a fundamental determination that a board must make to classify a director as independent, a determination *133that is also relevant under our law. The bottom line under the NASDAQ rules is that a director is not independent if she has a “relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”42 The NASDAQ rules’ focus on whether directors can act independently of the company or its managers has important relevance to whether they are independent for purposes of Delaware law. Our law is based on the sensible intuition that deference ought to be given to the business judgment of directors whose interests are aligned with those of the company’s stockholders.43 Precisely because of that deference, if our law is -to have integrity, Delaware must be cautious about according deference to directors unable to act with objectivity. To consider directors independent on a Rule 23.1 motion generates understandable skepticism in a high-salience context where that determination can short-circuit a merits determination of a fiduciary duty claim.

We presume that the Zynga board did not lightly classify Gordon and Doerr as having a “relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”44 And, although we do not know the exact reason the board made this determination,45 we do know this. In the case of a company like Zynga, which has a controlling stockholder, Pincus, who wields 61% of the voting power, if a-director cannot be presumed capable of acting independently because the director derives material benefits from her relationship with the company that could weigh on her mind in considering an issue before the board, she necessarily cannot be presumed capable of acting independently of the company’s controlling stockholder. That a director sits on a controlled company board is not, and cannot of course, be determinative of director independence at the pleading stage, as that would make the question of independence tautological. But, our courts cannot blind themselves to that reality when considering whether a director on a controlled company board has other ties to the controller beyond her relationship at the controlled company.

As to this reality, we consider it likely that the other facts pled by the plaintiff were taken into account by the Zynga board in determining that Gordon and Doerr were not independent directors. These facts include that: Gordon and Doerr are partners at Kleiner Perkins, which controls 9.2% of Zynga’s equity; Kleiner Perkins is also invested in One Kings Lane, a company co-founded by Pincus’s wife; and, Hoffman and Kleiner Perkins are both invested in Shopkick, and Hoffman serves on its board with another *134Kleiner Perkins partner. Of course, the defendants now argue that the relationships among these directors flowed all in one direction and that it is Pincus who is likely beholden to Gordon, Doerr, and Kleiner Perkins for financing. But, the reality is that firms like Kleiner Perkins compete with others to finance talented entrepreneurs like Pincus, and networks arise of repeat players who cut each other into beneficial roles in various situations. There is, of course, nothing at all wrong with that. In fact, it is crucial to commerce and most human relations. But, precisely because of the importance of a mutually beneficial ongoing business relationship, it is reasonable to expect that sort of relationship might have a material effect on the parties’ ability to act adversely toward each other. Causing a lawsuit to be brought against another person is no small matter, and is the sort of thing that might plausibly endanger a relationship. When, as here, pled facts suggest such a relationship exists and the company’s own board has determined that the directors whose ability to consider a demand impartially is in question cannot be considered independent, a reasonable doubt exists under Ra-les.

Finally, consistent with our prior admonition, why the Zynga board determined that Gordon and Doerr are non-independent is precisely the sort of issue for which the use of a targeted request for books and records would have been helpful to the plaintiff, and thereby to both the Court of Chancery and us. The plaintiffs lack of diligence put the Court of Chancery in a compromised and unfair position to make an important determination regarding these directors’ pleading stage independence. That is regrettable, and the plaintiff is fortunate that his failure to do a pre-suit investigation has not resulted in dismissal.

III.

Because we have determined that the plaintiff has met his pleading stage burden to create a reasonable doubt that a majority of the Zynga board could act impartially in considering a demand impheating Zyn-ga’s CEO and controlling stockholder, we reverse the Court of Chancery’s dismissal under Rule 23.1 and remand the matter for further proceedings consistent with this opinion.46

1

. NASDAQ Marketplace Rule 5605(a)(2).

2

. These shares were sold as part of a secondary public offering that increased Zynga’s public float, which at that time consisted of fewer than 150 million shares, compared to approximately 688 million shares held by Zynga directors, officers, employees, former employees, and other pre-IPO investors. Ap-pellee’s Answering Br. at 7.

3

. See Ct. Ch. R. 23.1 ("The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort. ”).

4

. Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993) (noting that demand futility is assessed at the time the complaint is filed).

5

. Id.

6

.Although the defendants assert that the Court of Chancery did not reach this conclusion, we disagree. The Court of Chancery conducted a simple analysis finding Pincus and Hoffman interested in the transaction when it stated:

Because Hoffman and Pincus are the only members of the Demand Board who sold shares in the Secondary Offering and received a benefit from the alleged wrongdoing, they are the only members of the Demand Board who face potential liability-under Brophy. Consequently, the other seven directors on the Demand Board are not interested in Count I for purposes of the Rales test, and I need only to determine whether plaintiff has created a reasonable doubt about their independence.

Sandys v. Pincus, 2016 WL 769999, at *7 (Del. Ch. Feb. 29, 2016).

7

. Id., at *14 n.70.

8

. The plaintiff does not dispute the Court of Chancery’s finding that directors Katzenberg and Meresman are independent.

9

. Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1021 (Del. 2015); Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004).

10

. Rales, 634 A.2d at 934.

11

. Sanchez, 124 A.3d at 1024 n.25.

12

. Id. at 1022.

13

. Id.

14

. See, e.g., Rales, 634 A.2d at 934 n.10; Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000); Guttman v. Huang, 823 A.2d 492, 504 (Del. Ch. 2003); Ash v. McCall, 2000 WL 1370341, at *15 n.56 (Del. Ch. Sept. 15, 2000).

15

. Verified Complaint Pursuant to 8 Del. C. § 220, Sandys v. Zynga Inc., C.A. No. 8450-ML (Del. Ch.).

16

. Of course, as with any source of information, including a traditional library, the internet should be used with care. Ultimately, any fact pleading has to be based on a source that provides a good faith basis for asserting a fact. Thus, as with any search, an internet search will only have utility if it generates information of a reliable nature. But with that key caveat in mind, we can take judicial notice that internet searches can generate articles in reputable newspapers and journals, postings on official company websites, and information on university websites that can be the source of reliable information.

17

. Sanchez, 124 A.3d at 1022.

18

. During oral arguments, there was a question raised by the Court over whether this was an airplane or a jet. The plaintiff's lawyer proceeded to characterize it as a jet during his rebuttal. But, Zynga’s Proxy Statement and the plaintiff's complaint both state "private airplane,” and therefore we call it an airplane. Regardless of whether it is an airplane or a jet, we reach the same conclusion.

19

. Zynga, Inc. Definitive Proxy Statement (Form 14A), at 1 (Apr, 25, 2013) (noting that Ms. Siminoff, her spouse, and Mr. Pincus "co-own a small private aiiplane, which was not used for Company travel”).

20

. App. to Appellant’s Opening Br. at A071 (Verified Shareholder Derivative Complaint).

21

. Id. at A145.

22

. Sandys, 2016 WL 769999, at *8.

23

. See, e.g., Rales v. Blasband, 634 A.2d 927, 935 n.10 (1993). This Court noted that although derivative plaintiffs may believe it is difficult to meet the particularization requirement in their pleadings:

[They] have many avenues available to obtain information bearing on the subject of their claims. For example, there is a variety of public sources from which the details of a corporate act may be discovered, including the media and governmental agencies such as the Securities and Exchange Commission. In addition, a stockholder who has met the procedural requirements and has shown á specific proper purpose may use the summary procedure embodied in 8 Del. C. § 220 to investigate the possibility of corporate wrongdoing.

Id.

24

. 845 A.2d 1040 (Del. 2004).

25

. Sandys, 2016 WL 769999, at *8.

26

. See In re MFW S’holders Litig., 67 A.3d 496, 509 n.37 (Del. Ch. 2013), aff’d sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (noting that if a friendship "was one where the parties had served as each other’s maids of honor, had been each other’s college roommates, shared a beach house with their families each summer for a decade, and are as thick as blood relations, that context would be different from parties who occasionally had dinner over the years, go to some of the same parties and gatherings annually, and call themselves 'friends’ ”); Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015) (finding that a director was not independent for pleading stage purposes because the director had a friendship of over 50 years with an interested party and the director's primary employment was as an executive of a company over which the interested party had substantial influence).

27

. 124 A.3d at 1020-22.

28

. Id. at 1019.

29

. Rales, 634 A.2d at 934.

30

. App. to Appellant's Opening Br. at A071 (Verified Shareholder Derivative Complaint).

31

. Id. atA020.

32

. Id. at A072.

33

. Id.

34

. Id.

35

. Zynga, Inc. Definitive Proxy Statement (Form 14A), at 1 (Apr. 25, 2013).

36

. Verified Complaint Pursuant to 8 Del. C. § 220, Sandys v. Zynga Inc., C.A. No. 8450-ML (Del. CL).

37

. Sandy’s, 2016 WL 769999, at *10.

38

. Id.

39

. Id. at *9.

40

. See In re MFW S’holders Litig., 67 A.3d at 510 (noting that stock exchange rules governing director independence “were influenced by experience in Delaware and other states *132and were the subject of intensive study by expert parties” and ‘‘[t]hey cover many of the key factors that tend to bear on independence ... and they are a useful source for this court to consider when assessing an argument that a director lacks independence”).

41

. NASDAQ Marketplace Rule 5605(a)(2).

42

. Id.

43

. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) ("The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under Section 141(a). It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.").

44

. NASDAQ Marketplace Rule 5605(a)(2).

45

.The Proxy Statement states that "the Board has affirmatively determined that Messrs. Hoffman, Katzenberg, Meresman and Paul and Ms. Siminoff do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is 'independent,'" without further explanation as to why the excluded directors were found to be non-independent. Zynga, Inc. Definitive Proxy Statement (Form 14A), at 1 (Apr. 25, 2013).

46

. As indicated, on appeal, the parties raised numerous other issues, including an argument to dismiss the claims against certain defendants under Court of Chancery Rule 12(b)(6) based on this Court's decision in In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173 (Del. 2015). Although the defendants ask us to reach these questions now, we consider that imprudent and believe that it is important for our Court of Chancery, which is the expert in these cases, to consider these issues in the first instance.

VALIHURA, Justice,

dissenting:

In a thoughtful forty-two page opinion, the Chancellor determined that the plaintiff had failed to demonstrate that demand would have been futile with respect to the claims in the Complaint. For the reasons set forth herein, I would affirm his well-reasoned decision.

This is a close case, and the plaintiff did not aid his cause in failing to direct a books and records request to the issues bearing on the board’s independence.1 De*135mand futility required the plaintiff to demonstrate that five of the nine directors were interested or lacked independence. In my view, the Court of Chancery correctly determined that directors Katzenberg, Meresman, Gordon, and Doerr were independent. Plaintiff raises no challenge in this Court as to the independence of directors Katzenberg and Meresman.2 Although the trial court did not separately analyze director Paul, it did state in a footnote that it “would reach the same conclusion regarding Paul, who did not participate in the Secondary Offering or even vote to approve it.”3 Because I would conclude that directors Katzenberg, Meresman, Gordon, Doerr, Siminoff, and Paul were independent, I would affirm the Court of Chancery’s determination that the plaintiff’s complaint failed to create a reasonable doubt that at least five of the nine directors were disinterested or independent for pleading stage purposes.

The plaintiffs arguments as to Gordon and Doerr’s alleged lack of independence arise from their positions as partners at Kleiner Perkins Caufield & Byers (“Klein-er Perkins”). The plaintiff alleged that Kleiner Perkins has (i) invested alongside Hoffman in a company co-founded by Pincus’s wife; (ii) invested in. a company of which Hoffman is a director; and (iii) completed two financings with Hoffman’s venture capital firm.4 As the Court of Chancery recognized, the plaintiff failed to plead any facts about the size, profits, or materiality to Gordon and Doerr of these investments or interests. Absent more, the relationships among these venture capitalists and entrepreneurs, as alleged, are not sufficient to raise a reasonable doubt as to Gordon and Doerr’s independence. Thus, I agree with the Chancellor’s view that their relationships and- overlapping investments do not rise to the level of creating a reasonable doubt as to their independénce.

As to Gordon’s and Doerr’s designation as “not independent” under the NASDAQ rules, the Court of Chancery correctly observed that independence under the NASDAQ rules is relevant to our analysis here but not dispositive.5 The plaintiff candidly acknowledged that he failed to allege why Gordon and Doerr lack independence under NASDAQ rules.6 As the trial court *136observed, “neither the proxy statement nor the plaintiff specifies the reason for this[,]”7 and so it is not clear whether Gordon and Doerr’s “non-independent” designation was due to a relationship with Zynga, Pincus, or another executive. It is not difficult to come up with a scenario where a director might be deemed “not independent” under the NASDAQ rules, or NYSE rules, yet deemed independent for demand futility purposes.8 A request pursuant to 8 Del. C. § 220 should have been targeted to this point, as plaintiff concedes.9

In the demand futility context, directors are presumed independent,10 and it is the plaintiffs burden to plead facts “with particularity” showing that a demand on the board would have been futile.11 Given this burden of proof, the presumption of independence, and the lack of any explanation as to why Gordon and Doerr were identified as “not independent” for NASDAQ purposes, I do not believe that plaintiffs are entitled to an inference that Gordon and Doerr lack independence for purposes of the fact-specific demand futility determination here. This is particularly true given that the allegations concerning Gordon and Doerr’s interlocking business relationships fall short of suggesting that they are of a “bias-producing” nature.

As to director Paul, the plaintiff argues that Paul lacked independence from Pincus because they co-founded a company over twenty years ago and Pincus serves in an advisory role and is an investor in Paul’s company, SideCar.12 There are no allegations that demonstrate the materiality or magnitude of the present business relationship, which the plaintiff conceded could have been “[s]omewhere between 10 cents and $10 billion.”13 He also did not dispute the trial court’s statement that the company Paul and Pincus co-founded was sold approximately 15 years ago.14 Thus, based upon my review of the record,15 I would *137conclude that these allegations are insufficient to plead a lack of independence.

Although I would not need to reach issues concerning Siminoffs independence had my view prevailed, I believe that a few points are worth making. The sum total of the allegations as to Siminoffs alleged lack of independence appear in paragraph 117(h) of the Complaint, which states that “Siminoff and her husband have an existing business relationship with defendant Pincus as co-owners of a private airplane and, therefore, Siminoff would not initiate litigation against her business partner defendant Pincus as it would substantially and irreparably harm, their ongoing business relationship.”16

Before the trial court, both parties referred to statements in Zynga’s public filings with the Securities and Exchange Commission, although the Complaint did not expressly incorporate these statements by reference.17 In briefing on the defendants’ motion to dismiss or stay, the defendants attached a proxy statement in which Zynga disclosed the “relationship between Ms. •Siminoff and ¡her spouse and Mr. Pincus, who co-own a small private airplane, which was not used for Company travel.”18 The Chancellor also acknowledged an unsupported reference in the plaintiffs brief describing Siminoff as a “close personal friend” of Pincus. At oral argument on the defendants’ motion to dismiss, the Chancellor offered counsel for Sandys an opportunity to expand on the nature of the relationship, but counsel was unable to do so.19

Given the plaintiffs failure to allege any specific facts as to the materiality of the co-owned asset (apparently a small plane, not a jet),20 whether there were other owners, or the nature of the Siminoff/Pincus relationship,21 I am sympathetic to the Chancellor’s view that “Plaintiffs allegations concerning co-ownership of an asset and friendship do not reveal a sufficiently *138deep personal connection to Pincus so as to raise a reasonable doubt about Simi-noff s independence from Pincus.”22 Given the plaintiffs burden, the Chancellor’s decision to err on the dismissal side of this fault line is not unreasonable.

The Majority states that “the most likely inference” to draw from co-ownership of the small plane is “not that the private airplane was a business venture” but that there was “an extremely close, personal bond between Pincus and Siminoff’ and that “the Pincus and Siminoff families are extremely close to each other and are among each other’s most important and intimate friends.”231 respectfully disagree given that the plaintiff has chosen to plead only a business relationship. Nothing more is alleged, let alone facts suggesting that kind of familial loyalty and intimate friendship.

To render a director unable to consider demand, a relationship must be of a “bias-producing nature.” 24 In Beam, this Court reaffirmed that a reasonable inference cannot be made that a particular friendship raises a reasonable doubt “without specific factual allegations to support such a conclusion.”25 In Beam, this Court affirmed dismissal of a complaint that had pled that certain directors were a “longtime personal friend,” a “longstanding friend[,]” and had a “longstanding personal relationship with defendant Stewart.”26 Given this plaintiffs decision to allege the existence of a business relationship only, he is left to argue that co-ownership of a small airplane is simply the kind of fact that, in and of itself, creates a reasonable doubt as to Siminoff s independence from Pincus. This is a close call. Although it may be reasonable to infer some kind of collaborative relationship given the nature of the asset, I do not believe the bare allegation in the Complaint rises to the level of creating a reasonable doubt as to Siminoff s ability to carry out her fiduciary duties, to properly consider a demand, and to put at risk her reputation by disregarding her duties.

Thus, this case stands in contrast to Sanchez,27 for example, where the plaintiff pled that the director had a fifty-year friendship with the interested party, that the director’s primary employment (and that of his brother) was as an executive of a company over which the interested party had substantial influence, and the director made thirty to forty percent of his annual income from his directorship.28 Here, the bare reference to a “close friendship” appears only as an unsupported assertion in a brief.29 This unsupported and unverified reference should not be considered and should not serve as a basis upon which to draw any inferences. For me, this is not a mere technicality. Court of Chancery Rule 3(aa) requires that all complaints “be verified.”30 This means that every pleading *139“shall be under oath or affirmation by the party filing such pleading that the matter contained therein insofar as it concerns the party’s act and deed is true, and so far as relates to the act and deed of any other person, is believed by the party to be true.”31 Unverified and unsupported statements in a brief should not be considered as if they were pleaded facts.

In Sanchez, we warned that, “[i]t is not fair to the defendants, to the Court of Chancery, or to this Court, nor is it proper under the rules of either court, for the plaintiffs to put facts outside the complaint before us.”32 We further cautioned that “this approach hazards dismissal with prejudice on the basis of a record the plaintiffs had the fair chance to shape and that omitted facts they could have, but failed to, plead.”33 Here, the plaintiff failed to heed that warning and unnecessarily complicated the task of both courts in exercising their best efforts to reach a just result.34 Even assuming that our law cannot “ignore the social nature of humans[,]”35 there is no equity here in asking the reviewing courts to speculate that the pleaded Siminoff/Pincus business relationship is of such a nature to render her beholden to him or so under his influence that her directorial discretion is sterilized.

Accordingly, because I would affirm the Court of Chancery’s decision, I respectfully dissent.

1

. To his credit, his counsel was candid about this at oral argument before this Court. See Oral Argument at 5:23, Sandys v. Pincus, No. 157, 2016 (Del. Oct. 19, 2016) [hereinafter "Oral Argument”], https://livestream.com/ DelawareSupremeCourt/events/6511893/ videos/139287026 ("Your Honor, at the time we started the process, a majority of the board had been sellers in the Secondary Offering, so it didn’t seem quite as critical at that point in time. I guess with the benefit of *135hindsight if I had to do it again we would have sought that.”).

2

. The Verified Shareholder Derivative Complaint (the "Complaint”) contains no allegations regarding Katzenberg’s relationship with Hoffman or Pincus. The Complaint’s only allegation regarding Meresman's independence is that both he and Hoffman serve on Linkedln's board, Verified S'holder Derivative Compl. at A71 II 117(i), Sandys v. Pincus (Del. Ch. Apr. 4, 2014) [hereinafter "Compl. at A_”], available at A12-78. Directors Simi-noff and Doerr joined the Board after the events at issue in this action and are not named as defendants; and directors Gordon, Katzenberg, Meresman, and Paul are outside directors who were on the Board during the events at issue, but did not sell any stock in the Secondary Offering.

3

. Sandys v. Pincus, 2016 WL 769999, at *14 n.70 (Del. Ch. Feb, 29, 2016).

4

. Compl. at A20 ¶¶ 17-18, A68 ¶¶ 114(c), (f), A71 ¶ 117(g), A72 ¶¶ 117(j-k). The Chancellor appropriately declined to consider other information regarding certain officers' investments in Kleiner Perkins funds. The plaintiff had raised this information in briefing and in an affidavit containing an excerpt from a public filing that was not incorporated by reference into or attached to the Complaint,

5

. See, e.g., In re MFW S’holders Litig., 67 A.3d 496, 510 (Del. Ch. 2013) ("[T]he fact that directors qualify as independent under the NYSE rules does not mean that they are necessarily independent under our law in particular circumstances.” (citing In re Oracle Corp. Derivative Litig., 824 A.2d 917, 941 n.62 (Del. Ch. 2003))), aff'd, 88 A.3d 635 (Del. 2014).

6

.See Oral Argument at 12:13.

7

. Sandys, 2016 WL 769999, at *9.

8

. See, e.g., Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 61 (Del. Ch. 2015) (comparing the bright-line test for independence set forth in the NYSE rules with the "case-by-case fact specific inquiry based on well-pled factual allegations” required by Delaware law). In Baiera, the Court of Chancery concluded that, "[g]iven the peculiarities of the NYSE Rules, the fact that [the director] was not designated as 'independent' under the NYSE Rules in Orbitz’s April 2013 proxy statement carries little weight.” Id. at 62. The court then found that "the factual allegations concerning [that director's] former relationship with Travelport [were] insufficient in [its] view to cast reasonable doubt on his presumed independence under Delaware law.” Id.

9

. See Oral Argument at 14:00 ("We alleged certain business relationships. It's true we didn't go through the 220 for that one and that was a deficiency in our process. And I guess I fall on my sword for that one.”).

10

. Beam v. Stewart, 845 A.2d 1040, 1048-49 (Del. 2004) ("The key principle upon which this area of our jurisprudence is based is that the directors are entitled to a presumption that they were faithful to their fiduciary duties. In the context of presuit demand, the burden is upon the plaintiff in a derivative action to overcome that presumption.” (emphasis in original) (citations omitted)).

11

. Del. Ch. Ct. R. 23.1; see also Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) ("Rule 23.1 is not satisfied by conclusory statements or mere notice pleading.”).

12

. Compl. at A71 ¶ 117(f).

13

. Transcript of Oral Argument on Defs.’ Mots. to Dismiss & Stay at A410-411 (Tr. 49:23-50:6), Sandys v. Pincus, No. 9512-CB (Del. Ch. Nov. 17, 2015), available at A3 62-435.

14

. Id. at A410 (Tr. 49:19-22).

15

. Beam, 845 A.2d at 1048 (“This Court reviews de novo a decision of the Court of Chancery to dismiss a derivative suit under Rule 23.1 [,]'' and "[t]he scope of this Court’s *137review is plenary.” (italics added) (citations omitted)).

16

. Compl. at A71 ¶ 117(h) (emphasis added).

17

. E.g., Zynga Inc., Definitive Proxy Statement (Form 14A) (Apr. 25, 2013), excerpt available at B210-21; Zynga Inc., Prospectus (Mar. 29, 2012), excerpt available at B125-60.

18

. Zynga Inc., Definitive Proxy Statement (Form 14A), at 1 (Apr. 25, 2013), excerpt available at B210-21.

19

. Transcript of Oral Argument on Defs.’ Mots, to Dismiss & Stay at A410 (Tr. 49:7-16).

20

. Zynga Inc., Definitive Proxy Statement (Form 14A), at 1 (Apr. 25, 2013), excerpt available at B210-21. Plaintiff's counsel referred to the plane as a "jet” during argument before this Court. See Oral Argument at 42:35 (“Your Honor I know you faulted Plaintiff for not doing a more complete books and records, but in the context of this case Defendants placed into the record many of the facts in the form of a proxy statement and a registration statement. And in the argument down below I did invite the Chancellor to look at all the facts in the registration statement and the proxy and both sides cited to those facts. So— that it’s a plane or a jet, the fact that it is a jet is properly before the Court just based upon the Defendants putting that document before the Court, to the extent there is a difference between a plane and a jet.”). The proxy statement does not refer to the plane as a "jet,” as the Majority acknowledges. See Majority Op. at 129 n.18. At oral argument, when asked whether the plane is a $40,000 Piper Cub or a $40 million Gulfstream jet, counsel for plaintiff merely responded that he never considered that the plane could be a smaller plane "given the positions of these individuals” and that he thought "it’s reasonable to infer that a private plane is a relatively weighty purchase and a weighty investment.” Oral Argument at 10:00.

21

.See Compl. at A71 ¶ 117(h).

22

. Sandys, 2016 WL 769999, at *8.

23

. Majority Op. at 129-30 (emphasis added).

24

. Beam, 845 A.2d at 1050,

25

. Id. (quoting Beam v. Stewart, 833 A.2d 961, 979 (Del. Ch. 2003)) (internal quotation marks omitted).

26

. Id. at 1045-47.

27

. Del. Cnty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015).

28

. Id. at 1020-21.

29

. Brief of PI. in Opp’n to Defs.' Mots, to Stay or Dismiss at A145, Sandys v. Pincus, No. 9512-CB (Del. Ch. Apr. 17, 2015), available at A82-150.

30

. Del. Ct. Ch. R. 3(aa).

31

. Id.

32

. Sanchez, 124 A.3d at 1021 n.14.

33

. Id.

34

. Finally, regarding the Majority’s repeated suggestions (both in its Opinion and at oral argument) that plaintiffs should search the internet for facts in fashioning a complaint, see, e.g., Oral Argument at 6:05, 14:00, 21:10, although perhaps useful on some level, internet searches likely are not, in most cases, an adequate substitute for demands made pursuant to 8 Del. C. § 220—particularly in terms of the reliability and trustworthiness of information discovered. Of course, a court cannot engage in independent fact-finding, on the internet or otherwise, and the Majority is correct that the Court of Chancery was stuck with the limited factual allegations made by the plaintiff—and so is this Court. The Majority suggests that, had the plaintiff undertaken an internet search, "he likely would have discovered more information about Siminoff’s relationship with Pincus," Majority Op. at 130; see also Oral Argument at 21:30. But the Majority never identifies what information likely would have been discovered. Whatever it may be, it can have no bearing on our disposition since the record on appeal before us consists of "the original papers and exhibits” only. Del, Sup. Ct. R. 9(a); see Tribbitt v. Tribbitt, 963 A.2d 1128, 1131 (Del. 2008) (observing that, "while a judge may take judicial notice of a fact outside the record, that fact must not be subject to reasonable dispute and the parties must be given prior notice and an opportunity to challenge judicial notice of that fact” (citations omitted)); Barks v. Herzberg, 206 A.2d 507, 509 (Del. 1965); Del. R. Evid. 201(e) ("A party is entitled upon timely request to an opportunity to be heard as to the propriety of taking judicial notice and the tenor of the matter noticed. In the absence of prior notification, the request may be made after judicial notice has been taken.”).

35

. Oracle, 824 A.2d at 938.

Joseph A. Rosenthal and Norman M. Monhait, Esquires, of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; Seth D. Rigrodsky, Esquire, of Milberg Weiss Bershad & Schulman LLP, Wilmington, Delaware; Of Counsel: Steven G. Schulman (argued), Joshua H. Vinik, Jennifer K. Hirsh, John B. Rediker and Laura H. Gundersheim, Esquires, of Milberg Weiss Bershad & Schulman LLP, New York, New York; for Appellants.

Lawrence C. Ashby, Richard D. Heins and Philip Trainer, Jr., Esquires, of Ashby & Geddes, P.A., Wilmington, Delaware; Of Counsel: Gary P. Naftalis (argued), Michael S. Oberman, Paul H. Schoeman and Shoshana Menu, Esquires; of Kramer Levin Naftalis & Frankel, LLP, New York, New York; for Appellee Eisner.

David C. McBride and Christian Douglas Wright, Esquires, of Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Of Counsel: Mark H. Epstein (argued), Bart H. Williams and Jason L. Haas, Esquires, of Munger, Tolles & Olson LLP, Los Angeles, California; for Appellee Ovitz.

Jesse A. Finkelstein, Gregory P. Williams (argued), Anne C. Foster, Lisa A. Schmidt, Evan O. Williford, and Michael R. Robinson, Esquires, of Richards, Layton & Finger, P.A., Wilmington, Delaware; [35] for Appellees Bollenbach, Russell, Nunis, Poitier, Stern, Walker, Watson, Wilson, Bowers, Lozano, Mitchell, O'Donovan, and Murphy.

Robert K. Payson, Stephen C. Norman and Kevin R. Shannon, Esquires, of Potter Anderson & Corroon LLP, Wilmington, Delaware; for Appellee Litvack.

A. Gilchrist Sparks, III and S. Mark Hurd, Esquires, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Of Counsel: Stephen D. Alexander and Susan C. Chun, Esquires, of Bingham McCutchen LLP, Los Angeles, California; for Appellees Disney and Gold.

Andre G. Bouchard and Joel Friedlander, Esquires, of Bouchard Margules & Friedlander, Wilmington, Delaware; for Appellee The Walt Disney Company.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.

[34] JACOBS, Justice.

In August 1995, Michael Ovitz ("Ovitz") and The Walt Disney Company ("Disney" or the "Company") entered into an employment agreement under which Ovitz would serve as President of Disney for five years. In December 1996, only fourteen months after he commenced employment, Ovitz was terminated without cause, resulting in a severance payout to Ovitz valued at approximately $130 million.

In January 1997, several Disney shareholders brought derivative actions in the Court of Chancery, on behalf of Disney, against Ovitz and the directors of Disney who served at the time of the events complained of (the "Disney defendants"). The plaintiffs claimed that the $130 million severance payout was the product of fiduciary duty and contractual breaches by Ovitz, and breaches of fiduciary duty by the Disney defendants, and a waste of assets. After the disposition of several pretrial motions and an appeal to this Court,^[1] the case was tried before the Chancellor over 37 days between October 20, 2004 and January 19, 2005. In August 2005, the Chancellor handed down a well-crafted 174 page Opinion and Order, determining that "the director defendants did not breach their fiduciary duties or commit waste."^[2] The Court entered judgment in favor of all defendants on all claims alleged in the amended complaint.

The plaintiffs have appealed from that judgment, claiming that the Court of Chancery committed multitudinous errors. We conclude, for the reasons that follow, that the Chancellor's factual findings and legal rulings were correct and not erroneous in any respect. Accordingly, the judgment [36] entered by the Court of Chancery will be affirmed.

I. THE FACTS

We next summarize the facts as found by the Court of Chancery that are material to the issues presented on this appeal.^[3] The critical events flow from what turned out to be an unfortunate hiring decision at Disney, a company that for over half a century has been one of America's leading film and entertainment enterprises.

In 1994 Disney lost in a tragic helicopter crash its President and Chief Operating Officer, Frank Wells, who together with Michael Eisner, Disney's Chairman and Chief Executive Officer, had enjoyed remarkable success at the Company's helm. Eisner temporarily assumed Disney's presidency, but only three months later, heart disease required Eisner to undergo quadruple bypass surgery. Those two events persuaded Eisner and Disney's board of directors that the time had come to identify a successor to Eisner.

Eisner's prime candidate for the position was Michael Ovitz, who was the leading partner and one of the founders of Creative Artists Agency ("CAA"), the premier talent agency whose business model had reshaped the entire industry. By 1995, CAA had 550 employees and a roster of about 1400 of Hollywood's top actors, directors, writers, and musicians. That roster generated about $150 million in annual revenues and an annual income of over $20 million for Ovitz, who was regarded as one of the most powerful figures in Hollywood.

Eisner and Ovitz had enjoyed a social and professional relationship that spanned nearly 25 years. Although in the past the two men had casually discussed possibly working together, in 1995, when Ovitz began negotiations to leave CAA and join Music Corporation of America ("MCA"), Eisner became seriously interested in recruiting Ovitz to join Disney. Eisner shared that desire with Disney's board members on an individual basis.^[4]

A. Negotiation Of The Ovitz Employment Agreement

Eisner and Irwin Russell, who was a Disney director and chairman of the compensation committee, first approached Ovitz about joining Disney. Their initial negotiations were unproductive, however, because at that time MCA had made Ovitz an offer that Disney could not match. The MCA-Ovitz negotiations eventually fell apart, and Ovitz returned to CAA in mid-1995. Business continued as usual, until Ovitz discovered that Ron Meyer, his close friend and the number two executive at CAA, was leaving CAA to join MCA. That news devastated Ovitz, who concluded that to remain with the company he and Meyer had built together was no longer palatable. At that point Ovitz became receptive to the idea of joining Disney. Eisner learned of these developments [37] and re-commenced negotiations with Ovitz in earnest. By mid-July 1995, those negotiations were in full swing.

Both Russell and Eisner negotiated with Ovitz, over separate issues and concerns. From his talks with Eisner, Ovitz gathered that Disney needed his skills and experience to remedy Disney's current weaknesses, which Ovitz identified as poor talent relationships and stagnant foreign growth. Seeking assurances from Eisner that Ovitz's vision for Disney was shared, at some point during the negotiations Ovitz came to believe that he and Eisner would run Disney, and would work together in a relation akin to that of junior and senior partner. Unfortunately, Ovitz's belief was mistaken, as Eisner had a radically different view of what their respective roles at Disney should be.

Russell assumed the lead in negotiating the financial terms of the Ovitz employment contract. In the course of negotiations, Russell learned from Ovitz's attorney, Bob Goldman, that Ovitz owned 55% of CAA and earned approximately $20 to $25 million a year from that company. From the beginning Ovitz made it clear that he would not give up his 55% interest in CAA without "downside protection." Considerable negotiation then ensued over downside protection issues. During the summer of 1995, the parties agreed to a draft version of Ovitz's employment agreement (the "OEA") modeled after Eisner's and the late Mr. Wells' employment contracts. As described by the Chancellor, the draft agreement included the following terms:

Under the proposed OEA, Ovitz would receive a five-year contract with two tranches of options. The first tranche consisted of three million options vesting in equal parts in the third, fourth, and fifth years, and if the value of those options at the end of the five years had not appreciated to $50 million, Disney would make up the difference. The second tranche consisted of two million options that would vest immediately if Disney and Ovitz opted to renew the contract.

The proposed OEA sought to protect both parties in the event that Ovitz's employment ended prematurely, and provided that absent defined causes, neither party could terminate the agreement without penalty. If Ovitz, for example, walked away, for any reason other than those permitted under the OEA, he would forfeit any benefits remaining under the OEA and could be enjoined from working for a competitor. Likewise, if Disney fired Ovitz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a non-fault payment (Non-Fault Termination or "NFT"), which consisted of his remaining salary, $7.5 million a year for unaccrued bonuses, the immediate vesting of his first tranche of options and a $10 million cash out payment for the second tranche of options.^[5]

As the basic terms of the OEA were crystallizing, Russell prepared and gave Ovitz and Eisner a "case study" to explain those terms. In that study, Russell also expressed his concern that the negotiated terms represented an extraordinary level of executive compensation. Russell acknowledged, however, that Ovitz was an "exceptional corporate executive" and "highly successful and unique entrepreneur" who merited "downside protection and upside opportunity."^[6] Both would be required to enable Ovitz to adjust to the reduced cash compensation he would receive [38] from a public company, in contrast to the greater cash distributions and other perquisites more typically available from a privately held business. But, Russell did caution that Ovitz's salary would be at the top level for any corporate officer and significantly above that of the Disney CEO. Moreover, the stock options granted under the OEA would exceed the standards applied within Disney and corporate America and would "raise very strong criticism."^[7] Russell shared this original case study only with Eisner and Ovitz. He also recommended another, additional study of this issue.

To assist in evaluating the financial terms of the OEA, Russell recruited Graef Crystal, an executive compensation consultant, and Raymond Watson, a member of Disney's compensation committee and a past Disney board chairman who had helped structure Wells' and Eisner's compensation packages. Before the three met, Crystal prepared a comprehensive executive compensation database to accept various inputs and to conduct Black-Scholes analyses to output a range of values for the options.^[8] Watson also prepared similar computations on spreadsheets, but without using the Black-Scholes method.

On August 10, Russell, Watson and Crystal met. They discussed and generated a set of values using different and various inputs and assumptions, accounting for different numbers of options, vesting periods, and potential proceeds of option exercises at various times and prices. After discussing their conclusions, they agreed that Crystal would memorialize his findings and fax them to Russell. Two days later, Crystal faxed to Russell a memorandum concluding that the OEA would provide Ovitz with approximately $23.6 million per year for the first five years, or $23.9 million a year over seven years if Ovitz exercised a two year renewal option.^[9] Those sums, Crystal opined, would approximate Ovitz's current annual compensation at CAA.

During a telephone conference that same evening, Russell, Watson and Crystal discussed Crystal's memorandum and its assumptions. Their discussion generated additional questions that prompted Russell to ask Crystal to revise his memorandum to resolve certain ambiguities in the current draft of the employment agreement. But, rather than address the points Russell highlighted, Crystal faxed to Russell a new letter that expressed Crystal's concern about the OEA's $50 million option appreciation guarantee. Crystal's concern, based on his understanding of the current draft of the OEA, was that Ovitz could hold the first tranche of options, wait out the five-year term, collect the $50 million guarantee, and then exercise the in-the-money options and receive an additional windfall. Crystal was philosophically opposed to a pay package that would give Ovitz the best of both worlds—low risk and high return.

Addressing Crystal's concerns, Russell made clear that the guarantee would not function as Crystal believed it might. Crystal then revised his original letter, adjusting the value of the OEA (assuming a two year renewal) to $24.1 million per year. Up to that point, only three Disney directors—Eisner, Russell and Watson— [39] knew the status of the negotiations with Ovitz and the terms of the draft OEA.

While Russell, Watson and Crystal were finalizing their analysis of the OEA, Eisner and Ovitz reached a separate agreement. Eisner told Ovitz that: (1) the number of options would be reduced from a single grant of five million to two separate grants, the first being three million options for the first five years and the second consisting of two million more options if the contract was renewed; and (2) Ovitz would join Disney only as President, not as a co-CEO with Eisner. After deliberating, Ovitz accepted those terms, and that evening Ovitz, Eisner, Sid Bass^[10] and their families celebrated Ovitz's decision to join Disney.

Unfortunately, the celebratory mood was premature. The next day, August 13, Eisner met with Ovitz, Russell, Sanford Litvack (an Executive Vice President and Disney's General Counsel), and Stephen Bollenbach (Disney's Chief Financial Officer) to discuss the decision to hire Ovitz. Litvack and Bollenbach were unhappy with that decision, and voiced concerns that Ovitz would disrupt the cohesion that existed between Eisner, Litvack and Bollenbach. Litvack and Bollenbach were emphatic that they would not report to Ovitz, but would continue to report to Eisner.^[11] Despite Ovitz's concern about his "shrinking authority" as Disney's future President, Eisner was able to provide sufficient reassurance so that ultimately Ovitz acceded to Litvack's and Bollenbach's terms.

On August 14, Eisner and Ovitz signed a letter agreement (the "OLA"), which outlined the basic terms of Ovitz's employment, and stated that the agreement (which would ultimately be embodied in a formal contract) was subject to approval by Disney's compensation committee and board of directors. Russell called Sidney Poitier, a Disney director and compensation committee member, to inform Poitier of the OLA and its terms. Poitier believed that hiring Ovitz was a good idea because of Ovitz's reputation and experience. Watson called Ignacio Lozano, another Disney director and compensation committee member, who felt that Ovitz would successfully adapt from a private company environment to Disney's public company culture. Eisner also contacted each of the other board members by phone to inform them of the impending new hire, and to explain his friendship with Ovitz and Ovitz's qualifications.^[12]

[40] That same day, a press release made the news of Ovitz's hiring public. The reaction was extremely positive: Disney was applauded for the decision, and Disney's stock price rose 4.4 % in a single day, thereby increasing Disney's market capitalization by over $1 billion.

Once the OLA was signed, Joseph Santaniello, a Vice President and counsel in Disney's legal department, began to embody in a draft OEA the terms that Russell and Goldman had agreed upon and had been memorialized in the OLA. In the process, Santaniello concluded that the $50 million guarantee created negative tax implications for Disney, because it might not be deductible. Concluding that the guarantee should be eliminated, Russell initiated discussions on how to compensate Ovitz for this change. What resulted were several amendments to the OEA to replace the back-end guarantee. The (to-be-eliminated) $50 million guarantee would be replaced by: (i) a reduction in the option strike price from 115% to 100% of the Company's stock price on the day of the grant for the two million options that would become exercisable in the sixth and seventh year of Ovitz's employment; (ii) a $10 million severance payment if the Company did not renew Ovitz's contract; and (iii) an alteration of the renewal option to provide for a five-year extension, a $1.25 million annual salary, the same bonus structure as the first five years of the contract, and a grant of three million additional options. To assess the potential consequences of the proposed changes, Watson worked with Russell and Crystal, who applied the Black-Scholes method to evaluate the extended exercisability features of the options. Watson also generated his own separate analysis.

On September 26, 1995, the Disney compensation committee (which consisted of Messrs. Russell, Watson, Poitier and Lozano) met for one hour to consider, among other agenda items, the proposed terms of the OEA. A term sheet was distributed at the meeting, although a draft of the OEA was not. The topics discussed were historical comparables, such as Eisner's and Wells' option grants, and also the factors that Russell, Watson and Crystal had considered in setting the size of the option grants and the termination provisions of the contract. Watson testified that he provided the compensation committee with the spreadsheet analysis that he had performed in August, and discussed his findings with the committee.^[13] Crystal did not attend the meeting, although he was available by telephone to respond to questions if needed, but no one from the committee called. After Russell's and Watson's presentations, Litvack also responded to substantive questions. At trial Poitier and Lozano testified that they believed they had received sufficient information from Russell's and Watson's presentations to exercise their judgment in the best interests of the Company. The committee voted unanimously to approve the OEA terms, subject to "reasonable further negotiations within the framework of the terms and conditions" described in the OEA.

[41] Immediately after the compensation committee meeting, the Disney board met in executive session. The board was told about the reporting structure to which Ovitz had agreed, but the initial negative reaction of Litvack and Bollenbach to the hiring was not recounted. Eisner led the discussion relating to Ovitz, and Watson then explained his analysis, and both Watson and Russell responded to questions from the board. After further deliberation, the board voted unanimously to elect Ovitz as President.

At its September 26, 1995 meeting, the compensation committee determined that it would delay the formal grant of Ovitz's stock options until further issues between Ovitz and the Company were resolved. That was done, and the committee met again, on October 16, 1995, to discuss stock option-related issues. The committee approved amendments to the Walt Disney Company 1990 Stock Incentive Plan (the "1990 Plan"), and also approved a new plan, known as the Walt Disney 1995 Stock Incentive Plan (the "1995 Plan"). Both plans were subject to further approval by the full board of directors and the shareholders. Both the amendment to the 1990 Plan and the Stock Option Agreement provided that in the event of a non-fault termination ("NFT"), Ovitz's options would be exercisable until the later of September 30, 2002 or twenty-four months after termination, but in no event later than October 16, 2005. After approving those Plans, the committee unanimously approved the terms of the OEA and the award of Ovitz's options under the 1990 Plan.

B. Ovitz's Performance As President of Disney

Ovitz's tenure as President of the Walt Disney Company officially began on October 1, 1995, the date that the OEA was executed.^[14] When Ovitz took office, the initial reaction was optimistic, and Ovitz did make some positive contributions while serving as President of the Company.^[15] [42] By the fall of 1996, however, it had become clear that Ovitz was "a poor fit with his fellow executives."^[16] By then the Disney directors were discussing that the disconnect between Ovitz and the Company was likely irreparable and that Ovitz would have to be terminated.

The Court of Chancery identified three competing theories as to why Ovitz did not succeed:

First, plaintiffs argue that Ovitz failed to follow Eisner's directives, especially in regard to acquisitions, and that generally, Ovitz did very little. Second, Ovitz contends Eisner's micromanaging prevented Ovitz from having the authority necessary to make the changes that Ovitz thought were appropriate. In addition, Ovitz believes he was not given enough time for his efforts to bear fruit. Third, the remaining defendants simply posit that Ovitz failed to transition from a private to a public company, from the "sell side to the buy side," and otherwise did not adapt to the Company culture or fit in with other executives. In the end, however, it makes no difference why Ovitz was not as successful as his reputation would have led many to expect, so long as he was not grossly negligent or malfeasant.^[17]

Although the plaintiffs attempted to show that Ovitz acted improperly (i.e., with gross negligence or malfeasance) while in office, the Chancellor found that the trial record did not support those accusations.^[18] Rejecting the plaintiffs' first factual claim that Ovitz was insubordinate, the Court found that although many of Ovitz's efforts failed to produce results, that was because his efforts often reflected a philosophy opposite to "that held by Eisner, Iger, and Roth."^[19] That difference did not mean, however, "that Ovitz intentionally failed to follow Eisner's directives or that [Ovitz] was insubordinate."^[20]

The Chancellor also rejected the appellants' second claim—that Ovitz was a habitual liar. The Court found no evidence that Ovitz ever told a material falsehood or made any false or misleading disclosures during his tenure at Disney.^[21] Lastly, the Chancellor found that the record did not support, and often contradicted, the appellants' third claim—that Ovitz had violated the Company's policies relating to expenses and to reporting gifts he received while President of Disney.^[22]

Nonetheless, Ovitz's relationship with the Disney executives did continue to deteriorate through September 1996. In mid-September, Litvack, with Eisner's approval, told Ovitz that he was not working out at Disney and that he should start looking for a graceful exit from Disney and a new job. Litvack reported this conversation to Eisner, who sent Litvack back to Ovitz to make it clear that Eisner no longer wanted Ovitz at Disney and that Ovitz should seriously consider other opportunities, including one then developing at Sony. Ovitz responded by telling Litvack that he was not leaving and that if Eisner wanted him [43] to leave Disney, Eisner could tell him that to his face.

On September 30, 1996, the Disney board met. During an executive session of that meeting, and in small group discussions where Ovitz was not present, Eisner told the other board members of the continuing problems with Ovitz's performance. On October 1, Eisner wrote a letter to Russell and Watson detailing Eisner's mounting difficulties with Ovitz, including Eisner's lack of trust of Ovitz and Ovitz's failures to adapt to Disney's culture and to alleviate Eisner's workload. Eisner's goal in writing this letter was to prevent Ovitz from succeeding him at Disney. Because of that purpose, the Chancellor found that the letter contained "a good deal of hyperbole to help Eisner `unsell' Ovitz as his successor."^[23] Neither that letter nor its contents were shared with other members of the board.

Those interchanges set the stage for Ovitz's eventual termination as Disney's President.

C. Ovitz's Termination At Disney

After the discussions between Litvack and Ovitz, Eisner and Ovitz met several times. During those meetings they discussed Ovitz's future, including Ovitz's employment prospects at Sony. Eisner believed that because Ovitz had a good, longstanding relationship with many Sony senior executives, Sony would be willing to take Ovitz in "trade" from Disney. Eisner favored such a trade, which would not only remove Ovitz from Disney, but also would relieve Disney of any obligation to pay Ovitz under the OEA. Thereafter, in October 1996, Ovitz, with Eisner's permission, entered into negotiations with Sony. Those negotiations did not prove fruitful, however. On November 1, Ovitz wrote a letter to Eisner notifying him that the Sony negotiations had ended, and that Ovitz had decided to recommit himself to Disney with a greater dedication of his own energies and an increased appreciation of the Disney organization.

In response to this unwelcome news, Eisner wrote (but never sent) a letter to Ovitz on November 11, in which Eisner attempted to make it clear that Ovitz was no longer welcome at Disney.^[24] Instead of sending that letter, Eisner met with Ovitz personally on November 13, and discussed much of what the letter contained. Eisner left that meeting believing that "Ovitz just would not listen to what he was trying to tell him and instead, Ovitz insisted that he would stay at Disney, going so far as to state that he would chain himself to his desk."^[25]

During this period Eisner was also working with Litvack to explore whether they could terminate Ovitz under the OEA for cause. If so, Disney would not owe Ovitz the NFT payment. From the very beginning, Litvack advised Eisner that he did not believe there was cause to terminate Ovitz under the OEA. Litvack's advice never changed.

At the end of November 1996, Eisner again asked Litvack if Disney had cause to fire Ovitz and thereby avoid the costly NFT payment. Litvack proceeded to examine that issue more carefully. He studied the OEA, refreshed himself on the meaning of "gross negligence" and "malfeasance," and reviewed all the facts [44] concerning Ovitz's performance of which he was aware. Litvack also consulted Val Cohen, co-head of Disney's litigation department and Joseph Santaniello, in Disney's legal department. Cohen and Santaniello both concurred in Litvack's conclusion that no basis existed to terminate Ovitz for cause. Litvack did not personally conduct any legal research or request an outside opinion on the issue, because he believed that it "was not a close question, and in fact, Litvack described it as `a no brainer.'"^[26] Eisner testified that after Litvack notified Eisner that he did not believe cause existed, Eisner "checked with almost anybody that [he] could find that had a legal degree, and there was just no light in that possibility. It was a total dead end from day one."^[27] Although the Chancellor was critical of Litvack and Eisner for lacking sufficient documentation to support his conclusion and the work they did to arrive at that conclusion, the Court found that Eisner and Litvack "did in fact make a concerted effort to determine if Ovitz could be terminated for cause, and that despite these efforts, they were unable to manufacture the desired result."^[28]

Litvack also believed that it would be inappropriate, unethical and a bad idea to attempt to coerce Ovitz (by threatening a for-cause termination) into negotiating for a smaller NFT package than the OEA provided. The reason was that when pressed by Ovitz's attorneys, Disney would have to admit that in fact there was no cause, which could subject Disney to a wrongful termination lawsuit. Litvack believed that attempting to avoid legitimate contractual obligations would harm Disney's reputation as an honest business partner and would affect its future business dealings.

The Disney board next met on November 25. By then the board knew Ovitz was going to be fired, yet the only action recorded in the minutes concerning Ovitz was his renomination to a new three-year term on the board. Although that action was somewhat bizarre given the circumstances, Stanley Gold, a Disney director, testified that because Ovitz was present at that meeting, it would have been a "public hanging" not to renominate him.^[29] An executive session took place after the board meeting, from which Ovitz was excluded. At that session, Eisner informed the directors who were present that he intended to fire Ovitz by year's end, and that he had asked Gary Wilson, a board member and friend of Ovitz, to speak with Ovitz while Wilson and Ovitz were together on vacation during the upcoming Thanksgiving holiday.^[30]

Shortly after the November 25 board meeting and executive session, the Ovitz and Wilson families left on their yacht for a Thanksgiving trip to the British Virgin Islands. Ovitz hoped that if he could manage [45] to survive at Disney until Christmas, he could fix everything with Disney and make his problems go away. Wilson quickly dispelled that illusion, informing Ovitz that Eisner wanted Ovitz out of the Company. At that point Ovitz first began to realize how serious his situation at Disney had become. Reporting back his conversation with Ovitz, Wilson told Eisner that Ovitz was a "loyal friend and devastating enemy,"^[31] and he advised Eisner to "be reasonable and magnanimous, both financially and publicly, so Ovitz could save face."^[32]

After returning from the Thanksgiving trip, Ovitz met with Eisner on December 3, to discuss his termination. Ovitz asked for several concessions, all of which Eisner ultimately rejected. Eisner told Ovitz that all he would receive was what he had contracted for in the OEA.

On December 10, the Executive Performance Plan Committee met to consider annual bonuses for Disney's most highly compensated executive officers. At that meeting, Russell informed those in attendance^[33] that Ovitz was going to be terminated, but without cause.^[34]

On December 11, Eisner met with Ovitz to agree on the wording of a press release to announce the termination, and to inform Ovitz that he would not receive any of the additional items that he requested. By that time it had already been decided that Ovitz would be terminated without cause and that he would receive his contractual NFT payment, but nothing more. Eisner and Ovitz agreed that neither Ovitz nor Disney would disparage each other in the press, and that the separation was to be undertaken with dignity and respect for both sides. After his December 11 meeting with Eisner, Ovitz never returned to Disney.

Ovitz's termination was memorialized in a letter, dated December 12, 1996, that Litvack signed on Eisner's instruction. The board was not shown the letter, nor did it meet to approve its terms. A press release announcing Ovitz's termination was issued that same day. Before the press release was issued, Eisner attempted to contact each of the board members by telephone to notify them that Ovitz had been officially terminated. None of the board members at that time, or at any other time, objected to Ovitz's termination, and most, if not all, of them thought it was the appropriate step for Eisner to take.^[35] Although the board did not meet to vote on the termination, the Chancellor found that most, if not all, of the Disney directors trusted Eisner's and Litvack's conclusion that there was no cause to terminate Ovitz, and that Ovitz should be terminated without cause even though that involved making the costly NFT payment.^[36]

[46] A December 27, 1996 letter from Litvack to Ovitz, which Ovitz signed, memorialized the termination, accelerated Ovitz's departure date from January 31, 1997 to December 31, 1996, and informed Ovitz that he would receive roughly $38 million in cash and that the first tranche of three million options would vest immediately. By the terms of that letter agreement, Ovitz's tenure as an executive and a director of Disney officially ended on December 27, 1996. Shortly thereafter, Disney paid Ovitz what was owed under the OEA for an NFT, minus a holdback of $1 million pending final settlement of Ovitz's accounts. One month after Disney paid Ovitz, the plaintiffs filed this action.

II. SUMMARY OF APPELLANTS' CLAIMS OF ERROR

As noted earlier, the Court of Chancery rejected all of the plaintiff-appellants' claims on the merits and entered judgment in favor of the defendant-appellees on all counts. On appeal, the appellants claim that the adverse judgment rests upon multiple erroneous rulings and should be reversed, because the 1995 decision to approve the OEA and the 1996 decision to terminate Ovitz on a non-fault basis, resulted from various breaches of fiduciary duty by Ovitz and the Disney directors.

The appellants' claims of error are most easily analyzed in two separate groupings: (1) the claims against the Disney defendants and (2) the claims against Ovitz. The first category encompasses the claims that the Disney defendants breached their fiduciary duties to act with due care and in good faith by (1) approving the OEA, and specifically, its NFT provisions; and (2) approving the NFT severance payment to Ovitz upon his termination—a payment that is also claimed to constitute corporate waste. It is notable that the appellants do not contend that the Disney defendants are directly liable as a consequence of those fiduciary duty breaches. Rather, appellants' core argument is indirect, i.e., that those breaches of fiduciary duty deprive the Disney defendants of the protection of business judgment review, and require them to shoulder the burden of establishing that their acts were entirely fair to Disney. That burden, the appellants contend, the Disney defendants failed to carry.^[37] The appellants claim that by ruling that the Disney defendants did not breach their fiduciary duty to act with due care or in good faith, the Court of Chancery committed reversible error in numerous respects.^[38] Alternatively, the [47] appellants claim that even if the business judgment presumptions apply, the Disney defendants are nonetheless liable, because the NFT payout constituted corporate waste and the Court of Chancery erred in concluding otherwise.^[39]

Falling into the second category are the claims being advanced against Ovitz. Appellants claim that Ovitz breached his fiduciary duties of care and loyalty to Disney by (i) negotiating for and accepting the NFT severance provisions of the OEA, and (ii) negotiating a full NFT payout in connection with his termination.^[40] The appellants' position is that by concluding that Ovitz breached no fiduciary duty owed to Disney, the Court of Chancery reversibly erred in several respects.

In this Opinion we address these two groups of claims in reverse order. In Part III, we analyze the claims relating to Ovitz. In Part IV, we address the claims asserted against the Disney defendants.

III. THE CLAIMS AGAINST OVITZ

The appellants argue that the Chancellor erroneously rejected their claims against Ovitz on two distinct grounds. We analyze them separately.

A. Claims Based Upon Ovitz's Conduct Before Assuming Office At Disney

First, appellants contend that the Court of Chancery erred by dismissing their claim, as a summary judgment matter, that Ovitz had breached his fiduciary duties to Disney by negotiating and entering into the OEA. On summary judgment the Chancellor determined that Ovitz had breached no fiduciary duty to Disney, because Ovitz did not become a fiduciary until he formally assumed office on October 1, 1995, by which time the essential terms of the NFT provision had been negotiated. Therefore, the Court of Chancery held, Ovitz's pre-October 1 conduct was not constrained by any fiduciary duty standard.

That ruling was erroneous, appellants argue, because even though Ovitz did not formally assume the title of President until October 1, 1995, he became a de facto fiduciary before then. As a result, the entire OEA negotiation process became subject to a fiduciary review standard. [48] That conclusion is compelled, appellants urge, because Ovitz's substantial contacts with third parties, and his receipt of confidential Disney information and request for reimbursement of expenses before October 1, prove that Eisner and Disney had already vested Ovitz with at least apparent authority before his formal investiture in office. Therefore, summary judgment was inappropriate, not only for those reasons but also because before summary judgment was granted, Ovitz failed to produce his work files that would have established his de facto status. Lastly, appellants contend that even if Ovitz was not a fiduciary until October 1, he is still liable for negotiating the NFT provisions because the OEA was considerably revised after October 1 and did not become final until December 1995. At the very least, issues of fact concerning those revisions should have precluded summary judgment.

On appeal from a decision granting summary judgment, this Court reviews the entire record to determine whether the Chancellor's findings are clearly supported by the record and whether the conclusions drawn from those findings are the product of an orderly and logical reasoning process.^[41] This Court does not draw its own conclusions with respect to those facts unless the record shows that the trial court's findings are clearly wrong and justice so requires.^[42] Whether the Chancellor correctly formulated the legal standard for determining if Ovitz owed a fiduciary duty to Disney during the OEA negotiations presents a question of law that this Court reviews de novo.^[43] Under any and all of these standards of review, the appellants have failed to persuade us that the Chancellor committed any error of fact or law.

As a threshold matter, the appellants' de facto fiduciary argument is procedurally barred, because it was never fairly presented to the Court of Chancery. Only questions fairly presented to the trial court are properly before this Court for review.^[44] In the Court of Chancery the appellants, as plaintiffs, never opposed the Ovitz motion for summary judgment on the ground that Ovitz was a de facto officer, nor did they move for reconsideration of the summary judgment motion after they received (post-summary judgment) the documents they contend should have been produced to them earlier.^[45]

In any event, the de facto officer argument lacks merit, both legally and factually. A de facto officer is one who actually assumes possession of an office under the claim and color of an election or appointment and who is actually discharging the duties of that office, but for some legal reason lacks de jure legal title to that office.^[46] Here, Ovitz did not assume, or [49] purport to assume, the duties of the Disney presidency before October 1, 1995. In his post-trial Opinion, the Chancellor found as fact that all of Ovitz's pre-October 1 conduct upon which appellants rely to establish de facto officer status, represented Ovitz's preparations to assume the duties of President after he was formally in office.^[47] The record amply supports those findings.

Similarly unavailing is the appellants' alternative argument that even if Ovitz did not become a fiduciary until October 1, his negotiation of the OEA must nonetheless be measured by fiduciary standards, because the OEA did not become final until December 1995, and because between October 1 and December 1995, substantial redrafting of the OEA had occurred. This argument lacks merit because the critical terms of Ovitz's employment that are at issue in this lawsuit were found to have been agreed to before Ovitz assumed office on October 1. The Chancellor further found that any changes negotiated after October 1 were not material. The appellants have not shown that those findings are clearly wrong.^[48]

B. Claims Based Upon Ovitz's Conduct During His Termination As President

The appellants' second claim is that the Court of Chancery erroneously concluded that Ovitz breached no fiduciary duty, including his duty of loyalty, by receiving the NFT payment upon his termination as President of Disney. The Chancellor found:

Ovitz did not breach his fiduciary duty of loyalty by receiving the NFT payment because he played no part in the decisions: (1) to be terminated and (2) that the termination would not be for cause under the OEA. Ovitz did possess fiduciary duties as a director and officer while these decisions were made, but by not improperly interjecting himself into the corporation's decisionmaking process nor manipulating that process, he did not breach the fiduciary duties he possessed in that unique circumstance. Furthermore, Ovitz did not "engage" in a transaction with the corporation—rather, the corporation imposed an unwanted transaction upon him.

Once Ovitz was terminated without cause (as a result of decisions made entirely without input or influence from Ovitz), he was contractually entitled, without any negotiation or action on his part, to receive the benefits provided by the OEA for a termination without cause, benefits for which he negotiated at arm's length before becoming a fiduciary.^[49]

The appellants claim that these findings are reversible error, because the contemporaneous evidence shows that Ovitz was not fired but, rather, acted to "settle out his contract."^[50] In those circumstances, appellants urge, Ovitz had a fiduciary duty [50] to convene a board meeting to consider terminating him for cause—a duty that he failed to observe.

These arguments amount essentially to an attack upon the trial court's factual findings. To the extent those findings turn on determinations of the credibility of live witness testimony and the acceptance or rejection of particular items of testimony, those findings will be upheld.^[51] To the extent the challenged factual findings do not turn on the credibility of live witnesses, this Court will accept those findings if they are supported by the evidence and are the product of an orderly and logical reasoning process.^[52] And, insofar as this claim of error challenges the Chancellor's legal rulings, we review those rulings de novo.^[53] The appellants' arguments fail to pass muster under any of these standards.

The record establishes overwhelmingly that Ovitz did not leave Disney voluntarily. Nor did Ovitz arrange beforehand with Eisner to structure his departure as a termination without cause. To be sure, the evidence upon which the appellants rely does show that Ovitz fought being forced out every step of the way, but in the end, Ovitz had no choice but to accept the inevitable. As the trial court found, "Ovitz did not `engage' in a transaction with the corporation—rather, the corporation imposed an unwanted transaction upon him."^[54] Every witness with personal knowledge of the events confirmed the unilateral, involuntary nature of Ovitz's termination in credible and colorful detail. The Chancellor credited the testimony of those witnesses, and the appellants have not shown that the Court exercised its fact finding powers inappropriately.

Nor is there any basis to overturn the Court of Chancery's finding that Ovitz played no role in the directors' decision to terminate him without cause. At trial the plaintiff-appellants attempted to prove that Ovitz had colluded with Eisner and others to obtain an NFT payment to which he was not entitled. The Chancellor found the facts to be otherwise, and ample evidence supports that finding. The record shows that the discussions between Eisner and Litvack as to the nature of the termination took place outside of Ovitz's presence and knowledge. At no point before this litigation was Ovitz ever told that Disney had even considered a for-cause termination a possibility. And, it is undisputed that Ovitz made no attempt to influence the board during that process.^[55]

That brings us to the appellants' final Ovitz-related claim, which is that Ovitz breached a fiduciary duty to Disney by not convening a meeting of the Disney board to consider terminating him for cause. That argument is defective both legally and factually. The appellants cite no authority recognizing such a duty in these circumstances. That comes as no surprise, given the Chancellor's affirmation of Litvack's legal conclusion that no [51] board action was required to terminate Ovitz and that no basis existed to terminate him for cause.^[56] The argument also fails factually because Ovitz never knew that a termination for cause was being considered. As the Court of Chancery stated:

No reasonably prudent fiduciary in Ovitz's position would have unilaterally determined to call a board meeting to force the corporation's chief executive officer to reconsider his termination and the terms thereof, with that reconsideration for the benefit of shareholders and potentially to Ovitz's detriment.

Furthermore, having just been terminated, no reasonably prudent fiduciary in Ovitz's shoes would have insisted on a board meeting to discuss and ratify his termination after being terminated by the corporation's chief executive officer (with guidance and assistance from the Company's general counsel). Just as Delaware law does not require directors-to-be to comply with their fiduciary duties, former directors owe no fiduciary duties, and after December 27, 1996, Ovitz could not breach a duty he no longer had.^[57]

The Court of Chancery determined that Ovitz did not breach any fiduciary duty that he owed to Disney when negotiating for, or when receiving severance payments under, the non-fault termination clause of the OEA. The Court made no error in arriving at that determination and we uphold it.^[58]

IV. THE CLAIMS AGAINST THE DISNEY DEFENDANTS

We next turn to the claims of error that relate to the Disney defendants. Those claims are subdivisible into two groups: (A) claims arising out of the approval of the OEA and of Ovitz's election as President; and (B) claims arising out of the NFT severance payment to Ovitz upon his termination. We address separately those two categories and the issues that they generate.

A. Claims Arising From The Approval Of The OEA And Ovitz's Election As President

As earlier noted, the appellants' core argument in the trial court was that the Disney defendants' approval of the OEA and election of Ovitz as President were not entitled to business judgment rule protection, because those actions were either grossly negligent or not performed in good faith. The Court of Chancery rejected these arguments, and held that the appellants had failed to prove that the Disney defendants had breached any fiduciary duty.

For clarity of presentation we address the claimed errors relating to the fiduciary duty of care rulings separately from those that relate to the directors' fiduciary duty to act in good faith.

[52] 1. The Due Care Determinations

The plaintiff-appellants advance five contentions to support their claim that the Chancellor reversibly erred by concluding that the plaintiffs had failed to establish a violation of the Disney defendants' duty of care. The appellants claim that the Chancellor erred by: (1) treating as distinct questions whether the plaintiffs had established by a preponderance of the evidence either gross negligence or a lack of good faith; (2) ruling that the old board was not required to approve the OEA; (3) determining whether the old board had breached its duty of care on a director-by-director basis rather than collectively; (4) concluding that the compensation committee members did not breach their duty of care in approving the NFT provisions of the OEA; and (5) holding that the remaining members of the old board (i.e., the directors who were not members of the compensation committee) had not breached their duty of care in electing Ovitz as Disney's President.

To the extent that these claims attack legal rulings of the Court of Chancery we review them de novo.^[59] To the extent they attack the Court's factual findings, those findings will be upheld where they are based on the Chancellor's assessment of live testimony.^[60] The issue these claims present is whether the Court of Chancery legally (and reversibly) erred in one or more of the foregoing respects. We conclude that the Chancellor committed no error.

(a) TREATING DUE CARE AND BAD FAITH AS SEPARATE GROUNDS FOR DENYING BUSINESS JUDGMENT RULE REVIEW

This argument is best understood against the backdrop of the presumptions that cloak director action being reviewed under the business judgment standard. Our law presumes that "in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company."^[61] Those presumptions can be rebutted if the plaintiff shows that the directors breached their fiduciary duty of care or of loyalty or acted in bad faith. If that is shown, the burden then shifts to the director defendants to demonstrate that the challenged act or transaction was entirely fair to the corporation and its shareholders.^[62]

Because no duty of loyalty claim was asserted against the Disney defendants, the only way to rebut the business judgment rule presumptions would be to show that the Disney defendants had either breached their duty of care or had not acted in good faith. At trial, the plaintiff-appellants attempted to establish both grounds, but the Chancellor determined that the plaintiffs had failed to prove either.

The appellants' first claim is that the Chancellor erroneously (i) failed to make a "threshold determination" of gross negligence, and (ii) "conflated" the appellants' [53] burden to rebut the business judgment presumptions, with an analysis of whether the directors' conduct fell within the 8 Del. C. § 102(b)(7) provision that precludes exculpation of directors from monetary liability "for acts or omissions not in good faith." The argument runs as follows: Emerald Partners v. Berlin^[63] required the Chancellor first to determine whether the business judgment rule presumptions were rebutted based upon a showing that the board violated its duty of care, i.e., acted with gross negligence. If gross negligence were established, the burden would shift to the directors to establish that the OEA was entirely fair. Only if the directors failed to meet that burden could the trial court then address the directors' Section 102(b)(7) exculpation defense, including the statutory exception for acts not in good faith.

This argument lacks merit. To make the argument the appellants must ignore the distinction between (i) a determination of bad faith for the threshold purpose of rebutting the business judgment rule presumptions, and (ii) a bad faith determination for purposes of evaluating the availability of charter-authorized exculpation from monetary damage liability after liability has been established. Our law clearly permits a judicial assessment of director good faith for that former purpose.^[64] Nothing in Emerald Partners requires the Court of Chancery to consider only evidence of lack of due care (i.e. gross negligence) in determining whether the business judgment rule presumptions have been rebutted.

Even if the trial court's analytical approach were improper, the appellants have failed to demonstrate any prejudice. The Chancellor's determinations of due care and good faith were analytically distinct and were separately conducted, even though both were done for the purpose of deciding whether to apply the business judgment standard of review. Nowhere have the appellants shown that the result would have been any different had the Chancellor proceeded in the manner that they now advocate.

(b) RULING THAT THE FULL DISNEY BOARD WAS NOT REQUIRED TO CONSIDER AND APPROVE THE OEA

The appellants next challenge the Court of Chancery's determination that the full Disney board was not required to consider and approve the OEA, because the Company's governing instruments allocated that decision to the compensation committee.^[65] This challenge also cannot survive scrutiny.

As the Chancellor found, under the Company's governing documents the board of directors was responsible for selecting the corporation's officers, but under the compensation committee charter, the committee was responsible for establishing and approving the salaries, together with benefits and stock options, of the Company's CEO and President.^[66] The compensation committee also had the charter-imposed duty to "approve employment contracts, or contracts at will" for "all corporate officers who are members of the Board of Directors regardless of salary."^[67] That is exactly what occurred here. The full board ultimately selected Ovitz as President, [54] ^[68] and the compensation committee considered and ultimately approved the OEA, which embodied the terms of Ovitz's employment, including his compensation.

The Delaware General Corporation Law (DGCL) expressly empowers a board of directors to appoint committees and to delegate to them a broad range of responsibilities,^[69] which may include setting executive compensation. Nothing in the DGCL mandates that the entire board must make those decisions. At Disney, the responsibility to consider and approve executive compensation was allocated to the compensation committee, as distinguished from the full board. The Chancellor's ruling—that executive compensation was to be fixed by the compensation committee—is legally correct.

The appellants base their contrary argument upon their reading of this Court's opinion in Brehm v. Eisner.^[70] A "central holding" of Brehm, which the appellants claim is the "law of the case," is that the Disney board had a duty to approve the OEA because of its materiality. The appellants misread Brehm. There, in upholding a dismissal of the complaint in a procedural setting where the complaint's well-pled allegations must be taken as true, we observed that "in this case the economic exposure of the corporation to the payout scenarios of the Ovitz contract was material, particularly given its large size, for purposes of the directors' decision-making process."^[71] Contrary to the appellant's position, that observation is not the law of the case, because in Brehm this Court was not addressing, and did not have before it, the question of whether it was the exclusive province of the full board (as distinguished from a committee of the board) to approve the terms of the contract. That issue did not arise until the trial, during which a complete record was made. Therefore, in deciding the issue of which body—the full board or the compensation committee—was empowered to approve the OEA, the Chancellor was not constrained by any pronouncement made in Brehm.^[72]

[55] (c) WHETHER THE BOARD MEMBERS' OBSERVANCE OF THEIR DUTY OF CARE SHOULD HAVE BEEN DETERMINED ON A DIRECTOR-BY-DIRECTOR BASIS OR COLLECTIVELY

In the Court of Chancery the appellants argued that the board had failed to exercise due care, using a director-by-director, rather than a collective analysis. In this Court, however, the appellants argue that the Chancellor erred in following that very approach. An about-face, the appellants now claim that in determining whether the board breached its duty of care, the Chancellor was legally required to evaluate the actions of the old board collectively.

We reject this argument, without reaching its merits, for two separate reasons. To begin with, the argument is precluded by Rule 8 of this Court, which provides that arguments not fairly presented to the trial court will not be considered by this Court.^[73] The appellants' "individual vs. collective" argument goes beyond being not fairly presented. It borders on being unfairly presented, since the appellants are taking the trial court to task for adopting the very analytical approach that they themselves used in presenting their position.

The argument also fails because nowhere do appellants identify how this supposed error caused them any prejudice. The Chancellor viewed the conduct of each director individually, and found that no director had breached his or her fiduciary duty of care (as members of the full board) in electing Ovitz as President or (as members of the compensation committee) in determining Ovitz's compensation. If, as appellants now argue, a due care analysis of the board's conduct must be made collectively, it is incumbent upon them to show how such a collective analysis would yield a different result. The appellants' failure to do that dooms their argument on this basis as well.

(d) HOLDING THAT THE COMPENSATION COMMITTEE MEMBERS DID NOT FAIL TO EXERCISE DUE CARE IN APPROVING THE OEA

The appellants next challenge the Chancellor's determination that although the compensation committee's decision-making process fell far short of corporate governance "best practices," the committee members breached no duty of care in considering and approving the NFT terms of the OEA. That conclusion is reversible error, the appellants claim, because the record establishes that the compensation committee members did not properly inform themselves of the material facts and, hence, were grossly negligent in approving the NFT provisions of the OEA.

The appellants advance five reasons why a reversal is compelled: (i) not all committee members reviewed a draft of the OEA; (ii) the minutes of the September 26, 1995 compensation committee meeting do not recite any discussion of the grounds for which Ovitz could receive a non-fault termination; (iii) the committee members did not consider any comparable employment agreements or the economic impact of extending the exercisability of the options being granted to Ovitz; (iv) Crystal did not attend the September 26, 1995 committee meeting, nor was his letter distributed to or discussed with Poitier and Lozano; and (v) Poitier and Lozano did not review the spreadsheets generated by Watson. These contentions amount essentially to an [56] attack upon underlying factual findings that will be upheld where they result from the Chancellor's assessment of live testimony.^[74]

Although the appellants have balkanized their due care claim into several fragmented parts, the overall thrust of that claim is that the compensation committee approved the OEA with NFT provisions that could potentially result in an enormous payout, without informing themselves of what the full magnitude of that payout could be. Rejecting that claim, the Court of Chancery found that the compensation committee members were adequately informed. The issue thus becomes whether that finding is supported by the evidence of record.^[75] We conclude that it is.

In our view, a helpful approach is to compare what actually happened here to what would have occurred had the committee followed a "best practices" (or "best case") scenario, from a process standpoint. In a "best case" scenario, all committee members would have received, before or at the committee's first meeting on September 26, 1995, a spreadsheet or similar document prepared by (or with the assistance of) a compensation expert (in this case, Graef Crystal). Making different, alternative assumptions, the spreadsheet would disclose the amounts that Ovitz could receive under the OEA in each circumstance that might foreseeably arise. One variable in that matrix of possibilities would be the cost to Disney of a non-fault termination for each of the five years of the initial term of the OEA. The contents of the spreadsheet would be explained to the committee members, either by the expert who prepared it or by a fellow committee member similarly knowledgeable about the subject. That spreadsheet, which ultimately would become an exhibit to the minutes of the compensation committee meeting, would form the basis of the committee's deliberations and decision.

Had that scenario been followed, there would be no dispute (and no basis for litigation) over what information was furnished to the committee members or when it was furnished. Regrettably, the committee's informational and decisionmaking process used here was not so tidy. That is one reason why the Chancellor found that although the committee's process did not fall below the level required for a proper exercise of due care, it did fall short of what best practices would have counseled.

The Disney compensation committee met twice: on September 26 and October 16, 1995. The minutes of the September 26 meeting reflect that the committee approved the terms of the OEA (at that time embodied in the form of a letter agreement), except for the option grants, which were not approved until October 16—after the Disney stock incentive plan had been amended to provide for those options. At the September 26 meeting, the compensation committee considered a "term sheet"^[76] which, in summarizing the material terms of the OEA, relevantly disclosed that in the event of a non-fault termination, Ovitz would receive: (i) the present value of his salary ($1 million per year) for the balance of the contract term, (ii) the present value of his annual bonus payments (computed at $7.5 million) for the balance of the contract term, (iii) a $10 million termination fee, and (iv) the acceleration of his options for 3 million shares, [57] which would become immediately exercisable at market price.

Thus, the compensation committee knew that in the event of an NFT, Ovitz's severance payment alone could be in the range of $40 million cash,^[77] plus the value of the accelerated options. Because the actual payout to Ovitz was approximately $130 million, of which roughly $38.5 million was cash, the value of the options at the time of the NFT payout would have been about $91.5 million.^[78] Thus, the issue may be framed as whether the compensation committee members knew, at the time they approved the OEA, that the value of the option component of the severance package could reach the $92 million order of magnitude if they terminated Ovitz without cause after one year. The evidentiary record shows that the committee members were so informed.

On this question the documentation is far less than what best practices would have dictated. There is no exhibit to the minutes that discloses, in a single document, the estimated value of the accelerated options in the event of an NFT termination after one year. The information imparted to the committee members on that subject is, however, supported by other evidence, most notably the trial testimony of various witnesses about spreadsheets that were prepared for the compensation committee meetings.

The compensation committee members derived their information about the potential magnitude of an NFT payout from two sources. The first was the value of the "benchmark" options previously granted to Eisner and Wells and the valuations by Watson of the proposed Ovitz options. Ovitz's options were set at 75% of parity with the options previously granted to Eisner and to Frank Wells. Because the compensation committee had established those earlier benchmark option grants to Eisner and Wells and were aware of their value, a simple mathematical calculation would have informed them of the potential value range of Ovitz's options. Also, in August and September 1995, Watson and Russell met with Graef Crystal to determine (among other things) the value of the potential Ovitz options, assuming different scenarios. Crystal valued the options under the Black-Scholes method, while Watson used a different valuation metric. Watson recorded his calculations and the resulting values on a set of spreadsheets that reflected what option profits Ovitz might receive, based upon a range of different assumptions about stock market price increases. Those spreadsheets were shared with, and explained to, the committee members at the September meeting.

The committee's second source of information was the amount of "downside protection" that Ovitz was demanding. Ovitz required financial protection from the risk of leaving a very lucrative and secure position at CAA, of which he was a controlling partner, to join a publicly held corporation [58] to which Ovitz was a stranger, and that had a very different culture and an environment which prevented him from completely controlling his destiny. The committee members knew that by leaving CAA and coming to Disney, Ovitz would be sacrificing "booked" CAA commissions of $150 to $200 million—an amount that Ovitz demanded as protection against the risk that his employment relationship with Disney might not work out. Ovitz wanted at least $50 million of that compensation to take the form of an "up-front" signing bonus. Had the $50 million bonus been paid, the size of the option grant would have been lower. Because it was contrary to Disney policy, the compensation committee rejected the up-front signing bonus demand, and elected instead to compensate Ovitz at the "back end," by awarding him options that would be phased in over the five-year term of the OEA.

It is on this record that the Chancellor found that the compensation committee was informed of the material facts relating to an NFT payout. If measured in terms of the documentation that would have been generated if "best practices" had been followed, that record leaves much to be desired. The Chancellor acknowledged that, and so do we. But, the Chancellor also found that despite its imperfections, the evidentiary record was sufficient to support the conclusion that the compensation committee had adequately informed itself of the potential magnitude of the entire severance package, including the options, that Ovitz would receive in the event of an early NFT.

The OEA was specifically structured to compensate Ovitz for walking away from $150 million to $200 million of anticipated commissions from CAA over the five-year OEA contract term. This meant that if Ovitz was terminated without cause, the earlier in the contract term the termination occurred the larger the severance amount would be to replace the lost commissions. Indeed, because Ovitz was terminated after only one year, the total amount of his severance payment (about $130 million) closely approximated the lower end of the range of Ovitz's forfeited commissions ($150 million), less the compensation Ovitz received during his first and only year as Disney's President. Accordingly, the Court of Chancery had a sufficient evidentiary basis in the record from which to find that, at the time they approved the OEA, the compensation committee members were adequately informed of the potential magnitude of an early.NFT severance payout.

Exposing the lack of merit in appellants' core due care claim enables us to address more cogently (and expeditiously) the appellants' fragmented subsidiary arguments. First, the appellants argue that not all members of the compensation committee reviewed the then-existing draft of the OEA. The Chancellor properly found that that was not required, because in this case the compensation committee was informed of the substance of the OEA.^[79]

Second, appellants point out that the minutes of the September 26 compensation committee meeting recite no discussion of the grounds for which Ovitz could receive a non-fault termination. But the term sheet did include a description of the consequences of a not-for-cause termination, and the Chancellor found that although "no one on the committee recalled any discussion concerning the meaning of gross [59] negligence or malfeasance," those terms "were not foreign to the board of directors, as the language was standard, and could be found, for example, in Eisner's, Wells', Katzenberg's and Roth's employment contracts."^[80]

Third, contrary to the appellants' position, the compensation committee members did consider comparable employment agreements. The Chancellor found, as Russell's extensive notes demonstrated, that the comparable historical option grants that Russell analyzed at the September 26 meeting were the grants to Eisner and Wells. The evidence also lays to rest the claim that the compensation committee members did not consider the economic impact of the extended exercisability of the options being granted to Ovitz. Russell and Crystal had assessed the value of those options using the Black-Scholes and other valuation methods during the two weeks preceding the September 26 compensation committee meeting. Russell summarized those analyses at that meeting, and (as earlier discussed) at the time the compensation committee members approved the OEA, they were informed of the magnitude of those values in the event of an NFT.

Fourth, the appellants stress that Crystal did not make a report in person to the compensation committee at its September 26 meeting. Although that is true, it is undisputed that Crystal was available by phone if the committee members had questions that could not be answered by those who were present. Moreover, Russell and Watson related the substance of Crystal's analysis and information to the committee. The Court of Chancery noted (and we agree) that although it might have been the better course of action, it was "not necessary for an expert to make a formal presentation at the committee meeting in order for the board to rely on that expert's analysis. . . ."^[81] Nor did the Chancellor find merit to the appellants' related argument that two committee members, Poitier and Lozano, were not entitled to rely upon the work performed by Russell, Watson and Crystal in August and September 1995, without having first seen all of the written materials generated during that process or having participated in the discussions held during that time. In reaching a contrary conclusion, the Chancellor found:

The compensation committee reasonably believed that the analysis of the terms of the OEA was within Crystal's professional or expert competence, and together with Russell and Watson's professional competence in those same areas, the committee relied on the information, opinions, reports and statements made by Crystal, even if Crystal did not relay the information, opinions, reports and statements in person to the committee as a whole. Crystal's analysis was not so deficient that the compensation committee would have reason to question it. Furthermore, Crystal appears to have been selected with reasonable care, especially in light of his previous engagements with the Company in connection with past executive compensation contracts that were structurally, at least, similar to the OEA. For all these reasons, the compensation committee also is entitled to the protections of 8 Del. C. § 141(e) in relying upon Crystal.^[82]

The Chancellor correctly applied Section 141(e) in upholding the reliance of Lozano and Poitier upon the information that Crystal, Russell and Watson furnished to [60] them. To accept the appellants' narrow reading of that statute would eviscerate its purpose, which is to protect directors who rely in good faith upon information presented to them from various sources, including "any other person as to matters the member reasonably believes are within such person's professional or expert competence and who has been selected with reasonable care by and on behalf of the corporation."^[83]

Finally, the appellants contend that Poitier and Lozano did not review the spreadsheets generated by Watson at the September 26 meeting. The short answer is that even if Poitier and Lozano did not review the spreadsheets themselves, Russell and Watson adequately informed them of the spreadsheets' contents. The Court of Chancery explicitly found, and the record supports, that Poitier and Lozano "were informed by Russell and Watson of all material information reasonably available, even though they were not privy to every conversation or document exchanged amongst Russell, Watson, Crystal, and Ovitz's representatives."^[84]

For these reasons, we uphold the Chancellor's determination that the compensation committee members did not breach their fiduciary duty of care in approving the OEA.

(e) HOLDING THAT THE REMAINING DISNEY DIRECTORS DID NOT FAIL TO EXERCISE DUE CARE IN APPROVING THE HIRING OF OVITZ AS THE PRESIDENT OF DISNEY

The appellants' final claim in this category is that the Court of Chancery erroneously held that the remaining members of the old Disney board^[85] had not breached their duty of care in electing Ovitz as President of Disney. This claim lacks merit, because the arguments appellants advance in this context relate to a different subject—the approval of the OEA, which was the responsibility delegated to the compensation committee, not the full board.

The appellants argue that the Disney directors breached their duty of care by failing to inform themselves of all material information reasonably available with respect to Ovitz's employment agreement. We need not dwell on the specifics of this argument, because in substance they repeat the gross negligence claims previously leveled at the compensation committee—claims that were rejected by the Chancellor and now also by this Court.^[86] [61] The only properly reviewable action of the entire board was its decision to elect Ovitz as Disney's President. In that context the sole issue, as the Chancellor properly held, is "whether [the remaining members of the old board] properly exercised their business judgment and acted in accordance with their fiduciary duties when they elected Ovitz to the Company's presidency."^[87] The Chancellor determined that in electing Ovitz, the directors were informed of all information reasonably available and, thus, were not grossly negligent. We agree.

The Chancellor found and the record shows the following: well in advance of the September 26, 1995 board meeting the directors were fully aware that the Company needed—especially in light of Wells' death and Eisner's medical problems—to hire a "number two" executive and potential successor to Eisner. There had been many discussions about that need and about potential candidates who could fill that role even before Eisner decided to try to recruit Ovitz. Before the September 26 board meeting Eisner had individually discussed with each director the possibility of hiring Ovitz, and Ovitz's background and qualifications. The directors thus knew of Ovitz's skills, reputation and experience, all of which they believed would be highly valuable to the Company. The directors also knew that to accept a position at Disney, Ovitz would have to walk away from a very successful business—a reality that would lead a reasonable person to believe that Ovitz would likely succeed in similar pursuits elsewhere in the industry. The directors also knew of the public's highly positive reaction to the Ovitz announcement, and that Eisner and senior management had supported the Ovitz hiring.^[88] Indeed, Eisner, who had long desired to bring Ovitz within the Disney fold, consistently vouched for Ovitz's qualifications and told the directors that he could work well with Ovitz.

The board was also informed of the key terms of the OEA (including Ovitz's salary, bonus and options). Russell reported this information to them at the September 26, 1995 executive session, which was attended by Eisner and all non-executive directors. Russell also reported on the compensation committee meeting that had immediately preceded the executive session. And, both Russell and Watson responded to questions from the board. Relying upon the compensation committee's approval of the OEA^[89] and the other information furnished to them, the Disney directors, after further deliberating, unanimously elected Ovitz as President.

Based upon this record, we uphold the Chancellor's conclusion that, when electing Ovitz to the Disney presidency the remaining Disney directors were fully informed of all material facts, and that the appellants [62] failed to establish any lack of due care on the directors' part.

2. The Good Faith Determinations

The Court of Chancery held that the business judgment rule presumptions protected the decisions of the compensation committee and the remaining Disney directors, not only because they had acted with due care but also because they had not acted in bad faith. That latter ruling, the appellants claim, was reversible error because the Chancellor formulated and then applied an incorrect definition of bad faith.

In its Opinion the Court of Chancery defined bad faith as follows:

Upon long and careful consideration, I am of the opinion that the concept of intentional dereliction of duty, a conscious disregard for one's responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith. Deliberate indifference and inaction in the face of a duty to act is, in my mind, conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct.^[90]

The appellants contend that definition is erroneous for two reasons. First they claim that the trial court had adopted a different definition in its 2003 decision denying the motion to dismiss the complaint, and the Court's post-trial (2005) definition materially altered the 2003 definition to appellants' prejudice. Their argument runs as follows: under the Chancellor's 2003 definition of bad faith, the directors must have "consciously and intentionally disregarded their responsibilities, adopting a `we don't care about the risks' attitude concerning a material corporate decision."^[91] Under the 2003 formulation, appellants say, "directors violate their duty of good faith if they are making material decisions without adequate information and without adequate deliberation[,]"^[92] but under the 2005 post-trial definition, bad faith requires proof of a subjective bad motive or intent. This definitional change, it is claimed, was procedurally prejudicial because appellants relied on the 2003 definition in presenting their evidence of bad faith at the trial. Without any intervening change in the law, the Court of Chancery could not unilaterally alter its definition and then hold the appellants to a higher, more stringent standard.

Second, the appellants claim that the Chancellor's post-trial definition of bad faith is erroneous substantively. They argue that the 2003 formulation was (and is) the correct definition, because it is "logically tied to board decision-making under the duty of care."^[93] The post-trial formulation, on the other hand, "wrongly incorporated substantive elements regarding the rationality of the decisions under review rather than being constrained, as in a due care analysis, to strictly procedural criteria."^[94] We conclude that both arguments must fail.^[95]

[63] The appellants' first argument—that there is a real, significant difference between the Chancellor's pre-trial and post-trial definitions of bad faith—is plainly wrong. We perceive no substantive difference between the Court of Chancery's 2003 definition of bad faith—a "conscious[] and intentional[] disregard[] [of] responsibilities, adopting a `we don't care about the risks' attitude..."—and its 2005 post-trial definition—an "intentional dereliction of duty, a conscious disregard for one's responsibilities." Both formulations express the same concept, although in slightly different language.

The most telling evidence that there is no substantive difference between the two formulations is that the appellants are forced to contrive a difference. Appellants assert that under the 2003 formulation, "directors violate their duty of good faith if they are making material decisions without adequate information and without adequate deliberation."^[96] For that ipse dixit they cite no legal authority.^[97] That comes as no surprise because their verbal effort to collapse the duty to act in good faith into the duty to act with due care, is not unlike putting a rabbit into the proverbial hat and then blaming the trial judge for making the insertion.

The appellants essentially concede that their proof of bad faith is insufficient to satisfy the standard articulated by the Court of Chancery. That is why they ask this Court to treat a failure to exercise due care as a failure to act in good faith. Unfortunately for appellants, that "rule," even if it were accepted, would not help their case. If we were to conflate these two duties and declare that a breach of the duty to be properly informed violates the duty to act in good faith, the outcome would be no different, because, as the Chancellor and we now have held, the appellants failed to establish any breach of the duty of care. To say it differently, even if the Chancellor's definition of bad faith were erroneous, the error would not be reversible because the appellants cannot satisfy the very test they urge us to adopt.

For that reason, our analysis of the appellants' bad faith claim could end at this point. In other circumstances it would. This case, however, is one in which the duty to act in good faith has played a prominent role, yet to date is not a well-developed area of our corporate fiduciary law.^[98] Although the good faith concept has recently been the subject of considerable scholarly writing,^[99] which includes articles [64] focused on this specific case,^[100] the duty to act in good faith is, up to this point relatively uncharted. Because of the increased recognition of the importance of good faith, some conceptual guidance to the corporate community may be helpful. For that reason we proceed to address the merits of the appellants' second argument.

The precise question is whether the Chancellor's articulated standard for bad faith corporate fiduciary conduct—intentional dereliction of duty, a conscious disregard for one's responsibilities—is legally correct. In approaching that question, we note that the Chancellor characterized that definition as "an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith."^[101] That observation is accurate and helpful, because as a matter of simple logic, at least three different categories of fiduciary behavior are candidates for the "bad faith" pejorative label.

The first category involves so-called "subjective bad faith," that is, fiduciary conduct motivated by an actual intent to do harm. That such conduct constitutes classic, quintessential bad faith is a proposition so well accepted in the liturgy of fiduciary law that it borders on axiomatic.^[102] We need not dwell further on this category, because no such conduct is claimed to have occurred, or did occur, in this case.

The second category of conduct, which is at the opposite end of the spectrum, involves lack of due care—that is, fiduciary action taken solely by reason of gross negligence and without any malevolent intent. In this case, appellants assert claims of gross negligence to establish breaches not only of director due care but also of the directors' duty to act in good faith. Although the Chancellor found, and we agree, that the appellants failed to establish gross negligence, to afford guidance we address the issue of whether gross negligence (including a failure to [65] inform one's self of available material facts), without more, can also constitute bad faith. The answer is clearly no.

From a broad philosophical standpoint, that question is more complex than would appear, if only because (as the Chancellor and others have observed) "issues of good faith are (to a certain degree) inseparably and necessarily intertwined with the duties of care and loyalty...."^[103] But, in the pragmatic, conduct-regulating legal realm which calls for more precise conceptual line drawing, the answer is that grossly negligent conduct, without more, does not and cannot constitute a breach of the fiduciary duty to act in good faith. The conduct that is the subject of due care may overlap with the conduct that comes within the rubric of good faith in a psychological sense,^[104] but from a legal standpoint those duties are and must remain quite distinct. Both our legislative history and our common law jurisprudence distinguish sharply between the duties to exercise due care and to act in good faith, and highly significant consequences flow from that distinction.

The Delaware General Assembly has addressed the distinction between bad faith and a failure to exercise due care (i.e., gross negligence) in two separate contexts. The first is Section 102(b)(7) of the DGCL, which authorizes Delaware corporations, by a provision in the certificate of incorporation, to exculpate their directors from monetary damage liability for a breach of the duty of care.^[105] That exculpatory provision affords significant protection to directors of Delaware corporations. The statute carves out several exceptions, however, including most relevantly, "for acts or omissions not in good faith...."^[106] Thus, a corporation can exculpate its directors from monetary liability for a breach of the duty of care, but not for conduct that is not in good faith. To adopt a definition of bad faith that would cause a violation of the duty of care automatically to become an act or omission "not in good faith," would eviscerate the protections accorded to directors by the General Assembly's adoption of Section 102(b)(7).

A second legislative recognition of the distinction between fiduciary conduct that is grossly negligent and conduct that is not in good faith, is Delaware's indemnification statute, found at 8 Del. C. § 145. To oversimplify, subsections (a) and (b) of that statute permit a corporation to indemnify (inter alia) any person who is or was a director, officer, employee or agent of the corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement of specified actions, suits or proceedings, where (among other things): (i) that person is, was, or is threatened to be made a party to that action, suit or proceeding, and (ii) that person "acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the [66] corporation...."^[107] Thus, under Delaware statutory law a director or officer of a corporation can be indemnified for liability (and litigation expenses) incurred by reason of a violation of the duty of care, but not for a violation of the duty to act in good faith.

Section 145, like Section 102(b)(7), evidences the intent of the Delaware General Assembly to afford significant protections to directors (and, in the case of Section 145, other fiduciaries) of Delaware corporations.^[108] To adopt a definition that conflates the duty of care with the duty to act in good faith by making a violation of the former an automatic violation of the latter, would nullify those legislative protections and defeat the General Assembly's intent. There is no basis in policy, precedent or common sense that would justify dismantling the distinction between gross negligence and bad faith.^[109]

That leaves the third category of fiduciary conduct, which falls in between the first two categories of (1) conduct motivated by subjective bad intent and (2) conduct resulting from gross negligence. This third category is what the Chancellor's definition of bad faith—intentional dereliction of duty, a conscious disregard for one's responsibilities—is intended to capture. The question is whether such misconduct is properly treated as a non-exculpable, non-indemnifiable violation of the fiduciary duty to act in good faith. In our view it must be, for at least two reasons.

First, the universe of fiduciary misconduct is not limited to either disloyalty in the classic sense (i.e., preferring the adverse self-interest of the fiduciary or of a related person to the interest of the corporation) or gross negligence. Cases have arisen where corporate directors have no conflicting self-interest in a decision, yet engage in misconduct that is more culpable than simple inattention or failure to be informed of all facts material to the decision. To protect the interests of the corporation and its shareholders, fiduciary conduct of this kind, which does not involve disloyalty (as traditionally defined) but is qualitatively more culpable than gross negligence, should be proscribed. A vehicle is needed to address such violations doctrinally, and that doctrinal vehicle is the duty to act in good faith. The Chancellor implicitly so recognized in his Opinion, where he identified different examples of bad faith as follows:

[67] The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense that I have discussed them above, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.^[110]

Those articulated examples of bad faith are not new to our jurisprudence. Indeed, they echo pronouncements our courts have made throughout the decades.^[111]

Second, the legislature has also recognized this intermediate category of fiduciary misconduct, which ranks between conduct involving subjective bad faith and gross negligence. Section 102(b)(7)(ii) of the DGCL expressly denies money damage exculpation for "acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law." By its very terms that provision distinguishes between "intentional misconduct" and a "knowing violation of law" (both examples of subjective bad faith) on the one hand, and "acts...not in good faith," on the other. Because the statute exculpates directors only for conduct amounting to gross negligence, the statutory denial of exculpation for "acts...not in good faith" must encompass the intermediate category of misconduct captured by the Chancellor's definition of bad faith.

For these reasons, we uphold the Court of Chancery's definition as a legally appropriate, although not the exclusive, definition of fiduciary bad faith. We need go no further. To engage in an effort to craft (in the Court's words) "a definitive and categorical definition of the universe of acts that would constitute bad faith"^[112] would be unwise and is unnecessary to dispose of the issues presented on this appeal.

Having sustained the Chancellor's finding that the Disney directors acted in good [68] faith when approving the OEA and electing Ovitz as President, we next address the claims arising out of the decision to pay Ovitz the amount called for by the NFT provisions of the OEA.

B. Claims Arising From The Payment Of The NFT Severance Payout To Ovitz

The appellants advance three alternative claims (each accompanied by assorted subsidiary arguments) whose overall thrust is that even if the OEA approval was legally valid, the NFT severance payout to Ovitz pursuant to the OEA was not. Specifically, the appellants contend that: (1) only the full Disney board with the concurrence of the compensation committee—but not Eisner alone—was authorized to terminate Ovitz; (2) because Ovitz could have been terminated for cause, Litvack and Eisner acted without due care and in bad faith in reaching the contrary conclusion; and (3) the business judgment rule presumptions did not protect the new Disney board's acquiescence in the NFT payout, because the new board was not entitled to rely upon Eisner's and Litvack's contrary advice. Appellants urge that in rejecting these claims the Court of Chancery committed reversible error. We disagree.

1. Was Action By The New Board Required To Terminate Ovitz As The President of Disney?

The Chancellor determined that although the board as constituted upon Ovitz's termination (the "new board") had the authority to terminate Ovitz, neither that board nor the compensation committee was required to act, because Eisner also had, and properly exercised, that authority. The new board, the Chancellor found, was not required to terminate Ovitz under the company's internal documents. Without such a duty to act, the new board's failure to vote on the termination could not give rise to a breach of the duty of care or the duty to act in good faith. Because those are conclusions of law that rest upon the Chancellor's legal construction of Disney's governing instruments, our review of them is plenary.^[113]

Article Tenth of the Company's certificate of incorporation in effect at the termination plainly states that:

The officers of the Corporation shall be chosen in such a manner, shall hold their offices for such terms and shall carry out such duties as are determined solely by the Board of Directors, subject to the right of the Board of Directors to remove any officer or officers at any time with or without cause.^[114]

Article IV of Disney's bylaws provided that the Board Chairman/CEO "shall, subject to the provisions of the Bylaws and the control of the Board of Directors, have general and active management, direction, and supervision over the business of the Corporation and over its officers...."^[115] From these documents the Court of Chancery concluded (inter alia) that:

1) the board of directors has the sole power to elect the officers of the Company;...3) the Chairman/CEO has "general and active management, direction and supervision over the business of the Corporation and over its officers," and that such management, direction and supervision is subject to the control of the board of directors; 4) the Chairman/CEO has the power to manage, direct and supervise the lesser officers and employees of the Company; 5) the [69] board has the right, but not the duty to remove the officers of the Company with or without cause, and that right is non-exclusive; and 6) because that right is non-exclusive, and because the Chairman/CEO is affirmatively charged with the management, direction and supervision of the officers of the Company, together with the powers and duties incident to the office of chief executive, the Chairman/CEO, subject to the control of the board of directors, also possesses the right to remove the inferior officers and employees of the corporation.^[116]

The issue is whether the Chancellor's interpretation of these instruments, as giving the board and the Chairman/CEO concurrent power to terminate a lesser officer, is legally permissible. In two hypothetical cases there would be a clear answer. If the certificate of incorporation vested the power of removal exclusively in the board, then absent an express delegation of authority from the board, the presiding officer would have not have a concurrent removal power. If, on the other hand, the governing instruments expressly placed the power of removal in both the board and specified officers, then there would be concurrent removal power.^[117] This case does not fall within either hypothetical fact pattern, because Disney's governing instruments do not vest the removal power exclusively in the board, nor do they expressly give the Board Chairman/CEO a concurrent power to remove officers. Read together, the governing instruments do not yield a single, indisputably clear answer, and could reasonably be interpreted either way. For that reason, with respect to this specific issue, the governing instruments are ambiguous.^[118]

Where corporate governing instruments are ambiguous, our case law permits a court to determine their meaning by resorting to well-established legal rules of construction,^[119] which include the rules governing the interpretation of contracts.^[120] One such rule is that where a contract is ambiguous, the court must look to extrinsic evidence to determine which of the reasonable readings the parties intended.^[121]

Here, the extrinsic evidence clearly supports the conclusion that the board and Eisner understood that Eisner, as Board Chairman/CEO had concurrent power with the board to terminate Ovitz as President. In that regard, the Chancellor credited the testimony of new board members that Eisner, as Chairman and CEO, was empowered to terminate Ovitz without board approval or intervention; and also Litvack's testimony that during his tenure as general counsel, many Company officers were terminated and the board never once took action in connection with their terminations. [70] ^[122] Because Eisner possessed, and exercised, the power to terminate Ovitz unilaterally, we find that the Chancellor correctly concluded that the new board was not required to act in connection with that termination, and, therefore, the board did not violate any fiduciary duty to act with due care or in good faith.

As the Chancellor correctly held, the same conclusion is equally applicable to the compensation committee. The only role delegated to the compensation committee was "to establish and approve compensation for Eisner, Ovitz and other applicable Company executives and high paid employees."^[123] The committee's September 26, 1995 approval of Ovitz's compensation arrangements "included approval for the termination provisions of the OEA, obviating any need to meet and approve the payment of the NFT upon Ovitz's termination."^[124]

Because neither the new board nor the compensation committee was required to take any action that was subject to fiduciary standards, that leaves only the actions of Eisner and Litvack for our consideration. The appellants claim that in concluding that Ovitz could not be terminated "for cause," these defendants did not act with due care or in good faith. We next address that claim.

2. In Concluding That Ovitz Could Not Be Terminated For Cause, Did Litvack or Eisner Breach Any Fiduciary Duty?

It is undisputed that Litvack and Eisner (based on Litvack's advice) both concluded that if Ovitz was to be terminated, it could only be without cause, because no basis existed to terminate Ovitz for cause. The appellants argued in the Court of Chancery that the business judgment presumptions do not protect that conclusion, because by permitting Ovitz to be terminated without cause, Litvack and Eisner acted in bad faith and without exercising due care. Rejecting that claim, the Chancellor determined independently, as a matter of fact and law, that (1) Ovitz had not engaged in any conduct as President that constituted gross negligence or malfeasance—the standard for an NFT under the OEA; and (2) in arriving at that same conclusion in 1996, Litvack and Eisner did not breach their fiduciary duty of care or their duty to act in good faith.

The appellants now urge that those rulings constitute reversible error. To the extent the trial court's rulings are legal, [71] we review them de novo, to the extent they involve factual findings based upon determinations of witness credibility, we will uphold them;^[125] and to the extent a factual finding is based on an expert opinion, it "may be overturned only if arbitrary or lacking any evidentiary support."^[126] Measured by these standards of review, the appellants have failed to establish error of any kind.

In determining independently that Ovitz could not have been fired for cause, the Chancellor held:

...I conclude that given his performance, Ovitz could not have been fired for cause under the OEA. Any early termination of his employment, therefore, had to be in the form of an NFT. In reaching this conclusion, ] rely on the expert reports of both [Larry] Feldman and [John] Fox, whose factual assumptions are generally consonant with my factual findings above. Nevertheless, by applying the myriad of definitions for gross negligence and malfeasance discussed by [John] Donohue, Feldman and Fox, I also independently conclude, based upon the facts as I have found them, that Ovitz did not commit gross negligence or malfeasance while serving as the Company's President.^[127]

The appellants challenge this conclusion on two grounds: (1) that the trial court did not articulate its understanding of the good cause determination; and (2) the court did not cite any facts to support its findings. Neither argument is correct.

The Court of Chancery considered (even though it did not accept all of) the definitions of gross negligence and malfeasance advanced by trial experts Feldman, Donohue and Fox. Based upon the facts as found by the Court, the Chancellor concluded that under all the myriad definitions discussed by those experts, Ovitz did not commit gross negligence. The appellants have not shown that the Court of Chancery relied arbitrarily upon the definitions advanced by these experts. Nor could they, because the appellants' true quarrel is with the factual findings that underlie the Court's legal conclusion. The appellants are unable, however, to show that those findings, all of which are based on extensive trial testimony, witness credibility determinations, and highly textured treatment in the Post-trial Opinion, are in any way wrong.

At the trial level, the appellants attempted to show, as a factual matter, that Ovitz's conduct as President met the standard for a termination for cause, because (i) Ovitz intentionally failed to follow Eisner's directives and was insubordinate, (ii) Ovitz was a habitual liar, and (iii) Ovitz violated Company policies relating to expenses and to reporting gifts he gave while President of Disney. The Court found the facts contrary to appellants' position. As to the first accusation, the Court found that many of Ovitz's efforts failed to produce results "often because his efforts reflected an opposite philosophy than that held by Eisner, Iger, and Roth. This does not mean that Ovitz intentionally failed to follow Eisner's directives or that he was insubordinate."^[128] As to the second, the Court found that:

In the absence of any concrete evidence that Ovitz told a material falsehood during his tenure at Disney, plaintiffs fall back on alleging that Ovitz's disclosures regarding his earn-out with, and past [72] income from, CAA, were false or materially misleading. As a neutral fact-finder, I find that the evidence simply does not support either of those assertions.^[129]

And, as to the third accusation, the Court found "that Ovitz was not in violation of The Walt Disney Company's policies relating to expenses or giving and receiving gifts."^[130] Accordingly, the appellants' claim that the Chancellor incorrectly determined that Ovitz could not legally be terminated for cause lacks any factual foundation.

Despite their inability to show factual or legal error in the Chancellor's determination that Ovitz could not be terminated for cause, appellants contend that Litvack and Eisner breached their fiduciary duty to exercise due care and to act in good faith in reaching that same conclusion. The Court of Chancery scrutinized the record to determine independently whether, in reaching their conclusion, Litvack and Eisner had separately exercised due care and acted in good faith. The Court determined that they had properly discharged both duties. Appellants' attack upon that determination lacks merit, because it is also without basis in the factual record.

After considering the OEA and Ovitz's conduct, Litvack concluded, and advised Eisner, that Disney had no basis to terminate Ovitz for cause and that Disney should comply with its contractual obligations. Even though Litvack personally did not want to grant a NFT to Ovitz, he concluded that for Disney to assert falsely that there was cause would be both unethical and harmful to Disney's reputation. As to Litvack, the Court of Chancery held:

I do not intend to imply by these conclusions that Litvack was an infallible source of legal knowledge. Nevertheless, Litvack's less astute moments as a legal counsel do not impugn his good faith or preparedness in reaching his conclusions with respect to whether Ovitz could have been terminated for cause....

* * *

In conclusion, Litvack gave the proper advice and came to the proper conclusions when it was necessary. He was adequately informed in his decisions, and he acted in good faith for what he believed were the best interests of the Company.^[131]

With respect to Eisner, the Chancellor found that faced with a situation where he was unable to work well with Ovitz, who required close and constant supervision, Eisner had three options: 1) keep Ovitz as President and continue trying to make things work; 2) keep Ovitz at Disney, but in a role other than as President; or 3) terminate Ovitz. The first option was unacceptable, and the second would have entitled Ovitz to the NFT, or at the very least would have resulted in a costly lawsuit to determine whether Ovitz was so entitled. After an unsuccessful effort to "trade" Ovitz to Sony, that left only the third option, which was to terminate Ovitz and pay the NFT. The Chancellor found that in choosing this alternative, Eisner had breached no duty and had exercised his business judgment:

...I conclude that Eisner's actions in connection with the termination are, for the most part, consistent with what is expected of a faithful fiduciary. Eisner unexpectedly found himself confronted with a situation that did not have an easy solution. He weighed the alternatives, [73] received advice from counsel and then exercised his business judgment in the manner he thought best for the corporation. Eisner knew all the material information reasonably available when making the decision, he did not neglect an affirmative duty to act (or fail to cause the board to act) and he acted in what he believed were the best interests of the Company, taking into account the cost to the Company of the decision and the potential alternatives. Eisner was not personally interested in the transaction in any way that would make him incapable of exercising business judgment, and I conclude that the plaintiffs have not demonstrated by a preponderance of the evidence that Eisner breached his fiduciary duties or acted in bad faith in connection with Ovitz's termination and receipt of the NFT.^[132]

These determinations rest squarely on factual findings that, in turn, are based upon the Chancellor's assessment of the credibility of Eisner and other witnesses. Even though the Chancellor found much to criticize in Eisner's "imperial CEO" style of governance, nothing has been shown to overturn the factual basis for the Court's conclusion that, in the end, Eisner's conduct satisfied the standards required of him as a fiduciary.^[133]

3. Were The Remaining Directors Entitled To Rely Upon Eisner's And Litvack's Advice That Ovitz Could Not Be Fired For Cause?

The appellants' third claim of error challenges the Chancellor's conclusion that the remaining new board members could rely upon Litvack's and Eisner's advice that Ovitz could be terminated only without cause. The short answer to that challenge is that, for the reasons previously discussed, the advice the remaining directors received and relied upon was accurate. Moreover, the directors' reliance on that advice was found to be in good faith. Although formal board action was not necessary, the remaining directors all supported the decision to terminate Ovitz based on the information given by Eisner and Litvack. The Chancellor found credible the directors' testimony that they believed that Disney would be better off without Ovitz, and the appellants offer no basis to overturn that finding.

* * * *

To summarize, the Court of Chancery correctly determined that the decisions of the Disney defendants to approve the OEA, to hire Ovitz as President, and then to terminate him on an NFT basis, were protected business judgments, made without any violations of fiduciary duty. Having so concluded, it is unnecessary for the Court to reach the appellants' contention that the Disney defendants were required to prove that the payment of the NFT severance to Ovitz was entirely fair.

V. THE WASTE CLAIM

The appellants' final claim is that even if the approval of the OEA was protected by the business judgment rule presumptions, the payment of the severance amount to Ovitz constituted waste. This claim is rooted in the doctrine that a plaintiff who [74] fails to rebut the business judgment rule presumptions is not entitled to any remedy unless the transaction constitutes waste.^[134] The Court of Chancery rejected the appellants' waste claim, and the appellants claim that in so doing the Court committed error.

To recover on a claim of corporate waste, the plaintiffs must shoulder the burden of proving that the exchange was "so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration."^[135] A claim of waste will arise only in the rare, "unconscionable case where directors irrationally squander or give away corporate assets."^[136] This onerous standard for waste is a corollary of the proposition that where business judgment presumptions are applicable, the board's decision will be upheld unless it cannot be "attributed to any rational business purpose."^[137]

The claim that the payment of the NFT amount to Ovitz, without more, constituted waste is meritless on its face, because at the time the NFT amounts were paid, Disney was contractually obligated to pay them. The payment of a contractually obligated amount cannot constitute waste, unless the contractual obligation is itself wasteful. Accordingly, the proper focus of a waste analysis must be whether the amounts required to be paid in the event of an NFT were wasteful ex ante.

Appellants claim that the NFT provisions of the OEA were wasteful because they incentivized Ovitz to perform poorly in order to obtain payment of the NFT provisions. The Chancellor found that the record did not support that contention:

[T]erminating Ovitz and paying the NFT did not constitute waste because he could not be terminated for cause and because many of the defendants gave credible testimony that the Company would be better off without Ovitz, meaning that would be impossible for me to conclude that the termination and receipt of NFT benefits result in "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration," or a situation where the defendants have "irrationally squandered or given away corporate assets." In other words, defendants did not commit waste.^[138]

That ruling is erroneous, the appellants argue, because the NFT provisions of the OEA were wasteful in their very design. Specifically, the OEA gave Ovitz every incentive to leave the Company before serving out the full term of his contract. The appellants urge that although the OEA may have induced Ovitz to join Disney as President, no contractual safeguards were in place to retain him in that position. In essence, appellants claim that the NFT provisions of the OEA created an irrational incentive for Ovitz to get himself fired.^[139]

[75] That claim does not come close to satisfying the high hurdle required to establish waste. The approval of the NFT provisions in the OEA had a rational business purpose: to induce Ovitz to leave CAA, at what would otherwise be a considerable cost to him, in order to join Disney.^[140] The Chancellor found that the evidence does not support any notion that the OEA irrationally incentivized Ovitz to get himself fired.^[141] Ovitz had no control over whether or not he would be fired, either with or without cause. To suggest that at the time he entered into the OEA Ovitz would engineer an early departure at the cost of his extraordinary reputation in the entertainment industry and his historical friendship with Eisner, is not only fanciful but also without proof in the record. Indeed, the Chancellor found that it was "patently unreasonable to assume that Ovitz intended to perform just poorly enough to be fired quickly, but not so poorly that he could be terminated for cause."^[142]

We agree. Because the appellants have failed to show that the approval of the NFT terms of the OEA was not a rational business decision, their waste claim must fail.

VI. CONCLUSION

For the reasons stated above, the judgment of the Court of Chancery is affirmed.

[1] The Court of Chancery dismissed the original complaint in 2000. In re The Walt Disney Co. Derivative Litig., 731 A.2d 342 (Del. Ch.1998). On appeal, this Court affirmed the dismissal in part and reversed it in part, remanding the case to the Court of Chancery and granting the plaintiffs leave to replead. Brehm v. Eisner, 746 A.2d 244 (Del.2000). The plaintiffs filed their second amended complaint in January 2002, and in May 2003, the Court of Chancery denied the defendants' motion to dismiss that complaint, ruling that a complete factual record was needed to determine whether the defendant directors had breached their fiduciary duties. In re The Walt Disney Co. Derivative Litig., 825 A.2d 275 (Del.Ch.2003). After extensive discovery Ovitz moved for summary judgment. That motion was granted in part and denied in part in September 2004. In re Walt Disney Co. Derivative Litig., 2004 WL 2050138 (Del.Ch. Sept.10, 2004). Thereafter, the case was scheduled for trial.

[2] In re The Walt Disney Company Derivative Litig., 2005 WL 2056651, at * 1 (Del. Ch. Aug. 9, 2005); ___ A.2d ___ (Del.2005) (cited throughout this Opinion as "Post-trial Op.").

[3] The facts recited herein are a skeletal summary of over 100 pages of factual findings contained in the Court of Chancery's Post-trial Opinion, supra at note 2. Except where noted, those findings are uncontroverted.

[4] The Disney board of directors at that time and at the time the Ovitz Employment Agreement was approved (the "old board") consisted of Eisner, Roy E. Disney, Stanley P. Gold, Sanford M. Litvack, Richard A. Nunis, Sidney Poitier, Irwin E. Russell, Robert A.M. Stern, E. Cardon Walker, Raymond L. Watson, Gary L. Wilson, Reveta F. Bowers, Ignacio E. Lozano, Jr., George J. Mitchell, and Stephen F. Bollenbach. The board of directors at the time Ovitz was terminated as President of Disney (the "new board") consisted of the persons listed above (other than Bollenbach), plus Leo J. O'Donovan and Thomas S. Murphy. Neither O'Donovan nor Murphy served on the old board.

[5] Post-trial Op. at ___, *6 (footnote omitted).

[6] Id.

[7] Id.

[8] The Black-Scholes method is a formula for option valuation that is widely used and accepted in the industry and by regulators.

[9] In a later, revised memorandum, Crystal estimated that the two additional years would increase the value of the entire OEA to $24.1 million per year.

[10] Sid Bass was one of Disney's largest individual shareholders.

[11] In its Opinion, the Court of Chancery was skeptical of Litvack's and Bollenbach's stated reasons for not wanting to report to Ovitz. The Court perceived that Litvack's resistance to Ovitz stemmed in part from his resentment at not being selected to be Disney's President, a post he coveted; and that Bollenbach's emphasis on the importance of being part of a cohesive trio was "disingenuous," since Bollenbach had been with the Company for only three months before learning of the Ovitz negotiations. Post-trial Op. at ___, *8.

[12] The appellants contend the trial court erred in finding that Eisner had made phone calls to the remaining board members, because there was no evidence that Eisner discussed the details of the OEA with those directors, and there was no contemporaneous documentary evidence of the content or the subject of those calls. The Court of Chancery, however, had sufficient evidence from which to make that finding. Directors Eisner, Gold, Bollenbach, Mitchell, Nunis, Lozano, and Stern testified that those conversations took place, and Eisner's telephone log corroborated that testimony. Post-Trial Op. at n. 72. At bottom, the appellants are claiming that the Chancellor should have disbelieved Eisner's testimony. That is a credibility determination based on testimony that the Chancellor, as the finder of fact, was entitled to make and that this Court will approve on review. Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972); Alabama By-Products v. Neal, 588 A.2d 255, 259 (Del.1991).

[13] In their Opening Brief, the appellants emphasize that during their trial testimony, neither Poitier nor Lozano could recall seeing Watson's spreadsheets at the September 26th meeting, and the meeting minutes did not indicate any discussion about the cost of a NFT payout. The Court of Chancery found that Poitier's and Lozano's lack of recollection on that point was more likely the result of the nine years that had passed since the meeting, and credited Watson's testimony that he had distributed the spreadsheets. Post-trial Op. at ___, *9, n. 82.

[14] The appellants contend, as a factual matter, that Ovitz became the "de facto" President of Disney before October 1, 1995, and as a result, owed fiduciary duties to Ovitz before his official start date. The appellants assert that "Ovitz's substantial contacts with third parties and his receipt of confidential Disney information before October 1st show that Eisner and Disney had already vested him with at least apparent authority prior to his formal investiture in office." (Appellants' Opening Br. at 46-47). Appellants base this contention upon (i) Ovitz having played a role in the design and construction of his new office at Disney in August 1995; (ii) Ovitz being furnished internal documents during that summer; (iii) Ovitz having met with third parties on Disney's behalf in relation to a deal Disney was considering with the NFL; and (iv) Ovitz having submitted requests for reimbursement for business related expenses during the pre-October 1 period. The Court of Chancery's findings undermine that contention. The Chancellor found that Ovitz's authority over the construction project was "minimal at best" (Post-trial Op. at ___, *12); that the pre-October 1 work that he performed at Disney was in preparation for his tenure there and made his request for reimbursement of expenses related to Disney "appropriate and reasonable" (Id. at n. 133); and that any work Ovitz did on Disney's behalf with respect to the NFL was evidence of "Ovitz's good faith efforts to benefit the Company and bring himself up to speed...." (Id. at ___, *12).

[15] As the Chancellor found, Ovitz made the successful recommendation to construct the gate to Disney's California Adventure Park across from the main gate to Disneyland. He was also able to recruit Geraldine Laybourne, founder of the children's cable channel, Nickelodeon, as well as overhaul ABC's Saturday morning lineup. Ovitz brought Tim Allen back to work after Allen walked off the set of Home Improvement following a disagreement; he also helped retain several animators that Jeffrey Katzenberg was trying to recruit to his new company, Dreamworks; and Ovitz also helped in handling relationships with talent.

[16] Post-trial Op. at ___, *11.

[17] Post-trial Op. at ___, *14 (footnotes omitted).

[18] Id. at ___, *12.

[19] Id. at ___, *14 (The surname references are to Robert Iger, President of ABC, and Joe Roth, head of the Disney Studio).

[20] Id. ("But different does not mean wrong. Total agreement within an organization is often a far greater threat than diversity of opinion. Unfortunately, the philosophical divide between Eisner and Ovitz was greater than both believed....").

[21] Id. at ___ _ ___, *14-15.

[22] Id. at ___, *16.

[23] Post-trial Op. at ___, *19.

[24] As with his October 1 letter, Eisner did not share this letter or its contents with the board. The only director to receive the November 11 letter was Russell, who also did not share it with the other board members.

[25] Post-trial Op. at ___, *19 (footnote omitted).

[26] Id. at 20.

[27] Id.

[28] Id. The Chancellor found Litvack's testimony on this issue especially persuasive because "[i]n light of the hostile relationship between Litvack and Ovitz, I believe that if Litvack thought it were possible to avoid paying Ovitz the NFT payment, that out of pure ill-will, Litvack would have tried almost anything to avoid the payment." Id. at ___, *20, n. 269.

[29] Id. at ___, *21.

[30] The Court of Chancery found that at least Eisner, Gold, Bowers, Watson, and Stern were present at that executive session. The Court also found that the record was in conflict as to whether any details of the NFT and the termination for cause question were discussed.

[31] Id. at ___, 22.

[32] Id.

[33] In attendance at that meeting were its members, Gold, Lozano, Poitier and Russell, although Poitier and Lozano attended by phone. Also in attendance were Eisner, Watson, Litvack, Santaniello, and another staff member, Marsha Reed.

[34] The committee members also awarded a $7.5 million bonus to Ovitz for his services performed during fiscal year 1996, despite Ovitz's poor performance and the fact that the bonuses were discretionary. That bonus was later rescinded after more deliberate consideration, following Ovitz's termination.

[35] Post-trial Op. at ___, *24 & n. 325, 326.

[36] Id. at ___, *25 & n. 332. Although neither the board nor the compensation committee voted on the matter, many directors believed that Eisner had the power to fire Ovitz on his own, and that he did not need to convene a board meeting to do so. Other directors believed that if a meeting was required to terminate Ovitz, then Litvack, as corporate counsel, would have so advised them and would have made sure that a meeting was called. Litvack believed that Eisner had the power to fire Ovitz on his own accord, and that no meeting was called, because it was unnecessary and because all the directors were up to speed and in agreement that Ovitz should be terminated.

[37] The plaintiff-appellants appear to have structured their liability claim in this indirect way because Article Eleventh of the Disney Certificate of Incorporation contains an exculpatory provision modeled upon 8 Del. C. § 102(b)(7). That provision precludes a money damages remedy against the Disney directors for adjudicated breaches of their duty of care. For that reason the plaintiffs are asserting their due care claim as the basis for shifting the standard of review from business judgment to entire fairness, rather than as a basis for direct liability. Presumably for the sake of consistency the appellants are utilizing their good faith fiduciary claim in a like manner.

[38] These claims are asserted against the Disney defendants in their capacity as directors. The appellants also advance, as an alternative claim, an argument that Disney defendants Eisner, Litvack and Russell, are liable in their separate capacity as officers who, unlike directors, are not protected by the business judgment rule or the exculpatory provision of the Disney charter. That alternative argument is procedurally barred, because it was not fairly presented to the Court of Chancery. SUP.CT. R. 8. Indeed, the Chancellor noted in his Post-trial Opinion that the application of the business judgment to Eisner and Litvack was not contested, and that the "parties essentially treat both officers and directors as comparable fiduciaries, that is, subject to the same fiduciary duties and standards of substantive review." Post-trial Op. at ___, *50, n. 588. To the extent the argument is advanced against Russell, it also is not grounded in fact, because Russell was not an officer of Disney.

[39] "When a plaintiff fails to rebut the presumption of the business judgment rule, she is not entitled to any remedy, be it legal or equitable, unless the transaction constitutes waste." Post-trial Op. at ___, *31 (citing In re J.P. Stevens & Co., Inc. S'holders Litig., 542 A.2d 770, 780 (Del.Ch.1988)).

[40] The claims against Ovitz, unlike those asserted against the Disney defendants, appear to be advanced as the basis for holding Ovitz liable directly, as distinguished from being used indirectly as a vehicle to shift the standard of review from business judgment to entire fairness. We use the qualifying term "appear," because we cannot ascertain with clarity, either from the appellants' briefs in this Court or in the Court of Chancery, the precise character of their liability argument. In the end, however, it does not matter, because our affirmance of the Chancellor's rulings render irrelevant the issue of whether appellants are asserting a claim of liability directly as a consequence of a breach of Ovitz's duty of loyalty and/or good faith, or indirectly as a consequence of his failure to prove the entire fairness of his actions.

[41] Dutra De Amorim v. Norment, 460 A.2d 511, 514 (Del.1983) (citing Levitt v. Bouvier, 287 A.2d 671, 673 (Del.1972)).

[42] Fiduciary Trust Co. v. Fiduciary Trust Co., 445 A.2d 927, 930 (Del.1982).

[43] Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del.1993).

[44] SUP.CT. R. 8.

[45] Four months elapsed between the summary judgment decision and the end of trial, yet the plaintiffs never sought reconsideration of the summary judgment motion on the basis of the evidence produced after the motion was decided.

[46] WILLIAM MEADE FLETCHER, FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 374 (perm.ed., rev.vol.1998) ("FLETCHER"); see also State ex rel. James v. Schorr, 65 A.2d 810, 817 (Del.1948); Rudnitsky v. Rudnitsky, 2000 WL 1724234, *6, 2000 Del. Ch. LEXIS 165, *21 (Nov. 14, 2000) ("It is an established principle of Delaware law that apparent authority cannot be asserted by a party who knew, at the time of the transaction, that the agent lacked actual authority.")

[47] See discussion supra at p. 41, note 14.

[48] The only evidence the appellants cite to support the claimed material change to the OEA is the assertion that after October 1, a "major rewrite of Section 10" occurred. (Appellants' Opening Br. at 47.) The rewrite of that section was not material, however. It only changed the terms that Disney must meet to make a "qualifying offer" to renew the OEA for a second term—from specific thresholds to a general requirement that Disney must make a "reasonable" offer. That change was not material to the issues presented in this lawsuit, and was not a critical term of the OEA.

[49] Post-trial Op. at ___, *37-38 (italics in original, footnotes omitted).

[50] Appellants' Opening Br. at 47.

[51] Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972).

[52] Id.; see also Hudak v. Procek, 806 A.2d 140, 151 n. 28 (Del.2002) (The Chancellor is "the sole judge of the credibility of live witness testimony.").

[53] Hudak, 806 A.2d at 150.

[54] Post-trial Op. at ___, *37.

[55] The only negotiation in which Ovitz engaged with Disney concerned how the NFT would work and what, if anything, Ovitz would receive in addition to the NFT. The trial court found, however, and the appellants do not contest, that Disney rejected all of Ovitz's requests and gave him only what he was entitled to receive under his contract.

[56] Post-trial Op. at ___, ___, *38-39, 48-49. For the reasons more fully set forth in Section V, infra, of this Opinion, we uphold these determinations.

[57] Id. at 52, *38 (italics in original, footnotes omitted).

[58] That determination stands independent of, and without regard to, whether the OEA and the NFT payout were properly approved, constituted a waste of assets or were otherwise the product of a breach of fiduciary duty by the Disney defendants. The appellants claim that the approval of the OEA and the NFT payout to Ovitz were legally improper on all these grounds. Those claims are addressed in Parts IV and V of this Opinion.

[59] Hudak, 806 A.2d at 150.

[60] Levitt, 287 A.2d at 673.

[61] Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

[62] Emerald Partners v. Berlin, 787 A.2d 85, 91 (Del.2001); Brehm v. Eisner, 746 A.2d 244, 264 n. 66 (Del.2000) ("Thus, directors' decisions will be respected by courts unless the directors are interested or lack independence relative to the decision, do not act in good faith, act in a manner that cannot be attributed to a rational business purpose or reach their decision by a grossly negligent process that includes the failure to consider all material facts reasonably available.").

[63] 787 A.2d 85, 93 (Del.2001).

[64] Id. at 91.

[65] Post-trial Op. at ___, ___, *42, 47.

[66] Id. at ___, ___, *42, 44.

[67] Id. at ___, *42.

[68] Id. at ___, *47.

[69] 8 Del. C. § 141(c).

[70] 746 A.2d 244, 259 (Del.2000).

[71] Id.

[72] The only arguably tenable "law of the case" contention might read Brehm to hold that the size of the NFT payout would be material to a decision maker, whether the decision maker is the full board or the compensation committee. Indeed, the appellants appear to suggest that argument in attacking as erroneous the Chancellor's determination that, even though the amount of the NFT payout was quite large, it was immaterial given the Company's size ($19 billion in revenues and over $3 billion in operating revenues) and the large amounts budgeted for a single feature film. See Post-trial Op. at *44, n. 532. If that is appellants' argument, it also reads too much into the Brehm decision, because our observation was based upon the facts as alleged in the complaint, not the facts as found by the Chancellor based upon a complete trial record. This argument also ignores our admonition therein that "[o]ne must also keep in mind that the size of executive compensation for a large public company in the current environment often involves huge numbers. This is particularly true in the entertainment industry where the enormous revenues from one `hit' movie or enormous losses from a `flop' place in perspective the compensation of executives whose genius or misjudgment, as the case may be, have contributed to the `hit' or `flop.'" 746 A.2d at 259, n. 49 (internal citations omitted). In any event, the materiality or immateriality of the NFT payout, whether viewed from an ex ante or ex post perspective, is not legally germane to our analysis of the claims presented on this appeal, or to the result we reach here. For that reason we do not decide the issue of the materiality of the NFT payout.

[73] SUP. CT. R. 8.

[74] Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972).

[75] Id.

[76] The term sheet was attached as an exhibit to the September 26 minutes.

[77] The cash portion of the NFT payout after one year would be the sum of: (i) the present value of Ovitz's remaining salary over the life of the contract (4 years × $1 million/yr = $4 million, reduced to present value), plus (ii) the present value of his unpaid annual bonus payments ($7.5 million/yr × 4 years = $30 million, discounted to present value), plus (iii) $10 million cash for the second tranche of options. These amounts total $44 million before discounting the $34 million of annual salaries and bonuses to present value. The actual cash payment to Ovitz was $38.5 million, which, it would appear, reflects the then-present value of the $34 million of salaries and bonuses.

[78] Or, if it is assumed that the compensation committee would have estimated the cash portion of an NFT payout after one year at $40 million, then the value of the option portion would have been $90 million.

[79] As the Court found, "the compensation committee was provided with a term sheet of the key terms of the OEA and a presentation was made by Russell (assisted by Watson), who had personal knowledge of the relevant information by virtue of his negotiations with Ovitz and discussions with Crystal." Post-trial Op. at ___, *45.

[80] Id. at ___, *9, n. 81.

[81] Id. at ___, *45.

[82] Id. at ___, *46.

[83] 8 Del. C. § 141(e).

[84] Id. at ___, *46 (emphasis in original). The appellants underscore that neither Poitier or Lozano could recall in their respective testimony, whether they had actually received or reviewed Watson's spreadsheets. The Court of Chancery, however, attributed that lack of recollection to the length of time that had passed since the meeting and credited Watson's testimony that he had shared his spreadsheets with the committee. We will not disturb that credibility determination.

The appellants also contend, in this connection, that Poitier and Lozano were not properly informed because they were not furnished with Crystal's August 26 letter. That letter, however, was based upon Crystal's misunderstanding about the guarantee originally proposed as a feature of the stock options. Once Russell cleared up that misunderstanding, Crystal revised his original letter to comport with the facts and sent the revised letter to Russell and Watson, who then described the revised letter's contents to Poitier and Lozano at the September 26, 1995 meeting.

[85] The remaining old board members were Bollenbach, Litvack, Roy Disney, Nunis, Stern, Walker, O'Donovan, Murphy, Gold, Bowers, Wilson and Mitchell.

[86] Specifically, the appellants contend that the entire board: (1) did not review or discuss a spreadsheet showing the possible payouts to Ovitz in the event of an NFT; (2) were not given any written materials to review; (3) did not have any report, written or given in person, by a compensation expert; (4) had no idea that the OEA was then the richest pay package ever offered to a corporate officer; and (5) did not discuss the gross negligence or malfeasance standards that would control Ovitz's receipt of an NFT payout.

[87] Post-trial Op. at, *47.

[88] The directors were informed of the reporting structure to which Ovitz had agreed. That reporting structure resolved Litvack's and Bollenbach's initial personal reaction to being told that Ovitz would be coming to Disney.

[89] Contrary to the appellants' assertion (made with no citation of authority), the remaining board members were entitled to rely upon the compensation committee's approval of the OEA, and upon Russell's report of the discussions that occurred at the compensation committee meeting, when considering whether to elect Ovitz as President of Disney. 8 Del. C. § 141(e).

[90] Post-trial Op. at —, *36 (italics in original, footnotes omitted).

[91] In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 289 (Del.Ch.2003) (italics in original).

[92] Appellants' Opening Br. at 23.

[93] Id.

[94] Id. at 4.

[95] The appellants also assert that the Chancellor erred by imposing upon them the burden of proving that the Disney directors acted in bad faith. That argument fails because our decisions clearly hold that for purposes of rebutting the business judgment presumptions, the plaintiffs have the burden of proving bad faith. Emerald Partners, 787 A.2d at 91; Brehm, 746 A.2d at 264.

[96] Appellants' Opening Br. at 23.

[97] The appellants cite only the Chancellor's 2003 pre-trial Opinion (825 A.2d at 289). But nowhere on the cited page does the Court suggest, let alone rule, that making material decisions without adequate information and without adequate deliberation, without more, constitutes bad faith. To the contrary, immediately after identifying the good faith standard, the Court states that "[k]nowing or deliberate indifference by a director to his or her duty to act faithfully and with appropriate care is conduct that, in my opinion, that may not have been taken honestly and in good faith to advance the best interests of the company." Id.

[98] The Chancellor observed, after surveying the sparse case law on the subject, that both the meaning and the contours of the duty to act in good faith were "[s]hrouded in the fog of...hazy jurisprudence." Post-Trial Op. at, *35.

[99] See, e.g., Hillary A. Sale, Delaware's Good Faith, 89 CORNELL L.REv. 456 (2004); Matthew R. Berry, Does Delaware's Section 102(b)(7) Protect Reckless Directors From Personal Liability? Only if Delaware Courts Act in Good Faith, 79 WASH. L.REV. 1125 (2004); John L. Reed and Matt Neiderman, Good Faith and the Ability of Directors to Assert § 102(b)(7) of the Delaware Corporation Law as a Defense to Claims Alleging Abdication, Lack of Oversight, and Similar Breaches of Fiduciary Duty, 29 DEL. J. CORP. L. 111 (2004); David Rosenberg, Making Sense of Good Faith in Delaware Corporate Fiduciary Law: A Contractarian Approach, 29 DEL. J. CORP. L. 491 (2004); Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law Jurisprudence, 55 DUKE L.J. 1 (2005) ("Griffith"); Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1 (2005); Filippo Rossi, Making Sense of the Delaware Supreme Court's Triad of Fiduciary Duties (June 22, 2005), available at http://ssrn.com/abstract=755784; Christopher M. Bruner, "Good Faith," State of Mind, and the Outer Boundaries of Director Liability in Corporate Law (Boston Univ. Sch. of Law Working Paper No. 05-19), available at http://ssrn.com/abstract=832944; Sean J. Griffith & Myron T. Steele, On Corporate Law Federalism Threatening the Thaumatrope, 61 Bus. LAW. 1 (2005)

[100] See, e.g., Robert Baker, In Re Walt Disney: What It Means To The Definition Of Good Faith, Exculpatory Clauses, and the Nature of Executive Compensation, 4 FLA. ST. U. Bus. REV. 261 (2004-2005); Tara L. Dunn, The Developing Theory of Good Faith In Director Conduct: Are Delaware Courts Ready To Force Corporate Directors To Go Out-Of-Pocket After Disney IV?, 83 DENV. U.L.REV. 531 (2005).

[101] Post-Trial Op. at —, *36 (italics added, italics in original omitted).

[102] The Chancellor so recognized. Id. at, *35 ("[A]n action taken with the intent to harm the corporation is a disloyal act in bad faith."). See McGowan v. Ferro, 859 A.2d 1012, 1036 (Del.Ch.2004) ("Bad faith is `not simply bad judgment or negligence,' but rather 'implies the conscious doing of a wrong because of dishonest purpose or moral obliquity...it contemplates a state of mind affirmatively operating with furtive design or ill will.'") (quoting Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208, n. 16 (Del.1993)).

[103] Post-trial Op. at —, *31 (citing Griffith, supra note 99, at 15).

[104] An example of such overlap might be the hypothetical case where a director, because of subjective hostility to the corporation on whose board he serves, fails to inform himself of, or to devote sufficient attention to, the matters on which he is making decisions as a fiduciary. In such a case, two states of mind coexist in the same person: subjective bad intent (which would lead to a finding of bad faith) and gross negligence (which would lead to a finding of a breach of the duty of care). Although the coexistence of both states of mind may make them indistinguishable from a psychological standpoint, the fiduciary duties that they cause the director to violate—care and good faith—are legally separate and distinct.

[105] 8 Del. C. § 102(b)(7).

[106] 8 Del. C. § 102(b)(7)(ii).

[107] 8 Del. C. §§ 145(a) & (b).

[108] As we recently stated in Stifel Financial Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002):

The invariant policy of Delaware legislation on indemnification is to "promote the desirable end that corporate officials will resist what they consider unjustified suits and claims, secure in the knowledge that their reasonable expenses will be borne by the corporation they have served if they are vindicated" Folk, on Delaware General Corporation Law sec. 145 (2001). Beyond that, its larger purpose is "to encourage capable men to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the directors they serve." Id.

[109] Basic to the common law of torts is the distinction between conduct that is negligent (or grossly negligent) and conduct that is intentional. And in the narrower area of corporation law, our jurisprudence has recognized the distinction between the fiduciary duties to act with due care, with loyalty, and in good faith, as well as the consequences that flow from that distinction. Recent Delaware case law precludes a recovery of rescissory (as distinguished from out-of-pocket) damages for a breach of the duty of care, but permits such a recovery for a breach of the duty of loyalty. See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1147-1150 (Del.Ch.1994), aff'd, 663 A.2d 1156 (Del.1995).

[110] Post-trial Op. at —, *36 (footnotes omitted).

[111] See, e.g., Allaun v. Consol. Oil Co., 147 A. 257, 261 (Del.Ch.1929) (further judicial scrutiny is warranted if the transaction results from the directors' "reckless indifference to or a deliberate disregard of the interests of the whole body of stockholders"); Gimbel v. Signal Cos., Inc., 316 A.2d 599, 604 (Del.Ch.1974), aff'd, 316 A.2d 619 (Del.1974) (injunction denied because, inter alia, there was "[n]othing in the record [that] would justify a finding...that the directors acted for any personal advantage or out of improper motive or intentional disregard of shareholder interests"); In re Caremark Int'l Derivative Litig., 698 A.2d 959, 971 (Del.Ch.1996) ("only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability."); Nagy v. Bistricer, 770 A.2d 43, 48, n.2 (Del.Ch.2000) (observing that the utility of the duty of good faith "may rest in its constant reminder...that, regardless of his motive, a director who consciously disregards his duties to the corporation and its stockholders may suffer a personal judgment for monetary damages for any harm he causes," even if for a reason "other than personal pecuniary interest").

[112] Post-trial Op. at —, *36. For the same reason, we do not reach or otherwise address the issue of whether the fiduciary duty to act in good faith is a duty that, like the duties of care and loyalty, can serve as an independent basis for imposing liability upon corporate officers and directors. That issue is not before us on this appeal.

[113] Kahn v. Lynch Commc'ns Sys., 669 A.2d 79, 84 (Del.1995).

[114] Post-trial Op. at —, *48.

[115] Id.

[116] Id. at —, *49 (emphasis in original) (footnotes omitted).

[117] See FLETCHER, supra note 46, at § 357.

[118] Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992) (ambiguity exists "when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings").

[119] Investment Assoc. v. Standard Power & Light Corp., 48 A.2d 501 (Del.Ch.1946); aff'd, 51 A.2d 572 (Del.1947).

[120] Ellingwood v. Wolf's Head Oil Ref. Co., 38 A.2d 743 (Del.1944).

[121] Eagle Industries, Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.1997); Pellaton v. The Bank of New York, 592 A.2d 473, 478 (Del.1991); Harrah's Entertainment, Inc. v. JCC Holding Company, 802 A.2d 294, 309 (Del. Ch.2002) (applying rule of construction to ambiguous corporate instruments).

[122] Post-trial Op. at ,*49, n. 571, 572. Nonetheless, the board was informed of, and supported, Eisner's decision.

[123] Id. at , *49.

[124] Id. To support their argument that the compensation committee's approval of the Ovitz termination was required, appellants point to a provision of the Option Plan giving the compensation committee "the sole power to make determinations regarding the termination of any participant's employment," including "the cause[s] therefor and the consequences thereof." That provision, however, is expressly limited by the language "or as otherwise may be provided by the [Compensation] Committee." Here, the compensation committee approved the OEA, which contained its own termination provisions and standards. Section 11 of the OEA provided that "the Company" shall determine if cause exists for a termination. The OEA does not purport to delegate any authority to the compensation committee to make such a determination. The Chancellor recognized that although the foregoing reasoning might not be dispositive, the limiting language of the Option Plan was "sufficiently ambiguous—as to whether action by the compensation committee is required in all terminations...of employees who possess options—to, in my opinion, absolve...the compensation committee for not acting with respect to Ovitz's termination." Id. at , *50.

[125] Hudak, 806 A.2d at 151, n. 28.

[126] Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1146 (Del.1989).

[127] Post-trial Op. at , *39.

[128] Id. at , *14.

[129] Id. at , *15.

[130] Id. at , *16.

[131] Id. at , *50.

[132] Id. at , *51

[133] Although the appellants continue to argue as fact that Eisner allowed Ovitz to receive an NFT as an act of friendship, the Chancellor found that Eisner did not want Ovitz to receive that payment. Id. at, *20 ("Despite the paucity of evidence, it is clear to the Court that both Eisner and Litvack wanted to fire Ovitz for cause to avoid the costly NFT payment, and perhaps out of personal motivations."). Appellants offer no tenable basis to overturn that finding.

[134] In re J.P. Stevens & Co., Inc. S'holders Litig., 542 A.2d 770, 780 (Del.Ch.1988).

[135] Brehm, 746 A.2d at 263.

[136] Id.

[137] Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del.1971); see also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del.1985).

[138] Post-trial Op. at , *39.

[139] The appellants also claim, because the Disney defendants had a rational basis to fire Ovitz for cause, the NFT payment to Ovitz constituted an unnecessary gift of corporate assets to Eisner's friend. Because we affirm the Court of Chancery's legal determination that no cause existed to terminate Ovitz, that claim lacks merit on its face.

[140] See Kerbs v. California Eastern Airways, 90 A.2d 652, 656 (Del.1952) ("Sufficient consideration to the corporation may be, inter alia, the retention of the services of an employee, or the gaining of the services of a new employee, provided there is a reasonable relationship between the value of the services to be rendered by the employee and the value of the options granted as an inducement or compensation.").

[141] Indeed, all the credible evidence supports the Chancellor's conclusion that Ovitz resisted, at every turn, all suggestions, communicated directly or indirectly by Eisner, that Ovitz leave Disney.

[142] Post-trial Op. at —, *38.

In re TRADOS INCORPORATED SHAREHOLDER LITIGATION.

No. CIV.A. 1512-VCL.

Court of Chancery of Delaware.

Submitted: May 21, 2013.

Decided: Aug. 16, 2013.

*20David A. Jenkins, Michele C. Gott, Robert K. Beste, III, Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware; Timothy J. McEvoy, Cameron McEvoy, PLLC, Fairfax, Virginia; Attorneys for Plaintiff Marc Christen.

Raymond J. DiCamillo, Scott W. Perkins, Richards, Layton & Finger, P.A., Wilmington, Delaware; David J. Berger, Elizabeth M. Saunders, Steven Guggenheim, Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California; Attorneys for Defendants David Scanlan, Lisa Stone, Sa-meer Gandhi, Joseph Prang, Klaus-Dieter Laidig, Joseph Campbell, and Jochen Hummel.

John L. Reed, Scott B. Czerwonka, Andrew H. Sauder, DLA Piper LLP, Wilmington, Delaware; Attorneys for Defendant Trados Inc.

OPINION

LASTER, Vice Chancellor.

TRADOS Inc. (“Trados” or the “Company”) obtained venture capital in 2000 to support a growth strategy that could lead to an initial public offering. The VC firms received preferred stock and placed representatives on the Trados board of directors (the “Board”). Afterwards, Trados increased revenue year-over-year but failed to satisfy its VC backers. In 2004, the VC directors began looking to exit. As part of that process, the Board adopted a management incentive plan (the “MIP”) that compensated management for achieving a sale even if the transaction yielded nothing for the common stock.

In July 2005, SDL pic acquired Trados for $60 million in cash and stock (the “Merger”). Under Trados’s certificate of incorporation, the Merger constituted a liquidation that entitled the preferred stockholders to a liquidation preference of $57.9 million. Without the MIP, the common stockholders would have received $2.1 million. The MIP took the first $7.8 million of the Merger consideration. The preferred stockholders received $52.2 million. The common stockholders received nothing.

Directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders which require that they strive prudently and in good faith to maximize the value of the corporation for the benefit of its residual claimants. A court determines whether directors have fulfilled their fiduciary duties by evaluating the challenged decision through the lens of the applicable standard of review. Because a board majority comprised of disinterested and independent directors did not approve the Merger, the defendants had to prove that the transaction was entirely fair.

The plaintiff contended that instead of selling to SDL, the Board had a fiduciary duty to continue operating Trados independently in an effort to generate value for the common stock. Despite the directors’ failure to follow a fair process and their creation of a trial record replete with contradictions and less-than-credible testimony, the defendants carried their burden of proof on this issue. Under Trados’s business plan, the common stock had no economic value before the Merger, making it fair for its holders to receive in the Merger the substantial equivalent of what they had before. The appraised value of the common stock is likewise zero.

*21I. FACTUAL BACKGROUND

Trial took place over five days in February and March 2013. The parties introduced over 650 exhibits, submitted deposition testimony from twenty witnesses, and adduced live testimony from eight fact and two expert witnesses. Because this case did not involve a transaction to which entire fairness applied ab initio, the burden of proof rested on the plaintiff initially to prove facts sufficient to rebut one of the elements of the business judgment rule. Once the plaintiff proved that a disinterested and independent board majority did not approve the Merger, the burden shifted to the defendants to establish that their decisions were entirely fair. Having evaluated the witnesses’ credibility and weighed the evidence as a whole, I find the facts to be as follows.

A. Trados’s Early Days.

Defendant Jochen Hummel and Iko Knyphausen founded Trados in 1984. Hummel became Chief Technology Officer and served on the Board. Knyphausen left the Company and did not play a significant role in the case.

Trados developed proprietary desktop software for translating documents. In overly simplistic terms, the software stored a database of words and phrases. When presented with a new document, the software identified words and phrases found in its database and replaced them with their foreign counterparts.

By the late 1990s, Trados enjoyed a dominant position in the desktop translation market. To expand, Trados sought to penetrate the enterprise market. As the name suggests, customers in this market are large corporate and government enterprises whose many users run programs on a network. Trados also envisioned transitioning its products to the internet and connecting translators directly with purchasers of translation services.

At the turn of the third millennium of the Common Era, Trados sought VC funding to spur its growth and help position itself for an IPO. At the time, Trados differed significantly from the stereotypical dot-com startup. Trados had been around for sixteen years and sold a successful desktop product. In 1999, the Company generated $11.3 million in revenue and was preparing to release its first enterprise products. In 2000, Trados generated revenue of $13.9 million, representing year-over-year growth of approximately 23%.

B. Wachovia Invests In Trados.

In early 2000, Trados came to the attention of First Union Capital Partners, the predecessor to Wachovia Capital Partners, LLC (“Wachovia”). For simplicity, this decision refers only to Wachovia. Around March 2000, after conducting due diligence, Wachovia invested $5 million. Defendant David Scanlan, a Wachovia partner, sponsored the investment. In return, Wachovia received 1,801,303 shares of Series A Participating Preferred Stock (“Series A”) and 1,838,697 shares of Series B Non-Voting Convertible Preferred Stock (“Series B”), which were convertible on a 1-for-l basis into Series A. Wachovia later converted, bringing its total Series A shares to 3,640,000. Because the conversion rendered the Series B irrelevant, this decision discusses only the Series A.

Each Series A share had an initial liquidation preference equal to its purchase price of $1.374. The stock paid a cumulative dividend at a rate of 8% per annum with unpaid dividends increasing the liquidation preference. As participating preferred, the Series A shared in any remaining distribution available for the common stock, subject to a cap not relevant to the *22case. At its option, Wachovia could convert the Series A into common stock pursuant to a formula in the Company’s certificate of incorporation. The Series A had the right to veto any attempt by Trados to (i) amend its certifícate of incorporation, (ii) authorize, issue, or reclassify shares, (iii) make, authorize, or approve dividends or distributions, (iv) redeem, repurchase, or acquire stock, (v) change the number of directors, or (vi) effect any change of control. The Series A also had the right to vote with the common stock on an as-converted basis.

As part of the investment, Wachovia obtained the right to designate a director. Wachovia designated Scanlan.

C.Hg Invests In Trados.

Around the same time, Trados came to the attention of Mercury Capital, the predecessor to Hg Capital LLP (“Hg”). For simplicity, this decision refers only to Hg. In April 2000, Hg invested $10.25 million in exchange for 5,333,380 shares of Series C Preferred Stock (“Series C”). Each Series C share had an initial liquidation preference equal to its purchase price of $1.922. Its other rights paralleled and participated pari passu with the Series A, except that the Series C was not participating preferred.

In August 2000, Hg invested an additional $2 million in exchange for 862,976 shares of Series D Preferred Stock (“Series D”). Each Series D share had an initial liquidation preference equal to its purchase price of $2.3176. Its other rights paralleled and participated pari passu with the Series C, including the cumulative dividend and veto rights. In September 2000, Hg bought 1,379,039 shares of common stock for approximately $2.3 million.1

Like Wachovia, Hg obtained the right to designate a director. The relevant director for this case is defendant Lisa Stone, a partner at Hg who joined the Board in mid-2002.

D. Trados Builds Its Business.

By February 2001, Trados was attracting new, large corporate clients. In May, Trados released the latest version of its desktop software, Trados 5.

In September 2001, Wachovia and Hg made follow-on investments in Series BB Preferred Stock (“Series BB”). Wachovia paid $1.0 million for 1,007,151 shares. Hg paid $2.0 million for 2,014,302 shares. Each Series BB share had an initial liquidation preference equal to its purchase price of $0.9929. Otherwise the rights of the Series BB paralleled and participated pari passu with the Series A, including its status as participating preferred.

At the end of 2001, Trados released the MultiTerm Client Server, an enterprise product that provided a web interface for customer databases. Revenue for the year reached $15.9 million, a 14% increase over 2000, even after the negative effects of the 9/11 terrorist attacks.

E. Trados Acquires Uniscape.

Although Trados was growing and making progress in the enterprise market, management felt the Company could accelerate its growth with an acquisition. Tra-dos focused on Uniscape, Inc., a software company with a superior enterprise product. By acquiring Uniscape, Trados hoped *23to gain strong enterprise development and sales teams.

Like Trados, Uniscape had received several rounds of VC funding. Uniscape’s principal backer was Sequoia Capital (“Sequoia”), a prominent Silicon Valley VC firm. Through various funds, Sequoia had invested $13 million in Uniscape. Defendant Sameer Gandhi, the Sequoia partner who sponsored the Uniscape investment, served on its board.

Another member of the Uniscape board was defendant Joseph Prang, the CEO of Conformia Software, Inc. Prang and a business partner used Mentor Capital Group LLC (“Mentor”) as their investment vehicle. Through Mentor, Prang had invested approximately $700,000-750,-000 of his own money in Uniscape. See Prang Dep. 17-19; Tr. 794-95.

In May 2002, Trados and Uniscape merged in a stock-for-stock transaction that valued Trados at $30 million, Unis-cape at $11 million, and the post-transaction entity at $41 million. See JX 474 at 00383-91 (recording stock issuance for transaction); JX 268 at 4 (memorializing per share purchase price as liquidation preference); JX 566. International Data Corporation (“IDC”), a market research firm, described the transaction as a “win-win.” JX 75 at 4. To acquire Uniscape, Trados issued 14,806,097 shares of Series E Preferred Stock (“Series E”) to the former Uniscape stockholders, with substantially all of it going to Uniscape’s preferred stockholders. Sequoia received 5,255,913 Series E shares, and Mentor received 263,810 Series E shares. Each Series E share carried an initial liquidation preference of $0.7248, equal to its effective purchase price. Its other rights paralleled and participated pari passu with the Series C.

As a result of the transaction, Sequoia wrote down its investment in Uniscape to $3.8 million. The value of Mentor’s investment dropped to $191,209. The reduced amounts represented what Sequoia and Mentor actually invested in Trados. For their own purposes, however, Gandhi and Prang continued to view their investments in terms of the much larger amounts they originally invested in Uniscape.

In the transaction, Sequoia gained the ability to designate two Trados directors. Sequoia designated Gandhi and Prang.

F. Invision Invests In Trados.

In August 2002, Trados raised $2 million from Invision AG, a Swiss private equity firm. Invision received 2,350,174 shares of Series F Preferred Stock (“Series F”). Each share of Series F carried an initial liquidation preference equal to its purchase price of $0.8510. Its other terms paralleled and participated pari passu with the Series C.

Invision received the ability to designate a director and named defendant Klaus-Dieter Laidig in December 2002. Unlike Scanlan, Stone, and Gandhi, Laidig was not the Invision partner who sponsored the Trados investment. Laidig was a technology consultant who previously worked as an executive at Hewlett-Packard for over thirty years. Laidig had a part-time consulting relationship with Invision that paid him a nominal amount for handling various projects. Laidig served on the boards of two other Invision portfolio companies and advised one of Invision’s funds.

G. Trados Continues To Grow Slowly.

The Board hoped that the Uniscape transaction would transform Trados. The transaction sought to unite the strengths of Trados’s desktop software and Unis-eape’s enterprise platform, but integration difficulties plagued the combined company. Trados’s desktop software programmers *24operated in a Microsoft environment, and their knowledge, skills, and practices were tailored to it. Uniscape’s enterprise software programmers operated in a Java environment and were equally specialized. The two teams had difficulty communicating and resisted compromise. Rather than capturing synergies, Trados ended up maintaining two separate code sets and two different engineering teams.

Trados’s performance in 2002 reflected these challenges. For the year, Trados generated $19.8 million in revenue, a 25% year-over-year increase, but far below the budgeted figure of $27 million. JX 95 at 4; JX 98 at 05079. In response, Trados cut costs by closing or downsizing regional offices, consolidating operations, and renegotiating leases. In January 2003, management developed a plan to combine the two code sets through Project Genesis, an effort that would “[u]nify our products on to a next generation platform” and “[d]e-velop a leveraged product organization and product suite.” JX 99 at 05108. Hummel, Trados’s CTO, believed completing Project Genesis was feasible and would keep Tra-dos at the leading edge for another decade. Tr. 597-602.

Gandhi’s mid-year report to his partners at Sequoia described Trados as “on track.” JX 105. He continued: “By year-end, we should have a business that can scale profitably in 2004 ... [and] ~$35M in revenue looks achievable. The government business is heating up and could account for 20-25% of revenue next year. No immediate actions are required here.” Id. Gandhi nevertheless cautioned that in terms of returns for Sequoia, Trados was unlikely to be a winner: “Within 18 months the company will be a decent acquisition target (Doeumentum, possibly?). Investment outlook: return capital at best. We do not own enough of the company to generate a meaningful return.” Id.

Stone gave her partners at Hg a similar mid-year evaluation of the business:

Overall, the management team is performing adequately but there are emerging issues around the HQ location, following the merger last year with Un-iscape, that will need to be addressed. The market for software sales, particularly in the enterprise arena, is tough. The business is however making reasonable progress, with some significant new customer wins and sales up 10% from last year. Overall, the business is forecasting breaking even this year.

JX 107 at 000062.

In August 2003, Invision invested another $2 million and received 2,428,513 shares of Series FF Preferred Stock (“Series FF”). Each Series FF share carried an initial liquidation preference of $0.8235, equal to its purchase price. Its other terms paralleled and participated pari pas-su with the Series C. That same month, Trados’s management presented the Board with a detailed plan to complete Project Genesis under Hummel’s leadership. See JX 114 at 02161-73. The plan showed estimated project costs of $964,150 if a portion of development was outsourced and $1,626,750 if kept in-house.

In September 2003, Trados released a new version of MultiTerm, an enterprise product that Trados described as “the most sophisticated, flexible and scaleable [sic] terminology management system on the market today” and “a powerful database solution designed to standardise [sic] terminology and distribute it throughout the enterprise over the Internet or intranet at the click of a button.” JX 120. Trados also updated its desktop product and prepared to launch TeamWorks, another enterprise product. JX 125. A Board presentation from October anticipated completing Project Genesis by the second quarter of 2005. Id. at 66.

*25By the end of 2003, Trados generated $24.8 million in revenue, achieving 25% year-over-year growth and making budget. Enterprise product revenue reached $3.0 million, representing more than 200% growth year-over-year. JX 137 at 10. On the downside, the Company remained unprofitable, and its cash balance declined. Stone provided her partners with another summary of the Company’s mixed performance, noting that the business was making “reasonable progress.” JX 133 at 000069. Gandhi was more positive about the business:

The company made significant strides this year in preparation for greater growth in 2004. Progress includes: major upgrade to [the] management team ...; consolidation of HQ in Sunnyvale (moved management team from VA); [and] consolidation of R & D .... Management has demonstrated the ability to execute on multiple complex initiatives simultaneously. With this work complete, and with the best pipeline ever entering a new fiscal year, this company should be able to grow 50% and generate cash in 2004.

JX 129. The “major upgrade to [the] management team” included a new CFO, James Budge. But despite these positive signs, Gandhi again bluntly assessed the prospects for a significant return to Sequoia: “Unfortunately, while we might end up with an attractive software company, our ownership position makes it difficult to do much more than hope to recover a portion of invested capital.” Id.

In early 2004, with Trados coming off a record revenue year, Gandhi asked the head of software investment banking for JMP Securities (“JMP”), Kevin McClel-land, to approach Trados’s then-CEO, Dev Ganesan. McClelland’s mission was to reach out to Ganesan and begin setting the table for a sale by discussing “opportunities for Trados in the public equities and M & A markets.” JX 139. McClelland emailed Ganesan, and the two met in person in February 2004.

H. The Board Replaces Ganesan.

During the first quarter of 2004, Tra-dos’s efforts to capture government business faltered because its three non-US directors and significant overseas equity ownership made it difficult to comply with federal contracting requirements. At a Board meeting on April 20, 2004, Ganesan detailed the Company’s first quarter performance and discussed the outlook for the year. Management had projected revenue of $33 million for 2004, representing year-over-year growth of 33%. Although first quarter revenue was ahead of budget, the Company lost $2.5 million, more than expected, and Trados’s cash balance fell to $6.6 million. Ganesan lowered the revenue forecast for the year from $33 million to $28 million. He then proposed maintaining headcount.

For the Board, this was a tipping point. Stone testified that the Board had been thinking about replacing Ganesan since the beginning of the year. See Tr. 688. Scan-lan noted that Ganesan had consistently missed his budgets, and the directors felt the Company was running out of time. See Tr. 242-43. During the April 20 meeting, the Board terminated Ganesan. The directors appointed Hummel as Acting President, but instructed him to consult with Scanlan and Gandhi “before taking any material action on behalf of the Corporation.” JX 152. The Board tasked Scan-lan with leading the search for a replacement CEO. The Board also decided to explore whether the Company could be sold in the near-term. The Board sent Hummel to meet with Trados’s principal commercial relationships — Microsoft, Bowne Global Solutions (“Bowne”), and *26Documentan, Inc. — to explore their interest in the Company. They also decided to have JMP “test the waters” for a potential sale with a broader set of acquirers. JX 186.

Hummel struck out. In June 2004, he met with Microsoft, historically a large user of Trados’s desktop product. In April 2000, to solidify the relationship, Microsoft had purchased 6,927,660 shares of Trados common stock. Microsoft listened appreciatively to Hummel’s report on recent developments but made clear they had no interest in acquiring Trados. Hummel’s efforts with Bowne and Docu-mentan were similarly unsuccessful.

Gandhi took the lead on the broader market canvass. On June 24, 2004, David Silver of Santa Fe Capital Group contacted Gandhi about one of his clients, SDL, who was “prepared to make an offer” for Tra-dos. JX 182. Gandhi quickly signed a nondisclosure agreement with Silver. Id. At the same time, Gandhi and Budge negotiated the terms of Trados’s engagement of JMP. On June 30, Trados formally retained JMP to “advise [Trados] concerning opportunities for maximizing shareholder value, which may include a sale or merger of the Company.” JX 192 at 00544. The engagement letter contemplated a 1.50% transaction fee for a deal with SDL or Lionbridge Technologies, Inc. (“Lion-bridge”), the two most logical acquirers, and a 1.75% transaction fee for a deal with another party. The same day, Silver introduced SDL’s CEO, Mark Lancaster, to McClelland via email.

Meanwhile, Scanlan worked with an executive search firm to identify candidates for the CEO position. His efforts ultimately led to defendant Joseph Campbell, the former COO of iManage, Inc., a company in the enterprise content management space. Campbell oversaw a highly successful sale of iManage to Interwoven in 2003. Although initially not interested, Campbell became convinced that Trados represented an attractive opportunity after conducting due diligence and speaking with members of the Board.

With the dual distractions of a sale process and CEO search, the Company’s business understandably faltered. Second quarter revenue came in at $5.8 million, missing budget by 8%, and Trados incurred a $1 million loss.

I. The Board Decides To Hire Campbell And Passes On A Distressed Sale.

On July 7, 2004, the Board approved hiring Campbell, and Scanlan suggested that the Board consider adopting a plan to incentivize senior executives to pursue a sale, which later became the MIP. The Board agreed, recognizing that otherwise the management team “may not have sufficient incentives to remain in the Company’s service and to pursue a potential acquisition of the Company, due to the high liquidation preference of the Company’s preferred stock.” JX 200 at 4.

At the same meeting, McClelland reviewed the prospects for a sale. JMP’s presentation valued Trados using comparable company and comparable transaction methodologies. The comparable company analysis generated a median multiple of 2.0 times last-twelve-months (“LTM”) revenue, implying an enterprise value of approximately $55 million. The comparable transaction analysis examined seven acquisitions from July 2003 through February 2004 involving “Selected Content Management and Search Companies.” JX 198 at 15. It generated a median multiple of 2.8 times LTM revenue, implying an enterprise value of approximately $75 million. JMP’s full valuation range was quite broad, extending from $20.4 million to $169.8 million.

*27JMP’s materials identified twenty-eight potential acquirers. JX 198 at 7. In addition to SDL, which had initiated contact through Gandhi, JMP reached out to Lion-bridge, Documentum, Filenet, Verity, Adobe, IBM, and Open Text. Most had no interest, and Lionbridge “terminated its discussions with the Company shortly after receiving the Company’s financial statements.” JX 200 at 5. Only SDL seemed serious.

On July 15, 2004, Lancaster met with Stone to discuss SDL. She reported that Lancaster’s “agenda was clearly to pur-suade [sic] me that Trados is better off with [SDL] than without and that selling to them for [stock] was a good idea.” JX 208. Subsequently, Lancaster spoke with Gandhi and Scanlan by conference call. On July 26, Lancaster called McClelland and offered $40 million for the Company, consisting of $10 million in cash and $30 million in stock.

Given the low value that SDL put on the Company, the directors rejected the offer. McClelland informed SDL about the Board’s “lack of interest at [the] current deal structure and valuation.” JX 227. The decision did not mean that the Board was not interested in a sale. The directors understood that the Company had stumbled and was not putting its best foot forward. A new CEO could “fix it,” particularly one with solid credentials as an operator and experience engineering a successful exit. Tr. 335.

At the end of July 2004, Scanlan and Campbell reached formal agreement on an employment package. Campbell’s compensation included a base salary of $250,000, a 30% allocation of the as-yet-undocumented MIP, and options to acquire common stock representing 4% of the Company’s fully diluted capitalization. His options had an exercise price “equal to the fair market value per share of the Company’s Common Stock,” which the Board had determined was $0.10 per share. JX 209 at 2. Campbell also would join the Board. Gandhi reported to Sequoia on the hire:

We have recruited a hard-nosed CEO whose task is to grow this company profitably or sell it. The company has never had decent management, but with a new CEO, VP Sales, VP Marketing, and CFO in place, for the first time we will see what professional management can do. Simultaneously, [JMP] has also been retained to explore the M & A options for the business. I would expect that the company is sold within the next 18 months (perhaps sooner).

JX 172.

J. Campbell’s Initial Steps.

On August 23, 2004, Campbell officially began his tenure as CEO. He quickly discovered that the Company’s cash position was worse than expected and that if Tra-dos missed sales in the third quarter by the same margin as in the second, the cash situation would become dire by year-end. See Campbell Dep. I 31-32. After just two weeks on the job, Campbell called a Board meeting.

On September 8, 2004, the directors met. After describing the Company’s situation, Campbell asked the VC representatives whether their firms would provide additional capital. Each declined. See Tr. 24; Campbell Dep. I 38-39.

Campbell then sketched out two alternatives. See JX 235 at 50424. Under the first scenario, Campbell would reposition Trados in the growing enterprise content management market, where iManage had operated. This would require investing in the Company’s enterprise products, developing Project Genesis, and stressing content management rather than translation services. The last aspect was largely an *28exercise in branding, but it could boost Trados’s value because content management companies commanded higher multiples. Under this alternative, Campbell would aim for double digit top-line growth with break-even profitability in 2005. Campbell estimated that it would require $4 million in new capital. Under the second scenario, Campbell would focus on stabilizing the core business. His goal would be to achieve near-term profitability and “[e]ngage in M & A activities in December.” JX 235 at 50427. This alternative required only $2 million in new capital.

The Board declined to select either option and asked Campbell to continue refining his views. The directors authorized him to seek venture debt financing to ameliorate the immediate cash problem.

On September 22, 2004, Campbell terminated Trados’s relationship with JMP. Campbell did not want a “for sale sign” on the business while he was trying to fix its operations. Tr. 17. He also felt that keeping Trados on the market too long would put downward pressure on the Company’s price. It was a gentle termination, and Campbell reassured McClelland that he anticipated reengaging. See JX 236.

K. Campbell Shows What Professional Management Can Do.

With Campbell at the helm, the Company’s situation began to improve. On the financing front, Campbell secured $4 million from Western Technology Investment (“Western Tech”), a provider of venture debt. Trados borrowed $2.5 million immediately and could draw the remaining $1.5 million by March 31, 2005. Western Tech charged interest of 12%, received warrants to acquire 366,000 Series FF shares immediately, and would receive additional warrants if the Company drew the balance of the venture debt. As is typical for venture debt, the loan came without any financial covenants. The Board was ecstatic; Scan-lan called it a “miracle.” Tr. 333.

The Company’s fourth quarter results proved Campbell’s mettle as an operator. Trados generated “record” revenue of $8.7 million and achieved a “record” profit of $1.1 million. JX 322 at 4. Enterprise revenue exceeded desktop, suggesting that the repositioning effort was gaining traction.

On the M & A front, SDL’s investment banker contacted Stone in November 2004. Stone emailed Campbell that the banker wanted to speak with him, even though she suggested that “the time might not be right....” JX 265. Stone explained that SDL “remained v[ery] keen on doing the Trados deal” and “wanted to ensure that a dialogue was in hand.... ” Id. Campbell agreed that it was “very important to somehow keep SDL ‘at the table.’ ” Id. As he explained,

They are definitely one of the three [acquirers] that could potentially represent a positive exit strategy within the Globalization Market. From a positioning standpoint, we can begin to position me as the one brought in to increase shareholder value similar to that of iM-anage. That way they can understand why we turned down an offer of $40 Millfion] but may be amenable to a future offer quite a bit higher.

Id. SDL’s banker also reached out to Gandhi. See JX 271.

In December 2004, Campbell met with Lancaster. The same month, Campbell and Budge presented the MIP to the Board. The plan provided senior management with an escalating percentage of sale proceeds depending on the valuation achieved. To the extent MIP participants also received consideration as equity holders, whether through common stock or options, their MIP payout would be reduced by the amount of the consideration *29received. See JX 278 at 3. The cutback feature ensured that management would focus exclusively on proceeds received through the MIP rather than from their status as common stockholders. The Board allocated 30%, 12%, and 10% of the MIP to Campbell, Hummel, and Budge, respectively. All of the directors, including Campbell and Hummel, voted to approve the MIP. See JX 277.

Gandhi summarized Trados’s situation at year-end in a report to his partners at Sequoia. He wrote that Campbell had done “a decent job getting the company cleaned up and organized (witness a much better 2nd half to the year)” and that “[h]is mission is to architect an M & A exit as soon as practicable.” JX 276. Gandhi remained negative about the potential returns: “Given the preference structure and likely exit valuation for this business, we unfortunately have to resign ourselves to getting a small fraction of our original Uniscape investment back.” Id. He then reassured his partners that Trados was not taking up too much of his time: “I am not spending a lot of time on this investment, even though I remain on the board.” Id.

L. Exit Discussions Intensify.

On January 10, 2005, Lancaster emailed Campbell and stated “there is sufficient potential that exists for an SDL-Trados combination” such that the two should “continue a more detailed dialogue.” JX 297. On January 17, Campbell reported to Scanlan that Lancaster was “very serious about taking next steps” and asked to meet with Stone and Scanlan before his next meeting with Lancaster. JX 298. Campbell also mentioned that he was “having another conversation” with Bowne, a major customer, and Golden Gate Capital, a private equity firm. Id.

On January 19, 2005, Campbell met with Scanlan and Stone and reviewed a presentation he had prepared entitled “Confidential M & A Discussions.” JX 291; JX 299. Campbell outlined three “Hypothes[e]s for Trados Exit,” labeled (i) Merge-Up, (ii) Harvest, and (iii) Merge-Up Adjacent. JX 291 at 3. The Merge-Up option entailed a merger with SDL, Bowne, or Lionbridge. This option was “low risk,” could be achieved within six months, and yielded valuation expectations of 1.3-1.6 times revenue based on median trading multiples of comparable companies. Id. The Harvest option contemplated a private equity firm like Golden Gate Capital acquiring both Trados and Bowne. This option was “higher risk,” could be achieved within nine months, and yielded valuation expectations “greater” than 2.0 times revenue. Id. at 3, 6. The highest risk option was Merge-Up Adjacent, which contemplated repositioning Trados as an enterprise content management provider and then achieving a merger in that space. The anticipated timeline for this option was twelve to eighteen months, and valuation expectations were less clear. The presentation did not include a stand-alone alternative.

On January 20, 2005, Campbell followed up with Scanlan, asking point blank: “What is an acceptable offer for Trados?” JX 300. Scanlan responded that “it really depends on the nature of the opportunity and the cash/stock dynamic” but promised to “give the dollar figure some thought.” Id. Shortly thereafter, Scanlan asked Campbell to prepare “a proceeds waterfall analysis by class of stock and shareholder that reflects the current ownership of the company and the management incentive plan,” and “run three sensitivities at $50 million, $60 million and $70 million.” JX 299. Scanlan said that looking at the numbers “may move along people’s view[s] on our alternatives.” Id.

*30On January 21, 2005, Campbell updated Scanlan, Gandhi, and Stone about his discussions with Lancaster, reporting that they had a “very open and candid conversation” about “potentially putting our companies together.” JX 302. Lancaster wanted “to see the two companies together in the next 3-5 months.” Id. Lancaster also was “willing to raise cash if need be to try to acquire Trados in an effort to try to resolve the [stock] issue.” Id.

Campbell then offered his thoughts on valuation, suggesting that “we need to be realistic about the offer range.” JX 302. As Campbell saw it, “$45-$55 million] with 50%-75% in stock is where we will wind up. I also believe it’s important for us to be realistic about this or any other offer. Trying to get above 2X revenue in our market is unprecedented .... ” Id. Gandhi responded by asking Campbell to “optimize for true liquidity, not a higher paper valuation,” by which he meant seeking more cash even if it meant a lower nominal price. Id. Campbell replied that getting more cash would be difficult:

The original cash component from SDL was $10 mil, with $30 mil in paper. I do believe we’ve come a long way since then, but there is a question here on ability not desire. They claim to have the equivalent of $26 mil (US) in cash. I suggested SDL look to raising additional cash but I’m certain to make something happen with SDL ... [t]here would still be some paper component to the deal. I think it’s a stretch to imagine a $45-$55 mil cash deal from anybody ....

Id. Gandhi replied that he was “ok with [Campbell’s] approach,” but the group “should realize that sdl paper does in fact require a heavy duty discount.” Id. Gandhi felt that “if [Trados] can get the cash component from sdl to $30m+ and get some stock, ... that deal is very much in the ballpark for what is reasonable for a business such as ours ....” Id.

Invision directly informed Hummel, however, that it would not sell below its entry valuation of $60 million. Hummel passed this along to Campbell. Soon thereafter, the Board reached a consensus that Campbell would seek $60 million from SDL. In his first deposition, Campbell testified that “[a]t this point in time 60 was the number we were attempting to achieve and not a penny higher than that.” Campbell Dep. 1102.

M. SDL And Trados Agree On Price And Structure.

On February 2, 2005, the Board met for an update on Trados’s financial performance and to consider prospects for a transaction. Campbell trumpeted the Company’s fourth quarter results: (i) “$8.7 mil in total revenue!!! — record quarter,” (ii) revenue growth of 27% over the first half of 2004, and (iii) “$1.1 mil in profit from Operations — record profit.” JX 318 at 4. The presentation listed several recent product sales (including a $1.8 million deal with HP), reported that Trados “[d]eliv-ered TeamWorks 2.0,” and indicated that offshore software development was “on track and productive.” Id. at 6. “In light of strong Q4 results,” Trados and Western Tech agreed to extend the deadline for Trados to draw the second tranche of the venture debt from March to September. Id. at 24. Campbell expected good results for the first quarter of 2005 as well, anticipating that Trados would achieve revenue of $7.1 million and do so “profitably.” Id. at 18.

Campbell then presented his stand-alone business plan for 2005-2007. He estimated the total size of the translation software market in 2004 at $170 million and Tra-dos’s “Addressable Software” market at $65 million. JX 309 at 35747. Campbell *31judged that Trados owned a 73% share of the desktop segment, a 58% share of the language services segment, and a 26% share of the enterprise segment. Campbell believed the bulk of Trados’s addressable market — $45 million — was in enterprise software, which gave Trados some room for growth. To increase growth further, Campbell planned to reposition Trados as the dominant vendor in what he labeled the Global Information Solutions (“GIS”) market, which was Campbell’s shorthand for the translation aspect of the enterprise content management space. The GIS strategy contemplated enhancing Trados’s existing enterprise products to provide content management features while the Company completed Project Genesis. Campbell projected revenue of $30 million in 2005, $38 million in 2006, and $50 million in 2007, all of which assumed flat desktop revenue and growth in the enterprise and GIS segments. Campbell testified that discussion of the business plan lasted “fifteen minutes.” Campbell Dep. II 61. During depositions, the VC directors and Prang could not recall considering it. See Scanlan Dep. 129-30; Gandhi Dep. II 92-93; Stone Dep. 118-19; Prang Dep. 116. There was zero interest in funding it. See e.g., Tr. 705 (Stone).

Campbell then updated the Board on the M & A efforts: (i) SDL had made “an updated working offer in January,” (ii) a merger with Bowne would “have to wait 6-9 months,” and (iii) a merger with Lion-bridge would be “possible later in the year but not likely at as high a valuation as SDL.” JX 291 at 4; JX 318 at 21; JX 319 at 00016. The Board authorized Campbell to contact Lancaster and “put a bar out there to say, look, we’re not going to agree on this, ... unless you are thinking in terms of a 60-plus number .... ” Campbell Dep. I 85.

On February 11, 2005, Campbell and Lancaster met, and Campbell conveyed the $60 million price. After balking initially, Lancaster agreed. The consideration would be $50 million in cash and $10 million in SDL stock. To make the price more palatable for his board, Lancaster asked that Trados pay its legal expenses and JMP’s fee out of the sale proceeds. The two executives roughed out a letter of intent (the “LOI”).

Campbell shared the news with the Board. Stone sent a positive report to her partners at Hg. See JX 310 at 000033 (noting Trados “[m]ade their numbers,” “[finished the year well — ahead of forecast and profitable,” and that “Campbell [was] performing well”). Stone also devoted a page to the forthcoming exit, which detailed the Merger consideration and indicated it would return $15.7-19.2 million to Hg on its investment of approximately $16.6 million. Id. at 000038.

On February 14, 2005, Campbell contacted Laidig to find out whether Invision would support the deal. As the most recent investor, Invision was the least out of the money, but also the most reluctant to take a loss. Laidig said Invision would be “fine with a market cap of 60 [million],” which was their pre-money entry price. JX 332.

On February 18, 2005, Budge sent a draft of the LOI to JMP, describing the content as “pretty well baked at this point .... ” JX 337. Then on February 23, Lancaster put the deal on hold after due diligence revealed Trados’s poor performance during the early part of 2004. After a week of inactivity, Budge “pegged the deal odds near zero.” JX 357. On March 1, Lancaster reengaged, but Budge still thought the odds were “no better than 40%.” Id.

On March 29, 2005, Campbell updated the Board on the M & A process and *32reported that Bowne was “in play” with Lionbridge as the likely acquirer. JX 365. This combination would remove two of the three most likely purchasers of Trados under Campbell’s low risk Merge-Up strategy. It also took away the other component (Bowne) of the Harvest strategy. From an operational perspective, it meant that one of Trados’s major customers (Bowne) would be owned by a company that had been seeking aggressively to compete with Trados (Lionbridge). The deal posed a competitive threat to SDL as well, but to the extent SDL felt compelled to respond with an acquisition of its own, Trados was not its only potential target. In short, the Bowne-Lionbridge development made SDL look like the only opportunity for a near-term exit, with going it alone and the less certain Merge-Up Adjacent strategy as fallbacks.

On April 5, 2005, SDL finally responded with comments to the LOI. The purchase price and structure remained substantially the same. Campbell called a special meeting of the Board to consider the LOI. On April 8, the Board gathered via conference call, reviewed the terms of the deal, and approved it. On April 11, Campbell and Lancaster executed the LOI.

N. Trados Continues To Perform Well.

Under Campbell’s leadership, Trados’s fortunes continued to improve. For the first quarter of 2005, the Company brought in revenue of $7.2 million, 26% higher year-over-year and 3% over budget. JX 354. Trados achieved an operating profit of $165,000, and its cash balance exceeded $5 million, beating budget. The GIS repositioning effort was producing results. During the first quarter, the Company issued nine press releases and produced two case studies about enterprise software solutions, and three market analysts issued reports on Trados. For the quarter, enterprise software sales generated over 50% of revenue. In a report to her partners at Hg, Stone was upbeat: “For the first time, the business is ahead of budget in all key areas and has a seemingly good pipeline. Q1 was a record quarter and the business has made a profit.” JX 393 at 000051. Equally important, the “[e]xit” remained “on track.” Id.

During the second quarter of 2005, Tra-dos continued performing. The Company again would have met its budget and shown a profit, except that Campbell and Budge agreed with Lancaster to delay shipping any new copies of Trados 7, the latest version of its desktop program, until after the Merger closed. The revenue manipulation allowed SDL to book the sales during the third quarter, post-Merger. The increased revenue for the third quarter helped Lancaster by making the acquisition immediately accretive for SDL.

During the same period, Lancaster agreed that Campbell would become President and Chief Strategy Officer of SDL. Campbell also would join SDL’s board.

O. The Merger Is Approved And Closes.

On June 9, 2005, Trados’s compensation committee (consisting of Gandhi, Scanlan, and Stone) approved a $250,000 bonus for Campbell and a $150,000 bonus for Budge. The bonuses were given for exemplary performance, including “[y]ear over year revenue growth exceeding market growth,” “forecast profitability” for the second quarter of 2005, and “[cjreation of three viable exit strategies for the Company.” JX 456.

On June 15, 2005, the Board met to approve the Merger. Under the MIP, the first 13% of the $60 million proceeds ($7.8 million) went to Campbell, Hummel, Budge, and other employees. Campbell’s share of the MIP was 30% ($2.34 million). JX 379. During the Merger negotiations, *33SDL insisted that Campbell enter into a non-competition agreement, but SDL would not dig any further into its pockets to compensate him for it. To preserve the deal, Campbell agreed to the non-compete. For reasons that were not clearly developed at trial, but which I suspect are tax-related, Campbell recharacterized $1.315 million of his MIP payment as compensation for his non-competition agreement. See JX 465 at 45286. He likewise allocated $250,000 of his MIP proceeds to his bonus, which appears to have been another accommodation to keep the deal on track. As a result, Campbell nominally received only $775,000 from the MIP. See id. at 45285-86 (allocating Campbell’s $2.34 million MIP payment). Unlike Campbell, Hummel demanded compensation for his non-competition agreement. His share of the MIP was duly increased from 12% to 14%. See JX 379. Hummel received $1.092 million from the MIP. See JX 465 at 45285.

At the time of the Merger, the total liquidation preference on the preferred stock was $57.9 million, including accumulated dividends. JX 465 at 45283-84. The proceeds remaining after the MIP payments — approximately $52.2 million — went to satisfy the liquidation preference. See id. at 45283. Each of the preferred stockholders received less than their full liquidation preference but more than their initial investment. The amounts recovered by the entities affiliated with the directors are shown in the following table:

As events turned out, the preferred stockholders actually received somewhat less. Under the Merger agreement, approximately $4 million of the consideration was set aside in escrow to address indemnification claims. Only $968,000 from the escrow was dispersed to the preferred stockholders, leaving them with total proceeds of $49.2 million. The common stockholders received nothing.

At the June 15, 2005 meeting, the Board determined that the Merger was “advisable and in the best interests of the Company and its stockholders” and formally “authorized, adopted and approved” it. JX 470 at 50853. The Board also approved and recommended to stockholders an amendment to the Company’s certificate of incorporation that reset the liquidation preferences of the preferred stock at the specific amounts they would receive in the Merger.

All that remained were the necessary stockholder approvals, one by the preferred and one by the common. Trados management anticipated getting both votes handily, as shown by the following table that Budge prepared and Campbell sent to Lancaster:

*34

JX 419; see JX 422 (Campbell forwarding to Lancaster).

On June 17, 2005, Trados’s stockholders approved the Merger. Microsoft abstained, advising Campbell that “the economic result from the perspective of our equity interest is not such that we are prepared to actively vote in favor .... ” JX 513.

P. The Plaintiff Sues.

Plaintiff Marc Christen owned about 5% of Trados’s common stock. On July 21, 2005, he sought appraisal for his 1,753,298 shares.

Discovery in the appraisal action did not proceed smoothly. Christen was forced to file several motions to compel, and Tra-dos’s representations that it had completed its document production were repeatedly proven incorrect. During the appraisal action, Christen deposed Campbell, Gandhi, McClelland, Budge, Knyphausen, and Kevin Passarello, who was Trados’s general counsel. Christen also defeated a motion for summary judgment.

On July 3, 2008, based on discovery from the appraisal action, Christen filed a second lawsuit, individually and on behalf of a class of Trados’s common stockholders, alleging that the former Trados directors breached their duty of loyalty by approving the Merger. After the actions were consolidated, the defendants moved to dismiss the new claims and obtained a stay of discovery in both actions pending the outcome of the motion. With one exception, Chancellor Chandler denied the motion. See In re Trados Inc. S’holder Litig. (Trados I), 2009 WL 2225958 (Del.Ch. July 24, 2009). The exception was a claim that Campbell and Hummel manipulated Tra-dos’s shipments to benefit SDL by increasing post-Merger revenue, and that SDL and two of its principals aided and abetted this breach of duty. The Chancellor dismissed the revenue manipulation claims because the amended complaint did not adequately plead any material benefit to Campbell or Hummel. Id. at *9-10. The evidence of revenue manipulation remained relevant to the value of Trados at the time of the Merger and to the defendants’ credibility. It is quite clear that revenue manipulation occurred.2

*35In 2010, the action was reassigned to me. In the interim, discovery in the breach of fiduciary duty action had not gone smoothly either. Christen was forced to file a motion to compel, which was granted. Christen also defeated a partial motion for summary judgment. On March 11, 2011, I certified a class “consisting] of all beneficial owners of Trados, Inc.’s common stock whose shares were extinguished by a merger on July 7, 2005, with the exception of defendants .... ” Dkt. 213. At the close of discovery, the defendants again moved for summary judgment. After the motion was denied, the case proceeded to trial.

II. LEGAL ANALYSIS

Since Cede & Co. v. Technicolor, Inc. (Technicolor I), 542 A.2d 1182 (Del.1988), the consolidated breach of fiduciary duty action and appraisal proceeding has been a fixture of Delaware law. The breach, of fiduciary duty claim seeks an equitable remedy that requires a finding of wrongdoing. The appraisal proceeding seeks a statutory determination of fair value that does not require a finding of wrongdoing. In Technicolor I, the Delaware Supreme Court stated that when presented with such a case, the court should address the breach of fiduciary duty action first, because a finding of liability and the resultant remedy could moot the appraisal proceeding. Id. at 1188. Consistent with the Delaware Supreme Court’s instructions, this decision starts with the plaintiffs claim for breach of fiduciary duty, then turns to the appraisal. It also considers the plaintiffs request for leave to file an application for fee shifting under the bad faith exception to the American Rule.

A. The Breach Of Fiduciary Duty Claim

When determining whether directors have breached their fiduciary duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review. See William T. Allen, Jack B. Jacobs, & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkorn and its Progeny as a Standard of Review Problem, 96 Nw. U.L.Rev. 449, 451-52 (2002) [hereinafter Realigning the Standard], The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors *36have met the standard of conduct. It describes what a plaintiff must first plead and later prove to prevail.

Under Delaware law, the standard of review depends initially on whether the board members (i) were disinterested and independent (the business judgment rule), (ii) faced potential conflicts of interest because of the decisional dynamics present in particular recurring and recognizable situations (enhanced scrutiny), or (iii) confronted actual conflicts of interest such that the directors making the decision did not comprise a disinterested and independent board majority (entire fairness). The standard of review may change further depending on whether the directors took steps to address the potential or actual conflict, such as by creating an independent committee, conditioning the transaction on approval by disinterested stockholders, or both. Regardless, in every situation, the standard of review is more forgiving of directors and more onerous for stockholder plaintiffs than the standard of conduct. This divergence is warranted for diverse policy reasons typically cited as justifications for the business judgment rule. See, e.g., Brehm v. Eisner, 746 A.2d 244, 268 (Del.2000) (explaining justifications for business judgment rule).

1. The Standard Of Conduct

Delaware corporate law starts from the bedrock principle that “[t]he business and affairs of every corporation ... shall be managed by or under the direction of a board of directors.” 8 Del. C. § 141(a). When exercising their statutory responsibility, the standard of conduct requires that directors seek “to promote the value of the corporation for the benefit of its stockholders.”3

“It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize profits currently. They may do so, however, because such activities are rationalized as producing greater profits over the long-term.” Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L.Rev. 135, 147 n. 34 (2012) [hereinafter For-Profit Corporations ]. Decisions of this nature benefit the corporation as a whole, and by increasing the value of the corporation, the directors increase the share of value available for the residual claimants. Judicial opinions therefore often refer to directors owing fiduciary duties “to the corporation and its shareholders.” Gheewalla, 930 A.2d at 99; accord Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del.1989) (“[Djirectors owe fiduciary duties of care and loyalty to the corporation and its shareholders .... ”); Polk v. Good, 507 A.2d 531, 536 (Del.1986) (“In performing their duties the directors owe fundamental fiduciary duties of loyalty and care to the corporation and its shareholders.”). This formulation captures the foundational relationship in which directors owe duties to the corporation for *37the ultimate benefit of the entity’s residual claimants. Nevertheless, “stockholders’ best interest must always, within legal limits, be the end. Other constituencies may be considered only instrumentally to advance that end.” For-Profit Corporations, supra, at 147 n. 84.

A Delaware corporation, by default, has a perpetual existence. 8 Del. C. §§ 102(b)(5), 122(1). Equity capital, by default, is permanent capital.4 In terms of the standard of conduct, the duty of loyalty therefore mandates that directors maximize the value of the corporation over the long-term for the benefit of the providers of equity capital, as warranted for an entity with perpetual life in which the residual claimants have locked in their investment.5 When deciding whether to pursue a strategic alternative that would end or fundamentally alter the stockholders’ ongoing investment in the corporation, the loyalty-based standard of conduct requires that the alternative yield value exceeding what the corporation otherwise would generate for stockholders over the long-term.6 Val*38ue, of course, does not just mean cash. It could mean an ownership interest in an entity, a package of other securities, or some combination, with or without cash, that will deliver greater value over the anticipated investment horizon. See QVC, 637 A.2d at 44 (describing how directors should approach consideration of non-cash or mixed consideration).

The duty to act for the ultimate benefit of stockholders does not require that directors fulfill the wishes of a particular subset of the stockholder base. See In re Lear Corp. S’holder Litig., 967 A.2d 640, 655 (Del.Ch.2008) (“Directors are not thermometers, existing to register the ever-changing sentiments of stockholders.... During their term of office, directors may take good faith actions that they believe will benefit stockholders, even if they realize that the stockholders do not agree with them.”); Paramount Commc’ns Inc. v. Time Inc., 1989 WL 79880, at *30 (Del.Ch. July 14, 1989) (“The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.”), aff'd in pertinent part, Time, 571 A.2d at 1150; TW Servs., 1989 WL 20290, at *8 n. 14 (“While corporate democracy is a pertinent concept, a corporation is not a New England town meeting; directors, not shareholders, have responsibilities to manage the business and affairs of the corporation, subject however to a fiduciary obligation.”). Stockholders may have idiosyncratic reasons for preferring decisions that misallocate capital. Directors must exercise their independent fiduciary judgment; they need not cater to stockholder whim. See Time, 571 A.2d at 1154 (“Delaware law confers the management of the corporate enterprise to the stockholders’ duly elected board representatives. The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders.” (citations omitted)).

More pertinent to the current case, a particular class or series of stock may hold contractual rights against the corporation and desire outcomes that maximize the value of those rights. See MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *6 (Del.Ch. May 5, 2010) (noting that preferential contract rights may appear in “the articles of incorporation, the preferred share designations, or some other appropriate document” such as a registration rights agreement, investor rights agreement, or stockholder agreement). By default, “all stock is created equal.” Id. Unless a corporation’s certificate of incorporation provides otherwise, each share of stock is common stock. If the certificate of incorporation grants a particular class or series of stock special “voting powers, ... designations, preferences and *39relative, participating, optional or other special rights” superior to the common stock, then the class or series holding the rights is known as preferred stock. 8 Del. C. § 151(a); see Starring v. Am. Hair & Felt Co., 191 A. 887, 890 (Del.Ch.1937) (Wolcott, C.) (“The term ‘preferred stock’ is of fairly definite import. There is no difficulty in understanding its general concept. [It] is of course a stock which in relation to other classes enjoys certain defined rights and privileges.”), aff'd, 2 A.2d 249 (Del.1937). If the certificate of incorporation is silent on a particular issue, then as to that issue the preferred stock and the common stock have the same rights.7 Consequently, as a general matter, “the rights and preferences of preferred stock are contractual in nature.” Trados I, 2009 WL 2225958, at *7; accord Judah v. Del. Trust Co., 378 A.2d 624, 628 (Del.1977) (“Generally, the provisions of the certificate of incorporation govern the rights of preferred shareholders, the certificate of incorporation being interpreted in accordance with the law of contracts, with only those rights which are embodied in the certificate granted to preferred shareholders.”).8

A board does not owe fiduciary duties to preferred stockholders when considering whether or not to take corporate action that might trigger or circumvent the preferred stockholders’ contractual rights.9 Preferred stockholders are owed fiduciary *40duties only when they do not invoke their special contractual rights and rely on a right shared equally with the common stock. Under those circumstances, “the existence of such right and the correlative duty may be measured by equitable as well as legal standards.”10 Thus, for example, just as common stockholders can challenge a disproportionate allocation of merger consideration,11 so too can preferred stockholders who do not possess and are not limited by a contractual entitlement.12 Under those circumstances, the decision to allocate different consideration is a discretionary, fiduciary determination that must pass muster under the appropriate standard of review, and the degree to which directors own different classes or series of stock may affect the standard of review.13

To reiterate, the standard of conduct for directors requires that they strive *41in good faith and on an informed basis to maximize the value of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm’s value, not for the benefit of its contractual claimants.14 In light of this obligation, “it is the duty of directors to pursue the best interests of the corporation and its common stockholders, if that can be done faithfully with the contractual promises owed to the preferred.” LC Capital, 990 A.2d at 452. Put differently, “generally it will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of the common stock — as the good faith judgment of the board sees them to be — to the interests created by the special rights, preferences, etc .... of preferred stock.” Equity-Linked, 705 A.2d at 1042. This principle is not unique to preferred stock; it applies equally to other holders of contract rights against the corporation.15 Consequently, as this court *42observed at the motion to dismiss stage, “in circumstances where the interests of the common stockholders diverge from those of the preferred stockholders, it is possible that a director could breach her duty by improperly favoring the interests of the preferred stockholders over those of the common stockholders.” Trados I, 2009 WL 2225958, at *7; accord LC Capital, 990 A.2d at 447 (quoting Trados I and remarking that it “summarized the weight of authority very well”).16

In this case, the directors made the discretionary decision to sell Trados in a transaction that triggered the preferred stockholders’ contractual liquidation preference, a right that the preferred stockholders otherwise could not have exercised. The plaintiff contends that the Board should not have agreed to the Merger and had a duty to continue operating Trados on a stand-alone basis, because that alternative had the potential to maximize the value of the corporation for the ultimate benefit of the common stock. The Trados directors, of course, contend that they complied with their fiduciary duties.

2. The Standards Of Review

To determine whether directors have met their fiduciary obligations, Delaware courts evaluate the challenged decision *43through the lens of a standard of review. In this case, the Board lacked a majority of disinterested and independent directors, making entire fairness the applicable standard.

“Delaware has three tiers of review for evaluating director decision-making: the business judgment rule, enhanced scrutiny, and entire fairness.” Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del.Ch.2011). Delaware’s default standard of review is the business judgment rule. The rule presumes that “in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”17 This standard of review “reflects and promotes the role of the board of directors as the proper body to manage the business and affairs of the corporation.” Trados I, 2009 WL 2225958, at *6. Unless one of its elements is rebutted, “the court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objectives.” In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del.Ch.2010). Only when a decision lacks any rationally conceivable basis will a court infer bad faith and a breach of duty.18

Enhanced scrutiny is Delaware’s intermediate standard of review. Framed generally, it requires that the defendant fiduciaries “bear the burden of persuasion to show that their motivations were proper and not selfish” and that “their actions were reasonable in relation to their legitimate objective.” Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del.Ch.2007). Enhanced scrutiny applies to specific, recurring, and readily identifiable situations involving potential conflicts of interest where the realities of the decisionmaking context can subtly undermine the decisions of even independent and disinterested directors. In Unocal the Delaware Supreme Court created enhanced scrutiny to address the potential conflicts of interest faced by a board of directors *44when resisting a hostile takeover, namely the “omnipresent specter” that target directors may be influenced by and act to further their own interests or those of incumbent management, “rather than those of the corporation and its shareholders.” 493 A.2d at 954. Tailored for this context, enhanced scrutiny requires that directors who take defensive action against a hostile takeover show (i) that “they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed,” and (ii) that the response selected was “reasonable in relation to the threat posed.” Id. at 955.

In Revlon, the Delaware Supreme Court extended the new intermediate standard to the sale of a corporation. See 506 A.2d at 180-82 (expressly applying Unocal test). Here too, enhanced scrutiny applies because of the potential conflicts of interest that fiduciaries must confront. “[T]he potential sale of a corporation has enormous implications for corporate managers and advisors, and a range of human motivations, including but by no means limited to greed, can inspire fiduciaries and their advisors to be less than faithful.” In re El Paso Corp. S’holder Litig., 41 A.3d 432, 439 (Del.Ch.2012). These potential conflicts warrant a more searching standard of review than the business judgment rule:

The heightened scrutiny that applies in the Revlon (and Unocal) contexts are, in large measure, rooted in a concern that the board might harbor personal motivations in the sale context that differ from what is best for the corporation and its stockholders. Most traditionally, there is the danger that top corporate managers will resist a sale that might cost them their managerial posts, or prefer a sale to one industry rival rather than another for reasons having more to do with personal ego than with what is best for stockholders.

Dollar Thrifty, 14 A.3d at 597 (footnote omitted). Consequently, “the predicate question of what the board’s true motivation was comes into play,” and “[t]he court must take a nuanced and realistic look at the possibility that personal interests short of pure self-dealing have influenced the board ....” Id. at 598. Tailored to the sale context, enhanced scrutiny requires that the defendant fiduciaries show that they acted reasonably to obtain for their beneficiaries the best value reasonably available under the circumstances, which may be no transaction at all. See QVC, 637 A.2d at 48-49.

Entire fairness, Delaware’s most onerous standard, applies when the board labors under actual conflicts of interest. Once entire fairness applies, the defendants must establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price.” Cinerama, Inc. v. Technicolor, Inc. (Technicolor III), 663 A.2d 1156, 1163 (Del.1995) (internal quotation marks omitted). “Not even an honest belief that the transaction was entirely fair will be sufficient to establish entire fairness. Rather, the transaction itself must be objectively fair, independent of the board’s beliefs.” Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del.Ch.2006).

To obtain review under the entire fairness test, the stockholder plaintiff must prove that there were not enough independent and disinterested individuals among the directors making the challenged decision to comprise a board majority. See Aronson, 473 A.2d at 812 (noting that if “the transaction is not approved by a majority consisting of the disinterested directors, then the business judgment rule has no application”). To determine whether the directors approving the transaction comprised a disinterested and independent *45board majority, the court conducts a director-by-director analysis.19

In this case, the plaintiff proved at trial that six of the seven Trados directors were not disinterested and independent, making entire fairness the operative standard. This finding does not mean that the six directors necessarily breached their fiduciary duties, only that entire fairness is the lens through which the court evaluates their actions.

a. The Management Directors: Campbell And Hummel

Two of the directors — Campbell and Hummel — received personal benefits in the Merger. The plaintiff proved that the benefits were material to them, rendering Campbell and Hummel interested in the decision to approve the Merger.

In Trados I, this court recognized that “a director is interested in a transaction if ‘he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders.’ ”20 This court further recognized that for purposes of fiduciary review, “the benefit received by the director and not shared with stockholders must be ‘of a sufficiently material importance, in the context of the director’s economic circumstances, as to have made it improbable that the director could perform her fiduciary duties ... without being influenced by her overriding personal interest.’” Trados I, 2009 WL 2225958, at *6 (quoting Gen. Motors Class H., 734 A.2d at 617, and citing Orman, 794 A.2d at 23).

At trial, the plaintiff proved that Campbell personally received $2.34 million from the MIP, portions of which were recharac-terized as a bonus and as payment for his non-competition agreement. Campbell bargained for and obtained post-transaction employment as SDL’s President and Chief Strategy Officer. He also became a member of SDL’s board, where he earned $50,000 per year for his service (later bumped to $60,000 per year).

During discovery, the plaintiff asked Campbell about his personal wealth to explore materiality. Defense counsel objected, and Campbell initially refused to provide any specifics. He then only agreed to estimate that his net worth at the time was $5-10 million. Defense counsel instructed him not to answer any further questions on the subject. See Campbell Dep. II125-27.

Campbell’s post-transaction SDL board membership, standing alone, would not be sufficient to create a disqualifying interest. See Orman, 794 A.2d at 28-29. Taken collectively, however, the benefits Camp*46bell received were material. The payments represented 23% to 47% of his net worth at the time of the Merger and paid him nearly ten times what he would make annually by continuing to manage Trados as a stand-alone entity. See, e.g., Oliver v. Bos. Univ., 2006 WL 1064169, at *27 (Del.Ch. Apr. 14, 2006) (“[The CEO], with significant financial interests of his own, cannot be said to have negotiated for the minority common shareholder because every dollar the minority common shareholder received was likely to reduce the Asset Value Realization Bonus that he would receive as a consequence of the merger.”); In re Lukens Inc. S’holders Litig., 757 A.2d 720, 730 (Del.Ch.1999), aff'd, 757 A.2d 1278 (Del.2000) (treating inside director as interested in transaction because of personal financial rewards from triggering golden parachute). It is also fair to infer that the payments were material in light of defense counsel’s objections and the defendants’ failure to produce any countervailing evidence. See Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1119 n. 7 (Del.1994) (“[T]he production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse.”); Smith v. Van Gorkom, 488 A.2d 858, 878-79 (Del.1985).

At trial, the plaintiff similarly proved that Hummel personally received material benefits. Hummel’s employment with Trados provided his sole source of income between 1984 and 2005; at the time of the Merger, he was earning approximately $190,000 plus an annual bonus. Hummel Dep. 132-33. SDL employed Hummel post-transaction at the same level of compensation. Tr. 667. Hummel originally was entitled to 12% of the MIP, representing $0,936 million of the Merger proceeds. Just before the Merger, Hummel complained to Campbell about some of the “strings” imposed by the MIP, such as his one year non-competition agreement. Tr. 663. After Hummel complained, his MIP percentage increased from 12% to 14% for total proceeds of $1,092 million. See JX 379; JX 465. Two days later, Budge described Hummel as “obviously a lock” to vote for the Merger. JX 390.

As with Campbell, defense counsel obstructed the plaintiffs efforts to explore the materiality of the payments to Hum-mel, calling it “an inappropriate area of questioning.” Hummel Dep. 163. Hummel only would estimate that his net worth at the time of the Merger was $2-4 million.

Taken collectively, the direct financial benefits Hummel received were material to him. He admitted that the $1 million payday was significant. See Hummel Dep. 164 (“A million dollars is significant, of course, yeah.”). His post-transaction employment also was a material benefit. See, e.g., In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 261 n. 45 (Del.Ch.2006) (noting that compensation from employment is generally material); In re Student Loan Corp. Deriv. Litig., 2002 WL 75479, at *3 n. 3 (Del.Ch. Jan. 8, 2002) (same). The defendants’ opposition to discovery warrants the same inference as with Campbell.

b. The VC Directors: Gandhi, Scanlan, And Stone

Three of the directors — Gandhi, Scanlan, and Stone — were fiduciaries for VC funds that received disparate consideration in the Merger in the form of a liquidation preference. Each faced the dual fiduciary problem identified in Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del.1983), where the Delaware Supreme Court held that there was “no dilution” of the duty of loyalty when a director “holds dual or multiple” fiduciary obligations. Id. If the interests of the beneficiaries to whom the dual fiduciary owes duties are aligned, *47then there is no conflict. See, e.g., Van de Walle v. Unimation, Inc., 1991 WL 29303, at *11 (Del.Ch. Mar. 7, 1991). But if the interests of the beneficiaries diverge, the fiduciary faces an inherent conflict of interest.21 “There is no ‘safe harbor’ for such divided loyalties in Delaware.” Weinberger, 457 A.2d at 710. The plaintiff proved at trial that Gandhi, Scanlan, and Stone faced a conflict of interest as dual fiduciaries.

In Trados I, Chancellor Chandler recognized that the VC firms’ ability to receive their liquidation preference could give the VC directors a divergent interest in the Merger that conflicted with the interests of the common stock. 2009 WL 2225958, at *7. In moving to dismiss, the defendants argued that because the preferred stockholders did not receive their full liquidation preference, and because the Series A and BB were participating preferred, the preferred stockholders would benefit from a higher price and their interests were aligned with the common. Id. Chancellor Chandler rejected their argument:

Even accepting this proposition as true, however, it is not the case that the interests of the preferred and common stockholders were aligned with respect to the decision of whether to pursue a sale of the [CJompany or continue to operate the Company without pursuing a transaction at that time.

The [M]erger triggered the $57.9 million liquidation preference of the preferred stockholders, and the preferred stockholders received approximately $52 million dollars as a result of the [MJerger. In contrast, the common stockholders received nothing as a result of the [Mjerger, and lost the ability to ever receive anything of value in the future for their ownership interest in Trados. It would not stretch reason to say that this is the worst possible outcome for the common stockholders.

Id. The Chancellor held that it was “reasonable to infer from the factual allegations in the Complaint that the interests of the preferred and common stockholders were not aligned with respect to the decision to pursue a transaction that would trigger the liquidation preference of the preferred and result in no consideration for the common stockholders.” Id.; see also Equity-Linked, 705 A.2d at 1058 (observing that in contrast to common stockholders, who had an incentive to maximize *48the value of their shares, “the [preferred stockholders] inherently have some interest in protecting their liquidation preference”).

Although Chancellor Chandler clearly understood the point, the fact that preferred and common “may have incentives to pursue different exit strategies is not obvious.” D. Gordon Smith, The Exit Structure of Venture Capital, 53 UCLA L.Rev. 315, 356 (2005) [hereinafter Exit Structure ]. Both are equity securities which give their holders incentives to maximize value of the firm. But preferred stock carries special rights that create specific economic incentives that differ from those of common stock. VCs also operate under a business model that causes them to seek outsized returns and to liquidate (typically via a sale) even profitable ventures that fall short of their return hurdles and which otherwise would require investments of time and resources that could be devoted to more promising ventures.

i. Economic Incentives

VCs invest through preferred stock with highly standardized features, although individual details vary.22 VC preferred stock typically carries a preference upon liquidation, defined to include a sale of the company, that entitles the holders to receive specified value before the common stock receives anything. It usually earns a cumulative dividend which, if unpaid, steadily increases the liquidation preference. It also entitles the preferred holder to convert into common stock at a specified ratio in lieu of receiving the liquidation preference.23 The preferred stock in this case carried each of these features.

There is nothing inherently pernicious about the standard features of VC preferred stock. The sophisticated contract rights, the use of staged financing, and the gradual acquisition of board control over the course of multiple financing rounds help VCs reduce the risk of entrepreneur opportunism and management agency costs. See Agency Costs, supra, at 983-84; Exit Structure, supra, at 318-24; Venture Survival, supra, at 56-68. Nevertheless, “[w]hile each of the ... contracting techniques helps VC investors minimize agency risk, they also give rise to the possibility *49that the venture capitalist may use the contract rights opportunistically.” Robert P. Bartlett, III, Venture Capital, Agency Costs, and the False Dichotomy of the Corporation, 54 UCLA L.Rev. 37, 56 n. 78 (2006) [hereinafter False Dichotomy]; accord Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 Stan. L.Rev. 1067, 1085 (2003) (“Reducing the agency costs of the entrepreneur’s discretion by transferring it to the venture capital fund also transfers to the venture capitalist ... the opportunity to use that discretion opportunistically against the entrepreneur.”).

The cash flow rights of typical VC preferred stock cause the economic incentives of its holders to diverge from those of the common stockholders. See Theory of Preferred, supra, at 1832 (noting “the preferred’s financial interest is defined by contract rights that conflict intrinsically with the interests of the common”). “[T]o the extent that VCs retain their preferred stock, their cash flow rights are debt-like; to the extent that they convert, their preferred stock offers the same cash flow rights as common.” Agency Costs, supra, at 982. “Because of the preferred shareholders’ liquidation preferences, they sometimes gain less from increases in firm value than they lose from decreases in firm value. This effect may cause a board dominated by preferred shareholders to choose lower-risk, lower-value investment strategies over higher-risk, higher-value investment strategies.” Id. at 994. The different cash flow rights of preferred stockholders are particularly likely to affect the choice between (i) selling or dissolving the company and (ii) maintaining the company as an independent private business. “In particular, preferred dominated boards may favor immediate ‘liquidity events’ (such as dissolution or sale of the business) even if operating the firm as a stand-alone going concern would generate more value for shareholders.”24 In these situations, “[liquidity events promise a certain payout, much [or all] of which the preferred shareholders can capture through their liquidation preferences. Continuing to operate the firm as an independent company may expose the preferred-owning VCs to risk without sufficient opportunity for gain.” Agency Costs, supra, at 993-94; accord Theory of Preferred, supra, at 1886 (“Preferred, as a senior claim, will avoid taking value-enhancing risk in a case where common, as the at-the-margin residual interest, would assume the risk.”).

The distorting effects “are most likely to arise when, as is often the case, the firm is neither a complete failure nor a stunning success.” Agency Costs, supra, at 996; accord Theory of Preferred, supra, at 1833, 1875. When the venture is a stunning success (everybody wins) or a complete failure (everybody loses), the outcomes are “cut and dried.” William W. Bratton, Venture Capital on the Downside: Preferred Stock and Corporate Control, 100 Mich. L.Rev. 891, 896 (2002) [hereinafter Downside ]. But in intermediate cases, preferred stockholders have incentives to “act opportunistically.” Agency Costs, supra, at 993. “The costs of this value-reducing behavior are borne, in the first instance, by common shareholders.” Id. at 995; see Exit Structure, supra, at 351. “[Bjeeause *50VCs in ... sales often exit as preferred shareholders with liquidation preferences that must be paid in full before common shareholders receive any payout, common shareholders may receive little (if any) payout. At the same time, the sale eliminates any ‘option value’ (upside potential) of the common stock.” Carrots & Sticks, supra, at 3.25

ii. Personal Incentives

The VC business model reinforces the economic incentives that the preferred stock’s cash flow rights create.

Before venture capitalists invest, they plan for exit.... The ability to control exit is crucial to the venture capitalist’s business model of short-term funding of nascent business opportunities. Exit allows venture capitalists to reallocate funds and the nonflnancial contributions that accompany them .... It also allows fund investors to evaluate the quality of their venture capitalists .... Finally, the credible threat of exit by venture capitalists may work to minimize the temptation towards self-dealing by the entrepreneurs who manage the venture-backed companies.

Exit Structure, supra, at 316; see also id. at 345 (“Any venture capitalist who desires to remain in business ... must successfully raise funds, invest them in portfolio companies, then exit the companies and return the proceeds to the fund investors, who in turn are expected to reinvest in a new fund formed by the same venture capitalist .... ”). The timing and form of exit are critical because VCs seek very high rates of return, usually a ten-fold return of capital over a five year period.26

Three forms of exit are common. An IPO is the gold standard and most lucrative; liquidation via sale to a larger company (a trade sale) is a second-best solution; *51and a write-off is the least attractive.27 “[V]enture capitalists will sometimes liquidate an otherwise viable firm, if its expected returns are not what they (or their investors) expected, or not worth pursuing further, given limited resources and the need to manage other portfolio firms.”28 This may seem irrational, but “it makes perfect economic sense when viewed from the venture capitalist’s need to allocate [his] time and resources among various ventures.” Venture Survival, supra, at 110 n. 218. “Although the individual company may be economically viable, the return on time and capital to the individual venture capitalist is less than the opportunity cost.” William A. Sahlman, The Structure and Governance of Venture-Capital Organizations, 27 J. Fin. Econ. 473, 507 (1990). VC firms strive to avoid a so-called “sideways situation,” also known as a “zombie company” or “the living dead,” in which the entity is profitable and requires ongoing VC monitoring, but where the growth opportunities and prospects for exit are not high enough to generate an attractive internal rate of return. These companies “are routinely liquidated,” usually via trade sales, “by venture capitalists hoping to turn to more promising ventures.”29

iii. The Evidence That The VC Directors Faced A Conflict In This Case

At the pleadings stage, Chancellor Chandler recognized that it was reasonably conceivable that the VC directors faced a conflict of interest. See Trados I, 2009 WL 2225958, at *7. At trial, the plaintiff had the burden to prove on the facts of *52this case, by a preponderance of evidence, that (i) the interests of the VC firms in receiving their liquidation preference as holders of preferred stock diverged from the interests of the common stock and (ii) the VC directors faced a conflict of interest because of their competing duties. Cf. In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1006 (Del.Ch.2005) (commenting that the court’s “job is not to police the appearances of conflict that, upon close scrutiny, do not have a causal influence on a board’s process”). The plaintiff carried his burden.

Campbell testified in his first deposition, taken on September 20, 2006, just over a year after the Merger and before anyone was sued for breach of fiduciary duty, that his mission upon joining Trados “was to help the company understand its future path, which in the mind[s] of the outside board members at that time was some type of either merger or acquisition event.” Campbell Dep. I 21; see also Tr. 117-18. Campbell perceived “degrees of aggressiveness” among the directors based on how long they had invested in Trados. Campbell Dep. I 21. From his “first week” at the Company, he perceived Gandhi as “probably the most aggressive,” Scanlan next, then Stone. Id. at 23; see also Tr. 119-22. In Campbell’s assessment, “[hjalf of the board felt that we should just do something now, take the first offer.” Campbell Dep. II 20. Campbell saw Gandhi and Scanlan as the most influential board members. Campbell Dep. 117, 25.

Consistent with Campbell’s deposition testimony, the evidence at trial established that Gandhi faced a conflict and acted consistent with Sequoia’s interest in exiting from Trados and moving on. As Gandhi explained at trial, when Sequoia invests, it hopes for “really fast” growth and “very large outsized returns.” Tr. 359, 411; see also Tr. 412 (explaining that Sequoia’s investors will not provide the firm with money “for ten or [twelve] years for [Sequoia] to get them back 10 percent returns. You can put that in a Vanguard index fund”). Within six months after the Uniscape merger, Gandhi had concluded that Trados would not deliver outsized returns and that Sequoia’s “real opportunity” was only “to recover a fraction” of its $13 million investment in Uniscape. JX 96; see also Tr. 355-62. By the end of 2002, Gandhi had decided not to put significant time into Trados beyond Board meetings and only to attend by phone unless meetings were held locally. See JX 96. From his perspective, this was simply a matter of prioritizing his time based on how Trados would perform for Sequoia relative to other opportunities with “a lot of upside.” Tr. 360-61. He later elaborated: “[M]y most, you know, limited resource is just where I’m putting my time. And it’s just better to work on something brand-new that has a chance .... Is [the next Sequoia investment] going to be Google?” Tr. 397.

Gandhi saw a sale as a means of liquidating Sequoia’s investment and moving on to better things. In June 2003, he told his partners at Sequoia that “[w]ithin 18 months the company will be a decent acquisition target .... ” JX 105. Gandhi’s investment outlook was a “return [of] capital at best.” Id. At the beginning of 2004, he put McClelland in touch with Trados’s then-CEO to start setting the table for a sale. In June 2004, Gandhi reported to Sequoia that “[w]e have recruited a hard-nosed CEO whose task is to grow this company profitably or sell it” and that he expected that “the company is sold within the next 18 months (perhaps sooner).” JX 172. In early 2005, he told Sequoia that Campbell’s “mission is to architect an M & A exit as soon as practicable.” JX 276. Contemporaneously, Gandhi told Campbell to “optimize for true liquidity” rather than *53push for greater total consideration in his discussions with SDL and that “if [Trados] can get the cash component from sdl to $30m+ and get some stock,” he thought “that deal is very much in the ballpark for what is reasonable” for Trados. JX 302.

The evidence at trial established that Scanlan had similar incentives, consistent with Campbell’s deposition testimony. Wachovia was the earliest VC investor in Trados and bought in before the technology bubble popped. Scanlan sponsored the deal and saw himself as the “owner” of the investment. Scanlan Dep. 49; see also Tr. 282. In February 2001, Wachovia regarded Trados as “well positioned for an exit either through an IPO or an M & A event” and noted that Trados had “been approached by several of its competitors (Lionbridge, SDL).” JX 48 at 8. With Wachovia still invested in summer 2004, Scanlan saw a sale as the best option, even though Trados had stumbled and lacked a CEO. Despite rebuffing SDL’s initial low-bail offer, Scanlan testified that the Board “never let SDL go. We knew they were the only party, and we had to figure out a way.” Tr. 335. Scanlan also recommended and designed the MIP to incentivize top management to favor a sale even at valuations where the common stock would receive zero.

Scanlan decided to leave Wachovia in late 2004 and informed Wachovia of his departure on January 5, 2005. When he told Campbell, in March or April 2005, Campbell asked him to stay on as Wacho-via’s designee until the SDL deal closed. Tr. 270-72, 337-38. Wachovia responded: “Please don’t be disruptive. If you’re willing to do it, even though you don’t need to do it, if you’re willing to do it, go ahead and stay on the board.” Tr. 271-72; accord JX 388 (Scanlan informed Campbell that Wachovia was “sensitive” to Campbell’s “concerns regarding a board change at this juncture” and agreed to “leave [Scanlan] on the board .... ”). Scanlan agreed to stay on, and his willingness to continue at Trados, even after resigning from Wachovia, demonstrates his continuing loyalty to his former employer.

As Campbell testified, Stone was the least aggressive in seeking an exit. The evidence at trial nevertheless established that Stone had the same desire to exit and faced the same conflict of interest as Gandhi and Scanlan, although she was more open to considering a sale in 12-18 months rather than pushing for a near-term outcome. Stone candidly admitted that “[a]ll private equity firms, ourselves included, are always, from the moment we buy [ ] a business, looking for an exit.” Stone Dep. 79. Indeed, when Hg invested in 2000, its investment thesis included an “explicit agreement with the management team” to pursue “an IPO in 18 to 24 months.” Id.; accord Tr. 683 (“[T]he plan was actually to do an IPO by 2002.”). In mid-2004, Hg remained invested in Trados, the Company lacked direction, and Stone felt “blind” as to Trados’s options and potential. Tr. 690. She was understandably concerned: Some of Hg^ “largest clients,” ones that they “have the closest relationship^] with,” were direct investors in Trados, as were Hg Capital Trust (Kg’s “publicly floated vehicle”) and some of Stone’s partners at Hg. Tr. 730-32.

Stone’s view on exit is best seen in her response to the business plan that Campbell presented on February 2, 2005. After Ganesan’s termination, Stone felt the Board needed to understand the Company’s potential before making any decisions. Tr. 688-89. She believed the Board “would be jumping the gun” by selling before they had a plan for the business. Tr. 689-90; see also Tr. 752-53. But when Stone finally received Campbell’s plan, she showed little interest. Within *54days of the February 2 meeting, she joined the other directors in authorizing Campbell to negotiate a sale to SDL at $60 million. With the prospect of a deal that would return most or all of Rig’s liquidation preference, she focused on that alternative. See Tr. 754 (Stone agreeing that “no one ever took Mr. Campbell’s plan a step further from February 2nd”); see also Tr. 722-23, 750-52.

Based on this evidence and other materials on which the plaintiff relied, the plaintiff carried his burden to show that Gandhi, Scanlan, and Stone were not independent with respect to the Merger. They wanted to exit, consistent with the interests of the VC firms they represented.

c. The Outside Directors: Laidig And Prang

Two of the directors — Laidig and Prang — were neither members of management nor dual fiduciaries. The plaintiff did not challenge Laidig’s disinterestedness and independence. By contrast, the plaintiff contended that (i) Prang was not independent because of his close business relationship with Gandhi and Sequoia, and (ii) he was not disinterested because he beneficially owned preferred stock through Mentor, his investment vehicle, and received a liquidation preference for his shares.

Because of the web of interrelationships that characterizes the Silicon Valley start-up community, scholars have argued that “so-called ‘independent directors’ ” on VC-backed startup boards “are often not truly independent of the VCs.” Agency Costs, supra, at 988. “Many of these directors are chosen by the VCs, who tend to have much larger professional networks than the entrepreneurs or other common shareholders.” Id. If there is a “conflict of interest” between the VCs and common stockholders, the “independent directors” have incentives to side with the VCs. Id. at 989.

Many of these outside directors have— or can expect to have — long-term professional and business ties with the VCs, who are more likely to be repeat players than are most of the common shareholders. Cooperative outside directors can expect to be recommended for other board seats or even invited to join the VC fund as a “venture partner.”

Id; accord id. at 989 n. 63 (noting that “conversations with local VCs confirm” that “independent directors” have incentives to side with VCs); Exit Structure, supra, at 320 (“[I]n the event of conflict between the venture capitalist and the entrepreneur, such outside directors may have a natural inclination to side with the venture capitalist.”); Downside, supra, at 921 (arguing outside directors are “highly susceptible to the influence of the VC”). At trial, the plaintiff could not rely on general characterizations of the VC ecosystem. The plaintiff had to prove by a preponderance of evidence that Prang was not disinterested or independent in this case. The plaintiff carried his burden.

Prang had a long history with Sequoia, dating back to Sequoia’s investment in Aspect Development, where Prang was President and COO. Tr. 354, 448. After Aspect Development, Sequoia asked Prang to work with them on other companies, and Gandhi recalled “a number where we worked very collaboratively .... ” Tr. 354. One was Uniscape. The relationship led to Prang investing about $300,000 in three Sequoia funds, including Sequoia X, which owned Trados preferred stock. At the time of the Merger, Prang was also the CEO of Conformia Software, a company backed by Sequoia where Gandhi served on the board. When Sequoia obtained the right to designate two members of Tra-dos’s Board, Sequoia designated Gandhi *55and Prang. JX 79 at 14. Having considered these facts as a whole and evaluated Prang’s demeanor,30 I find that Prang’s current and past relationships with Gandhi and Sequoia resulted in a sense of “owingness” that compromised his independence for purposes of determining the applicable standard of review.31

The plaintiff also introduced sufficient evidence at trial to establish that the $220,683 that Prang received in the Merger (through Mentor) was material to him. As with Campbell and Hummel, defense counsel limited inquiry into Prang’s economic circumstances, asserting that “we don’t think this is relevant and it makes the [witness] extremely uncomfortable.” Prang Dep. 170. Prang would only estimate that the range of his net worth at the time of the Merger was $4-6 million dollars. His sole sources of income were whatever he made from Mentor and his annual salary of $125,000 as CEO of Con-formia Software. See Prang Dep. 171; Tr. 909. Given this record and the litigation position taken by the defendants, the plaintiff established that $220,688 in Merger proceeds, representing nearly double Prang’s annual salary and 3.7%-5.5% of his estimated net worth, was material to Prang. Prang therefore cannot be counted as disinterested for purposes of determining the applicable standard of review.

3. Entire Fairness

A reviewing court deploys the entire fairness test to determine whether the members of a conflicted board of directors complied with their fiduciary duties. “A determination that a transaction must be subjected to an entire fairness analysis is not an implication of liability.” Emerald, P'rs, 787 A.2d at 93. Conditions precedent to imposing liability include (i) a finding that the directors acted in a manner that was not entirely fair, (ii) a specification of the fiduciary duty breached (loyalty or *56care), and (iii) the rejection of any affirmative defenses raised by the directors, such as reliance on advisors under Section 141(e) or exculpation under Section 102(b)(7). See id. at 96-97.

“The concept of fairness has two basic aspects: fair dealing and fair price.” Weinberger, 457 A.2d at 711. Fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Id. Fair price “relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.” Id. Although the two aspects may be examined separately, “the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.” Id. But “perfection is not possible, or expected .... ” Id. at 709 n. 7.

a. Fair Dealing

The evidence pertinent to fair dealing weighed decidedly in favor of the plaintiff. Indeed, there was no contemporaneous evidence suggesting that the directors set out to deal with the common stockholders in a procedurally fair manner. Nor were the defendants able to recharacterize their actions retrospectively to show that they somehow blundered unconsciously into procedural fairness, notwithstanding their vigorous and coordinated efforts at trial to achieve this elusive goal.

i. Transaction Initiation

Fair dealing encompasses an evaluation of how the transaction was initiated. In this case, the VC directors pursued the Merger because Trados did not offer sufficient risk-adjusted upside to warrant either the continuing investment of their time and energy or their funds’ ongoing exposure to the possibility of capital loss. An exit addressed these risks by enabling the VCs to devote personal resources to other, more promising investments and by returning their funds’ invested capital plus a modest return. The VC directors did not make this decision after evaluating Trados from the perspective of the common stockholders, but rather as holders of preferred stock with contractual cash flow rights that diverged materially from those of the common stock and who sought to generate returns consistent with their VC funds’ business model.32

*57Gandhi started setting the table for a sale at the beginning of 2004 when he reached out to JMP and asked McClelland to speak with Ganesan. After the Board fired Ganesan in April 2004, the VC directors explored a near-term sale. They appointed Hummel as Acting President and sent him to float the idea with Tra-dos’s strongest strategic relationships, while simultaneously keeping him on a short operational leash that required clearing any material decisions with Gandhi and Scanlan. Gandhi put JMP to work canvassing other potential acquirers and fielded an inbound call from SDL, while Scan-lan looked for a CEO who could fix up the Company and lead a sale process. The fact that the directors chose to hire Campbell rather than taking SDL’s low-ball bid of $40 million in summer 2004 does not demonstrate, as the defendants claimed at trial, that they were not interested in an exit. It simply meant that the defendants recognized the likelihood of a suboptimal sale price given the temporarily distressed nature of the asset. It is difficult to get top dollar for a house with broken windows, loose trim, peeling paint, and an overgrown lawn. An owner who decides to fix up the place need not have changed her mind about what to do with the property.

In his first deposition, Campbell testified that upon joining Trados, he understood that his “mission” was to “help the company understand its future path, which in the mind[s] of the outside board members at that time was some type of either merger or acquisition event.” Campbell Dep. I 21. He further understood that the “[preferred investors] who had invested longer were more aggressive to find a path for the company [ie. the ‘merger or acquisition event’].” Id. Budge, the CFO, testified similarly. See Budge Dep. 117-18. It is hardly surprising that Campbell and Budge understood the mission in these terms. The Board was contemporaneously exploring a sale with JMP and authorized Scanlan to design the MIP to ensure that management would benefit from a sale even if the common did not.

To carry out his mission, Campbell recalled coming up with “three scenarios”: (i) an immediate sale before the Company ran out of cash, (ii) a 12-18 month managed sale that required at least $2-4 million in additional capital, and (iii) a standalone business plan requiring an indeterminate amount of investment. See Campbell Dep. II 17, 34-36; JX 235 at 18, 20. In Campbell’s assessment, “[h]alf of the board felt that we should just do something now, take the first offer.” Campbell Dep. II 20. None of the VC directors wanted to invest in the Company to support a 12-18 month sale, much less a stand-alone business plan. Campbell was forced to raise venture debt because the “[VC] investors wouldn’t kick another round [of investment] in to keep the lights on in December [2004].” Id. at 60. Actions speak louder than words, and the VC directors were telling Campbell they wanted out.

*58The contemporaneous documents overwhelmingly support this account.33 It also comports with how VCs who found themselves at or beyond their typical hold period naturally would regard a seemingly sideways if not stumbling portfolio company. Yet at trial, the defendants offered closely coordinated testimony that contradicted the contemporaneous documents and, in Campbell’s case, his earlier deposition testimony. Campbell changed his story on the witness stand to claim his mission did not include a sale, but rather was “to grow the business, give it vision and create a strategy for the long-term.” Tr. 11. He denied feeling that any directors were aggressive in seeking an exit. Tr. 119-22. Whereas he previously saw Gandhi and Scanlan as the two directors who were most vocal and had de facto lead director roles, at trial he weakly recanted and suggested that he singled out Gandhi and Scanlan simply because of geographic proximity. Compare Campbell Dep. I 17, 25, with Tr. 113-14. But Scanlan was on the East Coast, and Prang was the other director in Silicon Valley. The other defendants similarly insisted they were not interested in selling the Company during 2004 and early 2005, wanted to build the business and hired Campbell for that purpose, and were pleasantly surprised when SDL happened to come along. See Tr. 246, 250, 257 (Scanlan); Tr. 445 (Gandhi); Tr. 486 (Laidig); Tr. 720-21 (Stone).

The defendants’ trial testimony on this point was a litigation construct. The contemporaneous documentary evidence and Campbell’s far more credible deposition testimony, backed up by Budge, establish that the VC directors wanted to exit. They were not interested in continuing to manage the Company to increase its value for the common. They initiated a sale process and pursued the Merger to take advantage of their special contractual rights.

ii. Transaction Negotiation And Structure

Fair dealing encompasses questions of how the transaction was negotiated and structured. To analyze these aspects of the Merger requires an understanding of the MIP.

VC-backed portfolio companies commonly adopt plans similar to the MIP to incent management to favor exits. See Carrots & Sticks, supra, at 5. Debate has raged for decades over whether similar severance arrangements at public companies advance stockholder interests. See, e.g., Henry F. Johnson, Those “Golden Parachute” Agreements: The Taxman Cuts the Ripcord, 10 Del. J. Corp. L. 45, 51 (1985). From a judicial perspective, the answer depends on the facts. Here, the structure and operation of the MIP provide evidence of unfair dealing towards the common stock.

Scanlan suggested a plan like the MIP in July 2004, and the Board authorized him to develop one. JX 200 at 4. In November *592004, the Board “authorized a Compensation Committee, consisting of Mr. Gandhi, Mr. Scanlan and Ms. Stone, to finalize the [MIP] and schedule [of recipients] .... ” JX 261 at 5. In December 2004, Campbell and Budge presented the MIP to the Board, even though they and Hummel were the three biggest recipients. The entire Board, including Campbell and Hummel, unanimously approved it. JX 277. Not surprisingly, the MIP favored the interests of the conflicted fiduciaries who initiated, designed, presented, and approved it.

The MIP paid a percentage of the total consideration achieved in any sale to senior management, before any amounts went to the preferred or the common. The percentage payout increased as the value of the deal increased as follows:

JX 278. Although the MIP nominally provided for a range of deal consideration, SDL had offered $40 million for Trados in July 2004, when the Company had no CEO and was coming off a terrible first half of the year. No one has contended in this case that any suitor would have paid more than $90 million for Trados. The real issue was whether management would get 11% or 13%.

As a practical matter, at deal prices below the preferred stockholders’ liquidation preference, the preferred bore the entire cost of the MIP because the common would not be entitled to any proceeds. Nothing about that is procedurally or substantively unfair. See Jedwab, 509 A.2d at 598 (“[S]hould a controlling shareholder for whatever reason (to avoid entanglement in litigation as plaintiff suggests is here the case or for other personal reasons) elect to sacrifice some part of the value of his stock holdings, the law will not direct him as to how that amount is to be distributed and to whom.”); see also In re Tele-Commc’ns, 2005 WL 3642727, at *14 (“[I]f Malone wished to be fair [to the minority holders of high-vote stock], then he could have shared some part of the value of his own stock holdings.”). Once the deal price exceeded the liquidation preference, however, the MIP took value away from the common.34 At the time of the Merger, for example, the total liquidation preference was $57.9 million. The $60 million in consideration exceeded the preference, so without the MIP, the preferred stockholders would have received $57.9 million and the common stockholders *60$2.1 million. With the MIP, management received $7.8 million, the preferred stockholders received $52.2 million, and the common stockholders received zero. To fund the MIP, the common stockholders effectively paid $2.1 million, and the preferred stockholders effectively paid $5.7 million. As a result, the common stockholders contributed 100% of their ex-MIP proceeds while the preferred stockholders only contributed 10% ($5.7 million / $57.9 million).

There is no evidence in the record that the Board ever considered how to allocate fairly any incremental dollars above the liquidation preference. Until the Merger proceeds cleared the preference, each dollar was allocated between management and the preferred stockholders, with management receiving its assigned percentage and the preferred taking the rest. But once the consideration topped the preference, thereby implicating the rights of the common, the additional dollars were not fairly allocated. All of the additional dollars went to management and the preferred. The common would not receive anything until the deal price exceeded the preference by more than the MIP payout.35

The break-even deal value was $66.5 million. At that point, the MIP payout would be $8.6 million, and the residual proceeds would be sufficient to pay the $57.9 million preference. Above $66.5 million, the common would receive consideration, but would still fund the MIP disproportionately. For example, at $70 million, the MIP receives $9.1 million, the preferred receive $57.9 million, and the common receive $3.0 million. Without the MIP, the preferred would receive $57.9 million, and the common would receive $12.1 million. The common effectively fund the MIP with 75% of the consideration they otherwise would receive, retaining only 25%. The preferred stockholders would not lose a dime. The following graph shows the relative contribution of the common and the preferred at different deal values:

*61

For purposes of fair dealing, the MIP skewed the negotiation and structure of the Merger in a manner adverse to the common stockholders. In February 2005, the Board reached a consensus that Campbell would seek $60 million from SDL. See Campbell Dep. I 85, 102. The defendants focused on this number after Campbell provided the waterfall analysis that Sean-lan requested reflecting the allocation of deal proceeds at prices of $50, $60, and $70 million. See JX 299; JX 325. The price target was also influenced significantly by Invision’s desire not to take a capital loss by selling below its pre-money entry price of $60 million. See JX 332. At that price, the preferred stockholders would receive back all of their capital and make a nominal profit. There was never any effort to explore prices above $60 million or to consider whether alternatives to the Merger might generate value for the common.

Without the MIP, in a transaction that valued Trados at $60 million, Campbell, Budge, and Hummel would have received nothing for their options, and Hummel would have received approximately $0.5 million for his common stock (excluding any participation by the Series A and BB). In confronting that reality, their personal financial interests would have been aligned with the interests of the common stockholders as a whole, giving them strong reasons to evaluate critically whether the Board should pass on the Merger and continue to operate Trados as a standalone entity with the prospect of a higher-valued exit in the future. Perhaps the Board would have reached the same decision, but the process would have been different.

The MIP changed matters dramatically. In a transaction at $60 million, the MIP allocated $7.8 million to senior management, with Campbell, Budge, and Hummel collectively receiving $4.2 million. Instead of $0.5 million, Hummel’s share was $1.092 million. The MIP accomplished this result by reallocating to the MIP recipients 100% of the consideration that the common stockholders would receive in a transaction valued at $66.5 million or less. On top of that, the MIP’s cutback feature ensured that to the extent any MIP participants might receive consideration at higher deal values in their capacity as equity holders, their MIP payout would be reduced by the amount of the consideration received. JX 278 at 3. The combination eliminated any financial incentive for senior management *62to push for a price at which the common stock would receive value or to favor remaining independent with the prospect of a higher valued sale at a later date.

The MIP converted the management team from holders of equity interests aligned with the common stock to claimants whose return profile and incentives closely resembled those of the preferred. Campbell and Hummel in fact acted and voted in a manner that served the preferred stockholders’ desire for a near-term sale. Given its design and effect, the MIP is evidence that the Board dealt unfairly with the common when negotiating and structuring the Merger.36

iii. Director Approval

Fair dealing encompasses questions of how director approval was obtained. Except for Laidig, all of the directors were financially interested in the Merger or faced a conflict of interest because they owed fiduciary duties to entities whose interests diverged from those of the common stockholders. The MIP played a role here as well, because it gave Campbell and Hummel a direct and powerful incentive to vote in favor of the deal.

The element of Board approval also encompasses how the directors reached their decision. A director’s failure to understand the nature of his duties can be evidence of unfairness. See In re Trans World Airlines, Inc. S’holders Litig., 1988 WL 111271, at *5 (1988) (Allen, C.) (observing that special negotiating committee members who believed their only obligation was to determine fairness and not to maximize value for the common stock had an “imperfect appreciation of the proper scope and purpose of such a special committee”). Directors who cannot perceive a conflict or who deny its existence cannot meaningfully address it. See Gesoff, 902 A.2d at 1151 (treating “blithe acceptance” of representation by a conflicted attorney as “evidence of unfair dealing”); cf. El Paso, 41 A.3d at 440, 446 (noting defendant directors’ failure to recognize and address investment bank’s conflict, which was referred to as a “potential conflict” or an “appearance of conflict”). The defendants in this case did not understand that their job was to maximize the value of the corporation for the benefit of the common stockholders, and they refused to recognize the conflicts they faced.

During his deposition, Laidig volunteered that the Trados directors never considered the common stockholders:

Q: ... Was it the best thing for the common stockholders to sell the company?

Laidig: To tell you the truth, between common and preferred was only a topic which really popped up through this *63court case. I didn’t even remember this thing as being a debate or discussion on the board ....

Q: You don’t recall any discussion at the board level as between the interests of the common stockholders[?]

Laidig: No.... It only once came up, you know, in conjunction with the stock option plan, you know, when we reduced the value. That’s what I have a vague memory of.

Laidig Dep. 44^15; see also Tr. 498 (“I said very clearly, ‘[w]e did not discuss common versus preferred.’ ”). Laidig’s deposition testimony comports with the documentary record, which does not reflect any serious consideration of the common stock or the divergence of interests between the common and the preferred.

At trial, the defendants tried to sanitize Laidig’s admission with a two-pronged response. First, Laidig changed his story, testifying that although his deposition testimony was accurate “at that point in time,” he subsequently refreshed his recollection by reviewing documents. Tr. 480, 494; accord Tr. 498-99 (“Basically, you know, I went through all of the documentation which was hundreds of pages from the various board meetings and, you know, prepared myself for the court case knowing that you will always get to this point.”); see also Tr. 490, 496. This review ostensibly enabled him to recall that the Board did discuss the distinction between the common and preferred stockholders and considered the interests of the common. Tr. 498-500.

Of the “hundreds of pages” Laidig said he reviewed, he could recall only two documents that refreshed his recollection on this point: the minutes of the February 2, 2005 Board meeting and Scanlan’s waterfall analysis. Tr. 496-97, 499-501. The minutes do not reflect any discussion of the relative interests of the preferred and the common, much less a discussion of the Merger or alternatives to the Merger from the perspective of the common stock. When presented with the minutes on cross-examination, Laidig conceded this unavoidable fact and changed his story again to say that he recalled the discussion “based on my personal notes, which I take at board meetings ....” Tr. 502-03. No personal notes had been produced in discovery. In response to further cross-examination, Laidig admitted that he no longer had his notes, and that he had not had them at the time of his deposition either. See Tr. 503. Like the minutes, the waterfall analysis merely depicts that the common stock receives nothing in deals valued at $60 million or lower. See JX 325. It does not reflect or suggest any analysis of the Merger or other alternatives from the perspective of the common stock. Laidig’s performance at trial convinced me that his deposition testimony was candid and truthful.

Second, the other directors tried to fix Laidig’s admission by reciting in lockstep that they considered all of the Company’s stakeholders, which necessarily included the common stockholders.37 The chorus *64sounded well-rehearsed, but the individual verses mentioned justifications that happened to coincide with the directors’ personal interests. Hummel, for example, said he favored the transaction in part because it would preserve Trados’s technology, which he had developed and worked on for years. By having the Tra-dos brand “still out there,” he could “have it on [his] CV and so can the other founders.” Tr. 649-52. Stone considered Hg’s “reputation” and the benefits that would inure to Hg from “seeing people remain employed.” Tr. 722. Gandhi thought about his duties to Sequoia’s partners and its clients. See Tr. 417. The directors’ stakeholder testimony reflected Chancellor Allen’s timeless insight that “human nature may incline even one acting in subjective good faith to rationalize as right that which is merely personally beneficial.” City Capital Assocs. Ltd. P’ship v. Interco Inc., 551 A.2d 787, 796 (Del.Ch.1988).

The Board’s ex post embrace of stakeholders did not in actuality encompass any consideration of the common stockholders. When pressed, the directors could not recall any specific discussion of the common stock, and they could not comprehend the possibility that the economic interests of the preferred stockholders might diverge from those of the common. See Tr. 291-92, 317-18 (Scanlan); Tr. 419 (Gandhi); Tr. 738 (Stone); Tr. 900 (Prang). Gandhi was particularly strident:

[P]eople ultimately wonder about this, the preferred versus common and the conflict. There’s no conflict. When ... a venture capital firm makes money, they only make money in scenarios where they’re ... converting to common shares. I think like a common shareholder because the great investments mean the common did phenomenally well and, therefore, I did well. We never made money on preferred instruments. Preferred for us, ... [is] a thinly veiled version of common. It gives you a couple little rights: you’re a minority investor. You can’t tell anybody what to do, there’s no control. You get to be on the board as one board member; and you have to use persuasion, influence, and good reasoning and arguments more than anything else. There’s no control provision at all. Maybe there’s some negative control provisions, like they have to ask you if they sell the company or something like that.

Tr. 390-91; accord Tr. 417 (“I understand people talk about conflicts and things like that. Over a long period of time over a lot of companies, there’s much more consistency there than there’s conflict.”).

Conflict blindness and its lesser cousin, conflict denial, have long afflicted the financially sophisticated.38 Given the directors’ intelligence, educational background, and experience, I believe they fully appreciated the diverging interests of the VCs, senior management, and the *65common stockholders. Despite this reality, the defendants did not consider forming a special committee to represent the interests of the common stockholders.39 See Tr. 289 (Scanlan); Tr. 485-86 (Laid-ig); Tr. 658 (Hummel); Tr. 904 (Prang). They also chose not to obtain a fairness opinion to analyze the Merger or evaluate other possibilities from the perspective of the common stockholders. See Tr. 218 (Campbell); Tr. 277-78 (Scanlan); Tr. 388-89 (Gandhi); Tr. 500 (Laidig); Tr. 658-59 (Hummel); Tr. 904 (Prang); Tr. 962 (McClelland). At trial, the defendants uniformly cited the cost of a fairness opinion, mentioning figures typical of bulge bracket institutions and their aspiring competitors. But no one appears to have explored the possibility contemporaneously, even after SDL’s counsel expressed “concerns over [the] common stockholders ... not getting any consideration,” JX 392 at 40092, and questioned whether Trados needed a “JMP fairness opinion .... ” JX 457 at 47624. One can remain appropriately skeptical of the value of fairness opinions while at the same time recognizing that an outside analysis of the alternatives available to Trados would have improved the record on fair dealing. Taken as a whole, the manner in which director approval was obtained provides evidence of unfair dealing.

iv. Stockholder Approval

Finally, fair dealing encompasses questions of how stockholder approval was obtained. The defendants never considered conditioning the Merger on the vote of a majority of disinterested common stockholders. See, e.g., Tr. 508-09 (Laidig). The vote on the Merger was delivered by the preferred, who controlled a majority of the Company’s voting power on an as-converted basis, and other “[l]arge [f]riendlies,” such as Hummel. See JX 419. Hummel originally was entitled to 12% of the MIP, but when he seemed to be having second thoughts just before the Merger, his MIP percentage was increased from 12% to 14%. See JX 379. Two days later, Budge described Hummel as “obviously a lock” to vote in favor of the Merger. JX 390. Other common stockholders reached different conclusions. One of the largest common stockholders, Microsoft, abstained because it could not stomach “the economic result” of the Merger, ie. the fact that it would receive nothing. JX 513. The plaintiff, who owned 5% of the common stock, sought appraisal.

“Stockholders in Delaware corporations have a right to control and vote their shares in their own interest.” Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845 (Del.1987). “They are limited only by any fiduciary duty owed to other stockholders. It is not objectionable that their motives may be for personal profit, or determined by whim or caprice, so long as they violate no duty owed [to] other shareholders.” Id. The fact that the preferred stockholders voted in their own interest is therefore not evidence of unfair dealing. The failure to condition the deal on a vote of the disinterested common stockholders is likewise not evidence of unfairness; it simply deprives the defendants of otherwise helpful affirmative evidence of fairness. The effect of the MIP on Hummel’s voting preferences, however, provides some additional evidence of unfairness.

*66b. Evidence Pertinent To Fair Price

In contrast to the evidence on fair dealing, which decidedly favored the plaintiff, the evidence on fair price was mixed. Consistent with the amount of consideration that the common stockholders received in the Merger, the defendants strived at trial to demonstrate that the common stock had no value. As with their trial testimony on issues relevant to fair dealing, the defendants adopted aggressive positions that were contrary to the contemporaneous documents and their earlier testimony. But as will be seen in the unitary fairness determination, their evidence on price fairness was ultimately persuasive.

i. Trados’s Dire Situation

To prove that the common stock had no value, the defendants tried to depict Tra-dos as a failing entity without cash, a business plan, or an addressable market. Each contention had a kernel of truth, but the directors exaggerated to the point of caricature.

One of the directors’ themes was that without a sale to SDL, Trados could not self-fund its business plan, would have run out of cash within 90 to 120 days, and then would have entered bankruptcy.40 At one point during their efforts to sell the Company, bankruptcy was a real risk, but that was in summer 2004 when Trados faced a cash crunch after its losses during the second quarter. If Trados had suffered a third quarter similar to the second, it would have run out of cash. Campbell, however, recognized the problem and moved to address it. He obtained venture debt financing, thereby solving the near-term issue. He also took steps to right size the Company, improve its cash conversion cycle, and reduce its working capital. He succeeded, as shown by the decision to defer drawing the second tranche of the Western Tech facility. Thanks to Campbell’s managerial acumen, the Company’s cash position improved substantially and during the first half of 2005 stayed above $5 million and ahead of budget.

Campbell also improved the Company’s operations. Before he entered the picture, Trados budgeted a third quarter loss of $1.4 million. Arriving with only one month left in the quarter, Campbell cut the actual loss to $0.9 million, then turned in a fourth quarter that achieved a “record profit” of $1.1 million. JX 231; JX 318 at 4. Stone reported to Hg that Trados finished “the year well — ahead of forecast,” Campbell was “performing well,” product development was “on track,” and the pipeline looked “fine.” JX 310 at 000033. Trados’s performance during the first half of 2005 showed that Campbell had stabilized the Company. During the first quarter, Tra-dos made its revenue budget and was profitable. During the second quarter, Trados continued to exceed budget for revenue and operating income. See JX 372; JX 394. In May 2005, Stone reported to Hg that “[f]or the first time, the business is ahead of budget in all key areas and has a seemingly good pipeline. Q1 was a record quarter and the business has made a profit.” JX 393 at 000051. Although Trados nominally missed its revenue budget in June by $1.8 million, JX 447, this was only because Trados management intentionally delayed product shipments so that SDL *67could book the revenue after the Merger closed. But for the revenue manipulation, Trados would have met or exceeded its revenue budget in each month of 2005. Contrary to the defendants’ exaggerated trial testimony, the Company was not headed for a cliff, and there was a realistic possibility that it could self-fund its business plan.

Along similar lines, the directors attempted at trial to disavow the business plan itself, and they were particularly critical of GIS. Campbell claimed at trial that he “invented” GIS, that Trados had no products to support it, and that developing a product from scratch would have required $15 million of additional investment. Tr. 62. Scanlan denigrated GIS as Campbell’s attempt to “make up an idea for a new business plan .... ” Tr. 300. Prang called it “nothing,” just a “couple of slides.” Tr. 784. Gandhi went the farthest, describing it as “fantasyland.” Tr. 378; accord Tr. 420 (“There’s no GIS. GIS is a fantasy.”); Tr. 423 (GIS was a “phantom” and “made up-”); Tr. 424 (GIS was a “whisper” or “glimmer” of “some kind of idea.”). He even claimed that for SDL to have paid anything for the Company based on GIS was “unfair to the buyer.” Tr. 389.

The directors’ trial testimony contrasted sharply with their depositions, when they could not remember whether Campbell even presented a business plan or if the Board discussed it. See Scanlan Dep. 129-30; Gandhi Dep. II 92-93; Stone Dep. 118-19; Prang Dep. 116. Campbell’s efforts to downplay his GIS plan conflicted with other testimony, where he admitted that he and others at Trados put “a lot of hard work” and “a lot of good work” in the plan. Tr. 62, 95-97. Campbell also believed that Trados was executing on the GIS vision. Tr. 176-77.

Hummel saw value in the business plan. As he credibly explained, GIS was Campbell’s shorthand for the enterprise content management space where he thought Tra-dos could command the highest multiple for its business. This involved completing a transition from traditional desktop vendor to enterprise software provider with the added concept of content management. Before Campbell arrived, Trados was widely perceived as a services business for individual translators, but that business had become commoditized, was not covered by any analysts, and appeared vulnerable to continuing technological erosion. GIS was an “attempt to somehow ... communicate to the market the importance of multilingual content” and to present Tra-dos as offering a content management solution. Tr. 558. By continuing the shift to enterprise products and emphasizing that aspect of the business, Campbell believed the Company could grow and command a higher multiple.

Contemporaneous documents show that Campbell was making progress in repositioning the Company. During the first half of 2005, Trados issued press releases and produced case studies to rebrand itself in the GIS space, and three market analysts issued reports on Trados. See, e.g., JX 625; see also JX 540 at 1 (discussing post-Merger . marketing “initiatives”). Trados had enterprise products, and a May 2005 internal management presentation discussed delivering “GIS prototype functionality” as one of Trados’s “Q2 Product Development Objectives.” JX 416 at 1. The project was “on plan.” Id.

SDL saw value in the business plan and GIS. Campbell testified that SDL insisted on a non-compete because SDL feared that Campbell would take his business plan, get funding, and “be directly competitive in a very bad way to SDL.” Tr. 99-100; accord Tr. 192 (“SDL liked the vision. They liked *68the vision a lot. They felt they needed me ... on the [SDL] board to help roll [GIS] out”). Post-closing documents establish that SDL embraced and pursued GIS, albeit with one word substitution: SDL called it Global Information Management, or “GIM.” See JX 530 (SDL marketing materials discussing GIM); JX 540 (same); JX 548 at 7 (SDL’s 2005 annual report emphasizing GIM); JX 531 at 2 (analyst report stating that “Global Information Management Spells a Much Bigger Market” for SDL). The February 2005 plan was not a sure thing, and GIS was the riskiest part, but it was viable.

The directors’ third theme was that Tra-dos could not grow because it operated in a stagnant niche market. Campbell estimated that Trados’s addressable market, given its existing resources, was $65 million. JX 309 at 35747. Prang believed the market was “much less than that,” around $50-55 million. Tr. 467. Gandhi again was the most extreme, calling it a “non-market.” Tr. 371-75; see also Tr. 386 (“I think that [Trados’s] existing market was going to have a higher likelihood of declining versus growing.”); Tr. 411 (“[T]he desktop market was limited and probably declining .... ”); Tr. 380 (“I don’t care if you’re talking about 5 or 10 percent growth. That’s flat in Silicon Valley .... [T]hat’s a 1 times revenue [valuation], if you can get it.”).

Here too, the documents told a different and less one-sided story. IDC, a market research firm, thought the market was more substantial. See JX 100 (IDC “expects the worldwide revenue for translation/globalization software tools to be $147 million in 2002 .... The market is now forecast to increase to $247 million in 2007, an 11% [CAGR] ....”); JX 156 (IDC “expects the worldwide revenue for translation/globalization software to be $158 million in 2003 .... The market is now forecast to increase to $238 million in 2008, an 8.6% [CAGR] ....”). In business presentations, Trados estimated that the market was more significant than the directors claimed at trial. See JX 169 at 3 (Trados presentation to Microsoft describing market potential of $250 million from translation departments and service providers); JX 220 at 9 (Trados presentation to Documentum incorporating IDC forecast of worldwide translation/globalization software revenue). Stone and SDL both perceived the market to be bigger. See JX 310 at 000037 (Stone noting in an update to her partners that Trados’s market was $100 million and growing at 5%); JX 511 at 11 (SDL calculating market size as $175 million, consisting of machine translation, translation memory, and other services, and growing to $263 million by 2009). Even Campbell’s assessment of a $65 million addressable market was not as bleak as the directors claimed at trial: the bulk of Trados’s addressable market — $45 million — was in enterprise software, where Trados only held 26% of the market and therefore had some room for growth. See JX 309 at 35749. The broader language services market was orders of magnitude bigger. See JX 531 at 2 (analyst commenting on the Merger and noting that “language services rings up over US$8 billion in outsourcing per year”); JX 48 at 3, 13-14 (Wachovia estimating translation market in 2001 at $11.5 billion).

The threat of bankruptcy, the viability of the business plan, and the size of Trados’s market were all concerns, but the directors’ portrayal at trial was overly strident. In evaluating fairness, I have taken these issues into account, but as risks rather than mortal crises.

ii. Fair Market Value Determinations For Option Grants

To prove the contrary proposition that the common stock had value, the plaintiff *69cited minutes in which the directors determined that the fair market value of Tra-dos’s common stock was $0.10 per share. Federal law mandates that if an issuer wants to avoid generating immediate income for an option recipient, then the exercise price for the option must be equal to or greater than the “fair market value of the stock at the time such option is granted .26 U.S.C. § 422(b)(4). IRS regulations require that a non-public company determine fair market value by taking into account “the company’s net worth, prospective earning power and dividend-paying capacity, and other relevant factors.” 26 C.F.R. § 20.2031-2. Serious penalties attach when taxpayers make false statements to the IRS.41

The Board first determined that the fair market value of Trados’s common stock was $0.10 per share in July 2004, during the Board’s initial effort to explore a sale. In making this determination, the directors lowered the fair market value from their previous valuation of $0.25 per share. JX 200 at 3. In November 2004, the Board reiterated its $0.10 per share determination. JX 261 at 3. In February 2005, contemporaneously with their decision to authorize Campbell to negotiate a sale to SDL at $60 million, the directors again resolved unanimously

[t]hat the Board hereby determines in good faith, after consideration of such factors as it deems necessary and relevant, including, but not limited to, current financial condition, business outlook, status of product development efforts, and business risks and opportunities relevant to the Company, that the fair market value of the Common Stock of the Company is $0.10 per share as of the date hereof [and] ...

[t]hat the Board hereby determines that the exercise price of the Options granted pursuant to these minutes of the Board shall be $0.10 per share, which is equal to the current fair market value of the Common Stock of the Company as determined in good faith by the Board.

JX 319 at 00017. Most pertinently, on April 21, 2005, after the Board had approved the LOI and Campbell had executed it, the directors approved identical resolutions. JX 381 at 01517; see also Tr. 178-82.

At trial, the directors foreswore their earlier determinations, testifying that despite the recitations in the minutes that they determined “in good faith” that the fair market value of the common stock was $0.10 per share, they actually did not believe at the time that it was true.42 Their *70reasons for misstating the fair market value of the stock were hardly laudable and amounted to benefitting the Company by misleading its employees and the IRS. According to the directors, they needed to ascribe positive value to the common stock so current and prospective employees would think the options were worth something.43 They also thought that if the fair market value was set at zero or close to it, the IRS might get suspicious. See, e.g., Tr. 575, 641 (Hummel); Tr. 899 (Prang).

Although it is difficult to countenance a “believe-me-now-that-I-was-lying-then” defense and tempting to hold the defendants to their determinations of fair market value, the directors convinced me that the minutes were, in fact, false. VC portfolio company boards often use rough, even arbitrary rules of thumb when determining the fair market value of stock for purposes of option grants.44 It is also impossible to overlook the fact that the fair market value determinations were made during an era when stock option backdating was prevalent among Silicon Valley technology companies.45 In an environment of laxity and sloppiness (at a minimum) regarding option grant dates, it is unsurprising for a non-public company during the same period to have taken a less than rigorous approach to option-related valuation. I do not rely on the minutes in evaluating fair price.

*71iii. The JMP Valuation

To prove that Trados’s value exceeded the deal price and that a stand-alone alternative would have generated something for the common, the plaintiff relied on the valuation of Trados that JMP prepared for the Board meeting on July 7, 2004. See JX 198. JMP used a comparable company method that yielded an indicative value for Trados of $55 million. Because it was based on a trading multiple, that number arguably included some discount for minority status.46 JMP also used a comparable transaction method that implied an enterprise value for Trados of approximately $75 million. Because it was based on an acquisition multiple, however, that figure implicitly included some value for synergies. See Montgomery Cellular Hldg. Co., Inc. v. Dobler, 880 A.2d 206, 222 (Del.2005); Union Ill. 1995 Inv. Ltd. P’ship v. Union Fin. Gp., Ltd., 847 A.2d 340, 356 (Del.Ch.2004). To the extent Tra-dos’s stand-alone value in July 2004 was somewhere between $55 million and $75 million, then the JMP valuation presented a problem for the defendants because Tra-dos’s financial performance improved significantly after Campbell arrived. Moreover, in contrast to the 2.8 multiple implied by JMP’s comparable transaction analysis, the Merger valued Trados at 2.3 times revenue based on Trados’s 2004 year-end financials. See JX 279 (noting revenue of $25.9 million for 2004). The multiple would be even lower based on Trados’s performance during the first half of 2005.

The defendants’ response at trial was more strained testimony: McClelland claimed the July 2004 analysis was not a valuation at all. Tr. 933. Instead, he described JMP’s work as simply an “application of these comparables to Trados’[s] figures.” Tr. 973. This was sad. JMP’s analyses were titled “Valuation Considerations” and “Valuation Summary.” JX 198 at 12-15. In his deposition, McClelland described the same pages candidly as “suggest[ing] [a] range of value.” McClel-land Dep. 64; accord id. (“Page 13 does contain a range of valuation.”). The presentation was, on its face, a standard investment banker valuation that included the ubiquitous “football field” valuation summary. See JX 198 at 13.

Although I reject McClelland’s timorous relabeling of JMP’s work, the July 2004 presentation was not a valuation for the ages. The comparable companies and transactions that JMP selected were a broad admixture that implied an expansive range of value running from $20.4 million to $169.8 million. With the high end coming in more than eight times the low, the resulting dispersion was four times what Chancellor Allen famously described as a range that “a Texan might feel at home on.” Paramount Commc’ns, 1989 WL 79880, at *13 (describing a range of $208-402 per share). A spread of that magnitude might be fine for a first cut, but it needed refining. Moreover, although the presentation implied a value of $55-75 million, it was clear from contemporaneous efforts to explore a sale that no one was interested in acquiring Trados at those prices. But for SDL, no one seemed interested in Trados at all. The real-world data called for a sharper pencil.

*72After July 2004, JMP never made another presentation to the Board. It is therefore impossible to know how JMP would have revised its analysis to evaluate the Merger or opine on fairness. Instead, in January 2005, Campbell asked JMP to generate a better set of comparables. On January 31, JMP provided a “larger number of general M & A software deals” that yielded a median transaction multiple of 2.2 times LTM revenue. JX 307. JMP also broke out its comparable companies into a “content” set and a “language translation services” set (consisting of only Li-onbridge and SDL). Id. The former had a median trading multiple of 1.6 times LTM revenue; the latter had a median trading multiple of 1.5 times LTM revenue. McClelland then asked Campbell if he “would like to see any of this [data] cut in another way.” Id.

Campbell took up McClelland on his offer. On February 1, 2005, JMP provided another cut of the trading multiples. At Campbell’s request, JMP had removed Adobe, Macromedia, and Viewpoint from the content set and added Bowne to the services set, reducing the trading multiples of both sets. Compare JX 311 at 00735, with JX 307 at 00732. On February 17, McClelland sent Campbell “some M & A [transaction] comps that work[ ] out to a median just under 2x [revenue].” JX 336. To get there, McClelland pared down the larger data set he produced on January 31 and added three transactions from 2002. Compare JX 336 at 00750, with JX 307 at 00731. Campbell then asked whether “there [had] been any activity we could represent from the globalization players,” which in Campbell’s view meant Bowne, Lionbridge, and SDL. JX 341. McClelland generated a separate list of acquisitions by those companies, which had a median transaction multiple of 1.3 times revenue. JX 343.

Campbell provided the resulting multiples to the Board. In testifying about their support for the Merger, the directors consistently recalled multiples of approximately 1.0 times revenue and stated that those multiples gave them comfort in the greater than 2.0 times revenue multiple implied by the Merger. See Tr. 45, 76, 211 (Campbell); Tr. 380-81, 383, 387, 429 (Gandhi); Tr. 574 (Hummel); Tr. 678, 710-11 (Stone); Tr. 878-79 (Prang). The plaintiff sees dark motives behind Campbell’s actions and believes he tried to manipulate the valuation information to justify the SDL deal.

I do not share this view. Despite McClelland and Campbell’s problematic testimony on other issues and the winding path by which the revised multiples reached the Board, the evidence as a whole convinces me that Trados did not have any true peer companies. The best available comparables were the language translation services companies — Lionbridge, SDL, and Bowne — which traded, respectively, at 1.6, 1.3, and 0.6 times LTM revenue. See JX 316. Before Trados could capture a higher multiple, it needed to execute on Campbell’s business plan and complete the transition to a primarily enterprise-driven business. Even then, it would be up to the market to determine whether the resulting business warranted a higher valuation. I therefore do not believe that JMP’s July 2004 valuation was inherently credible or that Campbell nefariously manipulated the comparables to generate artificially low multiples.

iv. The Expert Valuations

Both sides introduced expert testimony on the issue of fair price. Gregg A. Jarrell, the defendant’s expert, provided a balanced valuation that addressed the central issue in this case: whether Trados could generate positive value for the common stock if operated on a stand-alone basis *73according to the February 2005 business plan. William Becklean, the plaintiffs expert, did not provide similarly persuasive testimony.

Jarrell prepared comparable company and comparable transaction analyses but concluded that the comparables were insufficiently close to Trados to generate a reliable valuation. He therefore relied exclusively on a discounted cash flow (“DCF”) analysis based on the February 2005 business plan. For his projections, Jarrell started with the February 2005 projections, which were bullish, then added a second stage of more moderate growth. Management’s projections assumed that (i) revenue would grow at a compound annual growth rate of 24% from 2004-2007 (versus a historical compound annual growth rate of 18% from 2001-2004) and (ii) EBITDA margins would average 15.4% from 2005-2007 (versus negative historical EBITDA margins in 2001, 2002, and 2004 and a positive historical EBITDA margin of 2% in 2003). For his second stage, Jarrell started with management’s projected revenue growth rate of 31.6% in 2007, then lowered the growth rate evenly across each year of the five year secondary period to reach a perpetuity growth rate of 7%. This calculation effectively assumed that between 2004 and 2012, Trados’s revenue would grow annually at a rate of 21%. For his second stage EBITDA margins, Jarrell began with management’s projected margin of 19.4% in 2007, then lowered the margin evenly across each year to ultimately reach 15% in 2013. Based upon these assumptions, Jarrell projected net cash flow for Trados of negative $483,000 in 2005 rising to $9.3 million in 2013.

In steady state, it is typically assumed that future business growth will approximate that of the overall economy. See e.g., Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 513 (Del.Ch.2010) (noting that nominal GDP growth can be an appropriate proxy for a perpetual growth rate), aff'd, Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del.2010). Jarrell used a perpetuity growth rate of 7% because it is the long-term growth rate of the U.S. economy since the end of World War II. This was generous to the plaintiff; Delaware decisions often use lower growth rates.47

For his discount rate, Jarrell used 18.5%, derived through a standard WACC methodology. Valuation reference sources would suggest a discount rate of 21.82% for Trados in 2005. See JX 669 at 27 (comparing Jarrell’s WACC to an Ibbotson Associates report). The plaintiff did not criticize the discount rate before or during trial.

Using these figures, the sum of the present value of the terminal value, tax sav*74ings, and cash flows was $48.6 million. Adding back Trados’s cash on hand as of the Merger produced a going concern value for Trados of $51.9 million.

As Jarrell explained at trial, the $51.9 million generated by his DCF represented the best case scenario that the plaintiff claimed that the Board should have pursued:

[O]ne of the important questions on the table here is what would be the value of Trados if it had decided not to sell itself, if it had just, you know, said, “Look, let’s try to make this work and let’s see what we’re going to be worth down the road.” And I think that the answer is given by this DCF analysis. At least the best point estimate would be given by this DCF analysis, because the DCF analysis is based on [Campbell’s] projections that basically assume you hit a home run with respect to these plans. And they do not include certain of the costs.

So if everything went right, you stayed the course, you stayed independent ... [and] Trados went out and figured out a way to do this new plan and get these revenues and get these profits and not have to spend much money doing it, then this would be what would happen .... [T]he present value of that plan is given by this DCF analysis.

Tr. 1184-85. The present value of the DCF, based on Campbell’s business plan, was less than the Merger proceeds of $60 million.

Becklean did not prepare a DCF analysis, opting instead for three alternative methods. First, he valued Trados using LTM revenue multiples derived from the comparable companies JMP produced in early 2005. This method generated an implied value for Trados of $43.0 million. Becklean added a 25% control premium to imply a value of $53.7 million (below the Merger price). Second, Becklean valued Trados using LTM revenue multiples generated from a survey of transactions in the Capital IQ database involving companies in the “enterprise software industry” ranging in deal value from $50-250 million. JX 593 at 12. This method generated an implied value for Trados of $68.2 million. Third, Becklean valued Trados using a compara-bles-of-comparables analysis in which he derived a list of comparable transactions by looking at lists of comparable transactions generated by investment bankers in fairness opinions for target companies deemed comparable to Trados. See id. at 13. The LTM revenue multiple derived from the comparables-of-comparables approach generated an implied value for Tra-dos of $85.4 million.

There are a number of problems with Becklean’s work in this case. For one, in the two comparable transaction methodologies that generated values greater than the Merger price, Becklean did not back out any synergies. As estimates of standalone value, those figures are unreliably high. See Montgomery Cellular, 880 A.2d at 222; Union Ill., 847 A.2d at 356. For another, Becklean gamed the relative weightings of his three methodologies. In his initial report from 2008, Becklean weighted the three methods equally and stated there was no reason to emphasize one over another. His 2008 report made some errors that produced higher valuations than those set forth above. After Jarrell offered his criticisms of the report, Becklean issued a revised report in 2011 that adopted some of Jarrell’s suggestions, thereby lowering his valuations. To compensate, Becklean gave a 60% weight to his comparables-of-comparables approach and 20% weightings to the others, which brought his valuation back up to $75.6 million. An equal weighting would have produced a figure of $69.1 million. Beck-*75lean justified the new weighting as a “feels right sort of thing.” Tr. 1130.

Yet another problem was Becklean’s failure to demonstrate that the reference companies and transactions he used were comparable to Trados. “[T]he utility of a market-based method depends on actually having companies that are sufficiently comparable that their trading multiples provide a relevant insight into the subject company’s own growth prospects. When there are a number of corporations competing in a similar industry, the method is easiest to deploy reliably.” In re Orchard Enters., Inc., 2012 WL 2928805, at *9 (Del. Ch. July 18, 2012). Becklean’s data sets generated wide ranges of multiples (0.5— 8.5 for one; 0.4-21.0 for another; and 0.9-3.6 for a third), indicating that the companies in each data set were not in fact comparable. See, e.g., JRC Acq., 2004 WL 286963, at *11 (excluding comparables analysis where the wide range violated “any concept of comparability”). More focused analysis revealed significant differences. For example, in his enterprise software transactions analysis, Becklean applied transaction multiples derived from acquired enterprise software companies. See JX 593 at 12. Although Trados was trying to establish itself as an enterprise software company, it had not achieved that goal at the time of the Merger. In 2004, Trados generated 38% of revenue from enterprise software sales; in 2005, Trados budgeted 46% from enterprise software sales. See JX 447 at 50581-82. Beck-lean’s application of an enterprise software multiple to 100% of Trados’s revenue was misleading because enterprise software companies were more highly valued than Trados’s residual business.

Becklean came closest to the mark with a modified version of Jarrell’s DCF that used an exit multiple derived from his comparable company analysis to calculate the terminal value. This method generated an implied value for Trados of $77.8 million. When valuing a VC-backed portfolio company, using an exit multiple could make sense, because this technique recognizes that VCs often exit through trade sales. In this ease, however, at least two problems fatally undermined Becklean’s modified DCF, one methodological and the other factual.

From a methodological standpoint, Becklean did not use the same set of seventeen comparable companies for his exit multiple that he used in his comparable companies analysis. Becklean reduced his original seventeen to twelve and then to eight, thereby compromising the credibility of all three sets. If the seventeen companies used originally were really the best comparables, why change them? If the later cuts were better, why use the first set?

As a factual matter, Becklean’s modified DCF assumed Trados could be sold at the end of the projection period for 1.3-1.7 times revenue with the uncertainty surrounding that outcome appropriately captured in Jarrell’s discount rate of 18.5%, a relatively conservative WACC for Trados. But the evidence at trial demonstrated that the market for companies in the translation space was consolidating rapidly. Two of Trados’s most logical transaction partners — Bowne and Lionbridge— combined in 2005. The relative scarcity of suitable acquirers was not matched by a similar shortage of targets. Trados was one of several translation companies on the market, so if Trados passed on a sale to SDL, then SDL could go elsewhere. To the extent SDL made other acquisitions, it is far from certain that SDL would have had the same level of interest in Trados in the future. Although Campbell planned as an alternative to a near-term sale the repositioning of Trados as a content manage*76ment company with the potential to merge-up at a higher multiple in that space, that path presented the greatest risk because of the need to transition the business, obtain capital, and have an acquirer credit the Company’s greater value. To anticipate that Trados could exit through a sale at the end of the projection period and use the same discount rate that Jarrell used for stand-alone cash flows underestimates the uncertainty associated with that path.

Jarrell’s DCF valuation addressed the central question of fairness presented by this case. Jarrell made reasonable and plaintiff-friendly assumptions, yet his valuation still did not generate any return for the common. His work provided helpful input on the issue of fair price. Becklean’s did not.

c. The Unitary Determination Of Fairness

Although the defendant directors did not adopt any protective provisions, failed to consider the common stockholders, and sought to exit without recognizing the conflicts of interest presented by the Merger, they nevertheless proved that the transaction was fair. The Delaware Supreme Court has characterized the proper “test of fairness” as whether “the minority stockholder shall receive the substantial equivalent in value of what he had before.” Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 114 (Del.1952); accord Rosenblatt v. Getty Oil Co., 493 A.2d 929, 940 (Del.1985). If Trados’s common stock had no economic value before the Merger, then the common stockholders received the substantial equivalent in value of what they had before, and the Merger satisfies the test of fairness. See Blackmore P’rs, 864 A.2d at 85-86 (recognizing that the defendants could satisfy the entire fairness test if they proved that “there was no future for the business and no better alternative for the unit holders”); see also Orban, 1997 WL 153831.48

Despite the directors’ often problematic testimony, they proved that Trados did not have a reasonable prospect of generating value for the common stock. Trados’s ability to do so depended on financing its business plan with internally generated cash and the remaining venture debt. To the extent Trados needed outside funds, the Company could not raise them. None of the VC firms would put more money *77into Trados, and they had no obligation to. See Equity-Linked, 705 A.2d at 1057 (“[The preferred stockholders] were unwilling to put in more money. The preferred is of course not to be criticized for that. They have every right to send no good dollars after bad ones. Indeed, they had the right to withhold necessary consents to salvage plans unless their demands were satisfied”). As a practical matter no outside VC firm would invest without participation from the Company’s existing backers.49

Trados also could not return to the venture debt market. Venture debt providers are not like commercial lenders who rely primarily on the strength of a business and its cash flows. Venture debt providers see themselves as bridging a company to the next round of VC financing or a sale. See Darían M. Ibrahim, Debt as Venture Capital, 2010 U. Ill. L.Rev. 1169, 1173 (2010). Trados had played the venture debt card for its stage.

If Trados could not self-fund its business plan, then the Company could not execute it. Even if it could self-fund, Trados had to build value at a rate exceeding the 8% cumulative dividend earned by the preferred to generate a return for the common. Having considered the directors’ trial testimony, the documentary record, and Jarrell’s DCF analysis, I believe that Tra-dos would not be able to grow at a rate that would yield value for the common. Trados likely could self-fund, avoid bankruptcy, and continue operating, but it did not have a realistic chance of generating a sufficient return to escape the gravitational pull of the large liquidation preference and cumulative dividend.

I reach this conclusion despite regarding Trados’s prospects as more bullish than the gloomy picture painted by the defendants, particularly with a savvy operator like Campbell at the helm. As noted, I do not believe Trados faced mortal crises, but it did face risks. Its business was volatile, and Trados could suffer a bad quarter or lose market share to competitors. And the external threats were becoming more serious. Lionbridge had been a longtime business partner, but in 2004 it began competing directly with Trados. In 2005, Li-onbridge first acquired Logoport, a translation software company, then agreed to acquire Bowne, historically another large Trados customer. Other smaller translation companies like Idiom and GlobalSight were seeking buyers, suggesting a soft market. Given optimal conditions, Jar-rell’s DCF analysis demonstrated that the February 2005 business plan would not generate value for the common. The conditions Trados faced were not as dire as the defendants claimed, but they were suboptimal.

*78In light of this reality, the directors breached no duty to the common stock by agreeing to a Merger in which the common stock received nothing. The common stock had no economic value before the Merger, and the common stockholders received in the Merger the substantial equivalent in value of what they had before.

Under the circumstances of this case, the fact that the directors did not follow a fair process does not constitute a separate breach of duty. As the Delaware Supreme Court has recognized, an unfair process can infect the price, result in a finding of breach, and warrant a potential remedy. See, e.g., Kahn v. Tremont Corp., 694 A.2d 422, 432 (Del.1997) (“[H]ere, the process is so intertwined with price that under Wein-berger’s unitary standard a finding that the price negotiated by the Special Committee might have been fair does not save the result.”). On these facts, such a finding is not warranted. The defendants’ failure to deploy a procedural device such as a special committee resulted in their being forced to prove at trial that the Merger was entirely fair. Having done so, they have demonstrated that they did not commit a fiduciary breach.

B. The Appraisal Claim

The determination that no breach of duty occurred because the Merger price was fair does not necessarily moot the companion appraisal proceeding. “In an entire fairness case, the matter only proceeds to the remedial phase if the transaction fails the test of fairness.” Reis, 28 A.3d at 466. “The value of a corporation is not a point on a line, but a range of reasonable values ....” Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *2 (Del.Ch. Dec. 31, 2003), aff'd in part, rev’d in part on other grounds, 884 A.2d 26 (Del.2005). A court could conclude that a price fell within the range of fairness and would not support fiduciary liability, yet still find that the point calculation demanded by the appraisal statute yields an award in excess of the merger price. Compare Technicolor III, 663 A.2d at 1176-77 (affirming determination that merger consideration of $23 per share was entirely fair), with Cede & Co. v. Technicolor, Inc., 884 A.2d 26, 30 (Del.2005) (awarding fair value in appraisal of $28.41 per share).

This case will not support a higher point determination. The Supreme Court “has defined ‘fair value’ as the value to a stockholder of the firm as a going concern, as opposed to the firm’s value in the context of an acquisition or other transaction.” Golden Telecom, 11 A.3d at 217. If Tra-dos continued to operate as a stand-alone entity, then the common stock had no economic value, whether for purposes of an entire fairness case or an appraisal proceeding. Trados had no realistic chance of growing fast enough to overcome the preferred stock’s existing liquidation preference and 8% cumulative dividend. The fair value of Trados’s common stock for purposes of 8 Del. C. § 262 is zero.

C. The Request For An Award Of Attorneys’ Fees And Expenses

In addition to the prospect of a fee award if he prevailed, the plaintiff preserved the right to seek fees and expenses under the bad faith exception to the American Rule. “Although there is no single definition of bad faith conduct, courts have found bad faith where parties have unnecessarily prolonged or delayed litigation, falsified records or knowingly asserted frivolous claims.” Johnston v. Arbitrium (Cayman Is.) Handels AG, 720 A.2d 542, 546 (Del.1998) (footnotes omitted). Bad faith conduct also can include reversing position on issues and changing testimony to suit the moment. See Montgomery Cellular, 880 A.2d at 227-28. “The purpose *79of the ‘bad faith’ exception is to ‘deter abusive litigation in the future, thereby avoiding harassment and protecting the integrity of the judicial process.’” Kaung v. Cole Nat. Corp., 884 A.2d 500, 506 (Del.2005) (quoting Schlank v. Williams, 572 A.2d 101, 108 (D.C.App.1990)).

There is good reason to think that fees might be shifted. Serial failures to produce documents marred the discovery process. The plaintiff filed four motions to compel, each of which prompted the production of additional documents either to moot the motion, after receiving guidance from the court, or because the motion was granted at least in part. On one occasion, Chancellor Chandler deferred ruling on whether to impose sanctions until the completion of the case. See Christen v. Trades Inc., 2008 WL 5255817, at *2 (Del.Ch. Dec. 12, 2008). Viewed as a whole, the defendants’ conduct during discovery could have needlessly increased the litigation’s cost.

The defendants also filed three separate motions for summary judgment. At least one — the motion for summary judgment in the appraisal case — could be regarded as frivolous. This motion argued that the plaintiff waived his appraisal rights under a stockholder agreement when the Merger agreement itself provided for appraisal.

The directors’ frequently less-than-credible trial testimony and their changes of position between deposition and trial could provide a further basis for fee-shifting. So too could the directors’ belated disavowal of the four sets of minutes in which the Board ostensibly determined in good faith that the fair value of the common stock was $0.10 per share and upon which this court previously relied.

At this point, the parties have not briefed the question of fee-shifting. For present purposes it suffices to grant the plaintiff leave to make a formal application.

III. CONCLUSION

The defendants proved that the decision to approve the Merger was entirely fair. The fair value of the common stock for purposes of appraisal was zero. Within ten days, the parties shall confer and submit a stipulation establishing a briefing schedule for the plaintiffs fee application.

1

. Hg invested £1.663 million to buy the common stock. JX 107. The transaction closed on September 19, 2000. JX 474 at 00372. The exchange rate was $1.4043 per pound, yielding a dollar-denominated investment of $2.3 million. See Historical Exchange Rates, OANDA, http://www.oanda.com (providing dollar per pound exchange rate on September 19, 2000).

2

. See JX 466 (Budge asking Lancaster: "Don't you want to mention that it is available after the deal close date (July 5), so that you get all the revenue that comes with delayed shipments[?]”); JX 486 (Mike Kidd, one of Trados’s executives, reporting to Budge, Hummel, and Campbell that "[t]he delayed shipments of TRADOS 7 is [sic] causing major *35customer service issues. Customers are clogging our emails and phones wanting to know where their [Trados 7 updates] are"); JX 507 (Budge stating he expects to have “$1.9m in deferred software revenue to deliver to SDL,” which “[w]ill be close to the $2m we promised."); JX 518 (Budge drafting an email from Campbell to Lancaster; “As we’ve discussed on many occasions, we did not ship certain revenues for the last couple weeks of the quarter, the total of which is $2,046k. This $2,046k in business will be shipped after the deal is substantially closed which is hopefully today and the result will be $2m+ of revenue and profit immediately for SDL.”). The evidence at trial established that SDL made a bet-the-company decision when purchasing Trados. SDL was a public company, and the success of the Merger had major implications for the trading price of its stock. Delaying the revenue made the deal immediately accretive to SDL. Campbell took a portion of his MIP payout in the form of SDL shares worth approximately $700,000. JX 465 at 45285. He sold the shares within 90-120 days after the Merger for about $900,000. Tr. 9. The preferred stockholders also took a portion of the Merger consideration in the form of SDL shares. Had these facts been alleged sufficiently, it might have been reasonably conceivable for pleading purposes that the revenue manipulation benefitted the defendants. The plaintiff has not sought to revisit that aspect of Trados I, which is law of the case.

3

. eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 34 (Del.Ch.2010); accord N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del.2007) ("The directors of Delaware corporations have the legal responsibility to manage the business of a corporation for the benefit of its shareholder[] owners.”); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (citing "the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation's stockholders”); see also Leo E. Strine, Jr., et al., Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law, 98 Geo. L.J. 629, 634 (2010) ("[I]t is essential that directors take their responsibilities seriously by actually trying to manage the corporation in a manner advantageous to the stockholders.”).

4

.See 8 Del. C. § 160 (imposing restrictions on the ability of a Delaware corporation to redeem its own shares); SV Inv. P’rs, LLC v. ThoughtWorks, Inc., 7 A.3d 973, 983-88 (Del.Ch.2010) (interpreting charter provision requiring redemption of preferred stock out of "funds legally available” in light of restrictions on redemption imposed by statute and common law), aff'd, 37 A.3d 205 (Del.2011). See generally Lynn A. Stout, On the Nature of Corporations, 2005 U. Ill. L.Rev. 253 (2005) (exploring implications of equity capital lock-in); Margaret M. Blair, Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century, 51 UCLA L.Rev. 387 (2003) (tracing history of equity capital lock-in); Edward B. Rock & Michael L. Wachter, Waiting for the Omelet to Set: Match-Specific Assets and Minority Oppression in Close Corporations, 24 J. Corp. L. 913 (1999) (describing costs and benefits of equity capital lock-in). Shares, by default, are freely alienable. See 8 Del. C. § 202. Alienability ameliorates the effects of capital lock-in by enabling exit, but it does not alter the presumptively permanent status of equity capital. Selling simply substitutes a new owner as the holder of the bundle of rights associated with the equity. The capital remains locked in. In a publicly traded company, the successor holder’s ownership status is even more attenuated; since the implementation of the SEC’s policy of share immobilization, public stockholders do not own shares; they own the contract right to acquire record ownership and the equitable rights associated with beneficial ownership. See Kurz v. Holbrook, 989 A.2d 140, 161-62, 167-69 (Del.Ch.2010), aff'd in part, rev’d in part on other grounds, 992 A.2d 377 (Del.2010).

5

. See, e.g., Gantler v. Stephens, 965 A.2d 695, 706 (Del.2009) (holding that "enhancing the corporation’s long term share value” is a "distinctively corporate concerní ]"); TW Servs. v. SWT Acq. Corp., 1989 WL 20290, at *7 (Del.Ch. Mar. 2, 1989) (Allen, C.) (describing as "non-controversial” the proposition that "the interests of the shareholders as a class are seen as congruent with those of the corporation in the long run” and explaining that "[t]hus, broadly, directors may be said to owe a duty to shareholders as a class to manage the corporation within the law, with due care and in a way intended to maximize the long run interests of shareholders”); Andrew A. Schwartz, The Perpetual Corporation, 80 G. Wash. L.Rev. 764, 777-83 (2012) (arguing that the corporate attribute of perpetual existence calls for a fiduciary mandate of long-term value maximization for the stockholders' benefit); William T. Allen, Ambiguity in Corporation Law, 22 Del. J. Corp. L. 894, 896-97 (1997) (”[I]t can be seen that the proper orientation of corporation law is the protection of long-term value of capital committed indefinitely to the firm.”).

6

. Compare Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del.1994) (holding it was reasonably probable that directors breached their fiduciary duties by pursuing ostensibly superior value to be created by long-term strategic combination when, post-transaction, a controller would have “the power to alter that vision,” rendering its value highly contingent), and Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182 (Del.1986) (holding that alternative of maintaining corporation as stand-alone entity and use of defensive measures to preserve *38that alternative "became moot” once board determined that values achievable through a sale process exceeded board’s assessment of stand-alone value), with Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del.1989) (holding it was not reasonably probable that directors breached their fiduciary duties by pursuing superior long-term value of strategic, stock-for-stock merger without a post-transaction controller), Unocal, 493 A.2d at 956 (holding it was not reasonably probable that directors breached their fiduciary duties by adopting a selective exchange offer to defend against a two-tiered tender offer where blended value of offer was less than $54 per share and board reasonably believed stand-alone value of corporation was much greater), and Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 108-09 (Del.Ch.2011) (holding that board complied with fiduciary duties by maintaining a rights plan to protect higher stand-alone value of corporation rather than permit immediate sale).

7

. See 8 Del. C. § 151(a); MCG Capital, 2010 WL 1782271, at *6 (“Where there is an affirmative expression altering the rights of a class of stock, only those specific rights are altered, other default rights remain unaltered.”); Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 593-94 (Del.Ch.1986) (Allen, C.) ("If a certificate designating rights, preferences, etc. of special stock contains no provision dealing with voting rights or no provision creating rights upon liquidation, it is not the fact that such stock has no voting rights or no rights upon liquidation. Rather, in such circumstances, the preferred stock has the same voting rights as common stock or the same rights to participate in the liquidation of the corporation as has such stock.” (citations omitted)); see also Matulich v. Aegis Commc’ns Gp., Inc., 942 A.2d 596, 600 (Del.2008) ("If a certificate of designation is silent as to voting rights, preferred shareholders have the same statutory rights as common stockholders.”). See generally Richard M. Buxbaum, The Internal Division of Powers in Corporate Governance, 73 Cal. L.Rev. 1671, 1684 (1985) ("Whatever its attributes (its ‘rights, preferences, and privileges,’ in the jargon), preferred stock is quintessentially a matter of contract. If any deviation from the attributes of the residual common stock concept is desired, the contract must specify it.”).

8

. The primacy of the negotiated contract should not be overstated: preferred stock is senior in defined respects to common, but it is equity, not debt, and it remains subject to the statutory and common law limitations that apply to equity. See Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 645 (Del.Ch.2013) ("By investing in preferred stock, the defendants contracted for equity treatment, received the attendant benefits, and accepted the concomitant limitations, including restrictions like those found in Section 160.”); SV Inv. P’rs, 7 A.3d at 983-88 (applying statutory and common law restrictions on preferred stock redemption right).

9

. See Wolfensohn v. Madison Fund, Inc., 253 A.2d 72, 75 (Del.1969) (holding that former preferred stockholders who received debentures and a share of common stock were not owed fiduciary duties in their capacity as debenture holders and had only their contractual rights as creditors); LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 437 (Del.Ch.2010) ("[O]nce the QuadraMed Board honored the special contractual rights of the preferred, it was entitled to favor the interests of the common stockholders.”); Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2010 WL 2173838, at *7 (Del.Ch. May 28, 2010) ("[Rjights arising from documents governing a preferred class of stock, such as the Certificates, that are enjoyed solely by the preferred class, do not give rise to fiduciary duties because such rights are purely contractual in nature.”); MCG Capital, 2010 WL 1782271, at *15 ("[D]irectors do not owe preferred shareholders any fiduciary duties with respect to [their contractual] rights.”); Jedwab, 509 *40A.2d at 594 ("[Wjith respect to matters relating to the preferences or limitations that distinguish preferred stock from common, the duty of the corporation and its directors is essentially contractual .... ”); see also Simons v. Cogan, 549 A.2d 300, 303 (Del.1988) ("[A] convertible debenture represents a contractual entitlement to the repayment of a debt and does not represent an equitable interest in the issuing corporation necessary for the imposition of a trust relationship with concomitant fiduciary duties.”); Revlon, 506 A.2d at 182 ("[T]he Revlon board could not make the requisite showing of [fiduciary] good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights of the former already were fixed by contract.”).

10

. Jedwab, 509 A.2d at 594; accord LC Capital, 990 A.2d at 449-50; MCG Capital, 2010 WL 1782271, at *15; Trados I, 2009 WL 2225958, at *7; Rosan v. Chi. Milwaukee Corp., 1990 WL 13482, at *6 (Del.Ch. Feb. 6, 1990).

11

. See, e.g., In re Delphi Fin. Gp. S'holder Litig., 2012 WL 729232, at *12 n. 57 (Del.Ch. Mar. 6, 2012) (considering challenge by common stockholders to transaction in which controlling stockholder received differential merger consideration); N.J. Carpenters Pension Fund v. Infogroup, Inc., 2011 WL 4825888, at *9 (Del.Ch. Sept. 30, 2011) (same); In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *12 (Del.Ch. Oct. 2, 2009) (same); In re Tele-Commc’ns, Inc. S’holders Litig., 2005 WL 3642727, at *7 (Del.Ch. Dec. 21, 2005) (considering challenge to merger in which “a clear and significant benefit of nearly $300 million accrued primarily” to directors holding high-vote common stock (footnote omitted)); In re LNR Prop. Corp. S’holders Litig., 896 A.2d 169, 178 (Del.Ch.2005) (considering challenge by common stockholders to transaction in which corporation was sold to third party but controlling stockholder received right to roll equity in transaction).

12

. See, e.g., In re FLS Hldgs., Inc. S’holders Litig., 1993 WL 104562, at *5 (Del.Ch. Apr. 2, 1993) (rejecting disclosure-only settlement of claims challenging merger in which all consideration went to the common stockholders and the preferred stockholders received nothing, holding that board comprised of directors holding common stock would likely bear the burden of proving that allocation of consideration was entirely fair, and noting that absence of independent bargaining agent or other meaningful procedural protections for the preferred made fairness "a substantial issue that is fairly litigable”); Jedwab, 509 A.2d at 595 (holding that preferred stockholder could challenge controller's allocation of merger consideration between preferred and common but concluding that the defendants were likely to meet their burden).

13

. See Tele-Commc’ns, 2005 WL 3642727, at *7 (considering directors’ relative ownership of high-vote and low-vote stock in evaluating their interest in transaction that paid premium for high-vote shares and holding that entire fairness applied because of directors’ disproportionate ownership of high-vote shares); In re Staples, Inc. S’holders Litig., 792 A.2d 934, 950-51 (Del.Ch.2001) (considering directors' ownership of tracking stock in evaluating interestedness and applying business judgment rule because the directors' ownership stakes did not give rise to a material conflict of interest); In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617-18 (Del.Ch.1999) (same); Solomon v. Armstrong, 747 A.2d 1098, 1117-18 (Del.Ch.1999) (same).

14

. See LC Capital, 990 A.2d at 449-50 (holding that the board's duties required the board "to take reasonable efforts to secure the highest price reasonably available for the corporation” and rejecting argument that board had a duty to maximize the value of a liquidation preference and other contractual rights in the certificate of designations governing preferred stock); Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040, 1042 (Del.Ch.1997) (Allen, C.) (declining to enjoin debt issuance that "was taken for the benefit largely of the common stock,” that imposed "economic risks upon the preferred stock which the holders of the preferred did not want,” but that did not violate their contractual preferences); HB Korenvaes Invs., L.P. v. Marriott Corp., 1993 WL 205040, at *3-5 (Del.Ch. Apr. 2, 1993) (Allen, C.) (declining to enjoin planned spinoff of businesses to common stock and indefinite suspension of dividends on preferred stock on grounds that directors did not violate any contractual rights of the preferred stock). "Consistent with this viewpoint, it has been thought that having directors who actually owned a meaningful, long-term common stock stake was a useful thing, because that would align the interests of the independent directors with the common stockholders and give [the directors] a personal incentive to fulfill their duties effectively.” LC Capital, 990 A.2d at 452.

15

. See Gheewalla, 930 A.2d at 101 ("When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”); Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 790 (Del.Ch.2004) ("Having complied with all legal obligations owed to the firm’s creditors, the board would ... ordinarily be free to take economic risk for the benefit of the firm’s equity owners, so long as the directors comply with their fiduciary duties to the firm by selecting and pursuing with fidelity and prudence a plausible strategy to maximize the firm's value.”); Blackmore P’rs, L.P. v. Link Energy LLC, 864 A.2d 80, 85-86 (Del.Ch.2004) ("[T]he allegation that the Defendant Directors approved a sale of substantially all of [the company’s] assets and a resultant distribution of proceeds that went exclusively to the company’s creditors raises a reasonable inference of disloyalty or intentional misconduct. Of course, it is also possible to infer (and the record at a later stage may well show) that the Director Defendants made a good faith judgment, after reasonable investigation, that there was no future for the business and no better alternative .... [I]t would appear that no transaction could have been worse for the unit holders and reasonable to infer ... that a properly motivated board of directors would not have agreed to a proposal that wiped out the value of the common equity and surrendered all of that value to the company’s creditors.”); see also Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 191-98 (Del.Ch.2006) (applying business judgment rule to dismiss claims that directors of solvent corporation breached their duties by taking action to benefit subsidiary’s sole stockholder at the expense of its creditors), aff'd, 931 A.2d 438 (Del.2007). Even when a corporation is insolvent, creditors lack standing to assert a direct claim for breach of fiduciary duty; they merely gain standing to sue derivatively because they have joined the ranks of the residual claimants. See Gheewalla, 930 A.2d at 101 ("When a corporation is *42insolvent, however, its creditors take the place of the shareholders as the residual beneficiaries of any increase in value. Consequently, the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.”).

16

. Some scholars have interpreted Orban v. Field, 1997 WL 153831 (Del.Ch. Apr. 1, 1997) (Allen, C.), as supporting a "control-contingent approach” in which a board elected by the common stock owes duties to the common stockholders but not the preferred stock, but a board elected by the preferred stock can promote the interests of the preferred stock at the expense of the common stock. See, e.g., Jesse M. Fried & Mira Ganor, Agency Costs of Venture Capitalist Control in Startups, 81 N.Y.U. L.Rev. 967, 990-93 (2006) [hereinafter Agency Costs ]. The control-contingent interpretation does not comport with how I understand the role of fiduciary duties or the ruling in Orban, which I read as a case in which the common stock had no economic value such that a transaction in which the common stockholders received nothing was fair to them. See infra note 48. Some scholars also have argued that in lieu of a common stock valuation maximand, directors should have a duty to maximize enterprise value, defined in the common-preferred context as the aggregate value of the returns to the common stock plus the preferred stock, taking into account the preferred stock’s contractual rights. See, e.g., William W. Bratton & Michael L. Wachter, A Theory of Preferred Stock, 161 U. Pa. L.Rev. 1815, 1885-86 (2013) [hereinafter Theory of Preferred]; Douglas G. Baird & M. Todd Henderson, Other People’s Money, 60 Stan. L.Rev. 1309, 1323-28 (2008). Among other problems, such an approach does not explain why the duty to maximize enterprise value should encompass certain contract rights (those of preferred) but not others (those of creditors, employees, pensioners, customers, etc.). Moreover, while tolerably clear in the abstract and sometimes in real-world settings, see, e.g., In re Central Ice Cream Co., 836 F.2d 1068 (7th Cir.1987), the enterprise value standard ultimately complicates rather than simplifies the difficult judgments faced by directors acting under conditions of uncertainty and the task confronted by courts who must review their decisions. The enterprise value standard compounds the number of valuation alternatives that must be solved simultaneously, and the resulting multivariate fiduciary calculus quickly devolves into the equitable equivalent of a constituency statute with a concomitant decline in accountability. Delaware case law as I read it does not support the enterprise value theory. As long as a board complies with its legal obligations, the standard of fiduciary conduct calls for the board to maximize the value of the corporation for the benefit of the common stock. See LC Capital, 990 A.2d at 452 (”[I]t is the duty of directors to pursue the best interests of the corporation and its common stockholders, if that can be done faithfully with the contractual promises owed to the preferred ....”).

17

. Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984). In Brehm v. Eisner, 746 A.2d 244, 253-54 (Del.2000), the Delaware Supreme Court overruled seven precedents, including Aronson, to the extent they reviewed a Rule 23.1 decision by the Court of Chanceiy under an abuse of discretion standard or otherwise suggested deferential appellate review. Id. at 253 n. 13 (overruling in part on this issue Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 72-73 (Del.1997); Grimes v. Donald, 673 A.2d 1207, 1217 n. 15 (Del.1996); Heineman v. Datapoint Corp., 611 A.2d 950, 952 (Del.1992); Levine v. Smith, 591 A.2d 194, 207 (Del.1991); Grobow v. Perot, 539 A.2d 180, 186 (Del.1988); Pogostin v. Rice, 480 A.2d 619, 624-25 (Del.1984); and Aronson, 473 A.2d at 814). The Brehm Court held that going forward, appellate review of a Rule 23.1 determination would be de novo and plenary. Brehm, 746 A.2d at 254. The seven partially overruled precedents otherwise remain good law. This decision does not rely on any of them for the standard of appellate review and therefore omits the cumbersome subsequent history.

18

. See Realigning the Standard, supra, at 452 (defining an irrational decision as "one that is so blatantly imprudent that it is inexplicable, in the sense that no well-motivated and minimally informed person could have made it”); see also Brehm, 746 A.2d at 264 ("Irrationali-1y is the outer limit of the business judgment rule. Irrationality may be the functional equivalent of the waste test or it may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule.” (footnote omitted)); In re J.P. Stevens & Co., Inc. S’holders Litig., 542 A.2d 770, 780-81 (Del.Ch.1988) ("A court may, however, review the substance of a business decision made by an apparently well motivated board for the limited purpose of assessing whether that decision is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.”).

19

. See McMullin v. Beran, 765 A.2d 910, 923 (Del.2000) ("In assessing director independence, Delaware courts apply a subjective ‘actual person’ standard to determine whether a ‘given’ director was likely to be affected in the same or similar circumstances.” (citing Technicolor III, 663 A.2d at 1167)); Cede & Co. v. Technicolor, Inc. (Technicolor II), 634 A.2d 345, 361, 364 (Del.1993) (requiring director-by-director analysis); In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del.2006) (affirming director-by-director analysis); see also Orman v. Cullman, 794 A.2d 5, 25 n. 50 (Del.Ch.2002) (explaining that materiality is required for a breach of fiduciary duty claim but not for a violation of 8 Del. C. § 144).

20

. Trados I, 2009 WL 2225958, at *6 (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del.1993)); accord Technicolor II, 634 A.2d at 362 ("Classic examples of director self-interest in a business transaction involve either a director appearing on both sides of a transaction or a director receiving a personal benefit from a transaction not received by the shareholders generally.”); Pogostin, 480 A.2d at 624 (“Directorial interest exists whenever ... a director either has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not equally shared by the stockholders.”).

21

. See Krasner v. Moffett, 826 A.2d 277, 283 (Del.2003) (“[T]hree of the FSC directors ... were interested in the MEC transaction because they served on the boards ... of both MOXY and FSC.”); McMullin, 765 A.2d at 923 ("The ARCO officers and designees on Chemical’s board owed Chemical's minority shareholders 'an uncompromising duty of loyalty.’ There is no dilution of that obligation in a parent subsidiary context for the individuals who acted in a dual capacity as officers or designees of ARCO and as directors of Chemical.” (footnote omitted)); Rabkin v. Philip A. Hunt Corp., 498 A.2d 1099, 1106 (Del.1985) (holding that parent coiporation’s directors on subsidiary board faced conflict of interest); Weinberger, 457 A.2d at 710 (holding that officers of parent corporation faced conflict of interest when acting as subsidiary directors regarding transaction with parent); Trados I, 2009 WL 2225958, at *8 (treating Gandhi and Stone as interested for pleading purposes when "each had an ownership or employment relationship with an entity that owned Trados preferred stock”); see also Rales, 634 A.2d at 933 (explaining for purposes of demand futility that " '[directorial interest exists whenever divided loyalties are present'" (quoting Pogostin, 480 A.2d at 624)); Goldman v. Pogo.com, Inc., 2002 WL 1358760, at *3 (Del.Ch. June 14, 2002) ("Because Khosla and Wu were the representatives of shareholders which, in their institutional capacities, were both alleged to have had a direct financial interest in this transaction, a reasonable doubt is raised as to Khosla and Wu’s disinterestedness in having voted to approve the ... [l]oan.”); Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532 A.2d 1324, 1336 (Del.Ch. 1987) (same).

22

. When investing in the United States, VCs almost exclusively use preferred stock. See Steven N. Kaplan & Per Stromberg, Financial Contracting Meets the Real World: An Empirical Analysis of Venture Capital Contracts, 70 Rev. Econ. Studs. 281, 313 (2003) (finding that 94% of VC financings between 1987 through 1999 used preferred stock); Ronald J. Gilson & David M. Schizer, Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock, 116 Harv. L.Rev. 874, 875 (2003) [hereinafter Tax Explanation ] (noting that "overwhelmingly, venture capitalists make their investments through convertible preferred stock”); Joseph L. Lemon, Jr., Don’t Let Me Down (Round): Avoiding Illusory Terms in Venture Capital Financing in the Post-Internet Bubble Era, 39 Tex. J. Bus. L. 1, 5-6 (2003) ("In the vast majority of VC financings, VCs contribute funding in exchange for preferred stock.”). There is evidence that tax advantages drive the use of preferred stock for U.S. investments. See Tax Explanation, supra, at 877, 889. In jurisdictions with different tax rules, VCs frequently use other instruments, including common stock. See Agency Costs, supra, at 984.

23

. A wide range of treatises, law review articles, and practitioner pieces describe the typical features of VC preferred stock. See, e.g., Agency Costs, supra, at 981-82 (describing features); Michael A. Woronoff & Jonathan A. Rosen, Effective vs. Nominal Valuation in Venture Capital Investing, 2 N.Y.U. J.L. & Bus. 199, 208-19 (2005) (same); Manuel A. Utset, Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Finns, 2002 Wis. L.Rev. 45, 55 & n. 16 [hereinafter Venture Smvival] (describing VC contracts, including preferred stock, as "highly standardized” and "mostly non-negotiable”).

24

. Id.; accord Darían M. Ibrahim, The New Exit in Venture Capital, 65 Vand. L.Rev. 1, 27 (2012) [hereinafter New Exit ] (noting "traditional exits often do not align the incentives of VCs and entrepreneurs [which] can produce suboptimal outcomes for individual investors that are forced into a premature exit that leaves money on the table”); Exit Structure, supra, at 356 (noting "venture capitalists and entrepreneurs may have different interests regarding the timing and form of exit”).

25

. Professors Brian J. Broughman and Jesse M. Fried offer a simple illustration: "Consider, for example, a startup with $50 million in aggregate liquidation preferences. Assume there is a 50% likelihood that, within one year, the firm will be worth $90 million and a 50% likelihood that it will be worth $0. A hypothetical risk-neutral buyer content to earn a 0% return would pay $45 million for all of the equity of the startup. Preferred shareholders would get $45 million; common shareholders would get $0. But if the startup were to remain independent, the common stock would have an expected value of $20 million.” Brian J. Broughman & Jesse M. Fried, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups 12 n. 47 (Harvard Law & Econ., Discussion Paper No. 742, 2013), available at http://ssrn.com/ abstract=2221033 [hereinafter Carrots & Sticks ]. The preferred stockholders will prefer their sure $45 million over the risk-adjusted $25 million. The common stockholders will prefer the opportunity to receive a risk-adjusted $20 million over a sure zero. If the preferred have the power to force a sale, then the $20 million is "the 'option value' of the common stock that is lost in the sale of the firm today for $45 million.” Id.; see also Agency Costs, supra, at 995-97 (providing more detailed examples). Of course, this is not the only possibility. Under other scenarios, the preferred stockholders' incentives can lead to defensible results. See, e.g., Theory of Preferred, supra, at 1886.

26

. See Venture Survival, supra, at 60. "Among early-stage venture capitalists, ... it is generally assumed that an investment portfolio should yield an IRR of approximately 30 to 50 percent.” False Dichotomy, supra, at 72. "[Bjecause many of these investments will ultimately be written off, VC investors commonly make individual company investments with the expectation that each will produce a 40 to 50 percent projected IRR after accounting for the venture capitalist’s fees and compensation.” Id. See generally William A. Sahlman, A Method for Valuing High-Risk, Long-Term Investments: The “Venture Capital Method" 7-14 (Harvard Bus. Sch., Note 9-288-006, 2003) (JX 624) [hereinafter Venture Capital Method ] (describing factors contributing to VC demand for 50% projected IRR).

27

. See New Exit, supra, at 11-13. Other alternatives include redemption by the portfolio company or a sale of the preferred stock to another investor. See Exit Structure, supra, at 317 n. 8. "[S]kepticism of redemption provisions is common.” Id. at 350 n. 121. The secondary market is nascent but growing. See New Exit, supra, at 16-20.

28

. Manuel A. Utset, High-Powered (Mis)incen-tives and Venture-Capital Contracts, 7 Ohio St. Entrep. Bus. L.J. 45, 56 (2012) (footnote omitted) [hereinafter Venture-Capital Contracts]-, accord False Dichotomy, supra, at 62 ("VC funds are constrained with respect to both time and capital in their start-up company investments .... ”); Venture Survival, supra, at 110 ("[G]iven the other firms in its investment portfolio, a venture capitalist may liquidate an otherwise viable but weaker firm because the marginal return of spending limited resources and time on that one firm may not be worth the venture capitalist’s effort, despite the fact that if the venture capitalist were analyzing that firm independently, it would choose not to liquidate.”); Venture Capital Method, supra, at 17 ("In order to realize value from their investments, the fund’s managers need to commit time to board meetings, consultation with management, and other monitoring activities. Because of the number of competing opportunities ... there is a substantial opportunity cost (or shadow price) to the VC’s time.”).

29

.D. Gordon Smith, Venture Capital Contracting in the Information Age, 2 J. Small & Emerging Bus. L. 133, 142 (1998); see also Venture-Capital Contracts, supra, at 56 (noting "venture capitalists are wary of being stuck with the ‘living dead,’ firms that are profitable, but not enough to allow them to be sold on a timely basis in a private sale or public offering”); John C. Ruhnka et ah, The "Living Dead” Phenomenon in Venture Capital Investments, 7 J. Bus. Venturing 137, 147-48 (1992) (noting 20% of sample ended up as “living dead" and that "the most-often-used strategy (used in more than 75% of living dead situations) was an attempt to sell or merge the company — typically to a larger company with a related product line or technology”); Calvin H. Johnson, Why Do Venture Capital Funds Bum Research and Development Deductions?, 29 Va. Tax Rev. 29, 41 (2009) ("[S]emi-suc-cessful ventures are sometimes called 'zombies’ or 'the living dead,’ in the slang of the trade. A zombie gives back just its invested capital (or almost returns its capital), or gives back invested capital plus a return below what is needed to attract capital in a competitive market.”).

30

. At trial, Prang inexplicably tried to deny that he was a Sequoia designee before eventually conceding the point. Compare Tr. 453 (Prang denial), with Tr. 801 ("[A]s far as [the stockholder agreement’s] concerned, I was a Sequoia nominee. Fine, whatever that means.”). He also tried to deny having any business relationships with Gandhi outside of Trados and Conformia Software, despite Gandhi’s testimony about working together on a number of projects. When asked if Gandhi’s position on Conformia Software’s board made him one of Prang's bosses, Prang contended that as CEO and Chairman, he reported to himself. Tr. 814. Had Prang addressed these issues more candidly, I could well have reached a different conclusion.

31

. Orman, 794 A.2d at 27 n. 55; see, e.g., Emerald P'rs v. Berlin, 2003 WL 21003437, at *3 (Del.Ch. Apr. 28, 2003) (holding in post-trial opinion that director who had been an employee of controller for more than ten years was not disinterested and independent in decision to evaluate controller's proposed merger), aff'd, 840 A.2d 641 (Del.2003); Primedia, 910 A.2d at 261 n. 45 (holding on a motion to dismiss that directors who had "substantial past or current relationships, both of a business and of a personal nature, with [a controller]” were not independent); Orman, 794 A.2d at 27 n. 55 (noting that ”[a]lthough mere recitation of the fact of past business or personal relationships will not make the Court automatically question the independence of a challenged director, it may be possible to plead additional facts concerning the length, nature or extent of those previous relationships that would put in issue that director's ability to objectively consider the challenged transaction”); In re New Valley Corp. Deriv. Litig., 2001 WL 50212, at *7 (Del.Ch. Jan. 11, 2001) (noting in ruling on motion to dismiss that directors were not disinterested and independent based on their "current or past business, personal, and employment relationships with each other and the entities involved”); Int’l Equity Capital Growth Fund, L.P. v. Clegg, 1997 WL 208955, at *6-9 (Del.Ch. Apr. 22, 1997) (Allen, C.) (holding on a motion to dismiss that directors were not independent based on history of dealing and overlapping governance relationships).

32

. From a broader market or even societal perspective, there is nothing inherently wrong with a VC exit under these circumstances. It may well be that facilitating exit results in greater aggregate returns and maximizes overall societal wealth. This court’s task, at least as I understand it, is not to apply its own normative balancing of broader policy concerns, but rather to evaluate the fairness of the defendants’ actions in terms of an entity-specific arrangement of contract rights and fiduciary duties. The VC contracts in this case did not attempt to incorporate any mechanism for side-stepping fiduciary duties (such as a drag-along right if the VC funds sold their shares), nor did they explicitly seek to realign the directors’ fiduciary duties in a manner that might alter the traditional analysis. See 8 Del. C. § 141(a) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incoiporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation." (emphasis added)). This decision provides no opportunity for expressing a view as to the *57effectiveness of any such mechanism or realignment, and it does not intimate one. In the current case, the absence of any attempt at explicit contracting over exit-related conflicts does mean that to deviate from traditional fiduciary analysis would require giving credence to an implicit waiver or constructive fiduciary realignment. Setting aside the inherently ambiguous nature of the exercise— whether the common accepted a typical VC investment structure because they implicitly consented to a VC-dominated exit or because they believed fiduciary duties would protect them and therefore did not bargain over the issue — the structure of the DGCL and longstanding common law authority require that any such arrangement be explicit. See, e.g., 8 Del. C. §§ 102(b)(7), 141(a), 151(a), 202. See generally supra Part II.A.1 .

33

. See, e.g., JX 139 (Gandhi prompting JMP in early 2004 to meet with Ganesan); JX 172 (Gandhi updating his partners in June 2004 that "[w]e have recruited a hard-nosed CEO whose task is to grow this company profitably or sell it.... Simultaneously, [JMP] has also been retained to explore the M & A options for the business. I would expect that the company is sold within the next 18 months (perhaps sooner)”); JX211 (Scanlan, Gandhi, and Stone speaking with SDL in summer 2004); JX 276 (Gandhi updating his partners in December 2004 that Campbell's "mission is to architect an M & A exit as soon as practicable”); JX 302 (Gandhi arguing to optimize for cash rather than pushing for a higher price); JX 310 at 000037 (Stone updating her partners in February 2005 that "[c]ur-rent options” were (i) sell to SDL now for approximately $60 million, (ii) sell to a private equity firm as a package deal with Bowne, or (iii) sell in 18 months).

34

. For simplicity, this decision refers to the MIP's effect on the common stock. It would be more precise to refer to its effect on the residual claimants, because the Series A and BB had the right to participate in any distribution to the common on an as-converted basis. That fact only becomes relevant in the event of a damages calculation based on diversion of merger consideration. This decision need not confront that issue, because diversion of merger consideration was not a theory that the plaintiff advanced at trial.

35

. This case does not present the question of what would have been a fair allocation of the cost of the MIP. The boundaries are clear: 100% could come from proceeds that otherwise would go to the preferred stock (a scenario raising no fairness issues), or 100% could come from proceeds that otherwise would go to the common stock (a scenario raising serious fairness issues). A range of intermediate allocations are possible and could be justified depending on the facts.

36

. The plaintiff did not tty the case on a theory that the defendants breached their duty of loyalty by using the MIP to reallocate consideration from the common to the preferred and management, nor did the plaintiff seek damages for the class on that basis. As with other discretionary exercises of authority, the standard of fiduciary conduct requires that when approving employee compensation arrangements, directors must act to promote the value of the corporation for the ultimate benefit of the common stockholders. See supra Part II.A.l. Where, as here, a plaintiff has shown that the board lacked a majority of disinterested and independent directors, the standard of review is entire fairness. See Gottlieb v. Heyden Chem. Corp., 91 A.2d 57, 58 (1952); Valeant Pharm. v. Jerney, 921 A.2d 732, 745-46 (Del.Ch.2007). It would have been difficult for the defendants to prove that the MIP was fair. A logical remedy would have been for the class to recover its share of the consideration that would have dropped to the residual claimants had the MIP been structured fairly. The plaintiff, however, did not pursue this angle, likely because the resulting damage award would have been relatively small.

37

. See Tr. 317 (Scanlan explaining "I viewed the operation as a whole in its best interests and all of its stakeholders and all of its shareholders as my duties.”); Tr. 386, 417-18 (Gandhi stating his duty was to “maximize the value of the enterprise” for the benefit of "all the stakeholders”); Tr. 648-50 (Hummel stating that "there were a lot of stakeholders” and that he viewed his duties as ensuring that "customers would continue to have access to [Trados] technology,” that "people continue in jobs or, if they change jobs, that they would have success on their resume,” that "morally and ethically, for me it was important that the money I’ve raised ... that we pay that money back,” and that "[t]he Trados brand is still out there”); Tr. 734-38 (Stone testifying that she represented "all stakeholders” and her *64interest was to "maximize the value of the entity”); Tr. 788, 900 (Prang sought to "maximize the value of the corporation” for the benefit of "the company and all stakeholders”).

38

. See, e.g., Thurman W. Arnold, The Folklore of Capitalism 293-95 (1937) (Charles Hayden testifying that no conflict arose from his simultaneous roles as (i) chairman of the board of Cuban Cane Sugar Corp. ("Cuban Cane”), (ii) head of Hayden & Stone, the investment bank which sold Cuban Cane’s defaulted bonds, and (iii) director of Chase National Bank and New York Trust Company, both creditors of Cuban Cane, which insisted on security for their loans at Hayden's recommendation shortly before Cuban Cane defaulted on its bonds (quoting SEC Report On The Study And Investigation Of The Work, Activities, Personnel And Functions of Protective Committees 457-62 (May 10, 1937))).

39

. The decision not to form a special committee had significant implications for this litigation. The Merger was not a transaction where a controller stood on both sides, and the plaintiff did not challenge Laidig’s independence or disinterestedness. If a duly empowered and properly advised committee had approved the Merger, it could well have resulted in business judgment deference. Admittedly, under those circumstances, the plaintiff likely would have found reason to criticize Laidig.

40

. See Tr. 16 (Campbell testifying Trados could "run out of cash within the next 90 to 120 days”); Tr. 249 (Scanlan testifying Tra-dos was "bleeding” and "didn’t have a runway”); Tr. 390 (Gandhi testifying Trados would have gone "bankrupt”); Tr. 649 (Hum-mel testifying Trados’s "outcome was highly likely ... bankrupt[cy]”); Tr. 722 (Stone testifying Trados was in a "death loop”); Tr. 779, 791 (Prang testifying Trados would "be out of business”).

41

. See 26 U.S.C. § 6662 (civil penalty for accuracy-related tax underpayment); id. § 6663 (civil penalty for fraudulent tax underpayment); id. § 6701 (civil penalty for aiding and abetting understatement of tax liability); id. § 7201 (criminal penalty for willfully attempting to evade or defeat tax). In this case, I suspect any mispricing would not result in an underpayment. By setting the fair market value of the common stock above what the defendants now say was its actual value of zero, then setting the option strike price at the purported fair market value, the Board granted an out-of-the-money option that was underwater by $0.10 at the time of grant.

42

. See Tr. 396 (Gandhi describing the option price as "arbitrary” and based on "rough rules of thumb about option value pricing"); Tr. 575-76 (Hummel testifying that "the correct strike price [for the options] should have been zero” but that the Board set a price that was "not too far away from the real value at that time which was zero”); Tr. 712-13 (Stone testifying that she believed the "common stock of the company” was "worth nothing” on April 21, 2005). Prang first testified that he actually believed that the fair market value of the common stock was $0.10 per share on February 2, 2005. Tr. 869-70. He later recanted and joined the other directors by contending that they "believed [they] couldn’t set it at zero,” so they chose $0.10 *70per share for "accounting reasons and tax reasons and something else.” Tr. 899.

43

. See Tr. 181 (Campbell justifying option price because otherwise Trados "couldn’t bring new people into the company” and he "would have been in serious trouble”); Tr. 396 (Gandhi explaining "we had to do something .... [We were] having a hard time keeping people and recruiting people. They have other options in Silicon Valley, and we just have to feel like the equity is ... going to be worth something"); Tr. 497 (Prang agreeing that the Board set the price to "make it more attractive to the employees"); Tr. 899 (Prang testifying "we believed we couldn’t set it at zero. It was [for] accounting reasons and tax reasons and something else. And we had to have, we believed, a value on [the] stock because, if the LOI fell through, we had to continue as an entity and we needed a price to issue new share grants”); Tr. 575 (Hummel stating that a zero stock price "would trigger some suspicion with a [prospective] tech guy” and make a poor recruiting pitch); Tr. 713 (Stone explaining that the "business as normal would ... continue granting options to people, as part of the culture of the business, but also generally part of the incentives of the business. That's why we’re doing options. Why [$0.]10 rather than another value? We had already taken the value down from [$0.]25 to [$0.]10. It's not an exact science”).

44

. See New Exit, supra, at 18 (”[W]hen granting stock options to employees, start-ups usually take the position that the stripped-down common stock is worth no more than ten percent of the latest preferred price ....”); Jeff Thomas, The Legal Spark, 78 UMKC L.Rev. 455, 472 n. 18 (2009) ("In the past, many startups used a 10:1 valuation ratio for preferred stock and common stock issued at the same time.”); Tax Explanation, supra, at 900 n. 86 (citing a rule of thumb that the fair market value of common stock should be set at one-tenth of the latest preferred stock price and reporting that some VCs valued the common stock more aggressively at one-thousandth of the latest preferred stock price).

45

.A prominent study published in early 2005 identified statistically abnormal patterns associated with the dates of stock option grants. See Erik Lie, On the Timing of CEO Stock Option Awards, 51 Mgmt. Sci. 802 (2005). In March 2006, a Wall Street Journal article brought public attention to SEC investigations into option backdating and identified companies where option grant dates seemed uncommonly advantageous. Charles Forelle & James Bandler, The Perfect Payday, Wall St. J. (Mar. 18, 2006), available at http://www. stat.yale.edu/~jay/News/WSJmain.pdf; see also Lara E. Muller, Stock Option Backdating: Is the Government’s Response Enough to Eliminate the Problem or Is It Still a Work in Progress?, 51 Santa Clara L.Rev. 331, 335 (2011) (discussing scope of the problem).

46

. See M.G. Bancorp., Inc. v. Le Beau, 737 A.2d 513, 523 (Del.1999) (approving adjustment to comparable company valuation to correct for implicit minority discount); Agranoff v. Miller, 791 A.2d 880, 900 (Del.Ch.2001) (correcting for implicit minority discount). I say "arguably” because scholars have raised fair questions about the origins and rationale underlying the implicit minority discount. See generally Lawrence A. Hamer-mesh & Michael L. Wachter, The Short and Puzzling Life of the “Implicit Minority Discount” in Delaware Appraisal Law, 156 U. Pa. L.Rev. 1 (2007).

47

. See, e.g., Gearreald v. Just Care, Inc., 2012 WL 1569818, at *7 (Del.Ch. Apr. 30, 2012) (applying 5.5%); S. Muoio & Co. LLC v. Hallmark Entm’t Invs. Co., 2011 WL 863007, at *21 (Del.Ch. Mar. 9, 2011) (applying 1-3%), aff'd, 35 A.3d 419 (Del.2011); Global GT, 993 A.2d at 513 (applying 5%); In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *31 (Del.Ch. Aug. 18, 2006) (applying 5%); Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 337 (Del.Ch.2006) (applying 4%); Henke v. Trilithic Inc., 2005 WL 2899677, at *10 (Del.Ch. Oct. 28, 2005) (applying 5%); Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *13 (Del.Ch. Aug. 19, 2005) (applying 5%); Gholl v. Emachines, Inc., 2004 WL 2847865, at *13 (Del.Ch. Nov. 24, 2004) (applying 5%), aff'd, 875 A.2d 632 (Del.2005); Dobler v. Montgomery Cellular Hldg. Co., Inc., 2004 WL 2271592, at *7, *17 (Del.Ch. Sept. 30, 2004) (applying 4%), aff'd in part, rev'd in part, 880 A.2d 206 (Del.2005); Prescott Gp. Small Cap, L.P. v. Coleman Co., Inc., 2004 WL 2059515, at *30 (Del.Ch. Sept. 8, 2004) (applying 5%); Lane v. Cancer Treatment Ctrs. of Am., Inc., 2004 WL 1752847, at *31 (Del.Ch. July 30, 2004) (applying 5%); Cede & Co. v. JRC Acq. Corp., 2004 WL 286963, at *6 (Del.Ch. Feb. 10, 2004) (applying 3.5%).

48

. In Orban, Chancellor Allen assumed that the entire fairness test would apply to a recapitalization and third party merger in which all of the consideration went to the preferred stockholders to satisfy their liquidation preference, leaving nothing for the common. 1997 WL 153831, at *1. It was undisputed that (i) the merger was an arm’s length transaction, (ii) the price paid by the acquirer was a fair price for the corporation, and (iii) the board believed the merger represented the best transaction available. To obtain pooling of interests accounting treatment, however, the transaction was structured to require the affirmative vote of 90% of the common stockholders. This feature enabled a large common holder to threaten to block the deal unless he received side consideration. In response, the board took action to facilitate the dilution of his voting interest, thereby removing his blocking power. Id. at *6-7. In the ensuing lawsuit, the common stockholder did not argue that his shares had economic value but rather that the 90% approval condition "gave [his] stock a certain value," namely holdup value. Id. at *8. Moreover, the 90% approval condition was not a property right of the common stock, but rather a condition included in the transaction for the benefit of the acquirer. Id. at *9. Under those circumstances, where the common stock had no economic value before the transaction and was not deprived of any properly right, Chancellor Allen held that the transaction satisfied the entire fairness test. To my mind, the fiduciary principles implied by Orban are the same as those applied in this case. The difference is one of degree: the MIP neutralized common stockholder opposition subtly; the dilution in Orban did so directly.

49

. See Tr. 280 (Scanlan); Tr. 369 (Gandhi); Tr. 705-07 (Stone); see also José M. Padilla, What's Wrong with a Washout?: Fiduciary Duties of the Venture Capitalist Investor in a Washout Financing, 1 Hous. Bus. & Tax LJ. 269, 279-80 (2001) ("[V]enture capitalists will not invest in a company where existing investors do not participate.”); Joseph W. Bartlett & Kevin R. Garlitz, Fiduciary Duties in Bum-out/Cramdown Financings, 20 J. Corp. L. 593, 601 (1995) ("[0]nce a group of VCs have invested, it is rare that an issuer will have the ability to raise substantial capital unless the existing investors agree to 'play' — continue to invest — in future rounds of financing_ [T]he company can be given the putative opportunity to seek alternative sources, but the venture capital community is small and incestuous, with most managers knowing each other. If the company's existing cadre of VC investors is not willing to continue to support the company, then it is unlikely that any new investor will be interested.”). For outside VCs to invest without existing investor participation would run the risk of buying a lemon. See generally George A. Akerlof, The Market for “Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488 (1970).